Home | Databases | WorldLII | Search | Feedback Palau Sessional Legislation

Amendment to the Financial Institutions Act of 2001, RPPL 7-41 2008

RPPL NO. 7-41
(Intro. As H.B. No. 7-192-13, HD1, SD1)

AN ACT

To amend the Financial Institutions Act of 2001, Republic of Palau Public Law Number 6-3, to be codified as Title 26.10 of the Palau National Code, to clarify the scope of the powers of the Financial Institutions Commission relative to other offices and agencies of the National Government, to modify the required qualifications of and procedure for appointing members of the Financial Institutions Commission, to facilitate efforts to detect, prevent, and redress illicit financial transactions, and for other related purposes.

THE PEOPLE OF PALAU REPRESENTED IN THE OLBIIL ERA KELULAU DO ENACT AS FOLLOWS:

Section 1. Preamble. The Olbiil Era Kelulau of the Republic of Palau (hereinafter referred to as the "OEK"), endeavoring to strengthen the economy in the Republic of Palau by providing measures to protect the interests of consumers of financial services, to prevent systemic risk to the financial system, to provide sufficient scope for market forces to operate in the field of financial services, and to protect the reputation of the Republic in the international financial community, and establishing rules for the licensing, supervision and regulation of financial institutions by the Financial Institutions Commission of the Republic of Palau, hereby finds it to be in the best interest of the Republic to enact laws governing banks and financial institutions operating either in the Republic of Palau or under a grant of authority by the Republic of Palau.

Section 2. Amendment. The "Financial Institutions Act of 2001" in RPPL 6-3 is hereby amended to read as follows:

"Financial Institutions Act of 2001

Chapter I. General Provisions

Section 1. Scope of operation of this Act.

. . . .

Section 2. Definitions. Wherever used in this Act, the following terms shall have the following meanings:

. . . .

(g) "Credit" means any advances or commitments to advance funds by a financial institution to a person that are conditioned on the obligation of the person to repay the funds or that are repayable from specific property pledged by or on behalf of the person. The term includes a contractual liability of a financial institution to advance funds to or on behalf of a person, indebtedness evidenced by a lease financing transaction in which the financial institution is the lessor, and an overdraft funded by the financial institution on behalf of a person. The term does not include accrued but uncollected interest or discounted interest.

(h) "Credit documentation" means, with respect to an agreement entered into by a financial institution with any other person for the provision of credit:

(1) current financial statements of the borrower as may be required by a financial institution and any guarantor of the borrower's indebtedness;

. . . .

(q) "License" means an authorization issued by the Financial Institutions Commission of the Republic of Palau granting the right to a financial institution to engage in financial activities.

(r) "Order" means an obligatory directive in the implementation of this Act or of a regulation issued under this Act pursuant to section 79 issued to one or more financial institutions that constitute less than a class of financial institution.

. . . .

(v) "Regulation" means a general obligatory directive in the implementation of this Act pursuant to section 79 issued to one or more classes of financial institutions.

. . . .

(z) "Subsidiary" means any person in which another person holds: (1) the equivalent of fifty percent (50%) or more of any class of shares with voting rights; or (2) a significant interest that permits such other person or group of persons to control the management or policies of the subsidiary.

(aa) "Security" means: any evidence of indebtedness; share; investment contract; certificate of interest or participation in a profit-sharing agreement; limited partnership interest; collateral-trust certificate; pre-organization subscription; voting-trust certificate; any put, call, straddle, or option or warrant on a security or group or index of securities; or any interest or instrument commonly known as a "security"; the term does not include obligations of a bank regulated under the laws of the Republic of Palau that are entered into by the bank in the ordinary course of its banking business directly with its customers and not through intermediaries.

. . . .

Section 3. Prohibitions and exemptions.

(a) No person shall engage in the business of a bank, securities broker, or securities dealer without a license issued by the Financial Institutions Commission of the Republic of Palau.

(b) No person shall use the words "bank", "trust", "trust company", or "financial corporation", or derivatives of these words, with respect to a business, product, or service without a license as a bank issued by the Financial Institutions Commission of the Republic of Palau, unless such usage is established or recognized by law or international agreement, or unless it shall be clear from the context in which the words "bank ", "trust", "trust company", or "financial corporation" are used that it does not concern financial activities. With respect to any violation of subsections (a) and (b) in Section 3, the Financial Institutions Commission of the Republic of Palau may: (1) fine the entity, person, board members, and executive officers (in the case of a corporation) up to five thousand dollars ($5,000) per day such violation continues; (2) order the entity or person to cease and desist the offending activity; and (3) if the entity is a Palau corporation, dissolve the legal entity.

. . . .

(d) No bank organized outside the Republic of Palau shall be permitted to engage directly in taking deposits in the Republic of Palau unless the activity is undertaken through a branch office or subsidiary for which a license has been issued by the Financial Institutions Commission of the Republic of Palau.

. . . .

(f) Banks as a class that are organized as credit unions under Chapter 7 of the Corporation Regulations of the Republic of Palau and whose total assets do not exceed five hundred thousand dollars ($500,000) shall be exempt from the application of this Act.

Chapter II. Financial Institutions Commission

. . . .

Section 6. Objectives and basic tasks.

. . . .

(b) The Commission shall license, supervise, and regulate financial institutions, provided that nothing herein shall be construed to preempt or preclude other entities of the National Government, including, but not limited to, the Attorney General, the Registrar of Corporations, and the Bureau of Revenue, Customs and Taxation, from exercising authority over financial institutions pursuant to laws granting such authority to such entities.

Section 7. Cooperation with authorities.

. . . .

(b) The Commission shall provide general information as limited by the confidentiality and secrecy provisions of this Act as requested from time to time by the Ministry of Finance or other agencies of the Republic of Palau as may be necessary for the performance of their duties.

Section 8. International cooperation. The Commission is the official agency for information as to the status of any entity licensed or claiming or purporting to be licensed by the Republic of Palau to act as a bank. The Commission is authorized to the extent set forth in the Act and under Palau law to cooperate and exchange information with agencies of foreign governments and international agencies. The grant of a license under this Act shall constitute consent of the financial institution to the release and exchange of information between the Commission and any law enforcement, regulatory, or supervisory authorities of any foreign jurisdiction's government in which the financial institution may operate or otherwise conduct business.

. . . .

Section 12. Powers of the Governing Board.

(a) The Governing Board shall have the following powers:

. . . .

(2) to formulate and adopt the budget and the annual financial statements of the Commission and submit the same to the Olbiil Era Kelulau;

. . . .

Section 14. Composition of the Governing Board.

(a) The Governing Board of the Commission shall be composed of six (6) members, five of whom shall be voting members.

(b) One Commission member shall be the president of the National Development Bank of Palau, ex officio; he or she shall be a non-voting member. Five additional members of the Governing Board of the Commission shall be appointed by the President of the Republic of Palau. All appointments made by the President of the Republic shall be subject to the advice and consent of the Senate. All nominees for the Commission must hold a B.A./B.S. degree and have at least two years of business management experience and have recognized civic leadership qualities. The President of the Republic of Palau shall not appoint a person that is related within the second degree of consanguinity to the President. These members may not be an executive officer or principal shareholder in a financial institution and may not be related within the second degree of consanguinity to a person who is an executive officer or principal shareholder in a financial institution. The Governing Board shall elect a Chairman and a Vice Chairman from amongst its members.

(c) A member of the Commission may not be an officer, employee, agent, or paid consultant of a trade association representing the interests of banking or securities brokerage industries. A member of the Commission may not be related within the second degree of consanguinity to a person who is an officer, employee, agent, or paid consultant of a trade association representing the interests of the banking or securities brokerage industries.

(d) A majority of the appointed members of the Commission must be citizens of the Republic of Palau, to whom no ground for removal under section 17 applies.

(e) All Commission members must be persons of recognized integrity, and no member shall be appointed who has: been convicted of a felony or crime of moral turpitude; been a member of a board of a financial institution that has previously been deemed capital insolvent; or have questionable integrity.

(f) The term of three appointed members of the Commission shall be three years and the term of the remaining two appointed members shall be two years. Commission members shall be eligible for reappointment, unless a ground for removal under section 17 would apply to them.

(g) Whenever there is a vacancy on the Governing Board of the Commission, the President of the Republic of Palau shall appoint a new board member, in accordance with this section.

. . . .

Section 16. Ineligibility to serve on the Commission. No person shall serve on the Commission while he or she is a member of the Olbiil Era Kelulau, or the Council of Chiefs, or while serving as a cabinet member or as any other National or State Government official.

. . . .

Section 24. Secrecy.

. . . .

(b) Upon the Commission's receipt of confidential information from financial institutions pursuant to this Act, the Commission and all related employees and agencies shall be prohibited from disclosing or making known the existence of the information under review and under no circumstances may any person required to transmit confidential information or any other person having knowledge thereof communicate such confidential information to any natural or legal person other than a person serving as a member of the Commission or staff, or as an auditor or agent of the Commission, or as a technical advisor to the Commission, or in accordance with international agreements and obligations of the Republic of Palau.

. . . .

(d) Members of the Financial Institutions Commission and staff of the Commission shall execute an oath of secrecy in accordance with this section. Upon a finding by a court of competent jurisdiction that this oath has been violated, the violator shall be dismissed from office. The violator shall be subject to a fine not exceeding fifty thousand dollars ($50,000) or imprisonment for a period not exceeding ten years, or both, upon a finding by a court of competent jurisdiction that a person has violated the oath.

. . . .

Section 26. Collection of statistical information.

(a) The Commission shall collect statistics and related information required to fulfill its duties and responsibilities under this Act and regulations promulgated hereunder. To that end, it shall cooperate with the competent authorities from outside the Republic of Palau and with international organizations as required by Palau law.

. . . .

Section 27. Regulations, reporting. Except as otherwise provided herein, all proposed rules and regulations under this Act shall be promulgated pursuant to the Administrative Procedure Act, 6 PNC Chapter 1.

Section 28. Standards of good administration.

. . . .

(c) The Commission may not grant waivers of exception from compliance with this Act or regulations issued thereunder, except as provided in section 54(c).

(d) The Commission shall supervise and regulate, as provided in this Act, all financial institutions and shall enforce the provisions of this Act through the Executive Commissioner or through staff, employees or agents of the Commission. The Executive Commissioner, each member of the Governing Board of the Commission, and each staff member, employee or agent of the Commission shall not be personally liable for damages occasioned by official acts or omissions except when such acts or omissions are arbitrary, capricious, and done with malice. The Attorney General, or his or her designee, shall defend any action brought against the Executive Commissioner, any member of the Governing Board of the Commission, or any staff member, employee or agent of the Commission by reason of his or her official act or omission, whether or not at the time of the institution of the action the defendant has terminated his or her service with the Commission.

Chapter III. Licensing

. . . .

Section 30. Licensing of existing financial institutions.

(a) All banks existing and operating in the Republic of Palau as of the effective date of this Act shall be and are licensed to engage in all of the financial activities listed in section 52. Existing and operating securities brokers and securities dealers are licensed to engage in the financial activities listed in section 52 (a)(15), (16), and (17) only.

(b)(1). . . .

©) Existing financial institutions in the Republic of Palau licensed under this section which have loans on their books as of the effective date of this Act which do not conform to the requirements of this Act are exempt from the requirements of this Act as to such loans for the balance of the original term of such loans. Notwithstanding the foregoing, no extension of loan term shall be made or new credit extended in relation to such non-conforming loans.

(d) Existing financial institutions in the Republic of Palau licensed under this section shall annually pay a non-resident worker's fee of five hundred dollars ($500) to the Republic of Palau for each non-resident worker employed.

Section 31. Minimum capital.

(a) Financial institutions not existing or doing business in the Republic of Palau or licensed to do business in the Republic of Palau as of the effective date of this Act shall apply for a new license under this Act.

(b) The minimum capital required for financial institutions to qualify for a license after the effective date of this Act is as follows:

(1) For one hundred percent (100%) Palauan owned banks, the amount of minimum capital shall not be less than five hundred thousand dollars ($500,000); all other banks shall have minimum capital of not less than one million dollars ($1,000,000).

(2) For foreign bank subsidiaries in the Republic of Palau, the amount may not be less than five million dollars ($5,000,000).

(3) For a foreign bank branch or subsidiary in the Republic of Palau, the amount of minimum capital of the parent bank and all subsidiaries may not be less than seventy-five million dollars ($75,000,000), except for those foreign bank branches or subsidiaries that are already licensed in Palau at the effective date of this Act, provided that such institution remains in good standing with the United States Federal Deposit Insurance Corporation (FDIC) or, where such institution is not governed by the rules of the FDIC, such institution remains in good standing with its primary home country supervisor and maintains depositor insurance in accordance with its home country government sponsored insurance program.

(4) For securities brokers and securities dealers, the minimum capital may not be less than one hundred thousand dollars ($100,000).

(5) Provided, the Commission may, by regulation, increase the minimum capital amounts prescribed above for the licensing of a financial institution to such level as may be necessary to promote and assure the safety and soundness of the financial institution and the protection of depositors' and creditors' interests.

Section 32. License application.

. . . .

(d) No Palau financial institution shall establish or license a subsidiary, branch office, or other facility outside the Republic of Palau without the prior written consent and approval of the Commission.

Section 33. License decision.

(a) Within two months from the date of its receipt of an application for a license that has been completed to the satisfaction of the Commission, or its receipt of correspondence regarding the status of or a question about the application for a license, the Commission shall approve or deny the application and notify the applicant of its decision, or respond to the correspondence or question, it writing; decisions denying a license application shall include an explanation of the grounds on which the license was denied and shall not be subject to appeal under the Administrative Procedure Act, 6 PNC Chapter 1, or this Act.

. . . .

(b) In approving an application for a license, the Commission may impose conditions to be satisfied by the licensee prior to the commencement of business, including:

(1) the payment by shareholders of initial capital funds;

(2) a condition that the licensee carry on business at a designated place or places unless the prior written approval of the Commission is obtained;

(3) the types of services or products to be provided;

(4) registration with the Tax Office; or

(5) any other reasonable condition that the Commission deems necessary and appropriate to the licensee.

(c) The Commission shall revoke the license of a financial institution if the licensee fails to commence operations within a period of six months following the grant of a license.

(d) Before revoking the license of any financial institution under subsection (c), the Commission shall give the financial institution written notice of its intention to do so, and shall afford the financial institution a reasonable opportunity to show cause at a meeting of the Commission with a quorum present why such license should not be revoked; provided that in no event shall a license be revoked earlier than twenty-eight days after the notice of intention is served on the financial institution. The Commission shall consider any representations made by the financial institution and shall issue its decision in writing, with specific grounds for its decision. Any decision of the Commission shall be based on good cause shown and shall not be subject to appeal under the Administrative Procedure Act, 6 PNC Chapter 1, or this Act.

. . . .

(f) Branches of foreign banks must maintain assigned capital in the amount of five million dollars ($5,000,000) in an escrow deposit under terms and conditions satisfactory to the Commission or provide the Commission with written proof that the foreign bank's deposits are insured in accordance with a government sponsored depository insurance program.

Section 34. Scope of license; fees.

(a) A license shall be granted for an indefinite period of time and shall not be transferable.

(b) The Commission may charge fees on account of: the initial processing of a license application in the amount of two thousand and five hundred dollars ($2,500); and the issuance of any preliminary approval for a license. Such fees shall not be refunded in case a license application is denied, a financial institution does not commence business or ceases operations, or the license is revoked pursuant to section 36.

(c) Financial institutions licensed under sections 30, 31, 32, 33, and 34 shall annually pay to the Republic of Palau a non-resident worker's fee of five hundred dollars ($500) for each non-resident worker employed.

. . . .

Section 36. Modification, suspension, or revocation of a license.

(a) The Commission may, after notice and a hearing, modify, suspend, or revoke a license on one or more of the following grounds:

. . . .

(2) the financial institution has exceeded the terms of its license or failed to comply with any condition imposed on its license;

. . . .

(6) the financial institution has knowingly submitted to the Commission false material information concerning its financial condition and upon notice of the error or omission fails to correct same within a reasonable time after discovery.

(b) Before any action is taken under subsection (a), the Commission shall give a financial institution written notice of its intentions to do so, and shall afford the financial institution a reasonable opportunity to show cause at a meeting of the Commission with a quorum present why such action should not be taken. The Commission shall consider any representations made by the financial institution and shall issue its decision in writing, with specific grounds for its decision. Any decision of the Commission shall be based on good cause shown. A decision by the Commission shall be final and not subject to appeal under the Administrative Procedure Act, 6 PNC Chapter 1. However, the financial institution may, within 45 days after the date of the action taken by the Commission under subsection (a), make a written request to the Commission for a rehearing on the matter. Such rehearing shall continence within 45 working days of the request, provided that a quorum of the Commission is in Palau during that time period, or as soon as practible after a quorum is present in Palau. If the Commission refuses to change its decision during the rehearing, the financial institution may then appeal the decision within 45 days to the Trial Division of the Palau Supreme Court. Within 60 days after the appeal has been filed, the Palau Supreme Court shall hold a hearing to determine if there is any reasonable ground to uphold the decision of the Commission. If the decision of the Commission is determined to be reasonable, the decision shall be final and no further appeals shall be allowed. Neither party shall be permitted to engage in pretrial discovery regarding this matter and the action shall not adjudicate any issues other than the decision of the Commission. Pending the final adjudication of any appeal, the decision of the Commission shall remain in effect.

. . . .

Section 37. Publication and effect of license revocation.

(a) The final decision to revoke a license shall immediately be published in one or more newspapers of general circulation in the Republic of Palau and such other publications as may be deemed appropriate by the Commission; the decision to revoke a license shall become effective on the date of such publication or on such later date as the decision shall specify.

. . . .

Chapter IV. Organization and Administration

Section 38. Organization and independence.

(a) Palau financial institutions shall be organized as corporations under 12 PNC Chapter 1, with shares registered in the name of the beneficial owner. The provisions of 12 PNC Chapter 1 shall apply to financial institutions to the extent not inconsistent with this Act; in particular, the minimum required capital must be fully paid in, in accordance with section 31(b) of this Act.

. . . .

(c) Each financial institution shall enjoy legal, operational, financial and administrative autonomy from any other person, including the Commission and any agency or political subdivision of the government, unless the law, this Act, rules or regulations, or orders issued pursuant thereto specifically otherwise provide. This autonomy shall be respected and no person shall seek improperly to influence any administrator of a financial institution in the discharge of his or her duties or to interfere in the activities of any financial institution, except in the execution of a specific authority or duty under the law. Notwithstanding the foregoing, nothing in this Act shall be construed to limit or prevent the relevant supervisory and regulatory bodies, including, but not limited to, the Commission, the Attorney General, the Registrar of Corporations, and the Bureau of Revenue, Customs and Taxation, from exercising their respective supervisory, regulatory, or investigative powers over the operations of financial institutions.

Section 39. Management, books of account, and identity of banks organized in the Republic of Palau.

(a) A bank organized in the Republic of Palau must have a manager in the Republic of Palau who has authority to engage the financial responsibility of the bank and, for banks with assets of more than five hundred thousand dollars ($500,000), who works in the bank full time in the Republic of Palau.

(b) A Palau bank's books of account, including a daily ledger, must be kept in the Republic of Palau

(c) A Palau bank must trade only in the name designated in its license.

Section 40. Restrictions on ownership and holdings.

(a) To have legal effect, the transfer, stemming out of a single transaction or a series of related transactions, of an equity interest in a financial institution licensed in the Republic of Palau shall require the prior written authorization of the Commission if, as a result of such transfer, any one person or number of related persons acting in concert would, directly or indirectly, hold at least 20% interest or a controlling interest in such financial institution. In the event that transfer is for an interest of less than 20%, or if it is less than a controlling interest, prior to the transfer, the seller or transferor shall notify the Commission of the proposed sale or transfer and provide such information about the sale or transfer, and the prospective purchaser or transferee, as may be reasonably required by the Commission. Once notice of the proposed sale or transfer has been provided to the Commission, the Commission shall, within 45 days, either approve the sale or transfer, deny the sale or transfer, or request further information regarding the sale or transfer or proposed purchaser or transferee. If the Commission takes no action within 45 days, the sale or transfer shall be deemed approved. Any transfer of less than 5% in a financial institution whose shares are publicly traded on a stock exchange acceptable to the Commission shall be exempt from this requirement of prior Commission notification. Decisions shall be based upon

. . . .

Section 45. Disqualification and removal.

(a) . . . .

(b) . . . . section 54(a)(2) . . . .

Section 49. Reporting of suspicious transactions and compliance with money laundering and counter terrorism financing standards.

(a) A financial institution shall not carry out a transaction that appears to have an unlawful purpose or it suspects to be related to a serious criminal activity until it submits a confidential written report regarding the transaction that provides information as to the origin and destination of the money, the purpose of the transaction, and the identity of the transacting parties to the FIC and the Financial Intelligence Unit (FIU). The FIU may give instructions not to execute the transaction. Where a transaction is suspected to be related to a serious criminal activity and where a delay in carrying out the transaction is impossible or is likely to frustrate efforts to pursue the beneficiaries of such transaction, the financial institution shall inform the FIC and the FIU in writing immediately afterwards. For purposes of this Section, "serious criminal activity" includes any felony or other crimes of moral turpitude and such other activities as the FIU may determine by regulation. The FIC shall regularly examine all financial institutions Anti-Money Laundering and Counter Financing of Terrorism (hereinafter "AMLCFT") procedures and reporting standards. Such examinations may, in the sole discretion of the FIC, be conducted as an on-site or off- site examination, or both. Any additional costs resulting from the examination shall be borne by the financial institution. In the event that a Financial Institution's AMLCFT procedures and reporting has been assessed either by a private entity acceptable to the FIC , or by a governmental entity acceptable to the FIC, the FIC may accept such report in lieu of its report.

(b) With regard to any information provided to or requested by the FIU or the FIC for the purposes of complying with the MLPCA or any money laundering or financing of terrorism law of the Republic of Palau, or information disclosed in relation to a suspicious transaction, a financial institution shall not disclose to any person, other than a court or other persona authorized by law, that information has been transmitted to or requested by the Commission, the FIU or other authorities, that an investigation is being carried out, or that instructions not to execute a transaction are being carried out.

(c) When a financial institution provides information that is referred to in subsection (b) in good faith, the financial institution shall be exempted from liability of any kind for complying with this section and/or for breach of any restriction on disclosure of information, except as provided in subsection (b), regardless of the result of the communication.

(d) For the purposes of this section, "financial institution" includes the administrators, employees, and shareholders of a financial institution.

Section 50. Disclosure of conflicts of interest; fiduciary obligations.

. . . .

Chapter V. Operational Requirements

Section 51. General prudential principles.

. . . .

Section 52. Financial activities.

. . . .

(10) money brokering;

. . . .

(17) underwriting and distribution of debt and equity securities and brokering and dealing in equity securities; and

(18) such other financial activities as the Commission shall determine by regulation.

. . . .

(c) . . . . 52(a)(15), (16), and (17).

Section 53. Prohibited anti-competitive transactions and practices.

. . . .

Section 54. Prudential requirements.

. . . .

(c) . . . . section 54(a) and (b) . . . .

. . . .

Section 55. Corporate records and records of transactions.

. . . .

(b) Every bank shall cause to be created and shall maintain at the head office or branch office in the Republic of Palau of a foreign bank proper credit documentation.

Section 56. Transactions with related persons.

(a) Banks shall not enter into a transaction with or for the benefit of related persons of the bank, if such transaction would be entered into on less favorable terms and conditions, or not at all, with or for the benefit of persons who are not so related to the bank. However, Special Employee Banking Programs approved by the bank's board and the Commission shall not be prohibited by this section.

(b) Persons who are related to a bank are: (1) any administrator of the bank; (2) any significant shareholder of the bank; and (3) any person who is related to such administrator or significant shareholder by marriage, consanguinity to the second degree, or business interest; (4) any legal person that has a significant interest in a person in which the bank has a significant interest.

(c) No bank shall extend credit to or for the benefit of a person related to the bank if as a result thereof. (1) the aggregate amount outstanding on all credits extended by the bank to any one person so related to the bank would exceed twenty percent (20%) of a bank's capital; or (2) the aggregate amount outstanding on credits to all persons so related to the bank would exceed one hundred percent (100%) of the bank's capital.

(d) Credit extended by any bank to any related financial institution shall be subject to such additional conditions or restrictions as shall be prescribed by regulation of the Commission. For the purposes of this subsection, a related bank or financial institution shall be any financial institution in which the bank holds a significant interest.

(e) Any transactions by, with, or on behalf of a related person in violation of this section shall be a crime known as "Wrongful Insider Transactions", and the related person(s) on whose behalf such a transaction is completed, with knowledge of such related person, and the bank administrator(s) approving the transaction(s) shall be subject to a fine of not more than two times the aggregate amount of the transaction(s) in violation of this section, or imprisonment of not more than two (2) years, or both.

(f) Any transactions by, with, or on behalf of a related person in violation of this section shall be subject to civil penalties and the related person(s) on whose behalf such a transaction is completed, with knowledge of such related person, and the bank administrator(s) approving the transaction(s) shall be subject to a civil penalty of ten thousand dollars ($10,000) for each transaction, or up to ten percent (10%) of the amount of the transaction(s), whichever is more.

(g) Penalties and criminal sanctions specified herein are not intended to preempt any other remedies available under the laws of the Republic of Palau.

Chapter VI. Accounts, Financial Statements, Audit, Reporting, Examination

Section 57. Accounts and financial statements.

(a) Financial institutions shall maintain at all times accounts and records and prepare annual financial statements adequate to reflect their operations and financial condition in accordance with Generally Accepted Accounting Principles (GAAP) promulgated by the Financial Accounting Standards Board or such other generally accepted accounting standards as approved by regulation of the Commission.

. . . .

Section 58. Audit.

(a) Within four months after the end of each bank's fiscal year, each bank shall cause to be produced audited financial statements prepared on a consolidated basis by a licensed certified public accounting firm acceptable to the Commission, which firm shall present a full and fair view of the financial condition of the bank and shall submit such audited financial statements to Commission for its review. The banks licensed as of December 2, 2005 in the Republic of Palau shall become compliant with this section by March 30, 2008.

(b) No person having any interest in a bank other than as a depositor, and no officer, employee or agent of a bank, shall be eligible to produce, prepare, or otherwise conduct an audit of such bank. Any person appointed to produce, prepare, or otherwise conduct an audit of a bank who shall after such appointment acquire such interest, or become an officer, employee, or agent of such bank shall immediately be disqualified from producing, preparing, or otherwise conducting an audit of such bank. for purposes of subsection (a).

Section 59. Duties of auditors.

(a) If an auditor or certified public accountant or accounting firm, in the course of the performance of their duties believes that (I) there has been a serious breach of or noncompliance with the provisions of this Act or regulations or guidelines issued by the Commission, (ii) an apparent criminal offense involving fraud or other dishonesty has been committed; or (iii) serious irregularities have occurred, including those that jeopardize the security of depositors and creditors, the auditor or certified public accountant or accounting firm shall immediately report the matter and specific supporting details to the Commission.

(b) No duty of confidentiality to which an auditor or certified public accountant or accounting firm of a bank may be subject shall be regarded as contravened or breached and no civil, criminal or disciplinary proceeding shall lie against the auditor or certified public accountant or accounting firm by reason of communicating in good faith to the Commission any information relevant to a bank's functions under this Act, regulations and guidelines issued by the Commission, or other applicable laws.

Section 60. Publication and disclosure.

(a) The Commission shall call upon each bank annually to make and publish a statement of its financial condition as of the close of business on a date specified in such call. Such statements shall be upon such form and reflect such information as may be prescribed by the Commission. Where practical, the Commission shall accept such statements prepared by banks for submission to the FDIC, provided that the Commission may request such additional branch specific information as is necessary to fulfill the intent of this section. Such statement shall be delivered to the Commission and made available to the public within the time specified. A copy of the latest called statement shall be kept posted in the lobby of the back at a point accessible to the public. Any bank which fails to provide the Commission with such statement or provide such statement to a customer or potential customer upon demand, or to post such statement in its lobby, shall be subject to a penalty of one thousand dollars ($1,000) for each day for which the violation occurs.

. . . .

(c) Upon request, banks shall make available to the public their annual audited reports on a consolidated basis.

Section 61. Reports and examination.

(a) The Commission shall regularly conduct on-site examinations of the operations and affairs of every financial institution, and where the Commission so specifies, foreign branches of any Palau financial institutions, by examiners of the Commission or auditors appointed by the Commission. No one shall attempt to harass, intimidate, or exert undue influence on an examiner of the Commission or the auditors appointed by it.

(b) The primary purpose of any audit or examination under subsection (a) shall be to determine whether: (1) a financial institution is in a safe and sound financial condition; (2) the requirements of this Act, rules and regulations adopted by the Commission, and other applicable laws are being observed by the financial institution; and (3) the business of the financial institution is being operated in a lawful and prudent manner.

(c) For the purpose of determining the condition of a financial institution and its compliance with this Act and regulations adopted by the Commission in the course of an examination made under subsection (a), the Commission may cause an examination to be made of any affiliates of the financial institution in the Republic of Palau to the same extent that an examination may be made of the financial institution.

Section 62. Production of records and information for examiners and auditors.

(a) Every financial institution and every affiliate of such financial institution shall, pursuant to an examination conducted under section 61, produce for the inspection of any examiner or auditor duly authorized by the Commission to examine the financial institution, at such times and in such places as the examiner or auditor may specify (being times and places which, in the opinion of the examiner or auditor, would not be detrimental to the conduct of the normal daily business of such financial institution), all books, minutes, accounts, cash, securities and investments, documents and vouchers in their possession or custody, relating to their business and shall supply all information concerning their business as may reasonably be required by such examiner or auditor within such time as the examiner or auditor may specify. Any request for records regularly maintained at a home office outside the Republic of Palau must be produced within 30 days from the date of the request.

(b) If any documents are not produced or requested information is not supplied in accordance with subsection (a), the defaulting financial institution or affiliate, or both, as the case may be, shall be subject to a penalty of five thousand dollars ($5,000) for each day in which it fails to produce or supply each such document or information.

(c) If any information supplied or document produced under subsection (a) is materially false; the financial institution or affiliate, or both, as the case may be, shall be guilty of an offense and liable to a penalty of ten thousand dollars ($10,000) for each such false document or information.

Chapter VII. Infractions, Penalties, Remedial Measures

Section 63. Infractions, penalties, remedial measures.

(a) As provided for by rules and regulations promulgated hereunder, and except as otherwise provided for herein the remedial measures and penalties provided for infractions described in this section shall be determined in particular cases by the Commission and shall be imposed subject to the provisions of the Administrative Procedure Act, 6 PNC Chapter 1, unless otherwise provided by law.

(b) If the Commission finds that an administrator or employee of a financial institution, or the financial institution itself acting through any authorized person, has: violated the provisions of this Act, any rule, regulation, or order issued by the Commission, or any other law applicable to financial institutions; refused to comply with the provisions of this Act, any rule, regulation, or order issued by the Commission, or any other law applicable to financial institutions; willfully neglected to perform his or her duties, or committed a breach of trust or of fiduciary duty; committed any fraudulent or questionable practice in the conduct of the financial institution's business that endangers the financial institution's reputation or threatens its solvency; refused to submit to examination; conducted business in an unsafe or unauthorized manner; or violated any conditions of its license or any agreement with the Commission, the Commission shall give notice in writing to such financial institution and any offending administrator or employee, stating the particular violations or practices complained of, and the Commission shall call a meeting of the directors of said financial institution and lay before them such findings and demand a discontinuance of such violations and practices as have been found, and may take the following actions:

(1) issue written warnings;

(2) conclude a written agreement with the bank providing for a program of remedial action;

(3) issue an order to cease and desist from such violations and practices if the Commission finds it is necessary and in the best interests of the financial institution involved and its depositors, creditors, and stockholders;

(4) impose fines on the financial institution or corporation, or on its administrators or principal shareholders in an amount of up to ten thousand dollars ($10,000) per day for each day that the violation continues; provided, however, that fines shall be of similar amount far comparable financial institutions or corporations, with comparable total assets for the same type of violation;

(5) suspend temporarily or dismiss administrators from positions in a financial institution or corporation;

(6) impose restrictions on the operations of the financial institution or corporation;

(7) revoke the license of the financial institution or corporation;

(8) order the financial institution or corporation dissolved; or

(9) revoke the license of a Palau financial institution or the Palau branch of a foreign financial institution and appoint a receiver for the financial institution under this Act.

(c) Except where otherwise specifically provided in this Act, the classes of violations of this Act and the penalties and remedial measures, which attach thereto, and the procedures pertaining to the issuance and imposition of same shall be set forth in rules and regulations adopted by the Commission and shall not be subject to appeal under the Administrative Procedure Act, 6 PNC Chapter 1. With respect to a cease and desist order issued pursuant to subsection (b), the procedure shall be as set forth in the remainder of this subsection. At the directors' meeting provided for in subsection (b), or within thirty calendar days thereafter, the Commission shall serve on the financial institution, its directors and any offending administrators or employees, a written order to cease and desist from the violations and practices enumerated therein and to take such affirmative action as may be necessary to correct the conditions resulting from such violations or practices. Said order to cease and desist shall be effective upon issuance if the Commission finds that immediate and irreparable harm is threatened to the financial institution or its depositors, creditors, or stockholders; otherwise, said order to cease and desist shall state the effective date, being not less than ten calendar days after delivery or mailing of the notice thereof. A copy of said order to cease and desist shall be entered upon the minutes of the directors of the financial institution, who shall thereafter certify to the Commission in writing that each has read and understood the order to cease and desist. All copies of notices, correspondence or other records of the Commission relating to an order to cease and desist shall be confidential and shall not be publicized or revealed to the public except in any lawsuit authorized by this Act or by other lawful order or authority. The Administrative Procedure Act shall not apply to orders to cease and desist issued hereunder.

(d) For Palau banks whose capital is determined by the Commission to be less than the required minimum capital, in addition to the measures described in subsection (b), the Commission may require the bank to adopt a capital restoration plan satisfactory to the Commission that provides for the bank to attain capital adequacy within a specified time-frame as may be acceptable to the Commission.

(e) . . . .

(2) The Commission shall also, notwithstanding any other provision of law, be authorized to liquidate the business of such person under Chapter IX of this Act if it finds the financial institution to be insolvent.

(f) It shall be a criminal offense punishable by a fine of not less than one thousand dollars ($1,000) nor more than double the amount of credit sought or imprisonment of not less than one year nor more than ten years, or both, for a person to willfully make a misstatement of material fact or fail to state a fact material to an application for credit.

(g) The measures and penalties provided in this section shall not preclude application of other civil penalties or criminal penalties as provided by other laws of the Republic of Palau.

(h) . . . .

(I) . . . .

Chapter VIII. Electronic Banking

Section 64. Computer access.

. . . .

Chapter IX. Receivership for Banks

Section 65. Basis for initiation of receivership.

(a) If the Commission determines that (1) a Palau bank is insolvent or the foreign bank which has a branch in the Republic of Palau is determined to have been insolvent by the regulatory agency of the jurisdiction in which it is domiciled; or (2) a Palau bank or branch of a foreign bank in the Republic of Palau is in violation of one or more of the provisions of this Act and such violation is deemed by the Commission to cause significant risk to the financial institution's depositors or the Republic of Palau's financial system, the Commission must revoke, modify, or suspend the license of that Palau bank or the Palau branch of the foreign bank and forthwith take possession and control of that Palau bank or the Palau branch of the foreign bank through a managing or liquidating receiver appointed by the Commission, provided that the Commission shall appoint a managing receiver where practical, who shall ultimately return the bank to private management, unless, in the sole discretion of the Commission, a liquidating receiver is required to safeguard the depositors or the financial system of the Republic of Palau. Upon recommendation by the receiver and approval by the Commission, a receivership may be converted from a liquidating receivership to a managing receivership or from a managing receivership to a liquidating receivership. During any and all receivership actions and liquidation proceedings pursuant to this Act, the Commission shall be advised and represented by the Office of the Attorney General. The receiver may be represented by the Office of the Attorney General, or if deemed necessary by the Commission, the receiver may hire outside counsel. The provisions of this chapter shall apply to any receivership that is in effect at the time of the effective date of this Act.

. . . .

(c) A receiver may be a person from the private sector or an official of the Commission who meets the qualifications prescribed by regulations of the Commission. The Commission may, for good cause, dismiss a receiver it appoints. The terms of the liquidating receiver's compensation shall include incentives for meeting the objectives described in section 68(a) and penalties for failure to meet such objectives.

(d) . . . . 68(a)(2) . . . . section 68.

Section 66. Notice and registration of receivership.

. . . .

(3) the bank's license has been revoked, modified, or suspended; and

. . . .

Section 67. Powers and duties of receiver; effects of receivership.

(a) A liquidating receiver shall have all the powers of the administrators and shareholders of the bank for which he or she has been appointed and, notwithstanding that the bank's license has been revoked, may, subject to subsection (b), operate the bank in its own name, and shall take the action in selling the bank or its assets that, in his or her opinion, is likely to result in satisfying more of the bank's liabilities to depositors and other creditors within three years from the date of his or her appointment; provided, that the Commission may extend the receivership for a further period of up to two years if, in its opinion, such extension will result in a material increase in the satisfaction of the bank's liabilities. Subject to the primary objective of maximum satisfaction of the bank's liabilities to depositors and creditors, the receiver shall expedite the sale of the bank or its assets and payments to depositors and other creditors. A managing receiver shall have all the powers of the administrators and shareholders of the bank for which he or she has been appointed and may operate the bank in its own name and may take such actions including the sale of any assets necessary to correct deficiencies with the bank. In addition to the general powers available to the receiver under this section, a managing receiver may: (1) continue or change any operations of the bank including taking deposits and extending credit to new or existing customers; (2) discontinue any operations or policies; (3) borrow money on either a secured or unsecured basis; (4) stop or limit the payment of any obligation; (5) employ or dismiss any officer, employee, or professional advisor; (6) discharge any obligation to a related person or entity; (7) offset any deposit obligation against any outstanding loan or other obligation owed by the depositor; (8) sue any current or former officer, director, or professional of the bank; and (9) execute any instrument in the name of the bank, and initiate, defend, and conduct in the name of the bank, any action or legal proceeding.

(b) A liquidating receiver may: . . . .

(c) . . . .

(1) Any person who willfully interferes with a receiver's access to and control over the offices, books of account and other records, and other assets of a bank for which he or she has been appointed shall be guilty of a criminal offense and subject to imprisonment for a period of not less than one year nor more than five years or fined in an amount not less than one thousand dollars ($1,000) per day nor more than ten thousand dollars ($10,000) per day for each day that the offense continues, or both.

. . . .

(f) . . . .

(2) . . . . employees; and

. . . .

(g) . . . . section 68 . . . .

. . . .

(I) . . . . section 68(a)(2) . . . .

(j) . . . .

(l) . . . . section 68(d) . . . .

. . . .

(1) Any assets of the bank that have not been sold at the end of the term of the receivership may be abandoned by the receiver.

. . . .

Section 68. Priorities in payment of claims.

(a) . . . .

(2) deposits of unrelated depositors, up to an amount not exceeding two thousand dollars per depositor;

(3) the amounts not paid on unrelated deposits under subsection (2);

(4) . . . . bank; and

(5) all deposits of related persons as set forth in Section 56(b).

. . . .

Section 69. Final reporting to the Commission.

(a) . . . . section 68 . . . .

. . . .

(c) Once the managing receiver finds that, in his or her professional opinion, that the managing receiver is no longer necessary, a report shall be filed with the Commission to that effect. Within 30 days, the Governing Board of the Commission shall vote whether to terminate or continue the receivership. If the Governing Board of the Commission votes to terminate the receivership, the managing receiver shall be empowered to take such actions as are necessary to terminate the managing receivership and return the financial institution to private management, taking into account the need to provide a smooth transition, which do not jeopardize the financial institution or its depositors. In no event shall such transition take more than 90 days, unless otherwise approved by the Commission.

Section 70. Miscellaneous receivership provisions.

. . . .

(c) All claims arising out of or in connection with the insolvency of a bank or a bank in receivership against a bank receiver or the Commission in relation to a bank licensed under this Act shall be finally settled in accordance with the provisions of this Act. No appeals from the acts of a receiver or the Commission may be taken except that the bank's shareholders holding not less than ten percent (10%) of any class of shares with the right to vote may appeal against the appointment of a receiver for a bank.

. . . .

Chapter X. Securities Brokers and Dealers

Section 71. Exempt securities; amendment.

. . . .

Section 72. Securities dealers’ obligations.

. . . .

Section 73. Securities brokers' obligations.

. . . .

Section 74. Customers’ assets. For the purposes of this Act, securities brokers shall not have the use of customers' cash or securities as the broker's capital in the ordinary course of the broker's own business. Securities brokers that are not banks must clear transactions with customers in the Republic of Palau through a bank in the Republic of Palau that acts as escrow agent for securities purchases and sales whereby securities will be delivered against payment. Securities must be kept by a bank custodian in the Republic of Palau or a foreign custodian accredited by a securities commission that is a member or a working partner of IOSCO.

Section 75. Bond for foreign corporations. For purposes of this Act, a securities broker or dealer that is a registered foreign corporation in the Republic of Palau that wishes to conduct securities brokerage or dealing in the Republic of Palau must either be a duty registered broker dealer with the United States Securities and Exchange Commission or must meet criteria set forth in regulations promulgated pursuant to this Act.

Section 76. Insider trading.

. . . .

Section 77. Authority of the Commission for registration statements. 12 PNC Chapter 2, Issuance of Securities, is amended by substituting "Registrar of Corporations or, if the relevant entity is subject to the provisions of Title 26.10, Financial Institutions Commission" in lieu of "Financial Institutions Commission" wherever it appears.

Chapter XII. Miscellaneous and Transitional Provisions

Section 78. Licenses of existing institutions; compliance with the Act.

(a) Entities conducting the business of a bank in the Republic of Palau on the effective date of this Act that wish to operate as a bank in the Republic of Palau must comply with the requirements of section 30. Cessation of banking or winding up by financial institutions doing business in the Republic of Palau as of the effective date of this Act shall be in accordance with applicable laws or regulations other than this Act. The Commission may appoint a receiver to liquidate the business of entities that must wind their affairs in accordance with the provisions of this subsection.

(b) Banks whose organization, administration, operations, or financial condition do not comply in one or more respects with the requirements of this Act or with any regulation or order issued by the Commission pursuant thereto shall submit to the Commission a detailed plan acceptable to the Commission describing the means and timetable, being not more than one year from the effective date of this Act, by which the bank will achieve and thereafter comply with the requirements of this Act and any regulation or order issued by the Commission. Such plan shall be submitted within sixty days from the date of a written request by the Commission, unless a shorter time is specified due to the severity of the deficiency or noncompliance.

Section 79. Regulatory and supervisory powers of the Commission.

. . . .

(b) The Administrative Procedure Act, 6 PNC Chapter 1, shall apply to any decision made by the Commission except ministerial and administrative decisions. A decision of the Commission to which the Administrative Procedure Act is applicable shall be treated as a contested case under the Administrative Procedure Act and shall be reviewed and decided under the Administrative Procedure Act and any related judicial decision.

Section 80. Publication of rules and regulations; fees.

(a) Rules and regulations issued by the Commission shall be published in accordance with the Administrative Procedure Act, 6 PNC Chapter 1.

(b) The Commission shall by rules and regulations charge fees to financial institutions for its supervisory and regulatory services that shall defray its direct and indirect costs incurred in providing such services. Fees shall be assessed against banks in relation to extraordinary expenses incurred by the Commission or its agents in relation to a bank. The annual fee to banks for ordinary supervision and regulation shall be set by regulations promulgated by the Commission.

(c) All fees paid to the Commission shall be deposited in the National Treasury to the credit of a special non-lapsing fund, not subject to the reprogramming authority of the President of the Republic of Palau, known as the "Financial Institutions Commission Expense Fund" and shall be used exclusively for the administration of the statutory duties of the Commission.

Section 81. Exemption of National Development Bank of Palau and Pacific Islands Development Bank. The National Development Bank of Palau ("NDBP") and the Pacific Islands Development Bank ("PIDB") shall be exempt from the provisions of Section 3(b), provided the NDBP and the PIDB do not take deposits or issue any bond or any other debt securities to the public in the Republic of Palau. The Commission may, by rules and regulations, provide for similar exemption to other development banks whose purpose is that of providing aid and assistance pursuant to a bilateral or multi-lateral agreement and which do not take deposits or issue any bond or any other debt securities to the public.

Section 82. Exemption.

. . . .

Section 83. Fraudulent Conveyance.

(a) Any administrator or related person who, with the intent to defraud his or her creditors, or to diminish the assets available to his or her creditors for payment of his or her debts, removes his or her property or effects out of Palau, or who sells, conveys, assigns, or conceals his or her property, with the intent to defraud, delay, or hinder depositors or other creditors of a financial institution of their rights, claims, or demands, whether a litigation claim is pending or reduced to judgment or not, has committed the crime of "Fraudulent Conveyance", which is punishable by a fine not to exceed two times the value of the property transferred, or imprisonment not to exceed five (5) years, or both.

(b) A transfer of property by an administrator or related person (as defined in Section 56 of this Act) for less than reasonably equivalent consideration on or within one (1) year before or after a receivership proceeding is initiated under this Act, shall be presumed fraudulent for the purposes of criminal and civil proceedings to avoid or revoke such transfers, or to obtain money judgment for the value of the property transferred.

(c) Any property so transferred under subsections (a) and (b) of this section, or found to be a fraudulent conveyance under other applicable laws of the Republic of Palau, shall be recoverable by or on behalf of the receiver from the transferee, except that a good faith transferee without notice of the claims of any creditors or the receiver has a lien on the property to the then extent of the current value of any consideration paid therefore. In lieu of recovery of the transferred property, or where the value of the property transferred has declined in value after the date of the transfer or there has been a subsequent transfer, judgment may be entered against the transferee for the reasonable value of the property so transferred on the date of the transfer.

(d) This section shall apply to all receiverships in effect at the effective date of this Act with regards to civil remedies for the recovery of property or the value thereof only; and shall not apply to all receiverships in effect at the effective date of this Act with regards to criminal matters.

(e) This section shall be deemed to be in addition to any other remedies available to creditors or the receiver under the common law of the Republic of Palau, and shall not be interpreted to preempt or otherwise invalidate other remedies or claims the receiver or creditors may have with respect to such transfers."

Section 3. Severability. If any provision of this Act, or the application thereof to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of the Act which can be given effect without the invalid provision or application, and the[sic] this end the provisions of this Act are severable.

Section 4. Effective date. This Act shall take effect upon its approval by the President, or upon becoming law without such approval.

PASSED: January 31, 2008

Approved on this 13th , day of Feb , 2008.

/s/______________
Tommy E. Remengesau Jr., President
Republic of Palau