Technical Assistance Consultant’s Report

Project Number: 34389-02 March 2009

Cambodia: Second Financial Sector Program Implementation (Financed by the Technical Assistance Special Fund; e-Asia and Knowledge Partnership Fund [funded by the Republic of Korea]; and Financial Sector Development Partnership Fund [funded by the Government of Luxembourg)

This

Prepared by J. Chertkow

Phnom Penh, Cambodia

For National Bank of Cambodia Ministry of Economy and Finance Ministry of Commerce

consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and e Government cannot be held liable for its contents. (For project preparatory technical

nce: All the views expressed herein may not be incorporated into the proposed project’s design. ADB and th assista

Abbreviations

ABC Association of Banks in Cambodia ADB Asian Development Bank CMA Cambodia Microfinance Association CIS Credit Information System FSDS 2006-2015 Financial Sector Development Strategy 2006-2015 FSP II Financial Sector Program II NBC National Bank of Cambodia IMF International Monetary Fund MEF Ministry of Economy and Finance MFI Microfinance Institution MOC Ministry of Commerce MOJ Ministry of Justice NA National Assembly RGC Royal Government of Cambodia CSEC Cambodia Securities and Exchange Commission TA Technical Assistance

EXECUTIVE SUMMARY

The assignment was carried out in two phases: from May 25 to July 4, 2008 (“Phase 1”) and from October 17 to November 20, 2008 (“Phase 2”).

A comprehensive review of the Law on Banking and Financial Institutions (“the BFI Law ”) was conducted and the consultant engaged in a series of consultation meetings with the NBC, MOC, MEF and stakeholders from the banking and MFI sectors.

Based on the consultative process, there appears to be a broad consensus that the current BFI Law needs updating and improving in certain areas. However, there is also a consensus that the current BFI Law has a number of strengths and is operating successfully in a number of aspects. As a result, there is a reasonable case for updating and improving the law. However there does not appear to be a justification for a replacement or for a complete “upheaval” of the law.

A set of selective amendments is consistent with the vision and key priorities of the FSDS 2006-2015. This will improve the legal framework, strengthen banking supervision and achieve important improvements in compliance with international standards and best practices.

The NBC has acted to create a regulatory framework by enacting prakas in a number of key areas where it has the proper authority to do so under the BFI Law. The regulatory framework demonstrates that the BFI Law is performing as a successful law in many areas. A set of selective amendments, including additional authority to adopt new regulations, standards and guidelines, will provide the opportunity to build on the NBC's success to date.

Fundamentally, the approach taken in making the proposals for updating and improving the BFI Law is based on three guiding principles:

1) Principle of “Renovation” of the Current BFI Law: The goal should be to “renovate” and to build on the existing law, not to completely replace it with a new law. The amended articles should reflect international standards and best practices.

2) Principle of “Enabling and Empowering” of NBC: The aim is to strengthen its banking supervision to reflect international standards through the specific authority to issue new regulations, standards and guidelines.

3) Principle of “Addressing Deficiencies” of the Current BFI Law: The aim is to address certain areas where the current law does not reflect the reality of Cambodia’s financial sector or of NBC's supervisory practices (for example with regard to the MFI sector).

It is observed that the NBC's banking supervision “tool kit” is a strong one under the current BFI Law. The question is therefore not to add to (or to delete) these powers but for the NBC to apply and enforce the legal provisions.

For example, the NBC currently has powers to deal with holding companies and financial conglomerate groups. The BFI Law contains a number of Articles that, when read together, provide the basis for a framework to supervise bank holding companies and banking corporate groups on a consolidated basis consistent with the Basel Banking Supervision Committee Core Principles.

The Report notes that some changes will be needed in both the BFI Law and the NBC Law to reflect developments consistent with FSDS 2006-2015, notably the creation of the new Cambodia Securities and Exchange Commission to license and supervise securities activities.

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A document entitled Recommendations and Explanatory Notes for Proposed Amendments, revised November 14, 2008, is attached to this Report as Appendix “C”. It is a detailed “clause by clause” set of the recommendations for updating and improving the BFI Law with explanations to assist in understanding the reasons for the recommended amendments.

As a result of the comprehensive review of the BFI Law in Phase 1, ten key areas were identified, including eight areas for important recommended changes to the current law. Consistent with the three guiding principles, these should be seen as important technical improvements to renovate the law, to strengthen NBC's banking supervision and to address deficiencies. In some specific cases the recommendations for amendments address areas of concern where a 2004 IMF assessment found that the BFI Law was materially non-compliant with the Basel Banking Supervision Committee Core Principles.

During Phase 2 of the assignment, a number of comments were received and there was a consequential “fine tuning” of many of the proposed amendments to the BFI Law. Attached to this Report as Appendix “D” is a set of Draft Amendments to the BFI Law (Version 3.0), incorporating all comments received and agreed upon with the NBC. It should be read along with the Recommendations and Explanatory Notes document.

The above-noted documents (along with a Cover Note addressed to H.E. The Governor, attached as Appendix “B”) were provided to H.E. Governor Chea Chanto and NBC senior management officials at a meeting and presentation held on November 19, 2008.

In summary, this Final Report reviews the specific major recommendations for amendments to the BFI Law in order to achieve a principle-based revised law reflecting international standards. The Report also makes recommendations for future work with the NBC to prepare regulations, standards and guidelines relevant to its banking supervision role in several important areas of the NBC's authority (see Appendix “G”).

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1.0 INTRODUCTION AND BACKGROUND

The purpose of this Final Report is to describe the activities and outputs of the international banking legal expert's assignment with the TA work carried out in two phases from May 25 to July 4, 2008 (“Phase 1”) and from October 17 to November 20, 2008 (“Phase 2”).

The Financial Sector Development Strategy 2006-2015 adopted by the RGC provides a vision and strategy for Cambodia's financial sector. It identifies immediate, medium and long-term priorities for banking, microfinance, non-bank finance and capital markets in Cambodia. A key objective is continuing to improve the legal and regulatory frameworks for banking supervision. The FSDS 2006-2015 includes the goal of a “comprehensive review of the banking law and regulations to update and improve as necessary.”

In 2007 the Final Report for ADB TA 4835 Preparing the Financial Sector Development Program also recommended a comprehensive review of the Law on Banking and Financial Institutions (the “BFI Law”), noting as follows:

“The Law on Banking and Financial Institutions, adopted in 1999, is approaching the tenth anniversary of the original draft. There is a strong case to be made in favour of a comprehensive review of the banking law, as well as the Law on Insurance, to effectively address the features of a changing domestic market...”

Through the second Financial Sector Program from the ADB, the RGC agreed to undertake this comprehensive review and submit the revised law to the Council of Ministers and the NA for adoption before/by 2010.

2.0 TERMS OF REFERENCE FOR THE ASSIGNMENT

The TOR set out the following components:

(i) Objective/Purpose of the Assignment The primary purpose of the assignment was to assist the NBC to undertake a comprehensive review of the BFI Law to revise the law in view of a fast changing domestic market and increasing international economic integration, and to submit the draft law to the Council of Ministers and the NA during the FSP II that runs until 2010. (ii) Scope of Work According to the TOR, the expected key outputs were: (i) a draft revised BFI Law that is acceptable to NBC and ADB; (ii) draft Implementing Regulations (subdecree and prakas) to accompany the revised law; (iii) Explanatory Notes to help NBC staff, members of the Council of Ministers and the NA understand the objectives and intent of the revised sections; and (iv) an Interim Report, and a Final Report. The consultancy assignment covered a period of 2.5 months, carried out on an intermittent basis during 2008. (iii) Detailed Tasks According to the TOR, the detailed tasks for the international banking legal expert were:

To undertake a comprehensive review of the BFI Law in view of a changing domestic market;

In close consultation with NBC, commercial banks, and other stakeholders, to draft amendments to update the BFI Law that include provisions on consumer protection, protection of the regulator, procedures for distressed and insolvent banks, and

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implementing regulations;

To provide Explanatory Notes to help NBC present the draft amended law to the Council of Ministers and the National Assembly;

To submit Interim and Final Reports to ADB and NBC.

3.0 ACTIVITIES AND OUTPUTS FOR PHASE 1 AND PHASE 2 WORK The following table shows the relevant tasks set out in the TOR linked to the activities and outputs carried out for Phase 1 and Phase 2 of the assignment:

DETAILED TASKS SET OUT IN TOR

ACTIVITIES AND OUTPUTS FOR PHASE 1 AND PHASE 2 WORK

“Undertake a comprehensive review of the BFI Law in view of a changing domestic market.”

The consultant conducted a comprehensive review of the BFI Law during Phase 1.

“In close consultation with NBC, commercial banks, and other stakeholders, draft amendments to update the BFI law.”

The consultant engaged in a series of consultation meetings with NBC, MOC, MEF, and other stakeholders. See Discussion Paper attached as Appendix “A”. See List of Meetings attached as Table 1 and Table 2. The consultant drafted a set of Proposed Amendments to update and improve the BFI Law. (See Draft Amendments to BFI Law attached as Appendix “D”). There was an agreed upon list of Fine Tuning revisions during Phase 2. See Checklist attached as Appendix “E”.

“Provide explanatory notes to help NBC present the draft amended law to the Council of Ministers and the National Assembly.”

The consultant provided a Recommendations and Explanatory Notes document to NBC. (See Appendix “C”).

“Draft Implementing Regulations (subdecree and prakas) to accompany the revised law.”

Refer to Section 10.0 of this Report.

“Submit Interim and Final Reports to ADB and NBC.”

The consultant submitted the Draft Interim Report to ADB at conclusion of Phase 1 (July 2008) and the Final Report herewith.

4.0 METHODOLOGY AND APPROACH TO THE ASSIGNMENT

4.1 Consultation Meetings with NBC, MOC, MEF and Stakeholder Groups in Phase 1 and 2

The international banking legal expert engaged in a series of consultation meetings that commenced in Phase 1 with relevant senior officials and members of departments within the NBC and key officials of the MEF and MOC. Following the meetings with government officials, there were meetings during Phase 1 with the major stakeholders in the banking and microfinance sectors (ABC and CAM). These consultation meetings continued during Phase 2.

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Lists of the consultation meetings are set out on Table 1 and Table 2 attached to this Report.

A discussion paper entitled Some Issues for Discussion and Review (the “Discussion Paper”) was circulated in advance to the attendees for all consultation meetings. A copy of the Discussion Paper is attached to this Report as Appendix “A”. The Discussion Paper set out questions with respect to eleven (11) major areas relevant to Cambodia's legislative and regulatory framework for banking activities and banking supervision. These topics and questions were the focus for discussions at the consultation meetings during Phase 1.

Following Phase 1, a number of comments were received from the NBC and from Mr. Thierry Bangratz, General Advisor, including proposals for “fine tuning” of the draft amendments, plus some additional agreed upon proposals for revisions. During Phase 2 consultation meetings were held to discuss the comments with Mr. Bangratz and also the relevant NBC officials to review and clarify all comments.

The consultant prepared a Checklist Document of all agreed upon points for “fine tuning” and further revisions of the Draft Amendments. This is attached to the Report as Appendix “E”. There were approximately fifty (50) items agreed with the NBC for fine tuning of the draft amendments. During Phase 2 further meetings (including the consultant's presentation) were held with representatives of the banking industry (including MFIs). Some comments were received from individual stakeholders at these meetings and in written form.

4.2 Review of Relevant Banking and Financial Laws and Other Legal Documents

In order to conduct a comprehensive review of BFI Law, the international banking legal expert reviewed the following laws and legal documents (in addition to the text of the current BFI Law):

The laws and Prakas included in the new NBC Consolidated Volume, dated March 2008,entitled Laws and Regulations Applicable to Banks and Financial Institutions (Note: This is the first time such a volume has been produced in Cambodia. NBC senior management refer to this new volume as “the Banking Code” and the NBC intends to update it every two years.)

The relevant laws reviewed included: Law on the Organization and Conduct of the National Bank of Cambodia, 1996 (the “NBC Law”); Law on Negotiable Instruments and Payment Transactions (2005); Law on Anti-Money Laundering and Combating the Financing of Terrorism (2007); Law on Commercial Enterprises (2005);

The Prakas reviewed in the Banking Code included a wide range of regulations applicable to banks, MFIs and other entities;

Law on the Issuance and Trading of Non-Government Securities, 2007 (the “Securities Law”);

Financial Sector Development Strategy 2006-2015 (FSDS 2006 -20015);

The Basel Banking Supervision Committee, Core Principles for Effective Banking Supervision (revised 2006);

The Basel Banking Supervision Committee, Sound Corporate Governance Principles, 2006;

The Basel Banking Supervision Committee, Supervisory Guidance on Dealing with Weak Banks (2002);

IMF detailed assessment titled Compliance of Cambodia with Basel Core Principles, 2004;

Memorandum by Monsieur Michel Dabadie, NBC General Advisor, titled Banking Law

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and NBC Law: Potential Need for an Update, dated June, 2008;

Memoranda by Monsieur Thierry Bangratz, NBC General Advisor (from October 2008), dated November 4, 2008 titled Banking Law – Current Revision Process and Proposals; and dated November 8, 2008 titled Adjustments to Be Brought to the Banking Law,

Thailand Financial Institutions Business Act, 2008.

5.0 GENERAL OBSERVATIONS BASED ON CONSULTATIONS AND REVIEW OF THE BFI LAW

Based on the series of consultations noted above, there appears to be a broad consensus that the current BFI Law needs updating and improving in certain areas. However, it is observed that there is also a consensus that the current BFI has a number of strengths. This consensus is supportable based on the comprehensive review of the provisions of the current BFI Law. In other words, there is a reasonable case for updating and improving the law but there does not appear to be a reasonable case for a replacement or for a complete “upheaval” of the law.

A set of selective amendments is consistent with the vision and key priorities of the FSDS 2006-2015. This will improve the legal framework, strengthen banking supervision and achieve important improvements in compliance with international standards and best practices. These amendments will also correct deficiencies in the current law, for example, where the wording in the law does not reflect the reality of the NBC's practices or the Cambodian financial sector and legal infrastructure.

The NBC has acted to issue regulations in a number of key areas where it has the proper authority to do so under the BFI Law. The establishment of the framework of Prakas (e.g. Regulatory Framework) shows that the BFI Law is essentially a successful law in many areas. A set of selective amendments, including additional authority to set regulations, standards and guidelines will provide the opportunity to build on NBC's success to date.

It is noted that, in international practice, legislation makes provision for more detailed requirements to be set out in supporting regulations. This situation exists today in Cambodia with the NBC empowered to issue Prakas in a number of important areas as set out in the Banking Code. This provides greater flexibility for the banking supervisor to act under authority of the primary legislation and provides the capacity to build a set of regulations as needed. This avoids the lengthy and sometimes difficult process of amending the law in Cambodia. (Note that a lengthy process of fifteen separate steps is required in order for a new law to be adopted by the NA). The regulations issued by the banking supervisor have the full force of law because they are made under the proper authority of the legislation. Therefore banks and other financial institutions must conduct their business operations according to these regulations.

6.0 APPROACH TO THE UPDATING OF THE BFI LAW: THREE GUIDING PRINCIPLES

In connection with the updating and improving of the BFI Law, the consultant followed three (3) guiding principles:

1). Principle of “Renovation” of the Current BFI Law. There are a number of strengths in the BFI. The goal should be to “renovate” and to build on the existing law, not to completely replace it with a new law. The amended articles should reflect international standards and best practices. This “renovation” should also contribute to the growing understanding of the set of laws applicable to banking as set out in the new Banking Code volume. It also avoids the possible “upheaval” caused by an unnecessary replacement and substitution of a completely new law.

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2). Principle of “Enabling and Empowering” of NBC to strengthen its banking supervision to reflect international standards through the specific authority to adopt new regulations, standards and guidelines. Examples of new regulations, standards and guidelines could include the areas of corporate governance (in addition to current and new prakas), related party transactions, details on dealing with problem banks (not otherwise set out in the amended law), financial holding companies , customer protection matters and other identified areas.

3). Principle of “Addressing Deficiencies” of the current BFI Law. There are certain areas where the current law does not reflect the reality of the Cambodia's financial sector or of NBC's supervisory practice. For example, the law does not reflect the important growth of the microfinance sector since 1999 (and a number of prakas issued by NBC to date). In fact there is no specific reference to Microfinance Institutions (MFIs) at all in the current law, except a transitional provision in Article 74.

In light of the three guiding principles, the following sections of this Report set out observations and recommendations for updating and improving the BFI Law, including the “fine tuning” during Phase 2.

7.0 GENERAL OBSERVATIONS ON THE BFI LAW AND NBC BANKING SUPERVISION

7.1 The NBC's Enforcement of Its Current Supervisory Powers

It is observed that the NBC's banking supervision “tool kit” is a strong one under the current BFI Law. Reference can be made to Article 52 that provides a range of important powers for the NBC. The question for Article 52 is not to add to (or to delete) these powers but for the NBC to apply and enforce the legal provisions. The position will be assisted if there was statutory protection or immunity in order to enhance the independence of the banking supervisors as recommended in this Report (see below).

More specifically, the NBC currently has powers to deal with holding companies and financial conglomerate groups, although to date it has not acted within its authority to set rules or standards for the industry. This strong authority is based on the current wording of the law in several provisions, particularly Articles 21 and 36. According to Article 21 a “holding company” is treated as a “covered entity” that falls under the supervision of NBC. Also in the current Article 40.5 there is power for off-site and on-site examination of each “covered entity” and this can be extended to cover a subsidiary and any related entities, including shareholders.

Other provisions to be noted are: Article 41 (NBC's supervisory duties include defining and enforcing prudential rules related to the “financial structure and management that covered entities must abide by”); Article 45 (refers to “consolidating accounts under the conditions prescribed by the supervisory authority”) and Article 46 (external auditors duties include a report on “consolidation methods”).

These provisions together are strong powers and authorize the NBC to apply a system of consolidated supervision of banks and banking corporate groups. These provisions are consistent with the Basel Banking Supervision Committee Core Principles in this area (see CP 19 and CP 24). It is observed that these powers will be the basis for a supervisory framework that will be increasingly important as Cambodia's financial sector develops.

7.2 The Problem of the Article 75 Provision (and Similar Provisions under Cambodian Law)

The English version of Article 75 of the BFI Law says that “all provisions contrary to this law are hereby repealed”. Most, if not all, Cambodian statutes include such a provision. This appears to create a risk that a perfectly valid operating law will be “repealed” by implication as a result of

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this kind of statement included in another law, without any reference whatsoever to the first law. This contributes to create a greater level of uncertainty and lack of transparency.

It is observed that the Article 75 type of provision has been used as a result of Cambodia's recent history. Cambodia's legal infrastructure combines elements from various legal systems since Cambodia's independence from France in 1954. One of the major problems has been to identify all applicable laws, especially given the environment from 1975 to 1979 when all laws, treaties and related documentation were destroyed.

The solution applied by MOJ officials was to include an Article 75 type of provision in the laws. However, given the pace of change and reforms to Cambodia's legal infrastructure, this approach would seem to be a dangerous way of constructing a new legal system. In a few more years, it may be very difficult to know what laws are actually applicable since they potentially repeal each other. This should be recognized as an important area of legal reform that ought to be addressed and could be the subject of a donor TA program.

This is not a mere theoretical issue. An example of the problem is the situation of the BFI Law and NBC Law in connection with the new Securities Law. The question is whether some of the banking laws are “contrary” to the new Securities Law and therefore repealed by implication. In this context, what is the meaning of “contrary”? Does it include duplicating or supplementing of a legal duty (for example the licensing of securities activities by the new CSEC) or does it refer only to a true conflict where the two laws cannot “live together”?

The alternative position is for any new law or prakas to specifically refer to the previous laws being repealed by providing a detailed list of these relevant laws. It appears that recently the NBC has attempted to adopt this method and recent prakas have generally included a specific article that provides a detailed list of previous provisions repealed.

Therefore the current Article 75 of the BFI Law should be deleted and replaced by a list of any specific provisions that are repealed.

7.3 Impact of Reform to Cambodia's Capital Market: Need for Some Revisions to the NBC Law

The TOR for the assignment requires a comprehensive review of the BFI Law. It is noted that the NBC Law is not included under the TOR. However, it is observed that there is a need for some revisions to the NBC Law. Consistent with the FSDS 2006-2015, there have been some important recent developments in Cambodia related to the legal framework for its financial and capital markets.

Most importantly, the new CSEC is established under the Securities Law. Both the current BFI Law and the NBC Law reflect that NBC has the authority for licensing and supervision of securities activities. The relevant provisions of the BFI Law are Articles 6 and 7. There is a reference to the power of the NBC found to license and supervise securities activities in accordance with the provisions of the NBC Law (see Article 7, Paragraphs 4 and 11, and Article 33). This Report makes some recommendations to amend the provisions of the BFI Law in connection with the securities activities of banks, either carried out directly or through a securities company subsidiary. This is referred to as a “Double License Approach” and discussed below in section 8.2 of this Report. It is suggested that it will also be necessary in the future to amend the NBC Law to reflect the regulatory framework for securities activities and NBC's supervisory powers in light of the

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adoption of the Securities Law and the creation of the CSEC. There will also be a need for an MOU between the new CSEC (MEF) and the NBC with regard to the supervision of capital markets.

7.4 The Situation of Cooperatives and Credit Unions in Cambodia

During Phase 2 NBC Banking Supervision Department officials raised the issue of the carrying on of banking operations using some type of “cooperative” association form. There are currently small, rural operations sometimes calling themselves “savings bank”; there is a French-based initiative aimed at conducting the operations of a credit union in Cambodia; and there is a project being carried out by the Credit Union Foundation of Australia (CUFA).

Under the current BFI Law (and as retained in the proposed amendments), there is a reference to “cooperatives” carrying on business pursuant to a separate law. However, unlike a number of countries in the region, Cambodia does not currently have a Law on Cooperatives or any legal framework for using the cooperative form of business association.

It is strongly recommended that the ADB support work for the development of a new Law on Cooperatives, either as part of FSP II or another program. The benefit to Cambodia would be a legal framework for cooperatives that would facilitate the operations of credit unions and cooperatives, including MFIs that may decide to use this form of business association. This would enhance Cambodia's financial sector and contribute to sustainable economic growth, particularly in rural areas.

In the interim, it is observed that Article 74.3 of the BFI Law offers a purely short-term solution to deal with the types of operators attempting to use the cooperative form of association. This transitional provision of the law (previously used as the basis for NBC's regulations for MFIs) covers the situation of “any entity carrying out banking activity in particular so as to promote banking intermediation in ...services to households”. The NBC has the power to set special regulations regarding minimum capital, licensing, prudential rules and conditions of establishment.

8.0 SPECIFIC OBSERVATIONS AND RECOMMENDATIONS FOR UPDATING THE BFI LAW

The document entitled Recommendations and Explanatory Notes for Proposed Amendments, revised November 14, 2008, is attached to this Report as Appendix “C”. It is a detailed “clause by clause” set of the recommendations for updating and improving the BFI Law with explanations to assist in understanding the reasons for the recommended amendments.

As a result of the comprehensive review of the BFI Law, ten key areas were identified, including eight areas for important recommended changes to the current law. Consistent with the three guiding principles, these should be seen as important technical improvements to renovate the law rather than an in-depth “upheaval” of the law. During Phase 2 there was some “fine tuning” of the recommendations (and some additional revisions agreed on with the NBC), but all key areas for updating the law remain intact, as noted below.

8.1 Banking Operations and Business Powers

“Banking Operations” are now defined in Article 2 to be three categories of banking: (i) credit operations (including leasing, guarantees and commitments under signature), (ii) deposit-taking and (iii) provision of means of payment and processing of means of payment. It is observed that the BFI Law is working well in this area, with a good platform for banking operations and financial business activities. The stakeholder groups in the banking and MFI

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sectors advised that there are no barriers or obstacles in carrying out business activities or in introducing innovations for financial products and services. The current law requires that an entity carrying out even one of the categories of banking must obtain a license from the NBC. It is suggested that this approach to the business of banking is a reasonable and appropriate one at this stage of Cambodia's economic development as it provides the necessary foundation for NBC's banking licensing and supervision. The experience of the global financial crisis demonstrates the importance for banking supervisors to have the capacity and authority to regulate and to supervise both deposit-taking financial institutions and financial institutions which are credit providers and not permitted to take deposits from the public (e.g., the category of “Specialized Banks” under the BFI Law.) Therefore it is recommended that there should be no substantive change to Article 2, except for technical revisions to refer to MFIs (which can be deposit taking or non-deposit taking) and “Specialized Banks” (which are non-deposit taking). 8.2 Capital Market and Securities Activities

The question of the NBC's authority for the licensing and supervision of securities activities of banks in light of the future CSEC authority has been noted above in section 7.3 of this Report.

It is recommended that the BFI Law be amended to apply a “Double License Approach” that will reflect NBC's duties consistent with the responsibilities of the new CSEC under the Securities Law.

The “Double License Approach” being recommended will work as follows: A bank holding a license from NBC will also hold a license and be supervised by the CSEC to carry out the securities activities, subject to the terms of the license. The NBC will have supervisory authority to issue a prior written objection to the issuance of the securities license by the CSEC and will also have power to request the CSEC to revoke a license on the grounds that the bank has contravened a provision of the laws or regulations governing its activities or has failed to heed a warning by NBC or not complied with an injunction. In addition, a bank carrying out securities activities must establish specific policies and procedures appropriate to the activities it carries out, including the use of information barriers and restrictions (so-called “Chinese Walls” or firewalls) in order to avoid conflicts of interest, and to separate its functions and activities as required by the NBC and the CSEC. Where a bank chooses to conduct securities activities through a securities subsidiary, the Double License Approach will also apply to the licensing and supervision of the subsidiary.

8.3 Corporate Governance

Article 18 sets out conditions relevant to the “honesty” of board members, managers and authorized signatories (at least in terms of no history of criminal activities, fraud, breach of trust, etc.). However, there is no specific provision dealing with duties of board members or managers, or with their qualifications, fitness or character.

In practice, the NBC does examine the suitability of bank directors and managers using a detailed questionnaire, which covers such things as professional qualifications and experience. Article 40 also gives authority for issuing regulations to require changes in the “management

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and activities” of a bank. (It is noted that recently a “Fit and Proper” prakas has been prepared by the General Advisor, NBC, in addition to a general corporate governance prakas.)

The Basel Banking Supervision Committee has issued a set of eight principles for guidance in assembling the corporate governance framework including the board's qualifications, mandate, roles and duties. It is suggested that it is useful to build these elements into the BFI Law such as including some essential provisions in connection with the board of directors, and by empowering the NBC to set regulations, standards and guidelines on corporate governance.

Therefore it is recommended that the BFI Law be amended to provide improvements to include the duties of directors and the composition of the board, and also to strengthen NBC's authority to issue regulations, standards, circulars and guidelines in the areas of corporate governance and internal control (See proposed amendments to Articles 18 and 18.A).

During Phase 2, there was some fine tuning of the draft to include the “Fit and Proper” assessment in Article 18. Also some comments were received from MFIs and smaller banks about the requirements for board composition and “independent” members. As a result, there was some fine tuning to the amendments so that MFIs are only required to have three board members and one independent director. 8.4 Equity Participations

Articles 33 to 35 deal with investments by banks in other commercial entities and in financial institutions. The rules currently place some limits on the level of equity investments in commercial or industrial entities (15% of “own funds”). But currently there is no limit on an investment in an industrial, commercial or real estate entity “linked” to the business of the bank. There is no provision under the BFI Law for supervisory approval for this type of investment, although approvals are required for investments in another bank or financial institution (such as an insurance company).

An IMF assessment in 2004 identified this provision as “materially non-compliant” with the Basel Core Principles. Lack of limits or supervisory approvals for investments in domestic industrial, commercial or real estate firms “linked” to the running of a bank raises serious prudential concerns (given the international experience with financially troubled banks heavily invested in the real estate and/or construction industries linked to their businesses).

It is therefore recommended that amendments be made for improving Article 34 to bring it into compliance with the Basel Core Principles. The wording needs to be stronger to ensure there is no excessive risk taking by banks, such as investing in real estate or commercial entities. Also it is recommended that the provision be amended to require prior NBC approval for banks making any major investments, and to provide for “temporary investments” where a bank becomes the owner of shares after making a loan to a company. The NBC shall have the power to set criteria for approvals of equity participations.

It was also recommended that category of investments in agricultural companies by banks (e.g. unlimited investment by a bank without NBC approval) be deleted from Article 34. After detailed consultations on this point, it appears that the NBC senior management now agree with this recommendation.

8.5 Related Party Transactions

Abusive self-dealing practices have been identified as a major cause of bank failures worldwide. Articles 49 to 50 currently set out a definition of “related party” (for example, a person holding directly or indirectly at least 10% of the capital or voting rights) and gives the NBC the discretion to extend it to other parties (i.e., family members).

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However, there are no restrictions or prohibitions on related party transactions in the current BFI Law. There are some relevant rules in the Prakas on Loans to Related Parties setting out a requirement for market rates and a total limit of loans to related parties (10% of the bank’s net worth).

The IMF assessment found that the current rules were “materially non-compliant” with the Basel Core Principles (CP 11). It was specifically noted that the current rules did not cover loans to an entity controlled or influenced by a bank's major shareholder, raising the risk of a potential abuse and harm to the bank and its depositors.

Therefore it is recommended that the law be amended for the strengthening and improving the provisions on related parties. The aim is to prevent abuses from a bank's exposures to related parties. Therefore, there is a need to strengthen the wording in the definition of “related parties” (for example, to include entity controlled or influenced by bank's major shareholders or directors). It is also recommended that the rules be improved to clarify which related party transactions are permitted or prohibited.

During Phase 2, the proposed amendments were fine tuned. First, there is a revision in Article 48.3 to say now that: “A related party transaction with a covered entity shall be prohibited unless it can be performed in full compliance with the rules and restrictions set forth by the National Bank of Cambodia regulations.”

Second, it must be clear under the law that there will be no “special permission” granted on a case by case basis. The rules are principle-based with full transparency under the NBC's regulations. Therefore the draft now removes any possibility for misinterpretation. Third, the amendments have been fine tuned to now introduce a broad definition of “kinship” to reflect the situation of Cambodia's extended families. It includes not only immediate family members, but also brother-in-law, sister-in-law, son-in-law and others to apply to the extended family members.

8.6 Supervision of Holding Companies and Financial Conglomerates

As noted earlier in section 7.1 of this Report, the BFI Law contains a number of Articles that, when read together, will provide the basis for a framework to supervise financial holding companies (FHCs) and banking corporate groups on a consolidated basis consistent with the Basel Core Principles.

Therefore it is recommended that there is no need for any change in the current wording of the law (Articles 21 and 26). The most important thing is that the law should be applied and enforced by the NBC (for example, by consolidated supervision of banking groups). This is an area where it is strongly recommended that the NBC develops rules and standards for dealing with holding companies and banking corporate groups.

8.7 Protection or Immunity of Banking Supervisors

The Basel Core Principles (CP 1) contemplate legal protections for supervisors as a condition for their independence. The BFI Law should contain a provision for immunity or protection of NBC banking supervisors and regulators.

Therefore it is recommended that the BFI Law be amended to provide protection consistent with the Basel Core Principles with the aim of independence and effective banking supervision.

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8.8 Bank Secrecy Provision Article 47 creates a very strong non-disclosure obligation applicable to banks. There is also an exemption to this obligation: “the obligation of professional secrecy may not be used as a ground for nondisclosure vis-à-vis the supervisory authority, auditors, provisional administrators, liquidators, or a court dealing with criminal proceedings.” An important issue was raised in connection with the bank secrecy provision and the planned Credit Information System (CIS). The above-noted exemption for disclosure of information is not broad enough to cover the scope of the requirements of the CIS. Consequently, a revision will be necessary. During Phase 2, the NBC requested that an exemption under the provision be extended to the future operations of a private sector Credit Bureau. Therefore it is recommended that there be an appropriate amendment for purposes of the CIS and any private sector Credit Bureau operating in Cambodia (subject to regulations of the NBC).

8.9 Strengthening NBC's Powers for Supervisory Intervention for Problem Banks

Currently there are two important elements of the regulatory framework for dealing with financially troubled or insolvent banks: Chapter XX of the BFI Law (“Provisional Administration – Liquidation”) and Prakas on Standardized Procedures for Prompt Corrective Action for Banking and Financial Institutions.

The framework under the current BFI Law essentially deals with liquidation procedures for an insolvent bank. The current law does not provide the NBC with the flexibility or authority to engage in activities outside the context of a liquidation, for example steps for a restructuring, sale of all or part of the assets to a financially viable bank, sale of shares or other types of resolution activities. The Prakas on Prompt Corrective Action (PCA) sets out a framework for dealing with a financially troubled bank that is “undercapitalized” according to the categories based on the solvency ratios defined in the Prakas on Solvency Ratios of Banks.

It is clear that the NBC currently has a very limited set of powers under the law and Prakas for dealing with an insolvent or financially troubled bank. It is a reasonable conclusion that the NBC does not have the “tool kit” a banking supervisor needs to deal with financially troubled banks in order to protect the interests of depositors and the financial stability of Cambodia's banking system. This critical supervisory aspect has been highlighted during the global financial crisis. Fortunately, the recent experience in Cambodia avoided the most critical problems witnessed globally; and the crisis has provided some important lessons relevant to Cambodia's future financial and capital market reforms, including the amendments to the BFI Law and the development of future regulations and standards.

Therefore it is recommended that there should be amendments to Chapter XX of the BFI Law with the aim of building a framework with the necessary tool kit for NBC for the timely resolution in the case of a financially troubled bank. The proposed amendments provide a broad set of powers, including authority for a sale or restructuring of financially troubled bank.

During Phase 2, a significant amount of work was done to fine tune the proposed amendments. There was fine tuning of the provisions relevant to the appointment of a provisional administrator

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to refer to “financial viability” of problem bank or financial institution. This is intended to be a broader term than the bank's “solvency”. The fine tuning is intended to address the types of circumstances witnessed recently in the global financial crisis. Therefore NBC has the power to appoint a provisional administrator where “a covered entity has ceased, or is about to cease, to be financially viable, and the financial viability of the covered entity cannot be restored.”

There was also fine tuning of the previous version of the draft to make it clear that NBC may take into account all matters it considers relevant including but not limited to a broad set of factors that includes the bank's liquidity, solvency and management and any concerns about the stability of the banking system and the best interests of the financial system in Cambodia.

During Phase 2, the consultant was requested by the NBC Banking Supervision Department to provide a more detailed explanation of how the proposed new powers would operate. A memorandum dated November 3, 2008, was provided to Mrs. Chea Serey, Director of the Banking Supervision Department, titled Treatment of Problem Banks and Financial Institutions under BFI Law. A copy is attached to this Report as Appendix “F”.

8.10 Strengthening Customer Protection

A body of rules for the protection of customers is contemplated under Article 70 of the current law. However to date no rules have been drafted to implement fair practices for the benefit of consumers. It appears that the original basis for Article 70 was a type of voluntary code of practices supported by the banking industry professional association along the lines of the U.K.'s so-called “Banking Code”.

It is suggested that the provision should be strengthened to give specific authority to the NBC to adopt regulations, standards or guidelines for customer protection in a number of important areas. It is suggested that this is a prime example where it is appropriate for the NBC to address issues of customer protection and market conduct by issuing regulations, standards or guidelines. The main reason is that NBC needs the flexibility to act where there is a decision to deal with emerging market situations and new banking products. For example, ANZ Royal Bank is currently involved in launching a new retail banking service called “WING”. This service will provide a means of payment for bank customers using mobile phones to transfer money. This is a highly innovative new payment product for the Cambodia market with the potential to benefit both urban and rural customers.

The recommended categories where the NBC should be able to act include:

1. disclosure of fees and charges for the operation of accounts and for other banking and financial services,

2. opening and termination of accounts and credit lines, 3. negotiation and renegotiation of loans, 4. rights and obligations of the customer in connection with the use of credit and debit cards and other means of payment, including electronic and on-line means of payment, 5. disclosure of the methods for calculation of interest and borrowing charges,

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6. providing information and advice in connection with financial products and services, 7. prohibition on certain selling practices for financial products and services, including any “tied selling practice” where there is undue pressure on the customer. (However, a covered entity may offer a product or service to a customer on more favorable terms or conditions), and 8. complaints by customers of covered entities in connection with financial products and services.

Therefore it is recommended that the law be amended to provide for an enhanced authority so that the NBC may issue regulations, standards or guidelines in connection with the range of customer protection measures noted above.

9.0 DRAFT VERSION 3.0 OF THE PROPOSED AMENDMENTS TO THE BFI LAW

Attached to this Report as Appendix “D” is a set of Draft Amendments to the BFI Law, Version 3.0, dated November 14, 2008. This document is intended to be read as a “clause by clause” draft of a proposed Amended BFI Law. It should be read along with the Recommendations and Explanatory Notes for Proposed Amendments, dated November 14, 2008. (Appendix “C”).

10.0 IMPLEMENTING REGULATIONS (SUBDECREE AND PRAKAS) FOR THE REVISED LAW

This category of legal document is not necessary under Cambodian law and legislative process to accompany the set of Amendments to the BFI Law in the Council of Ministers and National Assembly.1 According to the requirements of Cambodian law and governance “Implementing Regulations” refer to regulations issued by the Government (being the executive power) in order to set out detailed rules/procedures guiding the implementation of higher regulations (most commonly the law adopted by the National Assembly). In other words, the term “Implementing Regulations” (subdecree and prakas) refers to a legal document or documents required where the higher law or regulation specifically so states. There is no strict rule in Cambodia which specifically and conclusively states when a new law will require an Implementing Regulation (subdecree or prakas). As a matter of practice, an Implementing Regulation is needed only when its existence is specifically required by the higher law/regulation. There are several recent examples in Cambodia where a new law specifically required an Implementing Regulation. The technical reason in each case is that there are detailed or technical procedures required for the new law to work and the government (executive power) requires the flexibility to adjust the detailed rules and procedures based on an actual identified need after the adoption of the new law: For example, the Law on Investment states that the detailed procedures for applying investment incentives shall be determined in an Implementing Regulation (subdecree). The Law on Commercial Arbitration specifically requires an Implementing Regulation (subdecree) setting out the details of the organization of the

1 This explanation is based on the advice and counsel of Mr. Sieng Deline, LL.M., a Cambodian lawyer who assisted

in the ADB Project ADB TA 4835 Preparing the Financial Sector Development Program.

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Commercial Arbitration Centre. This new law cannot operate until this subdecree is finalized. The Law on the Issuance and Trading of Non-Government Securities (the “Securities Law”) specifically states that the organization and conduct of the new Cambodia Securities and Exchange Commission (“CSEC”) “shall be provided for by a subdecree”. The specific requirement for an Implementing Regulation is something quite different from the operational circumstances of the NBC under the BFI Law and the NBC Law. The NBC is already fully operational with an apparatus under these two existing laws. It currently has broad authority to enact regulations and rules. The amendments to the BFI Law will provide enhanced authority under which the NBC may set regulations, standards and guidelines in a number of aspects. Therefore the law acts as a platform on which the NBC may use its authority to set future rules or guidelines for the banking industry based on its policy decisions and the need for effective banking supervision.

11.0 TRANSMITTAL OF PROPOSED AMENDMENTS AND MEETING WITH NBC SENIOR MANAGEMENT

The set of Draft Amendments to the BFI Law (Appendix “D”) and the Recommendations and Explanatory Notes document (Appendix “C”) were provided along with a Cover Note dated November 18, 1, 2008 to H.E. Governor Chea Chanto. The Cover Note titled Proposed Amendments to the Law on Banking and Financial Institutions: Report and Update on Phase 2 of ADB Project summarized the consultant's approach, observations, recommendations and work on fine tuning the draft during Phase 2. It is attached to this Report as Appendix “B”. In addition, on November 19, 2008, a meeting was held and a “PowerPoint” Presentation was delivered to H.E. the Governor and senior NBC management, followed by questions and discussion.

12.0 RECOMMENDATIONS FOR FUTURE WORK WITH THE NBC IN CONNECTION WITH THE BFI LAW

In summary, this Final Report has described the methodology of the TA with regard to the comprehensive review of the BFI Law leading to the recommendations for and the drafting of the Draft Amendments to the BFI Law and the Recommendations and Explanatory Notes. The result achieved is a set of proposals for a principle-based revised law reflecting international standards.

During the course of the TA in Phase 1 and Phase 2, it became clear that further work is required by the NBC in a number of aspects to enhance its role as banking supervisor and to build on the platform of its legal framework.

Attached to this Report as Appendix “G” is a document entitled Future NBC Work in Connection with the BFI Law. This document is intended to highlight the areas in which NBC should use its discretionary authority to develop regulations, standards and guidelines relevant to its banking supervision role.

The areas contemplated for future NBC work could include: licensing and supervision of securities activities carried out by banks; authority of NBC to license and supervise financial holding companies and banking corporate groups; various aspects of corporate governance of banks, MFIs and “cooperatives” not already covered by prakas; rules and restrictions for related party transactions, including procedures for reporting; setting of criteria for approval of investments by banks; setting prudential standards for risk management (Art. 40); detailed rules

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for problem banks and the role of the provisional administrator, as required; new regulations, standards and guidelines for a number of aspects of customer protection and market conduct.

It is strongly recommended that the aspects highlighted in Appendix “G”, or some of them, be the subject of further TA under FSP II, pursuant to a new TOR or a revised/extended TOR to provide for “Phase 3” of the consultant's assignment.

13.0 ACKNOWLEDGEMENTS

The Phase 1 and Phase 2 TA work was successfully conducted with the assistance and support of a number of individuals at the NBC including H.E. Madame Tal Nay Im, Director General; H.E. Madame Neav Chanthana, Deputy Governor: Mr. Kim Vada, Director, Bank Supervision Department, and Ms. Chea Serey, Director, Bank Supervision Department; Ms.Nguon Sokha, Director, Statistics and Economic Research Department; Madame Genevieve Hussenot Lebic, Legal Office; Monsieur Michel Dabadie, General Advisor and Monsieur Thierry Bangratz, General Advisor (from October 1, 2008); Ms. Sambo Rumony, Assistant to the Director General; and also Mr. Vanndy Hem, ADB Programs Officer, Economics and Finance, in Phnom Penh.

APPENDIX “A”

Cambodia Law on Banking and Financial Institutions (“BFI Law”):

Some Issues for Discussion and Review

Joe Chertkow LL.B., LL.M. Banking Legal Expert

ADB TA 4999 (CAM) – Financial Sector Program II Revised June 16, 2008

1. Banking Operations and Business Powers

Question: Should BFI Law be revised to provide for additional business powers? What kind of powers?

“Banking Operations” now defined in Art. 2 to be three categories of banking: (i) credit operations (including leasing, guarantees and commitments under signature),(ii) deposit-taking and (iii) provision of means of payment and processing of means of payment. Business powers set out in Art. 2 may be adequate now; but what about future needs in light of innovation and development of financial products and services? 2. Capital Market Activities of Banks

Question: Should BFI Law be revised to clarify and strengthen framework for NBC in connection with capital market activities of banks?

Art. 4 refers to “securities activities which constitute financial intermediation”, directly or indirectly, for a bank’s own behalf or for its customers. Expressly includes underwriting and trading in securities. Art. 6 and 7 refer to the authority of the NBC to supervise securities activities; this predates new Law on Issuance and Trading of Non-Government Securities (the “Securities Law”). What is contemplated for future framework in connection with the licensing and supervisory role of the NBC and SEC in a new capital markets regulatory structure? 3. Investments/ equity participations by banks; linkages to industrial/commercial sectors; bank holding companies and banking corporate groups

Question: Should current investment rules be clarified and strengthened in connection with investments by banks in commercial entities and in financial institutions, with power to NBC for approvals? Should BFI Law clarify rules for bank holding companies and banking groups?

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1) Art. 33 to 35 deal with investments by banks in the other commercial entities and in financial institutions. 2) Rules currently place some limits on the level of equity investments in commercial or industrial entities (15% of “own funds”). But apparently no limit on an investment in an industrial, commercial or real estate entity “linked” to the business of the bank. 3) It appears there is no provision under the BFI for supervisory approval for this type of investment, although approvals are required for investments in another bank or financial institution (such as an insurance company). 4) Lack of limits or supervisory approvals for investments in domestic industrial, commercial or real estate firms “linked” to the running of a bank raises prudential concerns (given the international experience with financially troubled banks heavily invested in the real estate and/or construction industries linked to their businesses). 5) The BFI Law contains a number of Articles that, when read together, appear to provide the basis for a framework to supervise bank holding companies and banking corporate groups on a consolidated basis consistent with the Basel Core Principles. Reference can be made to the following relevant Articles: Art. 21 (bank holding company supervised as “covered entity”); Art. 26 (consolidation of balance sheet); Art. 40.5 (off-site and on-site examination applied to subsidiary and shareholders): Art. 41 (supervisory duties include defining and enforcing prudential rules related to the “financial structure and management that covered entities must abide by”); Art.45 (refers to “consolidating accounts under the conditions prescribed by the supervisory authority”) and Art. 46 (external auditors duties include report on “consolidation methods”). 4. Corporate Governance Framework: Role and Duties of Board Members and Managers

Question: Should BFI Law be revised to strengthen the governance requirements for board members and senior managers of banks?

Art. 18 sets out conditions relevant to the “honesty” of board members, managers and authorized signatories (at least in terms of no history of criminal activities, fraud, breach of trust, etc.). However, there is no specific provision dealing with duties of board members or managers, or with their qualifications, fitness or character.

In practice, the NBC does examine the suitability of bank directors and managers using a detailed questionnaire which covers such things as professional qualifications and experience. Art. 40 also gives authority for issuing regulations to require changes in the “management and activities” of a bank.

Basel Banking Supervision Committee has set eight principles for guidance in assembling the corporate governance framework dealing including the board's qualifications, mandate, roles and duties. It may be useful to build this framework into the BFI Law Chap. VI, such as including some essential provisions and by empowering the NBC to establish Prakas on Corporate Governance.

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5. Protection or Immunity of Banking Supervisors

Question: Should BFI Law be revised to include new provision for immunity or protection of NBC?

Basel Committee on Banking Supervision Core Principles (2006) sets out need for legal protections for supervisors as requirement for independence. The BFI should contain a provision for immunity or protection of NBC banking supervisors/regulators.

6. Supervisory Authority of NBC

Question: Should BFI Law be revised to strengthen and clarify rule-making authority of NBC, including to enhance risk-based supervision by NBC?

Chapter XII of BFI sets out the rule-making authority of NBC. These are quite extensive in terms of the power to issue Prakas (regulations).

Important question is whether this rule-making power is largely (or entirely) “compliance-based” or is consistent with the international trend toward greater “risk based” supervision and operational risk management within banks and financial institutions.

For example, Article 40.3 gives the NBC power to make rules for “prudential ratios regarding particularly liquidity, solvency, risk diversification, foreign exchange exposure, and market risk exposure”. This type of provision appears to be purely compliance-based, notwithstanding the references to “risk diversification” and “market risk exposure”.

In the same context, refer to Art. 43 dealing with “internal control” at a bank, which also seems to compliance-based. Therefore, it is suggested that, as part of the review of the law, the supervisory authority and rule-making powers of the NBC should be reviewed and options considered for a “made in Cambodia” regulatory framework reflecting international standards and practices.

7. Power to impose “disciplinary sanctions”

Question: Should the BFI be revised to clarify or add to the NBC “toolkit” to impose sanctions on banks where contravention of a law, regulation, etc.?

Art. 52 provides for a range of sanctions that the NBC may impose on a bank where there has been a contravention of a law or regulation, a “failure to heed a warning” or non-compliance with an injunction.

There appears to be a broad scope to this authority: from a caution or reprimand to a prohibition on certain activities to a withdrawal of license and liquidation of a bank, as well as the imposition of a fine. However, It may be useful to review the provision to see if there is a sufficient “toolkit” for NBC and if there is adequate clarity in the provisions.

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In addition, critical question is whether this set of regulatory tools will be effective in the absence of some type of legal protection or “immunity clause” in the law as a necessary element in order to protect the banking supervisors.

8. Bank secrecy provision

Question: Should the bank secrecy provision in BFI Law be modified, for example, to allow for requirements of Credit Information System (CIS)?

Art. 47 creates a very strong non-disclosure obligation applicable to banks. There is also an exemption to this obligation: “the obligation of professional secrecy may not be used as a ground for nondisclosure vis-à-vis the supervisory authority, auditors, provisional administrators, liquidators, or a court dealing with criminal proceedings.”

Important issue is raised in connection with the bank secrecy provision and the planned Credit Information System (CIS). It seems clear that the exemption for disclosure of information is not broad enough to cover the scope of the requirements of the CIS. Consequently, a revision will be necessary.

9. Related party transactions

Question: Should the BFI rules on “related party” transactions and conflict of interest be strengthened in light of international standards and best practices?

Art. 49 to 50 set out a definition of “related party” (for example, a person holding directly or indirectly at least 10% of the capital or voting rights) and gives the supervisory authority the discretion to extend it to other parties (i.e., family members).

But there are no restrictions, prohibitions, limitations or requirements for procedures or reporting in connection with related party transactions set out in the BFI itself. The only relevant rules are found in the Prakas on Loans to Related Parties, setting out a requirement for market rates and a total limit of loans to related parties (10% of the bank’s net worth).

It may be observed that the current rules are weaker than those found in many other countries. It is highly questionable whether the current rules meet the prudential standards found in the Basel Banking Committee Core Principles (see Principle 11).

10. Supervisory intervention steps for the treatment of weak or insolvent banks

Question: Should the procedures and powers of NBC to deal with weak or insolvent banks be enhanced and strengthened? What kind of procedures and powers should be created?

Currently two important elements of the legal/regulatory framework for dealing with Insolvent Banks: Chapter XX of the BFI (“Provisional Administration – Liquidation”) and

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Prakas on Standardized Procedures for Prompt Corrective Action for Banking and Financial Institutions.

The framework under the current banking law essentially deals with liquidation procedures for a financially troubled or insolvent bank. It does not appear that the current framework provides the NBC with the flexibility or authority under the law to engage in activities outside the context of a liquidation, for example steps for a restructuring, sale of all or part of the assets to a financially viable bank, sale of shares or other types of resolution activities.

The Prakas on Prompt Corrective Action (PCA) sets out a framework for dealing with a financially troubled bank or financial institution that is “undercapitalized” according to the categories based on the solvency ratios defined in the Prakas on Solvency Ratios of Banks. While the PCA’s focus on a Capital Restoration Plan is very important, it is noteworthy that the Basel Committee’s Supervisory Guidance on Dealing with Weak Banks (2002) provides for a much more broadly-based supervisory approach.

Therefore appears that NBC currently has a limited set of powers under the law and Prakas for dealing with an insolvent bank or an undercapitalized bank. It is a reasonable conclusion that the NBC does not yet have a complete supervisory “toolkit” to deal with weak or insolvent banks and to protect the interests of depositors and the financial stability of the banking system.

11. Strengthening Consumer Protection

Question: Should BFI Law be revised to strengthen the provisions for consumer protection? What kind of provisions should be revised for the BFI Law, for example in connection with debit/credit cards?

A body of rules for the protection of customers is contemplated under the Law on Banking and Financial Institutions (see Art. 70) but thus far no rules have been drafted to implement fair practices for the benefit of consumers.

A specific component of the body of laws for market conduct and consumer protection could be regulations in connection with the use of debit and/or credit cards by consumers.

Could include such aspects as: disclosure of any annual or periodic fees or service charges payable by card holders; disclosure of costs of credit; disclosure of the method of calculating costs of credit; disclosure of any transaction fees or bank charges; rights and obligations of the banks and card holders with respect to lost or stolen cards or wrongful use of personal identification numbers (PINs); and other matters to ensure full disclosure, transparency and fair treatment for the benefit of consumers. Note that it may be that Art. 70 needs to be revised and strengthened to sufficiently cover the range of necessary consumer protection measures.

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APPENDIX “B”

Joe Chertkow LL.B., LL.M.

Banking Legal Expert

ADB TA 4999 (CAM) – Financial Sector Program

Phnom Penh, November 18, 2008

Note for: H.E. CHEA CHANTO

Proposed Amendments to the Law on Banking and Financial Institutions

Report and Update on Phase 2 of ADB Project

The purpose of this memorandum is to provide you and your colleagues with a report and update on my work during Phase 2 of my ADB assignment for the drafting of amendments to the Law on Banking and Financial Institutions (the “BFI Law”). I am pleased to attach the following documents to this memorandum: Revised Draft Amendments to the BFI Law (Version 3.0), dated November 14, 2008 Revised Recommendations and Explanatory Notes for Proposed Amendments, dated November 14, 2008 The following key points should be noted: 1.0 Methodology for Phase 2 Work Comments on Version 1.0 of the Draft Amendments were provided to me at the start of Phase 2 by the NBC and by Mr. Thierry Bangratz, General Advisor, NBC. Consultation meetings were held to discuss the comments with Mr. Bangratz and also the relevant NBC officials to review and clarify all comments. I prepared a Checklist Document of

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all agreed upon points for “fine tuning” and further revisions of the Draft Amendments. There were fifty (50) items. A meeting, including my presentation, was also held with representatives of the banking industry (including MFIs). Some comments have been received from individual stakeholders. The consultations during Phase 2 confirmed the earlier observations from Phase 1 that there is a broad consensus that the current law is performing successfully in many areas after almost ten years, but that there is a need for some updating and improvements in certain areas. I prepared Version 3.0 of the Draft Amendments to reflect the Checklist Document and other comments. It has been reviewed by Mr. Bangratz before distribution to the NBC. 2.0 Approach to the Drafting of the Amendments As previously discussed with you and your colleagues, I have followed three (3) guiding principles for the drafting:

Principle of “Renovation” of the Current BFI Law. The goal should be to “renovate” and build on the existing law, not to completely replace it with a new law. This renovation should also contribute to the growing understanding of the legal framework applicable to the financial sector. This avoids the possible upheaval of an unnecessary replacement with a new law.

Principle of “Enabling and Empowering” of NBC to strengthen its banking supervision to reflect international standards through additional authority to adopt new regulations and standards. Some examples of new Prakas could be in the areas of corporate governance, internal control and customer protection.

Principle of “Addressing Deficiencies” of the current law. There are some areas where the current law does not reflect the reality of NBC's supervisory practices or the growing financial sector. For example, it is noted that Prakas have been issued for the microfinance sector, but there is no express reference to MFIs in the law, except a transitional provision in Article 74.

3.0 Identification of Key Areas and Recommendations for Changes to the BFI Law

First, it is important to note that there are two (2) key areas where the BFI Law can work successfully and no substantive changes are needed. These are:

(a) Banking Operations: The BFI is working well in this area, with a good platform for banking operations and financial business activities. There is consensus on this among banking industry stakeholders. New products and innovations are possible under the current legal framework (for example, mobile phone payments). Therefore there should be no substantive change to Article 2,

(b) NBC's Present Supervisory Powers. According to internatiional standards and best practices NBC's banking supervision “tool kit” today is quite strong under the current BFI Law:

Specifically Article 52 (“Disciplinary Sanctions”)contains a number of important powers.

NBC also has important powers to deal with holding companies and financial conglomerate groups: See Articles 21 and 36. A“holding company” is treated as a “covered entity” that falls under the banking supervision.

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Also in the current Art. 40.5 there is power for off-site and on-site examination of each “covered entity”; this can be extended to cover a subsidiary and any related entities, including shareholders.

These provisions taken together provide authority for NBC to apply consolidated supervision of banks and banking groups. These powers are consistent with the Basel Core Principles in this area (CP 19 and 24).

It is not a question of adding to these powers but for NBC to use these powers and enforce the legal provisions. NBC's position may be assisted by a new statutory immunity to enhance the independence of the banking supervisors.

Secondly, it should be noted that the first version of the proposed Draft Amendments to the BFI Law (dated July 1, 2008) was based on recommendations for technical improvements to update the law in eight (8) major aspects:

1) Capital Market and Securities Transactions: Recommended a “Double License” approach for banks that will reflect NBC's duties consistent with the responsibilities of the new Securities and Exchange Commission of Cambodia established under the Securities Law.

2)Corporate Governance: Improvements to include duties of directors and composition of the board. Also to strengthen NBC's authority to issue regulations and standards for governance.

3)Equity Participations: Recommendation for improving Article 34 because it is now materially non-compliant with the Basel Core Principles. There is stronger wording to ensure no excessive risk taking by banks, such as investing in real estate or commercial entities. Also recommendations for prior NBC approval for banks making any major investments, and to provide for “temporary investments” where a bank becomes the owner of shares after making a loan to a company. Also recommended removing category of investments in agricultural companies.

4)Related Party Transactions: Recommendations for strengthening and improving provisions because today they are materially non-compliant with Basel Core Principles. The aim is to prevent abuses from a bank's exposures to related parties. Therefore, there was a stronger definition of “related party” and also a stronger definition of “related party transaction”.

5)Protection or Immunity of Banking Supervisors: Recommended protection consistent with the Basel Core Principles with the aim of independence and effective banking supervision.

6)Banking Secrecy Provision: Recommended appropriate amendment for purposes of CIS.

7)Supervisory Intervention for Financially Troubled Covered Entities: Recommended amendments to Chapter XX with aim of building a framework with the necessary “Tool Kit” for NBC for the resolution of financially troubled banks.

8)Strengthening Customer Protection: Recommended enhanced authority for NBC to issue prakas, standards and guidelines for a range of consumer protection measures, including for debit and credit cards.

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4.0 Fine Tuning and Revisions during Phase 2 of the Project Following the comments and consultations during Phase 2, a number of fine tuning and revisions were made for Version 3.0 of the Draft Amendments to the BFI Law, dated November 14, 2008. The major aspects are as follows:

1) Capital Market and Securities Transactions: The fine tuning for the “Double License Approach” is to apply to a Securities Company that is a Subsidiary of a Bank or Financial Institution (Article 5 & 6). It must be approved and licensed by NBC and the “fit and proper” testing shall be applied by the NBC in connection with the licensing of the Securities Company.

2) Corporate Governance: The fine tuning is to include the “fit and proper” testing in Article 18. Also some comments were received from MFIs and smaller banks about the requirements for board composition and “independent” members. As a result, there is the fine tuning that MFIs only require three board members and one independent director.

3) Microfinance: It is recommended that there be fine tuning for a special treatment in the case of MFIs. The reason for this is because Art. 11 requires that all covered entities are either public limited companies or cooperatives. But today MFIs may be organizations that are not public limited companies. There is not yet any legal framework for establishing cooperatives in Cambodia. The information at NBC currently shows 18 licensed MFIs that are private limited companies. There are also 25 NGOs that are registered where the goal is that they should make efforts to transform themselves into licensed MFIs operating under the law.

4) Related Party Transactions: There are several items for fine tuning. First, there is a revision in Article 48.3 to say now that : “A related party transaction with a covered entity shall be prohibited unless it can be performed in full compliance with the rules and restrictions set forth by the National Bank of Cambodia regulations.”

Second, it is must be clear under the law that there will be no “special permission” granted on a case by case basis. The rules are principle-based with full transparency under the NBC's regulations. Therefore the law should remove any possible misinterpretation. Third, the amendments have been fine tuned to now introduce a broad definition of “Kinship” to reflect situation of Cambodia's extended families. It includes immediate family members, but also brother-in-law, sister-in-law, son-in-law, etc. for extended family members. 5) Supervisory Intervention for Financially Troubled Covered Entities: There has been fine tuning of the working for the appointment of a provisional administrator to refer to “financial viability” of problem bank or financial institution. This is intended to be a broader term than “solvency”. The fine tuning is intended to address the types of circumstances as witnessed recently in the global financial crisis. Therefore NBC has the power to appoint a provisional administrator where “a covered entity has ceased, or is about to cease, to be financially viable, and the financial viability of the covered entity cannot be restored.” There is also fine tuning of the previous version of the draft to make it clear that NBC to take into account all matters it considers relevant including but not limited to a broad set of factors

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that includes the covered entity's liquidity, solvency and management and any concerns about the stability of the banking system and the best interests of the financial system in Cambodia.

6) Banking Secrecy Provision: The revision is to include an exemption to cover the situation of the operations of a Credit Bureau, not restricted to the CIS operated through the NBC.

For more details on the fine tuning and revisions for Version 3.0 of the Draft Amendments to the BFI Law, reference should be made to the Recommendations and Explanatory Notes document and also to the document entitled Amendments to BFI Law: Checklist for Fine Tuning and Additional Revisions, dated November 7, 2008.

Copy for: H.E. Dr. SUM SANNISITH H.E. NEAV CHANTHANA H.E. TAL NAY IM Ms. CHEA SEREY Mr. KIM VADA

Mr. RATH SOVANNORAK Ms. NGUON SOKHA Mr. HOU SAMNANG Mr. THIERRY BANGRATZ

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APPENDIX “C”

LAW ON BANKING AND FINANCIAL INSTITUTIONS

RECOMMENDATIONS AND EXPLANATORY NOTES

FOR PROPOSED AMENDMENTS

Joe Chertkow LL.B., LL.M. Banking Legal Expert

ADB TA 4999 (CAM) – Financial Sector Program II

Revised November 14, 2008

1. Purpose of this Document The purpose of this document is to set out a comprehensive set of recommendations and explanatory notes in connection with the proposed revisions to the articles of the Law on Banking and Financial Institutions. Set out below is the relevant recommendation and explanatory note for each specific revision to the current Law. In any case where it is proposed that a specific article of the current Law does not require a revision, it is noted that there shall be “no change”.

2. Guiding Principles for the Revisions to the Law on Banking and Financial Institutions

The current Law, adopted in 1999, has a number of strengths but there is consensus that the Law needs updating and improving in certain areas. In other words, there is a reasonable case for updating and improving the Law but there does not appear to be a reasonable case for a replacement or for a complete “upheaval” of the Law. Therefore a set of selective amendments will improve the legal framework, strengthen banking supervision and achieve important improvements in compliance with international standards and best practices. Three (3) guiding principles have been followed for the drafting of the revisions to the Law:

Principle of “Renovation” of the Current Law. The goal is to “renovate” and to build on the existing law, not to completely replace it with a new law. This renovation should also contribute to the growing understanding of the legal framework applicable to the financial sector. This avoids the possible upheaval of an unnecessary replacement with a new law.

Principle of “Enabling and Empowering” of the National Bank of Cambodia to strengthen its banking supervision to reflect international standards through additional authority to adopt new regulations and standards.

Principle of “Addressing Deficiencies” of the Current law. There are some areas where the current law does not reflect the reality of NBC's supervisory practices or the growing financial sector. For example, it is noted that Prakas have been issued for the microfinance sector, but there is no express reference to MFIs in the current law.

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3. Identification of Key Areas for Recommendations for Changes to the Law

1) First, it must be noted there are two (2) key areas where the Law can work successfully and no substantive changes are recommended:

(a) Banking Operations Allowed under the Law: The Law is working well in this area, with a good platform for banking operations and financial business activities. There is consensus on this among banking industry stakeholders. New products and innovations are possible under the current legal framework (for example, mobile phone payments).

(b) NBC's Present Supervisory Powers under the Law. According to international standards and best practices the NBC's banking supervision “tool kit” is quite strong and adequate to achieve safety and soundness of Cambodia's banking sector under the current Law. For example:

Specifically Article 52 (“Disciplinary Sanctions”) contains a number of important powers. The NBC also has important powers to deal with holding companies and financial conglomerate groups: See Articles 21 and 36. A “holding company” is treated as a “covered entity” that falls under the banking supervision. Also in the current Art. 40.5 there is power for off-site and on-site examination of each “covered entity”; this can be extended to cover a subsidiary and any related entities, including shareholders. These provisions taken together provide authority for NBC to apply consolidated supervision of banks and banking groups. These powers are consistent with the Basel Banking Supervision Committee Core Principles.

Therefore, it is not a question of adding to these powers but for the NBC to use these powers and enforce the legal provisions. The NBC's position may be assisted by a new statutory immunity to enhance the independence of the banking supervisors, as recommended.

2) Second, it should be noted that the recommendations for technical improvements to update the Law apply to eight (8) major aspects:

1) Capital Market and Securities Transactions: It is recommended that the Law have a “Double License” approach for banks that will reflect NBC's duties consistent with the responsibilities of the new Securities and Exchange Commission of Cambodia established under the Securities Law.

2)Corporate Governance: The recommendations include improvements to include duties of directors and composition of the board, and also to strengthen NBC's authority to issue regulations and standards for governance.

3)Equity Participations: There are recommendation for improving the relevant articles of the Law that are now materially non-compliant with the Basel Core Principles (set by the Basel Banking Supervision Committee). This includes stronger wording to ensure that there is no excessive risk taking by banks, such as investing in real estate or commercial entities. Ithere are also recommendations that there be prior NBC approval for banks making any major investments, and to provide for “temporary investments” where a bank becomes the owner of shares after making a loan to a company. It is also recommended that there should be removal of the category of investments in agricultural companies.

4)Related Party Transactions: The recommendations are for strengthening and improving the relevant provisions because today they are materially non-compliant with Basel Core Principles. The aim is to prevent abuses from a bank's exposures to related

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parties. Therefore, there was a stronger definition of “related party” and also a stronger definition of “related party transaction”.

5)Protection or Immunity of Banking Supervisors: It is recommended that there be protection consistent with the Basel Core Principles with the aim of independence and effective banking supervision to be consistent with international best practices..

6)Banking Secrecy Provision: Recommended appropriate amendment for purposes of CIS and any Credit Bureau operating in Cambodia..

7)Supervisory Intervention for Financially Troubled Covered Entities: There are recommended amendments to Chapter XX of the Law with aim of building a framework with for resolution of the problems with financially troubled banks. This includes broad powers tor the appointment of a provisional administrator by NBC where “a covered entity has ceased, or is about to cease, to be financially viable, and the financial viability of the covered entity cannot be restored.”

8)Strengthening Customer Protection: It is recommended that there be an enhanced authority for NBC to issue prakas, standards and guidelines for a range of consumer protection and market conductmeasures, including for debit and credit cards.

Set out below are the specific Recommendations and Explanatory Notes where it is proposed that there be revisions to Articles of the Law.

CHAPTER I: Banking and Financial Intermediation

Article 1. [Meaning of “Bank”] Recommendation: Recommend revising to include list of terms, including “Bank”, “Specialized Bank”, “Microfinance”,, “Microfinance Institution”, “Securities Company”, “Supervisory Authority”, “Licensing Authority” and some other definitions of terms (such as the word “Person”) . Explanatory Note: The purpose of the new definitions is to provide greater precision and clarity in the Law.

Article 2. [Banking operations] Recommendation: Recommend revision of Art. 2 by including new reference to “Microfinance Institution” licensed for banking operations, and to make clear that “Specialized Bank” is non-deposit taking institution.

Explanatory Note: The purpose of the revision is to improve Art. 2 by including MFIs within the legal framework for the first time and to clarify nature of the “Specialized Bank” category.

Article 3. [ Other Business Powers of Banks] No change.

Article 4. [Business relating to securities]

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Recommendation: Recommend revision to substitute “Securities Company” for "specialized institution. Explanatory Note: The purpose of this revision is for greater clarify and to improve clarity of other provisions related to securities activities (Art. 5 & 6). The revision makes it clear that a bank may operate through a Securities Company for securities transactions. Recommendation: It is also recommended to add the reference to “investment advice” after words “financial engineering” in Art. 4.6. Explanatory Note: This is for greater clarity and completeness of the categories of transactions.

Article 5. [Establishment of Securities Company That is Subsidiary; Need for Approval and License] Recommendation: Recommend revising by deleting and substituting new Article to deal with Securities Company and to clarify that NBC has power to approve and license a Securities Company that is a subsidiary of a bank or financial institution. Fit and proper testing shall be applied by the NBC in connection with the licensing of the Securities Company. Explanatory Note: The purpose of the revision to Art. 5 is to provide for a new rule as part of the framework for regulating capital market activities that may involve banks or financial institutions. It is part of the “Double Licensing Approach” because it provides for NBC to approve and license a Securities Company that is a subsidiary of a bank or financial institution. It includes the same kind of fit and proper testing to be applied by NBC as required for a bank or financial institution.

Article 6. [Licensing and Supervision of Securities Company That is Subsidiary] Recommendation: Recommend revision of this Article to reflect licensing and supervision in connection with securities activities as a result of the adoption of new Law on Issuance and Trading of Non-Government Securities, 2007 (the “Securities Law”) which gives new powers to the Cambodia Securities and Exchange Commission (“CSEC”) for licensing and supervision of securities activities. This Article covers the carrying out of securities activities by a Securities Company as described in Art. 5. Explanatory Note: The purpose of the revision to Art. 6 is to provide for a new rule as part of the framework for regulating capital market activities that may involve banks or financial institutions. It is part of the “Double Licensing Approach” because there is a license from CSEC for a Securities Company that is a subsidiary of a bank or financial institution.

Article 7. [Securities Activities within Banks, etc.] Recommendation: Recommend that Art. 7 be revised in light of the Securities Law, 2007 (see above). The Revised Article 7 does three (3) things: There is a “Double License” approach, meaning that a bank holding a license from NBC will also hold a license and be supervised by the Securities and Exchange

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Commission in order to carry out the securities activities set out in Article 4, subject to the terms of the license. The NBC will have supervisory authority over the bank: NBC will have the authority to issue a prior written objection to the issuance of the securities license by the Commission and will also have power to request CSEC to revoke a license on the grounds that the bank has contravened a provision of the laws or regulations governing its activities, has failed to heed a warning or not complied with an injunction. In addition, a bank carrying out securities transactions must establish specific policies and procedures appropriate to the securities activities it carries out, including the use of information barriers and restrictions (so-called “Chinese Walls” or firewalls) in order to avoid conflicts of interest, and to separate its functions and activities as required by the supervisory authority and the Commission. Explanatory Note: The purpose of the revision to Art. 7 is to provide for a new rule as part of the framework for regulating capital market activities that may involve banks or financial institutions. The most important element is the “Double License” Approach, meaning that a bank or financial institution holding a license from NBC will also hold a license and be supervised by the CSEC in order to carry out the securities activities set out in Article 4. Under this approach, NBC will have supervisory authority over the bank, including the power to issue a prior written objection to the issuance of the securities license by the CSEC. NBC can also request CSEC to revoke a license on the grounds that the bank has contravened a provision of the laws or regulations governing its activities, has failed to heed a warning or not complied with an injunction. In addition, a bank carrying out securities transactions must establish specific policies and procedures appropriate to the securities activities it carries out, including the use of information barriers and restrictions (so-called “Chinese Walls” or firewalls) in order to avoid conflicts of interest, and to separate its functions and activities. These will be subject to rules of the NBC and the CSEC.

Article 8. [Foreign exchange operations, etc. carried out for customers by entities other than banks] No change.

CHAPTER II: Scope

Article 9. [Covered entities] Note: Words have been revised in Art 9.2. to make accurate with Khmer version, but not requiring formal amendment to this Article. The correct English translation should be “in its ordinary course of business” and not “on a regular basis”.

Article 10. [Application of commercial law, etc.] Recommendation: Recommend revision of Art. 10 to refer to the Law on Commercial Enterprises (LCE) and to the “provisions of the law applicable to cooperatives (therefore delete reference to “noncommercial companies”)

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Explanatory Note: The purpose of this revision is to update the Law and to expressly make reference to the Law on Commercial Enterprises (2005). The reference to “noncommercial companies” is deleted because it is now irrelevant and not applicable in the Law.

CHAPTER III: Legal Form of Covered Entities

Article 11 [Legal form: public company, cooperative, MFIs] Recommendation: Recommend revision to refer to the Law on Commercial Enterprises and any separate law on cooperatives; delete reference to mutual societies because it is irrelevant and not applicable. Explanatory Note: The purpose of this revision is to update the Law and to expressly make reference to the Law on Commercial Enterprises (2005). The reference “mutual societies” is now deleted because it is now irrelevant and not applicable. Recommendation: It is further recommended that there be an exception to the rule in Art. 11 in the case of MFIs. Explanatory Note: The reason for the exception is because they may be licensed or registered organizations that are not public limited companies. There is not yet any legal framework for establishing cooperatives in Cambodia. The information at NBC currently shows 18 licensed MFIs that are private limited companies. There are also 25 NGOs that are registered where the goal is that they should make efforts to transform themselves into licensed MFIs operating under the law. Recommendation: In addition, some fine tuning revisions to refer to roles and functions of the “Central Body” for cooperatives. Explanatory Note: In the future the Central Body for cooperatives will safeguard liquidity and solvency and will also be responsible for ensuring safe and sound management and other matters for cooperatives.

Article 12. [Place of incorporation] No change.

Article 13. [Representative Office of Foreign Bank] Recommendation: Recommend two revisions as follows: Representative offices must use the business name of the foreign bank they represent along with the words “Representative Office in Cambodia”. Change last line so that an authorization for a Representative Office is given for a period of two years, which may be renewed. Explanatory Note: The purpose of the first revision is for greater transparency. The purpose of the second revision is to provide greater flexibility regarding the renewal of the authorization.

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CHAPTER IV: Licensing of Covered Entities

Article 14. [Conditions for Issuing of License] Recommendation: Recommend revision to Art. 14.1 to include qualifications of “directors and officers” Explanatory Note: This revision is necessary to reflect the practice at NBC to examine the information on proposed directors and officers to ensure that they are “fit and proper” persons to serve as directors or officers of the bank.

Article 15. [License Application; Duties of Supervisory Authority] Recommendation: The recommendation is for some fine tuning of the wording to clarify timing obligation after full application received by NBC. Explanatory Note: The purpose is for greater clarity and transparency regarding the timing.

CHAPTER V: Minimum Capital – Solvency

Article 16 [Minimum Capital] Recommendation: Revise to delete line in Art. 16.3: “Said amount has been determined on the basis of SDR = riel 5,616”. Explanatory Note: This revision is for accuracy (The remainder of Art. 16 will not be changed.)

Article 17. [Solvency Ratio] No change.

CHAPTER VI: Capacity of Directors and Managers

Article 18. [Disqualification of Directors, Managers, etc.]

Recommendation: Recommend revising Article 18 to include provision on professional competence and experience required for directors and officers of covered entities, including reference to “Fit and Proper” Testing. Explanatory Note: This provision is intended to apply to members of the board of directors, also any “supervisory board” and to senior officers and managers. In this connection, a “supervisory board” refers to a board that is not required by Law on Commercial Entities but may be established as a governance structure under the charter (articles) of the covered entity. Normally it would be established as a representative body to protect the interests of shareholders. It is used to provide a “control function” aimed ensuring that the board of directors is acting properly in the interests of the shareholders. Therefore, if a supervisory board is established for the bank or financial institutions, the same type of conditions apply as would apply to the members of the board of directors.

Recommendation: Recommendation to revise Chap. VI by adding new Article 18A on role, duties and composition of Board of Directors to reflect international standards on corporate governance. (There was fine tuning of some wording based on comments received). Also new references to MFIs and cooperatives that only require three (3) directors and one (1) independent director.

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Explanatory Note: The purpose of new Article 18A is to reflect international standards on corporate governance in connection with the role, duties and composition of the Board. The special treatment for MFIs and cooperatives is intended to apply different rule for entities in these classes compared to rule for commercial and specialized banks because of the special nature of these organizations. Recommendation: Also recommended to add New Article 18B to give specific authority to NBC to issue prakas, standards and guidance on broad range of corporate governance matters to implement international standards (Basel Core Principles, Principles on Corporate Governance). Explanatory Note: The purpose is to provide additional authority to the NBC to address matters in the future in order to comply with international standards and best practices.

CHAPTER VII: Composition, Permanent Identification, and Responsibilities of Partners in Covered Entities Constituted as Cooperatives

Article 19. Recommendation: Recommend revision to delete references to “mutual societies” and non-commercial societies and to make applicable only to cooperatives. Also revise title of Chap. VII to refer only to “Cooperatives”. Explanatory Note: Purpose is same as revisions for Art. 11, above.

CHAPTER VIII: Composition, Permanent Identification, and Responsibilities of Shareholders in Locally Incorporated Covered Entities

Article 20. [Shareholders of Locally Incorporated Covered Entities] Recommendation: Recommend revision in first line to change English word “individuals” to “natural persons”, and also add requirement to report to NBC. Explanatory Note: Purpose of revisions is for greater clarity.

Article 21. [Holding Company] No change.

Article 22. [Disclosure of Identity of Shareholders] No change.

Article 23. [Increase or Decrease of Shareholdings; Notification] Recommendation: Recommendation for fine tuning change to add requirement for reporting to NBC. Explanatory Note: Revision is for greater clarity and transparency.

Article 24. [Prior Authorisation for Changes in Shareholdings] Recommendation: Fine tuning change to add requirement for the Board's duty to report change.

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Explanatory Note: Revision is for greater clarity and transparency.

Article 25. [No minimum number of shareholders] Recommendation: Recommend deletion of the entire Article 25. Explanatory Note: It is not consistent with Law on Commercial Enterprise requirement that covered entity cannot be private limited company. Further, there are other provisions dealing with “influential” shareholder and authorities of NBC. Therefore this Article is not needed in the Law.

Article 26. [Shareholder deemed to be influential] No change.

Article 27. [Influential shareholder obliged to increase net worth of covered entity] No change.

CHAPTER IX: Composition, Permanent Identification, and Responsibilities of Shareholders of the Parent Company of a Covered Entity Constituted as a Branch of a Foreign Bank

Article 28. [Duty to notify regarding change in shareholdings; Appointment of Senior Management] Recommendation: Revision to add requirements for appointment of Senior Management of FBB in Cambodia. These are “Senior Country Executive” who is employee who is ordinarily resident in Cambodia and another employee ordinarily resident in Cambodia who is “Senior Country Compliance Officer” There is new obligation to notify NBC of these appointments immediately. Where a vacancy occurs in these positions the branch of the foreign bank or foreign financial institution shall without delay fill the vacancy and notify NBC. Explanatory Note: The purpose of this revision is to add requirements for greater accountability to the NBC by management of a Foreign Bank Branch (FBB).

Article 29. [Validity of License; weakened financial position, etc.] No change.

Article 30. [Foreign Bank Branch not abiding by prudential regulations] No change.

Article 31. [Voluntary Liquidation of Foreign Bank: Repayment of Resident Customers] No change.

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CHAPTER X: Equity Participations by Covered Entities in the Capital of Other Commercial or Financial Entities* * Recommend revising title of Chapter X to add words “or Financial” for greater clarity.

Article 32. [Meaning of Equity Participations] No change.

Article 33. [Limits on Equity Participations, Individual and Total] No change.

Article 34. [Where No Limits on Equity Participations; Need for Prior Approval] Recommendation: Recommendation for some important revisions to Article 34 to improve it by addressing prudential and risk concerns and to comply with the Basel Banking Supervision Core Principles:

REVISE Art 34.1 to permit participations only in those kinds of companies which carry on activities necessary and incidental to a bank's operations, with the prior approval of NBC

DELETE Art. 34.3: it is not appropriate for commercial banks to be free to have participations in agricultural companies.

ADD: New Article 34.3 for “temporary investments” (up to 5 years, plus extension with NBC approval) to cover situation where a bank becomes the temporary owner of an enterprise to which it has loaned money, as a consequence of that company becoming insolvent until such time as the workout or liquidation of that company is competed.

ADD: New paragraph to Article 34 (which have now been fine tuned) state that, NBC shall establish appropriate criteria in connection with the granting of approvals for investments under this Article and Art. 37, including:

-the determination that a proposed investment will not expose the covered entity to excessive risks or hinder the effective supervision of the covered entity by the NBC; and

- the determination that the covered entity has the adequate financial and organizational resources to manage the proposed investment in a prudent manner and to withstand potential financial problems faced by the company. Where there might be a material impact on the covered entity's overall risk profile, the NBC shall consider strengthened solvency requirements prior to issuing its approval.

Explanatory Note: These recommendations for some important revisions to Article 34 to improve it by addressing prudential and risk concerns and to comply with the Basel

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Banking Supervision Core Principles. The current provision allows for a potentially unsafe level of risky investments. For example, the wording in Art. 34.1 is too broad: it could be used to allow a bank to take a participation in any company with which its operations are now “linked" (for example through an outstanding loan). Therefore, the wording needs to be revised to permit participations only in those companies which carry on activities necessary and incidental to the bank's operations (for example, a data processing company or a safe custody company). In addition, the prior approval of NBC should be required. The present wording does not achieve this. In connection with investments in agricultural companies, it is inappropriate to allow banks to do this on an unlimited basis and without NBC approval.

Article 35. [Equity Participations in Banking or Financial Institutions] Recommendation: Recommend adding words in Art. 35.2 to include “Securities Companies”. Explanatory Note: This revision is for greater clarity to show that a bank can have an equity participation in a Securities Company, with the approval of NBC.

Article 36. [Calculation of Covered Entity's Net Work Where Investment in Banking or Financial Institution] Recommendation: Fine tuning change. Explanatory Note: It is to ensure the English version is consistent with Official Version of the law.

Article 37. [Investment in Industrial or Commercial Undertaking Registered Abroad; Need for Prior Approval] No change.

CHAPTER XI: Establishment Abroad or in Cambodia

Article 38. [Acquisition of Holdings in Bank or Financial Institution Abroad, etc.; Prior Approval] No change.

Article 39. [Opening of Branch in Cambodia; Need for Approval; Acquisition of Holdings by Covered Entity in Another Covered Entity] No change.

CHAPTER XII: Supervisory Authority and Regulatory Power

Article 40. [Supervisory Authority and Regulatory Power of National Bank of Cambodia] Recommendation: Recommendations as follows to reflect “risk based supervision” based on international standards: Para. 40.3.b: add to include Basel Core Principles references to “interest rate risk”

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Revise to add new category of regulation in Para. 40.3.b1: “prudential standards to require comprehensive processes to identify, measure, monitor and control all material risks to which covered entities are exposed.” Para. 40.3.f: change current wording (debts that are “doubtful”) to replace with “asset classification and related minimal provisioning and write-off requirements”. Strengthen power on NBC in Para. 40.8 for corrective action deemed necessary Explanatory Note: The purpose of the recommended revisions is to enhance the supervisory authority and regulatory power of the NBC to reflect risk based supervision” based on international standards (for example, Basel Banking Supervision Committee Core Principles numbers 7, 15 and 16):

Article 41. [Mandate of National Bank of Cambodia] Recommendation: Fine tuning to Para. 41.1 add in reference to Fit and Proper Testing for the licensing of entities. Explanatory Note: The purpose of the revision is to enhance the mandate of NBC to reflect the important international best practice of Fit and Proper Testing for the licensing of entities.

CHAPTER XIII: Prudential Measures – Internal Control

Article 42. [Prudential Measures; Calculation of Net Worth] Recommendation: Fine tuning of language in 1st paragraph of Art. 42 to revise as part of this article refers to specific reference to NBC Law and also is not currently clear in the Khmer version. Revise 2nd paragraph to refer to the power of NBC to set regulations for the calculation of net worth. Explanatory Note: The purpose of the proposed revision is intended (1) to simplify and clarify the language and (2) to provide greater clarity by referring to the power of NBC to set regulations for the calculation of net worth of the banks and financial institutions.

Article 43. [Covered Entity to have Internal Control System] Recommendation: Recommend some revisions of Art. 43 to improve the internal control system of covered entities as follows: Additional words in first sentence of Art. 43: “and comprehensive processes adequate for the size and complexity of the business operations”.

Add reference in 43.1 to policies issued by the board. Add reference to “operational risk” in paragraph 43.2. Also recommend new paragraph for requirements for internal control system for

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covered entities: “identifying, measuring, monitoring and controlling all material risks to which the covered entity is exposed”. Explanatory Note: The purpose of the revisions is to comply with international standards such as Basel Banking Supervision Committee Core Principles.

CHAPTER XIV: Accounting Obligations – External Auditors' Duties

Article 44. [Auditing of Accounts; Conditions Prescribed by Supervisory Authority] Recommendation: Recommend revision to delete reference to “the legal statute of noncommercial societies”, and to add reference to the Law on Commercial Enterprises. Explanatory Note: The purpose of the revision is to make the Law consistent with Cambodia's updated legal framework.

Article 45. [Preparation and Publishing of Accounts under Prescribed Conditions] No change.

Article 46. [Duties of External Auditor; Reporting, etc.] Recommendation: Recommend revision to the 3rd paragraph of Article 46 to require external auditor to inform the supervisory authority of violation of legal or regulatory provisions. Also revise 4th paragraph to include new duty as Item 5: “assessment of overall asset quality in light of prudence and material impact on the income recognition and on the financial condition”. Explanatory Note: The purpose of the revisions is to achieve consistency with international standards and best practices.

CHAPTER XV: Professional Secrecy

Article 47. [Duty of Professional Secrecy; Exceptions in Certain Cases] Recommendation: Recommend revision of Article 47 for purpose of allowing disclosure of information in connection with operation of the Credit Information Sharing System (CIS) where a covered entity is a member. In addition, recommend revision to add new paragraph to allow for use and disclosure of information in connection with the operations of a Credit Bureau in Cambodia. Explanatory Note: The current Article 47 does not allow this type of disclosure. There is an exception in the last paragraph of Art. 47 that allows disclosure to the supervisory authority (NBC). However this would not permit disclosure through the CIS to other banks and financial institutions. It is also not certain that the providing of a “consent form” by a bank customer would be enough to protect the banks which are members of the CIS. Therefore, clarity is necessary in the Law. It is therefore recommended that there be a specific exemption for the CIS and for a Credit Bureau in Art. 47.

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CHAPTER XVI: Related Parties

Article 48. [Loans to and Transactions with Related Party; NBC Regulations] Recommendation: Recommend revisions to Article 48 to comply with international standards and best practices (including Basel Banking Committee Core Principles):

add 2nd paragraph to clarify the meaning of “related party transaction”; it is not clear in the current wording of Art. 48,

It is very important to have a general prohibition in the law itself. This is to clarify that unless expressly permitted (see for example Prakas on Loans to Related Parties B7-01-137 dated October 15, 2001; as amended by Prakas B7-02-146 dated June 7, 2002), any related party transaction is prohibited.

In addition, it must be clear under the law that there will be no “special permission” granted on a case by case basis. The rules are principle-based with full transparency under the NBC's regulations. Therefore the law should remove any possible misinterpretation.

Therefore the recommendation is for Article 48.3 to say that: “ A related party transaction with a covered entity shall be prohibited unless it can be performed in full compliance with the rules and restrictions set forth by the National Bank of Cambodia regulations.”

Explanatory Note: All of the above are to ensure the law is consistent with international standards, including the Basel Banking Supervision Committee Core Principles.

Article 49. [Meaning of Related Party] Recommendation: Recommend revisions to Article 49 to provide a stronger and improved definition of “related party” to comply with international standards and best practices by: Including within “related party” a company or partnership which an influential shareholder, director, officer, external auditor controls or over which there is significant influence. Including board members, senior officers and managers as related parties. Including within “related party” based on “kinship” with natural persons based on family relationships. There is a broad definition of “Kinship” to reflect situation of Cambodia's extended families. It includes immediate family members, but also brother-in-law, sister-in-law, and extended family members. There are similar concepts of “related” persons in Cambodia's Insolvency Law. Explanatory Note: All of the above are to ensure that the Law is consistent with international standards, including the Basel Banking Supervision Committee Core

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Principles, but also to have a definition that is suitable and appropriate for the circumstances in Cambodia.

Article 50. [Related Party Based on Relationships or Financial Links] Recommendation: Recommend that this article be fine tuned to cover situations of relationships and financial links (going further than definition of “Kinship) and is intended to strengthen the power of NBC to have authority to “designate” persons as related parties and subject to the law. Explanatory Note: This is to ensure that the Law is consistent with international standards, including the Basel Banking Supervision Committee Core Principles.

CHAPTER XVII: Money Laundering

Article 51. [Obligations of Covered Entity; Preservation of Documentation] Recommendation: Recommend revision to Article 51 to reflect the fact of adoption of Law on Anti-Money Laundering and Combating the Financing of Terrorism. Also revision to change “ten years” to “five years”. Explanatory Note: This is to ensure that the Law is consistent with the Law on Anti-Money Laundering and Combating the Financing of Terrorism.

CHAPTER XVIII: Disciplinary Sanctions

Article 52. [Authority of Supervisory Authority to Impose Sanctions] No change.

Article 53. [Appointment of Provisional Administrator; Notice] No change.

Article 54. [Enforceability of Sanctions; Right of Appeal in Certain Cases] No change.

CHAPTER XIX: Penalties

Article 55. [Application of Specific Penalties] No change.

Article 56. [Penalties to be Imposed by the Courts] No change.

CHAPTER XX: Provisional Administration – Liquidation* Note: *Change title of Chapter XX to “Provisional Administration- Receivership, Restructuring and Liquidation” for greater clarity.

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Note:.The Recommendations build on current procedures for appointment of “provisional administrator” in Chap. XX. The Recommendations are aimed at improving and strengthening the Supervisory “Tool Kit” for NBC to take steps for resolution of financially troubled and insolvent institutions, for example for a sale of a financially troubled bank or a transfer of its assets and liabilities (deposits). The Recommendations follow international standards and practices, for example Basel Banking Supervision Committee Supervisory Guidance on Dealing with Weak Banks (2002)

Article 57. [Appointment of Provisional Administrator; Initial Term] Recommendation: Recommendation for revision of Article 57 for improvement and greater clarity of conditions where NBC has the power to appoint a provisional administrator:

(1) Wording to refer to “financial viability” of covered entity: “a covered entity has ceased, or is about to cease, to be financially viable, and the financial viability of the covered entity cannot be restored.”

(2) NBC can appoint provisional administrator for initial term of three (3) months.

(3) Wording to make it clear that NBC to take into account all matters it considers

relevant including but not limited to a broad set of factors that includes the covered entity's liquidity, solvency and management and any concerns about the stability of the banking system and the best interests of the financial system in Cambodia.

(4) Revision to state that NBC may set regulations, circulars and standards in connection with the appointment and activities of the provisional administrator and in connection with the exercise of any of the powers of the provisional administrator, including but not limited to the carrying out of the powers of the receiver, the restructuring transactions for covered entities and the liquidation process for covered entities.

Explanatory Note: The recommended Amendments to the Law in Chapter XX will provide for new powers for the NBC consistent with international standards and best practices. The condition for intervention by the NBC under the proposed Amended Article 57.1 is a finding by the NBC (“the supervisory authority is of the opinion”) that a bank or financial institution has ceased or about to cease to be financially viable.

The use of the term “financially viable” with reference to a problem bank or financial institution is intended to be a broader term than “solvency”. The use of this term is intended to address the types of circumstances witnessed recently in the global financial crisis. Therefore NBC has the power to appoint a provisional administrator where “a covered entity has ceased, or is about to cease, to be financially viable, and the financial viability of the covered entity cannot be restored.”

In these circumstances, the NBC may appoint a provisional administrator. (This can also be following the request of the shareholders or management of the bank). The initial term is for three (3) months with power to extend the appointment under the circumstances.

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The NBC may take all matters it considers relevant into account, including liquidity, solvency, management, any concern for the stability of the banking system and Cambodia's overall financial system. Therefore, there is a very broad authority to consider all relevant matters to deal with the problem bank or financial institutions and the appointment of the provisional administrator. The provisional administrator, once appointed, has exclusive powers to manage, direct and represent the bank or financial institution: See Art. 58. The NBC also shall have broad authority to issue regulations, circulars and standards in connection with the appointment and activities of the provisional administrator and in connection with the exercise of any of the powers of the provisional administrator, including but not limited to the carrying out of the powers of the receiver, the restructuring transactions for covered entities and the liquidation process for covered entities. This will provide the NBC with greater flexibility to adapt to future international standards and best practices set by international organizations following the global financial crisis.

Article 58.[Exclusive Powers of Provisional Administrator] No change.

Article 59. [Main Duties of Provisional Administrator] Recommendation: Fine tuning revision to change reference from the “solvency” to “financial viability” of covered entity.

Explanatory Note: As noted above, the term “financially viable” with reference to a problem bank or financial institution is intended to be a broader term than “solvency”. The use of this term is intended to address the types of circumstances witnessed recently in the global financial crisis.

Article 60.[Financially viable Covered Entity; Lifting of Protective Measures] Recommendation: Fine tuning revision to change the reference from “solvency” to “financial viability” of covered entity.

Explanatory Note: As noted above, the term “financially viable” with reference to a problem bank or financial institution is intended to be a broader term than “solvency”. The use of this term is intended to address the types of circumstances witnessed recently in the global financial crisis.

Article 61. [Covered Entity is Presently Financially Viable But Cannot Comply with Prudential Norms; Conversion to Voluntary Liquidation Process] Recommendation: Fine tuning revision to change this Article to read that “the bank has not ceased to be financially viable in the circumstances” but is not in a position to abide by financial norms; therefore conversion of the process into voluntary liquidation process.Explanatory Note: As noted above, the term “financially viable” with reference to a problem bank or financial institution is intended to be a broader term than “solvency”. The use of this term is intended to address the types of circumstances witnessed recently in the global financial crisis.

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Article 62.NEW [Vesting of Shares or Appointment of Receiver of Covered Entity] Recommendation: Recommendation to revise Chap. XX by substitution of new Art. 62 to provide as follows:

Where the assessment concludes that the covered entity is not financially viable in the circumstances and cannot be restored to financial viability, NBC will have the power to (i) order that the shares of the covered entity will be vested in the provisional administrator; or (ii) order that the provisional administrator is appointed as receiver in respect of the covered entity. When the NBC issues the order, the powers, duties, functions, rights and privileges of the directors of the covered entity and those of its officers responsible for its management are suspended. The receiver will have very broad powers as set out in the revised Art. 62 to carry out transactions on behalf of the covered entity.

Explanatory Note: This new Article creates important new powers for the NBC to take intervention steps through the provisional administrator where is concluded that the troubled bank or financial institutions is not financially viable in the circumstances and cannot be restored to financial viability. The NBC will have the power to either order that the shares of the bank be vested in the provisional administrator or order that the provisional administrator is appointed as receiver of some or all of the property of the bank. All powers and authorities of the bank become vested in the provisional administrator. The provisional administrator will have wide-ranging powers including the power to dispose of the bank’s assets or transfer of ownership in the shares of the bank (see below).

Article 62.A (NEW) [Stay of Proceedings, etc.]

Recommendation: Recommendation to revise Chap. XX to add new Article 62A to provide for “stay of proceedings” where there is order of NBC as noted above.

Explanatory Note: The effect of this order is that creditors of the Insolvent Covered Entity are not allowed, for example, to sue or enforce judgments. There is a similar provision in the Insolvency Law (Art. 18). This reflects international standards and practices in the insolvency field. It is particularly important for the protection of the assets of a financially troubled bank or financial institution.

Article 62.B (NEW) [Restructuring Transactions for Covered Entity] Recommendation: Recommendation to revise Chap. XX to add new Article 62B for “restructuring transactions”. Explanatory Note: This recommendation provides for broad range of options to deal with the covered entity that has ceased to be financially viable, aimed at resolution of the problem without liquidation: for example, sale of the shares or assets to a healthy bank or other financial institution and transfer of liabilities (deposits) to a healthy bank or other financial institution. These steps are aimed at providing advantages for the NBC to act through the provisional administrator for a cost effective and flexible resolution to help ensure public confidence in the banking sector. Recommendation: It is also recommended that the new Article 62B provide that the provisional administrator shall use all best efforts to ensure that a transaction referred to

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in this Article shall be substantially completed within sixty (60) days. The provisional administrator may apply to the supervisory for an extension of that period. Therefore the NBC will have the power to extend the time and allow the provisional administrator to take safeguard measures to protect the assets.

Explanatory Note: The intention of this recommendation is to provide a reasonable time for the provisional administrator, and to allow the NBC to provide an extension of time that may be reasonable in the circumstances for an effective resolution.

Recommendation: Further, it is recommended that where the provisional administrator informs the supervisory authority that a transaction cannot be reasonably completed on a timely basis the provisional administration may be converted into a liquidation process.

Explanatory Note: This is intended to deal with the scenario where it is not possible or feasible for the resolution to be completed as intended. Therefore, under these circumstances there may be a conversion to a liquidation process (see below).

Recommendation: Further it is recommended that the new Article 62B should also provide that the NBC has the power to approve any sale, disposition or restructuring transaction to be carried out.

Explanatory Note: This provision is intended for clarity to ensure that NBC has the power to approve any restructuring transaction.

Article 63. [Liquidation of Covered Entity; Withdrawal of License; Application of Insolvency Law Procedures] Recommendation: Recommendation that Art. 63 be revised to provide for NBC to make decision to proceed directly to the process of the liquidation of a covered entity that has ceased to be financially viable (in other words, not attempt a resolution by the restructuring in Art. 62B). As is the case in the current Chap. XX (Art. 62) the license is immediately withdrawn and the provisional administration is converted into a liquidation by order of the court, at the expense of the covered entity. Explanatory Note: The intention of this provision is to provide the power to NBC to make a decision to proceed directly to a liquidation (e.g. a court process). In other words, under the specific circumstances, NBC decides that a restructuring transaction is not feasible and that it is in the best interests of Cambodia's banking system to proceed directly to a liquidation of the problem bank or financial institution. The procedures should follow the applicable provisions of the Insolvency Law leading to an order of the court. However the provisions also recognize the special role of the supervisory authority to protect the banking system in Cambodia. Therefore, there are some revisions to make it clear that the NBC has oversight over the liquidation process, with the rights to receive reports and to issue “no objection” to the terms and conditions of the liquidation.

Article 64. [Priorities of Claims] Recommendation: Recommend revision of Article 64 for purpose of consistency with the Insolvency Law. Explanatory Note: The purpose of this revision is to have consistency with the approach taken in the Insolvency Law, to the greatest degree possible in connection with the

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categories and rankings for the claims in the liquidation of a covered entity (for example giving employee wages the highest ranking), while recognizing the unique features of the covered entity (for example, holding deposits).

Article 65. [Submission of Case to the Court Where Serious Violation] Recommendation: Recommendation for revision to improve the wording of this provision: “The supervisory authority, the provisional administrator or the liquidator shall submit the case to the court if they observe a serious violation of any legal or regulatory provision.” Explanatory Note: The purpose of this recommendation is to improve and clarify the conditions for submitting a case to the court.

Article 66. [List of Qualifying Professionals] No change.

Article 67.[Matter Referred to the Court] No change.

Article 68. [Voluntary liquidation; Appointment of Liquidator] No change.

Article 69. [Remuneration and Other Expenses to be Reimbursed] Recommendation: No change, except should include reference to new Article 62B. Explanatory Note: For completeness to include reference to new revised Article.

CHAPTER XXI: Customer Protection* *Recommend revising CHAPTER XXI with new title: “Supervisor and Customer Protection” to reflect broader scope of Chap. XXI

Article 70. [Protection of Supervisory Authority] Recommendation: Recommend revision of Art. 70 by deletion and substitution of new Article 70 to provide for immunity and protection of National Bank of Cambodia. Explanatory Note: This is a broad protection to the NBC, its officers and employees to enhance the NBC's independence in compliance with international standards (for example, Basel Core Principle 1). The provision will apply to provide protection for any act done in good faith in the exercise, execution or performance of any powers, duties and functions under the Law.

Article 71: [Customer Protection] Recommendation: Recommend that current Article 70 be revised and added as new

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Art. 71 to strengthen and clarify the comprehensive authority of NBC to make regulations (prakas), standards and guidelines for the protection of banking customers with the aim of improving transparency, openness and fair conduct in banking and financial operations. The new Art. 71 will give authority for the NBC to act in the following categories in connection with customer protection and market conduct rules: 1. disclosure of fees and charges for the operation of accounts and for other banking and financial services, 2. opening and termination of accounts and credit lines, 3. negotiation and renegotiation of loans, 4. rights and obligations of the customer in connection with the use of credit and debit cards and other means of payment, including electronic and online means of payment, 5. disclosure of the methods for calculation of interest and borrowing charges, 6. providing information and advice in connection with financial products and services, 7. prohibition on certain selling practices for financial products and services, including any “tied selling practice” where there is undue pressure on the customer. (However, a covered entity may offer a product or service to a customer on more favourable terms or conditions),and 8. complaints by customers of covered entities in connection with financial products and

services. Explanatory Note: A body of rules for the protection of customers is contemplated under Article 70 of the current Law. However the current provision of the Law is narrow in scope. To date no rules have been drafted by the NBC to implement fair practices for the benefit of consumers. It is therefore recommended that the Law should be strengthened to give specific authority to the NBC to adopt regulations, standards or guidelines for customer protection in a number of important areas. This is a key aspect where it is appropriate for the NBC to address issues of customer protection and market conduct by issuing regulations, standards or guidelines. The NBC needs the flexibility to act where there is a decision to deal with emerging market situations and new banking products introduced in Cambodia by banks and financial institutions. Therefore the recommended revision will provide a very broad authority for the NBC to protect customers of banks and financial institutions and generally to ensure proper market conduct. There is a greatly enhanced authority for NBC to issue prakas, standards and guidelines for a range of consumer protection measures.

Article 71.A. [Dormant Accounts Transferred to National Bank of Cambodia] (Revise so current Art. 71 will be Art. 71. A, but with no other changes.)

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CHAPTER XXII: Organization of the Profession

Article 72. [Single Professional Association] Recommendation: It is recommended that there be some fine tuning revisions to this Article: To reflect the fact that there are may be more than two professional associations in the banking industry (including MFIs) and to remove the reference to specific names of these associations. To delete reference to “non-commercial societies” (no longer necessary under the Law). To retain requirement that covered entities are members of professional association. To retain the requirement that NBC approves Articles of Association. Explanatory Note: The main provisions of the Article are retained but there is some fine tuning for greater clarity and to reflect the factors relevant to the operations of the Professional Associations.

Article 73. [Mandate of Professional Association] Recommendation: Recommend some fine tuning of the current Article to broaden the future role of the professional association(s) by adding: “serve as a consultative and standardization body for matters related to the development of the payments system in Cambodia under the control of the National Bank of Cambodia”. Explanatory Note: Most of the current Article is retained, but there are some additions to the Mandate to reflect a future broader role for the Professional Associations regarding the payments system.

CHAPTER XXIII: Transitional Provisions

Article 74. [Previously Licensed Institutions; Institutions Lacking Current License; Special Regulations for Microfinance Institutions, etc.] Recommendation: Recommend that Art. 74.1 and 74.2 should be deleted. Explanatory Note: These provisions are no longer relevant. These paragraphs of the law provide for transitional rules and it appears that these rules are no required for the administration of banking supervision by NBC. Recommendation: It is recommended that Art. 74.3 be retained in the Law. Explanatory Note: The reason for retaining Art. 74.3 is to ensure that the NBC has sufficient flexibility and authority to regulate and to supervise certain categories of operators in financial services. For example, Art.74.3 may be relevant to the NBC for authorizing regulations in connection with the registration and licensing of operators in rural Cambodia referring to themselves as “savings banks” or” credit unions” currently operating in some form outside the banking regulatory framework. The best option would be for the adoption of a new Law on Cooperatives for Cambodia that would apply to cooperatives and credit unions. But until such a new law has been adopted in Cambodia, the NBC may wish to exercise its authority under Art. 74.3 to issue regulations applicable to these types of organizations so that they are brought under the banking regulatory

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framework. The authority under Art. 74.3 was earlier used to issue regulations for MFIs, but it creates a broad authority for the NBC.

CHAPTER XXIV: Final Provisions

Article 75. Recommendation: Recommend deletion of present article 75. If the law in fact repealed previous banking and financial institutions law, the following should be substituted: “This law hereby repeals the following laws” with specific reference to earlier laws repealed. Explanatory Note: The English version of Article 75 says that “all provisions contrary to this law are hereby repealed”. Most, if not all, Cambodian statutes include such a provision. This creates a risk that a perfectly valid operating law will be “repealed” by implication as a result of this kind of statement included in another law, without any reference whatsoever to the first law. This contributes to create a greater level of uncertainty and lack of transparency. The better alternative is for a new or revised law (or Prakas) to specifically refer to the previous laws being repealed by providing a detailed list of these relevant laws. Therefore the current Article 75 should be deleted and replaced by a list of specific laws, or provisions of those specific laws, that are repealed.

Article 76. Recommendation: Recommend that this Article can be deleted or retained. Explanatory Note: Whether Article should be deleted or retained should depend on specific requirements of Cambodia law for statutory drafting.

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APPENDIX “D” Revised DRAFT Version 3.0 11/14/08

LAW ON BANKING AND FINANCIAL INSTITUTIONS

DRAFT AMENDMENTS

CHAPTER I: Banking and Financial Intermediation

Article 1. [Meaning of “Bank” and Other Terms Used in this Law]

In this law, the following terms have the following meanings:

“Bank” means a legal entity licensed to carry out banking operations as set out in Article 2 as its regular business.

“Specialized Bank” means a non-deposit taking financial institution licensed to carry out certain banking operations as set out in Article 2.

“Microfinance” means the delivery of financial services such as loans and deposits to the poor and low income households, and to micro-enterprises.

“Microfinance Institution” or “MFI” means a legal entity or an organization licensed by the National Bank of Cambodia to carry out microfinance as described in Article 2. A Microfinance Institution may be deposit taking or non-deposit taking, depending on its license.

“Securities Company” means a financial institution licensed under Article 5 to carry out some or all of the securities transactions and activities set out in Article 4.

“Licensing Authority” means the National Bank of Cambodia.

“Supervisory Authority” means the National Bank of Cambodia.

“Parent” and “Subsidiary” have the meanings found in the Law on Commercial

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Enterprises, Article 2.

“Person” includes a Legal Person and a Natural Person.

Article 2. [Banking Operations]

Banking operations include :

1. credit operations for valuable consideration, including leasing, guarantees and commitments under signature;

2. the collection of non-earmarked deposits from the public;

3. the provision of means of payment to customers and the processing of said means of payment in national currency or foreign exchange. Any entity carrying out even one of these three types of activities shall be considered de facto to be engaged in banking.

A financial institution carrying out only one of these three basic activities, or only one component of each of these three basic activities, with the exception of the taking of deposits, shall be known as a “Specialized Bank”.

A Microfinance Institution holding a license from the National Bank of Cambodia may conduct banking operations as defined in this Article, but subject to the terms of its license and to the regulations and standards issued by the National Bank of Cambodia specifically applying to Microfinance Institutions.

Article 3. [Other Business Powers of Banks]

Banks may also, for their customers or on their own behalf, perform or carry out :

1. all the financial operations referred to in Article 4 below, except insurance services which are the subject of a separate law;

2. foreign exchange operations;

3. money market intermediation, and all operations in negotiable claims on said market;

4. transactions in derivatives;

5.spot or forward dealing in precious metals, raw materials and commodities; and

6. other services related to their core activities, subject to the agreement of the supervisory authority.

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Article 4. [Business relating to securities]

Banks as defined above may, on their own behalf and for their customers, either directly or indirectly by participating in one or more entities that is a Securities Company, carry out securities transactions which constitute financial intermediation, such as :

1.taking deposits for the purpose of subscribing or purchasing securities, pursuant to instructions received from individual customers or from open-end investment companies,

2. subscribing in and trading securities,

3.custody of securities,

4. individual or collective management of securities,

5. underwriting of securities upon their issuance,

6. financial engineering and investment advice

7.trading in derivatives, and

8. all manner of securities transactions on their own behalf, in their capacity as commercial companies and in compliance with the laws and regulations in force.

Article 5. [Establishment of Securities Company That is Subsidiary; Need for Approval and License] The National Bank of Cambodia has the power to approve the establishment of and to license any new Securities Company that is a subsidiary of a bank or a financial institution. Fit and proper testing shall be applied by the NBC in connection with the licensing of the Securities Company.

Article 6. [Licensing and Supervision of Securities Company That is Subsidiary]

The licensing and supervision of a Securities Company approved and licensed by the National Bank of Cambodia in accordance with the Article 5 shall be done by the Securities and Exchange Commission of Cambodia (the “Commission”) pursuant to the provisions of the Law on the Issuance and Trading of Non-Government Securities and any regulations issued by the Commission.

Article 7. [Licensing and Supervision of Banks For Securities Activities] 1. A bank holding a license from, and supervised by, the Commission may carry out the securities activities set out in Article 4, subject to the terms of the license. 2.The Bank of Cambodia shall have the authority to issue a prior written objection to the issuance of the securities license referred to in paragraph 1. hereof or to request the

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Commission to revoke a license on the grounds that the bank has contravened a provision of the laws or regulations governing its activities, has failed to heed a warning or not complied with an injunction. 3. A bank holding a license referred to in paragraph 1 hereof shall establish specific policies and procedures appropriate to the securities activities it carries out, including the use of information barriers and restrictions, in order to avoid conflicts of interest, and to separate its functions and activities as required by the supervisory authority and the Commission.

Article 8. [Foreign exchange operations, etc. carried out for customers by entities other than banks]

The operations related to the banking business referred to in Article 3 Paragraphs 2, 3, 4 and 5 of this law, and carried out for customers by entities other than banks, shall comply with the rules established by the supervisory authority.

CHAPTER II: Scope

Article 9. [Covered entities]

1. The banking and financial institutions defined in Chapter I, and hereinafter referred to as covered entities, shall be subject to the provisions of this law.

2. No person other than a covered entity may carry out banking operations in its ordinary course of business.

2. No person other than a covered entity may make use of a business name, corporate name, advertising or, in general, any expression implying that it is an institution authorised to carry out an activity subject to authorisation in accordance with the provisions of this law.

Article 10. [Application of commercial law, etc.]

Covered entities shall comply either with the provisions of the Law on Commercial Enterprises or with the provisions of the separate statute applicable to cooperatives, as well as with the provisions of this law. In case of conflict, this law shall prevail.

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CHAPTER III: Legal Form of Covered Entities

Article 11 [Legal form: public company, cooperative, etc.]

A covered entity other than a Microfinance Institution shall be incorporated either as

1. a Public Limited Company under the Law on Commercial Enterprises; or

2. a Cooperative subject to a separate statute. Cooperatives shall belong to a common federative body called a “Central Body”. The Central Body shall be responsible for ensuring cohesion among the entities affiliated with their network as well as the smooth functioning thereof. To this end, it shall take all necessary measures, in particular to safeguard the liquidity and solvency of each of these institutions and of the network as a whole. In addition, the Central Body shall be responsible for internal control within such entities, establishing safe and sound risk management guidelines, consolidating the federated entities, ensuring that compliance with regulatory compliance be achieved on a consolidated basis as well as on a stand alone basis and ensuring that key decision-making persons comply with minimum fit and proper requirements. The Central Body itself is considered as a covered entity.

Article 12. [Place of incorporation]

A covered entity may be locally incorporated in Cambodia or be a branch of a foreign bank.

Article 13. [Representative Office of Foreign Bank]

With prior approval of the supervisory authority, a foreign bank may open an information, liaison or representative office in the Kingdom of Cambodia, which office shall not be entitled to carry out banking operations or financial intermediation and canvassing operations. Such establishments may be locally incorporated or be a simple entity, a delegate person, or an office, and shall be so entered in the Trade Registry. Such offices shall use the business name of the foreign bank they represent along with the words “Representative Office in Cambodia”.

An authorization for a Representative Office is given for a period of two years, which may be renewed.

CHAPTER IV: Licensing of Covered Entities

Article 14. [Conditions for Issuing of License]

Before starting business, covered entities must obtain a license from the licensing authority.

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Before issuing a license, the licensing authority shall ensure :

1. the qualifications of the shareholders, directors and officers and the accuracy of their reported financial position;

2. the ability of the principal shareholders to fulfill, jointly and severally, their obligation to strengthen the bank’s own funds if required to do so in accordance with the provisions of Article 27 of this law;

3. the adequacy of human, technical, and financial resources for the planned activities.

The licensing authority shall be aware of the reciprocity offered by other countries when the shareholders of a locally incorporated bank or the head offices of branches of foreign banks are from said countries.

Article 15. [License Application; Duties of Licensing Authority] The licensing authority shall reach a decision within six months of the date that it receives the complete application together with all relevant documents. Applicants shall be notified of any refusal of authorisation. The licensing authority shall maintain a current list of licensed institutions, which shall be published in the Bulletin of the National Bank of Cambodia and in the Official Gazette of the Kingdom of Cambodia.

CHAPTER V: Minimum Capital – Solvency

Article 16 [Minimum Capital]

1. Before obtaining a license, a covered entity that is locally incorporated as a Public Limited Company or as a cooperative whatever its legal form, must have fully paid-up initial capital at least equal to a sum fixed by the supervisory authority.

2. Before obtaining a license, a branch of a foreign bank must have a fully paid-up capital endowment at least equal to the minimum capital of a covered entity locally incorporated as a Public Limited Company.

3. The minimum capital shall be fixed by a regulation issued by the National Bank of Cambodia. A portion of the minimum capital, equal to a percentage prescribed by a regulation issued by the National Bank of Cambodia, shall be permanently deposited with the National Bank of Cambodia as a guarantee deposit. The minimum capital of commercial banks shall amount at least to riel 50 billion. The guarantee deposit maintained with the National Bank of Cambodia shall amount at least to five percent of the minimum capital.

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4. A covered entity that is either locally incorporated or operating as a branch of a foreign bank, must at all times be able to prove that its assets minus related potential losses and intangibles exceed its liabilities to third parties by an amount at least equal to the minimum capital.

Article 17. [Solvency Ratio]

Covered entities must also observe a solvency ratio, the level of which shall be fixed by the supervisory authority in compliance with international standards. The ratio shall be calculated as a proportion of the covered entity’s net worth in relation to its risks.

CHAPTER VI : Capacity of Directors and Managers

Article 18. [Disqualification of Directors, Managers, etc.] A member of a board of directors or supervisory board or executive directors or a senior officer or manager or any person with the power of management of a covered entity must have the appropriate professional competence and experience and must be able to exercise sound judgment about the affairs of the covered entity. The above mentioned persons shall undergo the fit and proper assessment by the National Bank of Cambodia in accordance with its regulations on fit and proper testing.

None of the above mentioned persons shall, either directly or through an intermediary, direct, manage or run a covered entity in any capacity, or be authorised to sign on behalf of such an institution if, among other things, he or she :

1. has been convicted of :

o a crime,

o theft, fraud or breach of trust,

o misappropriation when acting as a public depository,

o extortion of funds or securities, criminal bankruptcy, injury to the credit of the State, or breach of exchange control regulations,

o usury,

o money laundering,

o forgery and / or the use of forgeries,

2. has been sentenced to a period of imprisonment for issuing bad checks,

3. has been convicted by a foreign court of law of one of the crimes or offenses listed in Paragraphs 1 and 2 above,

4. has been convicted in Cambodia or abroad for personal bankruptcy, receivership, or liquidation of assets,

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5. has been relieved of his duties as a law official by virtue of a court ruling,

6. has been involved in a personal capacity in the management of a covered entity whose license has been withdrawn following a disciplinary action.

Article 18.A. [Role and Duties of Board of Directors]

1. The board shall establish policies and supervise the management of the covered entity, shall oversee the strategic objectives of the covered entity and shall enforce clear lines of responsibility and accountability throughout the organization in the form of policies and controls designed to do so.

2. The board shall ensure that there is appropriate oversight by the senior management consistent with board policy, and shall effectively utilize the work conducted by the internal audit functions, external auditors and other internal control functions.

3. The board shall establish and the covered entity shall comply with investment and lending policies, standards and procedures that are adequate for and commensurate with the institution's condition and aimed at protecting the interests of all stakeholders in respect of a portfolio of investments and loans to avoid undue risk of loss especially considering the overall economic situation and market competition and to obtain a reasonable return.

4. Subject to Paragraph 5, a covered entity established in Cambodia shall have at least five (5) directors. The board shall include at least two (2) members who qualify as independent directors.

5. A covered entity which is either a MFI or a cooperative may have at least three (3) directors and the board, or equivalent, shall have at least one independent member of the board or equivalent.

6. An independent member of the board of directors, or equivalent, is defined as member being capable of exercising judgment independent of the views of a controlling shareholder, the senior management, related parties and affiliates, political interests or inappropriate outside interests.

Article 18.B. [Authority of NBC with regard to Corporate Governance]

The National Bank of Cambodia has the authority to issue prakas, circulars, standards and guidelines in connection with the governance of covered entities, including

- the roles and duties of directors and senior management,

- the use of board committees,

- the handling of conflict of interest matters,

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- the roles and duties of internal auditors, compliance officers and senior management in charge of internal control functions,

- the establishment of codes of conduct for the management and employees,

- and generally for the processes and procedures relevant to the strengthening of governance, sound business and financial practices, and risk management within covered entities.

CHAPTER VII: Composition, Permanent Identification, and Responsibilities of Partners in Covered Entities Constituted as Cooperatives

Article 19. [Conditions Applicable to Covered Entities Constituted as Cooperatives] The conditions applicable to setting up the capital, variable or non variable, of the covered entities constituted as cooperatives, plus the permanent identification of members or holders of stocks, shall be defined in the special act applicable to cooperatives. In compliance with the provisions of Articles 11 and 14-2 of this law, the central body shall be responsible for guaranteeing the solvency and liquidity of each network vis-à-vis third parties, depositors and creditors.

CHAPTER VIII: Composition, Permanent Identification, and Responsibilities of Shareholders in Locally Incorporated Covered Entities

Article 20. [Shareholders of Locally Incorporated Covered Entities] The shareholders of locally incorporated covered entities may be individuals or, under conditions fixed by the supervisory authority, legal persons for which shareholders must be clearly identified and reported to the National Bank of Cambodia. The supervisory authority shall particularly avoid situations where there are chains of shareholding companies, each of them holding shares in the others.

Article 21. [Holding Company]

A holding company which holds as subsidiaries, exclusively or principally, one covered entity or more, shall itself be deemed a covered entity, particularly as regards its licensing approval and submission to the supervisory authority.

Article 22. [Disclosure of Identity of Shareholders]

A covered entity applying for a license must inform the supervisory authority of the identity of its shareholders who directly or indirectly hold 5 percent or more of its capital or voting rights.

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Article 23. Increase or Decrease of Shareholdings; Notification

Any shareholder, or any group of shareholders acting in concert, shall, directly or through the concerned covered entity, notify the supervisory authority of any increasing in or transfer of direct or indirect equity holdings in a covered entity which would enable this shareholder or group of shareholders to acquire or to lose 5 percent of the covered entity’s capital or voting rights. Notification of such changes to the supervisory authority shall be the responsibility of the board of directors or equivalent.

Article 24. [Prior Authorisation for Changes in Shareholdings]

1. Any shareholder, or any group of shareholders acting in concert, shall, directly or through the concerned covered entity, obtain the prior authorisation of the supervisory authority for taking on or disposing of equity holdings that would directly or indirectly enable this shareholder or group of shareholders to :

1. acquire or to lose a half, a third, a fifth, or one tenth of the capital or voting rights of the covered entity,

2. acquire or to lose the power of control over the management of the covered entity.

2. The covered entity shall be held accountable for completing the notification and authorisation request formalities under the responsibility of the board of directors or equivalent. If the formalities have not been observed, the vote of the concerned shareholders in the general meeting shall automatically be invalidated, without prejudice to other penalties applicable to such a case.

Article 25. [No minimum number of shareholders] Article Deleted.

Article 26. [Shareholder deemed to be influential]

For the purposes of this law, a shareholder shall be deemed to be influential from the moment that he directly or indirectly holds at least 20 percent of the share capital or voting rights, or if he holds de facto decision making power as a consequence, inter alia, of widely dispersed shareholding.

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Article 27. [Influential shareholder obliged to increase net worth of covered entity]

If the financial position of a covered entity so warrants, the supervisory authority shall enjoin the influential shareholders, jointly and severally, to increase the net worth until the solvency standards are met or deemed satisfactory to the supervisory authority with regard to the covered entity's risk profile. If they refuse to comply, the concerned influential shareholders shall be liable to penalties provided in Article 55.2 below, without prejudice, in case of voluntary liquidation, to actions in meeting disputed liabilities as opposed by creditors or depositors.

CHAPTER IX: Composition, Permanent Identification, and Responsibilities of Shareholders of the Parent Company of a Covered Entity Constituted as a Branch of a Foreign Bank

Article 28. [Duty to notify regarding change in shareholdings; Appointment of Senior Management]

A branch of a foreign bank or foreign financial institution licensed to carry on banking or financial activities in Cambodia shall inform the supervisory authority of any change in the composition of the influential shareholding of its parent company, as soon as such a change arises, under the responsibility of the local senior management.

A branch of a foreign bank or foreign financial institution shall appoint one employee who is ordinarily resident in Cambodia to be its Senior Country Executive and another employee ordinarily resident in Cambodia to be its Senior Country Compliance Officer and notify the supervisory authority of these appointments immediately. Where a vacancy occurs in these positions the branch of the foreign bank or foreign financial institution shall without delay fill the vacancy and notify the supervisory authority.

Article 29. [Validity of License; Weakened Financial Position, etc.]

The supervisory authority may call into question the validity of the license previously granted to a branch, if changes referred to in Article 28 above are likely to weaken the financial position or the accountability of the parent company abroad.

Article 30. [Foreign Bank Branch Not Abiding by Prudential Regulations]

If a branch does not abide by prudential regulations, the supervisory authority shall invite its parent company abroad to reconstitute its capital endowment as mentioned in Article 16.2 of this law or to modify the distribution of assets.

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Article 31. [Voluntary Liquidation of Foreign Bank: Repayment of Resident Customers]

In case of voluntary liquidation of the parent company abroad, all assets of the foreign branch in Cambodia are earmarked, on a priority basis, for repayment of resident customers, whether they are depositors of securities, gold, or cash, or whether they are creditors, as far as their rights to the assets of the branch at the time of liquidation have been acknowledged by the liquidator of the branch.

CHAPTER X: Equity Participations by Covered Entities in the Capital of Other Commercial Entities

Article 32. [Meaning of Equity Participations]

For the purposes of this law, holdings shall be regarded as equity participations when they directly or indirectly confer on a covered entity at least 10 percent of the capital or voting rights of another company.

Article 33. [Limits on Equity Participations, Individual and Total]

A covered entity may hold equity participations, which must at no time exceed either of the following two limits :

1. as regards each equity participation, 15 percent of the amount of the own funds of a covered entity,

2. as regards total equity participations, 60 percent of the amount of the own funds of a covered entity.

Article 34. Where No Limits on Equity Participations; Need for Prior Approval]

The following shall not be subject to the individual and overall limits laid down in Article 33 of this law :

1. equity participations in a company whose activities are necessary and incidental to the operations of a covered entity, with the prior approval of the supervisory authority.

2. equity participations in banking or financial institutions, with the prior approval of the supervisory authority,

3. an equity participation in a company to which a covered entity has made a loan and under the terms of the loan agreement the covered entity has the right to acquire shares of the company if a default has occurred, with the prior approval of the supervisory authority. This is a temporary equity participation for a maximum of five years. However, an additional period may be considered by the supervisory

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authority if there is a request in writing to the supervisory authority including all useful and necessary information and data to support the decision of the supervisory authority.

The National Bank of Cambodia shall establish appropriate criteria in connection with the granting of approvals for investments under this Article and Art. 37, including

(1) the determination that a proposed investment will not expose the covered entity to excessive risks or hinder the effective supervision of the covered entity by the supervisory authority; and

(2) the determination that the covered entity has the adequate financial and organizational resources to manage the proposed investment in a prudent manner and to withstand potential financial problems faced by the company. Where there might be a material impact on the covered entity's overall risk profile, the supervisory authority shall consider strengthened solvency requirements prior to issuing its approval, notwithstanding the requirements set out in Article 36.

Article 35. [Equity Participations in Banking or Financial Institutions]

For the purposes of Article 34.2 of this law, the following shall be regarded as banking or financial institutions:

1. covered entities,

2. Securities Companies, or financial companies including those engaging in the activities referred to in Article 8 of this law,

3. undertakings engaging in banking or financial operations abroad as their regular business,

4. insurance companies.

Article 36. [Calculation of Covered Entity's Net Worth Where Investment in Banking or Financial Institution]

Whenever a shareholder of a covered entity is a banking or a financial institution, or whenever a covered entity itself has a stake in a banking or a financial institution, the supervisory authority shall require for the calculation of a covered entity’s net worth on which prudential ratios are based :

-either the deduction of the participations held by the covered entity in other banking or financial institutions,

- or the prior consolidation of balance sheets of companies of the group whenever relevant upstream or downstream holdings reach at least 20 percent of the capital of related companies.

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Article 37. [Investment in Industrial or Commercial Undertaking Registered Abroad; Need for Prior Approval]

Any acquisition of holdings by a covered entity in the capital of an industrial or a commercial undertaking registered abroad shall be subject to the prior approval of the supervisory authority.

CHAPTER XI: Establishment Abroad or in Cambodia

Article 38. [Acquisition of Holdings in Bank or Financial Institution Abroad, etc.; Prior Approval]

Any acquisition of holdings by a covered entity in the capital of a bank or financial institution abroad, as well as any opening of a branch or representative office abroad, shall be subject to the prior approval of the supervisory authority.

Article 39. [Opening of Branch in Cambodia; Need for Approval; Acquisition of Holdings by Covered Entity in Another Covered Entity]

The opening of a branch in Cambodia by a covered entity shall be subject to the prior approval of the supervisory authority. Acquisitions of holdings by a covered entity in the capital of another covered entity are governed by the provisions of Articles 19 - 27 as well as Articles 33 - 35 of this law.

CHAPTER XII: Supervisory Authority and Regulatory Power

Article 40. [Supervisory Authority and Regulatory Power of National Bank of Cambodia]

The Central Bank supervises the banking system and its related activities such as the money market, the interbank settlement system, and financial intermediation. To this end the Central Bank shall :

1. issue licenses and define the licensing process,

2. prepare and keep up to date a list of licensed banks which shall be published in the Official Gazette of the Kingdom of Cambodia and in the Bulletin of the National Bank of Cambodia,

3. be empowered to issue regulations for the implementation of this law which authorise the National Bank of Cambodia to determine, in particular the

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a. amount of minimum capital and the nature of the assets it is backed with,

b. prudential ratios regarding particularly liquidity, solvency, risk diversification, foreign exchange exposure, market risk exposure, interest rate risk exposure and operational risk exposure and, more generally, any actual or potential risk concentration issue or concern.

b1. prudential standards to require comprehensive processes to identify, measure, monitor and control all material risks for covered entities.

c. valuation rules for accounting balances,

d. conditions under which participations can be taken and held in the capital of a covered entity or a financial institution,

e. conditions under which participations can be taken and held in the capital of other banking or financial companies,

f. asset classification and related minimal provisioning and write-off requirements,

g. the chart of accounts, the related accounting standards, the rules for the consolidation of accounts, and the rules of the disclosure of accounting statements,

h. conditions applicable to the banking and financial operations that may be carried out in their relations with customers,

i. organization of interbank joint services, including the centralization of financial information, risks, and overdue debts.

j. granting of individual, exceptional, and temporary exemptions,

k. requirements and authorization rules concerning modifications in the business name, legal form, capital distribution, management and activities of a covered entity, or of the head office in the case of a branch of a foreign bank,

l. practice of door-to-door selling of banking or financial services,

m. after consultation with the covered entities’ professional association, the rules governing the operation of a deposit guarantee system,

n. and, generally speaking, the modalities for enforcing this law in light of the differences concerning the legal form of covered entities, the scope of their network, and the nature of their activities,

4. it publishes all regulations issued by virtue of its authority in the Official Gazette of

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the Kingdom of Cambodia and in the Bulletin of National Bank of Cambodia,

5. it supervises the banking system through permanent off-site monitoring and periodic on-site examinations of each covered entity; if the need arises, on-site examinations may be extended to a subsidiary of a covered entity or to any other related entities, including shareholders,

6. It organises or supervises any interbank settlement system,

7. it may require that covered entities, public offices, auditors, and any other individual or legal entity disclose information considered as useful for its mission,

8. and it may, in accordance with the conditions defined in Articles 52 to 54 of this law, take disciplinary action. In addition, it shall require that any corrective action demand by implemented where and when necessary and in a timely manner.

Article 41. [Mandate of National Bank of Cambodia] The National Bank of Cambodia's duty consists:

1. in acting as the licensing authority in respect of banking and financial operations in Cambodia, including assessing if all key persons are fit and proper to exercise their functions according the provisions of regulations set by the National Bank of Cambodia,

2. in defining and enforcing prudential rules related to the financial structure and management that covered entities must abide by,

3. in supervising, permanently but after the fact, through both off-site and on-site examinations, the financial position and functioning of covered entities,

4. in imposing disciplinary sanctions against covered entities failing to comply with law and regulations,

5. in referring to the courts if failure to observe laws and regulations undermines the public interest. Managers and shareholders of the covered entities are accountable for errors of strategy, for mistakes in and errors of management, and for deficiencies in internal control, in accordance with the provisions of Articles 14, 19, 27 and 30 of this law.

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CHAPTER XIII: Prudential Measures – Internal Control

Article 42. [Prudential Measures; Calculation of Net Worth]

A covered entity shall, under the conditions prescribed by the supervisory authority, comply not only with the monetary policy rules defined in the Law on the Organization and Functioning of the National Bank of Cambodia, but also with management standards aimed at safeguarding its liquidity and solvency vis-à-vis depositors and, more generally, as regards third parties, as well as the strength of its financial structure. The net worth of a covered entity on which prudential norms are based shall be calculated according to the regulations set by the supervisory authority.

Article 43. [Covered Entity to have Internal Control System] Under conditions prescribed by the supervisory authority, a covered entity must have an internal control system and comprehensive processes adequate for the size and complexity of the business operations aiming particularly at :

1. verifying that the operations carried out by a covered entity, as well as the organization and internal procedures, comply with the laws and regulations in force, professional and ethical standards and practices, and the policies issued by the board of directors or equivalent executive body,

2. verifying that the limits laid down for risks, in particular counter-party, exchange-rate, interest-rate, and other market risks, and operational risks are strictly observed,

3. monitoring the quality of accounting and financial information, in particular the arrangements whereby this information is recorded, preserved, made available, and disclosed internally and externally, and

4. identifying, measuring, monitoring and controlling all material risks to which the covered entity is exposed.

CHAPTER XIV: Accounting Obligations – External Auditors' Duties

Article 44. [Auditing of Accounts; Conditions Prescribed by Supervisory Authority]

The provisions of Law on Commercial Enterprises concerning the closing and auditing of accounts as well as certification of annual individual accounts shall apply to a covered entity under the conditions prescribed by the supervisory authority.

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Article 45. [Preparation and Publishing of Accounts under Prescribed Conditions]

A covered entity shall prepare, publish and if need be consolidate its accounts under the conditions prescribed by the supervisory authority. A covered entity shall also periodically submit to the supervisory authority accounting statements and reports showing evidence of enforcement of legal, regulatory and prudential requirements.

Article 46.[ Duties of External Auditor; Reporting, etc.] No external auditor may audit a covered entity without prior authorisation of the supervisory authority. Before certifying the accounting statements, auditors must be satisfied of the fairness and truth of the annual accounting information reflected in the balance sheet and off-balance sheet items, income statement, and appended statements intended for publication or submission to the supervisory authority. Auditors shall inform the supervisory authority and the court if they notice that a covered entity has violated legal or regulatory provisions, in a manner likely to undermine the public interest. At the close of their audit, auditors shall prepare and submit to the supervisory authority a report summarizing their findings, in particular :

1. payment of capital

2. valuation methods of account balances

consolidation methods

financial position of the covered entity

assessment of overall asset quality in light of prudence and material impact on the income recognition and on the financial condition

agreements that may have been concluded, directly or indirectly, during the accounting year between the covered entity and its shareholders or its directors.

The supervisory authority may request from auditors any information about the activity or financial position of a covered entity. Furthermore, the supervisory authority may forward to auditors its remarks or requests for explanations, to which auditors shall reply in writing.

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CHAPTER XV: Professional Secrecy

Article 47. [Duty of Professional Secrecy; Exceptions in Certain Cases]

No person who participates in any capacity in the administration, direction, management, internal control, or external audit of a covered entity, and no employee of the latter, may provide to any person any confidential information pertaining to statements, facts, acts, figures or the contents of accounting or administrative documents of which he might have become aware through his functions. Any person who fails to observe this obligation of professional secrecy shall be liable to the sanctions laid down in Article 55 of this law. However, the obligation of professional secrecy may not be used as a ground for nondisclosure vis-à-vis the supervisory authority, auditors, provisional administrators, liquidators, or a court dealing with criminal proceedings.

The obligation of professional secrecy set out in this Article does not apply to the collection, management and utilization of credit information as authorized for a covered entity under

regulations issued by the National Bank of Cambodia in connection with the collection, management, utilization and protection of credit information and the operations of the Credit Information Sharing System; or

regulations issued by the National Bank of Cambodia in connection with the collection, management, utilization and protection of credit information in connection with the operations of a credit bureau operating in Cambodia.

CHAPTER XVI: Related Parties

Article 48. [Loans to and Transactions with Related Party; NBC Regulations]

1. For the purposes of this law, a related party transaction with a covered entity means:

(a) the granting of any credit to a related party or the making a guarantee on behalf of the related party;

(b) making an investment in any securities of a related party;

(c) taking an assignment of or otherwise acquiring a loan made by a third party to a related party; and

(d) taking a security interest in the securities of a related party.

2. Without prejudice to the provisions of Article 42 of this law concerning the calculation of net worth, any credit granted to a related party by a covered entity shall be subject to a regulation issued by the supervisory authority so that the extent of such credit shall be limited and known permanently.

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3. A related party transaction with a covered entity shall be prohibited unless it can be performed in full compliance with the rules and restrictions set forth by the National Bank of Cambodia regulations

Article 49. [Meaning of Related Party]

For the purposes of this law, a related party to a covered entity means as follows :

1. any person holding directly or indirectly at least 10 percent of the capital or voting rights,

2. any company of which the covered entity directly or indirectly holds at least 10 percent of the capital or voting rights,

3. a member of the board of directors or the supervisory board or a senior officer or manager,

4. the external auditors of the covered entity,

5. a person related by kinship to a natural person in paragraph 1 or the individuals in paragraphs 3 and 4,

6. any company or partnership that any of the persons in paragraphs 1, 3, 4 or 5 controls or over which they can exercise significant influence.

“Kinship” when used in relation to a natural person in this Article means:

(i) the person's spouse;

any ascendant or descendant of the person or of the person's spouse;

the spouse of any person described in paragraph (ii); and

any sibling, or the spouse of any sibling, of the person or of any person described in paragraphs (i) to (iii).

Article 50. [Supervisory Authority May Designated Related Party] The supervisory authority may designate a person as a related party and subject to this law because of their relationship or their financial links with persons referred to in Article 49 of this law, or any person or class of persons whose direct or indirect interest in or relationship with the covered entity might reasonably be expected to affect the exercise of the best judgment of the covered entity in respect of a transaction.

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CHAPTER XVII: Money Laundering

Article 51. [Obligations of Covered Entity; Preservation of Documentation] A covered entity must observe the Law on Anti-Money Laundering and Combating the Financing of Terrorism and shall take appropriate measures to identify precisely all its customers and, above a threshold defined by the supervisory authority, the transactions carried out through them, and shall keep all relevant documentation thereon for at least five (5) years.

CHAPTER XVIII: Disciplinary Sanctions

Article 52. [Authority of Supervisory Authority to Impose Sanctions]

If a covered entity has contravened a provision of the laws or regulations governing its activities, has failed to heed a warning or not complied with an injunction, the supervisory authority may impose one of the following disciplinary sanctions :

caution;

reprimand;

prohibition on the execution of certain operations and any other limitations on the carrying on of business;

temporary suspension of one or more of the executives, with or without appointment of a provisional administrator;

compulsory resignation of one or more of the executives, with or without appointment of a provisional administrator;

setting up a provisional administration; and

withdrawal of the license and liquidation.

Furthermore, the supervisory authority may, either in place of or in addition to these sanctions, impose - a fine not exceeding the minimum capital of the covered entity.

Article 53. [Appointment of Provisional Administrator; Notice]

The appointment of a provisional administrator or of a liquidator is an urgent administrative and protective measure. The covered entity concerned must be given notice of the measure, which is enforceable immediately.

Article 54. [Enforceability of Sanctions; Right of Appeal in Certain Cases]

The supervisory authority decides as a last resort jurisdiction in the case of the other disciplinary sanctions, which are of a moral or a financial nature. These decisions are enforceable immediately but may be appealed to the highest administrative jurisdiction on the grounds of legal flaw or irregularity.

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CHAPTER XIX: Penalties

Article 55. [Application of Specific Penalties]

In addition to the penalties provided for in case of violation of provisions of ordinary law or of the legal statute of noncommercial societies, the following penalties may be applied under this law :

1. Any person who, acting either for his own account or for the account of a legal person, as his regular business and on behalf of the general public carries out banking operations without a license, shall be liable before the courts to imprisonment from 1 year to 5 years and a fine from 5 million to 250 million riels, or to either of these penalties, without prejudice to the closure of the concerned establishment.

2. Any person or entity who infringes any of the provisions of Articles 9, 11, 18, 19, 27, 30, and 47, shall be liable before the courts to the penalties provided for in Article 55-1 above.

3. Any person, acting either for his own account or for the account of a legal person, shall be liable before the courts to imprisonment from one year to five years and a fine from 1 million to 10 million riels, or to either of these penalties :

o if he infringes any of the provisions of Articles 8, 13, 23, 24, 28, 38, 39, 44, 45, 46 and 51;

o or if, after formal demand from the supervisory authority, he fails to respond to request for information provided for in Article 40-7;

o or if he knowingly provides the supervisory authority with inaccurate information;

o or if he hinders examinations implemented by the supervisory authority or by the external auditors of a covered entity or hinders the missions of a provisional administrator or of a liquidator appointed by the supervisory authority.

Article 56. [Penalties to be Imposed by the Courts] The penalties provided for in Article 55 shall be imposed by the courts, in particular after a prior complaint or action for damages by the supervisory authority or by the covered entities' professional association provided for in Article 72 hereafter.

CHAPTER XX: Provisional Administration- Receivership, Restructuring and Liquidation

Article 57. [Appointment of Provisional Administrator; Initial Term; Grounds for Appointment] 1. Where the supervisory authority is of the opinion that a covered entity has ceased, or is about to cease, to be financially viable, and the financial viability of the covered entity cannot be restored by the exercise of powers by the supervisory authority, including appeals for reconstitution of own funds as provided for in Articles 14, 19, 27 and 30 of this

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law, the supervisory authority may, on its own initiative or following a request from the executives or shareholders, appoint at the covered entity’s expense a provisional administrator. The appointment shall be for an initial period not exceeding three (3) months, with power to extend the appointment if circumstances so warrant.

2. For the purposes of this Article, the supervisory authority may take into account all matters it considers relevant including but not limited to the covered entity's liquidity, solvency and management and any concerns about the stability of the banking system and the best interests of the financial system in Cambodia.

3. The National Bank of Cambodia may set regulations, circulars and standards in connection with the appointment and activities of the provisional administrator and in connection with the exercise of any of the powers of the provisional administrator, including but not limited to the carrying out of the powers of the receiver, the restructuring transactions for covered entities and the liquidation process for covered entities.

Article 58.[Exclusive Powers of Provisional Administrator]

As soon as he is appointed, a provisional administrator has exclusive powers to manage, direct and represent the covered entity.

Article 59. [Main Duties of Provisional Administrator]

The provisional administrator’s main duties are immediately to make an assessment of whether or not the covered entity is financially viable in the circumstances and to administer the current activities in order to preserve as far as possible the covered entity’s assets and maintain the rights of depositors and creditors.

Article 60.[Covered Entity is Financially Viable; Lifting of Protective Measures]

If the assessment concludes that the covered entity is considered financially viable in the circumstances and is in a position to abide by all legal and regulatory prudential norms, the provisional administrator shall so report to the supervisory authority which shall lift the protective measures.

Article 61. [Covered Entity is Presently Financially Viable But Cannot Comply with Prudential Norms; Conversion to Voluntary Liquidation Process] If the assessment concludes that the covered entity has not ceased to be financially viable in the circumstances but it is not in a position to abide by, within a period not exceeding 3 months, the prudential norms relating to net worth and liquidity, the license may be withdrawn by the supervisory authority and the provisional administration converted into a voluntary liquidation, at the expense of the covered entity. The liquidator, who may be the provisional administrator, shall liquidate all the assets and meet all liabilities under the control of the supervisory authority.

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Article 62. [Vesting of Shares or Appointment of Receiver of Covered Entity]

1. Where the assessment concludes that the covered entity is not financially viable in the circumstances and cannot be restored to financial viability, the supervisory authority may issue a decision to

(a) by order to the covered entity, vest the shares of the covered entity in the provisional administrator; or

(b) by order to the covered entity, appoint the provisional administrator as receiver in respect of the covered entity.

2. Where an order in respect of a covered entity is made

(1) vesting the shares in the provisional administrator, the powers, duties, functions, rights and privileges of the directors of the covered entity and those of its officers responsible for its management are suspended, or

(2) appointing the provisional administrator as receiver, the powers, duties, functions, rights and privileges of the directors of the covered entity and those of its officers responsible for its management are suspended with respect to the assets of the covered entity of which the provisional administrator has been appointed receiver

and the provisional administrator may exercise or perform those powers, duties, functions, rights and privileges.

3. An order made under paragraph 1.(b) appointing the provisional administrator as receiver

(a) constitutes the provisional administrator as the exclusive receiver of the assets of the covered entity or of such part thereof as may be specified in the order;

(b) gives the provisional administrator, as receiver, in respect of the assets of the covered entity, the power to

(i) enter the covered entity and take possession and control of the assets and require any person therein to account for and deliver up possession and control of the assets,

(ii) subject to subparagraph (iii), sell or otherwise dispose of the assets by private or public sale or in such other manner as the provisional administrator considers appropriate in the circumstances.,

(iii) sell or otherwise dispose of any asset that is subject to an agreement creating a security interest to any person who agrees to assume the obligation secured by the security interest,

(iv) arrange for the assumption by any person of all or any part of the covered entity's liabilities,

(v) carry on the business of the covered entity to the extent that the provisional administrator deems is necessary or beneficial to the receivership,

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(vi) sue for, defend and settle, in the name of the covered entity, any claim made by or against it,

(vii) in the name of the covered entity do all acts and execute all receipts and other documents; and

(viii) do all such other things as may be necessary or incidental to the exercise of the Corporation’s rights, powers, privileges and immunities as receiver; and

(c) gives the provisional administrator, on behalf of the supervisory authority, the right to recover out of the assets of the covered entity all the costs, charges and expenses properly incurred in the receivership, in priority to all other claims.

Article 62.A. [Stay of Proceedings, etc.)

Where an order is made for the vesting of shares in the provisional administrator or the appointment of the provisional administrator as receiver of the covered entity,

(a) no action or other civil proceeding may be commenced or continued against the covered entity or in respect of its asset;

(b) no method of enforcement of a judgment or order against the covered entity or its assets may take place or continue;

(c) no creditor has any remedy against the covered entity or its assets;

(d) no creditor has any right of set-off against the covered entity under contract, which, for greater certainty, does not include the contracts with a bank or other financial Institution for the purpose of clearing, settlement and similar financial services for the benefit of the covered entity; and

(e) no person may terminate or amend any agreement with the covered entity or claim an accelerated payment under any such agreement by reason only of

(i) the fact that the covered entity is an Insolvent Covered Entity,

(ii) a default, before the order was made, by the covered entity in the performance of its obligations under the agreement, or

(iii) the making of the order for the vesting of shares or the appointment of a receiver of the covered entity.

Article 62.B. [Restructuring Transactions for Covered Entity]

1. Where an order has been made for the vesting of shares of the covered entity in the provisional administrator, the provisional administrator may, in addition to any other rights and powers, carry out, or cause the covered entity to carry out,

(a) a transaction or series of transactions that involves the sale of all or part of the shares of the covered entity;

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(b) a transaction that involves the amalgamation of the covered entity;

(c) a transaction or series of transactions that involves the sale or other disposition by the covered entity of all or part of its assets or the assumption of all or part of its liabilities, or both; or

(d) any other transaction or series of transactions the purpose of which is to restructure a substantial part of the business of the covered entity.

2. Where an order has been made for the appointment of the provisional administrator as receiver of the covered entity, the provisional administrator may, in addition to any other of its rights and powers, carry out

(a) a transaction or series of transactions that involves the sale or other disposition by the provisional administrator as receiver of all or part of the assets of the covered entity or of all or part of its liabilities, or both; or

(b) any other transaction or series of transactions the purpose of which is to restructure a substantial part of the business of the covered entity.

3. The provisional administrator shall use all best efforts to ensure that a transaction referred to in this Article shall be substantially completed on or before the date that is sixty (60) days after the making of the order for the vesting of shares or the appointment of the provisional administrator as receiver of the covered entity. The provisional administrator may apply to the supervisory for an extension of that period.

4. Where the provisional administrator informs the supervisory authority that a transaction referred to in this Article cannot be reasonably completed on a timely basis, the supervisory authority may immediately withdraw the license of the covered entity and the provisional administration shall be converted into a liquidation by order of the court, at the expense of the covered entity.

5. The supervisory authority has the power to approve any sale, disposition or restructuring transaction to be carried out under this Article.

Article 63. [Liquidation of Covered Entity; Withdrawal of License; Application of Law on Insolvency Procedures]

1. Where the assessment concludes that the covered entity is not financially viable in the circumstances and cannot be restored to financial viability, the supervisory authority may make a decision to proceed directly with the liquidation of the covered entity. In this case, the license is immediately withdrawn and the provisional administration is converted into a liquidation by order of the court, at the expense of the covered entity.

2. The provisional administrator shall declare the suspension of payments and the case is referred to the court which shall appoint a liquidator, who may be the provisional administrator.

3. The liquidator shall liquidate the assets and meet the liabilities and in compliance with applicable steps for proceedings through the courts under the Insolvency Law.

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4. The supervisory authority shall have the right to receive all reports from the liquidator and the courts, the right to review all proposals in connection with the liquidation and the right to stipulate that it has no objection to the terms and conditions of the liquidation in the circumstances.

5. A liquidation, voluntary or by order of the court, depending on the solvency or insolvency of the covered entity, shall be undertaken following a license withdrawal pronounced as a disciplinary sanction imposed in accordance with Article 52.

Article 64. [Priorities of Claims]

1. The proceeds of the liquidation shall be used to satisfy claims in the following order:

(a) employee wages, fees or other charges for the provisional administration and for the liquidation, voluntary or by order of the court,

(b) secured claims up to the higher of the value of the secured portion of the claim or the relevant net proceeds from an effective sale of the collateral,

(c) taxes and fees due to the National Treasury,

(d) deposits, in cash, gold, or securities, or other claims of creditors other than banks and financial institutions, with the proviso that each depositor holding one or several accounts denominated in riels shall receive an equal amount up to two million riels,

(e) other deposits, in cash, gold, or securities, or other claims of banks and financial institutions,

(f)subordinated debts

2. With respect to any claim listed under paragraph 1.(b), the amount of such claim which is in excess of the respective limits stated in that paragraph shall be eligible for satisfaction as a general unsecured claim under paragraph 1.(d).

Article 65. [Submission of Case to the Court Where Serious Violation]

The supervisory authority, the provisional administrator or the liquidator shall submit the case to the court if they observe a serious violation of any legal or regulatory provision.

Article 66. [List of Qualifying Professionals]

Provisional administrators and liquidators shall be chosen by the supervisory authority from a list of qualified professionals drawn up beforehand by the latter and the Ministry of Justice.

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Article 67.[Matter Referred to the Court]

If a provisional administrator or a liquidator is in some way hindered from performing his duty by the concerned covered entity, he may refer the matter to the court.

Article 68. [Voluntary liquidation; Appointment of Liquidator]

The shareholders of a solvent covered entity, gathered for an extraordinary general meeting, may decide to liquidate the entity, in accordance with provisions of ordinary law. Advised of that decision, the supervisory authority shall appoint a liquidator who shall liquidate the entity under the control of the supervisory authority.

Article 69. [Remuneration and Other Expenses to be Reimbursed]

Remuneration to be paid and other expenses to be reimbursed for provisional administration or liquidation shall be established according to prevailing regional professional scales and charged automatically to the concerned covered entity, in compliance with Article 57, 61, 62, 62B, 63, 64 of this law.

CHAPTER XXI: Supervisor and Customer Protection

Article 70. [Protection of Supervisory Authority]

The National Bank of Cambodia and its officers and employees are not liable to any covered entity or any depositor, customer, creditor or shareholder of any covered entity, or to any other person, by reason of anything done in good faith, in the exercise, execution or performance of any powers, duties and functions under this law.

Article 71: [Customer Protection]

The supervisory authority may issue prakas, standards and guidelines aimed at ensuring customer protection and transparency, openness and fair conduct in banking or financial operations, including the following aspects:

1. disclosure of fees and charges for the operation of accounts and for other banking and financial services,

2. the opening and termination of accounts and credit lines,

3. the negotiation and the renegotiation of loans,

4. the rights and obligations of the customer in connection with the use of credit and debit cards and other means of payment, including electronic and on-line means of payment,

5. disclosure of the methods for calculation of interest and borrowing charges,

6. providing information and advice in connection with financial products and services,

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7. prohibition on certain selling practices for financial products and services, including any tied selling practice. In this Article, tied selling means that a covered entity shall not use unnecessary pressure on a customer to obtain a particular product or service as a condition for obtaining another product or service. However, a covered entity may offer a product or service to a customer on more favorable terms or conditions,

8. complaints by customers of covered entities in connection with financial products and services, and

9. such other areas as the supervisory authority may determine as necessary for good market conduct practices for banking and financial services.

Article 71.A. [Dormant Accounts Transferred to National Bank of Cambodia]

Credit balances of customer accounts or of accounts with other banks or financial institutions which have been dormant for 10 consecutive years, shall be transferred to the National Bank of Cambodia, which shall be accountable thereafter for administering such deposits.

CHAPTER XXII: Organization of the Profession

Article 72. [Professional Associations]

1. There shall one or more professional associations in which banks, financial institutions or MFIs may be members.

2. A professional association shall operate with the approval of the supervisory authority.

3. A covered entity shall be required to belong directly to the appropriate professional association.

4. The Articles of Association of the professional association shall have been endorsed by the supervisory authority.

Article 73. [Mandate of Professional Associations]

The aims of the professional associations shall be to :

1. represent the collective interests of the covered entities, particularly in relations with the government authorities and with the supervisory authority,

2. provide its members and the public with information concerning every aspect of banking and financial operations,

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3. conduct research into any questions of mutual interest,

4. promote professional interbank training,

5. organize and manage all interbank services, in agreement with the supervisory authority and under its control,

6. serve as a consultative and standardization body for matters related to the development of the payments system in Cambodia under the control of the National Bank of Cambodia; and

7. lodge a complaint before the courts in compliance with the provisions of Article 56 of this law.

CHAPTER XXIII: Transitional Provisions

Article 74. [Previously Licensed Institutions; NBC to Issue Special Regulations for Microfinance and Entity Carrying Out Banking Activity, etc.]

1.DELETE

2.DELETE

3. Any entity carrying out banking activity in particular so as to promote banking intermediation in the sectors of agriculture, handicrafts, small scale trade, and services to households, may operate under conditions waiving provisions of this law, as defined by special regulation issued by the National Bank of Cambodia regarding their :

o minimum capital,

o licensing process,

o applicable prudential rules,

o conditions of establishment.

CHAPTER XXIV: Final Provisions

Article 75. DELETE and SUBSTITUTE: “This law hereby repeals the following laws” followed by specific titles of earlier laws, if any, that were repealed.

Article 76.

This law has been marked as urgent.

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APPENDIX “E”

AMENDMENTS TO BFI LAW:

CHECKLIST FOR FINE TUNING AND ADDITIONAL REVISIONS November 7, 2008

NBC= National Bank of Cambodia TB= Thierry Bangratz, NBC, General Advisor JC= Joe Chertkow, Banking Legal Expert

ARTICLE SUBJECT AND COMMENTS FROM DONE

1. Definitions – add “Licensing Authority” TB Yes

1. Definitions - “Kinship” - add here or add in Article 49 NBC, JC Yes

2. MFI paragraph - revision for clarity TB Yes

5. Securities Company –need to revise for Subsidiary of Bank TB Yes

6. Securities Company license – need to revise for Sub., fit and proper TB Yes

10. & 11. Change to word: “separate” statute NBC Yes

11.2 Cooperative “Central”- additional wording for Central's functions TB Yes

13. Representative Office – 2 changes proposed to this Article NBC,TB Yes

14 & 15. License application – fine tuning; change to “licensing authority” TB, JC Yes

18. Qualifications of Directors - add “senior” officer; supervisory board NBC Yes

18. Fit and Proper Testing-- add in reference to this TB Yes

18. Directors – fine tune wording for “Disqualifications” NBC Yes

18. Add in words “among others” in Paragraph 3 TB Yes

18A. Role and duties of Board of Directors –see changes in Para. 1-4 TB Yes

18A. Role and duties of Board – changes for MFIs and cooperatives TB,NBC Yes

18B. Authority of NBC for corporate governance – additional words TB Yes

20. Shareholders of Local Covered Entities – add in “report to NBC” TB Yes

23. Increase or Decrease of Shareholdings- add Board's duty to report TB Yes

24. Prior Authorisation for Changes – add in Board's duty to report TB Yes

27. Influential Sh/h to increase net worth– add in language re: risk TB Yes

28. Foreign Bk Branch (FBB) – add language re: report by management TB Yes

28. FBB – new paragraphs re: Senior Country Executive TB, JC Yes

34. Equity Participations – change to delete agricultural activities TB, JC Yes

34.4 Equity Participations – add approval by NBC, additional powers NBC,TB Yes

34. Equity Participations – add additional criteria in last paragraph TB Yes

36. Calculation of Net Worth –English draft to be consistent with Official JC Yes

40. Supervisory Authority – fine tuning additions for powers TB Yes

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ARTICLE SUBJECT AND COMMENTS FROM DONE

41. Mandate of NBC – add in words for license with “fit and proper” TB Yes

42. Prudential Measures (1st Para.) – fine tuning revision NBC Yes

42. Net Worth –change 2nd Para. to refer to NBC regulation for net worth. NBC, JC Yes

43. Internal Control System – Para. 1 – fine tuning re: “policies” TB Yes

44. Auditing – change to refer to Law on Commercial Enterprises NBC Yes

46. Duties of External Auditor – additional words for duties TB Yes

47. Professional Secrecy – revise exemption to refer to “Credit Bureau” NBC Yes

48.3 Related Party Transactions – new Para. for permitted transactions TB, JC Yes

49. Meaning of Related Party – new definition of “Kinship”: see Art. 1 NBC, JC Yes

50. Designated Related Party –fine tuning to refer to “relationship” JC Yes

51. Anti-Money Laundering – change “ten” to “five years” NBC Yes

52. Disciplinary Sanctions – revise to current version re: “fines” NBC Yes

56. Penalties – revise to return to current version re: Art. 72 Yes

57. Appointment of Provisional Administrator – need to revise 57.2 to delete paragraphs and replace with broader factors for NBC: liquidity, solvency, management, any concerns for the stability of the banking system and overall financial system; based on finding that bank has ceased to be financially viable; also add power to set regulations.

TB, JC Yes

59. Main Duties of Provisional Administrator – change “solvency” test to “financially viable”

TB Yes

60. “Solvent Covered Entity” - change from “solvent” to “financially viable” and is in position to abide by financial norms.

TB Yes

61. “Solvent But Not Viable Covered Entity” - change to read “bank has not ceased to be financially viable in the circumstances” but is not in a position to abide by financial norms.

TB Yes

62. Vesting of Shares/Appointment of Receiver – change to stipulate that entity is “no longer viable in the circumstances” and “cannot return to viability”.

TB Yes

62B. Restructuring Transactions – need to revise 62.B to provide for greater time, with NBC to have power to extend time and allow for administrator to take safeguard measures to protect assets

TB Yes

63. Liquidation of Covered Entity – need to revise to make it clear that NBC has oversight and control over the process, working in parallel with Court; NBC to receive reports, right to issue “no objection”

TB Yes

72. Professional Associations – revise: not limited to two; change names NBC Yes

73. Mandate – revise to use original Para. 6 (Art. 56) NBC Yes

73. Mandate – include broader mandate for association (payments, etc.) TB Yes

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Appendix “F” Joe Chertkow

Banking Legal Expert ADB Financial Sector

Program II

Phnom Penh, November 3, 2008

Note for: Mrs. CHEA SEREY Director, Bank Supervision Dept. NBC

Treatment of Problem Banks and Financial Institutions Under Draft Amendments to BFI Law Explanation of Recommendations for Amended Chapter XX

1. Introduction and Background The purpose of this note is to provide a general explanation of how the proposed Amended Chapter XX of the BFI Law (titled “Provisional Administration – Receivership, Restructuring and Liquidation”) is intended to operate. This note also reviews the major principles and the new powers for NBC to intervene to deal with problem banks and financial institutions. It is my understanding that the NBC is also contemplating a future Prakas on the Treatment of Weak and Financially Troubled Banks to set out detailed rules. Chapter XX will provide the authority for the NBC to set this new Prakas. It is important to look at the context of the proposed amendments in relation to NBC's supervisory powers under the current framework. It is suggested that it is useful to look at three key phases in the process of dealing with problem banks or financial institutions: Early Warning Phase “Financial Non-Viability” Phase Liquidation Phase 2. “Early Warning” Phase Here we find a situation where there are problems in the policies or procedures of a bank or the existence of practices, conditions and circumstances that could lead to the outcome of the more serious problem of a threat to the financial viability of the bank. Therefore there must be a prompt solution before the situation becomes worse.

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In order to address financial weaknesses and violations of prudential requirements at the early warning stage, bank supervisors normally have at their disposal certain tools, ranging from informal measures to specific measures for intervention. In this connection, the definition of “weak bank”, as used in the Basel Committee Supervisory Guidance on Dealing with Weak Banks (2002) should be noted: “A weak bank is one whose liquidity or solvency is or will be impaired unless there is a major improvement in its financial resources, risk profile, strategic business direction, risk management capabilities and/or quality of management.” The importance of early steps by the bank supervisor is clear. A situation of “insolvency” is not the first relevant trigger for intervention by bank supervisors. Ordinarily, a situation of insolvency is when an entity has ceased to meet its liabilities as they fall due. But in the case of banking, the inability to pay a liability is not necessarily proof of insolvency. It may be due to a shortage of liquidity. This fact may reveal a violation of a regulatory liquidity requirement and therefore be an early warning of financial problems ahead. In fact, once a bank is technically “insolvent”, it is too late to intervene effectively. It is the purpose of prudential bank supervision to ensure a close monitoring of a bank’s financial condition. Growing financial losses, management failures and shortcomings of internal systems and controls should prompt the bank supervisor to intervene before such weaknesses develop into a more serious situation where the bank is no longer financially viable. In international practice, bank supervisors generally have broad authority to take remedial action, including the power to direct a bank to cease and desist from unsafe or unsound business practices. What are the examples of the these powers under the BFI Law? We find in Article 52 (“Disciplinary Sanctions”) a listing of the remedial actions that the NBC may take at the early warning stage. These can be used by the NBC “if a covered entity has contravened a provision of the laws or regulations governing its activities, has failed to heed a warning or not complied with an injunction.” The NBC has the power to impose a number of disciplinary sanctions under this Article. Note: some of these would be applied at the early warning stage, while the more serious ones – such as the appointment of a provisional administrator - could be used when the bank or financial institution is no longer “financially viable” or is an insolvent bank. (see below.) The disciplinary sanctions are: - caution; - reprimand; - prohibition on the execution of certain operations and other limitations on the carrying on of business; [“cease and desist order”] - temporary suspension of one or more of the executives, with or without appointment of a provisional administrator; - compulsory resignation of one or more of the executives, with or without appointment of a provisional administrators; - setting up a provisional administration; - withdrawal of the license and liquidation;

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- imposition of a fine, either in place of or in addition to the above (not exceeding the minimum capital of the entity) It can be noted that NBC can require the suspension or resignation of bank executives (for example if they do not meet the “fit and proper test” or do not provide the proper quality of management) with or without the appointment of a provisional administrator. Note also that under Article 27 of the BFI Law the NBC has the ability to require the “influential shareholders” to increase the net worth of the bank until solvency standards are met. There is also the Prakas on Prompt Corrective Action (“PCA”), B7-02-203, Oct. 17, 2002, as amended, setting out a framework for dealing with a financially troubled bank or financial institution. It should be noted that the PCA is triggered by a finding that the bank or financial institution has become “undercapitalized” according to categories based on the solvency ratios defined in the Prakas on Solvency Ratios of Banks. According to these solvency ratio categories, a bank is undercapitalized when its solvency ratio equals or exceeds 15 per cent, but is less than 20 per cent. This compares with a well-capitalized bank where the solvency ratio equals or exceeds 25 per cent. When a bank becomes “undercapitalized” it must prepare and submit a Capital Restoration Plan (“CRP”) to the NBC within 30 days “after it became undercapitalized”. There are serious sanctions provided for in the event that an undercapitalized bank does not comply with the Prakas and submit an acceptable CRP. (See Art. 7 of the Prakas). Some situations covered by the Prakas fall into the early warning phase where PCA is needed to address the problem. Other situations (“significantly undercapitalized” bank or “critically undercapitalzed” bank) may reasonably be seen as falling into a situation where the bank or financial institution is in danger of being no longer “financially viable” and may be insolvent (see below). 3. The Bank or Financial Institution is No Longer “Financially Viable” In this phase we find that the bank or financial institution now faces clear and severe financial threats. There may be no reasonable expectation of a solution such as an unlimited financial support from a financial parent company or other new financial support. Therefore the probable outcome will be a failure to meet regulatory requirements combined with an inability to rectify the situation within the necessary timeframe. In these circumstances there may be “triggers” or legal conditions that will apply to allow the bank supervisor to intervene by taking control or appointing a provisional administrator to take control.Where the situation is so serious that there is a danger that the bank may default on payments or a bank “run” on deposits may occur, drastic measures become necessary to protect the interests of depositors and creditors, and to maintain public confidence in the banking system. Under the current BFI Law, the NBC has a limited set of powers. The appointment and powers of the provisional administrator are triggered “if a serious and confirmed threat is weighing on the solvency” of a bank (See Article 57).

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The current framework in Art. 57 contemplates three (3) scenarios:

Scenario 1 Art. 60

Provisional Administrator makes assessment that bank is “considered solvent and in a position to abide by all legal and prudential norms” and therefore protective measures can be lifted

Scenario 2 Art. 61

Provisional Administrator concludes that bank is solvent but not in position to abide (within three months) by the prudential norms relating to liquidity and net worth in which case the license may be withdrawn and process converted into a “voluntary liquidation” under the control of the supervisory authority.

Scenario 3 Art. 62

Provisional Administrator concludes that bank is not solvent, license is immediately withdrawn and the provisional administration is converted into a liquidation by the order of the court.

It will be noted from the above that both Scenario (2) and (3) are liquidation procedures. It is contemplated that there will be a liquidator who shall “liquidate all the assets” of the bank and shall “meet the liabilities”. It can be seen that NBC does not have any authority under the current Chap. XX to engage in activities outside the process of a liquidation, for example steps for a restructuring, sale of all or part of the assets, sale of shares or other types of resolution activities which are found in international best practices for dealing with financially troubled banks. The ability of the bank supervisor to act in a timely and efficient manner, for example, for the sale of assets to a healthy bank, is a critical factor in maintaining public confidence in the banking sector. Therefore the proposed Amendments to the BFI Law in Chapter XX address this question and will provide for new powers for the NBC consistent with international standards and best practices. (Note: I propose to make some revisions in this connection for greater clarity and to reflect comments from Mr. Thierry Bangratz, General Advisor, NBC). How will the new provisions in the Amended BFI Law operate?

First, the trigger for intervention by the NBC under the proposed Amended Article 57.1 is a finding by the NBC (“the supervisory authority is of the opinion”) that a bank or financial institution has ceased or about to cease to be financially viable. In these circumstances, the NBC may appoint a Provisional Administrator. (This can also be following the request of the shareholders or management of the bank). The initial term is for three (3) months with power to extend the appointment under the circumstances. The NBC may take all matters it considers relevant into account, including liquidity, solvency, management, any concern for the stability of the banking system and overall financial system: Art. 57.2 The provisional administrator, once appointed, has exclusive powers to manage, direct and represent the bank or financial institution: Art. 58 The framework for the proposed Amended Chapter XX builds on the existing article, but adds greater powers and options for intervention under the circumstances.

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Scenario 1 Art. 60 (Amended)

Provisional Administrator makes assessment that bank is considered financially viable in the circumstances and in a position to abide by all legal and prudential norms. Therefore the protective measures can be lifted

Scenario 2 Art. 61 (Amended)

Provisional Administrator concludes that bank has not ceased to be financially viable but is not in a position to abide (within three months) by the prudential norms relating to liquidity and net worth in which case the license may be withdrawn and process converted into a “voluntary liquidation” under the control of the supervisory authority.

Scenario 3 Article 62 (New)

Where the assessment concludes that the bank is no longer financially viable in the circumstances and cannot be restored to viability, NBC may issue decision to order the bank to vest the shares in the provisional administrator. Note: Scenario 3 and 4 are each options for NBC under Article 62.

If Scenario 3 >>>>>> Powers, duties, functions, rights and privileges of the directors and management of the bank are suspended and the provisional administrator may exercise those powers, duties, functions, rights and privileges. Under Article 62.B, the provisional administrator carry out restructuring transactions (for example, sale of shares of the bank, amalgamation with healthy bank, sale of all or part of assets, other transactions to restructure the business).

Scenario 4 Article 62 (New)

Where the assessment concludes that the bank is no longer financially viable in the circumstances and cannot be restored to viability, NBC may issue decision to order the bank to appoint the provisional administrator as Receiver.

If Scenario 4 >>>>>> Powers, duties, functions, rights and privileges of the directors and management of the bank are suspended with respect to assets under receivership (which can be 100%) and the provisional administrator may exercise those powers, duties, functions, rights and privileges. Under Article 62.B, the provisional administrator carry out restructuring transactions involving the assets or liabilities of the bank (for example, sale of all or part of assets or disposition of all or part of its liabilities).

Scenario 5 Article 63 (Amended)

NBC may make decision to proceed directly with the Liquidation of the bank or financial institution. In this case, the license is immediately withdrawn and the provisional administration is converted into a liquidation by order of the court.

It is important to note that the type of provisional administration contemplated in Scenario 3 and 4 is not merely a temporary regulatory measure. Instead it must be emphasized that under the circumstances where the bank is no longer financially viable and cannot return to viability, the provisional administrator assumes exclusive control and the owners (shareholders) lose their rights. There is the application of what could be called the “Shut the Door” principle for the problem bank. All powers and authorities of the bank become vested in the provisional administrator appointed by the bank supervisor. The appointed administrator will have wide-ranging powers including the power to dispose of the bank’s assets or transfer of ownership in the shares of the bank. Any

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resolution option affecting the capital structure (e.g., a new share issue, or the transfer of ownership) can be carried out without the approval of the owners. This is the impact of the Draft Amended Chapter XX: See Article 58, along with Article 62. Another important point to note is that typically this kind of process will involve some type of full or partial suspension of payments and a stay of enforcement actions (“moratorium”). This is necessary to protect depositors’ interests and to avoid the dissipation or the attachment of assets by some creditors to the detriment of others. A “moratorium” is important because it allows some time to consider available resolution options while avoiding pressure from creditors. Given that the supervisory authority will be the first to recognize the need for such measures, it is common to find a legal provision creating this or giving the supervisor the power either to impose such a measure directly. This is the intention of the new Article 62.A (“Stay of Proceedings”) in the Amended Chapter XX. 4. Liquidation Phase

This phase is Scenario 5 noted above in the Draft Amendments to Chapter XX. As discussed earlier, prior to the start of this phase, attempts at intervention and corrective measures available under the banking law will have already been exhausted. As contemplated in the Draft Amendments to Chapter XX, there are two paths to this Scenario (in addition to a voluntary liquidation under Article 61):

1) Either there has been an attempt to have a resolution of the problem by a restructuring but it is not possible for the appropriate transactions to be done within the time frame (See Article 62.B.3); or

2) The bank supervisor makes a decision to proceed directly with the liquidation. (See Article 63).

It should be noted that in the liquidation scenario, the intention of the Draft Amendments is to use the framework and applicable steps for proceedings under the Insolvency Law (See Article 63). For example, the priorities of claims in the liquidation reflects the rules under the Insolvency Law (See Article 64). There is one important difference, however, between an ordinary liquidation of a commercial enterprise and the liquidation of a bank or financial institution: the role played by the NBC as the supervisory authority. The reason for this is to ensure that the liquidation terms and conditions do not have any unreasonably negative impact on other banks or on the financial system in Cambodia. Therefore, the provisions in Chapter XX dealing with the liquidation (to be revised further for the next version of the Draft Amendments) must reflect the oversight role of the NBC in the liquidation process. This should include the requirement under the law that NBC shall receive all reports from the liquidator, the right of NBC (working in conjunction with the court) to retain control of the proceeding and the right of NBC to sign off or to have “no objection” on the conditions of the liquidation. Copy to:

Mr. Thierry Bangratz, NBC, General Advisor

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APPENDIX “G ”

Future NBC Work in Connection with the BFI Law

December 2008

ARTICLE SUBJECT COMMENTS

7. 3 Licensing and Supervision of Banks for Securities Activities

NBC will have power to set requirements for banks with licenses to establish specific policies and procedures for licensed securities activities.

18.B. Authority of NBC with regard to Corporate Governance

NBC will have authority to issue prakas, circulars, standards and guidelines in connection with corporate governance. [Note: Prakas have already been prepared for some areas of corporate governance and for the “Fit and Proper Testing” for directors and officers.] There are other areas listed in Art.18.B to be identified for future action by NBC, including generally “processes and procedures relevant to the strengthening of governance, sound business and financial practices and risk management.”

21. Holding Company (e.g. holding as subsidiaries one or more covered entities).

NBC has the authority as regards licensing approval and supervision of Financial Holding Companies (FHCs). Currently, NBC is not enforcing this provision. NBC now needs to develop policies, procedures and standards based on international standards and best practices for exercising its authority under Art. 21.

34. Equity Participations Under Art.34 (as amended) NBC shall set appropriate criteria in connection with the granting of approvals for investments by banks and financial institutions. These criteria are to include the avoidance of excessive risks or hindering the effective supervision of the bank; and to ensure that the bank has the adequate financial and organizational resources to manage the proposed investment in a prudent manner and to withstand potential financial problems.

40. Supervisory and Regulatory Power of NBC

NBC has broad authority to issue regulations under the law. A new provision in Art. 40 is para.3.b1 that authorizes NBC to issue regulations for risk management: “prudential standards to require comprehensive processes to identify, measure, monitor and control all material

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risks” .

47. Professional Secrecy The draft Amendments to the BFI Law in Art. 47 provide for exemptions for the Credit Information Sharing System (CIS) and for the operations of a credit bureau. Both exemptions contemplate that NBC will issue regulations for these organizations.

48. Related Party Transactions Art. 48.3 (new) says that “a related party transaction with a covered entity shall be prohibited unless it can be performed in full compliance with the rules and restrictions set both by the National Bank of Cambodia regulations”. Therefore there is a need for NBC to further develop more detailed rules and restrictions for related party transaction as contemplated in Art. 48. These rules and restrictions may include such matters as detailed procedures and reporting requirements by banks, including at the board of directors or committee levels, to ensure greater transparency.

57. Appointment of Provisional Administrator Art. 57 (as amended) says that the NBC may set

regulations, circulars and standards in connection with the appointment and activities of the provisional administrator and in connection with the exercise of any of the powers of the provisional administrator, including but not limited to the carrying out of the powers of the receiver, the restructuring transactions for covered entities and the liquidation process for covered entities. It will be useful for NBC to use this power where appropriate to set out detailed rules under the framework for dealing with problem banks.

71. Customer Protection Art. 71 creates an important new power for NBC in the area of customer protection and market conduct. It says that the NBC may issue prakas, standards and guidelines aimed at ensuring customer protection and transparency, openness and fair conduct in banking or financial operations, including the following aspects:

1. disclosure of fees and charges for the operation of accounts and for other banking and financial services,

2. the opening and termination of accounts and credit lines,

3. the negotiation and the renegotiation of

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loans,

4. the rights and obligations of the customer in connection with the use of credit and debit cards and other means of payment, including electronic and on-line means of payment,

5. disclosure of the methods for calculation of interest and borrowing charges,

6. providing information and advice in connection with financial products and services,

7. prohibition on certain selling practices for financial products and services, including any tied selling practice. (Tied selling means that a covered entity shall not use unnecessary pressure on a customer to obtain a particular product or service as a condition for obtaining another product or service. However, a covered entity may offer a product or service to a customer on more favorable terms or conditions),

8. complaints by customers of covered entities in connection with financial products and services, and

9. such other areas as the NBC may determine as necessary for good market conduct practices for banking and financial services.

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Table 1

Consultation Meetings, June 2008

Mr. Joseph Chertkow

Banking Legal Expert TA-4999 (CAM)

No. Position Org. Name Date

1 Deputy Governor NBC H.E. Neave Chanthana Wed. 04/6/2008

2 General Director NBC H.E. Tal Nay Im Tue. 10/06/08

3 General Secretary of FIU NBC H.E. Phan Ho Tue. 03/06/08

4 General Inspector NBC H.E. Pal Bubunnang Tue. 03/06/08

5 Director of Bank Supervision NBC Mr. Kim Vada Mon. 09/06/08

6 Deputy Director of BSD NBC Mrs. Chea Serey Mon. 09/06/08

7 Deputy Director of BSD NBC Mr. Roth Sovannarak Mon. 09/06/08

8 Deputy General Director NBC Mr. Roth Savuth Mon. 02/06/08

9 Director of Banking Department

NBC Mrs. Kum Kuntha Mon. 02/06/08

10 Director of Statistics & Economic Research Dept.

NBC Mrs. Nguon Sokha Tue. 10/06/08

11 Deputy General Director NBC Mr. Huy Navy Wed. 11/06/08

12 Director of Exchange and Management Dept.

NBC Mrs. Srey Siyut Wed. 11/06/08

13 Director Legal Division MOC Mr. Oum Dararith Wed. 11/06/08

14 Deputy Under Secretary of State

MOC H.E. Mao Thora Wed. 11/06/08

15 Director of Financial Market Industry Dept.

MEF Mr. Mey Vann Thu. 05/06/08

16 Deputy Head of Financial Market Division

MEF Mr. Meatra In Thu. 05/06/08

17 Deputy Director of Financial Industry Dept.

MEF Mr. Bou Chanpirou Thu. 05/06/08

18 General Advisor NBC Mr. Michel Dabadie Tue. 17/06/08 & other meetings

19 Legal Services NBC Mad. Genevieve Labic Tue. 17/06/08 & other meetings

20 Association of Banks in Cambodia

Private

21 Cambodia Microfinance Association

Private 22 participants Thu. 19/06/08 & Fri. 27/06/08

22 ANZ Royal Bank (CEO) Private Mr. Stephen Higgins Wed. 25/06/08

23 IMF Resident Representative IMF Mr. John Nelmes Fri. 27/06/08

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93

Table 2

Consultation Meetings, Oct.-Nov. 2008

Mr. Joseph Chertkow

Banking Legal Expert TA-4999 (CAM)

No. Position Org. Name Date

1 Administrative Assistant to General Director

NBC Ms. Sambo Rumony Fri. Oct 17/08

2 Director, Banking Supervision Dept.

NBC Mrs. Chea Serey Mon. Oct 20/08

3 General Advisor NBC Mr. Thierry Bangratz Mon. Oct 27/08

4

Association of Banks in Cambodia, Cambodia Microfinance Association, Individual Banks

Private 20-30 participants from banking industry stakeholders

Tues. Oct 28/08

5 General Advisor NBC Mr. Thierry Bangratz Wed. Oct.29/08

6 General Advisor NBC Mr. Thierry Bangratz Nov. 2/08

7 Association of Banks in Cambodia, Cambodia Microfinance Association

Private 20-30 participants from banking industry stakeholders

Tues.Nov 4/08

8 NBC Senior Managers, Consultative Supervision Committee (“CSC”)

NBC Members of CSC Thurs. Nov.6/08

9

NBC Supervision Dept. Officials, Credit Union Foundation of Australia (“CUFA”)

NBC, CUFA

Ms. Catherine Drummond, Int'l Project Officer, CUFA

Mon. Nov. 17/08

10 Director, Banking Supervision Dept. and officials

NBC Mrs. Chea Serey, Mr. Thierry Bangratz, Gen. Advisor, NBC

Tues Nov.18/08

11 Deputy Governor NBC H.E. Neav Chanthana Wed. Nov.19/08

12 Governor & NBC Senior Management.

NBC H.E. Chea Chanto & Senior Management

Wed. Nov. 19/08

13 Secretary General NBC H.E. Sum Sannisith Thurs. Nov. 20/08

14 General Advisor NBC Mr. Thierry Bangratz Thurs. Nov. 20/08