Banking & Finance in Moldova

I. LEGAL FRAMEWORK

1.1. Which main legislative and regulatory provisions govern the banking sector in your jurisdiction?

The legal framework of the Moldovan financial sector is comprised of legislation regulating the supervision and control of credit institutions, e-money institutions and payment institutions, non-banking financial institutions, insurance companies, and other companies in the financial sector.

The Moldovan legal framework in this area has undergone significant reform in the past years. The legislation is continuing the process of implementing the EU`s legislation. Nonetheless, the Moldovan banking system is already regarded as harmonized at a high level with the relevant acquis communautaire.

Thus, the legal framework in the banking sector is comprised of a series of laws issued by the Parliament, as well as secondary legislation comprised of regulations and decisions issued by the National Bank of Moldova (NBM).

The main pieces of legislation in the banking sector are the Law on banking activity No 202 dated 6 October 2017 (Banking Law) and the Law regarding the National Bank of Moldova No 548 dated 21 July 1995 (NBM Law).

The Moldovan legislation in the banking sector has been aligned with the main European legislation and standards in the area such as (i) Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, and (ii) Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms.

The Banking Law mainly regulates the activity of the banks in Moldova, by establishing a number of specific requirements, that banks are required to comply with. These requirements are constantly improved in order to bring them in line with the legal provisions and generally accepted international principles and best practices, in particular the recommendations of the Basel Committee on Banking Supervision and the European Union Directives.

The NBM Law establishes the authority, responsibilities, competencies, and jurisdiction of the NBM. It mainly supervises and regulates the activity of Moldovan banks. To accomplish its responsibilities the NBM is entitled to issue regulations and decisions, so-called secondary legislation, which are mandatory for the banks.

Additionally, there is the Law on Capital Market No. 171 of 11 July 2012 (Capital Market Law), which regulates among others the trade of securities and other financial instruments as well as collective investments undertakings. The Capital Market Law has been drafted by transposing 11 EU directives, including MiFID, the Directive on Takeover Bids, the Investor Compensation Scheme Directive, the Market Abuse Directive, the Capital Adequacy Directive, and the UCITS Directive. As of today, the National Commission for Financial Markets (NCFC) supervises the securities market, insurance sector, and non-banking financing in Moldova.

Starting on July 1, 2023, the NBM will become also the regulator for non-banking credit organizations. The operation of non-banking financial institutions is mainly regulated by the Law on non–bank credit institutions No 86 dated 11 July 2020 (NBC Law), which sets the main requirements and legal framework for non-bank credit institutions.

1.2. Which bodies are responsible for enforcing the applicable laws and regulations? What are their main competencies?

The National Bank of Moldova (NBM) is the public institution that regulates and supervises the activity of credit institutions, e-money institutions and payment institutions, non-banking financial institutions, and insurance companies.

The NBM is the primary regulator in the industry, has the authority to issue and withdraw banking licenses and regulate and supervise the banking sector. One of the primary tasks of the NBM is to implement the best international standards in the banking sector.

The NBM is the competent resolution authority for the banks.

In this respect, Moldovan law requires that the NBM is operationally independent in the performance of its responsibilities both as a matter of law and in practice. Hence, the NBM shall ensure that the supervisory function is separate and independent of the resolution function and the latter has an explicit mandate and objectives tailored to resolution.

The NBM is the only authority competent to apply the resolution tools (i.e., the sale of business tool, the bridge institution tool, the asset separation tool, the bail-in tool) to the banks that meet the applicable conditions for resolution, and in this respect has the following legal powers:

a) General powers: may be exercised by the NBM individually or in any combination.

The main general powers are: to take control of a bank under resolution and exercise all the rights and powers conferred upon the shareholders; to transfer shares or other instruments of ownership issued by a bank under resolution; to reduce, including to reduce to zero, the principal amount of or outstanding amount in respect of bail-inable liabilities, of a bank under resolution; to convert bail-inable liabilities of a bank under resolution into ordinary shares or other instruments of ownership; to cancel debt instruments issued by a bank under resolution; to require a bank under resolution to issue new shares or other instruments of ownership or other capital instruments; to replace the management body and senior management of a bank under resolution, etc.

b) Ancillary powers: may be exercised where it is considered by the NBM to be appropriate to help to ensure that resolution action is effective or to achieve one or more resolution objectives. The main ancillary powers are to restrict the procurement of further shares or other instruments of ownership; to require the NCFM or the relevant authority of another country to discontinue or suspend the admission to trading on a regulated market or the official listing of financial instruments; to cancel or modify the terms of a contract to which the bank under resolution is a party, etc.

c) Other powers: to require the provision of services and facilities; to suspend certain obligations; to restrict the enforcement of security interests; to temporarily suspend termination rights; to apply administrative penalties or other administrative measures, etc.

The above-mentioned prerogatives of the NBM are in line with the provisions of the Bank Recovery and Resolution Directive 2014/59/EU.

Besides the above, the NBM is also the only authority competent to apply early intervention measures.

1.3. What are the current priorities of regulators and how does the regulator engage with the banking sector?

The priorities are established on an annual basis by the NBM as a common strategy. The current priorities of the NBM are:

1. Credit risks. The NBM is focused on assessing the banks’ lending practices to ensure compliance with applicable regulations and risk profiles, and that risks are identified and mitigated appropriately.

2. Internal governance, risk management, and internal risk and the internal process of capital adequacy assessment process (ICCAP). In the last two years, the NBM paid particular attention to the assessment of the adequacy of internal control functions in banks, namely risk management practices, especially with regard to the identification, anticipatory measurement, and mitigation of risks in a timely manner, the existence of a transparent organizational structure with clear reporting lines and an appropriate corporate culture, segregation of responsibilities and independence of control functions.

3. Internal liquidity adequacy assessment process (ILAAP). Another priority derives from the changes made in the regulations regarding the framework for the administration of banks’ activity, namely, the introduction of the internal liquidity assessment and adequacy process (ILAAP) by checking the quality of the liquidity adequacy assessment. Thus, the NBM is assessing the solidity, effectiveness, and comprehensive nature of the framework for managing liquidity and financing risks related to banks, ensuring that the banks have a rigorous management framework designed to manage liquidity risk, including a process for identifying, managing and monitoring liquidity and funding risks.

4. Risks associated with information and communication technologies (ICT). In the context of increasingly persistent and complex cyber threats, cyber risk is becoming prominent within banks, can generate significant losses, and damage banks’ reputations. The NBM is continuing to assess the situation in the field of ICT and emphasizesemphasis its effort on the: verification of the use of operating systems that have support from suppliers, performing complex continuity tests to ensure the continuity of the bank’s activity in case of unforeseen situations, performing penetration tests to demonstrate the banks’ ability to face cyber-attacks.

5. Combating money laundering and terrorist financing. NBM is focusing on the implementation of the risk rating methodology in the supervision process, which will lead to a significant improvement in its quality and efficiency. The aim will be to ensure an adequate framework for carrying out surveillance activities, mainly off-site, based on the specific risks of the significant transfer of activities to the online environment, the risks of evading international sanctions, but also from the perspective of the risks deriving from the activities which frequently involve large amounts of cash or high-risk foreign transfer operations.

6. Risks associated with the use of payment systems. The NBM is focusing on the analysis and evaluation of innovative services and products offered by payment service providers, as well as the measures taken by them in order to increase user confidence in services and payment instruments.

II. AUTHORISATION

2.1. What licenses are required to provide banking services in your jurisdiction? What activities do they cover?

The banking activity in Moldova is subject to licensing. The banking license is issued provided that the requirements established by the Banking Law and subsequent acts are duly observed. The NBM issues the license provided only it is fully convinced that the bank can ensure the safe conduct of banking activity and the compliance with the requirements of prudent and sound management guaranteeing the protection of interests of depositors and other creditors as well as good functioning of the banking system, making sure that the provisions of the banking laws and regulations are observed.

The banking license covers the following activities:

a) receiving deposits and other repayable funds;

b) granting loans, including consumer loans, real estate loan agreements, factoring with or without recourse, funding of commercial transactions (including the lump-sum business);

c) providing financial leasing;

d) providing payment services in accordance with Law No 114/2012 on Payment Services and Electronic Money;

e) issuing and administering traveler’s checks, bills, and other payment instruments insofar as such an activity does not fall under provisions of the letter (d);

f) issuing bank guarantees and undertaking commitments;

g) carrying out transactions on own account or on behalf of clients by using any of the following money market instruments (checks, negotiable instruments, certificates of deposit, etc.); foreign currency; futures and options contracts on financial instruments; instruments based on the exchange rate and interest rate; securities and other financial instruments;

h) issuing securities and other financial instruments, and providing services related thereto;

i) providing consultancy services to legal entities on social capital structure, business strategy, and other business-related issues, as well as consultancy and services related to mergers and acquisitions of legal entities;

j) providing money brokerage (intermediation on interbank markets);

k) managing portfolios and providing consultancy related thereto;

l) holding the custody and managing financial instruments;

m) providing information services regarding lending;

n) providing safety deposit box services;

o) providing electronic money in accordance with Payment Services Law;

p) carrying out any other activities or services permitted by the NBM insofar as they fall within the scope of financial activity and are in compliance with particular legal provisions governing such activities.

Activities that, according to special laws, are subject to obtaining specific authorization (licenses, approvals, or endorsements), may be carried out by banks only if the specific authorization has been obtained.

2.2. What is the procedure for obtaining a banking license? How long does this typically take?

The licensing activity is a complex procedure, established by the Banking Law and secondary legislation by which the applicant shall submit a set of documents to the NBM. The process for obtaining a license can last from a few months to a couple of years, depending on:

• the complexity of the proposed bank’s business;
• the proposed activities of the bank; and
• the potential regulatory concerns that arise in connection with the application.

The documents shall be prepared in accordance with the requirements of the law and based on the template approved by the NBM. While examining a license application, the NBM may request any additional documents and information related to the licensing process in case the submitted documents prove to be insufficient to assess compliance with the licensing conditions.

The NBM has a certain degree of discretion in deciding whether to grant or not the license. Thus, the NBM would grant the license only if it is convinced that the Bank can ensure the conduct of a safe activity and the observance of the requirements of prudent and healthy administration, ensuring the interests of depositors and other creditors and good functioning of the banking system. Therefore, typically, the NBM, when deciding whether or not to grant the License, is extremely cautious and prudent.

The licensing procedure is structured in two steps:

• obtaining the prior approval of the NBM for the incorporation of the bank;
• obtaining the banking license.

The NBM shall decide upon granting or refusal of the prior approval for bank incorporation within 5 months since the application has been submitted. This term is counted only if the submitted dossier is complete and the NBM is satisfied with the quality thereof. Otherwise, the examination term is suspended.

If the prior approval for bank incorporation is granted, additional information certifying compliance with banking licensing conditions will have to be submitted. Such documents will be assessed by the NBM within two months. If all conditions are met the banking license is to be issued. 

2.3. Can a foreign bank operate in your jurisdiction on the basis of its domestic license?

The Moldovan legal framework does not provide a “European passport” for both outgoing and incoming banking activities.

Foreign banks licensed in their country of origin may operate banking activities on the territory of the Republic of Moldova provided that the following cumulative conditions are met:

a) the activity is to be carried out through an established branch office in Moldova;

b) the branch was licensed by the NBM;

c) the competent authority in the country of origin of the bank does not oppose the establishment of the branch in Moldova, this fact being confirmed in a document issued by the regulating authority in the country of origin;

d) the legal framework of the state of origin and/or the manner of its application does not prevent the NBM from exercising its supervisory functions;

e) the foreign bank complies with the provisions of the law and the regulations issued for its application.

The activities, which are permitted to be carried out through a branch established in the Republic of Moldova, shall be stipulated in the license issued by the NBM and shall not exceed the scope of activities permitted to the bank under the license issued by the competent authority in the country of origin.

The activity of a foreign bank’s branch established in the Republic of Moldova is subject to the same prudential supervision of the NBM, under the Banking Law. The NBM may waive the application of prudential requirements to a foreign bank’s branch if the following conditions are cumulatively met: (i) following the assessment, it is found that a prudential regulatory framework of the bank’s country of origin is equivalent to that established in the Banking Law and that the competent authority of that country of origin exercises adequate supervision of the bank, including of its branch’s activity in the Republic of Moldova, and (ii) the NBM and the regulating authority from the country of origin has entered into a cooperation agreement on a reciprocal basis.

2.4. What are the restrictions on ownership, including foreign ownership of banks?

The Banking Law does not generally restrict foreign ownership or control of Moldovan banks. However, as discussed below, establishing, or acquiring a bank in Moldova, or establishing an office of a foreign bank, requires the approval of the NBM. The NBM will evaluate the foreign acquirer’s home country’s regulation in connection with such an approval.

Certain foreign investments in Moldovan banks may be subject to review and potentially rejection by the NBM.

The Banking Law has established specific criteria for assessing proposed acquirers concerning their reputation, experience, integrity, and financial soundness. These provisions are backed up by extensive disclosure requirements toward proposed acquirers, including ultimate beneficiary ownership disclosure, accompanied by the legal prohibition for offshore entities to acquire directly and/or indirectly equity interests in Moldovan banks. Moreover, during the acquirer assessment procedure, the NBM typically communicates and requests relevant information from relevant authorities of other states to verify the profile of the acquirer.

In addition to the above measures, any direct and/or indirect shareholder of a bank shall permanently ensure that it corresponds to Banking Law’s fit & proper criteria. Otherwise, the NBM is entitled to impose against the direct/indirect shareholders, including the ultimate beneficial owners, sanctions, and measures for violating the qualitative criteria.

2.5. What are the requirements for a proposed acquisition and acquirer of a qualified holding in a bank? Would the same requirements apply in case of an increase of a qualifying holding?

The Banking Law and the NBM Regulation No. 127/2013 on holdings in bank equity establish the legal framework for the prudential assessment of acquisitions by natural or legal persons of a qualifying holding in a bank.

In this respect, any natural or legal person or such persons acting in concert (the “proposed acquirer”), who has taken a decision either:

a) to acquire, directly or indirectly, including as an ultimate beneficial owner, a qualifying holding in a bank or

b) to further increase, directly or indirectly, including as an ultimate beneficial owner, such a qualifying holding in a bank as a result of which the proportion of the voting rights or of the capital held would reach or exceed 5%, 10 %, 20%, 33%, or 50 % or

c) so that the bank would become its subsidiary (the “proposed acquisition”),

shall notify the NBM in writing in advance of the acquisition, indicating the size of the intended holding and the relevant information, and obtain the NBM’s prior approval in this respect.

Compared to Directive 2013/36/EU, the Moldovan Law sets out a lower threshold for regulatory clearance.

Thus, as per the Banking Law, a qualifying holding is a direct or indirect holding in an undertaking which (i) represents 1% or more of the capital or of the voting rights, or (ii) makes it possible to exercise significant influence over the management of that undertaking.

In assessing the notification and the provided information, the NBM shall, in order to ensure the sound and prudent management of the bank in which an acquisition is proposed, and having regard to the likely influence of the proposed acquirer on that bank, assess the suitability of the proposed acquirer and the financial soundness of the proposed acquisition in accordance with the following criteria:

1. The reputation of the proposed acquirer:

A proposed acquirer (up to the ultimate beneficial owner(s)) should be of good repute and professionally competent.

Besides an impeccable reputation, the proposed acquirer has to demonstrate relevant and due skill, care, diligence, and compliance with the applicable standards.

The assessment of professional competence takes into account the influence that the proposed acquirer will exercise over the target undertaking.

The integrity and professional requirements are applied regardless of the size of the qualifying holding that the proposed acquirer intends to acquire and of its involvement in the management or the influence that it is planning to exercise on the target undertaking.

2. Financial soundness of the proposed acquirer:

The proposed acquirer should be sufficiently sound from a financial point of view to ensure the sound and prudent management of the target undertaking for the foreseeable future (usually three years).

3. The capacity of compliance with prudential requirements of the target undertaking:

The NBM assesses the ability of the target undertaking to comply at the time of the proposed acquisition and to continue to comply after the acquisition, with all prudential requirements, including capital requirements, liquidity requirements, and large exposures limits, as well as with requirements related to governance arrangements, internal control, risk management, and compliance.

Also, if the target undertaking will be part of a group as a result of the proposed acquisition, the NBM shall not be prevented from exercising effective supervision or from effectively exchanging information with the competent authorities.

4. Suspicion of money laundering or terrorist financing by the proposed acquirer:

The anti-money laundering and terrorist financing assessment complements the integrity assessment and is carried out regardless of the value and other characteristics of the proposed acquisition. The assessment also covers the persons with close personal or business links to the proposed acquirer, including the legal and beneficial owners of the proposed acquirer.

The same assessment criteria are used by the NBM when increasing the qualifying holding as well, but with respecting the principle of proportionality. This is envisaged in respect of (i) the intensity of the assessment, which should take into account the likely influence the proposed acquirer may exercise on the target undertaking, and (ii) the composition of the required information, which should be proportionate to the nature of the proposed acquirer and of the proposed acquisition.

Generally, the NBM calibrates the type and breadth of information required from the proposed acquirer, taking into account, amongst other matters, the nature of the proposed acquirer (legal or natural person, supervised financial institution or other entity, whether or not the financial institution is supervised in the EU or in a third country considered equivalent, etc.), the specifics of the proposed transaction (intra-group transaction or transaction between persons which are not part of the same group, etc.), the degree of involvement of the proposed acquirer in the management of the target undertaking and the size of the holding to be acquired.

III. REGULATORY CAPITAL AND LIQUIDITY

3.1. How are banks typically funded in your jurisdiction?

Banks are typically initially capitalized and funded by investors and organizers. Once operational, a bank is typically funded by equity investments along with deposits, loans, and debt securities. In addition, banks (particularly large banks) may obtain short-term funding through overnight loans and repurchase agreements.

The share capital of a Moldovan bank shall not be less than MDL 100 million (about EUR 5 million). When establishing a bank, the initial capital shall be made up of the share capital exclusive of the bank’s establishment costs.

3.2. What capital and own funds requirements apply to banks in your jurisdiction?

The Moldovan laws establish requirements for the initial capital and for separate own funds of the banks.

(a) Initial capital requirement:

Whenever a bank to-be applies for a license, the NBM shall refuse to license the bank where its initial capital is less than MDL 100 million (about EUR 5 million).

(b) Own funds requirements:

In order to ensure the stability and the safety of the performed activity and/or the fulfillment of its commitments, each bank shall maintain an adequate level of its own funds. A bank’s own funds may not fall below the initial capital level set for the license applicants.

Additionally, at any time, a bank shall:

(i) have the own funds’ level equal to or higher than the level required to cover the credit risk, the dilution risk, the counterparty credit risk, the position risk, the settlement/delivery risk, the foreign exchange risk, the commodity risk, the credit adjustment risk and the operational risk, whichever appropriate;

(ii) comply with the minimum levels set for the own fund’s adequacy ratios, calculated as a ratio between the own fund’s categories and the total exposure amount;

(iii) have adequate own funds to maintain capital buffers. Capital buffers shall be maintained above the required own funds minimum set by the NBM. For this purpose, banks shall have adequate own funds for keeping the capital buffer, the capital countercyclical buffer, the buffer for systemically important financial institutions, and the systemic risk buffer, to the extent and under the conditions laid down by the regulations issued by the NBM.

(c) Requirements for liquidity:

The banks shall meet the liquidity requirements as set out by the NBM regulations. In this respect, the banks shall maintain the liquidity provisions that are adequate for allowing them to tackle eventual imbalances between liquidity inflows and outflows in case of crisis for a 30-day period.

The Moldovan laws also provide a mandatory administrative procedure for any recognition, value decreasing, reduction, distribution, and exemption from deduction of the own funds of the banks, as well as for the distribution by the banks of the profit to the shareholders and/or for the payment of interest to the holders. In each of these cases, the banks shall obtain the NBM prior approval, granted in accordance with its regulations.

3.3. Has your jurisdiction implemented the Basel III framework? Are there any major deviations?

Taking into account Moldova’s commitments assumed under the Association Agreement with the European Union, the Moldovan legislation has been hurriedly moved into aligning with Basel III regulations, leapfrogging Basel II after having put Basel I in place. The Banking Law is transposing the Basel III regulations (based on the European CRD IV/ CRR framework) aligning with the international principles and standards, setting up the seize of capital buffers, which, if necessary, will diminish the impact of systemic crises on banks` capital. In 2016, the National Bank of Moldova approved the Strategy on Basel III standards implementation in the context of fulfilling the commitments assumed within the Association Agreement between the Republic of Moldova and the European Union.

Thus, several NBM regulations have been approved, which refer to bank’s own funds and capital requirements, bank’s capital buffers, credit risks treatment for banks according to a standardized approach, credit risk mitigation techniques used by banks, treatment of operational risk for banks according to the core approach and standardized approach, market risk treatment according to the standardized approach, settlement/ delivery risk treatment for banks, banks’ specific calculation of credit adjustments and of general credit risk adjustments, as well as the Regulation on banks„ external audit. Also, the Instruction on the presentation by banks of COREP reports for supervisory purposes has been approved and the Instruction on the method of preparing and submitting by banks of reports for prudential purposes has been modified. The new documents put an increased emphasis on the availability of capital to cover the risks of banks’ activity and introduce new requirements to its structure. In addition, the requirements are also established for minimum capital thresholds by levels based on quality. The risk-weighted assets’ structure has also been revised for better risk capture. Thus, a lower capital allocation is attributed to safer assets, while higher-risk assets receive a higher share and respectively, imply a higher capital requirement. Also, the Moldovan law requires coverage of more types of risks compared to those previously covered under Basel I, such as the market and operational risks. Consequently, under updated banking regulations the banks shall maintain a risk management framework, which includes policies and procedures for management, identification, assessment, timely monitoring, and control of risks. In parallel, under Basel III implementation new rules aimed to increase the effectiveness of risk supervision by the bank’s management body, as well as of the NBM have been introduced.

IV. REPORTING, ORGANISATIONAL REQUIREMENTS, INTERNAL GOVERNANCE, AND RISK MANAGEMENT

4.1. What key reporting and disclosure requirements apply to banks in your jurisdiction?

The Moldovan banks are subject to extensive reporting and disclosure requirements. Among other things, such financial institutions must periodically disclose balance sheets, organizational structure, business management framework, internal policies, liquidity, and regulatory capital ratios. Disclosing requirements are established in a way to improve market discipline and identify risks in financial institutions and act in a way that mitigates those risks.

In addition, NBM in the course of conducting supervisory examinations and reviews may require banks to disclose additional information that the supervisor believes may be relevant to its examination. Among other things, this could include a review of loan files, trading records, personnel files, and commercial agreements.

The NBM may intervene and impose additional reporting requirements, such as in relation to disclosure frequency and forms and modalities of disclosure. Also, the NBM may impose the requirement to publish annually in full or by way of references to equivalent information, a description of the bank’s legal structure and governance, the organizational structure of the group of banks and/or investment companies, by including information related to the entities with close links, as well as with regard to the governance arrangements.

4.2. What are the organizational requirements for banks, including with respect to corporate governance? Please briefly describe the requirements and the procedure of assessment of the suitability of the members of the management body and key function holders.

The legal basis is provided under the Banking Law and NBM Regulation No. 292/2018 regarding the requirements towards the members of the management body of the bank, of the financial holding or mixed holding company, the managers of the branch of a bank from another state, the key function holders and towards the liquidator of the bank in the process of liquidation.

These pieces of law set out the criteria and processes that the banks and the NBM should follow when assessing the suitability of proposed and appointed members of the management body of a bank.

The banks shall establish adequate policies and procedures to ensure compliance of banks including their managers and employees with their obligations under the law. In this respect, the law requires that the management body of a bank defines, oversees, and is accountable for the implementation of governance arrangements that ensure effective and prudent management of the bank including the segregation of duties in the bank and the prevention of conflicts of interest, and in a manner that promotes the integrity of the market and the interest of clients.

The bank shall have a policy for selecting and assessing members of the management body which takes into account the nature, scale, and complexity of the business of the bank. The assessment of the suitability of key function holders is the best practice expected from all banks to ensure robust governance arrangements.

Assessing the initial and ongoing suitability of members of the management body and key function holders is primarily the responsibility of the bank. The bank bears responsibility for ensuring that members of the management body shall at all times be of good repute and possess sufficient knowledge, skills, and experience to perform their duties and that they meet the requirements. Events with the potential to affect a person’s reputation or required experience can lead to the need to re-assess the suitability of that person.

The bank shall assess the suitability of members of the management body in the following situations:

a. when applying to be authorized as a bank;

b. when new members of the management body have to be notified to the NBM; and

c. whenever appropriate, in relation to appointed members of the management body.

When assessing the suitability of members of the management body, the bank shall also assess whether the management body is suitable collectively.

Where members of the management body do not fulfill the requirements set out in the law, or if the NBM is not satisfied that the members of the management body of the investment firm are of good repute, possess sufficient knowledge, skills, and experience, and commit sufficient time to perform their functions in the investment firm, or if there are objective and demonstrable grounds for believing that the management body of the firm may pose a threat to its effective, sound and prudent management and to the adequate consideration of the interest of its clients and the integrity of the market, the NBM has the power to remove such members from the management body.

These might be also ground for the NBM to refuse authorization as a bank.

(a) Requirements

Fit and proper requirements under the above-mentioned legal provisions for members of the management body play an important role as the management body bears the overall responsibility for the bank. The NBM assesses their suitability in accordance with the following criteria:

1. Reputation:

A member of the management body shall have an impeccable reputation. It is considered to be of good repute if there is no evidence to suggest otherwise and no reason to have reasonable doubt about his or her good repute.

All members of the management body need to be of good repute, regardless of the nature, scale, and complexity of the bank or the position of the member within it.

2. Experience:

A member of the management body shall prove both theoretical experiences attained through education and training, and practical experience gained in previous occupations. The experience requirements differ depending on the bank’s nature, scale, and complexity of its activities and the position concerned.

3. Independence of mind:

(a) A member of the management body shall prove relevant behavioral skills, past and ongoing behavior, in particular within a bank, and absence of conflicts of interest to an extent that would impede their ability to perform their duties independently and objectively, such as personal, professional or other economic relationships with the members of the management body or personal, professional or other economic relationships with the controlling shareholders of the same bank, subsidiary, etc.

4. Time commitment:

A member of the management body shall have sufficient time to carry out their responsibilities appropriately, to cover all the necessary subjects in depth, and in particular the management of the main risks. Also, they shall be able to commit sufficient time to understand the business of the bank, its main risks, and the implications of the business and the risk strategy.

(b) Procedure

An application or notification procedure applicable to appointments and re-appointments of a member of the management body is to be observed. The time period of the assessment by the NBM is 45 days and it starts on receipt of the complete application or notification.

4.2. What are the local rules for loans to the management body and their related parties?

Typically, the transactions with related parties (RP) shall reflect the bank’s interests, shall not be carried out on more advantageous conditions than those with non-RP, and shall not be performed by violating the limits and the provisions established in the NBM regulatory acts.

The banks shall have a strong framework to manage conflicts of interest and ensure prudent decision-making in the context of loans to RP.

The bank shall determine the transactions with their RP, including the bank’s exposures to these individuals and the total amount of these exposures, as well as monitor and report about them through an independent exposure management process.

Any transaction with a bank’s RP, in an amount that exceeds the equivalent of MDL 1 million (about EUR 50,000), shall be approved prior to its conclusion/amendment of contractual conditions, by the majority of members of the bank’s board. Upon its decision, the bank board may also approve such transactions in an amount not exceeding the equivalent of MDL 1 million.

Generally, in cases when the equivalent of MDL 1 million is not exceeded, the transaction is approved by the executive body of the bank.

The bank shall ensure that transactions with RP are reviewed and that the risks they pose for the institution are identified and adequately assessed.

When deciding on a loan or other transaction with a member of the management body or their RP, before taking a decision, the bank shall assess the risk to which the institution might be exposed due to the transaction.

In this respect, the bank’s transactions with RP shall be made under certain conditions, limitations, and restrictions set by the NBM, which might include the requirement to make additional provisions for losses on loans and other assets related to the transactions with RP.

Thus:

(i) the value of the exposure, after taking into account the effect of credit risk mitigation, to a bank’s RP and/or a group of parties related to the bank’s related party shall not exceed 10% of the bank’s eligible capital, and

(ii) the aggregate amount of the bank’s total exposures to RP and/or groups of parties related to the bank’s RP, after taking into account the effect of credit risk mitigation shall not exceed 20% of the eligible capital of the bank.

4.3. What are the main legal provisions governing risk management in the banking sector in your jurisdiction?

The main provisions in relation to the management activity within the banks are established in the Regulation on Banking Activity Management Framework approved by the Decision of the Executive Board of the NBM No 322 dated December 20, 2018 (Regulation 322/2018). Regulation 322/2018 transposes Directive 2013/36/EU of the European Parliament and of the Council of 23 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms. Regulation 322/2018 aims at ensuring effective and prudent risk management in a bank.

In general, the bank is required to develop a risk culture integrated at the general bank level based on a full understanding of the risks faced by the bank and the way they are managed considering the bank’s risk tolerance/ appetite. The bank shall have a comprehensive risk management framework covering all subdivisions, including support and control functions, identifying the economic substance of exposures and covering all risks relevant to the bank, ensuring that the risk management policies of the bank’s business model are consistent with its capital and risk management experience and the level of risks are appropriately observed.

The risk management policies of the bank transposed into internal regulations of the banks need to establish, at least, the following:

1. risk management procedures tailored to the size and nature of bank activity, which shall include the permanent identification and assessment of risk positions, risk monitoring, and control, including outsourced activities and off-balance-sheet transactions;

2. process of adjusting risk management procedures to changing risk profiles and market developments;

3. risk exposure limits set for all activities and for each significant activity and/or branch reflecting the chosen risk profile in terms of the ratio between accumulated risks and the profit obtained, which the bank considers acceptable under effective and prudent business continuity conditions;

4. procedures for authorizing operations that may be affected by risks, considering the responsibilities of the management body and the bank’s risk management staff;

5. measures required to minimize and limit the exposure to risks affecting the achievement of the bank’s objectives and/or its stability;

6. sufficient bank resources (including technical and human resources) to manage risks.

4.4. What are the legal requirements applicable to banks in combating money laundering and terrorist financing area?

Law No. 308/2017 on the prevention and combating of money laundering and terrorism financing (AML Law), which aims to transpose EU Directive 2015/849/EC and implement the FATF Recommendations (of February 2012) requires that banks, as reporting entities, shall apply a risk-based approach to AML/CFT.

The NBM is the supervisory authority in the prevention and combating of money laundering and terrorism financing by the banks.

(a) The Risk-Based Approach (RBA):

Banks’ identification and assessment of their own ML/TF risk should consider national risk assessments and take account of the national legal and regulatory framework, including any areas of prescribed significant risk and any mitigation measures defined at the legal or regulatory level.

Where ML/TF risks are higher, banks should always apply enhanced due diligence.

The RBA to AML/CFT aims to support the development of prevention and mitigation measures that are commensurate to the ML/TF risks identified. In this respect, the banks shall allocate their compliance resources, organize their internal controls and internal structures, and implement policies and procedures to deter and detect ML/TF.

(i) Risk assessment

While assessing the risk, the bank shall understand how, and to what extent, it is vulnerable to ML/TF. This shall help the bank determine the level of AML/CFT resources necessary to mitigate that risk.

(ii) Risk mitigation identification, verification, and the purpose and intended nature of the business relationship

Banks shall develop and implement policies and procedures to mitigate the ML/TF risks they have identified through their individual risk assessment. Customer due diligence (CDD) processes should be designed to help banks understand who are their customers by requiring them to gather information on what they do and why they require banking services.

Based on a holistic view of the information obtained in the context of their application of CDD measures, banks should be able to prepare a customer risk profile. This will determine the level and type of ongoing monitoring and support the bank’s decision on whether to enter into, continue, or terminate, the business relationship.

(b) Initial CDD:

Under the law, the banks are required to apply extensive know-your-customer procedures.

The initial CDD typically comprises:

• Identification of the customer and, where applicable, the customer’s beneficial owner;
• Verification of the customer’s identity on the basis of reliable and independent information, data, or documentation; and
• Understanding the purpose and intended nature of the business relationship and, in higher-risk situations, obtaining further information.

In addition, banks should take measures to comply with national and international sanctions legislation by screening the customer’s and beneficial owner’s names against the UN and other relevant sanctions lists.

As a general rule, CDD measures have to apply in all cases.

The amount and type of information obtained, and the extent to which this information is verified must be increased where the risk associated with the business relationship is higher. For instance, the banks shall apply additional (enhanced) measures in specific cases, which include non-face-to-face operations, transactions of politically exposed persons, cross-border interbank transfers, or electronic transfers when the parties cannot be fully identified.

CDD may be simplified where the risk associated with the business relationship is lower.

Banks, therefore, have to draw up, and periodically update, customer risk profiles, which serve to help them apply the appropriate level of CDD.

Where banks cannot apply the appropriate level of CDD, the AML Law requires that banks do not enter into the business relationship or terminate the business relationship.

(c) Ongoing CDD/Monitoring:

Monitoring transactions is an essential component in identifying transactions that are potentially suspicious.

The AML Law requires that the banks ensure the scrutiny of transactions to determine whether those transactions are consistent with the bank’s knowledge of the customer and the nature and purpose of the banking product and the business relationship.

Monitoring also involves identifying changes to the customer profile (for example, their behavior, use of products, and the amount of money involved), and keeping it up to date, which may require the application of new, or additional, CDD measures.

At present, local legal initiatives are promoted aiming to make possible the implementation of customer onboarding identification. The draft law also aims at the pre-implementation assessment when onboarding the customers remotely, third parties, and outsourcing, remote CDD.

(d) Reporting:

If a bank suspects or has reasonable grounds to suspect, that funds are the proceeds of a crime or are related to terrorist financing, it shall report its suspicions promptly to the Moldovan FIU.

Banks should have appropriate case management systems so that such funds or transactions are scrutinized in a timely manner and a determination made as to whether the funds or transactions are suspicious.

Any transaction which is deemed suspicious, irrespective of the amount of the transaction, should be reported within 24 hours.

(e) Tipping off:

Under the AML Law, the banks and their employees are bound not to inform the subject of a report that a report has been made to the Moldovan FIU. The tipping off, as wrongdoing, shall be examined under the general rules of the law, while the AML Law states that infringing the provisions of said law shall bring liability in compliance with civil, administrative, and criminal laws.

(f) Whistleblowing:

Under the AML Law, the banks, their employees, the responsible persons, and their representatives are bound not to inform the clients or the third parties that a report has been made to the monitoring authority until the legal terms of recordkeeping have expired. Such disclosure of data may interfere with rules on keeping banking secrets, and commercial secrets if done too early when a criminal investigation was not yet finalized and a final court decision was not issued.

(g) Recordkeeping:

Under the AML Law, the banks shall keep, on paper, all data related to national and international activities and transactions of the client, for a minimum of five years after the business contract has ended (or after the termination of the occasional transaction) and up to five years – on electronic support.

(h) Internal controls, governance, and monitoring:

(i) Internal controls:

Under the AML Law, as a prerequisite for the effective implementation of policies and processes to mitigate ML/TF risk, the banks shall have adequate internal controls.

Internal controls include appropriate governance arrangements where responsibility for AML/CFT is clearly allocated, controls to monitor the integrity of staff, in accordance with the AML Law, especially in cross-border situations, and the national risk assessment, compliance, and controls to test the overall effectiveness of the bank’s policies and processes to identify, assess and monitor risk.

(ii) Governance:

The successful implementation and effective operation of an RBA to AML/CFT depends on strong senior management leadership and oversight of the development and implementation of the RBA across the bank.

As per the AML Law, senior management should consider various ways to support AML/CFT initiatives:

• promote compliance as a core value of the bank by sending a clear message that the bank will not enter into, or maintain, business relationships that are associated with excessive ML/TF risks which cannot be mitigated effectively. Senior management, together with the board, is responsible for setting up robust risk management and controls adapted to the bank’s stated, sound risk-taking policy;
• implement adequate mechanisms of internal communication related to the actual or potential ML/TF risks faced by the bank. These mechanisms should link the board of directors, the AML/CFT chief officer, any relevant or specialized committee within the bank (e.g., the risks or the ethics/compliance committee), the IT division, and each of the business areas;
• decide on the measures needed to mitigate the ML/TF risks identified and on the extent of residual risk the bank is prepared to accept, and
• adequately resource the bank’s AML/CFT unit.

This implies that senior management should not only know about the ML/TF risks to which the bank is exposed but also understand how its AML/CFT control framework operates to mitigate those risks.

(iii) Ensuring and monitoring compliance:

According to the AML Law, the bank’s internal control environment should be conducive to assuring the integrity, competence, and compliance of staff with relevant policies and procedures. The measures relevant to AML/CFT controls should be consistent with the broader set of controls in place to address business, financial, and operating risks generally.

(j) Internal procedures:

The Moldovan banks should have internal AML programs and procedures in place to ensure collection of the information on the identity of the client, the ultimate beneficiary, politically exposed persons, the trust relations, the holder of the corresponding bank account, etc.

The banks shall adopt internal policies and adequate methods of working with clients, data storage, internal control, evaluation and management of risks, management of conformity, and communication to impede the activities and transactions related to money laundering or terrorism financing. The banks shall appoint the persons responsible for enforcement of the legal provisions, the names and responsibilities of which shall be reported to FIU.

(k) Training and awareness:

According to the AML Law, the competent bank staff shall receive AML/CFT training.

Within the training, the bank staff shall understand not only the processes they are required to follow but also the risks these processes are designed to mitigate, as well as the possible consequences of those risks.

The sanctions for the violation of AML local provisions are provided in the Law on the Procedure for Establishing Violations of Prevention of Money Laundering and Terrorist Financing and Imposition of Sanctions are established on an individualization criterion and are pecuniary (up to EUR 5 million) or non-pecuniary (public declaration in the mass-media, prescription on ceasing the illegal activity, suspension of the activity, license withdrawal, temporary ban on holding management positions in reporting entities).

4.5. Are there any legal provisions regulating banking secrecy in your jurisdiction?

In 2018, the European Banking Authority performed its equivalence assessment evaluating the professional secrecy and confidentiality regimes applicable to the NBM and assessed the Moldovan regime as being equivalent to the EU confidentiality regime.

In this respect, the notion of confidential information, the obligation of professional secrecy, the use of confidential information, and restrictions on disclosure of confidential information are provided in the Banking Law.

Any failure to observe the provisions of banking secrecy will result in the application of civil/administrative/criminal sanctions.

V. TRENDS

5.1. What are the main trends in the banking sector in your jurisdiction?

There have been several trends in the banking sector in recent years. Most of them are linked directly or indirectly to the implementation of the strategic objectives of the NBM or are driven by technological advances and changes in consumer behavior.

Some of the most significant trends include:

1. Digitalization. All the Moldovan banks are now offering a range of digital banking services, including mobile banking apps, online banking portals, and virtual assistance, which allow customers to access their accounts and conduct transactions remotely.

The Moldovan banks have been investing in digital technologies to improve customer experience and operational efficiency, by developing mobile banking apps and implementing digital payment solutions.

2. Open banking. In July 2022, a draft law amending the Payment Services Law has been approved. By the amending law, the provisions of Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC (PSD2 Directive) are transposed into national legislation. Following the implementation of the PSD2 Directive the open banking concept has been introduced.

3. Improved regulations. Following the Association Agreement between the European Union and the Republic of Moldova signed on June 27, 2014, and the implementation of the action plan, the Moldovan legislation has been subject to certain legislative amendments by implementing major European legislation.

4. Accession to SEPA. In 2021, the NBM has initiated the dialogue on Moldova`s accession to the SEPA area. In 2023 the process of adjusting to SEPA criteria shall progress.

5. E(-commerce)-Know-Your-Customer. Following the implementation of the PSD2 Directive, the amendment of the legislation governing the bank KYC has been initiated.

6. Social and environmental responsibility. Banks started prioritizing social and environmental responsibility.

5.2. What are the biggest challenges in the banking sector at the moment?

The biggest challenges the banking sector is facing are related to prudential requirements that the banks shall comply with and the possible system risks such as the currency rate risk.

Based on the latest report of the NBM, not only is the risk and credibility of banks at issue with the population, but the dramatic decrease in lending has also added to the frustration people have when dealing with banks.

Not only is their reserve requirement high relative to most banking sectors around the world, but commercial banks are also hurriedly working toward complying with Basel III requirements. Basel imposes a high level of Know Your Customer (KYC) processes. This, along with a focus on risk-based lending protocol over asset-based lending, has put banks on the defensive and has significantly reduced banks’ willingness to lend. In addition, banks face more amorphous risks such as the ever-changing political environment which can dramatically swing financial system requirements at any given moment.

5.3. What’s new in fintech?

The ecosystem of fintech in Moldova is starting to develop starting with the implementation of PSD2 for the evolution of the market trends to meet customer needs and regulatory demands.

Open Banking is facilitating the evolution of fintech in Moldova.

A draft law has been prepared to regulate the “virtual currency” and “virtual currency service provider”. The draft law was developed based on the recommendations of the MONEYVAL Committee of the Council of Europe and transposes a series of European directives in the field.