The Supervisory Role of the Bank of Mauritius in Respect of Cross-Border Financing Transactions
In this Expert Focus article, Anu Matikola and Jason Barbe of Bowmans in Mauritius discuss the attractions and risks of cross-border financing, and the guidelines issued by the Bank of Mauritius to address such risks.
Anu Matikola
Jason Barbe
Cross-border financing transactions have played an important role over the past years in positioning Mauritius as an international financial centre. In particular, they have offered Mauritian banks opportunities in terms of revenue generation, product diversification and access to a wider market, especially towards African countries. However, cross-border financing may well be attractive, but it also comes with its fair share of risks.
The Role of the Bank of Mauritius
In an attempt to mitigate those risks, and as part of its supervisory role, the Bank of Mauritius (BOM) has issued several guidelines to be adopted by banks licensed under the Banking Act 2004 (Banks), including the Guideline on Cross-Border Exposure, the latest iteration of which came into effect on 22 August 2022 (the Guideline).
Failure to comply with such directives, guidelines or instructions constitutes an offence, which upon conviction can lead to a fine not exceeding MUR1 million and, in the case of continuing offence, to a further fine of MUR100,000 for every day or part of a day during which the offence continues and imprisonment for a term not exceeding two years.
Mitigating Risks in Cross-Border Exposure
The Guideline provides a comprehensive set of frameworks that need to be incorporated into the relevant Banks’ internal policies and frameworks at various levels, including governance and risk management levels.
Governance framework
Banks should maintain a comprehensive board-approved policy on cross-border exposure that clearly defines the responsibilities of the board of directors and the processes in relation to such exposure.
Noteworthy responsibilities of the board of directors as provided in the Guideline include the need to:
- ensure necessary due diligence procedures are in place (i) when onboarding cross-border counterparties, including site visits and face-to-face meetings, (ii) in relation to jurisdictions and (iii) as regards third parties involved in such transactions;
- oversee processes and controls for, inter alia, credit processing, approval, administration, credit documentation and the valuation, perfection and enforceability of collateral; and
- ensure appropriate oversight and coverage by external auditors, who are required to conduct periodic reviews of the Banks’ cross-border exposure at intervals not exceeding 12 months.
Risk management framework
Implementation of an overarching risk management framework includes the following:
- establishing a risk appetite framework;
- identifying and assessing risk;
- conducting due diligence exercises on counterparties, jurisdictions and third parties;
- implementing a credit risk management system; and
- having a risk monitoring system in place.
Establishing a risk appetite framework
A risk appetite framework in respect of a cross-border exposure is required to include a risk appetite statement regarding:
- the Bank’s risk appetite based on the country, industry sector, counterparty and type of exposure involved in the cross-border transaction;
- any risk that arises from specialised lending/silent guarantees; and
- the Bank’s risk limits for cross-border exposure while considering the resources of the Bank.
A Bank that is a branch or subsidiary of a foreign bank may consider its group risk appetite framework when assessing the adequacy of the risk appetite statement.
Identification and assessment of risk
The Bank must establish procedures to identify and review cross-border exposures in excess of the Bank’s risk appetite and take the according remedial actions, including through an exit or credit protection measures such as insurance or participating in syndicated lending.
Conducting due diligence exercises
The Guideline provides the different categories of third parties on which due diligence should be conducted, the specific items to be covered and the frequency with which such exercises should be conducted, based on the perceived risk.
Additional requirements for due diligence conducted on counterparties have been added in the Guideline and include:
- ascertaining the existence of counterparties through official registries, stock exchanges and rating agencies;
- obtaining legal advice/opinions from a reputable legal counsel in the relevant jurisdiction on, inter alia, the legitimacy and enforceability of the cross-border facility agreements, guarantees and other documentation; and
- verifying and obtaining confirmation regarding the existence of underlying collaterals and charges inscribed thereon (including their respective rankings).
Credit risk management system
The Guideline provides a number of provisions with which Banks should comply. Notably, Banks must ascertain the enforcement procedures and comply with all relevant statutory requirements prior to accepting collateral to ensure their enforceability. Banks must also be satisfied as to the effectiveness of the enforcement procedures in the overseas jurisdiction, and must ensure that assets pledged as collateral are duly valued and charges inscribed thereon are duly registered.
Risk monitoring system
The Guideline requires that cross-border exposure should be duly monitored post-disbursement to, inter alia, ensure that funds are used for the purposes for which they were granted, review the status of the credit and review the financial health of the counterparties. The frequency of such review will depend on the amount of the credit or whether the operating environment of the Banks’ client is undergoing significant changes.
Banks are further required to have a management information system in place to monitor country risk, currency exposures, secured/unsecured exposures and insured/uninsured exposures, among others, and to determine whether there has been any deviation from board-approved limits.
The Guideline also provides that Banks are required to immediately inform the BOM if they are affected by a material increase in underlying risks of a credit, legal or reputational nature in connection with their cross-border exposure, or if they are approached by foreign authorities regarding such matters.
Final Note
It is worth noting that the Guideline only provides a set of minimum standards that would need to be followed by Banks in respect of their cross-border exposure; higher standards are expected. Those standards must have been fully implemented within three months from the Guideline’s effective date.
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