After much discussion among market players, the legislation regulating the principles and procedures that foreign exchange companies1 licensed in Turkey (“FX Company” or “FX Companies”) must follow was substantially amended in 2018 in response to sector need. The Communiqué on Decree No. 32 regarding the Protection of the Value of Turkish Currency No. 2018 – 32/45 (“New Communiqué”),2 published in the Official Gazette on 30 January 2018 and entered into force on the same date, abolished the Communiqué on Decree No. 32 regarding the Protection of the Value of Turkish Currency numbered 2006 – 32/32 (“Abolished Communiqué”), the main legislation that previously governed FX Companies. According to the Authorized Entities Activity Report3 issued on 31 July 2018 by the Ministry of Treasury and Finance (“Ministry”), the regulatory and supervisory authority governing FX Companies, the main reason novelties 1 Foreign exchange companies are defined as “authorized entity” (yetkili müessese) under the foreign exchange legislation. 2 Official Gazette: 30317 30 January 2018. 3 Please see the report in Turkish from the following link: https://ms.hmb.gov.tr/uploads/2018/11/Yetkili-M%C3%BCesseseler-Faaliyet-Raporu-2017.pdf 4 Please see the excel document in Turkish extracted from the following link: https://www.hmb.gov.tr/paydaslar-mski concerning FX Companies’ operations and activities were introduced is to ensure that FX Companies maintain strong corporate governance and internal systems, similar to the regulations enforcing these policies in other financial regulated sectors such as banks and insurance institutions. As per the document prepared by the Ministry and published on its website4 that lists the tradenames and contact details of stakeholders in the sector, there are 731 FX Companies and 120 branches in operation in Turkey. Most of the local and international players in the foreign exchange market invest in Turkish cities that are considered tourism hubs such as İstanbul, İzmir, and Antalya. 6 of the 731 FX Companies operate in a variety of airports across Turkey, including Muğla (Dalaman and Bodrum airports), Antalya, Istanbul (Sabiha Gökçen and Istanbul airports), Ankara (Esenboğa Airport), İzmir (Gazipaşa and Adnan Menderes airports), and Diyarbakır. Given that the foreign exchange market in Turkey is expected to grow, especially since Turkey is geographically located on both Europe and Asia serving as a crossroads between Europe, Asia, and Africa with substantial investments in the airport sector to re-enforce the global hub position of the country, these legislative amendments, with the order it is expected to bring onto the market. may increase the appetite of the international investors to invest in the Turkish foreign exchange market. Group System and Scope of Activities One of the main novelties introduced by the New Communique is the new categorization of FX Companies. FX Companies are now sorted according to their operation licenses type, similar to approaches seen in other countries. Operation licenses are now categorized as: (i) A Group FX Companies and (ii) B Group FX Companies. New Business Opportunities Available for Foreign Exchange Companies under New Legislation 02. The new legislation aims to ensure that the foreign exchange companies are subject to more robust corporate governance and internal system requirements in a way similar to the other financing institutions. New Business Opportunities Available for Foreign Exchange Companies under New Legislation | 11 In line with such novelty, the New Communiqué also broadens the scope of activities for FX Companies holding an A Group license whereby the B Group license holders will continue to carry out activities in line with the f ormer legislation. The differences in the license activities of the two groups are as follows: A Group FX Companies B Group FX Companies • A Group FX Companies are entitled to carry out all of the transactions that may be conducted by B Group FX Companies as listed in the next column. Additionally, the following activities are available: • Importing, exporting, and conducting transactions in relation to precious metals or stones in line with the applicable regulations provided that the relevant FX Company is registered with the Istanbul Stock Exchange; • Purchasing or selling foreign exchange or exchanging with other foreign currencies via “institutions that can carry out transfers”5 to banks, FX Companies, or their customers provided that the transfer order is complete or the subject of the transaction is physically delivered within the same business day; • Carrying out activities as representatives of electronic money institutions and payment institutions; • Purchasing and selling foreign exchange through cash machines in the headquarters and/or branches address or other places where appropriate and performance of the transactions in relation to same, provided that the Ministry’s approval has been granted; • Purchasing and selling foreign exchange via bank cards (excluding credit cards) without being subject to any monetary limitation and via pre-paid cards up to USD 10,000; • Shipping foreign exchange coins or Turkish Lira banknotes outside of Turkey, provided that the approval of the Ministry is granted pursuant to the procedures and principles identified by the Ministry; and • Performance of other activities that may be deemed appropriate by the Ministry. • Purchasing and selling foreign exchange except for deregistered/deposited money; • Exchanging foreign currencies except for deregistered/ deposited money with smaller or larger denominations or other types of foreign exchange; • Purchasing checks paid by foreign exchange pursuant to the procedures and principles identified by the Central Bank of the Republic of Turkey; • Purchasing and selling stamped gold produced by the General Directorate of Mint and Stamp Print House and standard unprocessed gold shaped as a bar or bullion weighing under one kilogram; and • Purchasing or selling foreign exchange or exchanging with other foreign currencies via bank transfers to banks, FX Companies, or their customers provided that the transfer order is complete or the subject of the transaction is physically delivered within the same business day. 5 This term is defined under the New Communiqué as “banks, headquarters of electronic money institutions, and payment institutions and their branches and foreign exchange companies who are representatives of electronic money institutions and payment institutions.” 12 | Hergüner | Bilgen | Özeke Attorney Partnership / Summer 2019 Differentiating from its predecessor, the New Communiqué provides an express discretionary right for the Ministry to expand the scope of activities that can be carried out by FX Companies. This provision serves as a gateway to expand the business of FX Companies to align with any other sub or additional activities that are already globally recognized and carried out by FX Companies in other jurisdictions to the extent possible under the applicable Turkish law. Another significant novelty introduced by the New Communiqué is the necessity for FX Companies to obtain prior consent from the Ministry before charging customers commissions or fees (under any name whatsoever), aside from fees gained from the buying and selling rates that they freely decide and declare in the foreign exchange purchase and sale transactions. Previously, FX Companies were able to freely determine the commissions and fees for their services. Similar to other regulated financial institutions and as was the case under the Abolished Communiqué, both A Group license holders and B Group license holders cannot use any words, phrases, or signs that create the impression that they are conducting activities other than those mentioned in their commercial titles, workplace licenses, announcements and advertisements, workplaces, or websites. Furthermore, regardless of their group, FX Companies cannot carry out derivative transactions or transactions through credit cards and are under no circumstances allowed to split the transactions they carry out into installments. FX Company Incorporation Permit Requirements The incorporation procedure and requirements in the New Communiqué are generally consistent with the Abolished Communiqué. The New Communiqué maintains the previous two-tier application procedure in relation to the establishment of FX Companies (i.e., (i) an incorporation permit (which is called a “preliminary permit” (ön izin)) and (ii) an operation permit (faaliyet izni)). 6 Records obtained with a camera or image recording system must be stored for 6 months from the date of recording. It is obligatory to obtain a document from the companies establishing the related systems that the camera or image recording system is established in a way that satisfies the requirements under the New Communiqué. Apart from the above-mentioned similarities, there are some differences in terms of incorporation requirements for FX Companies in relation to their tradenames, features of the shareholders (including shareholders holding at least 10% or more in the immediate shareholders to a FX Company), directors and certain senior management personnel, as well as the company’s capital in accordance with the license that they hold. Certain Financial and Monitoring Prerequisites have been Introduced for Operation Permits With the new requirements including the minimum investment requirements, the aim is to ensure a stronger sense of corporate governance as well as stability in the FX Companies market. Issuing operation permits for FX Companies now requires: a. A Group FX Companies to have a paid-in share capital of at least TRY 5,000,000 whereby B Group FX Companies must have a paid-in share capital of at least TRY 1,000,000 ; b. Payment of one-tenth of the capital of the FX Company (at least TRY 5,000,000 for A Group FX Companies and at least TRY 1,000,000 for B Group FX Companies) to a public financed bank or a public financed participation bank or a guarantee letter in the same amount issued by the above mentioned banks; c. An application fee in the amount of TRY 500,000 for A Group FX Companies and in the amount of TRY 200,000 for B Group FX Companies; d. Installment of a camera and image recording system6 on the premises; e. New corporate governance requirements; and f. For A Group FX Companies, appointment of an internal control officer. Amendments to the Branch Opening Process There are slight amendments in relation to branch opening procedures as well. Similar to the Abolished Communiqué, the New Communiqué also sets forth a two-tiered application procedure (branch establishment permit and branch operation permit). As per the New Communiqué, only A Group FX Companies are entitled to open branches. However, the share capital of the relevant A Group FX Company should be increased by TRY 2,000,000 per branch. Similar to the issuance of FX Company operation permits, certain collateral payments are required for the establishment and operation of branches among other documents and information. Corporate Governance and Internal Systems While FX Companies were previously only obliged to appoint a compliance officer under the applicable antimoney laundering legislation, the New Communiqué has introduced explicit obligations on A Group FX Companies to appoint an internal control officer, to establish an internal control system, and to comply with “know your customer” principles. Unlike the Abolished Communiqué, the New Communiqué also specifically regulates principles and pre-requisites for corporate governance and the internal systems of FX Companies. Such principles and pre-requisites differ for A Group FX Companies and B Group FX Companies in certain aspects. New Business Opportunities Available for Foreign Exchange Companies under New Legislation | 13 Execution of Framework Agreements In line with the expanded scope of activities that may be conducted by FX Companies, before A Group FX Companies can engage in foreign exchange transactions with institutions that can carry out transfers with the FX Company’s customers and that the FX Company will have a continuous business relationship with, a one-time framework agreement outlining the basis for the individual transactions should be executed between the A Group FX Company and the customer. Each customer should be given a separate customer number. The procedures and principles to use the framework agreements have yet to be announced by the Ministry. Website Similar to other regulated financial institutions, the New Communiqué introduces certain obligations on FX Companies regarding the composition of and maintenance of information on their websites. Scrutiny of the Ministry The scope of Ministry’s inspection and supervision authority to oversee FX Companies has also broadened under the New Communiqué. The Ministry now has the authority to take any precautions it deems necessary to ensure implementation of the New Communiqué, to evaluate force majeure or compulsory cases, to clarify gray areas subject to interpretation, and to review and conclude special circumstances other than those explicitly set forth under the New Communiqué. According to the New Communiqué, the Ministry also has the authority to evaluate and suspend the issuance of FX Companies’ general operation and branch operation permits in Turkey or permits in each city and to determine the total number of FX Companies and branches that may be opened in Turkey in general, in each city, at customs points, or in airports. FX market with a more robust corporate governance regime With these amendments to the legislation with respect to incorporation and operation requirements and the introduction of new concepts to the legislation such as group selection, internal systems, and website establishment requirements, the Ministry aims for FX Companies to have a sustainable and transparent corporate governance structure since the scope of financial activities that can be carried out by such institutions have been expanded. There are concerns regarding the implementation of certain new concepts introduced under the New Communiqué, such as payment machine services and framework agreements, since the secondary legislation has yet to be issued. However, it is expected that the secondary legislation will be issued by the Ministry in the near future and possibly in the second half of 2019, which would then enable market players to better implement new concepts and increase the transaction volume of the market. Yeşim Api Şamlı - Hakan Ekim