MODULE TWO

EXPLAINING REGULATIONS OF THE FINANCIAL SYSTEM

LECTURE NOTES
Overview

After completing this chapter, the student will be able to demonstrate knowledge of the
following:

The Banking and Financial Services Act No. 7 of 2017

The Securities Act No. 41 of 2016
The Pensions and Insurance Act
The Competition and Consumer Protection Act No. 24 of 2010

INTRODUCTION

This module examines the legal framework for banking supervision and
regulation in Zambia. Reference will be made only to the national legal framework
because not only are there no international treaties on bank supervision but the
guidelines and principles developed by Basle Committee on Banking Supervision
(BCBS) for the supervision of the conduct of banks sets out requirements that limit
their risk-taking. Mwenda (200). These guidelines and standards will normally cover
such areas as risk management, corporate governance, know your customer (KYC), and
anti-money laundering. Mwenda (200). The BCBS provides an international forum for
regular cooperation on banking supervisory matter. Its objective is to enhance an
understanding of key supervisory issues and improve the quality of banking supervision
worldwide. Mwenda (200).

These principles have become the most important global standards for prudential
regulation and supervision and the vast majority of countries have endorsed them by
declaring their intention to implement them. Mwenda (200). However, it is not yet clear
as to whether these principles have become customary international law. Mwenda
(200). Therefore, it can be concluded that the Basle Core Principles constitute soft law
as of now, in that they are globally the main guidelines for central bank supervision of
the commercial banks. Mwenda (200).

According to Chiumya (2004), the current regulatory framework of the banking sector
has performed relatively well since 2000 to date. Before then, the banking sector
witnessed a number of bank failure. Chiumya (2004). As of 2004, nine banks had
closed and this led to a loss of confidence in the financial system because people were
discouraged from placing their monies in the banks for fear of loss. Chiumya (2004).
This can be attributed to weak regulatory framework that consequently precluded
effective supervision of the sector. (Chiumya, 2004).

Banking instability can have serious adverse effects on a nation’s economy because it
can impair payment mechanism, reduce the nation’s savings rate, diminish the financial
intermediation process, and inflict serious harm on small savers. Chiumya (2004). To
prevent these adverse effects, efforts have been made by government to introduce
legislation on depositor’s protection. (Chiumya, 2004).

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 The regulatory framework of the banking sector has since 2000 strengthened through
the revision of the banking legislation such the Banking and Financial Services Act No. 7 of
2017 which was primarily intended to strengthen BOZ regulatory and supervisory powers in
light of the best practices and international standards for prudential regulation and
supervision. (Chiumya, 2004). This has been coupled with the formulation of regulation
against money laundering, corporate governance guidelines and minimum capital adequate,
among others. (Chiumya, 2004).

It must be noted that the greatest problem faced in regulation is not supervision but
enforcement. Supervision has to do with complying with the provisions of the enabling
legislation, whereas enforcement involves the actual implementation of those provisions.

KNOW YOUR CUSTOMER (KYC)

According to Cranston (2002, p.134). The origins of customer identification legislation

began with a variety of dangerous crimes like mob activity, drug trafficking, and even
terrorism. Cranston (2002, p.134). 'Know vour customer ' is now a widely accepted
obligation on banks. Cranston (2002, p.134). International KYC policies are an important
part of eliminating these activities and avoiding the impact they have on financial institutions
and the individuals who use them. Cranston (2002, p.134).

KYC, or know your customer, is a term used to describe the process used by banks,
insurers, and other financial institutions to ensure a customer’s identity is accurate and avoid
misuse of banks and government institutions. Cranston (2002, p.134). The goal of KYC is to
assess the level of risk a person poses to the financial institution serving them. Typically, KYC
processes occur when a customer opens an account and periodically during the working
relationship for risk management. Cranston (2002, p.134).

KYC establishes the identity and residential address of the customers by specified
documentary evidences. Cranston (2002, p.134). One of the main objectives of KYC
procedure is to prevent misuse of the banking system for money laundering and financing of
terrorist activities. Cranston (2002, p.134). The ‘KYC’ guidelines also reinforce the existing
practices of some banks and make them compulsory, to be adhered to by all the banks with
regard to all their customers who maintain domestic or foreign currency accounts with them.
Cranston (2002, p.134).

Specimen signature of the customer is obtained on the account opening form in the
presence of the bank staff and it is attested by an authorized bank officer on the form itself. A
customer is recognized mainly by his/her signature on the cheques/vouchers and these are
compared with the specimen signature on record to verify the genuineness of the customer’s
signature. Cranston (2002, p.134).

ANTI-MONEY LAUNDERING

THE DEFINITION OF MONEY LAUNDERING AND METHODS OF MONEY

LAUNDERING

Money Laundering is one of the most notorious, multidimensional, and trans-national

crimes on the Zambian scene like its sister crimes such as drug trafficking, robbery,
corruption, tax evasion fraud etc. it has serious social, political and economic
repercussions. The concept of crime of money laundering is a very new concept in the

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vocabulary of many Zambians, many Zambians still do not know what constitutes
money laundering.

WHAT IS MONEY LAUNDERING?

There are several definitions of what money laundering is. The prohibition and
prevention of Money Laundering Act No. 14 of 2001 as amended by Act No 44 of 201,
defined money laundering as a process of disguising or concealing the true nature or
source of funds or property derived from criminal means or illegal activities.

WHAT CONSTITUTES MONEY LAUNDERING?

Cleary, money laundering is a tool used by people involved in illegal activities or any
crime which generates a financial benefit such as:
• Fraud
• Drug trafficking
• Tax evasion
• Smuggling
• Robbery
• Bribery
• Human trafficking
• Corruption etc.

Criminals use or attempt to use the financial systems to clean money obtained from
illegal activities and make it appear to be clean or legitimate by acquiring property, and
sometimes through use of false identities of innocent people.

THE THREE STAGE PROCESS

Money laundering is usually achieved but not limited to the three stage process usually
referred to as the money laundering triad .

These are: PLACEMENT: Is the initial stage in the laundering process. The stage
where cash first enters the banking system in a manner that avoids detection or is
placed into the retail economy, or smuggled out of the country. Bulk movement of cash
is becoming increasingly popular.

LAYERING: Is the second stage in the process. It involves the separation of illicit
proceeds from their source by creating complex layers of financial transactions
designed to disguise the audit trail. The preferred means of disguising at this stage
include electronic fund transfers and internet banking. Electronic forms of transfers are
preferred because they offer the advantage of speed, distance, breaks in the audit trail
and increased anonymity amid huge daily volume. Once illicit proceeds are placed into
the financial system, they can be converted into any business posing as a legitimate
investment.

INTERGRATION: Is the final stage or phase, which places laundered proceeds back
into the economy in such away as to make them appear as ordinary earnings. Front
companies continue to be used at this stage. Investment of illicit capital in real estate is

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a classic method of laundering dirty money. A time–honored technique is the operating
of cash intensive businesses like restaurants and bars.

EFFECTS OF MONEY LAUNDERING

Money laundering has serious and devastating effects on the economy of the country in
that it:
• Destroys the moral fiber of society
• Empowers Corruption and organized crime • Discourages investors
•Causes loss of government revenue through tax evasion-affecting the quality of
delivery of social amenities to its citizens
•Destroys manufacturing industry as launderers are able to heavily subsidize their
products selling them at below market rates. This disadvantages legitimate businesses
and may force them out of the business.
• Threatens national security

COMBATING MONEY LAUNDERING

To combat money laundering in Zambia, government enacted the following pieces of

legislation;
• The prohibition and prevention of Money Laundering Act No. 14 of 2001 as amended
by Act No 44 of 2010, • The forfeiture of proceeds of crime Act No 19 of 2010
• The financial intelligence Centre Act No 46 of 2010 and
• The whistle blowers Act No 4 of 2010.

These Acts provide necessary legal or regulatory tools to authorities charged with
combating money laundering. For example, Act 46 of 2010 provides for disclosure of
information on suspicion of money laundering activities by supervisory authorities and
regulated institution.

2.1.1 The Banking and Financial Services Act

Mwenda (2000). The Banking Act of 1965 which was later repealed by the Banking
Act of 1972, was the first Act that regulated the conduct of banking business in
Zambia. Mwenda (2000). This Act was tailored to address the needs of the banking
environment of a newly independent state of Zambia had just gained independence in
1964. Mwenda (2000). It was formulated specifically to regulate commercial banks and
so as to be in line with the Zambian economy. Among other things to enable
government to compel commercial banks to be locally incorporated in order to bring in
large amounts of equity capital and commercial banks were mandated under this Act to
appoint Zambians as half the number of directors in those banks. Phiri (2004, p.11).
This was intended to help government to place its citizen in leading roles in as far as
national development was concerned. Phiri (2004, p.11).

Phiri (2004, p.11). The Banking and Financial Services Act of 1994 repealed the
Banking Act of 1972 owing to the change of economic policy of liberalization which
was adopted by the new government. Phiri (2004, p.11). The change in government
from a one party state to a multi-party state led by the MMD resulted in radical reform
from a state controlled economy to a free market or liberlised economy. Phiri (2004,
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p.11). Therefore, financial sector reforms were not only inevitable but expected and this
was evident in reforms to prudential regulation and supervision of banking and
financial institutions through the enactment of a new banking law in 1994. Phiri (2004,
p.11).

The objectives of the Banking and Financial Services Act 1994 was repealed by the
Banking and Financial Services Act No. 7 of 2017 whose aims are to provide for the
regulation of the conduct of banking and financial services, safeguard the interests of
investors and customers of banks and financial institutions and to provide for matters
connected with or incidental to the foregoing. Phiri (2004, p.11). In this vein, the Act
endeavours not only to create both legal and institutional safeguards for depositors’
monies but also to promote a safe, sound and efficient financial system. Phiri (2004,
p.11).

2.1.3 Licensing and Structure

The power to licence, supervise and regulate financial service providers in

Zambia is defined under two sets of legislation, namely:

(i) The Bank of Zambia Act, Chapter 360 of the Laws of Zambia; and
(ii)The Banking and Financial Services Act (BFSA), Chapter 387 of the Laws
of Zambia. These two sets of legislation outline the functions, responsibilities and
mandate of the Bank of Zambia.

In terms of Section 4(1) of the Bank of Zambia (BOZ) Act, the primary
objective of the Bank of Zambia is to "formulate and implement monetary policy and
supervisory policies that will ensure the maintenance of price and financial system
stability so as to promote balanced macro-economic development". To support this
function, the Bank is given the responsibility, among others, to "licence, supervise and
regulate the activities of banks and financial institutions so as to promote the safe,
sound and efficient operations and development of the financial system."

The Banking and Financial Services Act 2017 supports the BOZ Act by
amplifying the legal and regulatory framework of licensing, supervising and regulating
financial service providers in Zambia.

2.1.4 Grounds upon which the Registrar may refuse to grant a licence

In deciding whether or not to grant a banking licence, and in deciding what

conditions should be attached to such a licence, Mwenda (2010, p.42) the Registrar of
Banks and Financial Institutions can have regard to the capital adequacy of the
applicant; the financial condition, resources and history of the applicant and the
applicant’s associates and affiliates; the character and experience of the directors and
major shareholders and of persons proposing to be concerned in the management of the
business to be undertaken under the authority of the licence; the convenience and needs
of the community intended to be served by that business; and the prospects for
profitable operation of that business. Mwenda (2010, p.42).

In addition to the foregoing: section 10(1) of the Banking and Financial

Services Act 2017 provides that the Bank shall reject an application for a licence where
—
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 (a) an applicant does not meet the requirements of this Act;
(b) a licence previously held by an applicant has been cancelled by the Bank;
(c) an applicant submits false information in relation to the application; or
(d) the name that a financial service provider is proposing to be registered is—
(i) identical with that of another financial service provider; or
(ii) resembles the name of another financial service provider and is likely to deceive
the public

2.1.5 Duration of licences and some of the terms to be found in licences

Pursuant to section 17 the Banking and Financial Services Act 2017, a licence
granted to an applicant remains in force until it is revoked by the Registrar of Banks
and Financial Institutions.

According to Mwenda (2010, p.43), generally, there is no property in a licence, and

a licence is not capable of being bought, sold, leased, mortgaged or in any manner
transferred, demised or encumbered. Mwenda (2010, p.43). An exception is, however,
provided where, in the event of an amalgamation of banks under the Banking and
Financial Services Act 2017 and on such terms and conditions as the Bank of Zambia
may approve, a licence can be transferred from one party to another. (Mwenda, 2010,
p.43).

2.1.6 Appeals against decisions of the Registrar

An applicant for a banking licence whose application has been refused by the
Registrar of Banks and Financial Institutions or the Bank of Zambia has the right to
make his or her case in writing to the said Registrar or the Bank of Zambia to
reconsider the decision over the granting of a licence. Mwenda (2010, p.43). This
procedure applies, mutatis mutandis, to appeals against decisions of the Registrar or the
Bank of Zambia regarding the revocation of licences. Mwenda (2010, p.43). If, after
receipt of any representations from the applicant or person affected by its decision, the
Registrar or the Bank of Zambia reaffirms its decision, the applicant or other person
(hereinafter called the ‘appellant’) may, within seven days of receipt of the notice
reaffirming the decision, notify the minister that he or she desires to appeal against the
decision. (Mwenda, 2010, p.43).

2.1.7 Directors and managers of banks and incorporated financial institutions

While the Registrar of Banks and Financial Institutions authorises persons to

conduct banking and financial services business, the grant of such licence per se does
not automatically entitle a licensee to act as director or manager of a bank or an
incorporated financial institution. (Mwenda, 2010, p.45).

Section 34 (1) of the Banking and Financial Services Act 2017 provides that a
person shall not be elected or appointed as a director, chief executive officer or chief
financial officer of a financial service provider without the prior written approval of the
Bank.

Section 34 (2) states that despite anything to the contrary in the Companies Act,
2017, or any other written law, a person is not qualified for election or appointment as a
director or senior officer if that person—
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 (a) is not a fit and proper person to hold the relevant office in accordance with this
Act; (b) is below the age of twenty-one years;
(c) has been adjudged bankrupt by a competent court or has made an arrangement
or composition with that person’s creditors, in Zambia or elsewhere;
(d) has been convicted of an offence involving fraud or dishonesty;
(e) has a mental disability that makes the person incapable of performing the
functions of the office;

2.1.8 Disciplinary measures

Mwenda (2010, p.54), where a bank refuses to comply with an order of the
Bank of Zambia, or refuses to permit an examination to be made, or has otherwise
obstructed such an examination, the Bank of Zambia can take disciplinary action.
Equally, the Bank of Zambia may take disciplinary action where it is of the opinion that
an authorized examination shows:

(a) that the bank concerned conducts its business in an unlawful manner or engages
in a course of conduct that is unsafe and unsound; Mwenda (2010, p.54) or

(b) that for any reason (other than insolvency) the bank is unable or likely to
become unable to continue its operations in the ordinary course. Mwenda (2010, p.54).

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RECOMMENDED TEXTBOOKS

o R. Abrams and M. Taylor, (2000). ‘Issues in the Unification of Financial

Sector Supervision’ (Washington: International Monetary Fund).

o Arora, A, Practical Banking and Building Society Law, 1997, London:

Blackstone.

o Cranston. R. (2002). Principles of Banking Law 2 nd edn., Oxford University

Press

o Chilepa. D and Stuart Makanka Yikona (eds), The Quest for an Enabling
Environment for Development in Zambia, Ndola: Mission Press, pp 42-58

o Chiumya. C. (2004). Banking Sector Reforms and Financial Regulation: Its

Effects on Access to Financial Services Low Income Households in Zambia
(Paper presented to the 3rd International Conference on Pro-Poor Regulation
and Competition in South Africa).

o Mulaisho. D, (1994), ’The role of the central bank in economic liberalisation’

in Nathan

o Mwenda.K (2010) Legal Aspects of Banking Regulation: Common Law

Perspectives from Zambia (Pretoria University Law Press: Pretoria, Ch. 1

o Phiri. K. T (2004), The role of the Central Bank in the supervision of the
Commercial Banks.’ Obligatory Essay.

o Vagneur. K. (2004). Corporate Governance. (Edinburgh: Heriot – Watt

University Press).