Securities transactions can be generally defined as valuable documents traded in capital markets and representing various financial assets. This includes instruments such as equities, bonds and bills. Nowadays, national and international regulations are made in order to manage the risk management processes of institutions and investors trading in the financial market. In Turkey, as a result of efforts to harmonise this process with international standards, Anti-Money Laundering (AML), Know Your Customer (KYC) and Financial Action Task Force (FATF) standards and many others have become an integral part of the daily operations of financial institutions. To further explain these terms:
Anti-Money Laundering (‘AML’) refers to the activities that financial institutions undertake to comply with legal requirements to actively monitor and report suspicious activity.
Know Your Customer (‘KYC’) is the processes applied to verify the customer identities of businesses, to manage potential risks and to evaluate risk profiles by obtaining sufficient information about the customer.
The Financial Action Task Force (‘FATF’) was established within the OECD in 1989, to promote the promulgation and implementation of legal and operational measures by setting standards to combat money laundering, terrorist financing, proliferation of weapons of mass destruction and other threats to the integrity of the international financial system.
In securities transactions, there are some risks for investors or investees. These risks need to be addressed prior to the execution of the transactions and compliance with the regulations in order to prevent risks. Primarily, the risks need to be analysed separately in each case and are explained below in general terms:
Risks in international investments may include political risk, the risk that the investment value is stated in today’s terms and the risk of marginal changes in exchange rates.
Political risk can be counted as the internal situation of the foreign country, political crises, monitoring of capital movements, nationalisations, etc. Experts can be employed to eliminate the risk by estimating the country risk. Networks can be created to receive news in advance for unfavourable situations. At the same time, foreign investment can be insured in a way. If the company can resort to local borrowing, it will be beneficial in minimising the risks.
In the foreign currency risk, although the net amount is calculated by calculating the flow calculation over the present value of the investment, there may be changes in the net amount and the final amount of the investment due to changes in exchange rates in the process. This situation arises as a result of the conclusion of the contract in foreign currency. Foreign currency cash flows are valued and reported at the current exchange rate on the balance sheet date. At subsequent balance sheet dates, expected cash flows will also change due to changes in exchange rates.
The risk situation can be minimised by calculating the expected exchange rate, purchasing power and interest rate parities. In addition to the exchange rate forecasts of experts, a separate conclusion can be drawn on the link between foreign exchange and interest rates.
In the mitigation of risks and harmonisation process, many regulations have been published in local legislation and in the international arena. The matters they address and regulate are as important as these regulations.
Turkish Commercial Code No. 6102 (‘TCC’) is the basic law governing companies issuing securities. It regulates the establishment, capital structure, issuance of shares, bonds and other debt instruments of joint stock companies. In this context, the basic provisions regarding the qualifications, transfer and related rights and obligations of share certificates and bonds are also included in the TCC.
Law No. 5549 on Laundering Proceeds of Crime (‘Law No. 5549’) constitutes the main legal basis for the prevention of AML practices in Turkey. Law No. 5549 obliges institutions to identify and report suspicious transactions. At the same time, the communiqués issued by the Financial Crimes Investigation Board (‘MASAK’) detail how to fulfil this obligation. Financial institutions must adopt a risk-based approach methodology. In this process, these institutions are obliged to appoint a compliance officer and the compliance officer is obliged to prepare risk and compliance reports.
Organisations working with foreign investors should sensitively evaluate these communiqués and continue the process accordingly. Before bringing funds originating from abroad into the country, detailed information on their origin should be obtained, counterparty audits should be conducted and special risk audits should be applied for investments coming from high-risk countries.
In this sense, the status of the cash flow in terms of the investor company, the project, exchange rate changes, political differences, interest rate differences, foreign activity accounting legislation, foreign activity tax legislation should be examined in detail and compliance should be ensured.
KYC processes are also one of the important components of risk management. It includes some control stages such as identity information and address verification for real persons, trade registry records and partnership structure examination for legal entities. Institutions operating in Turkey should categorise their customers into risk categories and conduct a separate examination for customers in the high risk category.
It is necessary to ensure that the organisations that are among the obliged parties identify the real beneficiary. In this sense, the ‘Regulation on Measures to Prevent Laundering Proceeds of Crime and Financing of Terrorism’ issued based on the Law No. 5549 constitutes the legal framework of the real beneficiary identification. In the said regulation, the real beneficiary is defined as ‘the real person or persons who ultimately control or have ultimate influence over the real persons who carry out transactions before the obligor, the real person, legal entity or unincorporated entities on whose behalf transactions are carried out’. In legal entities, the obligation to reveal the natural person or persons who ultimately control the legal entity is given in Article 17/A of the same regulation as the obligation to reveal (i) the natural person shareholders holding more than 25% of the shares of the legal entity (ii) the natural person or persons who ultimately control the legal entity, if it is suspected that the natural person shareholder holding more than 25% of the shares of the legal entity is not the real beneficiary or if there is no natural person shareholder holding such shares. The procedures for the notification of the real person beneficiary are specified in the General Communiqué on Tax Procedure Law (Serial No: 529).
In the capital markets, the Capital Markets Law No. 6362 (‘CMB’) and related communiqués regulate the customer identification obligations of brokerage houses, special regulations on suspicious transaction reporting and investor identification and verification processes. The CMB regulates customer identification in electronic environment, taking security measures in remote customer acquisition, and the obligation to notify the Capital Markets Board (‘CMB’) in high-risk transactions.
At the same time, VII-128.1 Communiqué on Shares and VII-128.4 Communiqué on Debt Instruments regulate the issuance and public offering conditions of shares, and VII-128.4 Communiqué on Debt Instruments regulates the issuance of bonds, bills and other debt instruments.
Regarding intermediary activities, III-37.1 Communiqué on Principles Regarding Investment Services and Activities and Ancillary Services regulates the conditions for investment services and activities of intermediary institutions.
Internationally, FATF standards play a critical role in determining risk management practices in Turkey. The FATF’s 40 Recommendations set out the international standards that financial institutions in Turkey must comply with. Issues such as measures to prevent the financing of terrorism, international sanctions and monitoring sanctions lists, and adapting customer acceptance policies to FATF standards are on the agenda of financial institutions in Turkey. It is important to take special measures in relations with high-risk and non-cooperative jurisdictions identified by the FATF, to establish special approval mechanisms for transactions with countries on the grey and black lists, and to conduct periodically updated country risk assessments.
In addition, it would be beneficial to develop special risk management processes for foreign investors. Conducting due diligence on foreign banks, risk assessment in correspondent banking relationships and ensuring maximum transparency in international fund transfers will be beneficial in minimising risks. In addition, special requirements should be provided for identification in foreign investors’ transactions, measures should be taken in proxy transactions, and extra verification steps should be implemented.
The International Organisation of Securities Commissions (‘IOSCO’) was established by bringing together the organisations that regulate securities and futures markets. In this context, basic principles have been declared. It is important to ensure that states comply with these principles.
The European Union’s Market Abuse Regulation (‘MAR’) specifies the obligations and compliance processes of competent authorities and market participants. It is regulated to protect investors and ensure transparency in the capital market.
The framework of the above-mentioned legislation is part of the process of harmonisation with the ATF recommendations. In this sense, harmonisation with ATF recommendations is important internationally.
Financial institutions operating in Turkey and foreign investors trading in these markets should adopt a risk management approach in accordance with international standards. Risk management approach helps to prevent legal sanctions and ensure the safety of the financial system while protecting corporate reputation.
