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4. Results: Answers
How are the following key activities in the fintech space regulated and what specific legal issues are associated with each? (a) Crowdfunding, peer-to-peer lending; (b) Online lending and other forms of alternative finance; (c) Payment services (including marketplaces that route payments from customers to suppliers (eg, Uber and AirBnb); (d) Forex; (e) Trading; (f) Investment and asset management; (g) Risk management; (h) Roboadvice; and (i) Insurtech.

Answer ... (a) Crowdfunding, peer-to-peer lending

Crowdfunding and peer-to-peer lending are not expressly regulated in Iraq.

(b) Online lending and other forms of alternative finance

Online lending activities are not specifically regulated in Iraq. Nevertheless, we believe that the Consumer Protection Law (1/2010) and the E-signature and E-transactions Law (78/2012) are applicable to such activities.

Regarding forms of alternative finance, Iraq has an emerging microfinance sector that provides financing for low-income Iraqi entrepreneurs through credit-focused micro-finance institutions operating across Iraq. However, the sector’s overall growth and development have been hindered by the lack of a specific legal and regulatory framework. Micro-finance institutions are usually established as non-governmental organisations, and thus mainly rely on grants and are not authorised to raise equity or accept deposits.

(c) Payment services (including marketplaces that route payments from customers to suppliers (eg, Uber and AirBnb)

Electronic payment services are governed by the Electronic Payment Services System Regulation.

Electronic payment services authorised in Iraq include managing deposits and cash withdrawals through automated teller machines and executing electronic debit and credit payments. Such electronic payments are made through any means of digital communication and information technology, or network operator acting as an intermediary between the user and the supplier of services, or any other recipient, through mobile phone transfers.

These services are subject to the supervision of the CBI. Payment service providers must take all necessary measures and submit all requested documents to ensure the efficiency of such supervision.

(d) Forex

Forex companies are regulated under CBI Regulation 1/2018, as amended by CBI Regulation 30/12/2019, and are generally required to be established as a company limited by shares.

A licence from the CBI must be obtained in order for the forex company to conclude forex operations which include:

  • acting as a broker for the purchase and sale of foreign currencies;
  • purchasing and selling foreign currencies for its own account, with a ceiling not exceeding 75% of its capital in one day;
  • opening bank accounts in local and foreign currencies with a licensed bank in Iraq in the name of the company, provided that all of the company’s funds are deposited in its accounts;
  • initiating and receiving internal transfers (inside Iraq) in local or foreign currencies; and
  • obtaining credit facilities in an amount not exceeding 50% of the company’s capital from licensed banks for the purpose of providing cash liquidity to fulfil the company’s objectives.

In order to ensure compliance with the provisions of the licence granted, a forex company must:

  • provide the CBI with a bank guarantee equivalent to 50% of its capital from a licensed bank in Iraq; or
  • deposit an amount of IQD 100 million in a securities account at a licensed bank in Iraq.

However, certain operations are prohibited, including the following:

  • opening accounts for clients in its own books;
  • acting as broker for the purchase and sale of precious metals;
  • granting any direct or indirect loans, guarantees or facilities;
  • discounting commercial notes;
  • conducting foreign transfers; and
  • accepting deposits of any kind.

Additionally, the company’s records and transactions are subject to audit and inspection by the Forex Supervision Department of the CBI. The forex company is obliged to submit its annual financial statements to the CBI and to establish an electronic information system that includes the following:

  • sales and daily purchases of customers;
  • quarterly and annual accounts; and
  • accounting procedure programmes.

Forex companies are subject to:

  • CBI Decision 14/611 of 2019, which sets out certain criteria for conducting electronic payment services and dealing with cloud computing service providers (see question 3.1(d)); and
  • CBI Decision 5/9/468 of 2017, which sets out certain anti-money laundering for forex companies.

(e) Trading

Trading on the Iraq Stock Exchange is reserved to authorised brokers, as per the Capital Markets Interim Law (74/2004). This law sets out the conditions and requirements that must be satisfied by an Iraqi company for listing on the Iraq Stock Exchange.

Brokers authorised to trade on the capital markets may be local or foreign banks authorised by the CBI or companies specialised in the trading of stocks, asset management or investment consultancy.

Authorised brokers must adhere to the following obligations:

  • Protect confidential information of investors;
  • Act with honesty and integrity, and adhere to market rules and business principles;
  • Work in favour of and for the benefit of investors and preserve their rights; and
  • Refrain from engaging in fictitious transactions and all forms of market manipulation that could mislead and deceive investors or create a false impression of market effectiveness.

(f) Investment and asset management

Investment companies must be licensed by the CBI as per the Financial Investment Companies Regulation (6/2011). The records and financial statements of investment companies are subject to inspection and audit by the CBI.

Investment companies’ activities include:

  • purchase and sale of treasury bills and governmental bonds through banks for their own account or for the account of their clients;
  • purchase and sale of securities, bonds and other permitted financial instruments;
  • investment in other companies;
  • management of investment portfolios for their own account or for the account of their clients;
  • issuance of loan bonds and deposit certificates;
  • investment of part of their funds in fixed deposits with banks; and
  • preparation of economic, technical and financial studies for Iraqi and foreign investors’ projects.

Investment companies may further obtain the approval of the Iraq Stock Exchange to practise brokerage activities for the sale and purchase of securities.

Regulated investment companies are also vested with the right to manage investment portfolios for their own account or for the account of their clients.

Banks are also vested with the power to preserve and manage valuable securities as per the Banking Law (94/2004).

(g) Risk management

Banks, brokerage firms and all licensed electronic payment service providers are required, under CBI Decision 611/14 of 2019, to establish risk management measures including the following:

  • a risk management committee constituted from the institution’s board of directors, vested with the power to develop a risk management strategy and set out risk management roles and responsibilities;
  • a risk management department that takes charge of all risk management activities regarding information and communication technology (ICT);
  • a systematic and coordinated framework for ICT risk management which identifies and evaluates threats, risks and vulnerabilities that may arise and implements international standards (eg, ISO 31000, NIST, COBIT for RISK and ISO/IEC 27005:2018); and
  • an effective internal control practice to achieve data confidentiality and system security, reliability, flexibility and recoverability.

(h) Robo Advice

Robo advice activities are not specifically regulated in Iraq.

(i) Insurtech

There is no specific legislation governing insurtech activities in Iraq. We believe that such activities may be subject to the Insurance Business Regulation Act (10/2005), which regulates traditional insurance activities in Iraq.

The Iraqi Insurance Diwan is a department of the Ministry of Finance that is responsible for licensing and regulation of the insurance sector in Iraq. Insurance activities in Iraq may be conducted only by:

  • Iraqi public companies;
  • Iraqi joint stock companies (private/mixed);
  • branches of foreign insurers registered in Iraq;
  • takaful or retakaful entities; and
  • insurers or reinsurers that have the financial capacity to perform such activities.

Thus, fintechs must fall into one of the above categories in order to provide insurance services, and must comply with the requirements of the Insurance Business Regulation Act, including the condition to obtain a licence from the Iraqi Insurance Diwan, minimum capital requirements and tax obligations.

Fintechs licensed by the Iraqi Insurance Diwan may:

  • use electronic and computer data as evidence of insurance activities, as may be permitted by a court of law at its discretion;
  • substitute original documents, reports and statements with microfilms; and
  • use computers and other modern technology devices to organise their financial operations. The information derived from these operations is of equal value to that in the trade books that are legally required to be held by insurance companies.

For more information about this answer please contact: Lama Abou Ali from Aljad Law