Financial Crime World

Audit Committee and Governance Structure Crucial for Timorese Banks

In a move to strengthen the banking sector in East Timor, the Central Bank of Timor-Leste (BCTL) has established guidelines for the composition and functions of an Audit Committee. This committee plays a crucial role in ensuring compliance with accounting procedures and controls, as well as overseeing internal and external audit functions.

Composition and Functions of the Audit Committee

According to Instruction 4/2000 of the CPO, the Audit Committee shall consist of three members appointed by the bank’s General Meeting of Shareholders for a two-year mandate. The committee is responsible for:

  • Establishing adequate accounting procedures and controls
  • Monitoring compliance with banking rules and legislation
  • Delivering opinions on matters submitted to it

Risk Management Committee

In addition to the Audit Committee, banks are also required to establish a Risk Management Committee, comprising three members of the Governing Board. This committee is responsible for:

  • Establishing and monitoring credit appraisal procedures
  • Asset and liability management
  • Reporting directly to the Governing Board on these matters

Remuneration of the Members of the Governing Board

The remuneration of the members of the Governing Board is freely established by the General Meeting of Shareholders, but must be approved by BCTL for the first three years of operations. The approval process involves a certified copy of the decision of the General Meeting or the Governing Board on the remuneration of the board or senior management.

Internal Control Systems

Banks in East Timor are also required to establish internal control systems, which should include:

  • A “sound internal control process” aimed at preventing losses and maintaining reliable financial reporting
  • An appropriate segregation of duties in operational functions
  • Identification, minimization, and monitoring of potential conflicts of interest

Capital Requirements

The Banking Law sets out the minimum capital requirements for newly licensed banks, which may not be less than the equivalent of US$2 million. The amount of capital allocated to a bank determines the financial activities it will be permitted to engage in.

  • Instruction 2/2000 on Regulatory Capital establishes the concepts of regulatory, tier one and tier two capital, as well as their form of calculation.
  • Banks are required to maintain a minimum capital adequacy ratio of at least 12%, based on a comparison of their regulatory capital and assets and off-balance sheet exposures.
  • The distribution of dividends by banks is subject to limitations, aimed at ensuring that the bank maintains the minimum required amount of regulatory capital or the minimum capital adequacy ratio.

Liquidity Requirements

Instruction 3/2000 establishes liquidity requirements for banks licensed in East Timor, aiming to provide an adequate balance between a bank’s assets and liabilities. The Instruction also incorporates principles contained in Publication no. 69 of the Bank for International Settlements, which include:

  • Developing a structure for liquidity management
  • Measuring and monitoring net funding requirements
  • Managing market access

Conclusion

The implementation of these guidelines is expected to enhance the stability and competitiveness of the banking sector in East Timor, while ensuring the protection of depositors’ interests.