Financial Crime World

Chile’s Banks Must Comply with Strict Corporate Governance Requirements

Introduction

In order to operate in Chile, all banks must be registered as special corporations (sociedades anónimas especiales) under the General Banking Act. This requires compliance with strict corporate governance requirements, which are outlined in Article 40 et seq of the General Banking Act and regulations issued by the country’s financial regulator, the Comisión para el Mercado Financiero (CMF).

Board of Directors

The main body responsible for directing banks is the board of directors, which is entrusted with the direction of the bank and proper risk management. According to Article 40 of the General Banking Act, the board must have at least five members and a maximum of 11, and must always be composed of an odd number of directors. Directors remain in office for three years and can be re-elected.

Organisational Requirements

The internal organisation of banks is primarily carried out by the board of directors, which must provide necessary governance through senior management, committees, and policies. The board must adopt measures to remain informed of the bank’s management and general situation, and must meet at least once a month.

Key Responsibilities

  • Direction of the bank
  • Risk management
  • Monitoring of the bank’s management and general situation

Shareholder Contributions

Article 49 of the General Banking Act sets rules regarding shareholder contributions, including that they can only consist of cash in Chilean pesos, unless in cases of mergers or acquisitions. The capitalization of shareholders’ loans is also considered as cash.

Key Requirements

  • Cash contributions in Chilean pesos
  • No shares in public entities (treasury, public services, fiscal institutions, semi-fiscal entities, autonomous agencies, state-owned companies)

Public Entities

The treasury, public services, fiscal institutions, semi-fiscal entities, autonomous agencies, state-owned companies, and other public services created by law are prohibited from being shareholders of banks.

Corporate Governance Criteria

The CMF has established corporate governance criteria for evaluating a bank’s management, including the establishment of strategic objectives, corporate values, lines of responsibility, monitoring, and accountability. The regulator also considers it essential to verify the performance of senior management and compliance with policies established by the board of directors, promote sound internal controls and effective audit, and establish proper disclosure mechanisms.

Key Criteria

  • Strategic objectives
  • Corporate values
  • Lines of responsibility
  • Monitoring and accountability
  • Performance evaluation
  • Compliance with policies
  • Internal controls and audit
  • Disclosure mechanisms

Appointment of Auditors

Banks must appoint external auditing firms to review their accounting, inventory, and financial statements, and report on their findings to shareholders and the CMF. External auditors are appointed by the bank’s shareholders at regular shareholders’ meetings held within the first quarter of each year.

Key Requirements

  • Appointment of external auditors
  • Review of accounting, inventory, and financial statements
  • Report to shareholders and the CMF

Supervisory Regime

The supervisory regime for management of banks is governed by Article 49 bis of the General Banking Act, which sets out honourability and solvency requirements that directors must fulfill to be appointed as such. These requirements include not being convicted of serious crimes, not being sanctioned by market regulations, and not having incurred in serious conduct that may risk the bank’s stability or the safety of its depositors.

Key Requirements

  • Honourability
  • Solvency
  • No conviction for serious crimes
  • No sanctions from market regulations
  • No serious conduct that risks bank stability or depositor safety

Supervision Based on Risks (SBR)

The CMF’s Guide to the Banking Supervision Process outlines the main objective of banking supervision as assessing the quality of risk management used by banks. This approach reflects a Supervision Based on Risks (SBR) approach, which is designed to ensure the stability and safety of the banking system.

Key Objectives

  • Assessing the quality of risk management
  • Ensuring stability and safety of the banking system

Conclusion

In conclusion, Chilean banks are subject to strict corporate governance requirements under the General Banking Act and regulations issued by the CMF. Compliance with these requirements is essential for ensuring the stability and safety of the banking system in Chile.