LAW OF MONGOLIA

February 10, 2017                            Ulaanbaatar city

(2022.09.23-ны өдрийн орчуулга)     Unofficial translation

ON THE DEVELOPMENT BANK OF MONGOLIA

/Revised edition/

CHAPTER ONE

GENERAL PROVISIONS

Article 1. Purpose of the Law

1.1. The purpose of this Law is to define and regulate the operating principles of, and the legal basis for, the management and organization of the Development Bank of Mongolia (hereinafter referred to as 'the Development Bank') as well as the areas of its banking activity.

Article 2. Legislation on the Development Bank

2.1. The legislation on the Development Bank comprises of the Constitution of Mongolia, this Law and other legislative acts enacted in conformity with them.

2.2. If an international treaty to which Mongolia is a party stipulates otherwise than this Law, the provisions of such treaty shall prevail.

Article 3. Scope of applicability of the Law

3.1. Issues associated with the activity of the Development Bank shall be regulated by this Law. Other matters shall be subject to the relevant laws unless otherwise provided for herein.

Article 4. Definitions of terms used in this Law

/This Article was annulled by the law as of December 17, 2021/

4.1. The following terms used in this Law have the meaning defined below:

4.1.1. "The Concept of Sustainable Development of Mongolia" is as defined in Article 4.1.7 of the Development Policy and Planning Law;

4.1.2. "The Medium-term Development Policy" refers to the document specified in Articles 6.3 and 6.4 of the Development Policy and Planning Law.

Article 5. Legal status of the Development Bank

5.1. The Development Bank is a for-profit commercial legal entity whose objectives are to source the funds required for financing projects and program to be implemented in the important sectors that grow and sustain the national economy, and developing the production and services that are alternatives to imports or that increase export revenues, and whose functions are to engage in the activities stipulated in Article 8.1 of this Law.

5.2. The Government of Mongolia shall make decisions with regard to the incorporation or restructuring of the Development Bank, or putting it into liquidation.

Article 6. Equity of the Development Bank

6.1. The share capital of the Development Bank shall comprise of funds invested by the shareholder(s). The shareholder(s) shall set the level of equity.

6.2. The Development Bank shall establish a reserve fund with the aim of increasing the share capital from the net profit earned in a given year and cover losses using the balance thereof.

6.3. The shareholder(s) shall decide whether to approve additional funds where the reserve fund is not sufficient to cover the losses incurred by the Development Bank.

6.4. The Board of Directors shall approve the regulations for compiling the fund as stipulated in Article 6.2 of this Law and the management thereof.

Article 7. Principles applied by the Development Bank

7.1. The Development Bank shall apply the following principles of good corporate governance to its activities:

7.1.1. Profitability;

7.1.2 . Sustainability of operations;

7.1.3. Independence;

7.1.4. Transparency;

7.1.5. Responsibility;

7.1.6. Decision making in relation to the Development Bank's activities shall be based on collective management;

7.1.7 Independent supervision.

7.2. The principles set out in Article 7.1 above shall be adhered to upon inclusion within this Law and the rules and approved in conformity herewith.

CHAPTER TWO

ACTIVITIES OF THE DEVELOPMENT BANK

Article 8. Areas of activity undertaken by the Development Bank

8.1. The Development Bank engages in activities in the following areas:

8.1.1. Financing project and programs;

8.1.2. Effecting payments;

8.1.3. Issuing guarantees and guaranties;

8.1.4. Issuing securities, and selling, buying or depositing financial instruments;

8.1.5. Taking out loans;

8.1.6. Selling, buying or depositing foreign currencies;

8.1.7. Holding shares in companies, and investing in investment funds;

8.1.8. Providing consultancy services for the purpose of supporting the implementation of projects and programs;

8.1.9. Export and import financing;

8.1.10. Sourcing short-term or medium-term funds for enhanced solvency and increasing profitability purposes.

8.2. At least sixty per cent (60%) of total funds to be financed or guaranteed by the Development Bank shall be used for the implementation of projects and programs that support exports.

8.3. The Development Bank is prohibited from undertaking any activity that involves taking deposits and/or saving from private individuals.

Article 9. Taking out loans

9.1. The Development Bank may take out loans in conformity with the indicators and regulations stipulated in Article 25.1 of this law and restrictions in Article 28 hereof, and upon the Board of Director's decision.

Article 10. Financing projects and programs

10.1 The Development Bank finances projects and programs that meet the following requirements:

10.1.1. that conform with the Long-Term and the Medium-term Development Policy of Mongolia;

/This sub-paragraph was amended by the law as of December 17, 2021/

10.1.2. are viable economically and financially, and that shall be able to repay the loan;

10.1.3. that have had a technical-economic feasibility study carried out and have a design ready and a budget prepared;

10.1.4. that aim to support economic growth and exports, that are alternatives to imports and/or manufacture value-added products;

10.1.5. after having calculated a project's risk assessment, feasibility in obtaining finance, and the economic, environmental and social impact reviews in accordance with professional analysis and evaluation methodology and criteria; and

10.1.6. financing, except that specified in Article 8.1.7 of this Law is to be underpinned with satisfactory means of meeting obligations.

10.2. The Development Bank may finance projects and programs that meet the requirements set out in Article 10.1 of this Law, jointly with foreign or domestic banks, financial institutions and/or investors.

10.3. The Board of Directors of the Development Bank shall be responsible for setting the terms and requirements other than those stipulated in Article 10.1 of this Law.

10.4. The Development Bank shall make decisions with regard to the financing of projects and programs. The Board of Directors shall set out the regulations that are applicable in such decision-making processes.

Article 11. Effecting payments

11.1. The payment, clearing and settlement activities undertaken by the Development Bank shall be regulated in accordance with the Law on Savings, Payment Services and Lending activities of Banks and Licensed Legal Entities.

11.2. The Development Bank shall set their fees for payment, clearing and settlement services.

Article 12. Issuing guarantees and guaranties

12.1. The Development Bank may issue a guarantee or guaranty for a third party individually or jointly with other parties in conformity with the indicators and regulations stipulated in Article 25.1 of this Law and the restrictions in Article 28 of this Law.

12.2. A guarantee or guaranty can only be issued for a project or program that meets the requirements set out in Articles 10.1.2 to 10.1.5 of this Law.

Article 13. Issuing securities, and selling, buying or depositing financial instruments

13.1. The Development Bank may issue securities in conformity with the indicators and regulations stipulated in Article 25.1 of this Law and the restrictions in Article 28 of this Law, and upon the Board of Directors' decision.

13.2. Matters relating to the Development Bank's selling, buying or depositing of financial instruments shall be regulated under the applicable legislation.

Article 14. Selling, buying, and depositing foreign currencies

14.1. Matters relating to the Development Bank's selling, buying or depositing of foreign currencies shall be regulated under the applicable legislation.

Article 15. Holding shares in companies, and investing in investment funds

15.1. The Government shall make decisions with regard to authority to hold shares in companies and/or placement of funds in investment funds, in conformity with the relevant legislation.

Article 16. Providing consultancy services

16.1 The development Bank may provide consultancy services for the implementation of projects and programs, and to support preparatory work thereof.

Article 17. Export and import financing

17.1. Projects and programs eligible for export and import financing must meet the requirements set out in Article 10.1 of this Law.

CHAPTER THREE

THE MANAGEMENT OF THE DEVELOPMENT BANK

Article 18. The management of the Development Bank

18.1. The highest governing authority of the Development Bank is the shareholders' meeting. Between such meetings, it shall be the Board of Directors.

18.2. The shareholder(s) of the Development Bank is the Government of Mongolia and/or any other entity that has invested in the share capital of the Development Bank.

Article 19. The Board of Directors

19.1. The Board of Directors of the Development Bank shall comprise of nine (9) members, four (4) of which shall be independent members.

19.2. Members of the Board of Directors shall be elected by shareholders via open competitive selection and shall be appointed for a period of three (3) years, and they may be removed from office on the grounds stipulated in the Law on Company. Members of the Board of Directors may only be reappointed for one further term.

19.3. The chairman of the Board of Directors shall be appointed upon receiving an overwhelming majority vote of the Board of Directors' members.

19.4. It is prohibited for more than fifty percent (50%) of the board members to be replaced within a given budget year.

19.5. The chairman and members of the Board of Directors must meet the following criteria:

19.5.1. They must not have any overdue debt under a loan, guaranty or guarantee agreement;

19.5.2. They must have higher education qualifications, specialization and at least five (5) years' management experience of working in the banking, finance, legal, engineering and/or economics professions;

19.5.3. They must not have been convicted of any crime;

19.5.4. They must not be serving in a political position at a regulatory body;

19.5.5. They must be able to prove that any bankruptcy or insolvency of a legal entity where they previously worked as a governing person was not in any way due to their conduct;

19.5.6. They must not be a competent official at any other entity engaged in specialist activities in the banking sector;

19.5.7. If they were working as a governing person at a bank or non-bank financial institution when its license was invalidated due to a violation, then three (3) years must have elapsed since the invalidation; and

19.5.8. If they have had an administrative sanction imposed on them whilst working as a governing person at an entity engaged in specialist activities in the financial market, then three (3) years must have elapsed since then.

19.6. Independent members of the Board of Directors must meet the following criteria in addition to those set out in Article 19.5 of this Law and Article 79.1 of the Law on Company.

19.6.1.  They must not be serving in an administrative or special position at a regulatory body, and or have served in political office within the last five (5) years;

19.6.2. They must not be the Bank's governing person, or a person connected thereto; and

19.6.3. They must not own five (5) percent or more of the shares in the Bank, individually or jointly with their connected persons.

Article 20. Powers of the Board of Directors

20.1. The Board of Directors shall have the following rights and obligations in addition to those stipulated in the Law on Company:

20.1.1. to approve the Development Bank's medium-term and long-term strategic plans taking into consideration any suggestion from the central state administrative body in charge finance and budget matters;

20.1.2. to approve the Development Bank's business plan for a given year;

20.1.3.to approve indicators of the operating outcome;

20.1.4.to approve procedures for competitive selection of the Developments Bank's executive director, enter into a contract with him or her, and issue an evaluating conclusion regarding the fulfillment and performance of the contract;

20.1.5.to approve the Development Bank's organizational structure, annual budget and upper limit for staffing levels;

20.1.6.to approve the Development Bank's loan, investment, risk management, and asset and liability management policies;

20.1.7.to make suggestions or comments about draft indicators and regulations specified in Article 25.1 of this Law;

20.1.8. to make suggestions for items to be included on the agenda for the shareholders meeting;

20.1.9.to adhere to the regulations stipulated in Article 25.1 of this Law and the restrictions in Article 28.1 of this Law;

20.1.10.to report on its work to the shareholder on an annual basis;

20.1.11.to present the Development Bank's annual operations report and financial statements and audit opinions thereon, for discussion at the shareholders meeting;

20.1.12.to set up the Bank's internal audit to operate independently from the executive management, to approve its budget and staffing levels, appoint its employees, and set the level of their salaries and incentives; and

20.1.13.to select an audit firm.

20.2.The rights and obligations set out in Articles 76.1.2 and 76.1.3 of the Law on the Company shall not apply to the rights and obligations of the Board of Directors.

20.3.The Development Bank's Board of Directors shall convene a meeting at least once a month.

20.4.Meeting shall go ahead if there is a quorum consisting at least two thirds of the board members, and matters shall be resolved by votes an overwhelming majority of the members attending the meeting.

20.5.Members of the Board of Directors shall bear liabilities as stipulated in Articles 84.8 and 84.9, and 85 of the Law on Company for votes they cast at the board meeting.

20.6.The Board of Directors shall set its operating procedures.

Article.21.Executive management and its powers

21.1.The executive management shall manage the Development Bank's day-to-day activities.

21.2.The executive director shall exercise the executive management.

21.3.The executive director, senior vice-director and directors of the offices shall be elected via open international competitive selection under the procedures set out in Article 20.1.4 of this Law, and appointed or removed from office by the Board of Directors.

21.4.The executive director must meet the following requirements:

21.4.1.They must have higher education qualifications, specialization and at least five (5) years' financial sector management experience of working in the banking, finance and/or economics professions;

21.4.2.They must not have been convicted of any crime, and have an ethics and business reputation that shall not clash with proper management of the Bank; and

21.4.3.Other requirements set out by the Board of Directors.

21.5.The executive management shall exercise the following rights in addition to those stipulated in the Law on Company:

21.5.1.to approve the Development Bank's internal rules, procedures, instructions, guidance, and general terms on interest and charges which are not specified in law to be agreed by the Board of Directors;

21.5.2.to make decisions about bookkeeping, information, management and organizational matters associated with engaging in financial market activities and effecting payment, clearing settlement;

21.5.3.to prepare the Development Bank's annual budget and obtain approval for it, and organize its activities within the approved budget, and report on its performance;

21.5.4.to introduce new products and services;

21.5.5.to represent the Development Bank and enter into agreements and contracts on its behalf within the scope of the rights vested in it by Board of Directors;

21.5.6.to approve the human resources policy and pay scale, enter into or terminate employment contracts with employees, set the level of incentives, allowance, aid and/or benefit, and impose disciplinary sanctions; and

21.5.7.to demand and obtain relevant data, information and reports from customers on behalf of the Development Bank, view and check their financial statements and balance sheets, secure their assets as pledges in accordance with the legislation, and suspend financing on a temporary basis.

21.6.The executive management shall have the following obligations:

21.6.1.to carry out the medium-term and long-term strategic plans as well as business plans of the Development Bank's activities;

21.6.2.to adhere to the regulations stipulated in Article 25.1 of this Law and the restrictions in Article 28.1 of this Law;

21.6.3.to implement measures that ensure adherence to proper financial discipline and the continuation of the Development Bank's normal operations;

21.6.4.to ensure cohesion in activities of the Bank's internal units and divisions and the companies in which the Bank has a shareholding;

21.6.5.to create database and information management system for the analysis and assessment of the investment projects and programs and loans;

21.6.6. to create a system for recording loans and the internal monitoring and inspection of these;

21.6.7.to take measures to ensure fulfilment of the obligations of other persons to the Development bank;

21.6.8.to ensure compliance with the rules, regulations, and instructions relating to its activities and operations;

21.6.9.to implement as sound asset management system, which invests the available balance of resources in liquid financial instruments in order to obtain a good return, and to reduce operational risk;

21.6.10.to issue information regarding projects, programs and loans financed by the Development Bank in timely manner, and to bear responsibility for the accuracy thereof;

21.6.11.to prepare comments about the projects and programs financed, the amount of loans granted and the securities issued by the Development Bank, the sales figures of such securities, the sourcing of funds, the status of earnings and the prospects, and present these to the Board of Directors and the shareholders' meeting;

21.6.12.to take measures to implement policies intended to improve the Development Bank's finances, solvency and reputation;

21.6.13.not to take part in any discussion of, and/or, decision on matters where there is a potential conflict with their personal interests;

21.6.14.to report on its work to the Board of Directors each quarter;

21.6.15. not to concurrently hold a job or position at any entity except being appointed as a governing person of an entity specified in Article 8.1.7 of this Law or an entity that implements a project or program financed by the Development Bank; and

21.6.16.to oversee the process when information concerning the Development Bank prescribed in Article 30 of this Law made available to the public.

CHAPTER FOUR

POWERS AND COOPERATION OF THE REGULATORY BODIES IN RELATION TO THE DEVELOPMENT BANK

Article 22.Powers of the State Great Khural/Parliament of Mongolia

22.1. The State Great Khural of Mongolia shall exercise the following powers in relation to the Development Bank;

22.1.1.to review any decision to restructure the Development Bank or put it into liquidation; and

22.1.2.to review audit reports, opinions and recommendations on the Development Bank's financial statements and operations report.

22.2. The State Great Khural shall not be involved with the approval of projects to be financed with the funds sourced from the Development Bank.

Article 23.Powers of the Government

23.1.The Government shall exercise the following powers in relation to the Development Bank in addition to the powers as a shareholder as provided for in Article 62.1 of the Law on Company:

23.1.1.to buy long-term securities issued by the Development Bank on redemption terms, and make investments;

23.1.2.to approve audit opinions issued in regard to the Development Bank's financial statements, and deliver them to the State Great Khural of Mongolia, along with a conclusion on its activities;

23.1.3.to take comprehensive measures for ensuring normal and sustainable status of the Development Bank's finances and solvency;

23.1.4.to approve the Development Bank's corporate charter;

23.1.5.to change the structure and amount of the share capital of the Development Bank;

23.1.6.to conduct scheduled biennial examinations of whether the Development Bank's activities comply with the applicable legislation, and conduct random examinations when deemed necessary;

23.1.7.to approve procedures for competitive selection of members of the board of the Directors of the Development Bank; and

23.1.8.The government may issue a guarantee for the Development bank; such matters shall be regulated in accordance with the Debt Management Law.

23.2.The Government shall not be involved with the approval of projects and programs to be financed with funds sourced from the Development Bank.

Article  24.Powers of the central state administrative body in charge of finance and budget matters

24.1.The central state administrative body in charge of finance and budget matters shall exercise the following powers in relation to the Development Bank;

24.1.1.to prepare a proposal regarding the restructuring of the Development Bank or putting it into liquidation, and deliver it to the Government;

24.1.2.to obtain necessary information from the Development Bank within the scope of implementation of the stipulated in Article 5.1 of this Law; and

24.1.3.to raise issues associated with the Development Bank's financial activities to the Government through the Government member in charge of finance and budget matters.

CHAPTER FIVE

THE DEVELOPMENT BANK'S SUPERVISORY SYSTEM AND OPERATIONAL RESTRICTIONS

Article 25.Supervision of the Development Bank

25.1.Mongol Bank shall approve regulations for setting the Development Bank's required ratio criteria and monitoring thereof, and regulations for classifying assets and setting up an asset risk fund and expenditure thereof, taking into consideration any suggestions from the Government member in charge of finance and budget matters.

25.2.Mongol bank shall monitor and check the Development Bank's compliance with the regulations stipulated in Article 25.1 of this Law and the restrictions in Article 28.1 of this Law.

25.3.The Government shall monitor and check as provided for in Article 23.1.6 of this Law.

25.4.The Government shall approve regulations for conducting monitoring and examination specified in Article 25.3 of this Law.

Article 26. Internal audit of the Development Bank

26.1.The Development Bank shall have an internal audit unit operating under the direct management of the Board of the Directors.

26.2.The Development Bank's internal audit unit shall carry out the functions to audit compliance with the Bank's policy, plans, budget and other decisions approved by the Board of Directors as well as its internal monitoring activities, and to provide recommendations.

26.3.The Board of Directors shall approve operating procedures of the internal audit unit.

Article 27. Overseeing the implementation of projects and programs financed by the Development Bank

27.1.The Development Bank shall appoint an assessor who shall monitor and examine activities of implementers of projects and programs that use the Bank's funding sources, in accordance with this Law and under a contract.

27.2.The assessor shall have the following rights:

27.2.1.to check a project or program implementer's accounting records, financial statements, balance sheets, financial documents and receipts, and obtain explanation, reference, clarification and other necessary materials and documents;

27.2.2.to look at the implementation of project and program and present progress reports and associated suggestions to the Developments Bank's management; and

27.2.3.to disclose breaches discovered during examination to the relevant authorized state inspector and obtain decision.

27.3.The tenure of the assessor and the rights and obligations thereof shall be determined by the Development Bank's corporate charter in conformity with this Law.

Article 28. Restrictions on the Development Bank's activities

28.1.The Development Bank's activities shall be subject to the following restrictions:

28.1.1.The aggregate of loans, guarantees and assets similar to loans must not exceed thirty (30) times the Bank's equity. Mongol bank shall set the minimum level of equity.

28.1.2.Mongol bank shall approve regulations for defining large borrowers, setting the ceiling as well as the total sum of loans to be granted thereto, and reporting procedures. The total amount of loans to be granted to a single borrower and persons connected thereto must not exceed eight (8) times the Development Bank's equity.

CHAPTER SIX

FINANCIAL REPORTING AND TRANSPARENCY

Article 29. Financial reporting

29.1.The Development Bank's financial statements must be verified each year, by an audit firm or international repute, chosen upon the board's decision, and the Board of Directors shall deliver the resultant opinion to Mongol bank and the Government, along with the year-end financial statements.

29.2.The Development Bank's executive management is responsible for the accuracy of financial statements.

29.3.The Development Bank shall deliver the relevant statements, reports and information to Mongol bank and the state central administrative body in charge finance and budget matters.

29.4.Mongol bank and the Government member in charge finance and budget matters shall jointly approve procedures for the production of the statements, reports and information specified in Article 29.3 of this Law, and relevant samples and forms.

Article 30. Transparency

30.1.The Development Bank's audited year-end financial statements shall be released to the public via media.

30.2.The Development Bank shall provide all the required information as stipulated in law.

30.3. The Development Bank shall provide to the Tax authority the required information in connection with the implementation of its functions stipulated by the law.

/This paragraph was added by the law as of March 22, 2019/

CHAPTER SEVEN

MISCELLANEOUS PROVISIONS

Article 31. Sanctions to be imposed on violators of the legislation

31.1. Where a violation of the legislation on Development Bank of Mongolia is not subject to criminal liability, a judge or a relevant state inspector shall impose on the person at fault any of the following administrative sanctions:

31.1.1.an official violating Article 10.1 of this Law shall be fined a togrog amount equal to 75-150 times the minimum wage;

31.1.2.an individual interfering with monitoring and examination stipulated in Article 27 of this Law shall be fined a togrog amount equal to 15-40 times the minimum wage, whereas a business entity or organization shall be fined a togrog amount equal to 75-150 times the minimum wage;

31.1.3.an employee or official concealing a payment receipt or delaying transaction shall be fined a togrog amount equal to 10-40 times the minimum wage;

31.1.4.an official failing to produce financial statements, balance sheets, information documents and receipts in accordance with the applicable laws and regulations, i.e., failing to deliver such to the relevant bodies as stipulated in Article 30 of this Law, or failing, without good reason, to publish financial statements as required, shall be fined a togrog amount equal to 10-75 times the minimum wage;

31.1.5.if the published financial statements and information contain false, incorrect or inaccurate information, the executive director and other authorized officials who confirmed such shall each be fined a togrog amount equal to 75-225 times the minimum wage;

31.1.6.an official violating Article 8.2 of this Law shall be fined a togrog amount equal to 75-150 times.

Article 32. Commencement of the Law

32.1. This Law shall come into force on April 1, 2017.

THE CHAIRMAN OF THE STATE GREAT KHURAL OF MONGOLIA ENKHBOLD.M