## Introduction — IMF Module 2 Assessment of Gibraltar (May 2001) ## Source details **Canonical URL:** [Introduction — IMF Module 2 Assessment of Gibraltar (May 2001)](https://www.imf.org/-/media/files/publications/ofca/english/103101.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/103101.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/103101.pdf.json) --- ### Preface - The IMF Executive Board approved a program of assessments on July 26, 2000, under the paper “Offshore Financial Centers—The Role of the IMF”. - The Government of Gibraltar invited the IMF to carry out an assessment in May 2001 of supervisory arrangements for the offshore financial sector; Gibraltar indicated no distinction between regulation and supervision of onshore and offshore activities, so the assessment covers both sectors. - The assessment followed the “Module 2” approach and was carried out by a team led by Mr. Neville Grant with specialists from the IMF’s Monetary and Exchange Affairs Department, Legal Department consultants, and external experts; the team received cooperation from the Financial Services Commission and other authorities. ### Executive summary — Key findings - Structural and economic enablers: - Development facilitated by location, a favorable tax regime, a stable government, EU status, no exchange controls, a legal framework based on the British system, and a well-qualified labor force with accounting and legal skills. - Scope of assessment: - Covers both offshore and onshore activities because Gibraltar makes no regulatory distinction between them; regulation and supervision are based on relevant EU legislation and reflect U.K. practices. - Financial sector scale and composition: - Assets of banks conducting only offshore business: £1.9 billion. - Comparison references: Cyprus’ £12 billion; Cayman’s more than £450 billion. - Financial sector (onshore and offshore) accounts for roughly 30 percent of GDP — about the same as tourism. - Banking assets of US$5 billion (noted as small relative to some jurisdictions and not creating significant risk for the international financial system). - Insurance total assets: about US$325 million. - Approximately 28,500 active companies registered, of which 8,800 are exempt companies. - 83 groups licensed to conduct professional trusteeship and company management services; 47 licensed to act as professional trustees. - Assessment methodology (Module 2): - Basel Core Principles assessment for banking supervision. - IAIS principles for insurance supervision. - IOSCO principles for investment and securities business. - Assessment of company and trust services provision based on developing “good practices” (Edwards Report; KPMG Review). - Assessment results (summary): - Supervision generally effective and thorough; Gibraltar ranks as a well-developed supervisor and meets most international standards or good practices, making progress on others. - Basel Core Principles: compliant with 18 principles and largely compliant with 7 principles. - IAIS insurance principles: observant of 13 Core Principles, largely observant of 3, materially non-observant of 1 (related to onsite visits). - IOSCO principles: fully compliant with 19, largely compliant with 3, and 8 not applicable. - Company and trust regulation: Gibraltar is at the forefront of developing good practices and was among the first jurisdictions to introduce regulation and supervision of company and trust services. ### Macroeconomic background and public finance - Constitutional and demographic facts: - Gibraltar is an overseas territory of the United Kingdom, self-governing except for police, defense, and foreign affairs. - Size: 6.5 square kilometers. - Population: 30,000. - Economic structure and shares: - Former heavy dependence on Ministry of Defense reduced markedly over 16 years. - Main pillars: tourism, shipping, and finance, each accounting for roughly 25–30 percent of GDP. - Telecommunications constitutes about 10 percent of GDP. - Military base dependence reduced to less than 10 percent. - Low unemployment and inflation, both hovering at around 2 percent in recent years. - EU status: - Gibraltar part of the European Union since 1973 under the U.K. Treaty of Accession; Article 28 provided exemptions (common customs tariff, common agricultural policy, harmonization of turnover taxes). - Fiscal position and taxation (FY2000 = July–June): - Overall fiscal balance projected at £16 million. - Public debt: £71 million as of March 2000. - No capital gains tax, wealth tax, inheritance tax, estate duty or VAT, and no exchange control restrictions. - Corporate tax rate set at 35 percent; tax exempt companies pay no tax other than a flat rate of £200-300 a year; qualifying companies are subject to a prescribed tax rate usually set at 5-10 percent. - Tax exempt or qualifying companies cannot have Gibraltarians or residents as beneficial owners and cannot conduct business with residents. - Among 28,500 active companies: 8,800 have tax exempt status and do not have a physical presence in Gibraltar; 146 qualifying companies, all of which have a physical presence in Gibraltar. - Income tax: rate noted at 50 percent of taxable income exceeding £19,500; three quarters of tax revenue generated by income tax; corporate tax constitutes about 18 percent of tax revenue. - External sector: - Trade deficit in 2000 widened to £241 million from £167 million in 1997 due to rising imports. ### Financial sector — Banking and insurance (selected statistics and supervisory observations) - Banking sector (as of May 2001): - Licensed or authorized banks: 19 (down from 28 in 1998). - Ten banks incorporated in Gibraltar — licensed and subject to comprehensive FSC supervision. - Seven banks are branches of EU home country banks operating under home authorizations — not licensed by the FSC but subject to supervision limited to liquidity. - Two banks are branches of non-EEA banks (one from Jersey, one from the Isle of Man) — licensed and subject to comprehensive FSC supervision except for capital and large exposures calculation. - Total assets of the 19 banks: £5.2 billion as of April 2001. - Eleven offshore-only banks serving only nonresidents — total assets £1.9 billion. - Other eight banks doing a mixture of local retail and offshore business — total assets £3.3 billion. - Off-balance sheet items for all banks: £49.2 million. - Total assets under management by all banks: £5.9 billion. - Deposits: 2.5 (In billions of pounds). - Balances with banks: 3.9; Balances from banks: 1.7; Loans advances: 1.2; Capital: 0.9; Investments: 0.0; Other liabilities: 0.1; Other assets: 0.1; Total assets: 5.2; Total liabilities: 5.2. - Approximately 75 percent of total banking business originates offshore. - Total loans and advances amount to £1.2 billion with approximately 63 percent in the form of back-to-back loans. - Total non-bank deposits amount to £2.5 billion and total bank deposits to £1.7 billion. - Thirteen banks maintain assets under management amounting to £5.9 billion (of that £5.9 billion: £4 billion non-discretionary; £1.9 billion discretionary). - Insurance sector (as of May 2001): - Insurance companies licensed and supervised by the FSC: 18. - Two active in the local market; sixteen mainly conducting offshore business in captives and reinsurance. - Licensed insurance managers: 7. - Gross premium income written by all Gibraltar insurers: some £70 million. - Captive insurers primarily cover risks of parent or affiliated companies. - Investment services sector (as of March 2001): - Insurance intermediaries: 27. - Investment firms: 28. - Total assets under management at year-end 2000 were about £6.9 billion. ### Regulatory and supervisory framework (FSC remit, independence, resources, and cooperation) - Institutional framework: - Financial Services Commission (FSC) established by the Financial Services Commission Ordinance in 1989; FSC independent of the Government of Gibraltar in regulatory and supervisory matters. - Appointments under the Ordinance are made by the Governor (acting with the agreement of the U.K. Foreign Secretary). - FSC statutorily obliged to match U.K. supervisory standards where EU law applies; Gibraltar has implemented relevant EU directives. - FSC is the sole regulatory and supervisory authority for financial services providers operating in or from within Gibraltar. - Promotion of Gibraltar as a financial center is the responsibility of the Gibraltar Finance Center Division within the Ministry of Trade, Industry and Telecommunications. - Resources and staffing: - FSC current staffing: 15 people, eight professional staff. - Allocation: one or two each dedicated to banking supervision, insurance supervision, investment services supervision, controlled activities supervision, and internal financial accounting. - Professional qualifications: two qualified accountants; four staff hold university degrees. - Identified need: additional capacity for analytical and enforcement staff; recruitment under consideration. - Funding: mainly through licensee fees; shortfalls met by Government of Gibraltar financial assistance since FY1997 (April–March), accounting for 15–20 percent of the FSC budget. - FSC has proposed changes in fee regulation; fee regulation unchanged for a decade. - Cross-border cooperation: - Legal basis for information exchange provided under Section 22 of the Financial Services Commission Ordinance and various provisions of the Banking Ordinance and Insurance Ordinance. - No exclusion in the scope of information that can be exchanged. - Exchange with EEA supervisors governed by transposed EU directives; confidential information on banks can only be disclosed to foreign supervisors meeting EEA standards; FSC is satisfied that the United States, Switzerland, Jersey, Guernsey, and the Isle of Man meet these standards. - FSC allows foreign home supervisors to conduct onsite reviews; such reviews were conducted by banking supervisors from Denmark and the United States. - MOUs and agreements in place with the London Stock Exchange (June 1996), Jersey FSC (October 1998), LIFFE (August 1998), and an MOU with the Bank of England signed in 1995; negotiations with the FSA pending. - International membership: IAIS, OGIS, OGBS; FSC hosts OGIS Internet site and hosted a joint OGIS–OGBS meeting in June 2001. - Gibraltar Financial Intelligence Unit (GFIU) has sought membership in the Egmont Group since 1997; membership blocked due to political objections from Spain. - Prior external assessments: - U.K. reviews (April 1997 and spring 1998) examined the FSC; first found insurance supervision “up and running and matching U.K. standards,” bank supervision needed further work; second concluded recommendations had been addressed. - Financial Stability Forum (FSF) May 26, 2000 placed Gibraltar in Group II. - FATF June 22, 2000 report: Gibraltar not classified as uncooperative; FATF found Gibraltar had a comprehensive anti-money laundering system. - OECD List of Tax Havens (June 26, 2000) included Gibraltar; Gibraltar is considering making a commitment to the OECD by the deadline. ### Anti-money laundering (AML), Know-Your-Customer (KYC), and the Financial Intelligence Unit (GFIU) - AML framework and guidance: - Gibraltar’s anti-money laundering legislation modeled on United Kingdom law: Drug Trafficking Offences Ordinance 1995 (DTO) and Criminal Justice Ordinance 1995 (CJO). - Anti-Money Laundering Guidance Notes (AMLGN) issued March 2000, amended June 2000 by the FSC pursuant to the CJO. - CJO intends to transpose Council Directive 91/308/EEC into Gibraltar law. - AMLGN adopted by trade and representative organizations covering all activities regulated by the FSC; under the CJO AMLGN may be taken into account by a court. - FSC issued a Best Market Practice Newsletter stating compliance with AMLGN is a “continuous condition for a license” to institutions licensed under the Financial Services Ordinance not covered by the CJO. - KYC weaknesses and recommendations: - Identified weaknesses in provisions dealing with postal, coupon, telephone and internet business and Client Accounts Opened by Intermediaries; reliance on introducers may increase money laundering risks. - Recommendations to change AMLGN language that implies non-mandatory action (e.g., "recommended", "strongly recommended", "should", "would", "ideally", "may wish") to mandatory terms like "shall". - FSC should publish AMLGN on its web site along with amendments and the consultation paper. - Consultation Paper (March 1, 2001) concerns: - Contains four recommendations primarily updating KYC requirements. - Endorses practices permitting reliance on introducers to provide due diligence documentation; Recommendation No.1 would permit reliance upon copies of due diligence documentation provided by an introducer. - Such approaches may increase money laundering risks. - Specific suggestions to tighten Recommendation No.4: include reference to Sec. 10(1) of the CJO, characterize management sign-off as consent under Sec. 10(1), and add conditions to management sign-off. - Gibraltar Financial Intelligence Unit (GFIU) — structure and activity: - GFIU is a two-person unit within the Gibraltar Co-ordinating Center for Criminal Intelligence & Drugs (GCID), which has an additional five individuals (seven total), all seconded from RGP or Gibraltar Customs. - Staffing experience: one GFIU staffer with three months experience, the other three years; Head of GCID has six months experience. - The GCID Head reports to both the Chief Minister and the Governor. - Activity statistics for 2000: GFIU received 216 suspicious transaction reports. - Sources: about 70 percent from banks, 9 percent from telecommunications, 6 percent from money transmission services, 5 percent from company management and 4 percent from bureaux de change. - Outcomes: in about 98 percent of the reports, no criminal offense was determined; only 1 percent of the reports directly lead to an arrest or conviction on money laundering or other offenses. - Capacity recommendation: authorities should consider providing more staff to the FIU and retaining a cadre of career employees given needs for computer and financial analysis and investigative skills. ### Enforcement powers and recommendations - Current enforcement tools: - Civil money penalties authorized by regulation for violations of FSO 89; Penalty Fees Regulation schedule suggests application principally to relatively minor infractions though some more serious offenses are listed. - Penalties appear low and are stated as flat amounts. - Suspension/removal remedies sometimes indirect (e.g., suspension/removal of executive officers, removal of external auditors, appointment of temporary administrators for troubled insurers). - Recommendations: - Consider a regime of penalty fees for all sectors providing more flexibility to impose penalties at its discretion and in amounts high enough to deter serious violations, without prejudice to other sanctions; licensees retain recourse to the courts. - Seek explicit legal power, exercisable in appropriate circumstances, to: - Suspend on a temporary basis any officer or director of a regulated entity; - Permanently remove such an individual; and - In appropriate cases, bar an individual from working in the financial services industry for a period of time. - Clarify and, where necessary, codify powers to suspend/remove officers and to appoint temporary administrators to prevent asset dissipation and withstand legal challenge. ### Banking supervision — detailed findings and targeted recommendations (Basel Core Principles highlights) - Staffing and supervisory resources: - Banking Supervision Section comprises the Commissioner and two staff members (Banking Supervisor and a Banking Analyst) with access to an IT expert and six general office support staff as needed. - FSC statutorily obliged to match U.K. supervisory standards and has transposed relevant EU supervisory legislation. - FSC moving to a risk-based approach that will involve onsite inspections; currently does not carry out onsite inspections. - Reporting and oversight tools: - Quarterly returns include: balance sheet incorporating off-balance sheet items; profit and loss statement; calculation of capital adequacy ratios; large exposure listing; liquidity maturity schedule; lending book analysis; listing of the ten largest depositors; and details related to market risks. - Reporting accountant requirements: annual report from reporting accountant for the twelve banks for which FSC has primary supervisory responsibility; each year reporting accountant examines in detail an aspect of the bank’s activities as determined by the FSC. - FSC supported by a well-developed IT system providing timely management information and peer group analysis. - Basel Core Principles assessment summary: - Compliant with 18 Core Principles; largely compliant with 7 Core Principles; no materially non-compliant or non-compliant ratings reported. - Areas recommended for improvement (selected BCPs and recommendations preserved verbatim): - Independence and Resources (BCP 1.2): recommendation that at least one additional analyst be hired, preferably with direct onsite inspection experience. - Legal Protection (BCP 1.5): recommend amending legislation to provide statutory protection for FSC staff against civil suits and indemnify them against associated costs. - Loan Principles (BCP 7): adopt draft guidance notes addressing verification that prudential credit granting and investment criteria are approved, implemented, and reviewed. - Loan Classification (BCP 8): require loans to be classified when payments are contractually a minimum number of days in arrears. - Country Risk (BCP 11): classify exposures on an individual country basis and introduce appropriate minimum provisioning policy. - Internal Controls (BCP 14): require banks to appoint non-executive directors and to establish audit committees to which internal audit reports. - Money Laundering (BCP 15): adopt a more structured approach to overseeing AML compliance and include regular AML assessments as part of the onsite inspection regime. - Corrective Action (BCP 22): enact legislation to give the FSC authority to directly apply civil money penalties to a bank, the board of directors or management. ### Insurance supervision — IAIS assessment highlights and recommendations - IAIS Core Principles summary: - Corporate governance (IAIS 4): Largely observant; recommendation to review all licensed companies and adopt corporate governance arrangements set out by IAIS and to give the Commission direct powers to deal with governance issues. - Capital adequacy and solvency (IAIS 8): Observant; Gibraltar follows the EU Solvency Directive; recommend implementing the Insurance Groups Directive as soon as possible. - Market conduct (IAIS 11): Largely observant; recommend full review of market conduct issues, onsite inspections, review qualification requirements, collate more reliable statistics, consider an ombudsman. - Onsite inspection (IAIS 13): Materially non-observant; structured program of onsite visits required, objective of an inspection every three years or more frequently. - Sanctions (IAIS 14): Observant; recommend amending legislation to include specific powers outlined in IAIS principles to reduce legal challenge risk. - Coordination and cooperation (IAIS 16): Largely observant; recommend regular meetings with the FIU to exchange information about money laundering within the insurance sector. ### Investment and securities supervision — IOSCO assessment highlights and recommendations - Compliance summary with IOSCO objectives and principles: - Gibraltar is compliant with 19 principles, largely compliant with 3, and eight are not applicable. - FSC used investigatory and surveillance powers 15 times in last 2 years. - Investor compensation proposal: GICS would provide coverage for 90 percent of the value of consumer claims up to a maximum of £13,000 per investor (levy on all member firms or insurance alternative). - Key recommended improvements (selected IOSCO principles and recommendations): - Clear Responsibilities (CP1): amend law to state IOSCO core objectives explicitly (protect investors; ensure markets are fair, efficient and transparent; reduce systemic risk). - Adequate Resources (CP3): add resources to perform onsite inspections, offsite monitoring and prepare procedural and examination manuals; as interim measure rely on external auditors but institute a formal onsite inspection cycle and inspect new licensees about six months after commencement. - Compliance (CP10): issue guidance on fit and proper criteria, require periodic submission of updated financial and biographical information, use onsite inspections and examination manuals. - Internal Organization of Market Intermediaries (CP23): require independent review of compliance by licensees and use onsite procedures to spot check compliance. - Consider appropriate role for Self-Regulatory Organizations (CP6/7) given size and complexity of markets. ### Company and trust services — legal framework, practices, and supervisory recommendations - Legal and operational fundamentals: - Approximately 28,500 active companies registered; 8,800 are exempt companies. - Companies House Gibraltar (Registrar) has 16 staff; over half the staff have more than seven years experience; Companies Ordinance updated as recently as January 1, 2000. - Every company must have a registered office in Gibraltar; minimum one person to form a company and minimum one director under the law. - All information about directors and officers and share transfers are public records. - Trusts and trust law: - Over 2000 trusts under administration in or from within Gibraltar. - English Law (Application) Ordinance applies English equitable principles to Gibraltar trust law. - Trusts generally not regulated; Gibraltar observant of emerging good practices but some areas need improvement (e.g., “flee clauses”). - Recommendation: amend trust legislation to restrict use of “flee clauses”. - Supervision of Company and Trust Service Providers (controlled activities): - 83 groups licensed to provide “controlled activities business”; 47 licensed to act as professional trustees. - Licensing requires fit and proper assessment, at least two competent individuals directing the business (“four eyes” principle), physical presence in Gibraltar, and audited financial statements delivered to the Commissioner. - FSC conducts inspection visits and issues Newsletters advising licensees on “best market practice.” - Resourcing and supervision capacity: - Current staffing for line supervision: one full-time and one part-time member supervising 47 TSPs and 77 CSPs. - Number of onsite reviews in last two years: 44 (28 in 1999 and 16 in 2000). - At current rates, six years to complete onsite review of all fiduciary service providers. - Recommendation: engage an additional analyst to augment the division’s resources. - Recommended enhancements to supervision and enforcement: - Introduce an offsite manual of routine procedures covering granting/surrender/revocation of licenses, changes in ownership, appointment of directors, duties of a licensee, and enforcement powers. - Institute an onsite inspection program structured on a minimum three year cycle; onsite inspections should take four to five days with at least two days of sample testing of client files. - Introduce an enhanced onsite inspection manual with checklists covering management and supervision; operations and control; audit; account administration; conflict of interests; business volumes and development; and compliance. - Enact winding-up regulations to permit petitioning for the winding up of a licensee. - Strengthen statutory powers to disqualify directors and to apply meaningful civil money penalties; recommend legislative provision for director disqualification extending to all companies licensed by the FSC where fraud or criminal activity is involved. - Extend anti-money laundering obligations to company managers and professional trustees by adopting the March 1, 2000 consultation proposal to expand the definition of "relevant financial business." ### Operational and staffing recommendations for the FSC - Legal/Policy Development Officer: - Consider employing an attorney on FSC staff to draft legislation, regulations and guidance notes; initiate enforcement actions and litigation; act as secretary to the board; implement U.K. initiatives; and conduct policy development and analysis. - Rationale: FSC has relied on private firms recently; drafting amendments and revising AMLGN will be necessary. - Staffing augmentation and training: - Additional analysts recommended across banking, insurance, investment services and controlled activities supervision to support the planned onsite inspection programs and risk-based supervision. - Consider retention of career staff for the GFIU and expansion of FIU capacity. *The IMF mission’s Module 2 assessment of Gibraltar’s financial supervisory framework, conducted in May 2001, forms the basis of these findings.* ### Introduction..................................................................................................50 ### Introduction ### Preface - The IMF Executive Board approved a program of assessments on July 26, 2000, under the paper “Offshore Financial Centers—The Role of the IMF”. - The Government of Gibraltar invited the IMF to carry out an assessment in May 2001 of supervisory arrangements for the offshore financial sector; Gibraltar indicated no distinction between regulation and supervision of onshore and offshore activities, so the assessment covers both sectors. - The assessment followed the “Module 2” approach and was carried out by a team led by Mr. Neville Grant with specialists from the IMF’s Monetary and Exchange Affairs Department, Legal Department consultants, and external experts; the team received cooperation from the Financial Services Commission and other authorities. ### Executive summary — Key findings - The development of Gibraltar’s financial sector has been facilitated by location, a favorable tax regime, a stable government, EU status, no exchange controls, a legal framework based on the British system, and a well-qualified labor force with accounting and legal skills. - The assessment covers both offshore and onshore financial activities because Gibraltar makes no regulatory distinction between them; regulation and supervision are based on relevant EU legislation and reflect U.K. practices. - The Gibraltar financial sector is small by international standards but important domestically: - Assets of banks conducting only offshore business: £1.9 billion. - Comparison references: Cyprus’ £12 billion; Cayman’s more than £450 billion. - The financial sector (onshore and offshore) accounts for roughly 30 percent of GDP — about the same as tourism. - Range of financial services: banking, insurance, and some fund management and advisory business; policy requires these activities to be carried out in physical premises in Gibraltar with accounting records and management available for inspection in the territory. - Banking: - Most important offshore activity. - Banking assets of US$5 billion (noted as small relative to some jurisdictions and not creating significant risk for the international financial system). - Insurance: total assets of about US$325 million. - Corporate presence: - Approximately 28,500 active companies registered, of which 8,800 are exempt companies. - Provision of professional trusteeship and company management services is deemed “controlled activities”; 83 groups are licensed to conduct that business. - Assessment methodology (Module 2) included: - Basel Core Principles assessment for banking supervision. - IAIS principles for insurance supervision. - IOSCO principles for investment and securities business. - Assessment of company and trust services provision based on developing “good practices” (Edwards Report; KPMG Review). - Assessment results: - Supervision is generally effective and thorough; Gibraltar ranks as a well-developed supervisor and meets most international standards or good practices, making progress on others. - Basel Core Principles: compliant with 18 principles and largely compliant with 7 principles. - IAIS insurance principles: observant of 13 Core Principles, largely observant of 3, materially non-observant of 1 (related to onsite visits). - IOSCO principles: fully compliant with 19, largely compliant with 3, and 8 not applicable. - Company and trust regulation: Gibraltar is at the forefront of developing good practices and was one of the first jurisdictions to introduce regulation and supervision of company and trust services. - Institutional framework: - Financial Services Commission (FSC) established by the Financial Services Commission Ordinance in 1989; the FSC is independent of the Government of Gibraltar in regulatory and supervisory matters. - Appointments under the Ordinance are made by the Governor (acting with the agreement of the U.K. Foreign Secretary). - The FSC is required to match U.K. supervisory standards where EU law applies; Gibraltar, as part of the EU through the United Kingdom’s membership, has implemented relevant EU directives. - The FSC is the sole regulatory and supervisory authority for financial services providers operating in or from within Gibraltar. - The FSC provides advice to the Government and has a close working relationship with government agencies; promotion of Gibraltar as a financial center is the responsibility of the Gibraltar Finance Center Division within the Ministry of Trade, Industry and Telecommunications. - Operational strengths and constraints: - The FSC is diligent, approachable, and has intimate knowledge of supervised institutions; industry acknowledges the FSC’s professional approach. - Resource scarcity has limited the amount of onsite supervision; the FSC is aware and seeking resolution. - The FSC uses a well-developed IT system that provides timely management information, facilitating peer group analysis, trends, and exception reports. - Anti-money laundering measures, relative to the Basel Core Principles, IOSCO, and IAIS Principles, appear effective, though improvements in know your customer requirements are possible. - The FSC complies with accepted international standards for cooperation with foreign supervisory agencies and allows foreign home supervisors to conduct onsite reviews in Gibraltar. ### Background — Macroeconomic developments and public finance - Constitutional and demographic context: - Gibraltar is an overseas territory of the United Kingdom, self-governing except for police, defense, and foreign affairs. - Size: 6.5 square kilometers. - Population: 30,000. - Economic transformation and sectoral shares: - Former heavy dependence on Ministry of Defense (in 1984 accounted for some 60 percent of the economy) has been reduced over 16 years. - Main pillars: tourism, shipping, and finance, each accounting for roughly 25–30 percent of GDP. - Telecommunications constitutes about 10 percent of GDP. - Military base dependence reduced to less than 10 percent. - Low unemployment and inflation, both hovering at around 2 percent in recent years. - EU status: - Gibraltar has been part of the European Union since 1973 under the U.K. Treaty of Accession. - Article 28 of the Act of Accession granted exemptions: common customs tariff, common agricultural policy, and harmonization of turnover taxes (notably VAT). - Fiscal position and taxation: - FY2000 (July-June) overall fiscal balance projected at £16 million. - Public debt: £71 million as of March 2000. - No capital gains tax, wealth tax, inheritance tax, estate duty or VAT, and no exchange control restrictions. - Corporate tax rate set at 35 percent; tax exempt companies pay no tax other than a flat rate of £200-300 a year; qualifying companies are subject to a prescribed tax rate usually set at 5-10 percent. - Tax exempt or qualifying companies cannot have Gibraltarians or residents as beneficial owners and cannot conduct business with residents. - Among 28,500 active companies: - 8,800 have tax exempt status and do not have a physical presence in Gibraltar. - 146 qualifying companies, all of which have a physical presence in Gibraltar. - Income tax: - Rate noted at 50 percent of taxable income exceeding £19,500. - Three quarters of tax revenue generated by income tax; corporate tax constitutes about 18 percent of tax revenue. - Trade and external sector: - Trade deficit in 2000 widened to £241 million from £167 million in 1997 due to rising imports (fuels, manufactured goods, processed foods), mainly from the U.K. and Spain. - Economic diversification details (Box 1 highlights): - Tourism: about 30 percent of GDP; tourism expenditures estimated at £162 million in 2000; employment in tourism-related sectors over 3,000 out of total employment estimated at 13,500 in 2001; land arrivals reached 7 million in 2000 (4.5 million estimated tourists); about 85 percent of tourism expenditure spent by day excursionists from Spain. - Shipping: about 30 percent of GDP; over 6,300 vessels called the port in 2000 including 175 cruise liners (40 percent increase compared with 1996); Gibraltar bunkered 2.7 million tons of fuel to vessels. - Finance services: about 25 percent of GDP; financial institutions employ 2,200 people with expatriates about 15 percent. - Telecommunications: about 10 percent of GDP; presence of local and foreign telecommunications companies and a satellite control center. - E-commerce promotion and offshore gaming growth: offshore internet and telephone betting placed by nonresidents has rapidly grown and employs 630 people. ### Financial sector — Banking and insurance (selected statistics and supervision) - Banking sector (as of May 2001): - Licensed or authorized banks: 19 (down from 28 in 1998). - Bank composition: - Ten banks incorporated in Gibraltar — licensed and subject to comprehensive FSC supervision. - Seven banks are branches of EU home country banks operating under home authorizations — not licensed by the FSC but subject to supervision limited to liquidity. - Two banks are branches of non-EEA banks (one from Jersey, one from the Isle of Man) — licensed and subject to comprehensive FSC supervision except for capital and large exposures calculation. - Total assets of the 19 banks: £5.2 billion as of April 2001. - Eleven offshore-only banks serving only nonresidents — total assets £1.9 billion. - Other eight banks doing a mixture of local retail and offshore business — total assets £3.3 billion. - Off-balance sheet items for all banks: £49.2 million. - Total assets under management by all banks: £5.9 billion. - Banking Ordinance 1992 removed differential regulatory treatment of offshore and onshore banks. - Insurance sector (as of May 2001): - Insurance companies licensed and supervised by the FSC under the Insurance Companies Ordinance 1987: 18. - Two active in the local market covering risks in Gibraltar. - Sixteen mainly conducting offshore business in captives and reinsurance. - Licensed insurance managers: 7. - Gross premium income written by all Gibraltar insurers: some £70 million. - EEA presence: seven insurance companies from the EEA have branches in Gibraltar and are not licensed nor supervised by the FSC. - Insurers providing services into the EEA: 10 Gibraltar insurers as of May 2001. - Captive insurers primarily cover risks of parent or affiliated companies. *The IMF mission’s Module 2 assessment of Gibraltar’s financial supervisory framework, conducted in May 2001, forms the basis of these findings.* ### 0.0 Deposits 2.5 ### 0.0 Deposits 2.5 ### Banks: assets and liabilities (selected figures) - Deposits: 2.5 - Balances with banks: 3.9 - Balances from banks: 1.7 - Loans advances: 1.2 - Capital: 0.9 - Investments: 0.0 - Other liabilities: 0.1 - Other assets: 0.1 - Total assets: 5.2 - Total liabilities: 5.2 - Currency and units: (In billions of pounds) - Source: Financial Services ### Investment services sector (findings) - The investment services sector consists of two sub-sectors: - Insurance intermediaries (mainly cater to residents’ needs for family protection and investment, and general insurance). - Investment firms (mainly provide financial services such as portfolio management to nonresidents). - As of March 2001: - Insurance intermediaries: 27 - Investment firms: 28 - Further details are provided in Section VI of the publication. ### Controlled activities (findings) - Controlled activities refer to trust and company management services. - As of March 2001: - Groups licensed to carry on controlled activities business: 83 - Licensed to act as professional trustees: 47 - Licensed groups include accounting firms, law firms, and firms providing a variety of financial services business. - Regulation and supervision are pursuant to the Financial Services Ordinance 1989 and the Financial Services Commission Ordinance 1989. - Further details are provided in Section VII of the publication. ### Regulatory and supervisory framework (findings) - The Financial Services Commission (FSC) is the sole regulatory and supervisory authority for financial services providers operating in or from within Gibraltar, covering banks, insurance companies, insurance company managers, investment firms, insurance intermediaries, company managers, and professional trustees. - The Commissioner is responsible under various individual financial services ordinances for regulation and supervision. - Gibraltar, as part of the European Union through the United Kingdom’s membership, has implemented relevant EU Directives applicable to the financial sector. - The FSC is statutorily obliged under the Financial Services Commission Ordinance 1989 to match U.K. supervisory standards where EU legislation applies; those standards must be reviewed by U.K. authorities. - The FSC does not have responsibility to promote Gibraltar as a financial center; that responsibility rests with the Department of Trade, Industry, and Telecommunications and its Minister. The Financial Center Division was established in 1997 as part of the Department. ### Laws governing the financial sector (findings) - Major ordinances include: - Companies Ordinance - Income Tax Ordinance - Financial Services Ordinances 1989 and 1998 - Financial Services Commission Ordinance 1989 - Banking Ordinance 1992 - Insurance Companies Ordinance 1987 - Trustee Ordinance - Drug Trafficking Offences Ordinance 1995 - Criminal Justice Ordinance 1995 - Relevant supervisory legislation is available from the FSC. ### Prior external assessments (findings) - United Kingdom reviews: - Two reviews by U.K. authorities (April 1997 and spring 1998) examined the FSC; the first found insurance supervision “up and running and matching U.K. standards,” while bank supervision required further work to meet U.K. standards. - The second review concluded the FSC had addressed recommendations from the first review. - A third interim review in 1999 on investment services raised technical issues needing resolution. - Financial Stability Forum (FSF): - After its April 5, 2000 OFC report, the FSF’s May 26, 2000 categorization placed Gibraltar in Group II, described as jurisdictions perceived as higher quality than Group III but lower than Group I in legal infrastructure, supervisory practices, resources devoted to supervision, and/or degree of cooperation. - Financial Action Task Force (FATF): - In the FATF report of June 22, 2000, Gibraltar was not classified as an uncooperative jurisdiction; FATF found Gibraltar had a comprehensive anti-money laundering system. - In April 2001, the FSC received an FATF mutual assessment team under the auspices of the OGBS and is awaiting a report. - OECD: - Gibraltar was listed in the OECD List of Tax Havens (June 26, 2000). - Gibraltar is considering making a commitment to the OECD by the deadline, subject to OECD recognized needs. ### Responsibilities, independence, and resources of the FSC (findings and recommendations) - Responsibilities and independence: - The Governor of Gibraltar, with agreement of the U.K. Foreign Secretary, appoints the Commissioner (also Chairman) and seven other Commission members. - The FSC is fully independent of the Government of Gibraltar; daily supervision is discharged by staff, with consultation with government and industry on major policy changes. - The Commission must submit an annual report and accounts to the relevant government minister, who must lay them before the House of Assembly pursuant to the FSCO 89. - Resources: - FSC current staffing: 15 people, eight professional staff. - Allocation of professional staff: one or two each dedicated to banking supervision, insurance supervision, investment services supervision, controlled activities supervision, and internal financial accounting. - Professional qualifications: two qualified accountants; four staff hold university degrees. - Identified need: additional capacity for analytical and enforcement staff; recruitment of more professionals is under consideration. - Funding: mainly through licensee fees; shortfalls due to rising overhead costs met by Government of Gibraltar financial assistance since FY1997 (April – March), accounting for 15–20 percent of the FSC budget. - The FSC has received a letter of comfort from the Government of Gibraltar each March since the subvention started. - The FSC has proposed changes in fee regulation to enhance self-funding; the fee regulation has remained unchanged for a decade and proposed changes are under discussion with the private sector and government. ### Cross-border cooperation (findings) - Legal basis for information exchange: - Exchange of information is provided under Section 22 of the Financial Services Commission Ordinance and under Subsection 82(10) and Sections 60A, 61, 86A and Schedule 3 of the Banking Ordinance, Schedule 16 of the Insurance Ordinance, and Section 58 of the Financial Services Ordinance 1989. - No exclusion in the scope of information that can be exchanged. - Exchange with EEA supervisors governed by transposed EU directives; confidential information on banks can only be disclosed to foreign supervisors meeting EEA standards. - The FSC is satisfied that the United States, Switzerland, Jersey, Guernsey, and the Isle of Man meet these standards. - Onsite reviews: - The FSC allows foreign home supervisors to conduct onsite reviews; such reviews were conducted by banking supervisors from Denmark and the United States when U.S. banks operated from Gibraltar. - Memoranda and agreements: - Mutual Assistance Agreement with the London Stock Exchange (June 1996) on exchange of information on LSE members conducting investment business in Gibraltar. - Memorandum of Understanding (MOU) with Jersey FSC on exchange of information on banks (October 1998). - MOU with LIFFE in August 1998 regarding exchange of information on LIFFE members incorporated in Gibraltar. - An MOU with the Bank of England was signed in 1995; negotiations with the FSA were pending. Discussions with the Isle of Man about an MOU on banking information exchange were ongoing. - International membership and contacts: - The FSC is a member of IAIS, the Offshore Group of Insurance Supervisors (OGIS), and the Offshore Group of Banking Supervisors (OGBS). - The FSC hosts the Internet site for the OGIS and hosted a joint OGIS–OGBS meeting in June 2001. - Gibraltar Financial Intelligence Unit has sought membership in the Egmont Group of Financial Intelligence since 1997; membership has not been provided due to political objections from Spain. - The FSC sends staff to international seminars and maintains close contacts with the United Kingdom Financial Services Authority. ### Enforcement remedies (findings and recommendations) - General findings: - Enforcement remedies available to the FSC are adequate for most purposes, but broader arrays of tools are desirable to enhance deterrence and address unexpected problems. - Civil money penalties (penalty fees) are authorized by regulation for violations of FSO 89 and associated regulations; listed infractions on the Penalty Fees Regulation schedule suggest application principally to relatively minor infractions (e.g., failure to file required forms and notices, failure to display a license), though some more serious offenses (e.g., conducting business outside license terms) are listed. - Penalties appear low and are stated as flat amounts. - Civil penalties, being non-criminal, can be imposed speedily and serve as a deterrent. - Recommendation (enforcement fines): - The FSC should consider a regime of penalty fees for all sectors providing more flexibility to impose penalties at its discretion and in amounts high enough to deter serious violations of law or regulation, without prejudice to other sanctions as applicable under law. Licensees would retain recourse to the courts. - Suspension or removal of certain persons: - Current FSC enforcement powers in some matters are indirect (e.g., suspension/removal of executive officers of licensed entities, removal of external auditors of insurance companies, appointment of temporary administrators for troubled insurance companies); clarification of such powers would benefit the FSC and supervised institutions. - The ability to suspend temporarily or remove an officer or director causing damage, and to appoint a temporary administrator, are important supervisory tools to prevent asset dissipation and allow assessment of remedial options. - Enforcement remedies should not rely on indirect methods or implied powers; explicit legislative grant of such powers would better withstand legal challenge. - Recommendation (suspension/removal powers): - The FSC should consider seeking explicit legal power, exercisable in appropriate circumstances, to: - Suspend on a temporary basis any officer or director of a regulated entity; - Permanently remove such an individual; and - In appropriate cases, bar an individual from working in the financial services industry for a period of time. ### Prudential aspects of anti-money laundering (findings) - Scope of assessment: - The assessment relates primarily to standards in the Basel Core Principles, the IOSCO Principles, and the IAIS Principles. - The FATF found Gibraltar had a comprehensive anti-money laundering system. - Legislation: - Gibraltar’s anti-money laundering legislation is modeled on United Kingdom law and includes: - Drug Trafficking Offences Ordinance 1995 (“DTO”) - Criminal Justice Ordinance 1995 (“CJO”) - Anti-Money Laundering Guidance Notes (March 2000, amended June 2000) were issued by the FSC pursuant to the CJO. - The CJO intends to transpose Council Directive 91/308/EEC (EU anti-money laundering directive) into Gibraltar law. - Purpose of comments and recommendations: - Recommendations are intended to improve Gibraltar’s anti-money laundering system despite FATF’s finding of comprehensiveness. *Source: International Monetary Fund (Financial Services).* ### 55. The AMLGN have been adopted by the trade and representative organizations in ### 55. The AMLGN have been adopted by the trade and representative organizations in ### Adoption of the Anti-Money Laundering Guidance Notes (AMLGN) and KYC focus - The AMLGN have been adopted by the trade and representative organizations in Gibraltar that represent all of the activities regulated by the FSC. - Under the CJO, the AMLGN may be taken into account by a court in determining whether a person charged with a crime has complied with the requirements of the CJO. - The FSC issued a Best Market Practice Newsletter stating that compliance with the AMLGN was a “continuous condition for a license” to all institutions licensed under the Financial Services Ordinance that were not covered by the CJO (examples: general insurance intermediaries and company and trust services providers). - The AMLGN are based upon guidance notes issued in the United Kingdom by the Bankers Association and endorsed by U.K. regulatory authorities. - One focal point of the AMLGN is the “Know-your-customer” (KYC) requirements, particularly in Part IV, which require particular attention to ensure that best practices have been met. ### Identified weaknesses and areas for tightening KYC procedures - Provisions dealing with postal, coupon, telephone and internet business [4.42–4.51; 4.70 and CJO 12] should be revisited to explore ways to tighten identification procedures for opening new accounts. - Provisions dealing with Client Accounts Opened by Intermediaries [4.92–4.109 and CJO 13] concern KYC requirements involving intermediaries from EU countries and equivalent countries. - Reliance on intermediaries or introducers in lieu of the Gibraltar institution conducting its own KYC diligence may increase money laundering risks, even if such practices exist in EU countries and other jurisdictions. ### Recommendations regarding AMLGN language and publication - Review the use of terms that imply non-mandatory action: "recommended" [Sec. 3.06], "strongly recommended" [4.04], "should" and "would" [4.11, 4.30, 4.43], "ideally" [4.10], and "may wish" [3.06]; consider replacing with "shall" or a comparable term to indicate required, non-discretionary actions. - The FSC should make the AMLGN available on its web site, along with the amendments and consultation paper that are currently posted. ### Consultation Paper on Amendments to Gibraltar’s Anti-Money Laundering Regime (March 1, 2001) — recommendations and concerns - The Consultation Paper (March 1, 2001) contains four recommendations primarily relating to updating KYC requirements of Gibraltar laws and the AMLGN, partly in response to the FATF June 2000 report. - The Consultation Paper endorses practices allowing Gibraltar institutions to rely on introducers to perform due diligence actions the Gibraltar institution would otherwise perform. - Example: Recommendation No.1 would amend Part IV of the AMLGN to permit an institution “to rely upon copies of due diligence documentation provided by an introducer.” - Recommendation No.4 refers to verification of KYC documentation by introducers meeting certain criteria. - The statutory basis for such practices is found in Sec. 13 of the CJO. - These approaches may create increased money laundering risks despite parallels in EU countries and other jurisdictions. ### Specific recommendations on Recommendation No. 4 - Revisit the second bullet that permits “an institution’s management to signing off individual documentation requirements as having been met for business relationships...where the relationship is of such a nature as to make the obtaining of such documentation unnecessary” because it could be used as an all-purpose exemption from KYC requirements. - At a minimum: - (i) include a reference to the criminal offense provisions of Sec. 10(1) of the CJO (money laundering offense committed with the consent of a director or officer) in the AMLGN; - (ii) characterize the sign-off as a consent under Sec. 10(1) of the CJO to tie the sign-off more closely to the CJO; - (iii) add conditions to the management sign-off in the AMLGN to avoid using sign-off as the primary method of complying with KYC requirements. ### Gibraltar Financial Intelligence Unit (GFIU) — structure, activity, and capacity concerns - The GFIU: - Has an intelligence gathering and analysis function and provides suspicious transaction reports to the Royal Gibraltar Police (RGP) and Gibraltar Customs. - Is a two-person unit within the Gibraltar Co-ordinating Center for Criminal Intelligence & Drugs (“GCID”), which has an additional five individuals (seven total), all seven seconded from either the RGP or Gibraltar Customs. - Staffing experience: of the two at the GFIU, one has three months experience, the other three years, and the Head of the GCID has six months experience. - The GCID Head reports to both the Chief Minister of the Government and to the Governor. - Follow-up on reports is performed by the RGP and customs. - Activity statistics for 2000: - The GFIU received 216 suspicious transaction reports in 2000. - Sources of reports: about 70 percent from banks, 9 percent from telecommunications, 6 percent from money transmission services, 5 percent from company management and 4 percent from bureaux de change. - Within the financial sector, reporting varies widely across institutions. - Outcomes: in about 98 percent of the reports, no criminal offense was determined; only 1 percent of the reports directly lead to an arrest or conviction on money laundering or other offenses. - Capacity recommendations: - Authorities should consider providing more staff to the FIU to improve effectiveness. - Given needs for computer and financial analysis and investigative skills and the learning curve in financial investigations, consideration might be given to retention of a cadre of career employees. ### Legal/Policy Development Officer recommendation for the FSC - Consider employing an attorney on the FSC staff to: - Draft legislation, regulations and guidance notes; - Initiate enforcement actions and prosecute or defend litigation associated therewith; - Act as secretary to the board of the FSC (drafting board resolutions); - Implement U.K. initiatives with a view to implementing them in Gibraltar; - Conduct policy development and analysis related to FSC work. - Rationale: - The FSC has relied on private firms in the past two years though it had an in-house attorney previously. - In the coming year, drafting of amendments to current legislation administered by the FSC and revision of the Anti-Money Laundering Guidance Notes will be necessary. - Hiring a legal/policy development officer would free time of operations staff while retaining the option to retain outside counsel for specialized or complex matters. ### Banking sector structure, scale, and activities - Sector composition: - 19 banks in total. - 11 banks engaged exclusively in offshore activities. - 8 banks combine a mixture of offshore and onshore activities (mixed activity banks). - Balance sheet and activity figures: - Combined balance sheet total for the 19 banks is £5.2 billion. - Offshore banks: £1.9 billion of the combined total. - Mixed activity banks: £3.3 billion of the combined total. - Off-balance sheet activities: offshore banks £25.7 million; mixed activity banks £23.5 million. - Offshore banks have funds under management of £5.1 billion. - Mixed activity banks have funds under management of £0.8 billion. - Approximately 75 percent of total banking business originates offshore. - Total assets: £5.2 billion of which £3.9 billion is placed with other banks outside Gibraltar (mainly with group banks). - Total loans and advances amount to £1.2 billion with approximately 63 percent in the form of back-to-back loans. - Total non-bank deposits amount to £2.5 billion and total bank deposits to £1.7 billion. - Total off-balance sheet operations amount to £49.2 million. - Assets under management: - Thirteen banks maintain assets under management amounting to £5.9 billion. - Of that £5.9 billion: £4 billion non-discretionary; £1.9 billion discretionary. - Customer base and product focus: - Offshore customer base primarily North European nationals settled in Spain and to a lesser extent Portugal; U.K. nationals are prominent. - Several banks offer specialty mortgage services targeting acquisition of residential real estate in Spain and Portugal. ### Legal and supervisory framework for banking - Primary legislation: Banking Ordinance 1992; responsibility lies with the Commissioner of Banking who is also the Commissioner of the FSC. - EU context: - The EU Second Banking Coordination Directive established the Single European Passport for banks authorized within the EU; Gibraltar transposed the Directive under the Banking Ordinance 1992. - Branches of authorized EU banks may set up in Gibraltar without further authorization by the FSC; Gibraltar-incorporated banks may branch into EEA member countries without further authorization from those states. - In 1999, UK authorities confirmed satisfaction with Gibraltar banking supervision allowing Gibraltar-licensed banks to passport services into member countries. - Bank incorporation and supervisory responsibilities: - Ten banks incorporated in Gibraltar, seven are branches of EEA banks and two are branches of non-EEA banks (Jersey and the Isle of Man). - The FSC has primary supervisory responsibility for the 10 locally incorporated banks and the two non-EEA branches. - Countries of origin for the EEA Branches: United Kingdom [4], Spain [1], France [1] and The Netherlands [1]; those home-country supervisors have primary responsibility for these branches. - With the exception of one bank (minority owned by a bank and individuals), all banks are members of international banking groups. - Licensing history: - Prior to 1992: Class “A” for onshore activities and Class “B” (tax exempt) for offshore business. - Since 1992: single license type; licensed banks may select onshore, offshore or combination business. - Recent tax law modification permits banks to elect to provide a mixture of offshore and domestic services with each activity taxed independently. - No one bank deals exclusively onshore. ### Supervisory resources, procedures, and practices - Banking Supervision Section staffing: - The Section comprises the Commissioner and two staff members: the Banking Supervisor and a Banking Analyst. - These three supervisors have access to an IT expert and six general office support staff on an as needed basis. - Supervisory remit: - The Banking Supervision Section supervises all licensed deposit-taking institutions in Gibraltar. - Gibraltar has transposed all relevant EU supervisory legislation and is legally obliged to match U.K. standards of banking supervision. - Supervision includes authorization, ongoing supervision and policy development with no difference between domestic and offshore bank supervision. - FSC publications and training: - The Commission has produced: a Handbook of Banking Supervision, Banking Guidance Notes, Banking Newsletters, a guidance paper on anti-money laundering legislation, and circulated a discussion paper proposing legislative changes. - The FSC holds seminars on money laundering for the industry; all cited publications are available to the public. - The Handbook covers authorization procedures and EU directive implementation; guidance notes cover connected lending, cross-border services and outsourcing; draft guidance notes on risk-based supervision and provisioning policy are being finalized. - Eleven newsletters have been produced to date. - Authorization and fit-and-proper procedures: - Authorization procedures include detailed discussions with applicants, application forms from prospective bank, shareholders, directors and managers, and a comprehensive business plan. - Fit and proper criteria applied to shareholders, directors and managers include requirements relating to experience, expertise, head office presence, minimum capital and four-eyes principles. - Ongoing supervision and reporting: - Ongoing requirements include analysis of detailed quarterly returns, regular prudential meetings, and tripartite meetings (FSC, bank, external auditor). - Quarterly returns include: - a balance sheet incorporating off-balance sheet items, - a profit and loss statement, - the calculation of capital adequacy ratios, - a large exposure listing, - a liquidity maturity schedule, - a lending book analysis (sectoral, regional and connected lending), - a listing of the ten largest depositors, and - details related to market risks. - Prudential meetings: twice a year for locally incorporated banks and branches of non-EEA banks; once a year for EEA banks. - Tripartite meetings follow receipt of the external auditor’s report to discuss weaknesses uncovered by the auditor. - Reporting accountant requirements: - The FSC requires an annual report from the reporting accountant for the twelve banks for which it has primary supervisory responsibility. - Each year the reporting accountant examines in some detail an aspect of the bank’s activities determined by the FSC; topics have included: - high level controls; - credit risk; - money laundering; - information technology; - private banking; and - investment business. - Onsite inspections and move to risk-based supervision: - The FSC does not currently carry out onsite inspections; it relies on the above procedures based on UK practices. - The FSC is moving to a risk-based approach to supervision (in line with UK developments) that will involve onsite inspections. - IT and analytical support: - The FSC is supported by a well-developed IT system providing timely management information, a database of bank activities with statistical data from returns from 1990, in-depth peer group analysis, trends and exception reports. - The IT system facilitates analyst familiarity with supervised banks through data input and analysis. *International Monetary Fund* ### 88. The following points are also relevant in understanding Gibraltar’s banking system: ### The following points are also relevant in understanding Gibraltar’s banking system: ### Relevant descriptive points - A depositor’s protection scheme, based on the relevant EU Directive, was put in place in 1999. - The FSC is the “Authority” responsible for overseeing the banks’ (including the seven EEA branches) adherence to anti-money laundering legislation. - None of the banks licensed in Gibraltar has an overseas presence. - The FSC’s approach to information exchange is based on EU legislation. - Three overseas banks from Morocco, Jersey, Isle of Man have representative offices in Gibraltar. ### Assessment summary - The assessment finds a high level of compliance with the Basel Core Principles for Effective Supervision of Banking in Gibraltar: compliant with 18 of the principles and largely compliant with the seven other principles. - There are no instances of being materially non-compliant, or of non-compliance. - The nature of business undertaken is relatively limited and straightforward. - The FSC has the necessary legislative base to undertake effective supervision and carries out its functions in a professional and dedicated manner. - The FSC carried out its duties diligently and had an intimate knowledge of the banks under its supervision; in some instances the approach appeared informal, characteristic of small jurisdictions. - The FSC is generally acknowledged by banks visited to have a professional approach. ### Areas where improvements would be beneficial (by principle) - Independence and Resources (BCP 1.2) - Findings: - Gibraltar is largely compliant with this principle. - Supervisory staff: the Commissioner has 15 years and the Supervisor 10 years of supervisory experience and the analyst less than one. - The number of staff is inadequate to carry out day-to-day performance demands and will be more inadequate following the introduction of onsite inspections and a more structured approach to assessing banks’ compliance with anti-money laundering procedures. - Currently, the department has one experienced banking analyst and a relatively recent recruit. - Recommendation: - It is recommended that at least one additional analyst be hired, preferably with direct onsite inspection experience. - Legal Protection (BCP 1.5) - Findings: - Gibraltar is largely compliant with this principle. - There is no statutory provision protecting the FSC’s staff against civil suits and indemnifying them against the costs associated with such suits. - Recommendation: - It is recommended that relevant legislation be amended to provide for such protection. - Loan Principles (BCP 7) - Findings: - Gibraltar is largely compliant with this principle. - There is no explicit requirement for the FSC to verify periodically that prudential credit granting and investment criteria, policies, practices and procedures are approved, implemented, and reviewed by bank management and boards of directors. - Recommendation: - It is recommended that the draft guidance notes addressing this issue be adopted as a matter of urgency. - Loan Classification (BCP 8) - Findings: - Gibraltar is largely compliant with this principle. - The FSC does not require loans to be classified when payments are contractually a minimum number of days in arrears. - Recommendation: - It is recommended that the FSC require banks to introduce a loan classification regime that would reflect best international practices. - Country Risk (BCP 11) - Findings: - Gibraltar is largely compliant with this principle. - Exposures are not identified on an individual country basis, nor has the FSC decided on an appropriate minimum provisioning policy. - Recommendation: - It is recommended that exposures be classified and monitored on an individual country basis and that appropriate minimum provisioning policy be introduced. - Internal Controls (BCP 14) - Findings: - Gibraltar is largely compliant with this principle. - There is no formal requirement for banks to appoint non-executive directors to their boards or for the internal audit function to report to an audit committee. - Recommendation: - It is recommended that banks be required to appoint non-executive directors and to establish audit committees to which the internal audit function would report. - Money Laundering (BCP 15) - Findings: - Gibraltar is largely compliant with this principle. - The FSC is responsible for monitoring compliance by all banks (including the 7 EEA branches) with anti-money laundering legislation. - Each year the internal audit function of each bank carries out a review of anti-money laundering procedures; the FSC receives reports of these reviews and raises relevant findings with banks. - For the 12 banks for which it has primary supervisory responsibility, the FSC employs reporting accountants to assess such compliance; most of these banks were last assessed in 1997 and only two were assessed in the last two years. - Recommendation: - It is recommended that the FSC adopt a more structured approach to overseeing compliance with anti-money laundering procedures, and that regular anti-money laundering assessments form a regular part of the proposed introduction of the onsite inspection regime. - Corrective Action (BCP 22) - Findings: - Gibraltar is largely compliant with this principle. - The FSC does not have the legal authority to apply civil money penalties to a bank, the board of directors or management. - Recommendation: - It is recommended that appropriate legislation be enacted to give the FSC authority to directly apply such penalties. ### Table 3 compliance highlights (as reported) - Compliant: 18 Core Principles. - Largely Compliant: 7 Core Principles. - No instances of materially non-compliant or non-compliant ratings were reported. *Source: The assessment by the IMF mission.* ### 116. Gibraltar is largely observant of this principle. There are no individual sections under ### 116–143: Gibraltar — Insurance Supervision Assessment and Investment & Securities Overview ### Corporate governance (IAIS 4) - Observance: Largely observant. - Findings: - There are no individual sections under the legislation dealing specifically with corporate governance; essential criteria cannot be regarded as being met directly. - In 1998 the Commission issued a newsletter setting out the principles and practices of corporate governance. - The insurance supervisory team forms a view on whether principles are observed against the 1998 Newsletter criteria, but there are no standard questions used. - Recommendation: - Review all licensed companies and adopt the corporate governance arrangements set down in the essential and additional criteria brought out by the IAIS in principle number 6. - For managed captives, adapt criteria to account for the role of the insurance manager. - Give the Commission direct powers to specifically deal with corporate governance issues. ### Capital adequacy and solvency (IAIS 8) - Observance: Observant. - Findings: - Gibraltar follows the EU Solvency Directive. - Gibraltar, like the United Kingdom, has not yet implemented the new Insurance Groups Directive that will help counter the problems of double/multiple/gearing of capital. - Recommendation: - Implement the Insurance Groups Directive as soon as possible. ### Market conduct (IAIS 11) - Observance: Largely observant. - Findings: - Long-term life assurance contracts with an investment element are investments for the purposes of the Financial Services Ordinance 1989 (“the Ordinance”). - Intermediaries selling such investment products must be licensed under the Ordinance; insurance broking or acting as an insurance agent for other life or general insurance is a controlled activity under the Ordinance. - Detailed requirements of principle 11 are closely matched by the statement of principles in Part II of the Financial Services (Conduct of Business) Regulations 1991 (“CoB”). - For administrative convenience, the investment services supervisor supervises activities of general business insurance intermediaries. - Definition of controlled activities in the Financial Services Ordinance, 1989 is unclear; wording implies sales by insurers direct to the public may not be covered by the investment services supervisor’s market conduct rules. - Certain market conduct rules (for example commission disclosure) are not mandated in Gibraltar; the investment services supervisor cites the very small domestic market as a concern that such measures would deter insurers. - The insurance supervisor does not take as keen an interest in market conduct issues as the investment services supervisor. - Splitting supervision of products between two legislations and two supervisors has disadvantages and should be reviewed. - As passporting is increasingly utilized by Gibraltar insurers, the insurance supervisor should take greater interest in products and product literature to protect Gibraltar’s reputation. - Onsite visits to intermediaries have been deferred due to staff time spent on EU and U.K. matters; other jurisdictions have found onsite inspections uncover significant irregularities (money laundering and client recording). - No direct supervision of insurance sales persons; no direct powers to stop potentially unfit individuals from selling insurance products. - Gibraltar has no policy holder protection scheme; with only two companies licensed to write life business, industry-contributed levies are not currently suitable. - Recommendation that appropriate warning notices be present on all life policy literature; such warning required in any advertisement issued by an unlicensed non-EEA insurer per Conduct of Business Regulations. - Few miss-selling problems like those in the U.K. regarding endowment policies have occurred in Gibraltar. - Lack of resources may be holding back proactive work (including onsite visits and money laundering checks) of the investment services supervisor. - Handling complaints could conflict with prudential supervision; alternative dispute mechanism recommended. - Recommendation: - Full review of market conduct issues, including onsite inspections. - Review qualification requirements and possible omissions in conduct of business regulations. - Collate more reliable statistics and consider overseas policyholders. - Employ a financial services ombudsman, or similar, to resolve disputes between licensees and consumers. ### Onsite inspection (IAIS 13) - Observance: Materially non-observant. - Findings: - Supervisory visits are carried out to inform supervisors of company activities, organization, record keeping, customer care, and other matters but stop short of full onsite inspections (no detailed examination of documents). - Full onsite inspections are invaluable for prudential supervision and for checks on corporate governance, internal controls, and money laundering avoidance. - Recommendation: - Institute a structured program of onsite visits as soon as possible using a detailed checklist (including a money laundering module) with the objective of an inspection every three years, or more frequently, allowing appropriate feedback from the insurer or insurance intermediary. ### Sanctions (IAIS 14) - Observance: Observant. - Findings: - The Ordinance, Sections 62 to 70 and 98 to 109, give the Commissioner a wide range of remedial powers (including fines for late financial statements and license withdrawal for insolvency or unsound administration). - Certain specific powers stated in the IAIS principles are not reflected directly in Gibraltar legislation; the FSC believes it can achieve the same results by threatening withdrawal of license. - The mission believes including the specific powers within legislation would be beneficial and less open to legal challenge. - Recommendation: - Review the powers available to the Commissioner and amend legislation to include the specific powers outlined in Chapter III C above. ### Coordination and cooperation (IAIS 16) - Observance: Largely observant. - Findings: - The Financial Services Commission supervises Banking and Investment Services as well as Insurance; information is shared between relevant supervisors within the Commission. - Formal memoranda of understanding (MOU) with supervisors in other jurisdictions are limited, but lack of MOUs has not inhibited information sharing. - The Insurance Commissioner is not routinely informed about insurance fraud or money laundering within the insurance sector; the Insurance Supervisor lacks statistics on the number or types of disclosures made by the insurance sector. - Recommendation: - Hold regular meetings with the Financial Intelligence Unit (FIU) to exchange information about money laundering within the insurance sector. ### Table summary (IAIS Core Principles observance highlights) - Corporate governance (CP 4): Largely Observant — “A review of all licensees is needed with eventual law changes to give the Commissioner specific powers.” - Capital adequacy and solvency (CP 8): Observant — “Should implement EU Insurance Groups Directive as a matter of urgency.” - Market conduct (CP 11): Largely Observant — “Full review of market conduct issues required.” - Onsite inspection (CP 13): Materially Non-Observant — “Structured, documented onsite inspections required.” - Sanctions (CP 14): Observant — “Some sanctions currently indirect and a change to more specific language is recommended.” - Coordination and cooperation (CP 16): Largely Observant — “Regular meetings should be held with the FIU in order to exchange information about money laundering within the insurance sector.” ### Assessment of investment and securities standards (Introduction and framework) - Sector composition and scale: - About 22 insurance intermediaries serve local collective investment schemes and insurance products with investment value. - About 28 securities firms provide portfolio management and other investment services to institutions and high net worth individuals. - Some securities firms have discretionary authority; none deal as principal with customers, none provide underwriting services, and there are no securities exchanges. - About 2 locally operated collective investment schemes. - About 42 recognized collective investment schemes marketed locally but authorized and operated elsewhere. - About seven banks provide investment services under banking laws. - Total assets under management at year-end 2000 were about £6.9 billion. - Legal and supervisory framework: - Investment services are subject to Financial Services Ordinance, 1989, and Financial Services Ordinance, 1998 (FSO 89 and FSO 98). - The Commissioner, Financial Services Commission (FSC), assisted by an investment services supervisor and an assistant supervisor, enforces statutes and ensures compliance with EU directives and matching of UK supervisory standards where EU law applies. - Securities firms formed or headquartered in Gibraltar must obtain FSC authority; application procedure requires detailed information on services, financial resources, and backgrounds of principals. - Licensees must designate a compliance officer (not necessarily full-time depending on size). - FSC may impose conditions upon exercise of authority and publishes lists of authorized persons by category in the agency’s annual report and website. - Providers are subject to prudential regulation, capital adequacy requirements, disclosure and conduct of business regulation (including marketing restrictions), and reporting obligations. - Persons seeking to establish, manage or promote a collective investment scheme within Gibraltar must obtain authority under Part III of FSO 89; schemes satisfying UCITS directive requirements have a right to be marketed in Gibraltar. - The FSC monitors acquisitions of controlling interests and changes in control of securities firms under Section 10 of FSO 98; the FSC applies the “mind and management” requirement and the “four eyes” principle. - The FSC has closed down operations and frozen assets of unlicensed securities firms that operated entirely outside the jurisdiction, limiting misuse of licenses and protecting reputational risk. - Section 50 of FSO 89 provides for receipt in confidence of information and a framework to pass information to other authorities for statutory functions, crime prevention/detection, international commitments, or to assist foreign authorities in similar regulatory responsibilities; despite limited formal arrangements, the FSC has provided and received confidential information from securities regulators in other jurisdictions. *International Monetary Fund assessment* ### 144. Gibraltar is moving to bring itself into compliance with the European Union’s ### Gibraltar is moving to bring itself into compliance with the European Union’s Investor Compensation Schemes Directive (ICD) ### Investor Compensation Scheme proposal (GICS / GICF) - Government of Gibraltar issued a Consultation Paper in May 2001 proposing a safety net for small investors under the Gibraltar Investor Compensation Scheme (GICS). - Under the proposal: - Investment firms for which Gibraltar is the home state will be required to join GICS, which will administer the Gibraltar Investor Compensation Fund. - The Commissioner of FSC will serve as Chairman of GICS. - Funding and coverage proposals: - GICS would make a levy on all member firms in an amount sufficient to provide coverage for 90 percent of the value of consumer claims up to a maximum of £13,000 per investor. - Alternatively, consideration would be given to obtaining insurance in the amount required to provide the necessary cover. - The ICD permits the use of levies, but the levies funding method carries the possibility that the failure of one firm could trigger systemic difficulties in the sector within Gibraltar. ### Assessment of compliance with IOSCO Objectives and Principles - Overall compliance summary: - Gibraltar is compliant with 19 of the principles, largely compliant with three and eight are not applicable. - The FSC has the necessary legislative base to undertake effective supervision of the investment and securities industry, though some powers are indirect and the mission suggested amendments to make some powers more explicit. - Table 5 highlights (degree-of-compliance indicators preserved in commentary): - Regulator: Clear responsibilities (CP1) — Compliant; recommendation to amend law to state IOSCO core principles explicitly. - Power, resources and capacity (CP3) — Largely Compliant; powers adequate but limited resources reduce capacity; staff has limited experience in securities regulation and supervision. - Comprehensive inspection and surveillance powers (CP8) — Compliant; FSC has used investigatory and surveillance powers 15 times in last 2 years. - Effective use of powers and compliance program (CP10) — Largely Compliant; lack of onsite inspections, lack of procedural and exam manuals noted as weaknesses. - Market Intermediaries: Compliance with standards for internal organization (CP23) — Largely Compliant; must keep compliance manual and compliance record, report breaches; lack of onsite inspections is a weakness. - Collective Investment Schemes (CP17–20) — Various compliant or largely compliant findings; disclosure requirements mirror those of U.K. - Market Regulation CP25–30 — Not applicable or not anticipated (e.g., FSC never received an application for an exchange or trading system). ### Areas where improvements would be beneficial — findings and recommendations - Clear Responsibilities (IOSCO Principle no. 1) - Findings: - Gibraltar is compliant with this principle. - IOSCO core objectives (i) markets are fair, efficient and transparent; (ii) systemic risk is reduced — these are considered subsumed within Gibraltar statute language and FSC practice. - Greater certainty could be achieved by making the core objectives explicit in law. - Recommendation: - The responsibilities of the FSC as stated in the law should be amended to specifically include: (i) protect investors, (ii) ensure that markets are fair, efficient and transparent, and (iii) reduce systemic risk. - Adequate Resources (IOSCO Principle no. 3) - Findings: - Gibraltar is largely compliant. - FSC does not conduct onsite inspections using its own personnel except inspections of new licensees immediately after they open for business. - FSC relies on formal regulatory reports and third-party information in the small community; a risk-based focus guides limited resource allocation. - Onsite inspections have demonstrable benefits for compliance culture and regulator understanding of business and clientele. - Recommendation: - The FSC should add resources to give it the capacity to perform in a timely manner a range of supervisory functions, including onsite inspections, offsite monitoring and the preparation of procedural and examination manuals. - As an interim measure, reliance on external auditors could be necessary, but the FSC should institute a formal program of onsite inspections on a regular cycle and inspect new licensees about six months after business commencement (timing to depend on circumstances). - Self-Regulatory Organizations (IOSCO Principles nos. 6, 7) - Findings: - These principles are currently not applicable in Gibraltar; there are no SROs in Gibraltar. - The regulatory regime should make appropriate use of SROs, to the extent appropriate to the size and complexity of the markets. - Recommendation: - The FSC should consider how SROs could augment its efforts, taking into account Gibraltar's unique circumstances. - Compliance (IOSCO Principle no. 10) - Findings: - Gibraltar is largely compliant. - FSC does not use procedural manuals or examination manuals; limited staff resources constrain preparation and use of such manuals. - FSC has internal guidance on the “fit and proper” test (referred to internally as a “Newsletter”) but it is not yet made publicly available. - The law states that the “fit and proper” requirement for principals of a licensee is continuing, but consequences of failure to meet that standard on an ongoing basis are not clear. - Monitoring could be improved by requiring periodic submission of updated financial and biographical information. - Recommendations: - The FSC should use onsite inspections as well as procedural and examination manuals; outsourcing preparation of manuals could be considered given limited staff. - The FSC, acting with the advice of counsel, should issue a guidance note setting forth the fit and proper criteria that: - ensures transparency and clear public guidance; - places limits on discretion in administering the test; - specifically asserts that the obligation of a licensee’s directors and executive officers to remain fit and proper is a continuing one; and - states that failure to meet this test is grounds for removal of the person by the FSC. - Internal Organization and Operation of Market Intermediaries (IOSCO Principle no. 23) - Findings: - Gibraltar is largely compliant. - Licensees are required to keep compliance manuals and compliance records, and to report compliance breaches annually to the FSC. - To ensure compliance, the FSC should have an independent review conducted of the licensee, either by the FSC or a third party on behalf of the FSC. - Recommendation: - The FSC should use onsite inspection procedures to spot check compliance, even absent suspected breaches. ### Key statistics and operational facts preserved verbatim - Investor compensation coverage proposal: 90 percent of the value of consumer claims up to a maximum of £13,000 per investor. - Compliance with IOSCO Principles: compliant with 19 principles, largely compliant with three, and eight are not applicable. - FSC investigatory and surveillance usage: used investigatory and surveillance powers 15 times in last 2 years. - Companies statistics: - Approximately 28,500 active companies registered under the Companies Ordinance. - Out of these 8,800 are exempt companies. - In each of the past three years, an average of 1,990 exempt companies were registered and an average of 1,138 exempt companies were removed from the active list. - Companies Registry staffing and responsibilities: - Companies House Gibraltar (the Registrar) has 16 staff. - Over half the staff possess more than seven years experience in company formation and law. - The Companies Ordinance was updated as recently as January 1, 2000. - The Registrar has sole responsibility for registering companies (apart from company name approval subject to Government criteria) and may refuse registration for specified reasons; such decisions are subject to review by the Supreme Court of Gibraltar. *Source: International Monetary Fund mission assessment and recommendations.* ### 171. When reviewing company registration applications, it is usual for the database at ### When reviewing company registration applications, it is usual for the database at Companies House to be checked ### Company registration: legal framework and practice - Every company must have a registered office in Gibraltar. - Companies incorporated elsewhere but operating in Gibraltar must register at Companies House and have the same filing requirements, including the duty to file accounts, as those incorporated in Gibraltar. - The minimum number of persons required to form a company is one. - The minimum number of directors required under the law is one. - All information about directors and officers are a public record and available to all members of the public. - All information regarding share transfers form part of the public record and must be supplied to the Registrar with each Annual Return. - Anti-Money Laundering requirements apply to all persons in Gibraltar, including the Registrar. Where the beneficial owner is not known, customer identity requirements are considered the responsibility of the company manager or the professional incorporating the company and not the responsibility of the Registrar. - While there are no international standards concerning the regulation of companies, Gibraltar is observant of emerging good practices with respect to company regulation. ### Good-practice observations and recommendations for companies - Good practice: Authorities should be able to identify, at all times, the shareholders and directors of a company and the ultimate beneficial owners of a company’s shares, implying disclosure at registration and disclosure of any subsequent changes; bearer shares should be discouraged and if permitted effective custody arrangements should be in place. - Gibraltar practice: The authorities take measures to establish the identity of the shareholders, directors and ultimate beneficial owners of companies incorporated in Gibraltar. - Bearer-share instruments: While bearer shares are not permitted under Gibraltar law, share warrants to bearer are permissible. Very few share warrants to “bearer” are issued and outstanding in Gibraltar, and invariably they are immobilized. - Good practice: Authorities should have access, where necessary, to basic financial information relevant to the activities of companies to understand the nature, scale and purpose of individual companies’ activities. - Gibraltar practice: Gibraltar follows good practice regarding access to basic financial information. - Good practice: Directors must fulfill their obligations effectively and remain ultimately responsible even if they assign functions to others. - Gibraltar practice: Gibraltar follows good practice on directors’ responsibilities. - Good practice: Authorities must have the power to petition the courts to strike-off and/or wind up companies for due cause. - Gibraltar practice: Gibraltar follows good practice on powers to petition courts. ### Trusts: legal basis, scope, and practices - There are currently over 2000 trusts under administration in or from within Gibraltar by a variety of licensed service providers. - The English Law (Application) Ordinance applies English principles of equity to Gibraltar; these principles govern the Law of Trust in Gibraltar. - Trust types in Gibraltar mirror those in the United Kingdom: accumulation and maintenance settlements, non-interest in possession settlements, interest in possession settlements, bare trusts, discretionary trusts, and charitable trusts. - Trust legislation in Gibraltar does not differ to any marked extent from trust legislation in other offshore and onshore jurisdictions, including the United Kingdom, with English equitable principles applied by the English Law (Application) Ordinance. - Trusts are generally not regulated. - Gibraltar is observant of emerging good practices related to trusts, but improvements would be beneficial in a few areas. ### Good-practice observations and recommendations for trusts - Good practice: Trusts should not be used to obscure true ownership of assets, defraud creditors or frustrate legitimate claims; “flee clauses” that serve clearly illegitimate purposes should be prohibited (for example, triggering on commencement of criminal proceedings or enforcement action should not be allowed). - Gibraltar practice and issue: Trust legislation does not proscribe the inclusion of “flee clauses” in the trust instrument and, therefore, trusts in Gibraltar may include such clauses; the vast majority of such clauses are usually triggered by natural disasters, civil unrest, political instability, revolution, and similar events, but they might also be used to place assets derived from criminal or illicit activities out of the reach of law enforcement. - Gibraltar position: Based on legal advice, although there are no restrictions on specific events that might trigger a flee clause, certain events (for example, if the flee clause were triggered by the occurrence of a criminal act or fraud) would render it unenforceable as contrary to public policy. - Recommendation: Trust legislation should be amended to restrict the use of “flee clauses” as they are an issue of general application. - Good practice: Authorities should be able to ascertain quickly and efficiently the true owners of assets held in trust for the purposes of a criminal investigation. - Gibraltar practice: Gibraltar follows good practice on ascertaining true owners of trust assets. - Good practice: Authorities should be able to identify the settlor, beneficiaries, protector and custodian (where applicable) of a trust, and to obtain a copy of the trust instrument for the purposes of a criminal investigation. - Gibraltar practice: Gibraltar follows good practice on identifying trust parties and obtaining trust instruments. - Financial reporting and audit by licensee of clients' accounts: - There is a range of abuses that could arise from unscrupulous settlors or trustees. - The risk of abuse can be reduced if conduct and administration of the trust can be monitored. - Beneficiaries have a right to expect a paid trustee, who is licensed and regulated, to administer the trust with care, prudence and probity and to produce annual accounts for review. - The cost of such reporting should be borne by the trustee unless otherwise provided in the trust deed; the cost of an external audit is an administration expense borne by the trust. - Recommendation: The practice of conducting an annual audit by a licensee of clients’ accounts is becoming more widely accepted and Gibraltar may want to consider whether to implement this developing practice. ### Company and Trust Service Providers: licensing, supervision, and assessment - There are 83 groups licensed to provide “controlled activities business”; of those 47 are licensed to act as professional trustees. (Numbers are given in terms of groups because this business sector usually operates with a structure comprised of various related companies that, as a group, provide the licensable services.) - Schedule 3 to the Financial Services Ordinance 1989 describes various “controlled activities” to be licensed and supervised. - Company Management is defined as the provision of managerial services for profit or reward in or from Gibraltar, whereby a person is a director for, or a shareholder of, a company, or when control over the whole or substantial part of the assets of the company is vested in the management company. - Professional trusteeship is the holding out as a professional trustee for profit or reward, or soliciting for business as such, in or from within Gibraltar. - Any person who provides professional trusteeship and/or company management services by way of business must be in possession of a valid license issued under Section 8 of the 1989 Ordinance. - Before granting a license the Commissioner must, among other things: - consider whether the applicant, and any person associated with the applicant, is a “fit and proper” person to carry on the business proposed; and - consider the manner in which the business will be carried on, including meeting the requirement that at least two competent individuals direct the business of the licensee (the traditional “four eyes” principle). - “Fit and proper” criteria cover both technical competence and integrity; licensees must have a physical presence in Gibraltar and advertise in Gibraltar that they are applying for a license; the Commissioner must consider any representations received in response. - Once a license is granted, licensees must advise the Commissioner of material changes, seek consent for changes of control and appointment of new directors/managers, submit audited financial statements, and ensure auditors report to the Commissioner on compliance with specified regulatory obligations. - The Commission’s staff conducts inspection visits including review of systems and controls and KYC procedures; continuing supervisory process is an “onsite” inspection-based process. The Commission issues Newsletters advising licensees on “best market practice.” - Enforcement powers under the 1989 Ordinance include powers to obtain information, documents, suspension, and cancellation of licenses. ### Assessment, resourcing, and recommendations for service-provider supervision - Assessment: - There are no international standards concerning regulation and supervision of providers of company and/or trust services, but some offshore jurisdictions have extended regulation to Company Service Providers (CSPs) and Trust Service Providers (TSPs). - Inclusion by Gibraltar of TSPs and CSPs as a controlled and regulated activity is considered a positive feature of the 1989 Ordinance. - Gibraltar is observant of good practices with respect to regulation and supervision of company and trust service providers, but a few areas need fine-tuning. - Resourcing and workload: - Current staffing levels: one full-time and one part-time member of staff are involved in the line supervision of 47 TSPs and 77 CSPs. - Number of onsite reviews conducted in the last two years: 44 (28 in 1999 and 16 in 2000). - At current rates, it should take six years to complete the onsite review of all fiduciary service providers. - Progress can be accelerated with increased resources; the figure of six years does not take into account focused visits or prudential meetings that should be held at least on an annual basis. - Recommendation: Engage an additional analyst to augment the division’s resources. - Licensing scope and standards: - Good practice: Everyone who provides company and/or trust services should be licensed and subject to identical effective regulation; it should be an offense to provide such services without registration/license and to provide false or misleading information as part of the application; professionals such as lawyers and accountants who provide these services must be registered/licensed. - Gibraltar practice: Licensed TSPs and CSPs must have a minimum of two directors; the “four eyes” control for all licensed service providers accords with good international practices. - Issue: Some company management business areas, including formation of companies and provision of registered office services, are currently outside the scope of the legislation and regulatory net. - Legislative development: The Government of Gibraltar has agreed to an extension of activities that constitute licensable company management services and a draft of the amending legislation is awaited; effect will be that all company manager services, even currently unregulated or restricted activities, will need to satisfy full company manager license requirements. - Recommendation: If proposed amendments become law, current concerns will be suitably addressed. - Fit and proper and qualifications: - Any person(s), entity or institution requiring a license to provide financial services must satisfy the FSC that standards of fitness and propriety have been met. - Recommendation: The definition “fit and proper” should be contained in amendments to existing regulations currently being drafted to ensure consistent standards of assessment; the professional qualifications of those who seek to provide trustee services should be relevant to the industry because trustee duties differ from company management services and currently there is no distinction. - Application and supervision procedures: - The criteria for granting a license are comprehensive and meet good practice. - FSC staff use checklists as an “Aide-Mémoire” when considering new CSP license applications; while checklists serve a purpose their application is limited. - Recommendation: Expand checklists into a more comprehensive Applications Manual providing qualitative guidance on assessing an application (assessing a business plan; assessing and verifying references and other evidence of fit and proper criteria), forming the foundation for an offsite Inspection procedures manual covering financial reporting, due diligence, know your customer, segregation of client monies and source of funds, and routine day-to-day offsite procedures. - Licensing coverage: - With the exception of persons listed in Part I of the Register of Auditors under the Auditors Registration Ordinance and barristers or solicitors admitted and enrolled under the Supreme Court Ordinance who are specifically exempted by law, all other persons who provide professional trustee services or company management services in the jurisdiction are required to be licensed. - Recommendation: Developing international practice requires that all those engaged in the controlled activities market should be licensed and subject to effective regulation; bringing such professionals into licensing appears desirable. *International Monetary Fund* ### 228. The regulator should have effective and independent enforcement powers, including ### 228. The regulator should have effective and independent enforcement powers, including ### Enforcement powers and supervisory remit - The regulator should have effective and independent enforcement powers, including the power to monitor and supervise licensed company services providers, to inspect their activities, to investigate potential breaches of rules, regulations and laws and to petition the Court to wind up a company and/or trust services provider. - The FSC has in place a regulatory environment for the supervision of controlled activities, both onsite and offsite, to monitor compliance of TSPs and CSPs with the law and with the terms of their licenses. ### Offsite supervision: structure and enhancements - The offsite manual of routine procedures should cover: - granting, surrender and revocation of TSP’s and CSP licenses; - changes in ownership of shares in a trust company; - appointment of directors; - duties of a licensee; and - enforcement powers. - The day-to-day routine of the offsite supervisor should be documented in the offsite manual to provide "on the job training" and instruction to the supervisor, maximizing effectiveness in reviewing financial statements and regulatory returns. - Regulatory returns could be improved to obtain more qualitative information enabling offsite supervision to better assess the competence and integrity of the licensee. - Recommendation: We recommend the introduction of an enhanced offsite inspection manual along the lines outlined above. ### Onsite inspection program: frequency, staffing, and procedures - Fiduciary assets are not reflected in the annual financial reporting of the TSP licensee; regulatory prudence indicates more reliance on the onsite inspection process. - Onsite inspection program structure: - Onsite inspection program should be structured on a minimum three year cycle if it is to be effective. (This does not include either focused visits or prudential meetings.) - Only sample testing of client files by the regulator, at the premises of the licensee, can establish whether the service provider is compliant; offsite functions cannot be an effective substitute. - Current FSC implementation and capacity concerns: - One full-time officer and an assistant supervisor who provides part-time assistance are responsible for the supervision of all CSP licensees, in addition to all TSP licensees. - This level of staffing is assessed as inadequate to support a robust onsite supervision program. - Time allocation and visit type: - Insufficient time is currently devoted to onsite inspections, which should take between four to five days to complete. - Sample testing of client files should occupy at least two of the days. - Prudential visits/meetings should not be used as part of the onsite inspection program; those prudential visits should take place at least on an annual basis. - An effective onsite inspection program should include an inspection manual and cover pre-examination and past examination procedures with checklists on: - management and supervision; - operations and control; - audit (internal and external); - account administration; - conflict of interests; - business volumes and development; and - compliance. - Recommendation: We recommend the introduction of an enhanced onsite inspection manual along the lines outlined above. ### Management information systems and staffing - It is usual for the regulatory authority to verify that all licensees have management information systems which determine on a timely basis that business risks are adequately monitored and that senior management of the licensee understands the risks inherent in its business. - The trust service business can be particularly risk prone; at the time of the licensing application probable risks such as loss of staff, loss of existing business, loss of new business markets would be unlikely to have been identifiable by senior management or the regulator. - Unless the rate and quality of onsite inspections improves, there could be a considerable time gap before a licensee’s problems come to the regulator’s attention. This reinforces the need for an additional analyst. ### Winding-up regulations - The Financial Services Ordinance 1989 provides for the introduction of regulations for the petitioning of the winding up of a licensee. Such regulations have not been enacted. - The Commissioner is currently in consultation with the Government of Gibraltar with a view to putting these regulations into effect as soon as possible. - Recommendation: We support the introduction of such legislation. ### Sanctions, director oversight, and disqualification - Good Practice: The regulator should be able to apply a range of appropriate sanctions including the revocation of a license and the imposition of meaningful civil money penalties. - The FSC has a wide range of powers, but powers relating to the conduct of directors of licensed entities should be strengthened. - The statutory duties of directors are set out in the Companies Ordinance; there are also common law duties of directors similar to those in the United Kingdom. The Financial Services Commission has issued a newsletter on the General Duties and Responsibilities of Directors of licensed firms. - There do not appear to be procedures in place whereby the director’s actions and activities are monitored and the regulator can assess on a periodical basis whether the director still continues to meet the fit and proper criteria. - Directors are required to file an annual statement of compliance and were this found to be inaccurate following an onsite review there should be prima facie grounds against the institution. - Recommendation: When a director of a licensed company ceases to perform his/her duties in a proper manner or is no longer fit to manage the company’s affairs, a legislative provision should be in place so as to provide for disqualification. In instances where the director is involved in fraud or other criminal activity such disqualification should extend to directorship of all companies licensed by the FSC. ### Anti-money laundering, KYC, and beneficial ownership - Good Practice: Company and trust services providers should have in place effective anti-money laundering measures, including know your customer rules, record keeping, and staff training procedures. - The Criminal Justice Ordinance 1995 (CJO) requires relevant financial businesses put in place measures for the prevention of money laundering. - The legislation does not impose such requirements on company managers who do not undertake relevant financial business; the FSC nevertheless takes the view that best market practice requires that all licensees comply with the legislation and the procedures described in the Gibraltar Anti-Money Laundering Guidance Notes. - A consultation paper (Amendment to the Anti-Money Laundering Regime), dated March 1, 2000, proposes that the definition of "relevant financial business" for the purposes of the CJO should be extended to include all company management and professional trusteeships. - Recommendation: We recommend that the proposal in the consultation paper be adopted. This modification would meet the standards of developing international best practices. - Where business is conducted through introductions by other professional intermediaries operating in a different jurisdiction, company services providers should apply KYC rules so as to be able to identify the ultimate beneficial owners of a company; reliance on an intermediary may significantly undermine the authorities' ability to obtain required information about ultimate beneficial owners. - Good Practice: Law enforcement and regulatory authorities should be able to ascertain, quickly and efficiently, the identity of directors of and the shareholders in a company serviced by a company services provider and the beneficial owners of the shares in such a company for the purposes of a criminal investigation. - Gibraltar adheres to good practice. ### Conduct of business rules and compliance culture - Ongoing monitoring of company services providers is important. - The Financial Services (Conduct of Business) Regulations 1991 provide the core principles by which licensed company services providers must act and observe high standards of integrity and fair dealing and act with due care and diligence in the best interests of their customers and the integrity of the industry. - Certain legislative enhancements are required for business conduct principles to accord with developing international practices; the requisite amendments and rules have been proposed by the FSC and incorporate many good practices that were not previously codified. - Recommendation: We recommend the early adoption of those changes. - Development of a compliance function (and compliance culture) within firms providing company management and trust services is strongly recommended; scope for an independent compliance function may be limited in small service providers. - The FSC indicated a resolution to establish in Gibraltar a branch of the Compliance Institute, endorsed by the FSC and promoted by the Gibraltar Bankers Association, with the aim of extending compliance across all sectors and establishing a professional and qualified cadre of compliance officers within the jurisdiction. - The FSC is considering a proposal to allow for the outsourcing of compliance in the company and trust sectors, similar to outsourcing of internal audit in other sectors and jurisdictions. - Recommendation: We endorse both initiatives. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/103101.pdf_