## cr03253 ## Source details **Canonical URL:** [cr03253](https://www.imf.org/-/media/files/publications/ofca/english/cr03253.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr03253.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr03253.pdf.json) --- ### Preface — context, mission, and scope - IMF mission assessment conducted in May 2002 using the “Module 2” approach to evaluate regulatory and supervisory arrangements for Vanuatu’s financial sector, including prudential aspects of measures to combat money laundering. - Assessment covered all main domestic and offshore sectors; domestic and offshore banking sectors assessed separately because they are regulated under different statutes, by different agencies, and to different standards. - Mission activities: - Reviewed current legislation and held discussions with regulatory authorities, government officials, and private sector practitioners. - Was largely unable to review regulatory documentation because of confidentiality provisions. - Encountered constraint: resignation immediately prior to the mission of the only person directly responsible for supervision of the insurance and trust companies sectors. - At time of visit, Vanuatu was under a caretaker government pending formation of a new administration following general elections. - Mission leadership and team: - Led by Mr. Richard Chalmers, MFD; team included Legal, AML, banking, insurance, trust/company-services experts and IMF MFD staff. - Report structure: - Volume I: issues requiring authorities’ attention and recommendations summarized in Appendix I. - Volume II: principle-by-principle assessment of compliance with international standards. - Authorities’ response: formal response submitted May 2003 identifying planned or implemented actions; reproduced in Appendix II of Volume I. ### Executive Summary — overall assessments and strategic choices - Overall assessment of supervision: - Domestic banking sector supervised under Reserve Bank of Vanuatu (RBV) via the Financial Institutions Act and supervised to a reasonably competent level; RBV primarily functions as host supervisor for branches and subsidiaries of banks subject to competent home-country supervision. - Offshore sector and nonbank domestic financial institutions supervised by Vanuatu Financial Services Commission (VFSC) under largely outdated legislation and subject to a low standard of supervision. - Causes of weaknesses: deficiencies in legal framework and lack of resources rather than staff competence. - AML/CFT: - Important progress made; Financial Transactions Reporting Act (FTRA) introduced September 2000 but requires refining to meet standards. - Other core AML laws date from late-1980s and require amendment to reflect international developments. - Offshore sector outlook and reputational issues: - Legal and regulatory framework requires complete overhaul. - Prevalence of “shell” institutions has caused reputational damage affecting domestic banks. - Recommendation: authorities should first review the current position and future direction of the offshore industry before committing extensive resources. - Institutional consolidation recommendation: - Current split between RBV and VFSC is an unreasonable burden on limited resources. - Options: (a) major restructuring/expansion of VFSC if it retains role; (b) preferable option—consolidate prudential supervision for domestic and offshore sectors within RBV. - Confidentiality and cooperation: - Overriding concern for secrecy hinders regulation. - Vital to build confidence in supervisory authority integrity and ensure legal authority to cooperate with foreign counterparts. ### I. Action Plan — sequence and priority of reforms - Report’s Appendix I summarizes recommendations and relative priority; recommendations primarily focus on offshore and nonbank domestic sectors. - Stage sequencing (Table 1. Action Plan): - Stage 1 — Policy: - Undertake comprehensive review (in consultation with industry) of offshore sector focus and regulatory resources; determine appropriate future direction. - Stage 2 — Regulatory: - Review RBV capacity to assume prudential supervision responsibility for offshore banks and nonbank institutions; review resource requirements for preferred infrastructure. - Stage 3 — Legal: - Review legal framework required to support policy conclusions; seek technical assistance for prompt drafting of appropriate legislation. - Stage 4 — Enforcement (ongoing; should be expedited): - Examine background and business activities of licensed offshore banks and insurance companies; identify and remove those failing to meet appropriate standards. - Introduce strict fitness-and-propriety standards for existing and new licensees. - Stage 5 — Secrecy (legal amendments to assist enforcement): - Amend offshore regulatory laws to permit regulator-to-regulator exchanges of information; remove doubts about regulator powers to access licensee information; implement gateways for regulator-to-auditor contact; impose “whistle-blowing” obligation on auditors similar to domestic banking law. - Stage 6 — Assessment report: - Incorporate detailed recommendations of the report into above processes, observing stated priorities. ### II. Possible technical assistance requirements - Need: - Some recommendations straightforward; others require external technical assistance for expertise and implementation. - Ongoing expert assistance provided by IMF’s resident technical assistance advisor at RBV since January 2002; further specialist resources may be necessary. - Key themes for technical assistance (Table 2): - Legal drafting support for State Law Office (International Banking Act, Insurance Act, AML legislation). - Banking and insurance compliance assistance to review existing licensees for basic prudential compliance. - Training VFSC/RBV staff in offshore financial services structure and risks. - Governance advice if VFSC retains regulatory responsibilities. - FIU development advice (captured within IMF regional program). - Insurance supervision and trust company supervision training and procedures development. ### Domestic banking sector — structure, supervision, and key statistics - Structure and trends: - Five commercial banks: three branches/subsidiaries of Australian institutions, one government-owned institution, and one private bank with domestic license serving primarily nonresidents. - Two foreign-owned institutions to be consolidated when ANZ (Vanuatu) completes merger in late 2002. - Domestic license permits universal banking for residents and nonresidents. - Trend: gradual withdrawal of foreign banks from domestic market due to consolidation and closure of marginal operations. - Key statistics (end-2001): - Total assets of the domestic banking system: $345.6 million. - Share of local assets: about 40 percent. - Share of deposit base sourced from nonresidents: About 15 percent. - RBV supervisory framework and capacity: - Legal basis: Reserve Bank of Vanuatu Act, 1980; Financial Institutions Act, 1999. - RBV staff complement: 53; banking supervision staff: 4 plus an IMF-sponsored expert since January 2002. - Reporting requirements: monthly and quarterly returns on assets/liabilities, profitability, large exposures, maturity profile, country exposures, capital adequacy, loan classification, equity investments. - On-site reviews: typically at least every two years; annual prudential consultations with bank senior management. - Assessment of domestic supervision: - Overall high level of compliance with Basel Core Principles (BCPs). - Domestic regime materially noncompliant with only two BCPs in principle-by-principle examination; system compliant or largely compliant with all other principles except two considered not applicable; no areas assessed as noncompliant. - Key domestic improvement areas highlighted: - Capital adequacy guideline should incorporate market risk (BCP 6). - No formal procedure for operational risk assessment (BCP 13). - Extend on-site examinations to include anti-money-laundering systems (BCP 15). ### Offshore sector — scale, structure, conduct, and assessment - Origin and condition: - Offshore center established early 1970s; core legislation enacted 1970–71; overall offshore industry appears stagnated with marked decline in some sectors. - Economic contribution and employment: - Contribution to government revenues: less than $1 million per annum on a gross basis. - Employment in finance industry: around 457 ni-Vanuatu, of whom about 300 work in domestic banks and have little or nothing to do with offshore services. - Offshore banking scale and structure: - Number of licensed “exempt” banks at assessment: 34 (historical peak over 100). - Total assets of offshore banks: about $2.4 billion (as at December 2001). - Of the $2.4 billion, $1.8 billion recorded as market-related instruments and investments. - Only three offshore banks have physical presence beyond appointment of a local agent; majority are “shell banks” with mind and management and books/records outside Vanuatu. - Licensing condition since 1993 prohibits advertising for or soliciting deposits from general public; restriction not universally observed and not enforced. - Offshore insurance and trust/company service providers: - Offshore insurance companies: 15 licensed to carry on business from within Vanuatu; few maintain physical presence beyond a registered agent. - Trust companies: 10 licensed under Trust Companies Act; eight provide services primarily to nonresidents; all license holders have physical presence. - Company service providers: sector not subject to licensing; service providers reported to service approximately 4,342 international companies and 172 exempt companies on Vanuatu register. - Regulatory and supervisory framework for offshore sector: - VFSC established 1993; staff complement: 13, including the commissioner; two staff dedicated to banking supervision. - VFSC executive powers limited; licensing and enforcement often rest with the minister of finance. - Banking Act, 1970 exempts offshore institutions from most prudential requirements; vests most executive powers in minister. - Assessment of offshore supervision: - Very few areas compliant with Basel Core Principles; Banking Act weaknesses severely restrict VFSC’s ability to implement and enforce normal supervisory processes. - Absence of reliable data prevents assessment of potential risk to depositors and market from regulatory failure. - Reputational risk for Vanuatu is very real and has largely crystallized; common perception offshore banks used for undesirable purposes. - Key offshore recommendations: - Rewrite Banking Act to align offshore provisions with Financial Institutions Act. - Confine offshore licenses to banks with local resident managers/records or branches/subsidiaries of banks licensed and supervised in home jurisdictions. - Consolidate supervision of offshore banks with domestic banks under RBV or, if VFSC retains role, provide VFSC with robust governance, legal framework, and procedures modeled on RBV. ### Regulatory weaknesses, governance, and enforcement - Governance and independence: - VFSC statutory composition mixes officials and private-sector representatives, with substantial private-sector participation including persons with direct interests in regulated entities. - VFSC lacks operational independence; minister of finance may act contrary to VFSC recommendations with no appeal. - RBV governance arrangements comply with international standards; VFSC governance falls significantly short. - Access to information and secrecy: - Prevailing attitude of secrecy and belief that Companies Act secrecy provisions override regulatory powers hinders supervisors’ access to client-specific information. - Section 381 of Companies Act grants extensive secrecy for “exempt” companies; VFSC cannot routinely share information with overseas counterparts. - Recommendation: amend laws to clearly establish regulator authority to access information and to create gateways for regulator-to-regulator cooperation domestically and cross-border. - Enforcement powers and fit-and-proper: - Current statutory powers are broad and general (e.g., section 17 of Banking Act); absence of explicit graduated remedies invites legal challenge. - Recommend clear statutory hierarchy of remedial actions including differential prudential standards, administrative fines, powers over management, and revocation/winding-up authority. - Regulatory laws should require continuous fit-and-proper criterion for significant shareholders, controllers, and managers; require advance notification of changes and empower regulators to object and enforce removals/disenfranchisement where necessary. ### Insurance sector assessment and recommendations - Market composition and data: - At end-December 2001: - 12 domestic insurance companies - 1 underwriting association - 7 insurance agents - 6 brokers - 15 offshore insurance companies - Of 13 domestic insurers: - 5 locally incorporated - 8 branches of foreign entities - Gross property premiums of licensed insurers in 2001: approximately Vt 320 million. - Legal and supervisory deficiencies: - Insurance Act, 1973 exempts “offshore” insurance companies from key provisions including statutory filing, fit-and-proper tests, minimum capital, and audit requirements. - VFSC insurance supervision limited by staff shortages; sole insurance supervisor resigned immediately prior to mission. - Mission assessment against IAIS core principles: - observant of 1 principle - materially non-observant of 11 principles - non-observant of 4 principles - 1 principle not applicable - Key insurance recommendations: - Complete revision of Insurance Act to strengthen regulatory independence, licensing, fit-and-proper tests, financial reporting, on-site inspections, cross-border cooperation, and sanctions. - Consolidate insurance supervision with RBV or create formal communication between VFSC and RBV. - Develop procedures manual covering licensing, due diligence, enforcement, and on-site supervision. - Introduce a flexible range of enforcement powers vested in regulator (not only minister) and provide statutory right of appeal. ### Trust and company service providers — findings and recommendations - Trust sector: - Trust Companies Act (1971) regulates trust business; 10 entities licensed to conduct trust business (eight servicing international clients). - No requirement to register trusts; no record of total number or value of trusts. - Gaps: scope of trust business definition excludes some activities; limited AML guidance for verification of trusts; no modern trusts legislation beyond UK Trustee Act 1925 as adopted. - Recommendations (GP1–GP6): - Expand definition of trust business; vest licensing/supervisory powers in regulator; make false/misleading application information an offence; require on-site inspection program (at least once every three years); establish statutory gateways for cross-border information exchange; require trust service providers to hold up-to-date information on settlors, protectors, and beneficiaries; apply strong AML measures for trustees and all trust service providers. - Company service providers: - No legislation regulating company service providers. - Registered companies as of March 31, 2002: - 1,323 local companies - 174 exempt companies - 4,342 international companies - Registrations Jan 1, 1999–Mar 31, 2002: 19 exempt companies and 2,948 international companies registered; 823 companies struck off. - Uses: predominantly asset- and private-investment holding vehicles; ownership largely nonresident (Asia, Australia, New Zealand). - Recommendations (GP1–GP8 and Box 1 sketch): - License and supervise company service providers; require fit-and-proper assessment; require physical presence; impose audited financial statements, client asset segregation, codes of conduct, AML/KYC obligations, periodic on-site inspections (at least once every three years); statutory gateways for information exchange; require service providers to hold and report beneficial ownership and director information; prohibit unlicensed provision of services. ### AML/CFT assessment — legal framework, operational findings, and action priorities - Legal framework reviewed includes Financial Institutions Act, Banking Act, Insurance Act, Trust Companies Act, FTRA (2000), Serious Offences (Confiscation of Proceeds) Act (repealed later), Mutual Assistance in Criminal Matters Act, Companies and International Companies Acts, Extradition Act, and related instruments. - Primary AML framework: - Serious Offences (Confiscation of Proceeds) Act (criminalizes money laundering and provides for confiscation) — noted narrow definition and deficiencies. - Mutual Assistance in Criminal Matters Act (international cooperation). - Financial Transactions Reporting Act (FTRA) (customer identification, record keeping, STRs, establishment of FIU). - FIU activity and shortcomings: - FIU received 110 STRs from start-up to end-2001: - 38 from domestic banks - 1 from the casino - 71 from interactive gaming operators - FIU limits: limited manpower (two part-time staff), no operational plan, limited on-site verification power, uncertainty whether search warrant required for records. - No prosecutions to date for money-laundering offences. - Customer identification shortcomings: - FTRA requires identification only when transaction amount exceeds Vt 1 million (about $7,000). - FTRA does not require customer identification on all account openings; Guidelines require it but lack force of law. - Recommendation: Amend section 10 of FTRA to require customer identification on all account openings and when establishing any business relationship; FIU to issue guideline on acceptable identification documents. - On-site verification and legal clarity: - Secrecy provisions in Companies Act and International Companies Act create legal uncertainty preventing FIU and regulators from performing on-site verification of individual account records. - Recommendation: Amend FTRA to override secrecy provisions for AML purposes and to protect institutions disclosing information; clarify powers to permit FIU/regulators to review random samples of individual accounts. - FIU strengthening and strategy (examples from Box 2): - Provide FIU with operational strategy and adequate resources; set a rolling 12-month strategic plan. - Immediate actions: organize meetings with industry within six months; build an STR database within three months; introduce internal STR dissemination procedures within three months; organize meeting with financial regulators within three months. - Confiscation powers and legal gaps: - Serious Offences (Confiscation of Proceeds) Act lacked specific power to confiscate proceeds/instrumentalities; narrow proceeds definition; no power to freeze accounts; production orders limited. - Recommendation: Amend confiscation law to include specific confiscation and freeze powers and to widen definition of proceeds; extend production orders to include bankers’ books. - Cross-sectoral AML/CFT priorities (selected from Table 3 and Table 9): - High priorities include: fundamental offshore sector review; assess RBV capacity to assume prudential supervision; review legal framework for offshore/nonbank sectors; cease licensing of privately owned “shell” financial institutions; restrict licenses to institutions with fully staffed offices in Vanuatu or to branches/subsidiaries of recognized foreign banks; undertake comprehensive review/background checks of all offshore licensees; clarify legal authority of supervisors to access information; introduce legal gateways for supervisory exchanges; amend FTRA to require customer identification at account opening; require record retention for at least 5 years; broaden STR protections; require VFSC and auditors to report suspicious transactions; provide FIU with more manpower; include money laundering as extraditable offence; extend mutual assistance to non-commonwealth countries without treaties. ### Part 2 and 3 recommendations — AML/CFT in prudentially regulated and other sectors - Organizational and administrative arrangements: - Provide FIU with more manpower to verify AML compliance by banks and insurers. Priority: High. - Clarify FIU investigative powers and on-site supervisory powers of regulators vis-à-vis Companies Act secrecy provisions. Priority: High. - Strengthen coordination between FIU and financial regulators. Priority: High. - Sector-specific actions: - Initiate on-site examinations for customer identification, record-keeping, and STR compliance. Priority: High. - Introduce legal gateway for offshore banking regulator to exchange information with counterparts abroad. Priority: High. - Strengthen capacity and legislation for insurance, trust companies, and company service providers to ensure AML coverage and supervision. Priority: High. ### Authorities’ response and implementation actions (Government of the Republic of Vanuatu) - Government established a high-level committee (RBV, VFSC, State Law Office, Office of Prime Minister, Ministry of Finance and Economic Management) to review report and recommend actions. - Legislative and institutional measures implemented or proposed (selected exact measures): - International Banking Act passed; takes effect January 1, 2003. - VFSC Act amended November 2002 to change board composition. - Amendments to Financial Institutions Act (November 2002) and International Banking Act give supervisors explicit powers to access information. - FTRA to be amended to allow greater information sharing between supervisory authorities and the FIU. - RBV issued prudential guideline 9: Customer Due Diligence in July 2002 and a prudential guideline on ‘fit-and-proper’ criterion in September 2002. - The Financial Institutions Act amended to support fit-and-proper Guideline; International Banking Act includes fit-and-proper criterion and ongoing approval powers for ownership changes in excess of 10 percent of issued capital. - With International Banking Act enactment (November 2002), RBV now has supervisory responsibility for offshore banks. - International Banking Act provisions (as enacted) include: - requirement for licensees to maintain physical presence in Vanuatu with meaningful mind and management located within jurisdiction (transition arrangements allow existing licensees a one-year period with some relaxations); - minimum capital requirement of US$0.5 million (adjustable to reflect size/nature of risks); - powers for RBV to issue/revoke licenses, conduct on-site examinations, request data, place limits on business, issue directives and prudential guidelines, and share information domestically and internationally; - requirement for licensees to submit statistical data subject to external auditor review; RBV to conduct on-site inspections including AML reviews. - The Serious Offences (Confiscation of Proceeds) Act was repealed and Proceeds of Crime Act passed November 2002, including full forfeiture and restraining, monitoring and production powers. - Extradition Act repealed and replaced by Extradition Act No 16 of 2002; new Act includes money laundering as an extraditable offence. - Financing of Terrorism is an offense under Proceeds of Crime Act No. 13 of 2002. - Bills for the United Nations Act of 2002 and International Convention for the Suppression of the Financing of Terrorism Act passed November 2002. - FTRA amended to include suspicious transaction reporting where financing of terrorism is suspected. - Government agreed to provide additional resources to the FIU; FIU to issue revised guidelines on acceptable identification documents consistent with RBV guideline. - Members of the FIU participated in RBV on-site examinations and will continue to do so. - Fit-and-proper guidelines issued for domestic and offshore banks; similar criteria to be included in legislation covering trust companies and company service providers. - Sectoral reform timetables and commitments: - New legislation proposed for Insurance Act, Trust Companies Act, and company service provider regulation targeted for introduction into parliament in the second half of 2003. - VFSC to approve insurance project (completed 29 October 2002). ### Selected exact numeric and factual highlights preserved - Domestic banking total assets (end-2001): $345.6 million. - Offshore banks licensed at time of assessment: 34 (down from peak over 100). - Offshore banking total assets (as at December 2001): about $2.4 billion, of which $1.8 billion were market-related instruments and investments. - Contribution of offshore sector to government revenues: less than $1 million per annum on a gross basis. - Employment in finance industry: around 457 ni-Vanuatu; about 300 work in domestic banks. - FTRA customer-identification threshold at time of assessment: Vt 1 million (about $7,000). - Sanction for unlicensed banking business (approximate): approximately $350 per day. - Administrative capital figure used by VFSC: $150,000. - Estimated cost for VFSC to absorb expanded audit costs: up to Vt 1 million. - Insurance sector counts at end-December 2001: - 12 domestic insurance companies - 1 underwriting association - 7 insurance agents - 6 brokers - 15 offshore insurance companies - Gross property premiums of licensed insurers in 2001: approximately Vt 320 million. - FIU STR counts to end-2001: total 110 STRs (38 from domestic banks; 1 from casino; 71 from interactive gaming operators). - New International Banking Act capital requirement for licensees: minimum capital of US$0.5 million (with adjustments based on size and risk). - Transitional licensing provision: existing international banks/exempt financial institutions taken to be issued a license under International Banking Act valid for one year commencing January 1, 2003, during which physical presence and minimum capital adequacy provisions are relaxed (subject to other Act provisions). *Source: IMF mission report and Government of the Republic of Vanuatu response (IMF mission assessment conducted in May 2002; authorities’ response and legislative actions as set out in the report).* ### Preface................................................................................................................. ### Preface ### Context and scope - The mission conducted an assessment in May 2002 of the extent to which the regulatory and supervisory arrangements for Vanuatu’s financial sector complied with certain internationally accepted standards and measures of good practice, including the prudential aspects of measures to combat money laundering. - The assessment covers all main domestic and offshore sectors, and the prudential aspects of measures to combat money laundering. - Domestic and offshore banking sectors were assessed separately because they are regulated under different statutes, by different agencies, and to different standards. - The overall assessment was carried out on the basis of the “Module 2” approach. ### Mission activities and constraints - The mission reviewed relevant current legislation and held discussions with regulatory authorities, certain government officials, and a broad cross-section of private sector practitioners. - The mission was unable, with some minor exceptions, to review regulatory documentation because of confidentiality provisions. - The resignation, immediately prior to the mission’s arrival, of the only person directly responsible for supervision of the insurance and trust companies sectors limited the mission’s ability to review practices in these areas. Attempts to invite that person to meet the mission were unsuccessful. - At the time of the mission’s visit, Vanuatu was under a caretaker government pending the formation of a new administration following general elections. ### Mission leadership and team - The mission was led by Mr. Richard Chalmers, Monetary and Financial Systems Department (MFD). - Team members included: - Ms. Cecilia Marian (Legal Department) - Mr. Hideaki Suzuki (anti-money-laundering expert, formerly Head of the Japanese Financial Intelligence Unit) - Mr. Dick Lang (banking expert, formerly Deputy Governor of the Reserve Bank of New Zealand) - Mr. Gordon Rowell (Head of Insurance Supervision, Cayman Islands Monetary Authority) - Mr. Andrew Le Brun (trust and company services expert, Director of Policy and Legal at the Jersey Financial Services Commission) - Ms. Megan Thomas (MFD) assisted with report preparation. ### Report structure and authorities’ response - The report has two volumes: - Volume I discusses issues requiring authorities’ attention and offers recommendations summarized in Appendix I. - Volume II provides a principle-by-principle assessment of compliance with the international standards forming the basis for the assessment. - In May 2003, the authorities submitted a formal response identifying planned or implemented actions to address recommendations; the response shows a substantial level of acceptance and implementation and is reproduced in Appendix II of Volume I. ### Executive Summary ### Overall assessment of supervision - The regulatory framework is divided into two distinct parts: - The domestic banking sector is supervised under the Reserve Bank of Vanuatu (RBV) within the framework of the Financial Institutions Act and is supervised to a reasonably competent level; however, the RBV primarily functions as a host supervisor for branches and subsidiaries of banks subject to competent home country supervision. - The entire offshore sector and the nonbank financial institutions within the domestic market are subject to a low standard of supervision by the Vanuatu Financial Services Commission (VFSC) under legislation that, for the most part, is old and out of tune with modern expectations. ### Causes of weaknesses - Weaknesses are largely consequences of deficiencies in the legal framework and lack of resources; they are not intended as a comment on the competence and dedication of staff. - Despite constraints, the VFSC has, over the past year or so, identified a significant number of offshore banks requiring enforcement action. ### Anti-money-laundering (AML) and CFT - Vanuatu has made important progress on measures to combat money laundering and the financing of terrorism, but further work is required to make the system robust. - The Financial Transactions Reporting Act (FTRA) was introduced in September 2000 to avoid potential blacklisting by the Financial Action Task Force (FATF), but it requires refining to bring it more fully into compliance with standards. - Other core AML laws were enacted in the late-1980s and require amending to reflect international developments since that time. ### Offshore sector outlook and reputational issues - The legal and regulatory framework for the offshore sector requires a complete overhaul. - Before devoting resources to an overhaul, the authorities should review the current position and future direction of the offshore industry to assess the real value to the wider economy and to determine the appropriate pace of change and resource allocation. - The prevalence of “shell” institutions has caused reputational damage that has affected domestic banks; delays in restructuring could lead to further international political and commercial pressures and disrupt the domestic financial market. ### Institutional consolidation recommendation - The current division of supervisory responsibilities between the RBV and the VFSC places an unreasonable burden on limited resources. - Options: - If VFSC retains supervisory role, it would require major restructuring and expansion. - The mission considers it preferable to build on RBV strengths and consolidate responsibility for all aspects of prudential supervision of both domestic and offshore sectors within the RBV. ### Confidentiality and cooperation - An overriding concern for secrecy hinders the regulatory process. - Resistance to supervisory information requests appears to reflect distrust of how supervisors will use information. - It is vital to build confidence in the integrity of the supervisory authority and its staff and to ensure supervisors have full legal authority to cooperate with foreign counterparts. ### I. Action Plan ### Overview - Appendix I summarizes all recommendations and indicates relative priority. - Recommendations are primarily focused on the offshore sector and the nonbank domestic sector. - The mission suggests considering recommendations within the action plan framework detailed below. ### Sequence and stages (Table 1. Action Plan) - The plan reflects a logical sequence; some elements may be pursued simultaneously, but many steps are contingent on earlier-stage decisions. Stage 4 (enforcement) is ongoing and should be further expedited. - Stage 1 — Policy: - Undertake a comprehensive review (in consultation with the industry) of the focus of the business activities in the offshore sector and of the regulatory resources available and determine the most appropriate future direction of the sector. - Stage 2 — Regulatory: - Review the RBV’s capacity to assume responsibility for the prudential supervision; first, of the offshore banks and, second, of the remainder of the domestic and offshore nonbank financial institutions. Review the resource requirements for whatever overall regulatory infrastructure is preferred. - Stage 3 — Legal: - Conduct a review of the legal framework needed to support the conclusions of the policy review and seek technical assistance to enable prompt drafting of appropriate legislation. - Stage 4 — Enforcement: - Undertake a complete examination (with technical assistance where necessary) of the background and business activities of the existing licensed offshore banks and insurance companies, and identify those that fail to meet appropriate standards and pose a threat to the reputation of the jurisdiction. - Take prompt action to remove those found to be unsuitable. - Introduce strict standards of fitness and propriety for all existing and new licensees. - Stage 5 — Secrecy (legal amendments to assist enforcement): - Enact immediate amendments to the offshore regulatory laws to: - permit regulator-to-regulator exchanges of information (both domestic and cross-border); - remove any doubts about the powers of the regulator to access complete information from licensees; - implement gateways for the regulator to talk directly to the auditors; - impose a “whistle-blowing” obligation on the auditors similar to that contained in the domestic banking law. - Stage 6 — Assessment report: - Consider the detailed recommendations contained in the report and incorporate them into the above processes, taking note of the respective priority attached to each. ### II. Possible Technical Assistance Requirements ### Need and delivery - The report’s recommendations identify a significant number of issues; some are straightforward, others may require external technical assistance to provide expertise and to assist with implementation. - Ongoing expert assistance will, in large part, continue to be provided by the IMF’s resident technical assistance advisor attached to the Bank Supervision Division of the RBV since January 2002. Further specialist resources may be necessary to complement local capacity. ### Key themes for technical assistance (Table 2. Key Themes for Technical Assistance) - Legal drafting: - Support for the State Law Office to draft and/or comment on changes in legislation resulting from the offshore sector and regulatory framework review (particularly the International Banking Act and the Insurance Act), and recommended changes to AML legislation. - Banking and insurance compliance: - Assist VFSC/RBV with review of all existing licensees to establish compliance with basic prudential principles. - General offshore business: - Provide training to VFSC/RBV staff in the structure and risks associated with offshore financial services, contingent on decisions about supervisory location. - Governance of regulatory agencies: - If VFSC retains some or all regulatory responsibilities, advise on governance model, organizational structure, systems, and procedures. - Financial intelligence units: - Advise on ongoing development of the FIU (already captured within the current IMF regional program). - Insurance supervision: - Assist with development of supervisory procedures, manuals, guidance notes, and provide training for supervisory staff. - Supervision of trust companies: - Assist with development of supervisory procedures and provide training in principles of regulation of trust and company service providers. ### III. Background ### Domestic sector (opening) - The mission’s report proceeds to discuss the domestic sector (Banking...), with subsequent chapters addressing offshore sector, regulatory and supervisory framework, prior assessments, and theme-specific assessments for banking (domestic and offshore), insurance, trust company sector, company service providers, and AML/CFT measures. *Source: IMF mission assessment conducted in May 2002 and reported in the Preface and Executive Summary of the assessment report.* ### 5. The domestic banking sector comprises five commercial banks, including three branches ### 5. The domestic banking sector comprises five commercial banks, including three branches and subsidiaries of Australian institutions, one government-owned institution, and a private bank ### Domestic banking sector — structure and trends - The domestic banking sector comprises five commercial banks: - three branches and subsidiaries of Australian institutions, - one government-owned institution, - one private bank that holds a domestic license but is not involved in the local market and offers private banking facilities to nonresidents. - Two foreign-owned institutions will be consolidated when ANZ (Vanuatu) completes the merger of its acquisition, in late 2002, of the local subsidiary of Bank of Hawaii. - The domestic license permits universal banking operations servicing both resident and nonresident customers. - Focus of banks: primarily on traditional retail and commercial activities. - Trend: gradual withdrawal of foreign banks from the domestic market due to consolidation and closure of marginal operations; recent continuation with the sale of the Bank of Hawaii’s business. ### Key statistics for the domestic banking system (end-2001) - Total assets of the domestic banking system: $345.6 million. - Share of local assets: about 40 percent. - Balance (almost entirely deposit placements overseas, mostly by foreign banks with their respective parent banks). - Share of deposit base sourced from nonresidents: About 15 percent. ### Insurance (domestic) - Composition: - 12 insurance companies, - 1 underwriting association, - 7 insurance agents, - 6 brokers. - Ownership: Five companies locally incorporated; eight are branches of foreign entities (mostly from Australia, Europe, and New Zealand). - Business mix: life and nonlife companies, mostly writing property, motor, life, and health insurance. - Heavy reliance on overseas reinsurance, particularly for natural disaster cover. - Data limitations: There are no accurate data for gross premiums or other relevant indicators. ### Other financial institutions and securities market - Nonbank financial sector comprises credit unions, small savings institutions, and cooperatives offering deposit and loan facilities. - Supervision: - Credit unions supervised by Vanuatu Credit Union League (industry body). - Other institutions established under specific Acts that define activity limitations but provide for no supervision. - Scope of assessment: These institutions have not been included within the scope of this assessment. - Local securities market: almost non-existent; six organizations understood to have licenses to deal in securities under the Prevention of Fraud (Investments) Act. ### Offshore sector — origin and development - Origin: Established in the early 1970s, initiated mostly by the British co-administration under the Anglo-French Condominium; core legislation enacted in 1970–71 and remains the basis for the current legal framework. - Original focus: English-speaking markets in the region; later realignment toward Southeast Asia and Hong Kong due to regional legislative changes. - Primary services historically: offshore deposit-taking and incorporation of international companies (international business companies). - Decline in trust services and lack of development of captive insurance market. - Overall condition: the offshore industry overall appears, at best, to have stagnated and has shown marked decline in some sectors. - Attributed causes of decline: - changed perceptions internationally of certain offshore banking structures; - slow response by government and private sector to market changes; - failure to maintain up-to-date legislation; - increased competition in the region; - perception among client base that Vanuatu lacks political and economic stability. ### Offshore sector — economic contribution and employment - Contribution to government revenues: less than $1 million per annum on a gross basis. - Employment in the finance industry as a whole: around 457 ni-Vanuatu. - of whom about 300 work in the domestic banks and have little or nothing to do with offshore services. - Data gaps: no information on additional “downstream” effects of the offshore sector. ### Offshore banking — scale, structure, and conduct - Number of licensed “exempt” banks at time of assessment: 34. - Total assets of offshore banks: about $2.4 billion. - Term “exempt”: under the Banking Act of 1970, offshore institutions are exempted from most prudential standards and reporting requirements applied to the domestic sector. - Historical peak: offshore banking sector comprised over 100 institutions at its peak; significant decline largely due to moves by authorities to “weed out” the market. - Ownership and affiliation: - Five banks are subsidiaries of foreign banks. - Remainder have no apparent affiliation with established financial institutions overseas; many linked to trading companies in Southeast Asia; significant number controlled by private individuals across Asia Pacific, Europe, and the Americas. - Activities and records: - Activities of the banks are not a matter of public record; information held by authorities is limited. - VFSC understands several are used primarily to provide “in-house” treasury operations for group companies. - Licensing condition since 1993: condition attached to all new licenses requiring banks not to advertise for, or otherwise solicit, deposits from the general public. - Compliance: restriction far from universally observed and regulatory authorities do not have resources to enforce it. - Physical presence: only three offshore banks have physical presence in Vanuatu beyond appointment of a local agent; effective “mind and management,” and books and records, are believed to be located in controllers’ jurisdictions. - Characteristic: structure typical of “shell banks.” ### Offshore insurance - Offshore insurance sector comprises 15 companies licensed to carry on business from within Vanuatu. - Physical presence: very few maintain physical presence beyond statutory registered agent. - Market focus: believed primary target market is the sale of tax-efficient policies into Australia. - Data limitations: mission unable to obtain complete information on types of business written. ### Trust and company service providers - Trust companies: - 10 entities licensed under the Trust Companies Act to conduct trust business (acting as trustee, executor, or administrator). - Of these, eight provide services primarily to nonresidents; two linked to native title issues. - Three offshore service providers associated with international accounting firms; two with legal practices. - Provision of trust services not significant in offshore market, largely because use of trusts is not part of Southeast Asian client culture. - Company service providers: - No complete data because sector not subject to licensing or regulatory requirements. - Several accountants, lawyers, and independent service providers active, providing company formation, secretarial, management, administration, and nominee services. - They service approximately 4,342 international companies and 172 exempt companies on the Vanuatu register (i.e., companies prohibited from carrying on business in Vanuatu), and an unknown number of foreign-incorporated offshore companies. - Activities of international companies: no reliable information; believed predominantly asset-holding and private investment vehicles, ownership largely based in Australia, New Zealand, and Southeast Asia. ### Regulatory and supervisory framework - Division of regulation: - Reserve Bank of Vanuatu (RBV) responsible for licensing and supervision of the domestic banking sector under the Financial Institutions Act, 1999. - Vanuatu Financial Services Commission (VFSC) responsible for regulation of all other domestic and offshore sectors. - VFSC executive powers: limited; responsibility for licensing and enforcement usually rests directly with the minister of finance. - RBV details: - Established in 1980. - Typical central banking functions including promotion of a sound financial structure via regulation of domestic banks. - Staff complement: 53; of whom 4 allocated to banking supervision. - Immediately prior to mission’s visit, director of bank supervision promoted to deputy governor but intended to retain overall responsibility for bank supervision. - IMF placed a technical assistance advisor with the bank supervision division in January 2002. - VFSC details: - Established in 1993. - Roles: registrar of companies; regulator of offshore banking sector, domestic and offshore insurance sectors, and local trust companies. - Primary legislation administered (as used in the assessment): - Vanuatu Financial Services Commission Act, 1993; - Banking Act, 1970; - Insurance Act, 1973; - Trust Companies Act, 1971; - Companies Act, 1986; - International Companies Act, 1992; - Prevention of Fraud (Investments) Act. - Also administers Acts relating to trademarks, patents, stamp duties, and charities. - Statutory objectives include protecting the public against financial loss arising from dishonesty, incompetence, and malpractice, and protecting the reputation of Vanuatu as a financial center. - Staff complement: 13, including the commissioner (the only full-time employee represented on the board). - Two staff dedicated to banking supervision function. - Staffing issue: immediately prior to mission’s arrival, the sole employee directly responsible for supervision of the insurance and trust company sectors resigned with immediate effect and indicated intention not to return to the office. ### Prior assessments of the financial sector - Financial Stability Forum (FSF): - Report on Offshore Financial Centers (OFCs) published April 5, 2000; FSF published a categorization of OFCs on May 26, 2000 “reflecting their perceived quality of supervision and perceived degree of cooperation.” - FSF included Vanuatu within Group III, jurisdictions considered to fall significantly short of standards adopted by countries in the other two groups. - Joint APG/OGBS mutual evaluation report: - Asia Pacific Group on Money Laundering and Offshore Group of Banking Supervisors conducted a joint mutual evaluation of Vanuatu in early-2000. - Report made recommendations to strengthen the anti-money-laundering (AML) system; recommendations taken into account in drafting the Financial Transactions Reporting Act (FTRA) implemented in September 2000. - Financial Action Task Force (FATF): - Vanuatu was subject to FATF review in mid-2000 in the context of identifying Noncooperative Countries and Territories (NCCTs). - Vanuatu was not placed on the list of NCCTs. ### Assessment of general issues — cost-benefit and strategic choices - Information constraints: - Lack of available information on the exact scale and nature of offshore activities impedes accurate risk assessment and resource allocation. - Potential risk that proposed measures may be excessive given actual circumstances. - Recommendation: authorities should undertake a cost-benefit analysis of the offshore sector to: - determine its true economic and financial value, - provide guidance on risks and future allocation of resources, - consider the potential for further reputational damage to the jurisdiction. - Observations on internal views: significant differences of opinion within Vanuatu about real contribution of offshore sector to the economy; improved analysis important. - Strategic options for the offshore sector: - “Easy” option: leave matters as they stand. - Consequences: - increased international criticism, - continuing reputational damage, - commercial decisions by counterparties (e.g., banks unwilling to process payments involving Vanuatu counterparties due to enhanced due diligence costs), - undermining of investor confidence in both domestic and offshore sectors. - “Preferred” option: enhance regulatory regime to meet international standards. - Consequences: - several offshore institutions likely to migrate or close rather than submit to greater scrutiny or bear extra regulatory costs, - likely fall in registrations of international companies due to greater transparency requirements, - over time jurisdiction may become more attractive to corporate business and financial institutions needing a well-regulated environment. - Mission recommendation (urgency): authorities, in consultation with the private sector, should undertake a fundamental review of: - the focus of business activities in the offshore industry, - the regulatory framework, - the direction in which they wish to proceed. - Review must account for industry capacity to deliver high-quality product and government capacity to exercise effective and efficient oversight. - Cost and benefit caveat: any jurisdiction hosting international financial services should be willing and able to make a minimum investment in a regulatory regime that achieves certain core standards, irrespective of market size. *Source: IMF mission report.* ### 34. Such changes in the structure of the market will feed through, in the short term, into ### cr03253 - 34. Such changes in the structure of the market will feed through, in the short term, into ### Market-structure changes and short-term impacts - Reductions in government revenues from license and registration fees. - Possible employment pressures in the industry. - Consequences cannot be accurately assessed because lack of transparency in the whole offshore sector makes it impossible to identify the underlying nature of much of the business conducted through Vanuatu. - A comprehensive review of the market should be used to identify areas for potential development that might substitute for declines in traditional products. ### Licensing of "shell" financial institutions and supervision - Current practice of licensing “shell” financial institutions poses a fundamental obstacle to implementing effective supervision in line with international standards. - Absence from the jurisdiction of any real “mind and management” or of the primary books and records prevents the supervisory authority from undertaking most key procedures forming part of the core principles for effective banking supervision. - Restricting licensed banks to related-party transactions has been ineffective and cannot be properly monitored or enforced. - Argument that “in-house” restricted entities do not require supervision to the same standard as other deposit takers is unsustainable: - If so restricted, there is no justification in licensing them as banks under the Banking Act. - Without a proper supervisory regime, there is no way of ensuring compliance with license conditions. - Effective regime for “shell” operations only possible when institutions are branches or subsidiaries of recognized international institutions and the home supervisor accepts full responsibility for consolidated supervision. - Otherwise, all licensees should be required to maintain a physical presence in Vanuatu with supervisory access to management, books and records, systems and controls, and other relevant aspects of the business as the RBV currently does for domestic banks. ### Legal framework: need for comprehensive overhaul - Regulatory laws are largely based on concepts of the 1970s, with subsequent amendments, and excessively rely on general company law rather than specialist financial services legislation. - Regulators lack legal authority and powers to enforce decisions; current human and financial resources devoted to offshore regulation are largely being wasted. - Government must lead a comprehensive review of the legal framework, using technical assistance where appropriate and available; private-sector consultation is essential but should not be delegated to the private sector to design the regime. - Proposals for a new International Banking Act have been under private-sector development for over four years without resolution. - If a new International Banking Act is adopted: - Use implementation to weed out institutions that do not meet current standards of integrity and require remaining institutions to reach proper financial standing. - Consider requiring all existing licensees to reapply for authorization under the new legislation within a specified period (six months, for example). - Apply criteria on fitness, propriety, and physical presence in Vanuatu vigorously at reauthorization. - Where significantly higher capital is demanded, consider immediate intermediate threshold with a short grace period for full compliance. - Avoid automatically “grandfathering” existing institutions. ### Organization, independence, and resources of regulatory authorities - Marked contrast between supervision of the domestic banking sector (RBV) and the offshore industry (VFSC); RBV regime is far superior when benchmarked against international standards. - VFSC disadvantaged by outdated legislation; VFSC staff show dedication but work under extremely difficult conditions. - VFSC lacks real decision-making authority; minister of finance can act against VFSC advice and has done so on several occasions. - Statutory composition of the VFSC Board comprises: - The commissioner; - The Governor of the Reserve Bank of Vanuatu; - A member (appointed by the minister) who has legal qualifications or experience; and - Four members (appointed by the minister), one of whom is a member of the Executive Committee of the Finance Center Association, and three of whom have previous knowledge and experience of financial business. - At assessment time, a vacancy existed for the legally qualified board member; the appointment was indicated to be from within government rather than private sector. - Of the four minister-appointed members, three are from the private sector. - Substantial private-sector participation on the VFSC board includes practitioners with direct interests in the regulated sector; the current chairman is chief executive of a financial services group partly regulated by the VFSC and providing agency services to other regulated entities. - Reorganization of the VFSC to create a more balanced structure is reasonable, but preference expressed to build on strengths of RBV systems: - Supporting two separate regulatory authorities is a luxury in a small country with limited financial resources and technical expertise. - RBV governance arrangements comply with international regulatory standards; VFSC governance arrangements fall significantly short. - Recommendation: consider consolidating regulation of domestic and offshore banking sectors under RBV: - Expected standards of supervision are the same for both sectors. - RBV systems are more robust and should gain from VFSC staff knowledge of offshore market. - Transfer all prudential supervision functions into RBV, including insurance (both domestic and offshore), trust companies, and company service providers. - Leave company registry and other nonprudential VFSC functions within the current organization, with governance amendments to reflect reduced role. - Resource implications: - Current resources devoted to offshore supervision are insufficient and would need to be increased very substantially if the number of licensees remained at current level. - Effective supervision will likely lead to a significant reduction (in the short term, at least) in the number of institutions that meet enhanced criteria or wish to submit to more rigorous supervision. - Appropriate resource levels for RBV depend on identification of the state of the residual market. ### Access to information by regulators - Concern about prevailing attitude throughout financial sector to regulatory access to information. - RBV and VFSC (except for trust companies) have statutory powers to request whatever information needed to carry out duties. - Regulators sometimes challenged or ignored in exercising authority to access client-specific information (e.g., to check compliance with account-opening procedures or verify credit-risk controls). - Reasons for challenge include beliefs that: - Provisions of the Financial Institutions Act, Banking Act, and Financial Transactions Report Act do not override Companies Act secrecy provisions. - An unspecified universal secrecy law exists to prevent such access. - Regulatory authorities cannot be trusted with information and might disclose or misuse it. - Recommendations: - Clearly establish legal authority for regulators to access information and override potentially conflicting provisions. - Review and strengthen provisions relating to professional confidentiality and integrity as needed, noting need to comply with international standards of regulator-to-regulator cooperation. - Pursue vigorously any incidents where information is misused to convey correct message to industry and regulator staff. ### Cross-border cooperation - RBV has authority under section 55(3) of the Financial Institutions Act to cooperate with domestic and foreign counterparts and uses it routinely as host supervisor for foreign banks. - VFSC laws lack such a “gateway”; Companies Act binds VFSC to absolute secrecy regarding exempt or offshore institutions (with respect to information collected under that Act), except in very narrow circumstances. - Because offshore sector is predominantly international, ability to exchange information with overseas counterparts is essential to integrity of financial system and to counter regulatory and criminal abuse. - VFSC staff attempt to assist overseas counterparts but cannot routinely push beyond legal authority without exposure to potential criminal liability. - Recommendation: whichever agency supervises the offshore sector in future should be granted powers of cross-border cooperation similar to those in domestic banking legislation. ### Enforcement powers - RBV and VFSC (the latter acting through minister of finance) have statutory powers to require licensed institutions to remedy identified problems or fall into compliance. - Current statutory powers are cast in very general terms, permitting regulators to issue directives "as it thinks fit"; absence of clearly defined courses of action is unhelpful and may invite challenges of unreasonableness. - Recommendation: statute should provide a framework identifying a hierarchy of remedial actions, typically including: - Ability to set differential prudential standards; - Power to levy administrative fines; - Power to require specific actions affecting management; - Ultimate power to revoke authorization and bring about orderly winding-up of the institution. - Financial Institutions Act partially achieves this objective; mission recommends reviewing provisions and establishing a common basis for enforcement measures across all sectors, both domestic and offshore. - Prefer incorporation of enforcement powers in specific regulatory laws rather than subsuming them within general Companies Act powers. ### Fit-and-proper criterion and ongoing suitability - Ensuring institutions are controlled and managed at all times by persons who are fit and proper is essential for both prudential and anti-money-laundering purposes. - Financial Institutions Act (section 13) and Insurance Act (section 6) provide for fit-and-proper assessment at licensing stage. - Financial Institutions Act includes provisions relating to subsequent changes of ownership, but no direct controls over future changes in management. - Section 42 of the Financial Institutions Act disqualifies persons from being directors and managers of banks if they have been convicted of offences involving dishonesty, or are bankrupt, or have been involved with a financial institution that has had its license revoked. - Other regulatory laws affecting domestic and offshore sectors (except Trust Companies Act) are silent on continuous fit-and-proper criterion beyond disqualification for specified reasons (e.g., conviction of offence involving dishonesty). - VFSC practices: - Requires detailed personal questionnaires on shareholders, controllers, and directors at application and conducts due diligence enquiries with overseas agencies. - Offshore laws (except Trust Companies Act) do not provide for prior notification of subsequent changes and do not explicitly empower VFSC to object to new shareholders or managers. - Recommendations: - Regulatory laws should require fit-and-proper criterion to be met on a continuous basis for all significant shareholders, controllers, and managers. - Any changes in such positions should be notified in advance to the regulatory authority and regulators should have power to object to new appointments. - Where appointments take place without prior consent, regulator should be empowered to force removal of the individual (for managers) or to disenfranchise an undesirable shareholder or controller. - Exemption in the form of a post-event notification requirement for changes in significant shareholdings should apply to institutions with publicly-traded shares. ### Assessment of domestic banking sector (summary points) - There are five banks licensed to conduct business in Vanuatu. - Two (soon to be merged into one) are subsidiaries of ANZ Bank (Australia). - One is a branch of Westpac Bank (Australia). - The National Bank of Vanuatu is government-owned. - The fifth, European Bank, is a small, privately-owned institution. - Service scope: - The first four offer a full range of commercial and retail banking services. - European Bank offers a limited range of services targeted at high-worth individuals and companies; its operations are almost entirely offshore. - Branch network: - The National Bank has a widespread branch network throughout Vanuatu. - The two Australian banks operate only in Vila and Santo. - All banks have been operating in Vanuatu for some years. - Total assets as at the end of December were approximately Vt 50 billion (about $350 million), of which about Vt 32 billion were held outside Vanuatu. *International Monetary Fund mission report.* ### 60. The RBV is responsible for the licensing and supervision of the domestic banks. The ### The RBV is responsible for the licensing and supervision of the domestic banks. ### Legal and institutional framework for domestic banks - Principal laws: - Reserve Bank of Vanuatu Act, 1980 - Financial Institutions Act, 1999 - Statutory mandates: - RBV Act: empower the Bank “to promote a sound financial structure and to regulate banks.” - Financial Institutions Act: places responsibility on the RBV to protect bank depositors and confers specific powers including: - to issue and revoke banking licenses; - to conduct on-site examinations; - to request data; - to place limits on the type and nature of business undertaken by banks; - to issue prudential guidelines. - Pre-license and ongoing supervision: - Due diligence and assessment prior to issuing a domestic banking license covering ownership, management, proposed capital (source and structure), risk management, and accounting and internal control systems. - Ongoing supervision under the Financial Institutions Act, supplemented by prudential guidelines addressing: - minimum capital requirements; - maximum exposure limits; - restrictions on shareholdings; - customer identification requirements; - constraints on connected lending; - credit risk management, loan classification, provisioning for impaired assets; - liquidity ratio; - issues relating to the appointment and role of external auditors. - Reporting and monitoring: - Banks required to submit monthly and quarterly data on assets and liabilities; profitability; large credit exposures and deposits; maturity profile of assets and liabilities; country exposures; exposure to related entities; capital adequacy; loan (asset quality) classification; and equity investments. - Compulsory public disclosure requirements: audited annual accounts must be submitted to the RBV, published in the press, and made available to members of the public. - On-site reviews typically at least every two years, largely focused on credit exposures and policies. - Annual prudential consultations between RBV and senior management of banks. ### Anti–money laundering liaison - The Financial Intelligence Unit (FIU) of the State Law Office has prime responsibility for Vanuatu’s anti-money-laundering activities. - RBV maintains close liaison with the State Law Office, has reviewed domestic banks’ AML policy documents, and discusses policy implementation with banks as part of supervisory activities. ### Assessment of domestic supervision - Overall finding: - The assessment indicates a high level of compliance with the Basel Core Principles (BCPs). - Legislation and guidance: - Financial Institutions Act (1999) modeled on an IMF draft with amendments incorporating aspects of comparable Australian legislation. - Prudential guidelines issued, some based on Australian equivalents. - Prudential guidelines on ‘customer due diligence’ and ‘fit-and-proper’ requirements for management and directors issued subsequent to the mission’s visit. - Legislation and guidelines meet most internationally accepted prudential standards as set out in the BCPs. - Supervisory resources and capacity: - Supervision provided by a specialist unit of the RBV with four permanent staff plus a temporary (IMF-sponsored) expert, headed by the RBV’s deputy governor. - All local staff have several years training and experience; actual supervision appears to be of a good standard. - RBV is “home” supervisor to only one bank at present; if that changes, further resources and skills may be needed. - Principal problem: - Spillover reputational damage from poor offshore legislation and supervision; recommendation to bring offshore legislation and supervision into line with domestic regime and merge supervisory regimes. - BCP compliance summary: - Domestic regime materially noncompliant with only two of the BCPs in the principle-by-principle examination. - System compliant or largely compliant with all other principles except two considered not applicable. - No areas assessed as noncompliant. ### Key areas for improvement (domestic) - Objectives (BCP 1.1): - Weakness arises from inconsistency between offshore and domestic treatment and lack of provision for formal two-way communications between supervisors; root cause is provisions in the Banking Act covering the offshore regime. No action recommended for domestic law; issue should be resolved by amendments to the offshore legislation. - Capital adequacy (BCP 6): - Capital adequacy guideline does not incorporate any provision for market risk. - As the level of market risk held by Vanuatu banks is negligible, omission not material now, but desirable to include market risk in the next revision of the capital adequacy guideline. - Other risks (BCP 13): - No procedure currently for assessing the range of operational risks. - RBV indicated this weakness would be addressed by directing banks’ external auditors to conduct a targeted audit review of banks’ risk management procedures, including operational risk policies and procedures. - Under prudential guideline 5 and sections of the Financial Institutions Act the RBV can require an audit report be prepared. - Money laundering (BCP 15): - Prudential aspects addressed in section VIII of the report with recommendations. - Key development for RBV: extend on-site examination program to include assessment of banks’ anti-money-laundering systems and controls. --- ### Assessment of the offshore banking sector ### Structure and scale - Offshore banking sector composition: - 34 licensed banks (down from a peak of 110 a few years ago). - Only three have a real physical presence in Vanuatu; the remainder are “shell banks” with no presence beyond either a resident “nominee” director or resident agent who acts mainly as a service address. - All 34 prohibited from undertaking business with Vanuatu residents; those licensed since 1993 also restricted from soliciting funds from the public in any jurisdiction. - May take deposits from associated and non-associated persons provided they do not publicly advertise for deposits. - Known asset base: - Total known assets of the 34 banks, as at December 2001, were approximately $2.4 billion, of which $1.8 billion were recorded as market-related instruments and investments. - Information gaps and risks: - Authorities have very little information on offshore banks’ business; some believed to be in-house treasuries for trading conglomerates, others linked to tax avoidance and/or asset protection schemes. - Offshore banks’ asset base is some six times that of the domestic banks, creating a presumption of material reputational risk to Vanuatu from regulatory failure. ### Legal framework for offshore banks - Main Acts: - Banking Act, 1970 - Vanuatu Financial Services Commission Act, 1993 - Companies Act, 1986 - Historical and substantive features: - Banking Act formed part of original suite of laws to establish the offshore center. - Until 1999 it covered both domestic and offshore banks; with enactment of Financial Institutions Act it now applies to offshore sector only. - Banking Act vests most executive powers in the minister of finance and exempts offshore banks, either overtly or by omission, from most standard prudential requirements including capital adequacy and limits on large exposures or connected lending. - Minister has a general power to give directions to banks and broad power to revoke licenses; widespread use of these powers could be subject to legal challenge. ### Regulatory framework and supervisory practice for offshore sector - Supervisor: - Supervision responsibility with the Vanuatu Financial Services Commission (VFSC). - VFSC Board mixes officials and industry representatives; chairman is from the industry. - Banking supervision unit comprises two staff responsible for supervising the 34 offshore banks. - Licensing and enforcement: - Issuing new licenses, enforcement actions, and revocation of existing licenses are prerogatives of the minister of finance, acting on VFSC recommendation. - Due diligence on initial registration exists, with some follow-up on changes of ownership or management. - Information gathering and limitations: - VFSC can acquire information from licensed institutions but not to pass it on to other regulators. - Quarterly unaudited statistical returns and audited annual accounts received from most banks; analysis by VFSC is limited. - A few banks voluntarily provide capital adequacy information; not legally underpinned given general exemptions in the Banking Act. - On-site inspection constraints: - On-site inspections confined to visiting local agent or resident “nominee” director except for the three locally based banks; records are usually held offshore, so visits are general Q&A sessions. - Recently passed AML legislation applies to offshore banks and some guidelines issued, but authorities have not checked implementation through on-site processes. ### Assessment of offshore supervision - Historical mismatch: - Banking Act (1970) reflects earlier objectives focused on domestic stability and deposit protection, not the broader international expectations that now apply. - International expectations require supervision to enhance financial stability, protect depositors wherever resident, and avoid banks being used to facilitate criminal activities. - Legislative reform status: - New domestic Financial Institutions Act passed in 1999; progress on new offshore legislation stalled and remained uncompleted after more than four years; VFSC Board later established a working committee to review draft proposals. - AML legislation introduced covering both domestic and offshore sectors, with delays in full implementation. - VFSC actions and constraints: - VFSC attempted to mitigate deficiencies using directives, license conditions, voluntary reporting, and informal communication with other supervisors; some measures of dubious legality and ignored by some industry elements. - VFSC identified many banks below expected standards, prompting enforcement and a sharp decline in licensed institutions. - Mission strongly recommends additional resources and technical assistance to complete work quickly. - Compliance with Basel Core Principles: - Principle-by-principle assessment identified very few areas where current practice is compliant with the BCPs. - Weaknesses in the Banking Act severely restrict VFSC’s ability to implement and enforce normal supervisory processes. - Absence of reliable data prevents assessment of potential risk to depositors and the market from regulatory failure. - Reputational risk for Vanuatu is very real and has largely crystallized; common perception that many offshore banks used for undesirable purposes. ### Key areas for improvement (offshore) - Legislative overhaul: - Most pressing: rewrite the Banking Act to bring offshore provisions broadly into line with the Financial Institutions Act, followed by implementation of guidelines and supervisory processes paralleling the domestic sector. - Revised legislation should, after a brief transition period, confine offshore licenses to banks that have a real physical presence (management and records) in Vanuatu, or that are subsidiaries or branches of banks licensed and appropriately supervised in their home jurisdictions. - Supervisory consolidation and model adoption: - Domestic legislation and supervisory regime provide a valuable model; recommended action is to implement provisions and processes on a par with those adopted by the RBV for the domestic sector. - Review assumes overarching recommendation to consolidate supervision within the RBV will be adopted; if not, VFSC will need a governance structure, legal framework, and regulatory procedures similar to RBV’s. - Specific weaknesses and governance concerns: - Objectives (BCP 1.1): VFSC Act defines regulatory role, but Banking Act lacks basis for VFSC to fulfill objectives due to broad exemptions granted to offshore institutions; VFSC can exercise prudential authority mainly by directives with uncertain legal footing. - Independence (BCP 1.2): All key regulatory decisions vested in the minister, who may act contrary to VFSC recommendations with no appeal; past cases show applicants accessing minister directly. - Governance conflicts: Extensive private sector participation on VFSC board—several members active in the financial sector and some control institutions supervised by VFSC; chairman is CEO of a major local market player; only one board member has executive capacity within VFSC, which constrains senior-level support for the commissioner. - Legal framework (BCP 1.3): Banking Act vests licensing and revocation in the minister; offshore banks exempted from capital and other prudential norms; VFSC’s power to issue directives appears limited and not clearly authorized to set general prudential rules. - Information barriers: Section 381 of the Companies Act provides extensive secrecy for “exempt” companies (including offshore banks), leading several banks to refuse to supply information to the VFSC. *IMF report cr03253* ### 93. Enforcement powers (BCP 1.4). In principle, the minister has the power to apply any ### Enforcement powers (BCP 1.4) and supervisory assessment (banking and insurance sectors) ### Banking sector — supervisory and legal framework weaknesses - Enforcement powers (BCP 1.4) - The minister has the power to apply any control or sanction under the sweeping powers of section 17 of the Banking Act. - The absence of a broader menu of specific, graduated options creates uncertainty about how the minister might use this power and could expose decisions to challenge on grounds that they are unreasonable and lack a legal basis. - The Vanuatu Financial Services Commission (VFSC) has no overt powers to ensure compliance by the banks. - Information sharing (BCP 1.6) - There are no legal “gateways” within the regulatory laws allowing the VFSC to exchange information or cooperate with domestic and foreign regulators. - Adopting informal procedures exposes VFSC staff to criminal sanctions. - The VFSC is covered by very restrictive secrecy provisions in relation to exempt companies, including offshore banks, under the Companies Act. - Permissible activities (BCP 2) - Sanctions for carrying on banking business without a license are approximately $350 per day and are unlikely to be a serious deterrent in many cases. - Licensing and ownership (BCP 3–4) - The Banking Act does not specify any objective criteria for authorization, creating uncertainty about minimum entry requirements. - VFSC seeks to impose “fit and proper” and other tests administratively, but the legal basis for criteria (e.g., initial capital) is uncertain. - VFSC’s paper-only application process, without required face-to-face contact, weakens assessment of applicants. - No direct, overt controls over subsequent changes of beneficial ownership; annual shareholder filings under the Companies Act do not extend to disclosure of beneficial ownership. - Investment criteria and consolidated supervision (BCP 5) - No controls or notification requirements for investments in subsidiaries or affiliates, hindering assessment of overall risk and responsibility for consolidated supervision. - Capital adequacy (BCP 6) - No minimum statutory capital requirements for entry to the market. - VFSC uses an administrative across-the-board figure of $150,000, which is very low and does not account for institutional risk. - VFSC lacks legal authority to require capital improvements based on ongoing monitoring data received. - Credit policies, loan provisioning, and large exposures (BCP 7–10) - Offshore sector structure (only three institutions with a physical presence in Vanuatu) makes it impracticable for VFSC to verify banking practices on-site. - External auditors are not used to review or report on credit practice issues; banks resisted expanded audits due to cost, estimated at up to Vt 1 million if borne by VFSC. - VFSC has not implemented guidelines on loan-loss provisions and lacks reliable data and on-site procedures to assess adequacy. - Arguments that offshore banks’ “in-house” restriction obviates need for large-exposure or related-party controls are unfounded; customer bases extend beyond related parties, making large-exposure policy essential. - Cross-border, internal controls, and audit (BCP 11–14, 21) - Absence of data on cross-border activities prevents assessment of country, market, and other risks. - Inability to conduct meaningful on-site examinations and near-total lack of direct contact with management prevent assessment of internal control and quality of management. - No policy on internal audit function; VFSC lacks access to internal audit reports where they exist. - External auditors are prevented by statute from discussing clients’ affairs directly with the VFSC. - Audits are usually undertaken by foreign auditors applying home-country standards, preventing VFSC from understanding accounting bases or consistency across the sector. - No requirement for offshore banks to publish any form of financial data on their activities, even if taking deposits from the public. - Anti–money laundering (BCP 15) - Vanuatu has enacted laws on money laundering that apply to offshore banks; the VFSC issued Practice Notes to the sector. - VFSC has no procedures to verify banks’ anti–money-laundering systems or compliance. - The FIU’s requirement that all banks submit anti–money-laundering policy manuals was initially rejected by five offshore banks as irrelevant; following the mission’s visit, all indicated they will comply, following directions from the VFSC. - On-site and off-site supervision, validation of supervisory information (BCP 16–19) - No effective on-site examination program; offshore sector nature makes effective implementation impracticable. - External auditors are not used to perform supervisory functions and are precluded by cost, practicality, and secrecy provisions. - A quarterly reporting system was introduced (positive development), but not all banks comply and VFSC appears to have no authority (or will) to enforce compliance. - Quarterly returns are not comprehensive and do not permit proper assessment of capital adequacy or other prudential norms; no mechanism exists to verify accuracy of submitted data. - VFSC has experienced cases where quarterly data varies significantly from audited financial statements. - No mechanism exists for validating supervisory returns; no obligation on auditors to check quarterly return accuracy. - Remedial measures (BCP 22) - Powers under section 17 of the Banking Act are broad but too general, lacking explicit, transparent, graduated options with appropriate checks and balances. - All powers are vested directly in the minister; VFSC has no apparent authority to take action independently. - Issuing directives to overcome weaknesses has an uncertain basis in law. - The most common enforcement measure under the Banking Act is revocation of the license. - No measures allow supervisors to take control of an institution to protect assets and ensure orderly winding-up and distribution. - Supervision over foreign banks’ establishments (CP 25) - Absence of “gateways” for regulator-to-regulator information exchange prevents effective supervision of banks’ cross-border activities. - VFSC staff sharing information potentially exposes them to criminal liability under the Companies Act. - Virtually all licensed banks have their operational base overseas, making confidential communication with fellow regulators essential. ### Insurance sector — structure, legal framework, and supervisory assessment - Sector structure and market statistics - At end-December 2001: - 12 domestic insurance companies - 1 underwriting association - 7 insurance agents - 6 brokers - 15 offshore insurance companies - Of the 13 domestic insurers: - 5 are locally incorporated companies subject to home regulation in Vanuatu - 8 are external “foreign branch” operations, subject to host regulation - The majority of these companies are based in Australia, Europe, and New Zealand. - Available 2001 estimate: gross property premiums of licensed insurers were approximately Vt 320 million. - Domestic market predominately writes property, motor, life, and health insurance and is heavily reliant on overseas reinsurance, particularly for cyclone, flood, and earthquake catastrophe cover. - All agents, brokers, and salesmen are required to be licensed under the Insurance Act. - No public data was available on the type of companies that write offshore insurance business; primary market for such companies appears to be Australia and may be linked to investment schemes rather than traditional insurance products. - Legal framework - Organizations carrying on business in or from within Vanuatu must be licensed as local, external, or exempt insurance entities under the Insurance Act, 1973, and the Companies Act, 1986. - Companies Act provides filing and statutory requirements for exempt companies, including offshore insurance. - Insurance Act structure (as provided): - Part II: regulation and licensing requirements for insurance companies, administration and accounting, investigation responsibilities, judicial management, and winding-up - Part III: requirements for associations of underwriters - Part IV: regulation and licensing requirements for agents, brokers, and salesmen - Part V: specifically exempts “offshore” insurance companies from certain provisions of the Act, including statutory filing requirements and fit-and-proper tests - Part VI: general powers and duties of the regulator, including powers to waive certain requirements, to carry out investigations and on-site inspections, and to petition for winding-up of a licensee - Part VII: miscellaneous provisions regarding use of the word insurance, jurisdiction of the courts, borrowing powers of directors, and legal protection for the insurance supervisor - Regulatory framework and capacity - VFSC is responsible for supervision of domestic and offshore insurance sectors through adoption of the powers of the Registrar for the Administration of Insurance Companies under the Insurance Act. - The acting supervisor of insurance and compliance (the supervisor of insurance) was the only dedicated resource charged with regulation; at the time of the mission’s visit the insurance supervisor had resigned and was not available for meetings. - Key functions (licensing, investigations, sanctions) require approval from the minister of finance. - VFSC has legal protection pursuant to Section 54 of the Insurance Act to perform and exercise its powers. - Supervisory process focuses solely on traditional off-site supervision centered on licensing and inspection of audited annual financial returns. - Operational responsibilities further clarified in the contract of employment for the insurance supervisor. - Assessment and compliance with IAIS core principles - The mission’s overall impression: insurance business in Vanuatu is supervised to a standard that falls well short of IAIS core principles. - The mission considers Vanuatu: - observant of 1 principle - materially non-observant of 11 principles - non-observant of 4 principles - 1 principle not applicable - Key legal and supervisory deficiencies - Insurance Act is silent on multiple key areas: - Does not require that key functionaries of offshore companies be fit and proper - Does not define requirements for changes in beneficial ownership - Allows for only one enforcement action: cancellation of the license - Does not provide gateways for exchange of information with other regulators - Does not specify detailed requirements for annual returns - Act exempts offshore insurers from a number of key prudential regulations to reduce ongoing requirements, particularly regarding capitalization, due diligence, sanctions, and statutory filing requirements. - VFSC lacks operational independence; key decisions are made by the minister of finance, and VFSC functions more as a registry than a central regulatory authority. - Licensing includes submission of business plans and background information on key functionaries, but very little analysis of these documents is evidenced. - Ongoing supervision is mostly limited to cursory review of annual returns. - Resource constraints and difficulty obtaining skilled staff have been detrimental to supervision. - Mission recommendations for the insurance sector - Consider a complete revision of the Insurance Act, particularly in the areas of: - regulatory independence - licensing - fit-and-proper tests - financial reporting - on-site inspections - cross-border cooperation - sanctions - Revision would provide the basis for development of appropriate regulatory procedures. ### Key statistics and figures (preserved exactly) - Sanction for unlicensed banking business: approximately $350 per day. - Administrative capital figure used by VFSC for banks: $150,000. - Estimated cost for VFSC to absorb expanded audit costs: up to Vt 1 million. - Insurance sector counts at end-December 2001: - 12 domestic insurance companies - 1 underwriting association - 7 insurance agents - 6 brokers - 15 offshore insurance companies - Of 13 domestic insurers: - 5 locally incorporated (home regulation in Vanuatu) - 8 external “foreign branch” operations (host regulation) - Gross property premiums of licensed insurers in 2001: approximately Vt 320 million. - Mission assessment of IAIS core principles compliance: - observant of 1 principle - materially non-observant of 11 principles - non-observant of 4 principles - 1 principle not applicable *Source: IMF mission report.* ### 127. The regulatory system is marked by a lack of operational independence for the VFSC, an ### The regulatory system is marked by a lack of operational independence for the VFSC, an absence of transparency of process, insufficient expert resources, and a legal infrastructure that is in need of substantial revision. ### Regulatory weaknesses — overview and findings - The Insurance Act vests all decisions with the minister responsible for commerce (now taken to be the minister of finance) to be made upon advice from the VFSC, creating a structure where operational independence can be interfered with and which does not lend itself to efficiency or professional integrity (paragraphs 127–128). - Prior to the mission visit there was one full-time insurance supervisor who was relatively inexperienced, particularly for on-site inspections; he resigned at the time of the visit and there was no obvious successor within the VFSC (paragraph 129). - The Insurance Act does not adequately address fit-and-proper criteria and enforcement powers; exemptions for offshore insurance companies further weaken regulation (paragraph 130). - Part V specifically exempts offshore insurers from: - Minimum capital requirements (Section 4); - The fit-and-proper test for persons associated with the insurer (Section 6); - Audit requirements (Section 16); - Separate account requirement for insurance companies (Sections 13 and 14); - Periodical investigation requirements into life companies (Section 20). (paragraph 130) ### General recommendations on regulatory structure - Consolidate offshore and domestic insurance under one adequately resourced and experienced body with operational independence, free from political involvement (paragraph 131). - Consider consolidating insurance supervision with banking supervision or design a formal communication structure between the two regulatory agencies (paragraph 131). - Develop a detailed procedures manual covering licensing, due diligence, enforcement actions, and on-site supervision to ensure continuity and transparency of process (paragraph 132). - Undertake a full review of the Insurance Act focusing on operational independence, sanctions, fit-and-proper tests, and financial reporting; amend the Act to allow an appeal of any regulatory decision and introduce a structure for appeals (paragraph 133). - Require the insurance supervisor to hold regular meetings with licensees to gauge business developments and facilitate routine communication (paragraph 134). ### Licensing (Principle 2) — findings - Under Section 6 the minister of finance may refuse a license if it appears contrary to the public interest and may refuse a domestic insurer if any officer is not fit and proper; however, the fit-and-proper test is not defined, applies only to domestic insurers, and extends only to officers of the licensee (paragraphs 135–136). - In practice, due diligence has included a biographical affidavit; passport photograph; police clearance certificate; statement of net assets and liabilities; and two references, with some use of the International Chamber of Commerce in the United Kingdom for checks, but the process is not consistently applied and lacks full statutory support (paragraphs 136–137). - Business plans submitted are incomplete, lacking information on anti-money laundering, business complexity, and evidence of communication with overseas authorities (paragraph 138). ### Licensing — recommendations - Clarify attributes of fit-and-proper to include honesty, integrity, competence, capability, and financial soundness; explicitly define requirements for key functionaries in the Insurance Act and provide required forms (paragraph 139). - Issue a guidance note on the fit-and-proper test, clarifying approach to: - Offences — consider significance on merits and surrounding circumstances; - Bankruptcies — account for surrounding circumstances, role, and degree of culpability; - Experience — expect 5 years’ experience in the preceding 10 years at a similar level or, for junior positions, experience in a licensed insurance company that has carried on similar business. (paragraph 140) - Construct and implement a procedures manual with a fitness checklist containing all possible checks for key functionaries; develop guidance notes to achieve consistency in licensing (paragraph 141). - Issue guidance notes for offshore insurance clarifying business plan requirements (Section 5); business plans should cover at minimum the first three years and address coverage; exposures; reinsurance; capitalization; fronting arrangements; loss control; underwriting; claims management; corporate governance; ownership; and other pertinent information. New plans should be filed whenever content changes, with particular emphasis for offshore insurers (paragraph 142). ### Change in control (Principle 3) — findings - Section 11 requires notification to the VFSC within 20 days of new principals, change of principal office, or change in name; Section 21 (not applicable to offshore companies) requires ministerial sanction for amalgamation or transfer of business by local insurance companies (paragraphs 143–144). - Section 11 is notification-only (no prior sanction) and does not relate to beneficial or ultimate ownership (paragraph 144). ### Change in control — recommendation - Amend the Insurance Act to grant the VFSC power to approve changes in beneficial ownership and establish clear requirements when change in control occurs, extended to all licensees (paragraph 145). - Require submission, at minimum, of two years of annual reports for corporate bodies, or for natural persons two references; copies of passports; CVs; qualifications of principals; a police clearance report; and statements of shareholders’ assets and liabilities when ownership changes (paragraph 146). ### Financial reporting (Principle 12) — findings - Financial reports submitted to the VFSC are limited and little data analysis is performed; reporting is the sole method for ongoing supervision and useful for market statistics (paragraph 147). - Domestic insurers must file annual accounts under Section 16; accounts and supporting documents must be signed by directors and audited by an independent auditor in accordance with sound insurance principles (paragraph 148). - VFSC has power under Section 16(3) to require further particulars; Section 20 requires actuarial valuation for long-term business every three years; Section 17(1) requires a certified copy of audited balance sheet and accounts within six months of year-end; Section 17(3) requires statements to be made public (paragraphs 149–150). - Offshore insurance companies are exempt from Sections 16, 17, and 20 but must file audited financial statements under Section 377 of the Companies Act; supervisor can require correction of inaccuracies (paragraph 151). - Section 37 grants VFSC power to require specified information at specified times, but there was no evidence this power has been used for financial reporting (paragraph 152). ### Financial reporting — recommendations - Amend the Insurance Act to remove the exemption on statutory filing for offshore insurance companies and clarify documentation required in support of audited financial statements; required filing forms should be outlined in VFSC rules (paragraph 153). - Consistently request and analyze valuation reports for long-term business; extend the power to request valuation reports to all classes of business, particularly where IBNR is required (paragraph 154). - Produce a checklist summarizing exposures on an expected-loss basis, a worst-case basis, and a total-loss basis, compared to funds available over the forthcoming year; explain observations with reference to reinsurance adequacy, level of long-term business reserves, analysis of underwriting lines, and parent strength where Vanuatu is not the home supervisor (paragraph 155). - Make financial results accessible on a system at the lowest denominator (profit-and-loss by class of business) for industry-specific statistics and trend identification (paragraph 156). - Impose fines for late filings with additional interest for each month unpaid; for serious violations consider license suspension (paragraph 157). - Develop a comprehensive procedures manual relating to financial analysis and make industry aware of VFSC methods (paragraph 158). ### On-site inspections (Principle 13) — findings - Supervision is based solely on audited accounts and directors’ reports; no on-site inspections are practiced (paragraph 159). - Section 39 allows on-site inspections but the process has never been implemented; Section 39 does not appear to allow outsourcing of on-site inspections (paragraphs 160–161). ### On-site inspections — recommendations - Develop a fully documented and structured on-site program; consider transferring insurance regulation to RBV or leveraging RBV inspection resources if consolidation occurs (paragraph 162). - Consider repealing Section 39 if it bars outsourcing; outsourcing may solve the lack of qualified VFSC resources (paragraph 162). - Ensure the inspection manual examines anti-money-laundering procedures; compliance issues; internal controls; underwriting and claim practices; reinsurance; accounting systems; corporate governance; capital adequacy; and investment management. Use OGIS on-site supervision manual template as a starting point (paragraph 163). ### Sanctions (Principle 14) — findings - Section 9 permits license cancellation by the minister of finance only in specified circumstances, many of which apply only to domestic insurers: - licensee ceased or not commenced business; - minister not satisfied there are sufficient free assets for safe conduct of business; - insurance business not conducted in accordance with sound insurance principles; - licensee has gone into voluntary liquidation; - license procured from false, misleading, or inaccurate information; - in mixed-business companies, the non-insurance business likely contrary to public interest; - licensee has contravened any provision of the Insurance Act (e.g., late filing). (paragraph 164) - First three points apply only to domestic insurance companies; Section 52 provides imprisonment and fines for gross contraventions; Section 53 explicitly precludes appeal of ministerial decisions in any court (paragraph 165). - Intervention powers include ministerial restrictions on investments for domestic insurers; limiting or prohibiting writing new policies; appointment of inspectors; and VFSC demand for specified information (paragraph 166). ### Sanctions — recommendations - Vest a more flexible range of powers in the VFSC (not the minister of finance) applicable to all licensees, such as powers: - to force a portfolio transfer or commutation of business; - to effect a cease-and-desist order where business is unsafe or unsound; - to remove external auditors or appoint a special auditor at licensee expense; - to remove external actuaries or appoint a special actuary at licensee expense; - to remove directors, officers, or key personnel for not being fit and proper or for unsound conduct; - to immediately suspend a license pending investigation; - to impose administrative fines without summary conviction. (paragraphs 167–168) - Remove Section 53 provisions and provide statutory right to appeal decisions under the Insurance Act in line with natural justice (paragraph 169). ### Cooperation and coordination (Principle 16) — findings - Adequate and effective communication should be developed and maintained to share relevant information with other supervisors, including cross-border and across sectors; agreements should address confidentiality and types of information to be shared (paragraph 170). - Section 381(3) of the Companies Act allows a court-appointed liquidator to disclose offshore insurer affairs to a public officer in another country with attorney general consent, but formal “gateway” provisions do not exist in the Insurance Act and are not explicitly clear in the Companies Act (paragraph 171). ### Cooperation and coordination — recommendation - Develop and implement formal “gateway” provisions to clarify what information can be shared; consider formulating a model memorandum of understanding (MOU) to define arrangements for regulatory exchanges (paragraph 172). *International Monetary Fund mission report.* ### 173. There is currently no formal mechanism to ensure that another body responsible for ### 173. There is currently no formal mechanism to ensure that another body responsible for investigating fraud or money laundering will inform the VFSC about an investigation that is taking place of an insurer licensed and supervised by the VFSC. ### Information sharing between VFSC and other authorities - Finding: There is no formal mechanism to ensure that another body responsible for investigating fraud or money laundering will inform the VFSC about an investigation of an insurer licensed and supervised by the VFSC. - Finding: It is possible that other bodies will be unaware of the number or type of disclosures to the FIU that could have some bearing on prudential supervision. - Legal note: Under the FTRA, the FIU has the power to forward STRs to the VFSC, if the attorney general deems it appropriate. - Authorities’ position: The authorities have stated that it has always been government policy that any department or agency that may be affected by a particular action or decision must be informed, and they believe that this has always been the case with respect to any investigations into a licensed insurer. - Practice: The VFSC has assisted other authorities in the past and is continuing to do so in money laundering and fraud investigations and in conducting due diligence on behalf of other authorities. - Recommendation: The mission recommends routine scheduled meetings between the VFSC and the FIU to build on this relationship. ### Assessment of the trust company sector — overview - Finding: There is no international grouping for trust and company service regulators, and there are no international standards concerning the regulation and supervision of trust and company service providers. - Rationale: Because trust and company administration is a significant feature of the offshore market in Vanuatu, assessment of legislation, regulation, and supervision of these activities is appropriate. - Observation: Trust and company service providers often act as the point of entry for outsiders to the local offshore market; their standards of probity and conduct can greatly influence the level of risk, particularly reputational risk. ### Structure of the sector - Finding: Ten entities are licensed to conduct trust business in Vanuatu, although only 8 service international clients. - Composition of the 8 servicing international clients: three are international accounting firms, two are legal firms, and three are dedicated trust and company service providers. - Finding: All license holders have a physical presence in Vanuatu. - Finding: There is no requirement to register trusts in Vanuatu (other than Authorized Unit Trust Schemes under the Prevention of Fraud (Investments) Act); therefore there is no record of the total number of trusts established, nor of the value of property in trust. - Observation: From general enquiries, trusts are not widely used in Vanuatu. ### Legal framework — Trust service providers and trusts - Trust Companies Act: - Came into force on May 13, 1971. - Regulates the provision of trust business, defined as the business of acting as trustee, executor, or administrator. - It is an offence to conduct trust business without a license. - Restricts the use of the words “trust company” and similar words by companies. - Gaps: - Other activities, such as trust formation and the provision of nominee services, are not regulated. - A person carrying on business as a trustee “in respect of funds of other persons” is defined as a financial institution under the FTRA and is required to verify customer identity where the amount of a transaction exceeds Vt 1 million. - No guidance is produced on verification of identity of trusts; no external agency has confirmed trustees’ adherence to these requirements. - Trusts law: - No modern trusts legislation in place; the United Kingdom’s Trustee Act of 1925 (as in force and amended up to Vanuatu’s independence in 1980), English Common Law, and doctrines of equity provide the basis for trust law in Vanuatu. - The Supreme Court may consider subsequent changes to the 1925 Act and case law in England and other commonwealth jurisdictions as persuasive authority. - Types of trusts available mirror those in the United Kingdom: discretionary trusts; interest in possession trusts; accumulation and maintenance trusts; and charitable trusts. ### Regulatory framework for trust companies - Licensing and application requirements (Trust Companies Act, Parts I and II of Schedule): - Applicants must submit a three-year business plan. - Evidence that the governing body or connected persons possess substantial and practical experience in trust company business. - Evidence of a prescribed capital base: Vt 12.5 million or Vt 50 million, depending on the company’s structure. - Character references in writing for each director or officer (plus evidence that none has a criminal record). - The name, address, and nationality of each shareholder. - Annual accounts for the holding or parent company (if any). - It is not an offence under the Act to provide false and misleading information in an application. - Process and ministerial powers: - Applications are made to the minister, but the VFSC first considers and assesses applications and recommends grant or refusal. - The minister is bound only to consider whether carrying on the proposed business will “not be against the public interest.” - The minister may grant a license subject to terms and conditions, may refuse a license (need not give reasons), must approve any proposed change in ownership in advance, and may revoke a license, issue directions, or order winding up where a business is detrimental to public interest or creditors/customers. - There is no requirement under the Act to notify changes in directors except in specified circumstances; changes in directors are reported annually under the Companies Act. - No inspector has been appointed under the Act; there is no ongoing supervision of trust company service providers other than audited financial statements under the Companies Act. - No supplementary legislation or guidance addresses segregation of customer assets, span of control, or other sound business conduct principles. - Under the Act, information collected may be released only with the agreement of the trust company concerned. - Supervision and auditing: - Ongoing supervision limited to provision of audited financial statements under the Companies Act within eight months of the end of the accounting period (subject to an extension of a further period of four months). - Only an auditor authorized by the minister may act as auditor to an exempt company, but no specific relevant experience is required to audit a trust company. ### Good practice issues, findings and recommendations (GP1–GP4) - GP1: Only fit-and-proper persons should offer trust services; regulator should have enforcement powers to monitor, inspect, and investigate. - Comment: Some trust service activities fall outside current definition of “trust business,” e.g., arranging for another person to act as trustee. - Recommendation: Expand the definition of trust business to cover all areas of trust business. - Comment: Applications are granted or refused by the minister on “public interest” grounds rather than a statutory fit-and-proper test; providing false and misleading information in an application is not an offence. - Recommendation: - Applications should be considered and assessed by the regulator rather than the minister. - It should be a criminal offence to provide false and misleading information to the regulator, subject to an unlimited fine, imprisonment, or both. - Extend statutory fitness-and-propriety assessment to include “span of control” (at least two individuals controlling the business), structure, organization, and physical presence in the country. - Publish and use a detailed standard application form that requests, among other items: name of compliance officer and money-laundering reporting officer; details on insurance cover; name of applicant’s auditor; extent of existing activities; disclosure of regulation in other jurisdictions or prior regulatory interactions; disclosure of revoked licenses or disciplinary actions; disclosure of past financial difficulties; and detailed personal questionnaires for all directors and owners. - Regulator should be entitled to object to changes in ownership and directors, require advance notification, and be able to bar individuals from participation where necessary. - Comment: Inspector powers have not been used; ongoing supervision limited. - Recommendation: - Regulator should exercise responsibilities currently held by the minister and inspector under the Trust Companies Act, including powers to require information and documents, instigate investigations, and enter and search premises. - On-site inspection program should cover all service providers at least once every three years. - Legislation should require submission of annual audited financial statements by an approved firm of auditors within four months of the year-end, external certification of compliance with regulatory standards, segregation of client assets, and restrictions on undesirable or misleading advertising. - Auditors should have a gateway to report relevant matters to the regulator. - Establish codes governing standards of conduct and diligence; regulator should have power to disqualify providers failing to meet codes. - Codes should address anti-money-laundering compliance, employee qualifications and experience (to be prescribed), and establishment of a dedicated compliance resource. - Regulator should have statutory basis to review underlying customer files and obtain information for regulatory investigations. - It should be an offence to knowingly or recklessly make false statements or provide false and misleading information to the regulator, and to obstruct the regulator during a statutory investigation. - Additional recommendation: - Regulator should be able to amend and set additional license conditions, issue public statements, and fine; an appeals procedure should be established. Regulator should use civil law procedures for managing or winding up businesses and for restraint and recovery of assets. - GP2: Regulator should have power to cooperate with domestic and international supervisory agencies, including spontaneous information sharing and information collection to assist another regulator. - Comment: No statutory gateways exist for exchange of information held on trust service providers; under the Trust Companies Act, information may be released only with agreement of the trust company. - Recommendation: Establish a statutory gateway for confidential information exchange domestically and internationally; provide for disclosure of certain public information on trust service providers (e.g., class of license held). - GP3: Authorities should be able to establish settlors, protectors, and beneficiaries of trusts settled in their jurisdiction. - Comment: FIU guidelines do not clearly establish whom a trustee must identify to comply with the FTRA requirement to verify a customer’s identity; legislation does not extend to arranging for another person to act as trustee. Consequently, insufficient information may be held in Vanuatu on a trust. - Recommendation: Legislation (regulatory or anti-money laundering) should require trust service providers to hold up-to-date information on settlors, protectors, and beneficiaries of all trusts for which they act. The regulator should monitor compliance, regularly review underlying customer records, and severe criminal penalties should apply for noncompliance. - GP4: Trusts should not be used to obscure true ownership of assets, frustrate legitimate claims, or defraud creditors. - Comment: Trusts may be used to conceal assets from creditors, estranged spouses, suitors, and tax authorities, and in processes to conceal proceeds of crime from police, customs, prosecutors, and courts; trusts may be used to put assets beyond the reach of pursuers. *Source: the mission (IMF assessment).* ### 213. Settlers may seek an arrangement whereby the trustee recognizes that the assets remain ### 213. Settlers may seek an arrangement whereby the trustee recognizes that the assets remain the settlor’s in all but name and that the task of the trustee is to do exactly what the settlor says. ### Recommendations on trust service provider conduct and accountability - Under Codes governing standards of conduct and diligence, trust service providers should be able to demonstrate that reasonable care has been taken to: - understand and verify the purpose of a trust; - ensure that the trust is legitimate and effective; - take reasonable steps to ensure that legal and taxation obligations are understood. - The regulator should have the power and duty to disqualify trust service providers, and staff members concerned, where they fail to act in accordance with these standards. - GP5: Authorities should have a means of access to basic financial information relevant to the activities of trusts. Trust service providers should be obliged to: - make proper disclosure to beneficiaries, any co-trustees and any protectors; - produce, submit, and preserve accounts. - Trust service providers should produce, submit, and preserve accounts as appropriate. - GP6: Trust service providers should have effective anti-money-laundering measures in place, including: - know-your-customer rules; - record keeping; - staff training; - reporting procedures. - Providers should be obliged to establish the identity of the “customer” to which they provide services. - Recommendation: All service providers (including those forming trusts) should be required by statute to: - obtain and verify information on settlors, protectors, and beneficiaries; - keep records; - train staff; - report suspicious transactions to the FIU. ### Commentary on trustee, settlor, beneficiary responsibilities and abuses - There is a range of abuses that could arise from unscrupulous behavior by settlors, trustees, or both; monitoring of conduct and administration reduces these risks. - Professional trustees must be accountable for their actions, particularly where negligence or default is willful. - Beneficiaries, prime beneficiaries, co-trustees, and protectors are entitled to request production of accounts in order to: - review stewardship of the trust; - ensure proper administration and adherence to trust terms. - Periodic reporting should act as a deterrent and reduce the risk of misappropriation by unscrupulous trustees. - Comment on FTRA application: - Under the FTRA, trustees are required to identify customers where the amount of a transaction exceeds Vt 1 million and to report suspicious transactions to the FIU. - Trustees under the FTRA are subject to record keeping and staff training requirements. - Other trust service providers (e.g., those forming trusts) are not subject to the Act’s requirements. - No external agency has confirmed adherence to these requirements. - No guidance is available to define “customer” in relation to a trust. ### Assessment of the company service provider sector — structure and activity - A number of accountants, lawyers, and dedicated service providers provide company formation, secretarial, management, administration, and nominee services. - No official information is available on the size of the sector because provision of corporate services to Vanuatu and foreign incorporated companies is not subject to licensing or supervisory requirement; number of companies registered gives an indication of activity. - Registered companies as of March 31, 2002: - 1,323 local companies; - 174 exempt companies; - 4,342 international companies registered with the Registrar of Companies (which is subsumed within the VFSC). - Registrations between January 1, 1999 and March 31, 2002: - 19 exempt companies and 2,948 international companies were registered; - 823 companies (local, exempt, and international) struck off. - In 2001: 5 exempt companies formed and 557 international companies formed. - Uses of international companies are similar to other offshore jurisdictions (predominantly, asset and private investment holdings); ownership is largely nonresident, generally individuals based in Asia, Australia, and New Zealand. ### Legal and regulatory framework for company service providers and companies - There is no legislation addressing regulation of company service providers. - Company service providers (other than those “administering or managing funds”) are not subject to the anti-money-laundering requirements of the FTRA. - Company formation statutes and requirements: - Local and exempt companies formed under the Companies Act (last updated in 2000), based on UK legislation of 1967. - International companies formed under the International Companies Act (updated in 2000). - Exempt and international companies are prohibited from carrying on business in Vanuatu and cannot invite the public to subscribe for shares or debentures. - International companies cannot carry on banking, trust company, insurance, or company management business. - Every company must have a registered office in Vanuatu; every international company must also have a registered agent in the country. - Registration and information practices: - VFSC processes exempt company applications and recommends grant or refusal to the minister; VFSC alone is responsible for registration of international companies. - Some due diligence is conducted for exempt company applications, including intended directors and business activity; in practice beneficial ownership information is requested though not legally required in all cases. - Applicants for exempt companies and intended directors/beneficial owners are expected to provide passports; data checks conducted with authorities including Australia, New Zealand, and the United Kingdom. - International company registration requires filing only a “constitution” with the VFSC; no declaration of intended beneficial ownership or activity is required. - Exempt companies must provide an annual return listing shareholders and directors and file annual audited financial statements (with some exemptions). - No ongoing reporting requirements for international companies other than advising changes in registered office or agent. - Overseas companies establishing a place of business within Vanuatu must register with the Registrar and file accounts (does not extend to overseas companies administered in the country). - Secrecy and disclosure: - Secrecy provisions in the Companies Act prevent public access to information held by the VFSC on exempt companies; names of registered shareholders or directors may not be obtained from an exempt company’s registered office. - Confidential information held by the VFSC can be disclosed outside the country on production of a court order, where permitted under other legislation, and in certain circumstances on liquidation. - Public access to limited information is available for international companies; secrecy provisions in the International Companies Act make it an offence to disclose ownership and management information except where required by court order or “for the carrying on of the business of the company.” - Certain exempt companies and all international companies may issue bearer shares. - Duty of officers: - The Companies Act and International Companies Act require every officer to act in good faith and in the best interests of the company and to exercise care, diligence, and skill. - Under the International Companies Act, there is no provision to disqualify those that do not meet these standards. - Corporate directors are permitted under the International Companies Act. - Enforcement and inspection powers: - The minister may appoint inspectors to investigate exempt companies where grounds exist to believe involvement in fraudulent or unlawful purpose. - Supreme Court power under the International Companies Act to investigate company affairs where reasonable cause exists to believe an officer has committed an offence in relation to its management. - In practice, VFSC expects applications to be submitted by an accountant or lawyer practicing in the country, licensed trust companies, or experienced company service providers despite the absence of legal restrictions. ### Good practice issues and recommended regulatory measures for company service providers - GP1: Only fit-and-proper persons should offer company services. The regulator should have effective and independent enforcement powers, including: - monitoring and supervising licensed providers; - inspecting activities; - investigating potential breaches of rules, regulations, and laws. - Recommendation: Company service providers should be licensed by the regulator and subject to a full supervisory regime; initial registration should set high standards to exclude dubious or incompetent providers. - Scope of legislation recommendation: All areas should be included where carried on as a business, including: - formation of companies; - acting as or arranging for others to act as directors, alternate directors, partners, secretaries, alternates, deputies, agents; - providing registered accommodation, correspondence, or administrative addresses; - acting or arranging others to act as nominee shareholders or unit holders. - Law should provide for exemptions. - GP2: Regulator should have power to cooperate with domestic and international supervisory agencies, including spontaneous information exchange. - Recommendation: Information collected by the regulator should be confidential but there should be a statutory gateway to exchange information with other supervisory authorities; certain information on company service providers (e.g., class of license held) should be publicly disclosable. - GP3: Authorities should be able to establish ultimate beneficial owners, directors, and activities of companies incorporated in their jurisdiction and foreign companies administered from there. - Comment: Company service providers are not required to hold information on directors, beneficial shareholders, or activities of exempt and international companies, or foreign incorporated companies administered in Vanuatu. - Exempt companies’ information at time of registration may be held by VFSC, but subsequent changes need not be notified. - Exempt and international companies may issue bearer shares, which can enable concealment of ownership. - Recommendations regarding beneficial ownership and bearer shares: - Legislation should require company service providers to hold up-to-date information on beneficial ownership, directors, and activities of all companies for which they act. - Regulator should monitor compliance and regularly review underlying customer records. - Severe criminal penalties should be in place for failure to hold this information. - Company service providers should report subsequent changes in ownership, directors, and activities of exempt companies to the VFSC. - Authorities may require company service providers to ensure effective custody or immobilization arrangements for bearer shares to ensure any change in ownership can be controlled and monitored. - GP4: Use of companies in sensitive activities that risk bringing the center into disrepute should be avoided. - Recommendation: VFSC should publish a list of sensitive activities; service providers should have due regard for activities listed. - GP5: Authorities should have access to basic financial information relevant to companies’ activities. - Comment: Exempt and international companies are required to maintain accounts and records, but there are no requirements to audit or disclose any financial information held. - Recommendation: Service providers should ensure accounts and records are maintained in line with company law requirements; where a Vanuatu service provider does not maintain accounts and records, they should be requested and reviewed periodically. - GP6: Authorities should be aware of the extent to which foreign incorporated companies are administered or operating in the jurisdiction. - Comment: Foreign incorporated companies managed by corporate service providers in Vanuatu do not register as overseas companies. - Recommendation: Periodically, corporate service providers should submit information on foreign incorporated companies they administer, including name and country of incorporation. - GP7: Company service providers must fulfill director obligations effectively and remain ultimately responsible even if they assign functions. - Recommendation: Under codes governing standards of conduct and diligence (Box 1), company service providers should be required to demonstrate that reasonable care has been taken to have knowledge of the activities of the companies for which they act as director. - The regulator should have the power and duty to disqualify company service providers, and staff members concerned, where they fail to act in accordance with these standards. - GP8: Company service providers should have effective anti-money-laundering measures, including know-your-customer rules, record keeping, staff training, and reporting procedures; providers should be obliged to establish the identity of beneficial owners and directors of companies to which they provide services. *International Monetary Fund — Assessment and recommendations on trust and company service provider standards and supervision* ### 263. Except to the extent to which corporate service providers “administer or manage funds,” ### cr03253 - 263. Except to the extent to which corporate service providers “administer or manage funds,” ### Recommendations for company service providers and regulatory framework - All service providers should be required by statute to: - obtain and verify information on beneficial ownership and directors; - keep records; - train staff; and - report suspicions to the FIU. - It should be an offence to act as a service provider without being licensed. - Regulators should be able to bar individual officers or key personnel from participation in the provision of company service provider activities. ### Sketch of principles for legislation to register and regulate company service providers (Box 1) - Licensing and fit-and-proper assessment: - Regulators should assess applicants to ensure they are fit-and-proper in terms of integrity, competence, financial standing, structure, and organization. - Assessment should cover owners, controllers, officers, key personnel, and the proposed business. - Adequate “span of control” is required (at least two individuals controlling the business; at least one jurisdiction requires three). - A physical presence in the country is required. - Licensing decisions and conditions: - After assessment, grant, refuse, or grant a license subject to conditions (which may be amended, added to, or withdrawn). - Regulators may impose conditions, revoke or set conditions on a license, issue directions, public statements, and fines; offences should be subject, on conviction, to a fine, imprisonment, or both. - Ongoing supervision and notification: - Company service providers should be supervised on an ongoing basis. - Regulators should be entitled to object to changes in ownership and directors and must be notified in advance; failure to notify should be an offence. - Financial, audit, and compliance requirements: - Legislation should provide for audited financial statements, external certification of compliance with regulatory standards, segregation of client assets, and restrictions on advertising. - Auditors should have a gateway to report relevant matters to the regulator. - Codes of conduct and standards: - Codes should oblige providers to: - conduct business with integrity; - have the highest regard for customers’ interests; - organize and control affairs effectively and demonstrate adequate risk-management systems (including complying with anti-money-laundering legislation and guidance, ensuring employees hold prescribed qualifications and experience, keeping up to date with industry and technical developments, and establishing a dedicated compliance resource); - be transparent in business arrangements; - maintain and demonstrate adequate financial resources and insurance; and - deal with the regulator and other authorities in an open and cooperative manner. - The regulator should have the power and duty to disqualify providers failing to discharge activities adequately per the codes. - Inspection and enforcement powers: - Legislation should provide effective and independent powers to monitor, supervise, inspect activities, and investigate breaches. - An on-site inspection program should cover all company service providers at least once every three years. - There should be a clear statutory basis for reviewing underlying customer files and obtaining information. - It should be an offence to knowingly or recklessly make false statements, provide false and misleading information to the regulator, or to obstruct the regulator during a statutory investigation. - Appeals procedures should be provided; regulators should use civil law procedures (including calling in persons to manage or wind up businesses, and for restraint and recovery of assets). ### Assessment of anti-money-laundering (AML) measures — Legal and institutional framework - Relevant legislation and regulations reviewed include: - Financial Institutions Act, 1999; - Banking Act, 1970; - Insurance Act, 1973; - Trust Companies Act, 1971; - Financial Transactions Reporting Act, 2000; - Guidelines for Financial Institutions issued by the FIU; - Anti-terrorism regulations under the Charitable Associations Act; - Serious Offences (Confiscation of Proceeds) Act, 1989; - Mutual Assistance in Criminal Matters Act, 1989; - International Companies Act, 1992; - Companies Act, 1986; - Extradition Act, 1988. - The primary AML framework is based on: - Serious Offences (Confiscation of Proceeds) Act (criminalizes money laundering and provides for confiscation); - Mutual Assistance in Criminal Matters Act (international cooperation); - Financial Transactions Reporting Act (FTRA) (customer identification, record keeping, suspicious transaction reporting, and establishment of an FIU). - Additional measures: - FIU and RBV guidelines and practice notes on regulated entities’ AML obligations. - Financial Institutions Act requires retention of certain documents and enhanced due diligence for suspect transactions and customers; fit-and-proper tests for significant shareholders and management of domestic banks upon licensing. - Insurance Act requires fit-and-proper tests for officers of domestic insurers upon licensing. - Banking Act and Financial Institutions Act prohibit a person convicted of dishonesty from acting as an officer of a bank. - Money laundering is not specifically included as an extraditable offence under the Extradition Act. - Institutional roles: - FIU functions include receiving STRs, disseminating STRs to law enforcement and regulatory agencies, conducting investigations to ensure compliance with the Act, receiving information from domestic and foreign bodies, issuing guidelines regarding record keeping and reporting, and providing training programs. - Vanuatu police investigate money-laundering offences; the public prosecutor prosecutes; to date, there have been no prosecutions. - The attorney general handles international cooperation on money-laundering matters. ### Operational findings and compliance process - Suspicious transaction reporting (STR) activity: - Since operation start up to end-2001, the FIU received 110 STRs: - 38 from the domestic banks; - 1 from the casino; - 71 from interactive gaming operators. - STRs from interactive gaming operators were brought to the attention of the regulator of the interactive gaming industry; 5 other STRs were referred to the police for investigation. - FIU activity limitations: - The FIU issued guidelines on a couple of occasions but has not initiated investigations into compliance or provided training programs beyond a few seminars for the domestic banking sector. - Compliance verification by banks has been limited to off-site review of internal policies and procedures; no on-site verification has been carried out by the FIU or financial regulators. - The FIU’s power to enter premises is limited to checking compliance with customer identification and record keeping; it does not extend to ensuring compliance with suspicious transaction reporting obligations. - The FTRA is unclear whether a search warrant is required before access to financial institution records; protection from liability for disclosures does not extend to disclosures made pursuant to routine on-site examinations. - Supervision gaps: - Financial regulators have played a minimal role in enforcing AML in the banking sector. - Offshore banking, insurance, and trust companies’ sectors are not currently subject to effective supervision. - Company service providers, money remitters, and money changers fall outside any regulatory regime. ### Assessment conclusions and key deficiencies - Legislative and institutional improvements achieved: - Enactment of the Serious Offences (Confiscation of Proceeds) Act, Mutual Assistance in Criminal Matters Act, FTRA, and establishment of an FIU have significantly strengthened Vanuatu’s legal and institutional framework. - Measures to fight terrorist financing have been introduced by passing relevant subsidiary legislation to implement the UN Convention for the Suppression of the Financing of Terrorism. - Significant remaining loopholes and needs: - Amendments needed to the FTRA to strengthen customer identification requirements and to the Serious Offences (Confiscation of Proceeds) Act to include powers to freeze and confiscate proceeds and instrumentalities of crime. - Clarify legal uncertainty regarding FIU investigative powers and on-site supervisory power of financial regulators vis-à-vis secrecy provisions in the Companies Act and International Companies Act to permit on-site verification. - Provide the FIU with an operational strategy and adequate resources. - Establish fit-and-proper tests for directors, significant shareholders, and management of financial service providers as ongoing statutory requirements, not only at licensing. - Vienna, Palermo, and Suppression of Financing of Terrorism Conventions have not been signed or ratified. - Money laundering is not specifically included as an extraditable offence under the Extradition Act. - International cooperation is limited by requirement that a treaty is required before legal assistance can be provided to non-commonwealth countries. ### Key areas for improvement — Customer identification - Current FTRA provisions: - The requirement to identify customers arises only when a person conducts a transaction through a financial institution and the amount of transaction exceeds Vt 1 million (about $7,000). - Requirement to identify the beneficial owner also arises only when transaction amount exceeds Vt 1 million. - The FTRA does not create a statutory requirement to identify a customer at account opening on all occasions; Guidelines for Financial Institutions require this, but guidelines lack force of law. - Section 10(4) of the FTRA and the Guidelines provide exemptions for transactions conducted through another financial institution and for transactions that are part of an established business relationship where satisfactory evidence was previously produced. - The Act and Guidelines lack clarity on acceptable identification documents for individual and corporate customers. - Recommendation: - Amend section 10 of the FTRA to require customer identification on all account openings, for all intermediaries acting on behalf of such customers, and when establishing any business relationship. - Subsequent verification should be needed only when there are doubts about the transaction or identity. - Customer verification can be exempted when dealing with a financial institution under prudential regulation and subject to similar obligations. - The FIU should issue a new guideline delineating acceptable identification documents. ### Key areas for improvement — On-site verification and legal clarity - Current barriers to on-site verification: - Legal uncertainty about FIU investigative power and regulators’ on-site supervisory power vis-à-vis Companies Act secrecy provisions has led authorities to hesitate to review individual account records on premises. - FIU manpower is limited and it has not produced a strategy plan, including an on-site inspection program. - Financial regulators face resource constraints and have not prioritized AML compliance verification. - Recommendations: - Amend the FTRA to override the secrecy provisions specifically and protect financial institutions from liability for making disclosures pursuant to the Act. - Clarify investigative and supervisory powers to permit FIU and regulators to review random samples of individual accounts and verify AML compliance. - Coordinate on-site verification between the FIU and financial regulators; consider assigning financial regulators the role of primary verifier and the FIU to verify when major noncompliance is suspected. - FIU should be responsible for on-site verification for financial institutions not supervised by financial regulators (e.g., money exchangers). ### Strengthening the FIU — operational capacity and strategy - Operational weaknesses: - The FIU has acted mainly as recipient of STRs and has not carried out its multiple functions due to: - lack of prioritized functions; - absence of an operational plan with time frames; - only two part-time staff and no officer fully dedicated to operations; - power to analyze suspicious transactions is not set out in the FTRA. - Recommendations: - FIU should operate on the basis of a rolling strategic plan covering the next 12 months with priority targets and specified timelines. - Example strategic actions (Box 2): - Reaching out to “financial institutions”: organize meetings within the next six months with associations or representatives of each industry defined as “financial institution” to increase AML awareness; consider annual follow-up meetings. - Establish an STR database appropriate to Vanuatu: within the next three months, sort existing STRs in EXCEL or ACCESS and identify patterns or trends. - Introduce internal procedures for dissemination of STRs: within the next three months, delineate steps from receipt to database entry to provision to relevant agencies; consult with agencies to agree on contact persons and consider MOUs to ensure confidentiality. - Organize a meeting with financial regulators: within the next three months, discuss general compliance and role-sharing on on-site verification; consider semi-annual meetings thereafter for regulator briefings. *Source: International Monetary Fund (cr03253).* ### 288. In addition, to the formulation of a strategy plan, the FTRA should be amended to allow ### cr03253 - 288. In addition, to the formulation of a strategy plan, the FTRA should be amended to allow ### FIU powers, suspicious transaction analysis, and investigative authority - Paragraph 288: The report states that, in addition to the formulation of a strategy plan, the FTRA should be amended to allow the FIU to: - analyze suspicious transactions; and - request further information needed from institutions and relevant agencies for this purpose. ### Confiscation powers and legal gaps identified - Paragraph 289: The report finds that the Serious Offences (Confiscation of Proceeds) Act: - does not specifically provide for the confiscation of property that is the proceeds of crime, instrumentalities, and other property used in the commission of crime; - has a narrow definition of proceeds of crime and should be widened to include property that is derived directly and indirectly from the commission of the offence; - does not provide for the power to freeze transactions or accounts when a money-laundering offence is suspected; and - limits production orders so that they do not extend to bankers’ books. ### Recommendation (Paragraph 290) — statutory amendments proposed - The report recommends amending the Serious Offences (Confiscation of Proceeds) Act to: - include a specific power to confiscate property that is the proceeds of crime and instrumentalities of crime; - widen the definition of proceeds of crime; - include a specific power to freeze transactions or accounts; and - extend production orders to include bankers’ books. ### Cross-sectoral and sectoral recommended action plans (summaries) - Table 3 — Recommended Action Plan for Cross-Sectoral Issues (selected high-priority items): - Undertake a fundamental review of the focus and future direction of the offshore sector. Priority: High - Assess the RBV’s capacity to assume responsibility for prudential supervision of all sectors of both the domestic and offshore market. Priority: High - Review the overall legal framework for the offshore and nonbank domestic sectors. Priority: High - Cease the practice of licensing privately owned “shell” financial institutions. Priority: High - Restrict licenses to institutions that either maintain a fully staffed office (with proper books and records in Vanuatu), or are branches and subsidiaries of recognized foreign banks, subject to effective home-country-consolidated supervision. Priority: High - Undertake a comprehensive review of the background and activities of all offshore licensed institutions, and take action to remove any undesirable institutions. Priority: High - Clarify legal authority of supervisory authorities to access information required from a licensed institution. Priority: High - Introduce legal “gateways” to permit supervisory authorities to exchange information and cooperate with domestic and foreign counterparts (under conditions of confidentiality). Priority: High - Introduce a common “menu” of enforcement actions available for application to all institutions in both the domestic and offshore markets. Priority: Medium - Introduce a common “fit-and-proper” requirement for shareholder/controllers, directors and managers of all financial institutions, and make it an ongoing obligation to meet the test. Priority: Medium - Table 4 — Recommended Action Plan to Improve Compliance of the Basel Core Principles—Domestic Banks (selected items): - Legal Framework (BCP 1.3): Build more flexibility into the Financial Institutions Act to give the supervisor more scope to set prudential ratios appropriate to each bank. Priority: Medium - Enforcement Powers (BCP 1.4): Make it legally explicit that the provisions of section 28 of the Financial Institutions Act take precedence over the Companies Act. Priority: High - Legal Protection (BCP 1.5): Issue a statement to RBV staff setting out the policy for the indemnification of costs of defending any legal proceedings brought against staff in relation to the performance of their official duties. Priority: Medium - Capital Adequacy (BCP 6): Include provision for market risk when the relevant prudential guideline is next revised. Priority: Low - Money Laundering (BCP 15): Incorporate within the RBV’s on-site examination process a review of systems and controls to guard against money laundering. Priority: High - Table 5 — Recommended Action Plan to Improve Compliance of the Basel Core Principles—Offshore Banks (selected high-priority items): - Rewrite the Banking Act entirely to reflect the approach of the Financial Institutions Act. Priority: High - Bring the supervisory policies and procedures into line with those applying to the domestic banking sector. Priority: High - Confine offshore banks to those with local resident managers and records or to those that are branches or subsidiaries of banks licensed and subject to international standards of supervision in their home jurisdictions. Priority: High - Consolidate the responsibility for supervision of offshore banking with that for the domestic banks within the RBV. Priority: High - Table 6–8 — Insurance, Trust, and Company Service Providers (selected actions and priorities): - Insurance corporate governance and internal controls: issue guidance notes on corporate governance and internal controls; obtain management letters regularly from external auditors. Priorities: Low, Low, Medium - Insurance prudential rules: amend the Insurance Act to remove the exemption under Section 8(2) that applies restrictions on investments only to domestic insurance companies; consider deposit “ring-fencing” for external domestic insurance companies; issue guidance on admissible investments and limits on common stock and real estate. Priorities: Medium, High, Low, Low, High - Insurance liabilities (CP 7): remove the exemption for offshore insurance companies under Section 20 to obtain an actuarial valuation report for all offshore companies; enforce statutory filing of actuarial valuations for long-term business; examine reinsurance treaties at licensing stage and ongoing basis; require detailed reporting on major reinsurers as part of annual return. Priorities: High, Low, Low, High - Trust service providers: extend the scope of the Trust Companies Act to address all trust activities; vest licensing and supervision powers in the regulator; provide additional enforcement powers and sanctions. Priorities: Medium, High, High - Trust service providers: establish a gateway for cooperation with other regulators; establish legal requirement for trust service providers to hold information on settlors, protectors, and beneficiaries subject to external monitoring; extend anti-money-laundering legislation to cover all trust service providers. Priorities: High, High, High - Company service providers: license company service providers and introduce a full supervisory regime. Priority: High - Company service providers: establish a gateway to cooperate with other regulators; require company service providers to hold information on beneficial owners, directors, and activity subject to external monitoring; extend the scope of anti-money-laundering legislation to cover company service providers. Priorities: High, High, High - Company service providers: publish a list of sensitive activities. Priority: Medium - Company service providers: issue codes of practice requiring company service providers to maintain or request books and records; require periodic submission by company service providers of information on foreign incorporated companies administered or operating in Vanuatu. Priorities: Medium, Low ### AML/CFT legal and institutional recommendations (Table 9, Part 1 — selected items) - Customer due diligence: - Amend section 10 of the FTRA to require customer identification on all account opening and to narrow the exceptional circumstances where identification requirement is waived. Priority: High - Issue a new guideline on acceptable identification documents. Priority: Medium - Make inclusion of originator information on fund transfers mandatory. Priority: High - Record keeping: - Amend section 11 of the FTRA so that records have to be kept for at least 5 years after the business relationship or transaction has ceased. Priority: High - Suspicious transactions reporting: - Amend section 7 of the FTRA to expand the protection for financial institutions to any information given to the FIU by financial institutions. Priority: High - Require the VFSC and the auditors to report suspicious transactions. Priority: High - AML/CFT internal controls: - Include a requirement in the FTRA for a compliance officer to be appointed. Priority: Medium - Integrity standards: - Introduce a fit-and-proper test at the time of licensing and ownership change under the relevant legislation. Priority: High - Criminalization and confiscation: - Introduce provisions to criminalize the financing of terrorism. Priority: High - Amend the Serious Offence (Confiscation of Proceeds) Act to include full confiscation and freeze powers and to extend ambit of production orders. Priority: Medium - FIU resourcing and powers: - Provide the FIU with more manpower to carry out its functions under the FTRA. Priority: High - Clear the legal uncertainty with respect to the FIU’s investigative power to ensure compliance with the Act by financial institutions. Priority: High - Give the FIU statutory power to analyze transactions. Priority: Medium - International cooperation: - Include money laundering as an extraditable offense under the Extradition Act. Extend the Mutual Assistance in Criminal Matters Act so that legal assistance can be rendered to noncommonwealth countries without the need for a treaty. Priority: Medium *Source: IMF staff report (cr03253).* ### Part 2: AML/CFT in the Prudentially Regulated Sectors ### Part 2: AML/CFT in the Prudentially Regulated Sectors ### Organizational and administrative arrangements — recommended actions and priorities - Provide the FIU with more manpower to verify compliance with the AML requirements by banks and insurers. Priority: High. - Clear the legal uncertainty with respect to the investigative power of the FIU and the on-site supervisory power of the financial regulators vis-à-vis the secrecy provisions in the Companies Act and the International Companies Act, to permit the FIU and the regulators to carry out on-site verification of compliance with the AML requirements. Priority: High. - Strengthen coordination between the FIU and the financial regulators in ensuring compliance by banks and insurers. Priority: High. ### Customer identification and due diligence — recommended actions and priorities - Organize a meeting between the FIU and the representatives of each industry to increase the awareness of the importance of the latters’ compliance with customer identification requirement. Priority: Medium. - Initiate a program of on-site examinations to verify compliance by the financial institutions, including interviews with compliance officers and relevant bank employees. Priority: High. - Convene a meeting on a regular basis between the financial regulators and the FIU to review compliance with the reporting requirements in each industry. Based on the input from the financial regulators, the FIU should consider initiating its own on-site examination to ensure general compliance by financial institutions. Priority: High. ### Monitoring and reporting suspicious transactions — recommended actions and priorities - Organize a meeting between the FIU and the representatives of each industry to increase the awareness of the importance of their compliance with suspicious transaction reporting. The FIU should also consider providing the industries with the feedback, at least on the aggregate basis, on the STRs submitted. Priority: Medium. - Initiate a program of on-site examinations to verify compliance by the financial institutions, including interviews with compliance officers and relevant bank employees. Priority: High. - Convene a meeting on a regular basis between the financial regulators and the FIU to review compliance with the reporting requirement in each industry. Based on the input from the financial regulators, the FIU should consider initiating its own on-site examination to ensure general compliance by financial institutions. Priority: High. ### Record-keeping, compliance and audit — recommended actions and priorities - Organize a meeting between the FIU and representatives of each industry to increase the awareness of the importance of their compliance with record-keeping. Priority: Medium. - Initiate a program of on-site examinations to verify compliance by the financial institutions with the record-keeping requirement on the basis of samples randomly selected of individual accounts. Priority: High. - Convene a meeting on a regular basis between the financial regulators and the FIU to review compliance with record-keeping requirements in each industry. Based on the input from the financial regulators, the FIU should consider initiating its own on-site examination to ensure general compliance by financial institutions. Priority: High. ### Cooperation and licensing — recommended actions and priorities - Introduce a legal “gateway” for the regulator of the offshore banking sector to exchange information with the supervisory agencies in other countries. Priority: High. - (Licensing and authorizations) — recommendations are implicit across sectors to strengthen licensing and authorization processes through enhanced supervisory capacity and legal frameworks. Priority: High where specified. ### Suggested additional actions for the banking sector - Issue a guideline on customer identification required in the case of high-risk customers, transactions through lawyers and accountants, nonface-to-face customers and fund transfers. Priority: Medium. - (Other actions for banking sector mirror the general recommendations on monitoring, record-keeping, cooperation.) Priority: High. ### Suggested additional actions for the insurance sector - Strengthen the capacity of the financial regulator, in terms of new legislation and more resources, to permit it to monitor and enforce compliance with the requirements. Priority: High. - Monitoring and reporting suspicious transactions: As above. Priority: High. - Record-keeping, compliance and audit: As above. Priority: High. - Licensing and authorizations: As above. Priority: High. ### Part 3: AML/CFT in Other Sectors (trust companies, company service providers) — recommended actions and priorities - Strengthen the manpower of the FIU to permit it effectively to enforce the AML requirement on trust companies. Priority: High. - Strengthen the financial regulator’s capacity to supervise trust companies, in terms of new legislation and more resources. Priority: High. - Introduce a system to regulate and supervise company service providers. Priority: High. - Strengthen the supervisory capacity of the financial regulator, in terms of new legislation and more resources, to permit it to monitor and enforce customer identification requirements. Priority: High. - Monitoring and reporting of suspicious transactions: As above. Priority: High. - Record-keeping: As above. Priority: High. - Establish a statutory gateway through which to cooperate with other regulators. Priority: High. - Strengthen the supervisory capacity of the financial regulator, in terms of new legislation and more resources, to permit it to apply an effective fit-and-proper test at the licensing stage. Priority: High. ### Authorities’ Response and Implementation Actions (Government of the Republic of Vanuatu) - The Government of the Republic of Vanuatu provided a letter and table outlining steps taken to address the recommendations and underlined its commitment to the reform agenda. - The government has established a high-level committee comprised of senior officials from the RBV, VFSC, the State Law Office, the Office of the prime minister, and the ministry of finance and economic management to review the report and recommend actions. - New legislation enacted to strengthen supervisory arrangements for international (offshore) banks; legislation introduces supervisory standards consistent with international requirements and requires all offshore banks to maintain a physical presence in Vanuatu consistent with the Basel Committee paper “Shell Banks and Booking Offices.” - The authorities acknowledged capacity constraints in implementing recommendations within a short time frame but emphasized commitment to improving standards; legislative and implementation measures taken to date demonstrate this commitment. ### Detailed responses to specific recommendations (selected highlights and exact measures) - Review legal framework: - The government has passed the International Banking Act, which takes effect from January 1, 2003. - The government is reviewing legislation covering the insurance, trust company and company service providers sectors and aims to introduce new comprehensive legislation consistent with international standards in the second half of 2003. - Organization, independence and resources: - The VFSC Act was amended in November 2002 to change the composition of the board. - Access to information: - Amendments to the Financial Institutions Act (domestic bank law) in November 2002 and the International Banking Act give explicit powers to supervisors to access information. - The FTRA will be amended to allow for greater sharing of information between supervisory authorities and the FIU. - Fit-and-proper criterion: - The RBV issued a prudential guideline on ‘fit-and-proper’ criterion for management and directors in September 2002. - The Financial Institutions Act has been amended to support this Guideline. The International Banking Act also includes ‘fit-and-proper’ criterion for management and directors. - The supervisor can require removal of a person who is deemed no longer to meet the fitness and propriety criteria. The supervisor is required to give approval to changes in ownership or share transfers in excess of 10 percent of the issued capital of the company. - Domestic and offshore banks: - With enactment of the International Banking Act in November 2002, the RBV now has supervisory responsibility for offshore banks. - The Financial Institutions Act was amended in November 2002 to provide the RBV with increased flexibility (including prudential ratios). - Offshore banking framework (International Banking Act provisions and transitional arrangements): - The Act confers a wide range of powers on the RBV, including: the power to issue and revoke banking licenses; conduct on-site examinations; request data; place limits on the type and nature of business undertaken by banks; and issue directives and prudential guidelines. - The Act specifies objective criteria for authorization, including an assessment of the bank’s owners, with ‘fit-and-proper’ requirements at authorization and on an ongoing basis. - Licensees will be required to maintain a physical presence in Vanuatu with meaningful mind and management located within the jurisdiction. The existence of a local agent or low-level staff will not constitute physical presence. - Licensees will be required to meet a minimum capital requirement of US$0.5 million. The capital requirement would be adjusted to reflect the size of the operation and the nature of risks undertaken by licensees. - Licensees will be subject to on- and off-site analysis and review; required to submit statistical data to the RBV; data provided would be subject to review by the licensee’s external auditor; the RBV will conduct on-site inspections to review risk management policies in the areas of credit risk and anti-money laundering. - The Act provides for the RBV to share information with other regulatory bodies both domestically and internationally. - Existing international banks and other exempt financial institutions licensed under the Banking Act [CAP 63] will be taken to be issued with a license under the International Banking Act to continue to carry on banking business. This license, which will commence on January 1, 2003, is to be valid for one year, and during this period license holders are not required to maintain a physical presence in Vanuatu or to meet minimum capital adequacy provisions. However, they are subject to all other provisions of the Act. - RBV supervisory practices and AML emphasis: - The RBV issued prudential guideline 9: Customer Due Diligence in July 2002, based on Basel Committee principles. - The RBV has developed an on-site inspection manual and has conducted on-site AML visits; further inspections, covering domestic and international banks, are scheduled for 2003. - Insurance sector: - The VFSC requested AESOP undertake a review of insurance supervision to address issues identified by the assessment; AESOP completed its review and presented a report outlining a planned four-stage course of action. *Source: IMF assessment and the Government of the Republic of Vanuatu’s response to the AML/CFT review.* ### 1. The VFSC to approve the project ### 1. The VFSC to approve the project ### Insurance sector: legislative and supervisory reform - Action items: - Commence drafting a new Insurance Act. - Train insurance supervisors. - Establish office systems and procedures for insurance supervisors. - Government timetable and commitment: - Recommendation accepted; the government proposes that new legislation be introduced into parliament in the second half of 2003 to rectify deficiencies in existing legislation. - Completed action: - The VFSC to approve the project (completed 29 October 2002). ### Trust service providers: review and strengthened framework - Recommendation: - Vanuatu should review trust legislation to ensure consistency with best practice. - Government response and proposed measures: - Recommendation accepted; new legislation proposed for introduction into parliament in the second half of 2003 to rectify deficiencies in existing legislation. - Revised legislation will address: - Licensing arrangements, including an assessment of fitness and propriety, and the ability to impose restrictions on licenses. - Changes in ownership to be subject to regulatory approval. - Empowering the regulator to exercise responsibilities currently held by the minister and intended for the inspector of trust companies under the Trust Companies Act, including powers to require the provision of information and documents, to instigate investigations, and to enter and search premises. - Clear and unambiguous access to client files by the regulator. - Provision of annual audited financial statements. - Power to collect statistical data. - Gateways for the regulator to discuss issues with other regulatory bodies. - Establishment of codes governing the standards of conduct expected of participants in the sector. - The FTRA will be reviewed and strengthened if necessary to require trust service providers to hold up-to-date information on the settlors, protectors and beneficiaries of all trusts for which they act. ### Company service provider sector: licensing, supervision, and AML linkage - Recommendation: - Review the company service provider sector to ensure practices are consistent with best practice and that participants are fit-and-proper persons. - Government response and proposed measures: - Recommendation accepted; new legislation proposed for introduction into parliament in the second half of 2003 to rectify deficiencies and provide for ongoing supervision. - Areas to be addressed: - Introduction of a licensing regime, including an assessment of fitness and propriety and the ability to impose restrictions on licenses. - Changes in ownership to be subject to regulatory approval. - Requirement for the provision of audited accounts. - Gateways for the regulator to discuss issues with other regulatory bodies. - Ability to conduct on-site inspections and allow clear and unambiguous access to client files by the regulator. - Establishment of codes governing the standards of conduct expected of participants in the sector. - The FTRA will be reviewed and widened to ensure company service providers are required to obtain and verify information on beneficial ownership and directors, to keep records, to train staff, and to report suspicious transactions to the FIU. ### Anti-money-laundering (AML) measures and institutional strengthening - Key deficiencies and needs identified: - Amend the FTRA to strengthen customer identification requirements. - Amend the Serious Offences (Confiscation of Proceeds) Act to include powers to freeze and to confiscate the proceeds and instrumentalities of crime. - Mechanisms to ensure compliance with AML requirements need strengthening. - Remove legal uncertainty about the investigative powers of the FIU and the on-site supervisory power of financial regulators vis-à-vis secrecy provisions in the Companies Act and the International Companies Act, to permit on-site verification of compliance with AML requirements. - FIU needs an operational strategy and adequate resources. - Fit-and-proper tests for directors, significant shareholders and management of financial service providers should be clearly and formally provided for in legislation. - Government response and proposed/amended measures: - A policy paper was prepared for consideration by the Council of ministers proposing a number of amendments to the FTRA; some proposed amendments go beyond IMF proposals. - Proposed/implemented amendments and measures include: - Clarification of obligations of financial institutions in respect of AML issues, such as customer identification obligations, record keeping requirements, ensuring originator information is included on all funds transfers. - Providing for the FTRA to override any banking or other secrecy provisions and to clarify the FIU’s investigative power. - Give the FIU power to analyze transactions as well as provide for probity checking for government agencies. - Protection for financial institutions that pass information to the FIU. - Power to enter into Memoranda of Understanding with foreign governments on the exchange of information relating to money laundering. - Expansion of the definition of “financial institution” to include auditors, trust companies and company service providers. - Amend section 10 of the FTRA so as to require customer identification on all account opening and to narrow the exceptional circumstances where identification requirements are waived. - Amend section of the FTRA to expand protection for financial institutions to any information given to the FIU by financial institutions. - Amend section 11 of the FTRA so that records have to be kept for at least five years after the business relationship or transaction has ceased. - Require the VFSC and the auditors to report suspicious transactions. - Include a requirement in the FTRA for a compliance officer to be appointed. - Legislative and institutional actions taken: - The Serious Offences (Confiscation of Proceeds) Act was repealed and the Proceeds of Crime Act passed in November 2002; this includes full forfeiture and restraining, monitoring and production powers. - The Extradition Act [CAP 199] was repealed in November 2002 and replaced by the Extradition Act No 16 of 2002; the new Act includes money laundering within the scope of extraditable offences. - The Financing of Terrorism is an offense under the new Proceeds of Crime Act No. 13 of 2002. - The Bill for the United Nations Act of 2002 and a Bill for the International Convention for the Suppression of the Financing of Terrorism Act were passed in the November 2002 session of parliament. - The FTRA was amended to include suspicious transaction reporting where financing of terrorism is suspected. - The government has agreed to provide additional resources to the FIU. - The FIU will issue revised guidelines in relation to acceptable identification documents; this guideline will be consistent with the guideline issued by the RBV. - Members of the FIU have participated in on-site examinations conducted by the RBV and will continue to do so. - It has been recommended to the government that the Criminal Code be amended to make terrorism a crime; the government has accepted this recommendation and amendments will be placed before the next session of parliament. - Fit-and-proper guidelines have been issued for domestic and offshore banks and relevant legislation strengthened; similar criteria will be included in legislation covering trust companies and company service providers. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr03253.pdf_