## Detailed Assessment with Compliance with the Basel Core Principles—Domestic Banks (cr03254) ## Source details **Canonical URL:** [Detailed Assessment with Compliance with the Basel Core Principles—Domestic Banks (cr03254)](https://www.imf.org/-/media/files/publications/ofca/english/cr03254.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr03254.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr03254.pdf.json) --- ### General and methodology - The assessment was undertaken in May 2002 under the Offshore Financial Center (OFC) Assessment Program, Module 2. - The Reserve Bank of Vanuatu (RBV) agreed to the assessment and was the focus for the domestic sector; the offshore sector was assessed separately by the IMF mission. - Mission leadership and inputs: - Mission undertaken primarily by Mr. Richard Lang, former Deputy Governor of the Reserve Bank of New Zealand, with assistance from Mr. Richard Chalmers (mission chief). - Information and methodology used: - Review of applicable laws, regulations, and prudential guidelines (detailed in Volume I). - Discussions with RBV staff, industry groups, representatives of individual financial institutions, and government ministry representatives. - Review of RBV internal procedures manuals, statistical and reporting forms, policy notices (including drafts). - RBV response to a pre-mission questionnaire and an informal self-review (not a formal self-assessment). - A recommended action plan resulting from the assessment is contained in the appendix to Volume I of the report. ### Institutional and market overview (domestic banking) - RBV responsibilities and supervisory model: - RBV responsible for licensing and supervision of the domestic banking sector; VFSC responsible for offshore banks. - RBV banking supervision unit is small and headed by the deputy governor; supervision performed through routine off-site surveillance (quarterly reporting) and an on-site examination program. - Domestic banking sector composition: - Five commercial banks, including three branches and subsidiaries of Australian institutions. - One government-owned institution. - One private bank licensed domestically that primarily offers private banking to nonresidents. - License and market focus: - Domestic license permits universal banking operations servicing both resident and nonresident customers; domestic banks focus primarily on traditional retail and commercial activities. - Recent trend: gradual withdrawal of foreign banks from the domestic market as institutions consolidate and close marginal operations. - Key statistics (as at end-2001): - Total assets of the domestic banking system: $345.6 million. - About 40 percent of total assets comprised local assets. - About 15 percent of the deposit base was sourced from nonresidents. - The balance of assets represented almost entirely deposit placements overseas. ### Principle 1 (Objectives, Autonomy, Powers, and Resources) — selected findings - Principle 1 summary: supervisors require clear responsibilities/objectives, operational independence, legal powers, legal protection, and confidentiality arrangements. - Principle 1(1) — Clear responsibilities and objectives: - Assessment: Materially noncompliant. - Comments: - No mechanisms ensure consistent supervisory treatment of domestic and offshore banks. - Communications between RBV and VFSC are informal and limited. - Offshore sector law is outdated and inadequate; recommendation: improve communications or amalgamate supervisory authorities and harmonize legislation. - Principle 1(2) — Operational independence and adequate resources: - Assessment: Compliant. - Comments: - Reserve Bank of Vanuatu Act provides operational independence for licensing and supervisory methods. - Supervision funded from RBV income; main resource constraint relates to experience and skills rather than finance. - Principle 1(3) — Suitable legal framework: - Assessment: Largely compliant. - Prescriptions in the Financial Institutions Act: - Minimum capital requirement: Vt 200 million (start-up capital specified). - Large exposures maximum: 25 percent of capital. - Limits for unsecured connected lending: Vt 500,000 or 1 percent of capital. - Minimum liquidity requirement currently set at 15 percent by Prudential Guideline 3. - Comment: When Act is next amended, provide additional flexibility to RBV to allow exceptions or institution-specific limits. - Principle 1(4) — Powers to address compliance and safety-and-soundness: - Assessment: Compliant. - Description: - RBV has full powers to obtain information, and Part V of the Financial Institutions Act includes remedial options including license revocation. - Section 28 of the Financial Institutions Act takes precedence over Companies Act provisions relating to secrecy. - Principle 1(5) — Legal protection for supervisors: - Assessment: Largely compliant. - Description: - Section 57 of the Reserve Bank of Vanuatu Act provides legal protection for RBV staff acting in good faith. - Legislation does not specify protection for costs of defending any action; RBV states it would cover such costs; recommendation: RBV should issue a statement of policy to staff. - Principle 1(6) — Information sharing and confidentiality: - Assessment: Compliant. - Description: - Financial Institutions Act treats information in RBV possession as confidential (Section 55); disclosure allowed to foreign supervisory authorities provided RBV is satisfied recipient will maintain confidentiality; RBV may deny demands for information other than by court order or other legislation (e.g., Financial Transactions Reporting Act). ### Selected prudential principles and supervisory practice (domestic banks) - Licensing (Principle 3): Assessment Compliant; practice consistent with Act though only one application was received under current legislation (and rejected). - Ownership and change-in-control (Principle 4): Assessment Largely compliant; Section 51 requires written RBV approval for specified events affecting 20 percent or more of voting stock, though enforceability in practice can be problematic. - Investment review (Principle 5): Assessment Compliant; Section 50 requires prior RBV approval for major acquisitions/investments. - Capital adequacy (Principle 6): Assessment Largely compliant. - Minimum capital adequacy ratio: 8 percent of capital to risk-weighted assets on consolidated and stand-alone basis; at least 4 percent must be Tier 1 capital. - Prudential Guideline 4 includes off-balance sheet risks; market risk not currently included. - Credit policies, loan classification, provisioning (Principles 7 and 8): Assessment Compliant. - Guideline No. 2 requires classification: standard, substandard, doubtful, loss. - RBV may require 1 percent of outstanding balance of “standard” facilities as general provision; specific provisioning rules for substandard/doubtful/loss categories specified. - Quarterly asset-quality reporting required; on-site examinations prioritize credit risk management. - Large exposures and related-party lending (Principles 9 and 10): - Section 38: exposures not to exceed 25 percent of capital to any person or group under control (51 percent voting interest). - Section 39: unsecured related-party facilities prohibited beyond Vt 500,000 or 1 percent of capital (whichever is greater). - Section 40: banks must extend facilities to related parties on substantially the same terms as to the general public. - Prudential Guideline 8 requires MIS to enable identification of concentrations and related-party groupings. ### Selected BCP compliance snapshot (domestic banks) - Principles assessed as Compliant, Largely compliant, or Materially noncompliant across the BCP spectrum as summarized in the assessment: - Principle 11 (Country Risk): Compliant. - Principle 12 (Market Risks): Not applicable (current market risk negligible). - Principle 13 (Other Risks): Largely compliant. - Principle 14 (Internal Control and Audit): Compliant. - Principle 15 (Money Laundering): Materially noncompliant (legislation requires tightening; RBV needs to implement on-site AML review processes). - Principles 16–25: predominantly Compliant or Not applicable with specific notes on consolidated and host supervision. ### Recommended supervisory actions (domestic banking summary) - Improve formal coordination and communication mechanisms between RBV and VFSC; consider amalgamating supervisory authorities and harmonizing legislation. - Incorporate market risk into capital adequacy measures when exposure increases. - Make explicit legal provisions where truncated in assessment (e.g., explicit authority references), and issue internal RBV policy statements on legal protection for staff. *Source: International Monetary Fund — Detailed Assessment with Compliance with the Basel Core Principles—Domestic Banks (May 2002).* --- ### Offshore Banking Assessment (VFSC and Banking Act) — cr03254 ### Institutional framework and supervisory responsibilities - The Vanuatu Financial Services Commission (VFSC) is responsible for ongoing supervision of the offshore banking sector; the minister of finance retains responsibility for licensing and exercise of enforcement powers. - Banking Act is primary legislation for offshore ("exempt") banks but explicitly exempts offshore banks from capital, liquidity and other prudential standards. - Attempts to update the Banking Act had progressed little over a period of four to six years at the time of assessment. ### Offshore sector structure and known exposures (as at December 2001) - Licensed offshore banks: 34 licensed banks. - Physical presence: only 3 of the 34 have a real physical presence in Vanuatu; remaining described as “shell banks” with presence limited to a resident nominee director or resident agent. - Business restrictions: - All 34 prohibited from undertaking business with Vanuatu residents. - Banks licensed since 1993 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 levels: - Total known assets of the 34 banks: approximately $2.4 billion. - Of which $1.8 billion were recorded as market-related instruments and investments. - Authorities have very little information on the nature of offshore banks’ business; some believed to be in-house treasuries, others associated with tax-avoidance or asset-protection schemes. ### Key legal and institutional deficiencies (offshore) - Licensing and enforcement: - Minister of finance holds licensing/enforcement/revocation powers; VFSC acts in advisory capacity and minister has acted contrary to VFSC advice. - No appeal against minister’s decisions. - Governance and conflicts: - VFSC board comprises seven persons including private sector representatives; current chairman is chief executive of a local financial services group, creating potential conflicts. - Resourcing: - Banking supervision within VFSC carried out by two persons (one in office only a few months); VFSC cannot retain surplus funds and must pass surplus to government. - Legal powers and information access: - Offshore banks exempted from prudential norms; 1995 amendment gives VFSC power to conduct examinations and require information, but Section 381 of the Companies Act is interpreted by many banks to prohibit disclosure of customer information. - VFSC Act and Banking Act silent on information sharing with domestic or foreign regulators; Section 381 precludes disclosure except in limited circumstances. - Sanctions and supervisory toolkit: - Sanction authority concentrated in minister; limited menu of graduated administrative measures; absence of administrative fines except for late payment of annual fees. ### Principle-by-principle compliance findings (selected) - Principle 1(1): Assessment Materially noncompliant. - Principle 1(2) — Operational independence: Assessment Noncompliant. - Principle 1(3) — Legal framework: Assessment Noncompliant. - Principle 1(4) — Enforcement powers: Assessment Materially noncompliant. - Principle 1(5) — Legal protection: Assessment Compliant. - Principle 1(6) — Information sharing/confidentiality: Assessment Noncompliant. - Licensing criteria (Principle 3): Assessment Materially noncompliant. - Banking Act provides only administrative licensing criteria; no statutory minimum capital, fit-and-proper tests, or objective authorization criteria. - VFSC administrative practice enforces an administrative initial paid-up capital of $150,000 (no legal backing). - Ownership controls (Principle 4): Assessment Noncompliant; Banking Act contains no provision requiring notification or VFSC approval for ownership/control changes. - Capital adequacy (Principle 6): Assessment Noncompliant; absence of statutory minimum capital requirements; $150,000 administrative practice described as extremely low. - Credit, asset, concentration, market, other risk management (Principles 7–13): Predominantly Noncompliant or Materially noncompliant due to absence of supervisory procedures, inability to verify practices, limited data, and auditors’ unwillingness to undertake non-statutory work. - On-site and off-site supervision (Principles 16 and 18): Materially noncompliant. - VFSC legal authority under sections 15 and 16 to examine offshore banks exists but physical presence absent for 31 of 34 banks; VFSC conducted "twenty-two 'on-site' reviews" of agents in two years and set a target of "one per month"; VFSC has "never met a member of the management" of most licensed offshore banks; quarterly returns lack legal basis and five long-standing banks refuse to submit returns. - Accounting standards and external audit (Principle 21): Materially noncompliant. - No authority to specify accounting standards or verify audits on-site; audited accounts disclosure prohibited under Companies Act; auditors not obligated or able to communicate with VFSC. - Remedial measures and enforcement (Principle 22): Materially noncompliant. - Section 17 empowers minister to impose remedial measures and revoke license, but powers are broad, general, and vested in minister rather than VFSC; revocations have been used mostly for nonpayment of fees or cessation of banking business. - Cross-border cooperation (Principles 20, 23–25): Not applicable in many instances; where applicable, absence of "gateways" for information exchange creates serious supervisory obstacles and potential criminal liability for staff sharing information. ### VFSC statutory functions (VFSC Act Section 7) — selected duties - To protect the public in Vanuatu and elsewhere against financial loss arising out of dishonesty, incompetence or malpractice. - To protect and enhance the reputation of Vanuatu as a center for carrying-on financial business. - To act internationally as a national authority for supervision and regulation of financial business. - To provide advice and assistance to government and to prepare reports and recommendations. ### Suggested legislative and structural remedies (as implied by assessment) - Redraft the Banking Act to align provisions with the Financial Institutions Act and remove broad exemptions that exclude offshore banks from prudential standards. - Clarify and explicitly provide VFSC with statutory powers to issue general prudential rules and to obtain information from licensees, including customer information where appropriate and lawful. - Reconsider VFSC board composition to reduce conflicts of interest and ensure appropriate senior-level support for the commissioner. - Rebalance powers so key regulatory decisions are exercised by the VFSC with contestable processes rather than solely by the minister. - Increase VFSC banking supervision staff beyond two persons and permit VFSC to retain surplus funds to build contingency reserves. - Create legal gateways in VFSC Act, Banking Act, and Companies Act to permit lawful exchange of supervisory information with domestic and foreign regulators. *Source: International Monetary Fund assessment contained in CR03254 (offshore banking assessment — May 2002).* --- ### Insurance Sector Supervision Assessment — cr03254 ### Institutional responsibilities and market structure (end-December 2001) - VFSC responsible for supervision of the insurance sector; minister of finance retains authority to license and apply enforcement actions. - Insurance Act commenced on December 29, 1973. - Market counts: - 12 domestic insurance companies. - 1 underwriting association. - 7 insurance agents. - 6 brokers. - 15 offshore insurance companies. - Of the 13 domestic insurers: - 5 locally incorporated companies subject to home regulation in Vanuatu. - 8 external “foreign branch” operations subject to host regulation. - Available 2001 figure: gross property premiums of licensed insurers approximately Vt 320 million. - Domestic market reliance: heavily reliant on overseas reinsurance (cyclone, flood, earthquake catastrophe cover). - Distribution: mainly through agencies or on a direct basis. ### Institutional resources and capacity - VFSC staffing: 13 persons including the messenger and 4 daily-rated employees; four vacancies. - Supervisor of insurance: at time of assessment vacancy; previous incumbent had a high-school diploma and worked in Insurance Regulation since 1996 without insurance qualifications. - Assistance being sought from AESOP for volunteer support to establish an insurance supervision unit and provide training. ### Legal framework and key exemptions - Insurance Act contains significant statutory exemptions for offshore insurance companies undermining supervision, including exemptions from: - minimum capital requirements (Section 4). - provisions restricting business and investments (Section 8). - fit-and-proper tests for persons associated with insurer (Section 6). - cancellation/solvency requirements and audit requirements for offshore companies. - Separate Account requirements and periodic investigation requirements. - Jurisdiction of local courts (Section 46). - Section 4 of the Insurance Act (financial requirements for domestic licensing): - Life insurance companies: maintain a paid-up share capital of Vt 30million. - Nonlife insurance companies: maintain between Vt 14 million to Vt 140 million dependent on the level of premium income. - Section 9(1) requires free assets sufficient for proper conduct of insurance business. - Assessment for financial requirements: Materially non-observant. ### Principle-by-principle IAIS findings (selected) - Principle 1 (Organization of supervisor): Assessment Materially non-observant. - Lack of operational independence; minister makes licensing/regulatory decisions on supervisor’s advice. - Principle 2 (Licensing): Assessment Materially non-observant. - Licensing grounds and application content not well defined in Act; fit-and-proper test not defined or limited to domestic insurers/officers. - Administrative practices implemented by VFSC but lack statutory underpinning. - Principle 3 (Changes in control): Assessment Materially non-observant. - Section 11 requires notification within 20 days but does not require prior approval or address beneficial ownership. - Principle 4 (Corporate governance): Assessment Non-observant. - Section 9 references “Sound Insurance Principles” but no specific guidance; no on-site inspection program to assess governance. - Principle 5 (Internal controls): Assessment Non-observant. - No appraisal of internal controls at licensing or via on-site inspections. - Principle 6 (Assets): Assessment Materially non-observant. - Offshore insurers exempt from investment restrictions; no deposit ring-fencing requirements. - Principle 7 (Liabilities): Assessment Materially non-observant. - Offshore companies exempt from actuarial valuation requirements (Section 20) and no consistent filing/assessment of technical provisions. - Principle 8 (Capital adequacy and solvency): Assessment Materially non-observant. - Domestic minimums exist per Section 4 but offshore companies lack minimum capital requirements. ### Supervision, reporting, and on-site inspections - Financial reporting: - Domestic insurers must file audited accounts; offshore insurers exempt from Insurance Act filing requirements but required to file under Section 377 of Companies Act. - Section 20 requires actuarial valuation for long-term business every three years (offshore insurers exempt). - Assessment: Financial reporting — Materially non-observant. - On-site inspection: - Section 39 allows on-site inspections but process never implemented. - Assessment: Non-observant. - Sanctions and intervention: - Minister’s grounds for license cancellation specified in Section 9; many powers apply only to domestic insurers. - Intervention powers exist (Section 8, Section 39, Section 37), but enforcement and appeal mechanisms weak. - Assessment: Materially non-observant. ### Cross-border cooperation and confidentiality - Section 381(3) of Companies Act permits disclosure by a court-appointed liquidator to a public officer in another country with attorney general consent. - No explicit “gateway” provisions in Insurance Act; cooperation with other supervisors occurs informally and is legally unclear. - Recommendation: Place provisions in Insurance Act confirming confidentiality-sharing arrangements and promote routine meetings and MOUs with RBV and FIU. ### Key supervisory weaknesses and recommended actions (insurance) - Strengthen operational independence of insurance supervisor; reduce ministerial discretion over licensing/enforcement. - Define and codify fit-and-proper criteria, application forms, and documentation requirements including beneficial ownership. - Establish minimum capitalization requirements for offshore insurance companies. - Develop documented licensing procedures, assessment standards, and change-in-control approval processes. - Issue guidance on corporate governance, internal controls, investment restrictions, liabilities, and actuarial reporting; implement on-site inspections. - Build VFSC capacity: fill vacancies, recruit experienced staff, and create an insurance supervision unit with on-site capability. *Source: IMF supervisory assessment extracts (insurance sector) from CR03254.* --- ### AML/CFT Assessment and FIU Findings — cr03254 ### Assessment context and methodology - AML/CFT assessment undertaken at the request of Vanuatu authorities using the April draft IMF/World Bank methodology in the context of the OFC Assessment Program, Module 2 (May 2002). - Assessment inputs: review of legislation/regulations, guidance notes, policy statements; discussions with FIU staff, law officers, police, RBV, VFSC, industry, and private sector institutions. - Authorities submitted questionnaire responses in advance; not a detailed self-assessment. ### Legal framework and institutional roles - Financial Transactions Reporting Act (FTRA) 2000: - Establishes FIU within the State Law Office with functions to receive STRs, disseminate STRs, conduct compliance investigations, receive information from domestic/foreign regulators, issue record-keeping/reporting guidelines, and provide training. - Section 4(2): FTRA prevails over provisions of any other Act. - Section 10: requires verification of identity for transactions exceeding Vt 1 million; definition of “transaction” does not include opening an account. - Section 11: identification records retention requirement (six years). - Section 5: requires reporting of suspicious transactions to FIU. - Section 13(1)(c): FIU power to investigate to ensure compliance; Section 13(3) authorizes FIU to enter premises to ensure compliance with identification and record-keeping requirements. - Section 15: confidentiality obligations for FIU officers. - Criminalization and confiscation: - Money laundering criminalized under Serious Offences (Confiscation of Proceeds) Act 1989; definition and predicate offences limited as assessed. - Sanctions for money laundering: fine not exceeding Vt 20 million or imprisonment not exceeding 15 years for natural persons; fine not exceeding Vt 100 million for body corporates. - Proposed amendments to criminalize financing of terrorism (proposed penalties: imprisonment not more than 20 years for natural person; fine not exceeding Vt 500 million for body corporate). - Confiscation framework conviction-based; restraining and production orders available; production orders not available for bankers’ books. ### FIU capacity, operations, and limitations - FIU operational features: - FIU located in State Law Office with independence from outside influence. - FIU has two part-time staff, both legally qualified. - FIU not mandated to analyze STRs; police and public prosecutor determine money-laundering activity. - FIU issued Guidelines for Financial Institutions (September 2000) with suspicious-transaction examples and Schedule for STRs. - FIU has conducted training seminars and issued guidelines; FIU organized limited outreach. - Operational limitations and legal uncertainties: - Entry/search powers limited and unclear regarding need for search warrants; entry power under section 13(3) limited to compliance with identification and record-keeping, not STR obligations. - FIU lacks authority to freeze/block transactions or accounts suspected of ML/TF. - Protection from liability for financial institutions disclosing information does not extend to disclosures made pursuant to FIU examinations. - FIU not specifically authorized to enter into MOUs with foreign authorized government officials; minister-level MOU with Australia exists. - No statutory gateway for VFSC to share information with FIU; Section 381 Companies Act secrecy provisions hinder information exchange. - FIU assessment: Materially noncompliant (operational capacity, legal clarity, and staffing limitations). ### STRs and reporting statistics (to end-2001) - Total STRs received to end-2001: 110 STRs. - 38 made by domestic banks. - 1 made by the casino. - 71 made by interactive gaming operators. - STR handling and dissemination: - Many STRs filed have not been forwarded to relevant authorities; FIU has authority to give STR copies to public prosecutor and other relevant authorities if the attorney general considers it appropriate. - Proposed amendments: FTRA should be amended to clarify RBV access to STRs relating to domestic banks when attorney general thinks appropriate; FTRA should specifically override banking secrecy provisions. ### AML/CFT prudential and sectoral findings (selected) - Principle 1 (Organizational and Administrative Arrangements — prudential sectors): Assessment Materially noncompliant. - Legal uncertainty and lack of coordination limit FIU/regulators’ ability to carry out on-site verification of AML compliance. - RBV directive of July 2000 (domestic banks) and March 2002 (terrorist financing) exist; VFSC issued Practice Notes October 2001. - VFSC’s on-site checklist does not mention AML matters; RBV on-site inspections have concentrated on credit quality and not AML. - Principle 2 (Customer Identification and Due Diligence): Assessment Materially noncompliant. - Section 10 limited to transactions above Vt 1 million; FTRA does not statutorily require identification on account opening; FIU Guidelines fill some gaps but lack legal basis; no requirements for originator information on funds transfers. - Principle 3 (Monitoring and Reporting of Suspicious Transactions): Assessment Materially noncompliant. - Reporting required under Section 5 of FTRA (report within two working days), but no verification via on-site examinations; offshore sector weaknesses impede reporting compliance. - Principle 4 (Record-keeping, Compliance, and Audit): Assessment Materially noncompliant. - Section 9 and Section 11 require transaction and identification records for six years; FIU guidance exists but no supervisory on-site verification program. - Principle 5 (Cooperation Between Supervisors and Competent Authorities): Assessment Materially noncompliant. - FTRA designates FIU as gateway for STR exchange, but Section 13(1)(b) discretion to share with foreign bodies depends on attorney general; Companies Act secrecy impedes VFSC cooperation. - Integrity/fit-and-proper requirements across sectors: Assessment Materially noncompliant. - Section 42 of Financial Institutions Act and Section 9 of Banking Act bar persons convicted of dishonesty from bank officer roles, but statutory fit-and-proper requirements are absent across most sectors and ongoing verification is lacking. - Criminalization and asset recovery assessments: - Money laundering and confiscation frameworks exist but have material shortcomings; financing of terrorism not yet criminalized at assessment date; assessment: Materially noncompliant for criminalization and confiscation frameworks; international cooperation largely Largely compliant. ### AML/CFT supervisory recommendations (selected) - Clarify legal uncertainties to permit FIU and regulators to carry out on-site verification of AML compliance and explicitly override secrecy provisions where appropriate. - Amend FTRA to: - Require customer identification at account opening (remove limitation to transactions above Vt 1 million). - Require originator information on funds transfers. - Specify protection for disclosures and extend protection for auditors and supervisory disclosures under FTRA. - Strengthen FIU capacity: increase staff beyond two part-time lawyers; develop internal procedures for STR intake, analysis, dissemination, and on-site compliance checks. - Strengthen coordination between FIU, RBV, VFSC, and law enforcement through MOUs, routine meetings, and clarified statutory gateways for information sharing. - Include auditors and VFSC as reporting entities under FTRA and require designation of compliance officers by financial institutions. - Introduce statutory, ongoing fit-and-proper tests for directors, managers, and significant shareholders across all financial sectors; expand RBV prudential guideline on fit-and-proper to other sectors. *Source: IMF AML/CFT assessment and related supervisory findings (cr03254 — May 2002).* --- *International Monetary Fund assessment material contained in CR03254.* ### 1. Detailed Assessment with Compliance with the Basel Core Principles—Domestic ### Detailed Assessment with Compliance with the Basel Core Principles—Domestic Banks ### General - The assessment of compliance with the Basel Core Principles for Effective Banking Supervision (BCP) was undertaken in May 2002 under the Off­shore Financial Center (OFC) Assessment Program, Module 2. - The Reserve Bank of Vanuatu (RBV) agreed to the assessment and was the focus for the domestic sector; the offshore sector was assessed separately. - The mission was undertaken primarily by Mr. Richard Lang, a former Deputy Governor of the Reserve Bank of New Zealand, with the assistance of Mr. Richard Chalmers, mission chief. - A recommended action plan resulting from the assessment is contained in the appendix to Volume I of the report. ### Information and methodology used for assessment - The assessment was based on: - A review of applicable laws, regulations, and prudential guidelines (detailed in Volume I). - Discussions with RBV staff (primarily the deputy governor and banking supervision unit staff), industry groups (bankers’ and accountants’ associations, finance center association), and representatives of individual financial institutions. - Meetings with government ministry representatives (e.g., ministry of finance and the State Law Office). - Review of RBV internal procedures manuals, statistical and reporting forms, policy notices (including drafts), and similar documentation. - Prior to the mission, the RBV responded to a questionnaire on the regulatory environment and performed an informal self-review of compliance with the core principles; this did not constitute a formal self-assessment. ### Institutional and macroprudential setting, market structure—overview - The RBV is responsible for licensing and supervision of the domestic banking sector; the Vanuatu Financial Services Commission (VFSC) is responsible for offshore banks. - The RBV’s banking supervision unit is small and headed by the deputy governor; supervision is carried out through routine off-site surveillance based on a quarterly reporting system and an on-site examination program. - Domestic banking sector composition: - Five commercial banks, including three branches and subsidiaries of Australian institutions. - One government-owned institution. - One private bank licensed domestically that primarily offers private banking to nonresidents rather than serving the local market. - License and market focus: - The domestic license permits universal banking operations servicing both resident and nonresident customers; domestic banks focus primarily on traditional retail and commercial activities. - Recent trend: gradual withdrawal of foreign banks from the domestic market as institutions consolidate and close marginal operations. - Key statistics (as at end-2001): - Total assets of the domestic banking system: $345.6 million. - About 40 percent of total assets comprised local assets. - The balance of assets represented almost entirely deposit placements overseas, mostly by foreign banks with their parent banks. - About 15 percent of the deposit base was sourced from nonresidents. ### Principle-by-principle assessment — Principle 1: Objectives, Autonomy, Powers, and Resources - Principle summary: An effective system of banking supervision requires clear responsibilities and objectives for each agency, operational independence and adequate resources, a suitable legal framework for authorization and ongoing supervision, powers to address compliance and safety-and-soundness concerns, legal protection for supervisors, and arrangements for information sharing and confidentiality. Principle 1(1): Clear responsibilities and objectives - Description: - RBV has supervisory responsibility for domestic banks. - The Reserve Bank of Vanuatu Act (effective 1980) provides RBV powers to promote a sound financial structure and to regulate domestic banks. - The Financial Institutions Act (enacted 1999) states RBV’s responsibility to protect banks’ depositors and confers a wide range of powers (issue/revoke licenses, conduct on-site examinations, request data, limit business types, issue prudential guidelines). - Assessment: Materially noncompliant - Comments: - No mechanisms ensure consistent supervisory treatment of domestic and offshore banks. - Communications between RBV and VFSC are informal and limited. - Offshore sector law is outdated and inadequate; difficulties will persist until addressed. - If separate supervisors remain, recommendation: put formal mechanisms in place to improve communications. - Optimal recommendation: amalgamate supervisory authorities and harmonize legislation where feasible. Principle 1(2): Operational independence and adequate resources - Description: - Reserve Bank of Vanuatu Act provides operational independence for issuing and revoking licenses and supervisory methods. - Supervision function funded from within the RBV’s income. - Main resource constraint relates to experience and skills rather than finance. - Assessment: Compliant - Comments: - No specific financial constraints on the supervisor, but limited resources are inevitable in a small developing country. Principle 1(3): Suitable legal framework for authorization and ongoing supervision - Description: - Financial Institutions Act provides RBV sole responsibility for issuing (Section 12) and revocation (Sections 17 and 46(3)) of domestic banking licenses. - Act empowers RBV to set prudential rules (Part 3) not otherwise specified in legislation and obtain information from banks in any form and frequency. - Act specifies minimum capital requirements: Vt 200 million. - Act specifies maximum levels for large exposures: 25 percent of capital. - Act specifies limits for unsecured connected lending: Vt 500,000 or 1 percent of capital. - Banks are subject to a minimum liquidity requirement; currently set at 15 percent by Prudential Guideline 3. - Assessment: Largely compliant - Comments: - Specifications in the Financial Institutions Act relating to large exposures constrain RBV’s capacity to set prudential rules but are not a material problem. - Recommendation: when the Act is next amended, provide additional flexibility to RBV to allow exceptions or set institution-specific limits. Principle 1(4): Powers to address compliance and safety-and-soundness concerns - Description: - Under the Reserve Bank of Vanuatu Act and the Financial Institutions Act, RBV has full powers to obtain information from banks to judge compliance with prudential requirements. - Part V of the Financial Institutions Act includes options, including revocation of license, to force remedial action where necessary. - Some banks questioned RBV’s powers to view individual customer files, but section 28 appears to provide necessary authority. - Assessment: Compliant - Comments: - Recommendation: at next opportunity, make explicit in one or other of the acts that [text truncated in source at this point]. *Source: Detailed Assessment with Compliance with the Basel Core Principles—Domestic Banks* ### section 28 of the Financial Institutions Act takes precedence over the provisions in the Companies ### section 28 of the Financial Institutions Act takes precedence over the provisions in the Companies Act relating to secrecy ### Legal protection for supervisors and confidentiality arrangements - Principle 1(5): A suitable legal framework for banking supervision is necessary, including legal protection for supervisors. - Description: Section 57 of the Reserve Bank of Vanuatu Act provides legal protection to the RBV and its staff while discharging their duties in good faith. - Assessment: Largely compliant - Comments: - Legislation does not specify that RBV staff would be protected for costs of defending any action, but the RBV says that it would do so. - Recommendation: RBV should issue a statement of policy to its staff (internal administrative issue). - Principle 1(6): Arrangements for sharing information between supervisors and protecting confidentiality should be in place. - Description: - The Financial Institutions Act provides that any information (statement, return, or information provided by a licensee) that RBV has in its possession is to be regarded as confidential. - Section 55 requires that RBV, its staff, and any other appointed person must not disclose any information acquired in the performance of their duties. - Disclosure may be made to a supervisory authority in any other country to enable that supervisory authority to perform its supervisory duties, provided the RBV satisfies itself that the recipient will maintain confidentiality. - RBV may deny any demand for information held in respect of licensees other than in response to a court order or another piece of legislation, e.g., the Financial Transactions Reporting Act. - Assessment: Compliant - Comments: (none provided) ### Permissible activities and the use of the word “bank” - Principle 2: Permissible activities of licensed supervised banks must be clearly defined; use of the word “bank” should be controlled. - Description: - Most financial institutions supervised by RBV or VFSC; credit unions supervised by an industry body; a few very small informal savings institutions and cooperatives established under other Acts must submit annual accounts to the VFSC but are not formally supervised. - Definition of “banking business” under Section 2 of the Financial Institutions Act: - (a) accepts deposits of money from members of the public that are withdrawable or payable upon demand, after a fixed period or after notice; or - (b) undertakes operations with members of the public involving the frequent sale or placement of bonds, certificates notes or other securities; and uses such deposits or the proceeds of such operations, either in whole or in part, for loans or investments for the account and at the risk of the person accepting the deposits or undertaking the operations. - Person is taken to be carrying on banking business if: - (a) advertises for or solicits deposits of money, or offers to sell or place bonds, certificates, notes, or other securities; and - (b) uses or intends to use the funds so acquired, either in whole or in part, for making loans or investments, or any other activity authorized by law or customary banking practice, for the account and at the risk of the person advertising, soliciting or making offers. - Act allows any other financial activity approved in writing by a licensee to be deemed banking business. - Section 7: only a licensed bank may have the word “bank” in its title or describe itself as a bank. - Section 61 also provides for restrictions on the use of the word “bank.” - Assessment: Largely compliant - Comments: - A small number of insignificant financial institutions, mainly cooperative societies that take deposits, are not directly supervised. - Section 5(3) provides for nonbank financial institutions (such as credit unions) to be supervised by the RBV if their assets exceed a threshold: Vt 10 million. ### Licensing criteria and authority - Principle 3: Licensing authority must set criteria and reject applications not meeting standards; assessments should cover ownership, directors, senior management, operating plan, internal controls, projected financial condition; prior consent of home country supervisor for foreign parent. - Description: - Reserve Bank of Vanuatu Act (Part 2 Division 2) and RBV practice are fully consistent with the description. - Practice is somewhat untested: since present legislation was implemented only one application has been received and that was rejected. - Assessment: Compliant - Comments: (none provided) ### Ownership controls and transfer approvals - Principle 4: Supervisors must have authority to review and reject proposals to transfer significant ownership or control interests. - Description: - Section 51 of the Financial Institutions Act requires a domestic licensee to obtain the written approval of the RBV before carrying out a specified event resulting in a person acquiring, or exercising power over, 20 percent or more of the voting stock of the licensee. This includes sale, transfer, other disposition of share capital, or issue/allotment of any new share capital. - A person who disposes of any shares of a licensee must notify the licensee of the disposal if it would constitute a specified event. - Assessment: Largely compliant - Comments: - Practical enforceability of section 51 is open to question because licensed institutions cannot control shareholders’ actions, particularly for Australian-owned banks where local branches/subsidiaries may not be consulted in advance of ownership changes. - RBV retains power to revoke a bank’s license if new owners are not fit-and-proper, so the intent of the principle is met. ### Investment review and prudential controls - Principle 5: Supervisors must establish criteria for reviewing major acquisitions or investments and ensure corporate affiliations do not create undue risk or impede supervision. - Description: - Section 50 requires prior RBV approval before a licensee undertakes a major acquisition or investment. - Section 35 and Prudential Guideline 6 place restrictions on the size of investments by banks. - RBV reviews impact on capital structure, management of acquisition, integration timetable, board approval, and price to be paid; requests internal papers and normally meets management to understand strategic fit. - Expected that major acquisitions/investments be in the field of finance. - Assessment: Compliant - Comments: (none provided) ### Capital adequacy framework - Principle 6: Supervisors must set minimum capital adequacy requirements reflecting bank risks and define capital components; internationally active banks should meet Basel Accord minima. - Description: - Section 31 of the Reserve Bank of Vanuatu Act: a domestic licensee must maintain at all times capital in such minimum proportion in relation to its assets, liabilities or risk exposures, and in such amount as the RBV specifies from time to time. - Section 14: start-up capital for a bank is Vt 200 million; RBV has discretion to set higher initial capital requirement. - 1999 capital adequacy guideline: Prudential Guideline 4 describes RBV’s approach for assessing capital adequacy of Vanuatu banks (and consolidated groups). Off-balance sheet risks included; no provision for market risks. - Capital tiers: - Tier 1 (core capital): highest quality capital elements. - Tier 2 (supplementary capital): other elements contributing to overall strength. - Minimum capital adequacy ratio: 8 percent of capital to risk-weighted assets on both a consolidated group and stand-alone basis, of which at least 4 percent must be Tier 1 capital. - Assessment: Largely compliant - Comments: - No provision made for market risk; current exposure of Vanuatu banks to market risk is negligible, but incorporation into calculation desirable at some stage. ### Credit policies, loan evaluation, and provisioning - Principle 7: Supervisory system must independently evaluate bank policies, practices, and procedures for lending, investments, and ongoing portfolio management. - Description: - RBV issued a policy guideline on loan classification and provisioning for impaired assets. - Branches/subsidiaries of international banks with parent-mandated systems compatible with RBV’s minimum approach may follow group systems; otherwise RBV’s guideline (No. 2) must be applied. - Guideline requires classification into standard, substandard, doubtful, and loss. - Banks must maintain: - Prudent general provisions against losses not yet identified on good quality loan portfolio. - Specific provisions against reasonably anticipated losses on poor quality assets and all specifically identified losses on impaired assets. - On-site examinations concentrate on this area. - Assessment: Compliant - Comments: (none provided) - Principle 8: Supervisors must be satisfied banks have adequate policies for evaluating asset quality and adequacy of loan-loss provisions and reserves. - Description: - RBV can recommend increased provision levels where under-assessment may overstate capital and profits and affect solvency certainty. - RBV may require 1 percent of the outstanding balance of all facilities classified as “standard” to be allocated to the general provision. - For branches of foreign institutions, RBV may require written confirmation from head office where general provision is maintained in head office books to cover Vanuatu operations. - If a bank lacks a risk-grading or portfolio review system, RBV requires provisions not less than the sum of: - 20 percent of the outstanding balance of all facilities classified as substandard (may be an unallocated specific provision); - 50 percent of the outstanding balance of all facilities classified as doubtful, as an allocated specific provision; - 100 percent of the outstanding balance of all facilities classified as loss (unless already written off in full) as an allocated specific provision. - Banks required to report quarterly on asset quality. - Priority area for on-site examinations. - Assessment: Compliant - Comments: (none provided) ### Large exposure limits and related-party lending - Principle 9: Supervisors must ensure MIS enables identification of concentrations and set prudential limits to restrict exposures to single borrowers or related groups. - Description: - Section 38 of the Reserve Bank of Vanuatu Act: a licensee must not make advances or credit facilities to any person or body, or any group of bodies under control of an individual (holding or power to vote for at least 51 percent of voting shares), exceeding 25 percent of its capital. - Exposures include claims and commitments recorded on and off balance sheet on a consolidated group basis. - Prudential Guideline 8 requires treating counterparties as related where linked by cross guarantees, common ownership, ability to control, financial interdependency, or other connections identifying them as a single risk. - Licensing assesses proposed internal risk management systems; prudential guideline on credit risk management requires MIS to track portfolio diversification and enable grouping of credits by single/associated counterparties, facility types, and industries. - Ongoing monitoring via on-site inspections. - Assessment: Compliant - Comments: (none provided) - Principle 10: Supervisors must have requirements that banks lend to related companies/individuals on an arm’s-length basis and effectively monitor such extensions of credit. - Description: - Section 39 of the Financial Institutions Act prohibits banks from extending on an unsecured basis any facility (including a guarantee) in excess of Vt 500,000 or 1 percent of capital (whichever is the greater) to related parties, as defined (including directors, family, and business interests). - Assessment and Comments: (text truncates here; full assessments/comments not provided in available content) *International Monetary Fund — cr03254* ### Section 40 of the act, banks must extend facilities to related parties on substantially the same terms ### Section 40 of the act, banks must extend facilities to related parties on substantially the same terms ### Scope and main requirement - The Act requires banks to extend facilities to parties related to the bank on substantially the same terms as they would for the general public. - Advances to parties related to the bank are subject to the requirements of Section 38 (Restrictions on Advances Exceeding 25 percent of Capital). ### Dealings with subsidiaries and associates (Prudential Guideline 7) - A bank may not give a general guarantee of the obligations of a subsidiary or associate. - A bank must address risk exposures from financial dealings with subsidiaries and associates (including transactions between a foreign bank and its Vanuatu subsidiaries and associates) as strictly as it would address risk exposures to unrelated entities. - Banks must establish prudent limits on exposures to subsidiaries and associates at both an individual and an aggregate level. - In determining limits on acceptable levels of exposure to subsidiaries and associates, a bank must have regard for: - (a) the level of exposures that would be approved for unrelated entities of similar credit status; and - (b) the impact on the bank’s capital and liquidity positions, as well as its ability to continue operating, in the event of a failure of any of these entities to which the bank is exposed. ### Definitions of affiliation and control - The Act defines a body corporate as an affiliate of another body corporate if: - either body corporate holds not less than 20 percent but not more than 50 percent of the outstanding voting stock of the other body corporate; or - either body corporate has the power to exercise influence over the policies of management of the other body corporate. - For the purposes of the Act, whether a body corporate is a subsidiary of another is to be determined in the same manner as under the Companies Act. - Section 39 captures business relationships of directors (the definition of directors includes family). - Prudential Guideline 8 expands the definition of exposures to include claims and commitments recorded both on and off the balance sheet on a consolidated group basis. - Banks are required to treat counterparties as related where they are linked by cross guarantees, common ownership, ability to control, financial interdependency, or other connections which, in the bank’s assessment, identify the counterparties as representing a single risk. ### Reporting, monitoring, and supervisory review - Data on exposures to related parties, subsidiaries, and associates is included in banks’ quarterly returns and is subject to reviews in on-site inspections. - Under Prudential Guideline 5, each bank’s external auditors must annually provide a report to the RBV expressing opinions on: - (a) whether the bank has observed all prudential standards (relating to capital adequacy, liquidity, credit quality, large exposures, and connected lending); - (b) whether the statistical and financial data provided by the bank to the RBV are reliable; - (c) whether the bank has complied with all statutory requirements, any conditions on the banking license, and any other conditions imposed by the RBV in relation to the bank’s operations; and - (d) whether there are any matters which, in the auditor’s opinion, may have the potential to prejudice materially the interests of depositors of the bank. - Under Prudential Guideline 5, each bank is required, within three months of its annual balance date, to provide the RBV with a “declaration” from its chief executive, endorsed by the board (or, for a foreign bank branch, by a senior officer from outside Vanuatu with responsibility for overseeing the Vanuatu operations), attesting that, for the past financial year: - (a) the board and management have identified the key risks facing the bank; - (b) the board and management have established systems to monitor and manage those risks including, where appropriate, by setting and requiring adherence to a series of prudent limits, and by adequate and timely reporting processes; - (c) these risk management systems are operating effectively and are adequate with regard to the risks they are designed to control; and - (d) the risk management systems descriptions held by the Reserve Bank are accurate and current. - On-site reviews are undertaken about every 24 months and to date have been confined to reviewing banks’ credit risk management systems. ### Supervisory powers and related provisions - The Financial Institutions Act gives the RBV powers under section 45(2) to direct that management be changed if there are concerns and under section 25 to appoint an external auditor or other person to prepare a report for the RBV. - Section 55(3)(c) provides authority for the RBV to share information with other supervisors. - The RBV can require institutions to hold additional capital above the required minimum if the RBV considers that the bank’s risk profile justifies such a requirement, and can revoke a license if it views that the interests of depositors are being jeopardized. ### Observations from the assessment (selected Basel Core Principles) - Principle 11 (Country Risk): Assessment Compliant. - Principle 12 (Market Risks): Assessment Not applicable; comments note current market risk is negligible. - Principle 13 (Other Risks): Assessment Largely compliant; RBV lacks criteria to determine adequacy of internal management systems but can direct external auditors to review aspects of risk management and controls. - Principle 14 (Internal Control and Audit): Assessment Compliant. - Principle 15 (Money Laundering): Assessment Materially noncompliant; legislation requires tightening and RBV needs to implement on-site review processes for anti-money laundering procedures. - Principle 16 (On-site and Off-site Supervision): Assessment Compliant; off-site monitoring via returns, on-site inspections focused on credit risk management. - Principle 17 (Bank Management Contact): Assessment Compliant. - Principle 18 (Off-site Supervision): Assessment Compliant; none of the four banks has any subsidiary companies or offshore operations. - Principle 19 (Validation of Supervisory Information): Assessment Compliant. - Principle 20 (Consolidated Supervision): Assessment Compliant; powers exist should consolidated supervision become necessary. - Principle 21 (Accounting Standards): Assessment Compliant; banks must submit annual accounts audited by a RBV approved auditor. - Principle 22 (Remedial Measures): Assessment Compliant; a wide range of sanctions available, including fines, additional capital requirements, directives under Section 45, and license revocation. - Principle 23 (Globally Consolidated Supervision): Assessment Not applicable; licensed banks do not have offshore branches or subsidiaries. - Principle 24 (Host Country Supervision): Assessment Compliant; RBV maintains regular contact and information sharing with the relevant Australian supervisory authority for Australian banks operating in Vanuatu. - Principle 25 (Supervision over Foreign Banks’ Establishments): Assessment Compliant; supervision rules and processes are the same for all domestic licensed banks except minor differences for Westpac reflecting branch status. *Source: IMF country report material.* ### 7. The VFSC is responsible for the ongoing supervision of the offshore banking sector, ### The VFSC is responsible for the ongoing supervision of the offshore banking sector ### Overview of supervisory framework and practices - The Vanuatu Financial Services Commission (VFSC) is responsible for ongoing supervision of the offshore banking sector, while the minister of finance retains responsibility for licensing and the exercise of enforcement powers. - Supervisory processes employed by the VFSC are described as relatively underdeveloped and largely based upon the receipt and review of quarterly financial returns. - The Banking Act is the primary legislation under which the VFSC exercises powers over offshore or “exempt” banks, but it explicitly exempts offshore banks from capital, liquidity and other prudential standards. - Attempts to update the Banking Act have progressed little over a period of four to six years. - The VFSC Act (Section 7) sets out the following functions and duties for the VFSC: - a) to seek, through the provision of effective services for the supervision of financial business, to protect the public in Vanuatu and elsewhere against financial loss arising out of dishonesty, incompetence or malpractices on the part of persons engaged in financial business in or from within Vanuatu; - b) to protect and enhance the reputation of Vanuatu as a center for the carrying-on of financial business and to develop Vanuatu as such a center; - c) to be responsible for the general administration of, and for the collection of fees, charges and other general revenue due under the acts specified in schedule 1; - d) to act internationally as a national authority or representative of Vanuatu with respect to matters relating to the supervision and regulation of financial business; - e) to provide advice and assistance to the government and, in particular, to prepare and submit to the government reports and make recommendations on the regulation of financial business; and on legislation relating to financial business or to persons, companies and other undertakings engaged in financial business in or from within Vanuatu; and - f) to assist and advise the government on matters relating to any Act or Regulation directly or indirectly relevant to financial business. ### Offshore banking sector structure and known exposures - Licensed offshore banks: 34 licensed banks. - Physical presence: only 3 of the 34 have a real physical presence in Vanuatu; the remaining are described as “shell banks” with no presence beyond either a resident “nominee” director or resident agent who acts mainly as a service address. - Business restrictions: - All 34 are prohibited from undertaking business with Vanuatu residents. - Banks licensed since 1993 are restricted, under a general condition of their license, from soliciting funds from the public in any jurisdiction. - They may take deposits from associated and non-associated persons provided they do not publicly advertise for deposits. - Known asset levels (as at December 2001): - Total known assets of the 34 banks: approximately $2.4 billion. - Of which $1.8 billion were recorded as market-related instruments and investments. - Nature of business (information gaps and uses): - Authorities have very little information on the nature of the business of the offshore banks. - Some banks are believed to be in-house treasuries for trading conglomerates. - Others are understood to be mainly associated with financial sector groups and used principally to facilitate tax avoidance and/or asset protection schemes. ### Key legal and institutional deficiencies identified - Licensing and enforcement powers: - Under the Banking Act, the power to license, apply enforcement measures and to revoke authorization are vested in the minister of finance; the VFSC acts in an advisory capacity. - It has not been uncommon for the minister to act contrary to the advice of the commission, particularly as regards the licensing of banks. - All key regulatory decisions are vested in the minister, and there is no appeal against the minister’s decisions. - Board composition and conflicts: - The VFSC board comprises seven persons, including the commissioner (the only full-time executive); up to five of the remaining positions may be filled by private sector representatives. - The current chairman is the chief executive of a local financial services group that is either directly subject to regulation by the VFSC or acts as agent of regulated entities. - The board’s composition prevents it from accessing information as to the affairs of individual firms and creates conflicts given private sector representation. - Resourcing: - The VFSC is funded by company registration and license fees and may set its own budget in consultation with government; all surplus funds are passed automatically to government and the VFSC cannot build contingency reserves. - The banking supervision function within the commission is carried out by two persons, one of whom has been in office for only a few months, and there are no plans to increase this resource. - Legal powers and information access: - Offshore banks are specifically exempted from the capital and other prudential norms in the Banking Act. - The Act provides for VFSC directives but appears to limit this power to specific circumstances and does not explicitly permit use to set general prudential rules. - A 1995 amendment gives the VFSC the power to conduct examinations and to require submission of information, but many banks believe disclosure of customer information is prohibited under Section 381 of the Companies Act. - Both the VFSC Act and the Banking Act are silent on information sharing with domestic or foreign regulators; Section 381 of the Companies Act precludes disclosure by the VFSC (as registrar) of information in relation to an exempt company except in limited circumstances. - Sanctions and supervisory toolkit: - Section 17 of the Banking Act gives the VFSC certain powers if a bank is detrimental to depositors or creditors, insolvent or acting contrary to law, including imposing measures, appointing advisors, and revoking a license. - The absence of a broader menu of specific, graduated options and the concentration of sanction authority in the minister create uncertainty and legal vulnerability. ### Principle-by-principle compliance findings (selected) - Principle 1. Objectives, Autonomy, Powers, and Resources: - Principle 1(1) — Assessment: Materially noncompliant. - Principle 1(2) — Assessment: Noncompliant. - Principle 1(3) — Assessment: Noncompliant. - Principle 1(4) — Assessment: Materially noncompliant. - Principle 1(5) — Assessment: Compliant. - Principle 1(6) — Assessment: Noncompliant. - Summary of key compliance observations: - The VFSC Act clearly defines the VFSC’s objectives, but the Banking Act lacks a real basis for the VFSC to fulfill those objectives for the offshore sector. - The VFSC’s operational independence is limited by ministerial control over licensing and enforcement and by board composition with potential conflicts of interest. - The Banking Act’s exemptions for offshore banks from prudential requirements and uncertainty about information-gathering powers undermine effective supervision. - Legal protections exist for supervisors under Section 21 of the VFSC Act and were judged compliant. - No legal “gateways” exist in regulatory laws to permit information exchange and cooperation with other domestic and foreign regulators, in conflict with supervisory standards. ### Suggested legislative and structural remedies (as implied by assessment) - Redraft the Banking Act to: - Bring its provisions into line with those relating to domestic banks in the Financial Institutions Act. - Remove broad exemptions that exclude offshore banks from capital, liquidity and other prudential standards. - Clarify and explicitly provide the VFSC with statutory powers to issue general prudential rules and to obtain information from licensees, including customer information where appropriate and lawful. - Adjust governance and accountability: - Reconsider board composition to reduce conflicts of interest and to ensure appropriate senior-level support for the commissioner within the agency. - Rebalance powers so key regulatory decisions are exercised by the VFSC with clear, contestable processes rather than solely by the minister. - Strengthen supervisory resources and resilience: - Increase the banking supervision staff beyond two persons and permit the VFSC to retain surplus funds to build contingency reserves. - Create legal gateways for information sharing: - Amend relevant Acts (VFSC Act, Banking Act, Companies Act) to permit lawful exchange of supervisory information with domestic and foreign regulators. *International Monetary Fund assessment contained in CR03254.* ### Section 10 reserves the use of the word “bank” and its derivatives for licensed banks, but grants ### Section 10 reserves the use of the word “bank” and its derivatives for licensed banks, but grants the minister the power, acting on the advice of the VFSC to make exceptions. ### Licensing framework and practice - Assessment: Largely compliant for reservation of the term “bank”; Materially noncompliant for licensing criteria. - Legal reservation: Section 10 restricts use of “bank” and its derivatives to licensed banks, with ministerial exceptions based on VFSC advice. - Sanctions: Sanctions for carrying on banking business without a license are considered unlikely to pose a serious deterrent in many cases. - Licensing decision authority: - Final licensing authority rests with the minister, acting after consultation with the VFSC. - No statutory obligation to give reasons for refusal; minister’s discretion is absolute. - Several licenses have been granted against the recommendation of the VFSC. - Application process and information collected: - VFSC prescribes application form requiring extensive personal details of principals and managers, financial statements for corporate shareholders, and a business plan and financial projections over three years. - For a foreign bank, a statement from the home supervisory authority confirming no objection is required. - VFSC processes applications through local agents and does not typically meet principals face-to-face. - Administrative capital practice: - VFSC seeks to enforce an initial paid-up capital of $150,000 on an administrative basis. - The Banking Act contains no statutory minimum capital requirement; the $150,000 requirement has no legal backing. ### Principle 3 — Licensing Criteria - Principle summary: Authority must set criteria and reject applications not meeting standards; assessments should include ownership, directors and senior management, operating plan/internal controls, projected financial condition including capital; prior consent from home supervisor for foreign parents. - Description and findings: - Banking Act sets only administrative criteria for offshore banks (principal office in Vanuatu; appointment of authorized agents). - No statutory financial tests, minimum capital requirements, or explicit fit-and-proper tests for shareholders, directors, managers. - VFSC’s administrative practices include detailed application materials but lack legal underpinning. - Assessment: Materially noncompliant. - Comments: - Failure to specify objective authorization criteria is a serious weakness. - VFSC’s paper-based review and lack of face-to-face engagement undermines effective assessment of applicants. ### Principle 4 — Ownership - Principle summary: Supervisors must review and reject proposals to transfer significant ownership or control. - Description and findings: - Banking Act contains no provisions requiring notification or VFSC approval for changes in ownership or control. - VFSC seeks to require notification through administrative procedures. - Companies Act requires an annual filing by exempt (offshore) banks including shareholders and directors; this is the primary monitoring mechanism. - Assessment: Noncompliant. - Comments: Absence of direct controls over changes in beneficial ownership undermines fit-and-proper safeguards; Companies Act filings are after-the-fact and lack qualitative criteria. ### Principle 5 — Investment Criteria - Principle summary: Supervisors must have authority to review major acquisitions/investments and corporate affiliations. - Description and findings: - No legal provisions permit VFSC to control or review bank investments in subsidiaries or affiliates. - Assessment: Noncompliant. - Comments: Lack of controls prevents assessment of overall risk and determination of consolidated supervision responsibilities. ### Principle 6 — Capital Adequacy - Principle summary: Supervisors must set minimum capital adequacy requirements reflecting bank risks; international banks should meet Basel Accord minima. - Description and findings: - VFSC applies no capital adequacy measures beyond administrative initial paid-up capital of $150,000; no legal backing. - Assessment: Noncompliant. - Comments: - Absence of statutory minimum capital requirements needs remedy. - $150,000 is described as extremely low and risk-insensitive. - VFSC lacks authority to require capital improvements and receives insufficient data for meaningful ongoing capital assessment. ### Principles 7–13 — Credit, Asset, Concentration, Country, and Market Risk Management - Principle 7 (Credit Policies): - Description: VFSC has no procedure to review or evaluate banks’ credit policies, practices, and procedures. - Assessment: Noncompliant. - Comments: Offshore structure with only three institutions having physical presence in Vanuatu impedes VFSC verification; external auditors are not used to review these matters. - Principle 8 (Loan Evaluation and Loan-Loss Provisioning): - Description: VFSC has no policies/procedures on asset quality, classification, and provisioning. - Assessment: Noncompliant. - Comments: No guidelines on loan loss provisions; inability to verify practices due to offshore/shell bank prevalence and auditors’ unwillingness to perform non-statutory work. - Principle 9 (Large Exposure Limits): - Description: Banking Act exempts offshore banks from credit exposure controls; VFSC has no legal authority to set exposure limits; receives quarterly large exposure data for information only. - Assessment: Noncompliant. - Comments: Restriction on public solicitation does not prevent customer base extending beyond related parties; large exposure policy is an essential but missing feature. Legislation should grant supervisor discretion rather than overly specific limits. - Principle 10 (Connected Lending): - Description: Offshore banks exempt from credit exposure controls; VFSC receives statistical aggregates of related party exposure but applies no policy. - Assessment: Noncompliant. - Comments: See comments under Principles 7 and 9. - Principle 11 (Country Risk): - Description: VFSC has no policy on country risk and receives no relevant data. - Assessment: Noncompliant. - Comments: Materiality unclear due to absence of cross-border activity data. - Principle 12 (Market Risks): - Description: VFSC does not address market risk in supervisory procedures. - Assessment: Noncompliant. - Comments: Materiality unclear due to lack of data on foreign exchange and other market exposures; inability to conduct on-site reviews prevents assessment of controls. - Principle 13 (Other Risks): - Description: VFSC receives quarterly liquidity data but has no policies/procedures to ensure appropriate liquidity management; other risk management not monitored. - Assessment: Noncompliant. - Comments: Refer to Principle 7. ### Principle 14 — Internal Control and Audit - Principle summary: Supervisors must determine adequacy of banks’ internal controls, segregation of duties, reconciliation, asset safeguarding, and audit/compliance functions. - Description and findings: - VFSC obtains information at licensing on proposed internal systems and business plan but has no monitoring procedure thereafter. - VFSC seeks notification of senior management changes administratively but lacks explicit legal authority. - No specific powers to remove poor management; minister of finance can require appointment of an adviser where serious deficiencies are identified. - External auditors are statutorily prevented from discussing clients’ affairs directly with the VFSC. - Assessment: Noncompliant. - Comments: Lack of meaningful on-site examination and minimal direct contact with licensed institutions inhibit assessment of control environment and management quality; no policy on internal audit function and no access to internal audit reports. ### Principle 15 — Money Laundering - Principle summary: Supervisors must ensure banks have adequate anti–money laundering policies, including strict know-your-customer rules. - Description and findings: - Vanuatu has enacted a range of laws in relation to money laundering (see separate section). - (Detailed AML supervisory findings are treated in the separate section referenced.) *International Monetary Fund* ### annex of the report). These laws apply equally in all respects to offshore banks, and the VFSC ### Assessment of Offshore Banking Supervision (Annex) ### Anti–Money Laundering (AML) Compliance - VFSC has issued Practice Notes reminding offshore banks of their legal obligations under AML laws that "apply equally in all respects to offshore banks." - The VFSC has no procedures to verify that banks have adequate systems to combat money laundering or that they are complying with legal obligations. - A requirement by the FIU that all banks submit copies of their anti-money laundering policy manuals was rejected by "five offshore banks" on grounds that such controls are irrelevant to their business. ### On-site and Off-site Supervision (Principle 16, Principle 18) - Legal authority: - VFSC authority under "sections 15 and 16 of the Banking Act" to examine offshore banks and require disclosure of books, records, and other information. - Physical presence and on-site activity: - Only "3 of the 34 offshore banks" have any form of physical presence in Vanuatu beyond the statutory appointment of a local agent. - There is no obligation for local agents to maintain more than basic statutory records. - VFSC began a program of conducting "on-site" meetings with agents using a checklist provided one month in advance; checklist relates exclusively to financial data agents acquire from clients. - Bank management is invited but "almost without exception" declines; VFSC "has never met a member of the management" of most licensed offshore banks. - "Twenty-two 'on-site' reviews" have been undertaken in the past two years; VFSC has set a target of conducting "one per month." - VFSC lacks resources to consider on-site visits to the actual locations where banks operate. - Off-site supervision and reporting: - Off-site supervision is based on quarterly statistical returns capturing basic balance sheet information and a maturity analysis. - All banks must submit audited financial statements annually under the Companies Act; accounts are "almost invariably filed well after the statutory period." - The quarterly returns have "no legal basis, unless incorporated as a condition of the original license," and "five banks of long standing continue to refuse to submit the returns." - VFSC has not attempted enforcement action to ensure compliance; returns are used "almost entirely for statistical purposes" with some basic risk analysis. - Assessments and comments: - Principle 16: Assessment "Materially noncompliant." Comment: "There is no meaningful form of on-site examination in place" and the offshore structure makes effective supervision impracticable; use of external auditors is not employed and is "effectively precluded by the secrecy provisions within the legislation." - Principle 18: Assessment "Materially noncompliant." Comment: Quarterly reporting was a positive step but is materially deficient: not all banks comply, VFSC lacks authority or will to enforce, data are limited and do not permit proper assessment of capital adequacy, and there is no mechanism to verify accuracy. Conflicting legal interpretations (Companies Act secrecy vs. Banking Act powers) undermine VFSC authority. ### Bank Management Contact (Principle 17) - Only "3 of the 34 offshore banks" have a form of real "mind and management" in Vanuatu. - VFSC has rarely met bank management; requests for meetings are "rarely agreed to" because of travel inconvenience and banks' belief VFSC lacks authority. - Assessment "Noncompliant." Comment: VFSC relies on local agents as intermediaries, which does not permit obtaining a proper understanding of bank operations. ### Validation of Supervisory Information (Principle 19) - There is "no mechanism for validating the supervisory returns." - Assessment "Noncompliant." Comment: VFSC cannot undertake relevant on-site procedures itself and auditors are not obligated to check the accuracy of quarterly returns. ### Accounting Standards and External Audit (Principle 21) - VFSC has no specific authority to specify accounting standards or to verify standards through on-site examination; sole reliance is placed on external audit. - No obligation for banks to publish audited accounts; it is "an offence for any person to disclose the audited accounts filed with the VFSC." - Auditor appointment is subject to ministerial approval; no specific power to revoke approval except under general remedial powers. - Auditors are not required to be located in the jurisdiction and are bound by Companies Act secrecy provisions, preventing disclosure directly to VFSC without client approval. - There are no "whistle-blowing" duties on auditors and no practice of using auditors to carry out tasks at the instigation of the supervisory authority. - Assessment "Materially noncompliant." Comment: VFSC relies entirely on external audit but cannot determine or verify audit standards, cannot communicate with auditors due to secrecy provisions, and audits are often carried out by foreign auditors applying home-country standards. There is no requirement for offshore banks to publish financial data even when taking deposits from the public. ### Remedial Measures and Enforcement (Principle 22) - Section 17 of the Banking Act empowers the minister to require remedial measures and to appoint an adviser; ultimate sanction is license revocation. - No powers to impose administrative fines except for late payment of annual fees. - Section 4(4)(b) allows revocation for failure to comply with a VFSC directive, but the Act "appears not to identify circumstances under which the VFSC may issue a directive." - VFSC has adopted issuing directives as a practice to enforce authority where legal basis is unclear. - Recent enforcement: bank licenses reduced from a peak of "about 110" to the "current level of 34," many revocations for nonpayment of fees or cessation of banking business. - Assessment "Materially noncompliant." Comment: Powers are broad but too general, vested in the minister rather than VFSC, lack graduated options, and no measures allow supervisors to take control to protect assets and ensure orderly winding-up; revocation is the most common enforcement action. ### Cross-border and Host/Global Supervision (Principles 20, 23–25) - Principle 20 (Consolidated supervision): Assessment "Not applicable" — VFSC not aware of licensees with branches or subsidiaries. - Principle 23 (Globally consolidated supervision): Assessment "Not applicable." - Principle 24 (Host Country Supervision): Assessment "Not applicable." - Principle 25 (Supervision over foreign banks’ establishments): VFSC is host supervisor to "five subsidiaries of foreign banks." As part of authorization, statement required that the home supervisor has no objection. Companies Act secrecy provisions prohibit revealing information related to offshore banks; no "gateways" in VFSC Act or Banking Act to override secrecy. Secrecy laws would preclude on-site examination by a home supervisor, although lack of physical presence makes this moot. - Assessment "Noncompliant." Comment: Absence of "gateways" for regulator-to-regulator exchange of information hinders effective supervision; staff could face criminal liability under the Companies Act for sharing information. Most licensed banks have operational bases overseas, making confidential communication with fellow regulators essential. ### Summary Compliance Snapshot (Table 4) - Several core principles assessed as: - "Materially noncompliant" for Principles: 1.4 (Enforcement powers), 3 (Licensing criteria), 6–19 (including Money laundering, On-site and off-site supervision, Off-site supervision), 21 (Accounting standards), 22 (Remedial measures). - "Noncompliant" for Principles: 1.2 (Independence), 1.3 (Legal framework), 17 (Bank management contact), 19 (Validation), 25 (Supervision over foreign banks’ establishments). - "Not applicable" for Principles: 20, 23, 24. - Table indicates a pervasive weakness in supervisory capacity, legal clarity, information exchange, and enforcement mechanisms across the offshore banking sector. *Source: IMF assessment annex of the report.* ### 12. Responsibility for the supervision of the insurance sector is vested in the VFSC, but ### 12. Responsibility for the supervision of the insurance sector is vested in the VFSC, but ### Overview - Responsibility for the supervision of the insurance sector is vested in the VFSC, but the minister of finance retains the authority to license and apply enforcement actions. - At the time of the assessment, there was a vacancy for the supervisor of insurance within the VFSC, following the immediate and unexpected resignation of the previous incumbent prior to the mission’s arrival. - The Insurance Act commenced on December 29, 1973. ### Market structure and activity (end-December 2001) - Licensed under the Insurance Act: - 12 domestic insurance companies - 1 underwriting association - 7 insurance agents - 6 brokers - 15 offshore insurance companies - Of the 13 domestic insurers: - 5 were locally incorporated companies subject to home regulation in Vanuatu - 8 were external “foreign branch” operations subject to host regulation - Majority of these companies were based in Australia, Europe, and New Zealand. - Domestic market composition: mixture of life and nonlife companies predominantly writing property, motor, life, and health insurance; supervision covers only private insurance, largely related to property. - Available 2001 figure: gross property premiums of the licensed insurers were approximately Vt 320 million. - Domestic market reliance: heavily reliant on overseas reinsurance, particularly for cyclone, flood, and earthquake catastrophe cover. - Distribution channels: mainly through agencies or on a direct basis. - All agents, brokers, and salesmen are required to be licensed under the Insurance Act. - No public data provided on offshore insurers’ business types; primary market for such companies appears to be Australia and may be linked to investment schemes rather than traditional insurance products. ### Institutional resources and capacity - VFSC staffing: presently staffed with 13 persons, including the messenger and 4 daily-rated employees; there are four vacancies. - The supervisor of insurance is the one permanent member of the regulatory department and also charged with responsibility for trusts. - The supervisor of insurance who resigned immediately prior to the mission’s arrival had a high-school diploma, had worked in Insurance Regulation since 1996, and had not pursued any insurance qualifications. - Assistance being sought from AESOP for a volunteer to assist in establishing an insurance supervision unit and provide training. ### Legal framework and ministerial powers - VFSC is a statutory body under the portfolio of the minister of finance; VFSC board comprised of three private sector individuals and two ex-officio members, including the commissioner of the VFSC and the governor of the RBV. - The Insurance Act provides that the minister responsible for commerce makes all decisions with respect to licensing and regulatory matters, upon advice from the supervisor of insurance. - The supervisor of insurance is offered protection from liability in damages for anything done or omitted in the discharge of any powers or functions in good faith under Section 55 of the Insurance Act. - Section 37 gives the registrar the power to demand any document or information relating to any matter of a licensee; evidence presented that this had been used in 2002. ### Key exemptions and statutory weaknesses (offshore and domestic) - Significant statutory exemptions for offshore insurance companies that weaken regulation, including exemptions from: - minimum capital requirements (Section 4 of the Insurance Act) - provisions for restricting business and investments (Section 8) - the fit-and-proper test for persons associated with the insurer (Section 6) - cancellation requirements, including Solvency (Section 9(1)e) and Fit-and-proper Conduct of Business (Section 9(1)f) - audit requirements (Section 16) - Separate Account requirements (Sections 13 and 14) - periodic investigation requirements into life companies (Section 20) - jurisdiction of local courts (Section 46) ### Principle-by-principle findings (IAIS Insurance Core Principles) — selected principles 1–8 - Principle 1. Organization of an Insurance Supervisor - Assessment: Materially non-observant - Findings: - Lack of operational independence: minister of finance makes all licensing and regulatory decisions upon advice from the supervisor. - Absence of transparency, insufficient expert resources, and weak legal infrastructure impede prudent regulation. - Supervisor’s duties and powers are prescribed in Section 7 of the Financial Services Commission Act and supplemented within the supervisor’s contract of employment. - Comment: The structure allows potential interference with operational independence and does not lend itself to efficiency or operational independence. The Insurance Act is prescriptive but lacks substantive detail and adequate sanctions. - Principle 2. Licensing - Assessment: Materially non-observant - Findings: - The minister of finance has legal authority to grant a license under Parts II, III, and IV of the Insurance Act; permitted legal forms are prescribed in the Act. - Grounds for refusal include whenever the minister considers it to be in the public interest and if an officer is not a fit-and-proper person. - The form of application is not defined in the Insurance Act or Company Act; VFSC has implemented a schedule of requirements (business plan, principal names, two references, copies of passports, CVs and qualifications of principals, police clearance report, statements of assets and liabilities of beneficiaries, and a license fee). - The content of a business plan is not defined. - Fit-and-proper test is not defined, only extends to domestic insurers and only to officers of the licensee; in practice due diligence is performed inconsistently. - Only one guidance note has been issued [on anti-money laundering]. - Comments and risks: - Material risks for small jurisdictions attracting offshore insurance business, including foreign resident involvement in procurement, due diligence difficulties, and reputation risk. - Inconsistencies in licensing due to lack of awareness and staff; no documented procedures for new license procedures or assessment standards. - Missing licensing provisions include: transparent application form; minimum capitalization requirement for offshore insurance companies; fit-and-proper criteria for key functionaries beyond Section 6(3); evidence of beneficial and ultimate shareholders. - No statutory prohibition preventing minister from issuing a license if a key functionary is not fit-and-proper, except Section 6(3) for officers of local insurance companies. - Principle 3. Changes in Control - Assessment: Materially non-observant - Findings: - Section 11 requires notification within 20 days of new principals, change of principal office, or change in name of principals. - Section 21 (not applicable to offshore companies) requires minister sanction for amalgamation or transfer of insurance business for local companies. - Comments: - Section 11 requires notification only and does not require prior sanction or relate to beneficial/ultimate ownership — significant regulatory weakness. - Recommendations under Principle 2 on due diligence should apply to changes in control. - Principle 4. Corporate Governance - Assessment: Non-observant - Findings: - Section 9 of the Insurance Act refers to “Sound Insurance Principles” and can be interpreted to regulate corporate governance. - Section 132 of the Companies Act requires all insurance companies to hold an annual general meeting. - Comments: - No further clarification or guidance issued to industry on corporate governance standards; supervisor should specify that governance and control environment must set culture and be reviewed via on-site inspections. - Principle 5. Internal Controls - Assessment: Non-observant - Findings: - Section 9 provides a basis for internal controls but no guidance issued to industry. - No appraisal of internal controls is performed at licensing or through on-site inspections. - Companies considered too small to justify an internal audit function, but must still conduct business in a sound and prudent manner. - Comments: - Controls must be adequate and appropriate to nature and scale; supervisor may take appropriate action (including license withdrawal) where controls are inadequate. - Principle 6. Assets - Assessment: Materially non-observant - Findings: - Section 8(2) allows the minister to place restrictions on local domestic insurance companies’ investments; offshore insurance companies are exempt from Section 8(2). - Section 13 provides for separation of business other than insurance for domestic companies; Section 14 requires separation of life and nonlife business for domestic companies. - No prohibitions in relation to loans for offshore insurance companies; no deposit “ring-fencing” provisions in the Insurance Act. - Auditor required to certify that financial return prepared in accordance with international accounting standards. - Comments: - Management of assets is straightforward in practice given simple investments, but legal loopholes exist. - No evidence that minister has exercised authority over investment strategy; guidance or rules could specify statutory asset classes. - Trust arrangements for foreign operations provide additional protection in event of market withdrawal. - Principle 7. Liabilities - Assessment: Materially non-observant - Findings: - Section 20 requires companies carrying on long-term business to provide an actuarial valuation of liabilities every three years; actuary must state assumptions and methods; offshore companies are exempt from Section 20. - No provisions prescribe rules on liabilities and technical provisions for nonlife or offshore business. - No rules prescribe amount of credit allowed to reduce liabilities for reinsurance recoverables. - No consistent filing of actuarial reports by domestic insurance companies as prescribed. - Supervisor does not check sufficiency of technical provisions or require increases where necessary; supervisor cannot intervene against specific reinsurance arrangements if conditions are unsuitable. - Comments: - Technical provisions should be determined in accordance with sound accounting and actuarial principles; lack of supervisory checks and consistent actuarial reporting is a supervisory weakness. - Recommend coverage by a comprehensive on-site inspection program. - Principle 8. Capital Adequacy and Solvency - Description: Determination of technical provisions and assets are dealt with under Principles 6 and 7, in relation to which Vanuatu is materially non-observant. ### Cross-cutting supervisory shortcomings and recommendations (implicit in assessments) - Strengthen operational independence of the insurance supervisor by reducing ministerial discretion over licensing and enforcement decisions. - Define and codify fit-and-proper criteria, application forms, and documentation requirements (including beneficial and ultimate ownership) in law or regulation. - Establish minimum capitalization requirements for offshore insurance companies. - Develop documented licensing procedures, assessment standards, and change-in-control approval processes. - Issue guidance on corporate governance, internal controls, investment restrictions, and liabilities; expand the use of guidance notes beyond anti-money laundering. - Implement consistent actuarial reporting requirements and supervisory review of technical provisions, including powers to intervene on inadequate reinsurance arrangements. - Build VFSC capacity: fill vacancies, recruit experienced insurance supervision staff, provide targeted training, and establish an insurance supervision unit with on-site inspection capabilities. *Source: International Monetary Fund assessment.* ### Section 4 of the Insurance Act outlines the financial requirements for licensing of domestic ### cr03254 - Section 4 of the Insurance Act outlines the financial requirements for licensing of domestic insurance companies ### Financial requirements and solvency (Section 4; Section 9(1)) - Life insurance companies: maintain a paid-up share capital of Vt 30million. - Nonlife insurance companies: maintain between Vt 14 million to Vt 140 million dependent on the level of premium income. - Section 9(1) requires that the free assets of a domestic insurance company are sufficient for the proper conduct of its insurance business. - Assessment: Materially non-observant. - Key findings and concerns: - Risk that reliance on minimum margins of solvency will result in capital that is not many times the exposure of any one loss; focus needed on per exposure net and gross retentions relative to capital. - No margin of solvency prescribed for offshore insurance companies; no minimum capital requirements for offshore insurance companies. - No controls to ensure an insurer can meet obligations at all times. - No requirement in the Insurance Act or guidance notes for the supervisor to require minimum capital be covered by unencumbered assets (i.e., not pledged assets). - Supervisor has statutory authority to monitor technical provisions and their coverage by assets and an additional buffer, but this monitoring is not being performed to a satisfactory standard. - Annual return and accounts examinations should monitor how assets and liabilities have been determined and whether minimum capital for domestic insurance companies has been maintained. ### Derivatives and off‑balance sheet items (Principle 9; Section 8(2)) - Section 8(2) empowers the minister of finance to make restrictions on investments by a domestic insurance company. - There are no such investment restrictions in place for offshore insurance companies. - Assessment: Not applicable. - Comments: - Vanuatu is a very small insurance market; licensed companies do not appear to have used derivatives (could not be verified). - The minister of finance has not issued any restrictions on investments. ### Reinsurance (Principle 10) - Reinsurers licensed in Vanuatu are subject to the same supervision and licensing as a direct insurer. - Assessment: Non-observant. - Key findings and concerns: - Vanuatu has great exposure to cyclones, earthquakes, and flooding; catastrophe reinsurance is important. - Excessive reliance on insurers to self-determine proper level of catastrophe coverage; high risk of insurers retaining too much risk, particularly local domestic insurers. - No requirements outlining business plan content with respect to reinsurance arrangements. - No statutory requirements referring to adequacy of reinsurance, exposure to reinsurance, or credit taken for reinsurance ceded. - Regulatory staff lack adequate knowledge of reinsurance arrangements; no formal procedure or checklist for analyzing reinsurance treaties. - No evidence of assessment of maximum retention per risk or probable maximum loss, either in isolation or relative to capital and surplus. ### Market conduct (Principle 11; Section 26, Sections 12 and 45) - Section 26 requires agents, brokers, and salesmen to be of good character and sufficiently competent and knowledgeable for their class of business. - Sections 12 and 45 provide limited policyholder protection (cancellation, protection against agent non-receipt of premiums, misleading advertising, policy surrender, carrying on business properly). - Assessment: Materially non-observant. - Key findings and recommendations: - Little evidence intermediaries are being regulated or that provisions are being monitored. - Recommendation: carry out a full review of regulatory practices with respect to intermediaries and determine how to effectively monitor the effect of the legislation. ### Financial reporting (Principle 12; Sections 16, 17, 20; Companies Act references) - Domestic insurance companies: annual accounts required to be filed under Section 16; must be audited by an independent auditor and prepared in accordance with sound insurance principles. - Section 16(3): supervisor may require further particulars as prescribed in the rules. - Section 17: domestic insurance company must provide, within six-months of year-end, a certified copy of the audited balance sheet and accounts and other documents prescribed by the rules. - Section 17(2): copy of any report on affairs submitted to policyholders or shareholders. Section 17(3): requires these statements to be made public. Offshore companies are exempt from Section 17. - Offshore insurance companies: exempt from filing requirements of the Insurance Act but required to file audited financial statements on a consolidated basis or solo basis under Section 377 of the Companies Act. - Section 166 of the Companies Act indicates who can be approved to audit an exempt company. - Section 37 grants the supervisor power to require information at specified times or intervals; no evidence this power has been used in financial reporting context. - Section 20: companies writing long-term business must provide an actuarial valuation report of liabilities every three years. - Assessment: Materially non-observant. - Key findings and concerns: - Financial reporting environment is weak; limited information submitted and little analysis performed. - No consistent receipt of actuarial valuation reports despite Section 20. - Returns submitted are not being examined consistently; lack of comprehensive procedure manual or checklist. - No effective evaluation of reinsurance exposures is consistently performed. - Strong reporting environment is critical as it is presently the sole method for ongoing supervision of licensees. ### On‑site inspection (Principle 13; Sections 37, 39) - Section 39 allows for on-site inspections, but the process has never been implemented. - Section 37 allows the supervisor to demand documents or information relating to insurance business or transactions. - Assessment: Non-observant. - Key findings and concerns: - Supervision is based on off-site methods (audited accounts, director’s report, officer appointment notifications); no on-site inspections have been performed. - Absence of on-site inspections is of particular concern for offshore insurance business with limited enforceable regulation. - On-site inspections are important for prudential supervision and for checking corporate governance, internal controls, and anti-money laundering. - Section 39 does not appear to permit outsourcing of on-site inspections. ### Sanctions and intervention powers (Principle 14; Section 9; Sections 8, 37, 39; Section 52; Companies Act Section 377(2)) - Grounds for license cancellation by the minister (Section 9): - (a) the licensee has ceased or not commenced carrying-on business; - (b) the minister is not satisfied that there are sufficient free assets for the safe conduct of business; - (c) insurance business is not being conducted in accordance with sound insurance principles; - (d) voluntary liquidation; - (e) the license was procured from false, misleading, or inaccurate information; - (f) in the case of a company that carries on some form of business in addition to insurance business, that business is likely to be contrary to the public interest; - (g) the licensee has contravened any provision of the Insurance Act, e.g., filing statutory returns late. - Note: Section (a), (b), and (c) apply only to domestic insurance companies. - Section 52: provides for imprisonment and fines for gross contraventions of the Act. - Companies Act Section 377(2): if audited financial statements for an offshore insurance company are not filed within 14 days, the company and every officer shall be liable to a default fine (no evidence of fine amount or enforcement). - Intervention powers available: - (a) Section 8: minister can set restrictions on investments for domestic insurance companies; - (b) Section 8: minister can limit or prohibit a domestic insurer from writing new policies; - (c) Section 39: minister can appoint inspectors to investigate an insurer’s affairs; - (d) Section 37: supervisor can demand specified information. - Assessment: Materially non-observant. - Key findings and recommendations: - Supervisor lacks a broad range of powers to take remedial action where problems are identified. - Enforcement powers should be given to the supervisor of insurance and applied to all licensees, not just domestic insurance companies. - A licensee presently has no opportunity to appeal a regulatory decision. ### Cross‑border business operations (Principle 15; Part III) - Under Part III, all insurance companies must be licensed and subject to the same regulatory standards regardless of home jurisdiction. - Assessment: Materially non-observant. - Key findings and concerns: - A foreign parent’s subsidiary (including a joint venture) must seek a license and submit to supervision. - Substantial gaps in effective regulation compromise regulation of companies operating within Vanuatu. ### Coordination and cooperation (Principle 16) - “Gateway” provisions do not exist in the Insurance Act and are not explicit in the Companies Act. - Implication: - Lack of explicit gateway provisions limits the legal basis for sharing information or entering into cooperation agreements with supervisors in other jurisdictions. *Source: Extracts from the Insurance Act and the supervisory assessment of insurance regulation and supervision in Vanuatu.* ### Section 381(3) of the Companies Act provides that a liquidator appointed by the court may, upon ### Section 381(3) of the Companies Act provides that a liquidator appointed by the court may, upon ### Coordination, cooperation, and confidentiality (Insurance supervision) - Section 381(3) of the Companies Act permits a liquidator appointed by the court, upon request in writing of a public officer in any country or territory and with the consent of the attorney general, to disclose to such public officer information with respect to the affairs of an offshore insurance company. - The Companies Act provides that information on offshore insurance companies may not be disclosed at any time, except by court order; however, certain information could be disclosed to other regulatory bodies for supervisory purposes only. - The Insurance Act does not define confidentiality; employment contracts reference the Official Secrets Act and Section 381 of the Companies Act. - Assessment: Observant for Confidentiality (Principle 17) but gaps identified in practice: - “Gateway” provisions do not exist in the Insurance Act and are not explicit in the Companies Act; cooperation occurs informally and it is unclear what information can be shared or if limitations apply. - The Vanuatu Financial Services Commission (VFSC) has not entered into agreements/understandings with other supervisors (domestic or foreign) to share information or otherwise work together. - No formal mechanism ensures that bodies investigating fraud or money laundering will inform the insurance supervisor of investigations into a licensed insurer. - Recommendation: Place provisions in the Insurance Act confirming what information can be shared between regulatory bodies on a confidential basis. - Recommendation: Routine scheduled meetings between the VFSC and the FIU to build on existing informal cooperation. - Recommendation: A formal MOU between VFSC and the RBV and/or a centralized regulatory authority would help resolve coordination issues. ### IAIS Core Principles summary (as reported) - Degree of Observance excerpts (selected): - Organization of Insurance Supervisor (CP 1): Observant. - Licensing (CP 2): Observant. - Changes in control (CP 3): Observant. - Corporate governance (CP 4): Materially Non-Observant. - Internal controls (CP 5): Materially Non-Observant. - Assets (CP 6): Observant. - Liabilities (CP 7): Observant. - Capital adequacy and solvency (CP 8): Observant. - Derivatives and off-balance sheet items (CP 9): Non-Observant. - Reinsurance (CP 10): Materially Non-Observant. - Market Conduct (CP 11): Observant. - Financial reporting (CP 12): Observant. - On-site inspection (CP 13): Materially Non-Observant. - Sanctions (CP 14): Observant. - Cross-border business operations (CP 15): Observant. - Coordination and cooperation (CP 16): Observant. - Confidentiality (CP 17): Observant. ### AML/CFT assessment context and institutional framework - The AML/CFT assessment was undertaken at the request of the authorities in Vanuatu, using the April version of the draft IMF/World Bank methodology, and was in the context of the OFC Assessment Program, Module 2. - The assessment took place in May 2002 and was undertaken primarily by Cecilia Marian, Legal Department, with financial sector experts; input from an IMF consultant (Ms. Pat O’Sullivan) was also used. - Information and methodology used: - Review of legislation and regulations in force, guidance notes, policy statements; discussions with FIU staff, government law officers, police, RBV, VFSC, industry bodies, and private sector institutions. - Authorities had submitted responses to questionnaires in advance; not a detailed self-assessment. - Institutional roles: - The Financial Transactions Reporting Act gives a pivotal role to the FIU established in the State Law Office with functions to: - receive suspicious transaction reports (STRs); - disseminate STRs to law enforcement and regulatory agencies; - conduct investigations to ensure compliance with the Act; - receive information from domestic and foreign regulatory or law enforcement bodies in relation to investigation/prosecution of money laundering; - issue guidelines regarding record-keeping and reporting obligations; - provide training programs for financial institutions about record-keeping and reporting obligations. - Financial regulators have played a minimal role in enforcing AML requirements in the banking sector; RBV has been developing its supervisory role. - Offshore banking, insurance, and trust companies’ sectors are not currently subject to effective supervision. - Company service providers, money remitters, and moneychangers fall outside any regulatory regime. - Vanuatu Police Force investigates money-laundering offences; the public prosecutor prosecutes; to date, there have been no prosecutions. - The attorney general is responsible for international cooperation on money-laundering matters. ### Principle 1: Legal requirements for Financial Service Providers (FSP) — key findings and recommendations - 1a. Customer due diligence - Description: - Section 10 of the Financial Transactions Reporting Act 2000 (FTRA) requires financial institutions to verify customers’ identity. - Verification required when a person conducts a transaction through a financial institution and the amount of transaction exceeds Vt 1 million. - Definition of “transaction” in the FTRA does not include opening an account. - Section 16 of the FTRA prohibits false name accounts. - “Financial institution” is widely defined in section 2 to include domestic and offshore banks; domestic and offshore insurers; nonbank financial institutions; lawyers; and accountants when dealing with money. - Section 53 of the Financial Institutions Act 1999 prohibits domestic banks from undertaking transactions if they doubt authenticity of documents or suspect funds from illegal activity; section 52 requires domestic banks to retain copies of checks, bank drafts bills of exchange, or promissory notes for six years. - Assessment: Materially noncompliant. - Comments and recommendations: - FTRA does not statutorily require financial institutions to identify a customer when opening an account; the FIU Guidelines require identity verification for new account holders but lack legal basis. - The verification requirement in section 10 applies only to transactions above Vt 1 million and does not cover occasional customers. - Section 10(4) waives identification when transactions are conducted through another financial institution or when part of an established business relationship where satisfactory evidence of identity already produced. - The customer identification requirement has been applied only to transactions and business relationships entered into after passage of the FTRA in September 2000. - FTRA and FIU Guidelines lack clarity on acceptable identification documents for individuals and corporates. - No legislation requires financial intermediaries to include originator information on funds transfers; the government has no plan to introduce such a requirement. - 1b. Record-keeping - Description: - FTRA requires financial institutions to keep customer identification records (section 11) and transaction records (section 9). - Identification records must be kept for six years after they were obtained (section 11(2)). - Transaction records must be kept for six years after completion of the transaction (section 9(3)). - Assessment: Largely compliant. - Comment: The prescribed period for retention of identification records should commence after transactions or business relations have ceased. - 1c. Suspicious transactions reporting (STRs) - Description: - FTRA requires financial institutions to report suspicious transactions to the FIU (section 5). - Section 7 and section 4(2) provide protection to persons reporting STRs. - Section 6 prohibits and criminalizes “tipping off.” - An amendment to the Serious Offences Act has been proposed to criminalize financing of terrorism as a serious offence. - Regulations under the FTRA require financial institutions to report transactions suspected of being linked to terrorist financing. - Section 4(2) provides that FTRA prevails over provisions of any other Act; confidentiality and secrecy provisions in other laws would be overridden. - Assessment: Largely compliant. - Comments and recommendations: - Authorities have not issued regulations requiring financial institutions to pay special attention to transactions with persons in jurisdictions with inadequate AML regimes. - Protection under section 7 is limited to STRs made and information provided in relation to that STR; other disclosures under the FTRA are not protected. - No regulation requires scrutiny of funds transfers that do not contain originator information. - STRs made by domestic and offshore banks are provided to the RBV; STRs made by offshore banks are provided to the VFSC only if the attorney general thinks it appropriate. - Proposed amendment: FTRA should be amended so RBV is provided with STRs relating to domestic banks where the attorney general thinks it appropriate. - Proposed amendment: FTRA should specifically override banking or other secrecy provisions to prevent ambiguity. - Recommendation: Auditors and the VFSC should be included as a financial institution under FTRA and be obliged to report STRs. - 1d. AML/CFT internal controls - Description: - Section 8(1) of the FTRA requires financial institutions to establish and maintain internal procedures for prevention of money laundering; section 8(2) requires submission of a written statement of those procedures to the FIU. - RBV issued a notice to domestic banks in July 2000 requiring development of internal policies and employee training. - Assessment: Largely compliant. - Comments and recommendations: - Neither the FIU nor supervisory authorities have issued guidelines on designation of a compliance officer or implementation of other internal measures, although the Code of Banking Practice by Bankers’ Association contains a provision to that effect. - Neither the FIU nor supervisory authorities have issued guidelines on employee screening. - Recommendation: FTRA should require the designation of a compliance officer. - 1e. Sanctions - Description: - FTRA provides adequate criminal sanctions for noncompliance with AML requirements; these are to be enforced by the public prosecutor’s office. - RBV has power to issue ‘cease and desist’ orders to onshore banks under section 45 of the Financial Institutions Act of 1999 to require banks to cease any “unsound or unsafe practice in the conduct of its business.” - Under section 17 of the Banking Act, the VFSC may require an offshore bank to take corrective measures, but only after its examination of the institution. - Assessment: (Descriptive material provided; adequacy of administrative enforcement mechanisms noted per above.) *Source: IMF mission assessment of Vanuatu (May 2002).* ### Section 13(1) (c) of the FTRA provides the FIU with the power to investigate to ensure compliance ### Section 13(1)(c) of the FTRA provides the FIU with the power to investigate to ensure compliance ### FIU investigative and entry powers; limitations - Section 13(1)(c) of the FTRA provides the FIU with the power to investigate to ensure compliance with the Act. - Section 13(3) of the FTRA authorizes the FIU to enter the premises of financial institutions to ensure compliance with identification and record-keeping requirements. - The FIU may request additional information from reporting financial institutions under section 5 of the FTRA. - Limitations and legal uncertainty: - The FIU’s explicit entry power under section 13(3) is limited to customer identification and record-keeping; it does not extend to enforcing suspicious-transaction-reporting obligations. - The FTRA is unclear whether a search warrant is required before the FIU can access financial institution records. - Protection from liability for financial institutions for disclosure of information does not extend to disclosures made pursuant to such examinations. - The FIU is not provided with authority to freeze or block transactions or accounts suspected to involve money laundering or financing of terrorism. - Legal uncertainty exists as to whether the FIU can obtain beneficial ownership details from an international business company’s account without a court order. - Assessment: Largely compliant (for investigative powers), but material legal uncertainties and limitations remain. ### FIU functions, capacity, and information sharing - Statutory functions (Part 4 of the FTRA): - receive suspicious transaction reports (STRs) given by financial institutions; - disseminate suspicious transaction reports; - conduct investigations to ensure compliance with the FTRA; - receive information from domestic and foreign regulatory or law enforcement bodies in relation to the investigation or prosecution of money laundering; - issue guidelines regarding transaction record-keeping and reporting obligations; - provide training programs for financial institutions about record-keeping and reporting. - Operational and structural features: - The Vanuatu FIU is established within the State Law Office and enjoys independence from outside influence. - The FIU is not mandated to analyze STRs; determination of possible money-laundering activities is carried out by the police and the public prosecutor’s office. - The FIU has issued guidelines with a detailed list of suspicious transaction examples and a Schedule to the FTRA specifies STR details. - The FIU has two part-time staff, both legally qualified. - Section 15 of the FTRA requires officers of the FIU and relevant agencies to keep confidential any information contained in an STR or provided under the act. - Information sharing and MOUs: - Section 13(1)(d) permits the FIU to receive information from the public prosecutor’s office, the RBV, the VFSC, and the Vanuatu Police Force, but no cases of such receipt have occurred to date. - There is no statutory gateway for the VFSC to share information with the FIU. - Section 13(1)(b) authorizes the FIU to give copies of STRs to the public prosecutor’s office and, if appropriate, other relevant authorities; many STRs filed have not yet been sent to relevant authorities. - The FIU is not specifically authorized in the FTRA to enter into agreements/MOUs with foreign authorized government officials on the exchange of information related to money laundering; the minister of internal affairs has signed an MOU with Australia. - Capacity and procedural gaps: - Small size and part-time nature of staff limit capability to carry out functions: on-site visits, issuing guidelines, providing training, receiving/analyzing STRs, requesting additional information, and disseminating STRs. - FIU and its information are not protected from legal suit and process. - The FIU has not yet developed internal rules and procedures for core functions. - Assessment: Materially noncompliant. ### Integrity standard; fit-and-proper regimes across sectors - Domestic banking sector: - Sections 13 and 14 of the Financial Institutions Act provide criteria for issuance of banking licenses, including a character test of substantial shareholders and management. - Section 42 bars any person convicted of an offence involving dishonesty from being a director, manager, secretary, or other officer of a bank. - Offshore banking sector: - The Banking Act does not explicitly provide a fit-and-proper test, but section 9 bars any person convicted of an offence involving dishonesty from being a director, manager, secretary, or other officer of a bank. - In practice, the VFSC carries out fit-and-proper checks when licensing offshore banks. - The Banking Act gives the minister discretionary power to grant an offshore banking license and has no provision for a fit-and-proper test for significant shareholders, directors, management, or significant ownership change. - Insurance sector: - Section 6(3) of the Insurance Act empowers the minister to refuse registration of a local insurer if any officer is not a fit-and-proper person. - Trust companies and international companies: - The inspector of trust companies has supervisory powers under the Trust Companies Act. - For international companies registered under the International Companies Act, the registration authority (the VFSC) has no power at registration to obtain names of directors, shareholders, or share structure. - Identified weaknesses and recommendations: - No statutory fit-and-proper requirement for significant shareholders, directors, and management as an ongoing requirement across all sectors, except minister’s approval for trust company ownership change. - Since the mission’s visit, the RBV has issued a new prudential guideline for fit-and-proper requirements for directors and managers of domestic banks. - Recommendation: Government should introduce statutory fit-and-proper tests for directors, managers, and significant shareholders at the time of licensing of all financial service providers, and when ownership changes; make the fit-and-proper test an ongoing requirement. - Assessment: Materially noncompliant. - Comments: Other than domestic banking, much of the financial sector is under lax regulatory regime or under no government supervision. ### Criminalization of money laundering and financing of terrorism - Legal framework: - Money laundering is a criminal offence in Vanuatu under the Serious Offences (Confiscation of Proceeds) Act 1989 (the Serious Offences Act). - Vanuatu has signed the Vienna Convention; legislation needed for full implementation has not been passed although parliament passed the Act for its ratification in December 2001. - Vanuatu has signed the Convention for the Suppression of the Financing of Terrorism and drafted bills required for its ratification. - Vanuatu has not yet signed the Palermo Convention. - Definition and scope: - Under section 19(1) of the Serious Offences Act, a person engages in money laundering if the person engages in a transaction involving money or other property that is the proceeds of crime; or receives, possesses, conceals, disposes of or brings into Vanuatu any money or other property that is the proceeds of crime, and the person knows, or ought reasonably to know, that the money or other property is derived or realized, directly or indirectly, from some form of unlawful activity. - Section 18 limits predicate offences to “serious offence” as defined in section 1(1): “serious offence” means an offence for which the maximum penalty is imprisonment for not less than three years or the proceeds from the commission of which is not less than Vt 1 million. - Section 18(b) extends predicate offences to offences committed outside Vanuatu that would have constituted a serious offence if committed in Vanuatu. - Money laundering, as defined under the Serious Offences Act, does not require that a predicate offence be committed. - Sanctions: - Section 19(2) provides sanctions of a fine not exceeding Vt 20 million or imprisonment for a period not exceeding 15 years for a natural person. - For a body corporate, the sanction is a fine not exceeding Vt 100 million. - Proposed sanction for the financing of terrorism: imprisonment for not more than 20 years for a natural person, and a fine not exceeding Vt 500 million for a body corporate. - Supervisory authorities can remove a license if a business is deemed detrimental to the public interest. - Assessment: Materially noncompliant. - Comments: - The three conventions have not been ratified, and therefore there is no requirement that laws be passed to implement the Conventions’ provisions; this significantly weakens the AML/CFT framework. - Financing of terrorism has not been criminalized, though the government has proposed an amendment to the Serious Offences Act to criminalize financing of terrorism as one of the serious offences. ### Confiscation, restraining, and production orders; limitations - Confiscation framework: - Confiscation is conviction-based under the Serious Offences Act. - Section 4(1) construes “confiscation orders” as orders to pay to the government a pecuniary penalty not exceeding the value of the profits from serious offences. - Parts 3 to 5 provide for restraining orders (domestic and foreign), production orders, and search warrants for property-tracking documents; production orders are not available for bankers’ books. - The Act provides for enforcement of foreign confiscation, restraining, and production orders. - An application for a restraining order may be made ex parte to the supreme court when a person has been or is about to be charged with a serious offence and the defendant has received profits from the commission of the offence; restraining orders can relate to property of the defendant or property derived from the offence and held by a third party. - The Schedule requires courts to take into account an interest held by a person other than the defendant when assessing value of proceeds; protection of bona fide third parties is provided under common law. - Section 22 provides for production orders under which a person convicted of a serious offence is ordered to produce property-tracking documents to a police officer. - The Criminal Procedure Code provides powers of search and seizure and to require witnesses to be examined; these can be used for money-laundering investigations. - Limitations and gaps: - No power to directly confiscate proceeds of crime, instrumentalities, and property used in the commission of the crime other than via pecuniary penalty under confiscation orders. - Definition of proceeds of crime for confiscation is limited. - No statutory power to freeze transactions and accounts when a money-laundering offence is suspected. - Production orders do not extend to bankers’ books. - Government has no specific authority to void contracts or render them unenforceable where parties knew or should have known that the contract would prejudice authorities’ ability to recover financial claims under the Serious Offences Act. - Assessment: Materially noncompliant. ### Processes for receiving, analyzing, and disseminating disclosures (FIU processes) - Statutory ARRANGEMENTS: - The FIU is responsible for receiving and disseminating STRs, conducting compliance investigations, receiving information from domestic and foreign agencies, issuing guidelines on record-keeping and reporting, and providing training. - Key operational deficiencies: - The FIU is not mandated to analyze STRs; police and public prosecutor handle determination of money-laundering activities. - Section 13(1)(b) authorizes sharing STR copies with foreign law enforcement or supervisory bodies if the attorney general considers it appropriate; “appropriate” has not been defined and determinations are made case-by-case. - No cases of the FIU receiving information from certain domestic agencies to date; many STRs filed have not been forwarded to relevant authorities. - The FIU has no specific authority to enter MOUs with foreign agencies; minister-level MOU with Australia exists. - FIU has not developed internal procedures for receiving STRs, requesting additional information, disseminating STRs, or conducting visits. - FIU’s small, part-time staffing severely limits operational capacity. - Recommendations and legal clarifications needed: - Clarify FIU’s investigative power to ensure compliance by financial institutions, potentially via amendment to the FTRA. - Specifically override banking secrecy for disclosures under the FTRA to remove ambiguity. - Increase FIU manpower and establish internal rules and procedures. - Assessment: Materially noncompliant. ### International cooperation - Legal basis: - Mutual Assistance in Criminal Matters Act and the Serious Offences Act form the basis for international judicial cooperation. - The attorney general is designated as central authority to grant mutual assistance requests and require government agency assistance for investigations, evidence collection, enforcing restraint and confiscation orders. - Scope of assistance: - Assistance can be given to commonwealth countries; for noncommonwealth countries assistance is possible if there is a treaty. - Parts 3 and 4 of the Mutual Assistance in Criminal Matters Act provide for evidence obtaining, locating/identifying persons, search and seizure, arranging attendance, transferring prisoners, serving documents, tracing property, and obtaining restraining orders. - Sections 15, 16, 25, and 28 of the Serious Offences Act provide for issuance of confiscation orders, restraining orders, production orders, and search warrants when requested under the Mutual Assistance Act. - Mutual assistance may be provided even when an individual is charged only with money laundering; dual criminality is required before assistance can be given. - Money laundering is not listed as an extraditable offence in the Extradition Act; extradition for money laundering is possible if both Vanuatu and the requesting commonwealth country are signatories to an international convention requiring extradition for money laundering. For noncommonwealth countries, extradition requires a treaty; no treaties have been signed. - Assessment: Largely compliant. - Comments: - Government lacks a policy on asset sharing; assets found to be proceeds of illicit activity by a Vanuatu court would become government property. - Money laundering is not listed as an extraditable offence; no treaties exist with noncommonwealth countries. ### Controls and monitoring of cash transactions (informational) - Import/export of bank notes: - There is no government control on the import and export of bank notes. - Cross-border cash reporting: - There is currently no reporting requirement for cross-border movement of large amounts of cash. - Use of cash in transactions: - In most business transactions, large amounts of cash are rarely used in Vanuatu and, if used, will usually attract attention. - The ratio of cash to nominal GDP has declined from 7.5 percent in 1998 to 6.1 percent in 2001. *Source: IMF content unit "cr03254 - Section 13(1) (c) of the FTRA provides the FIU with the power to investigate to ensure compliance"* ### Part 2: AML/CFT Elements in the Prudentially-Regulated Financial Sectors ### Part 2: AML/CFT Elements in the Prudentially-Regulated Financial Sectors — Module 1: AML/CFT Core Criteria for Prudentially-Regulated Financial Sectors ### Principle 1. Organizational and Administrative Arrangements - Assessment: Materially noncompliant - Description / findings: - The FTRA has introduced AML requirements, including the development of internal procedures by financial institutions for the prevention of money laundering. - The FTRA gives the FIU the authority to conduct investigations to ensure compliance with the Act by financial institutions. - The RBV issued a directive on the prevention of money laundering in July 2000, and another on the suppression of terrorist financing in March 2002. - The VFSC issued practice notes on anti-money-laundering requirements in October 2001. - The FTRA provides sanctions for noncompliance to be enforced by the public prosecutor’s office. - The FIU is given a function to provide training programs; the FIU organized a couple of seminars on the prevention of money laundering since its inception. - Domestic banks have internal AML procedures in place. - The RBV has power under the Financial Institution Act to carry out on-site examinations and to issue ‘cease and desist’ orders, but inspections have concentrated on credit quality in line with an inspection manual that does not reference money laundering. - The VFSC has conducted 22 on-site “reviews” of the local agents of offshore banks over the last two years; its checklist does not mention AML matters. - The VFSC’s supervision is severely limited by the lack of physical presence in Vanuatu by most offshore banks. - Insurance business requires government registration under the Insurance Act; VFSC has power under Section 39 of the Insurance Act to conduct on-site inspections but has performed none to date; many offshore insurance companies lack physical presence. - Subsequent to the mission, the RBV agreed that members of the FIU can accompany the RBV during on-site inspections for training and ensuring compliance with the FTRA. - Key problems / constraints: - The FIU has not carried out any on-site inspections due to lack of resources and legal uncertainty regarding investigative power and Companies Act secrecy provisions. - Legal uncertainty exists regarding the investigative power of the FIU and the on-site supervisory power of regulators vis-à-vis secrecy provisions in the Companies Act and the International Companies Act. - There is no coordination between the FIU and the financial regulators in ensuring compliance by banks and insurers. - Recommendations: - Clarify the legal uncertainty to permit the FIU and regulators to carry out on-site verification of AML compliance. - Strengthen coordination between the FIU and financial regulators on compliance verification. ### Principle 2. Customer Identification and Due Diligence - Assessment: Materially noncompliant - Description / findings: - Section 10 of the FTRA requires financial institutions, including banks and insurers, to identify customers. - Under section 13(1)(e), the FIU is authorized to issue guidelines to financial institutions in relation to record-keeping, including customer identification; the FIU issued Guidelines for Financial Institutions in September 2000 which include a section on customer identification. - The Financial Institutions Act contains some customer identification and record-keeping requirements. - Key issues: - The FTRA and FIU Guidelines contain a number of loopholes on customer identification. - There have been no efforts by the FIU and financial regulators to verify compliance with customer identification requirements through on-site examination. - Most offshore banks and offshore insurers have no physical presence, making it infeasible for the VFSC to verify that banks follow internal customer identification rules claimed by local agents. - In the insurance sector, the VFSC lacks appropriate powers to verify compliance with customer identification. - Recommendations: - The FIU should organize a meeting with industry representatives to increase awareness of the importance of compliance with customer identification. - Financial regulators should initiate on-site examination programs to verify compliance on the basis of samples of randomly selected individual accounts. - The financial regulators and the FIU should meet regularly to review compliance status; based on regulators’ input, the FIU should consider initiating its own on-site examination program for institutions not covered by regulators. ### Principle 3. Monitoring and Reporting of Suspicious Transactions - Assessment: Materially noncompliant - Description / findings: - Section 5 of the FTRA requires financial institutions, including banks and insurers, to report suspicious transactions to the FIU as soon as possible, but no later than two working days after forming the suspicion. - Up to the end of 2001, the FIU received 110 STRs: 38 were made by domestic banks, 1 by the casino, and 71 by interactive gaming operators. - Under section 13(c) of the FTRA, the FIU has authority to conduct investigations and to enter the premises of financial institutions to check compliance with customer identification and record-keeping requirements. - Under section 13(1)(e), the FIU is authorized to issue guidelines on reporting obligations; the FIU issued a guideline with a detailed list of examples of suspicious transactions in the banking sector. - Key issues: - No efforts by the FIU and financial regulators to verify compliance with reporting requirements through on-site examination. - Regulation of offshore banking and insurance sectors has major weaknesses due to lack of physical presence and lack of meaningful supervisory powers for the VFSC. - The government has not issued regulation requiring special attention to transactions with persons in jurisdictions that do not apply sufficient AML/CFT measures. - Recommendations: - The FIU should organize meetings with industry representatives to raise awareness on suspicious transaction reporting. - The FIU should consider providing feedback to industries, at least on an aggregate basis, on submitted STRs. - Financial regulators should initiate on-site examinations, including interviews with compliance officers and relevant staff, to verify reporting compliance. - The financial regulators and the FIU should meet regularly to discuss compliance; based on regulators’ input, the FIU should consider initiating its own on-site examinations. ### Principle 4. Record-keeping, Compliance, and Audit - Assessment: Materially noncompliant - Description / findings: - Sections 9 and 11 of the FTRA require financial institutions, including banks and insurers, to keep transaction records and customers’ records. - Under section 11(2) of the FTRA, customer identification records must be kept for six years after they are obtained. - Section 9(3) of the FTRA requires transaction records to be kept for six years after completion of the transaction. - Section 52 of the Financial Institutions Act requires onshore banks to retain all checks, bank drafts, bills of exchange, or promissory notes for six years. - Under section 13(1)(e), the FIU is authorized to issue record-keeping guidelines and has issued a guideline specifying how this obligation is to be fulfilled. - Under section 13(c) of the FTRA, the FIU can conduct investigations and provide training on record-keeping obligations. - Key issues: - No efforts by the FIU and financial regulators to verify compliance with record-keeping requirements through on-site examination. - Offshore banking and insurance sectors’ supervision is weak due to lack of physical presence by many offshore entities and VFSC limitations. - The prescribed period to keep identification records under the FTRA may, in some cases, be shorter than required under internationally accepted best practice, which requires five-year record-keeping after the account is closed. - Recommendations: - The FIU should organize a meeting with industry representatives to increase awareness of record-keeping compliance. - Financial regulators should initiate on-site examinations to verify compliance using randomly selected samples of individual accounts. - The financial regulators and the FIU should meet regularly on compliance status; based on regulators’ input, the FIU should consider initiating its own on-site examinations. ### Principle 5. Cooperation Between Supervisors/Regulators and Competent Authorities - Assessment: Materially noncompliant - Description / findings: - The FTRA designates the FIU as the gateway for information exchange related to suspicious activities within Vanuatu and with other countries. - Under section 13(1)(b), the FIU is authorized to give copies of suspicious transaction reports to the public prosecutor’s office and, if appropriate, other relevant authorities. - Section 15 of the FTRA requires the authorized government official to keep strict confidentiality of information obtained under the Act. - Under section 13(1)(b) of the FTRA, the FIU may give copies of STRs to a law enforcement agency or supervisory body outside Vanuatu if the attorney general considers it appropriate; the State Law Office has not defined “appropriate” conditions. - Section 55(3) of the Financial Institutions Act permits the RBV to provide information to a supervisory authority in another country. - Under section 13(1)(d), the FIU can receive from foreign agencies information related to money laundering or enforcement of the Serious Offences Act; section 15 guarantees confidentiality for such information. - Key issues: - There is no legislation authorizing the VFSC to provide information related to offshore banks and insurers to supervisory authorities in other countries. - The Companies Act imposes strict secrecy provisions precluding such cooperation. ### Principle 6. Licensing and Authorizations - Assessment: (No separate assessment line provided in source; findings and issues below) - Description / findings: - Sections 13 and 14 of the Financial Institutions Act provide criteria for issuance of banking licenses, including character of substantial shareholders and character and experience of management. - Section 11(3) of the Financial Institutions Act requires an onshore banking license applicant to furnish information and documents; current RBV requirements include details of directors and key senior management, a copy of the Memorandum and Articles of Association, certificate of incorporation, and a business plan. - RBV conducts background checks on change in control or new significant participation in licensed banks similar to initial licensing checks. - Section 17 of the Financial Institutions Act gives the RBV authority to revoke licenses for contraventions. - In the offshore banking sector, section 4 of the Banking Act gives the minister of finance discretionary power to grant an offshore banking license without specifying licensing criteria. - Under section 3(2), an applicant must submit to the VFSC a copy of the memorandum and articles of association and such other information as the commission may require; to date the VFSC has required copies of passport, a statement of assets and liabilities, police clearance certificates, a business plan, and at least three references for each beneficial owner and director. - Section 4(4) of the Banking Act gives the minister of finance power to revoke offshore licenses; the government has no legal power to reject proposals to transfer ownership. - Over the last two years, the minister of finance has withdrawn the offshore banking licenses of 30 institutions partly due to failure to comply with regulatory and statutory requirements. - The minister has denied an application for offshore banking on four occasions over the last two years partly because of applicants’ suspicious backgrounds. - The number of offshore banks declined from over 100 in the mid-1990s to 36 in May 2002. - Under the Insurance Act, government registration is required to carry out insurance business; section 6(3) empowers the minister to refuse registration of a local insurer if any officer is not a fit-and-proper person. - Key issues: - “Fit-and-proper” is not defined, the requirement is restricted to a local insurer and applies only to officers and not to significant shareholders. - For domestic insurance, the Act does not specify required documents and particulars to accompany an application. - For “exempted insurers,” section 35 of the Insurance Act requires an applicant to furnish annually a certificate from the insurance supervisory authority in the mother jurisdiction stating compliance with its supervisory requirements. *Source: IMF — Part 2: AML/CFT Elements in the Prudentially-Regulated Financial Sectors (Module 1 — AML/CFT Core Criteria for Prudentially-Regulated Sectors).* ### Section 42 of the Financial Institutions Act and section 9 of the Banking Act bars any person who ### Section 42 of the Financial Institutions Act and section 9 of the Banking Act bars any person who has been convicted of an offence involving dishonesty from being a director, manager, secretary, or other officer of a bank ### Fit-and-proper requirements and supervisory capacity - Finding: Section 42 (Financial Institutions Act) and section 9 (Banking Act) bar any person convicted of an offence involving dishonesty from serving as a director, manager, secretary, or other officer of a bank. - Assessment: Materially noncompliant (as stated). - Comments: - VFSC lacks adequate means to carry out fit-and-proper tests when reviewing applications for new licenses. - Difficulty in verifying background information for applicants that are not banking institutions in their home jurisdictions. - VFSC does not possess the capacity to review and verify license applications for insurance business. ### AML/CFT sector-specific criteria — Banking sector (Module 2) - Table reference: Table 9. Detailed Assessment of AML/CFT Sector-Specific Criteria for the Banking Sector. - Principle 2 (Customer Identification and Due Diligence) - Required supervisor actions (listed in source): (1) through (9) including more extensive due diligence for high-risk customers, systematic identification procedures, due diligence for introduced business, non-face-to-face customer procedures, restrictions on correspondent banking relationships with banks without physical presence, attention to respondent banks in weak jurisdictions, and requirements for originator information on funds transfers. - Description of practice: - FIU and RBV issued guidelines on AML obligations including account opening requirements, customer identification, and verification. - Neither the FIU, the RBV, nor the VFSC have issued regulations requiring special attention to high-risk or non-face-to-face customers, introduced business, correspondent relationships, or originator information on fund transfers. - Customer identification requirement is exempted when a transaction is conducted through a lawyer or an accountant considered another “financial institution.” - No legislation/regulation specifically requires financial intermediaries to include originator information on fund transfers. - Vanuatu banks are not suppliers of correspondent banking services. - Assessment: Materially noncompliant. - Principle 3 (Monitoring and Reporting of Suspicious Transactions) - Supervisor should require consolidated worldwide account monitoring. - Description: Criterion not applicable because Vanuatu banks do not carry out global operations. - Principle 4 (Record-keeping, Compliance, and Audit) - Supervisor should require global KYC standards for banking groups. - Description: Criterion not applicable because Vanuatu banks do not carry out global operations. - Principle 5 (Cooperation Between Supervisors and Competent Authorities) - Licensing foreign banks: section 14(2) Financial Institutions Act requires RBV to be satisfied that foreign bank is subject to comprehensive consolidated supervision, has written confirmation from home supervisor that it has no objection, is supervised consistent with Basel Committee guidelines, authority willing to cooperate, and bank has provided written acknowledgement that RBV may discuss conduct/status with home supervisor. No similar requirement in the Banking Act for offshore banks. - Section 55(3)(c) Financial Institutions Act allows RBV to disclose information to home country supervisory authorities, including on-site inspection results. - VFSC requires letter from a supervisor of any country where foreign bank will offer services confirming no objection and regulatory requirements fulfilled; no requirement for confirmation from home supervisor. - VFSC prohibited by Companies Act secrecy provisions from revealing information about offshore bank affairs; no gateways in VFSC Act or Banking Act to override secrecy. - Assessment: Materially noncompliant. - Comments: - No specific requirement that RBV ensures home supervisor has no impediments accessing information, including on-site examinations, to verify foreign branches’ compliance with KYC; only a licensing-time confirmation and no ongoing requirement. - No such requirements imposed on offshore banks. - Absence of legal authority for VFSC to cooperate with overseas agencies is a material deficiency. ### AML/CFT sector-specific criteria — Insurance sector (Module 3) - Table reference: Table 10. Detailed Assessment of AML/CFT Sector-Specific Criteria for the Insurance Sector. - Principle 2 (Customer Identification and Due Diligence — Insurance) - Supervisor should ensure verification that verification subjects relevant to applications exist; internal controls before significant business; verification of contract parties; verification of proposed recipients if payments made to persons other than policyholder. - Description: FIU issued guidelines under section 13 of the Financial Transactions Reporting Act. - Assessment: Materially noncompliant. - Comments: Absence of an effective regulator and physical presence of most offshore insurers makes it difficult for FIU or VFSC to ensure compliance; guidelines have no insurance-specific guidance. - Principle 3 (Monitoring and Reporting of Suspicious Transactions — Insurance) - Description: Part 2 of FTRA requires insurers to monitor and report suspicious transactions; FIU has power under section 13 to issue guidelines. - Assessment: Materially noncompliant. - Comments: Same capacity and presence deficiencies impede enforcement. - Principle 4 (Record-keeping, Compliance, and Audit — Insurance) - Description: Section 13 FTRA gives FIU power to issue guidelines and to enter premises to inspect records. - Assessment: Materially noncompliant. - Comments: No VFSC or FIU directives/guidance as set out; inability to identify noncompliers or take measures. ### AML/CFT elements for other service providers (trust and company service providers) - Table reference: Table 11. Detailed Assessment of AML/CFT Elements for Other Service Providers. - Principle 1 (Organizational and Administrative Arrangements) - FTRA introduced AML requirements on financial institutions, including trustees; FIU can conduct investigations and provide training. - Company service providers are not regulated and are not subject to AML requirements under FTRA; when one person arranges for another to act as trustee, that arranger may not be caught. - Assessment: Materially noncompliant. - Comments: - FIU has not carried out an on-site inspection of trust companies due to lack of resources and legal uncertainty with investigative power and International Companies Act secrecy provisions. - VFSC has no on-site inspection powers under the Trust Companies Act. - Inspector of trust companies is provided for but has not been appointed; unclear whether inspector could review underlying trust file without arrangement with FIU. - Principle 2 (Customer Identification and Due Diligence) - FIU issued guidelines under section 13 of FTRA to financial institutions, including trust companies; company service providers are not subject to AML requirements. - Assessment: Materially noncompliant. - Comments: - No regulator appointed for trust companies. - Company service providers not subject to regulation. - FIU has not met with representatives of trust companies subject to FTRA; guidelines lack trust-company-specific guidance on who should be identified when acting as trustee. - FTRA exemption: customer identification exempted when financial institution conducts business with another financial institution (includes a trust company acting as trustee), assuming trust companies conducted due diligence that is not subject to verification by any regulator. - Principle 3 (Monitoring and Reporting of Suspicious Transactions) - Description: Part 2 of FTRA requires trust companies to monitor and report suspicious transactions; FIU has power to issue guidelines. - Assessment: Materially noncompliant. - Comments: No regulator appointed for trust companies; company service providers not regulated; FIU has not ensured compliance. - Principle 4 (Record-keeping) - Requirement: Maintain records regarding customer identification and individual transactions for a period of five years. - Description: Section 13 FTRA empowers FIU to issue guidelines and to inspect records. - Assessment: Materially noncompliant. - Comments: No regulator for trust companies; company service providers not subject to regulation; FIU has not ensured compliance. - Principle 5 (Cooperation among Competent Authorities) - Description: FTRA designates FIU as gateway for information exchange related to suspicious activities. - Under section 13(1)(b) FIU authorized to give copies of STRs to law enforcement or a supervisory body outside Vanuatu if attorney general considers it appropriate; State Law Office has not defined “appropriate” conditions. - Under section 13(1)(d) FIU may receive foreign information related to ML/Serious Offences Act enforcement; section 15(2)(b) guarantees confidentiality to information obtained under section 13(d) equivalent to domestic STRs. - Assessment: Materially noncompliant. - Comments: No legislation authorizes VFSC to provide information related to trust companies to supervisory authorities in other countries; company service providers unregulated so exchange of information related to them is not feasible. - Principle 6 (Licensing and Authorizations) - Description: Trust Company Law grants license by minister of finance; application must include evidence of substantial and practical experience, and a character reference establishing no director/officer has a criminal record. - Company service providers are not required to obtain a license and there is no ongoing review. - Assessment: Materially noncompliant. - Comments: No ongoing review to ensure delivery of services by properly qualified persons for trust companies. ### Summary compliance matrix (Table 12 highlights) - Legal and Institutional Framework — Requirements (selected entries preserved as in source): - Customer due diligence 1a. Materially noncompliant - Record-keeping 1b. Largely compliant - Suspicious transactions reporting 1c. Largely compliant - AML/CFT internal controls 1d. Largely-compliant - Sanctions 1e. Largely compliant - Integrity standards 2 Materially noncompliant - Criminalization of money laundering and terrorism financing 3 Materially noncompliant - Confiscation of proceeds of crime or assets used to finance terrorism 4 Materially noncompliant - Process for receiving, analyzing, and disseminating disclosures of financial information and intelligence 5 Materially noncompliant - International cooperation in AML/CFT matters 6 Largely-compliant - Prudentially-regulated sectors requirements (selected sector ratings preserved): - Banking: Organizational and administrative arrangements Materially noncompliant; Customer identification and due diligence Materially noncompliant; Monitoring and reporting of suspicious activities Materially noncompliant; Record-keeping, compliance and audit Materially noncompliant; Cooperation with regulators and competent authorities Materially noncompliant; Licensing and authorizations Materially noncompliant - Insurance: Organizational and administrative arrangements Materially noncompliant; Customer identification and due diligence Materially noncompliant; Monitoring and reporting of suspicious activities Materially noncompliant; Record-keeping, compliance and audit Materially noncompliant; Cooperation with regulators and competent authorities Materially noncompliant; Licensing and authorizations Materially noncompliant - Other Service Providers: Organizational and administrative arrangements Materially noncompliant; Customer identification and due diligence Materially noncompliant; Monitoring and reporting of suspicious activities Materially noncompliant; Record-keeping, compliance and audit Materially noncompliant; Cooperation with regulators and competent authorities Materially noncompliant; Licensing and authorizations Materially noncompliant --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr03254.pdf_