## Offshore Financial Centers Assessment Report for the Principality of Monaco

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### Assessment scope, mission, and acknowledgements
- Assessment scope and methodology:
  - AML/CFT regime assessed based on the April 2, 2002 version of the Draft Fund and Bank AML/CFT Methodology.
  - Regulation of portfolio management and mutual funds evaluated relative to the IOSCO Objectives and Principles of Securities Regulation.
  - AML-related principles of the Basel Core Principles for Effective Banking Supervision were assessed; AML/CFT assessment of non-prudentially regulated institutions covered company and trust service providers (CSPs) and gaming establishments.
  - Report updated in May 2003 to take account of legislation and regulatory measures undertaken since the mission.
- Mission and participants:
  - Mission carried out during April 22 to May 3, 2002.
  - Mission members included Ms. Mary G. Zephirin (Mission Chief), Ms. Jennifer Elliott (both MFD), Messrs. Louis Forget (Consulting Counsel, LEG), Marcel Maes, and Ronald Ranochak (both consultants), and Ms. Sonia Echeverri (Mission Assistant, MFD).
  - Meetings held with the Minister of State, Mr. Patrick Leclercq; Mr. Franck Biancheri; Mr. Patrice Davost; Ms. Sophie Thevenoux; Ms. Isabelle Rosabrunetto; officials from public institutions; and representatives of financial institutions, auditors, and private lawyers.
- Acknowledgements:
  - Mission expressed gratitude to Monegasque authorities and public institution staff; special thanks to Ms. Sophie Thevenoux and Ms. Isabelle Rosabrunetto for organizational and logistical support.

### Wealth management as economic strategy and regulatory focus
- Findings:
  - Wealth management is central to Monaco’s economic strategy; minimizing reputational risk and maintaining system integrity are supervisory goals.
  - Banking activity is often most vulnerable to reputational and integrity concerns.
  - Banking in Monaco is regulated and supervised via French supervisory arrangements; BCP assessment focused on AML principles for which Monegasque authorities are responsible.
  - AML/CFT assessment covered banks, security intermediaries, CSPs, and gaming establishments (gaming included because of macroeconomic and reputational implications).
  - Regulation and oversight of portfolio management and mutual funds were assessed; cross-border cooperation and information sharing were explicitly examined.
- Political, demographic, and legal background (selected):
  - total area of about two square miles;
  - resident population in 2000 of about 32,000 persons, some 6,000 of whom are Monegasque nationals;
  - 39 percent of other residents are French nationals;
  - 25 percent of other residents are Italian nationals.
  - Constitution changed in April 2002 to increase Council members from 18 to 24; currently, and until the next elections, there are actually 18 Councillors.
- France relations and financial arrangements:
  - Relationship based on a 1918 treaty and related agreements; 1918 treaty updated by a treaty signed on October 24, 2002.
  - May 18, 1963 Customs Agreement formed a customs union applying French customs laws in the Principality.
  - Profit tax of 33 1/3 percent imposed on industrial and commercial business with at least 25 percent turnover from operations outside Monaco.
  - French Banking Act of 1984 applies to credit institutions in Monaco under exchange agreements, but Monegasque credit institutions are subject to Monegasque, not French, AML/CFT legislation and rules.
- Currency and ECB relations:
  - Monaco adopted the Euro; SO 15.185 of January 14, 2002 referenced.
  - Monegasque institutions must observe ECB reserve requirements and statistical reporting obligations (SO 13.889 of February 18, 1999); credit institutions subject to sanctions for noncompliance and participate in the Euro area payments system on same terms as French credit institutions.

### Economy, market structure, and private banking dominance
- Economy and industry structure (2000 estimates):
  - total private sector turnover estimated at €9.2 billion;
  - 38 percent of turnover generated in wholesale and retail distribution (29 percent of distribution being hotel and restaurant retail);
  - 21 percent in banking and finance;
  - industry at 8 percent of total turnover (49 percent of industrial turnover in pharmaceuticals and cosmetics);
  - tourism: arrivals of over 300 thousand in 2000; business visitors averaged about one third of bed-nights in the late 1990s.
- Tax regime:
  - No direct taxes on property, capital or the income of residents, except French nationals who became resident after 1957 subject to French income tax.
  - Profit tax of 33 percent on industrial and commercial business with at least 25 percent of turnover from operations outside Monaco.
- Financial system characteristics:
  - Dominated by private banking; asset management for high-net worth clients is predominant.
  - Managed funds are over 50 percent larger than deposits.
  - Credit is a fraction of deposits; system is a net interbank creditor.
  - Employees in the sector grew by a third in the four years to 2000.
- Portfolio management and mutual funds:
  - Two forms of portfolio management: discretionary and advisory.
  - 24 nonbank management companies; banks do most of the business.
  - Both dedicated and general mutual funds exist; dedicated funds designed for a single holder.
  - Investment of funds often sub-delegated to specialized portfolio managers.

### Company and trust service providers (CSPs) and trust law
- CSPs:
  - 40 company and trust service providers licensed in Monaco (as of April 30, 2002).
  - CSPs facilitate entry for prospective residents, provide management services, and support estate planning.
  - Approximately 3,950 offshore companies and approximately 725 trusts under CSP management (as at April 30, 2002).
- Trust law:
  - Law No. 214 of 1936 authorizes a special category of trust unique to Monaco; in excess of 95 percent are testamentary trusts.
  - Law No. 214 trusts function essentially as a will substitute and come into force only upon death; purpose is to permit persons resident in Monaco to retain common law as governing law for wills, avoiding forced heir-ship under local civil code.

### Insurance sector and banking/mutual fund statistics (selected figures)
- Insurance sector:
  - No insurance companies are incorporated in Monaco.
  - 49 total agent/broker entities: No. of broker licenses: 39; No. of agent licenses: 23.
  - Agents and brokers represent 44 life companies, 101 property and casualty, and 1 private retirement fund; represent or offer products of some 150 companies established in France.
  - Brokers and agents must be authorized by the Direction de l’Expansion Economique (DEE).
- Developments in the financial sector (table extracts; figures preserved as in source):
  - Credit institutions (Number):
    - Sociétés Anonymes Monégasque: 20 20
    - Branches of foreign banks: 34 57
    - Branches of French banks: 19 18 16 15
    - Municipal credit company: 11 11
    - Monégasque finance companies: 44 44
    - Branches of French finance companies: 22 22
  - Banks (million Euro):
    - Total assets (balance sheet): 39,58050,531 56,17458,505
    - Assets under management: 20,62929,702 32,12932,602
    - Deposits: 15,84316,524 18,54920,239
    - Loans: ...... 2,9552,863
  - Portfolio management companies (Number): 18 23 28 24
    - Assets under management (million euro): ...... 2,9445,015
  - Investment funds (Number): 49 52 52 60
    - Total assets (million euro): 3,2974,313 4,7135,213
    - Mutual funds: 1,3182,076 2,2702,701
    - Dedicated mutual funds: 1,9792,237 2,4432,512
  - CSPs by corporate structure (Number = 40):
    - Sociétés Anonymes Monégasques (SAM): 25 (in general business: 19; managing single-family wealth: 6)
    - Sociétés en nom collectif (SNC): 8
    - Sociétés en commandite simple (SCS): 2
    - Individuals: 5
  - Banking sector deposits (In millions of euro):
    - By holder total: 15,81516,67118,546 20,249
    - Resident: 5,5026,1146,682 6,894 (Individuals: 3,7374,0874,615 4,873; Business: 1,7651,4171,547 2,021)
    - Non-resident: 10,31310,55711,864 13,355
  - Managed portfolios, non-financial client total: 20,76629,72832,172 32,600
    - Composition: shares 4,2807,7979,060 7,800; bonds 9,81912,14412,075 13,669; mutual funds 6,3019,37410,684 10,505
- Mutual funds market structure (2001):
  - Total assets (2001): 5,213 (mn Euro), Market Share 100.0 (percentage)
  - Custodian bank and parent country breakdown (2001):
    - Monaco / Switzerland: 1,705 32.7 36.8
    - Monaco / Monaco: 1,313 25.2 20.4
    - Monaco / France: 1,722 33.0 34.1
    - Monaco / France/Italy: 761.5 0.9
    - Monaco / UK: 397 7.6 7.8

### Regulatory framework, supervisory bodies, and market integrity
- Key supervisory bodies and arrangements:
  - Mutual funds supervisory commission (CSOM) and Supervisory Commission for Portfolio Management and Related Stock Market Activities (CCGP) advise the Minister of State on securities business.
  - Company service providers overseen by the Department of Economic Expansion (DEE).
  - AML/CFT supervised by SICCFIN (Service d’Information et de Contrôle sur les Circuits Financiers).
  - French CRBF, FCB, and CECEI participate in banking regulation and supervision under historical agreements; portfolio management and securities regulation are Monegasque responsibilities.
  - CSOM relies in practice on COB personnel to inspect mutual fund companies on behalf of CSOM.
- Supervisory staffing (2002 excerpts, as presented in table):
  - Credit institutions: FCB; SICCFIN – AML/CFT9 (specialized staff 8); DBT6 (specialized staff 4)
  - Brokers and agents: SICCFIN – AML/CFT9 (specialized staff 8); DEE (general staff 20, specialized staff 12)
  - Portfolio management: CCGP, FCB; DF (CCGP - 7 members; SICCFIN – AML/CFT; DF - 9; DF - 4)
  - Mutual Funds: CSOM - 6 members; SICCFIN – AML/CFT
  - CSPs: DEE, SICCFIN – AML/CFT 20 (number of staff) 12 (specialized staff)
- Notes: DBT = Division of Budget and the Treasury; DEE = Division of Economic Expansion; CCGP = Supervisory Commission for Portfolio Management; FCB = French Banking Commission; DF = Department of Finance and the Economy; CSOM = Supervisory Commission for Mutual Funds.

### SICCFIN, AML/CFT legal framework, and operational performance
- SICCFIN establishment and mandate:
  - Established by SO No. 11.246 of April 12, 1994 (amended by SO No. 15.452 of August 8, 2002), pursuant to Law No. 1.162 of July 7, 1993 (AML Law).
  - Mandate (Article 2 of SO No. 11.246): gather, seek, process, and circulate information on financial circuits used to launder money.
  - AML Law (Article 26) designates SICCFIN responsible for monitoring application of the AML Law.
- AML coverage and obligations:
  - Financial institutions (Article 1) subject to customer identification, special scrutiny, record keeping, vigilance, internal controls and suspicious transaction reporting; includes banks, insurance companies, portfolio management firms, bureaux de change, and CSPs.
  - Other professionals listed in SO No. 14.466 of April 22, 2000 subject to suspicious transaction reporting requirements.
  - Customer identification: verify identity before opening an account; verify identity of occasional customers for transactions over €15,000 or who rent a safe deposit box; verify beneficial owners where appropriate.
  - Record keeping: keep for five years documentary evidence of identity of regular and occasional customers and documents related to transactions.
- Internal controls, reporting thresholds, and sanctions:
  - Special scrutiny threshold for unusual/complex transactions: €150,000.
  - Administrative penalties: warning, reprimand, ban on certain transactions, withdrawal of authorization.
  - Criminal fines: failure to report or refusal to undertake suspicious transaction: €9,000 to €18,000; other breaches including record keeping: €2,250 to €9,000.
- FIU operations and outcomes:
  - SICCFIN activities include AML supervision, onsite inspections, training, receiving and analyzing suspicious transaction reports, and cooperation with other FIUs.
  - Average suspicious transaction reports per year 1994–1999: 45.
  - Suspicious transaction reports: 210 in 2000 and 307 in 2001.
  - Files transmitted for prosecution: average two per year 1994–1999; 12 in 2000 and 21 in 2001.
  - From 1998 through 2001, some €37 million had been seized at the request of SICCFIN.
  - SICCFIN staff increased from three to eight, with a ninth person expected at end-2002; an intensive training program organized.
  - International letters rogatory (1998–2001): Principal Prosecutor’s office received 63 ILR related to money laundering, executed 55, processing 8 (in 2002), denied none; Monaco issued 32 ILRs related to money laundering, 11 executed, 21 being processed, none denied.
- Investigative powers and information sharing:
  - SICCFIN may freeze a transaction for up to 12 hours on its own initiative; longer freezes and sequestration may be ordered by the President of the Tribunal of First Instance.
  - SICCFIN can obtain information from all State agencies and has direct access to the Monaco business registry.
  - Article 31 of the AML Law authorizes the Minister of State to provide foreign authorities with information in specified circumstances, subject to reciprocity and absence of criminal proceedings in the Principality on the same facts.
  - SICCFIN is a member of the Egmont Group; entered into seven information exchange MOUs and four more under discussion.
  - July 2002 amendment authorizes SICCFIN to use investigative powers to respond to requests from foreign FIUs.

### CSP licensing, supervision, and recent supervisory actions
- Licensing standards and requirements (as of April 30, 2002):
  - 40 CSPs licensed.
  - Minimum standards include detailed client identification protocol, appropriate education and experience, verification of source of funds, and police background check.
  - For SAM legal form: minimum capitalization of €150,000; retain services of a notary; appointment of two statutory auditors from an approved list who prepare an annual statement and statutory audit report.
  - Law No. 408 requires accounts be submitted within nine months of every fiscal year.
  - DEE has authority under Law No. 1.144, 1991 to conduct onsite reviews and may nominate a CPA to inspect if accounts not submitted.
- Licensing duration, audits, and withdrawal grounds:
  - Individuals and partnerships licensed for two years, renewable upon reapplication.
  - SAM entities exempt from renewal but subject to annual audit and statutory auditors must file reports to DEE.
  - Law No. 767: five tests for withdrawal of license include insignificant turnover over two years, noncompliant facilities, deviation from authorized activity, operation of another company without authorization, bankruptcy.
- Supervision enhancements and outcomes:
  - Code of Conduct (Recommendations Concerning the Management and Administration of Foreign Entities) developed August 2001; CSPs required to acknowledge receipt and commit to apply Code.
  - Onsite-review program produced by a working group; program began October 2002 (DEE); SICCFIN began supervisory program November 2002.
  - By end-April, 2003, 18 entities examined (14 by DEE, 4 by SICCFIN); outcomes: 2 authorizations removed, 6 requests for authorization (5 refused).
  - SICCFIN had visited two entities by end-2002 and organized a seminar in December 2002.
  - A Monegasque CSP professional association is being created.
- Oversight gaps and recommendations:
  - Oversight of non-SAM CSPs less robust; DEE’s on-site authority sparingly employed.
  - Regulators acknowledged shortfall in direct and timely information on CSP activities and have taken steps to remedy the gap.
  - Recommendations specific to CSP oversight and examiner training:
    - Expand training for examiners conducting onsite examinations, including training programs by regulators in other jurisdictions.
    - Continue and formalize cooperation among supervisors—cross-border and domestically—to improve access to information necessary for effective supervision and AML/CFT efforts.

### Information sharing, formal arrangements, and coordination mechanisms
- Formal arrangements and MOUs:
  - SO No. 14.892 (May 2001) recognized need for consolidated supervision; exchange of letters (April 6, 2001) between Monaco and France allows Monegasque banks to transmit information to parent institutions for consolidated supervision.
  - Amendments to portfolio management law in 2001 permit sharing information between CCGP and foreign securities supervisors if a formal information sharing arrangement is in place.
  - Formal MOU signed with French COB in March 2002 allowing CCGP to obtain and share information for specified regulatory purposes; confidentiality protected under the MOU.
  - Negotiations begun with securities regulators in Italy and Luxemburg.
  - Inspections of mutual funds, management companies, and custodian banks are undertaken by COB staff on behalf of CSOM pursuant to a 1992 agreement.
- Coordination Committee:
  - Created by SO No. 15.530 (September 27, 2002) to formalize gateway for information flow among supervisory bodies.
  - Chaired by the Government Finance and Economic Counselor; comprises a member of that department, the Director of Budget and Treasury, the Director of DEE, and the Director of SICCFIN; may invite other qualified persons.
  - Charged with organizing information exchange and coordination among financial supervisory bodies.
- Identified weaknesses and suggestions:
  - Key weakness: limited information sharing with foreign financial sector supervisors; planned signature of an agreement between SICCFIN and the FCB expected to address this gap.
  - Confidentiality requirements limit cross-border, cross-sector exchange; specific provisions of law or agreements necessary to authorize such exchanges under safeguards.
  - Recommendation: clarify and formalize information sharing between FCB and CCGP and extend authority to CSOM.

### AML/CFT legal issues, criminalization, confiscation, and recommendations
- Criminalization and predicate offenses:
  - Money laundering criminalized under Articles 218 to 218–3 of the Penal Code; Article 4–3 of Law No. 890 of July 1, 1970 criminalizes laundering for drug offenses.
  - Predicate offenses listed in Article 218–3 include forgery, misappropriation by persons exercising public authority, extortion, bribery, murder, procuring, kidnapping, and extortion when committed within organized criminal activity.
  - Terrorism financing not yet added as a predicate offense in the Penal Code; terrorism financing offenses in the International Convention incorporated by SO No. 15.320 of April 8, 2002, including criminal liability of legal persons (excluding the State, the City, and public agencies).
- Freezing and confiscation:
  - SICCFIN may freeze a transaction for up to 12 hours on its own initiative; longer freezes/sequestration may be ordered by the President of the Tribunal of First Instance.
  - Confiscation under Article 219: criminal court may order confiscation of assets and funds of illicit origin; confiscation does not extend to assets used in the commission of the predicate offense or which facilitated it, except in drug-related laundering; confiscation of assets of equivalent value is not provided in the law.
  - SO No. 15.321 of April 8, 2002 requires entities holding assets linked to financing of terrorism to freeze them if requested by Ministerial Order; Ministerial Orders issued April 9, 2002, and in July and October 2002.
- Recommendations to enhance AML/CFT regime:
  - Add financing of terrorism offenses as predicate offenses for money laundering in the Penal Code.
  - SICCFIN should ensure financial institutions apply increased due diligence for higher-risk customers, especially politically exposed persons, their families, and associates.
  - Introduce in legislation confiscation of assets of equivalent value and confiscation of assets used in or which facilitated predicate offenses (“instrumentalities”).
  - Ensure well-executed transition to new arrangements for oversight and AML/CFT supervision of CSPs.
  - Organize a comprehensive review of SICCFIN’s work preferably no later than the second half of 2003.

### Supervisory assessments: Basel Core Principles, AML/CFT, and IOSCO
- Assessments undertaken:
  - Partial review of the Basel Core Principles for Effective Banking Supervision.
  - Full assessment of IOSCO Objectives and Principles of Securities Regulation (confined to relevant Principles due to limited securities activity).
  - Detailed assessment of AML/CFT implementation across the financial sector under the IMF/World Bank AML/CFT Methodology (April 2002 version).
- Basel Core Principles (selected findings):
  - BCP 1.6: progress on international cooperation and ability of Monegasque banks to provide information to parent banks for consolidated supervision; recommendation to enhance framework by providing direct formal channels between the two supervisors of Monegasque banks.
  - BCP 15: authorities commended for proactive action; key weakness is limited information sharing with foreign financial sector supervisors; pending FCB-SICCFIN agreement expected to fill this gap; SICCFIN should adopt more formalized approach and issue policy guidelines.
- IOSCO-related findings and recommendations:
  - Securities activity confined to mutual funds and portfolio management; sector uniform and concentrated.
  - Supervisory commissions: composition includes COB and Bank of France staff acting in personal capacities; presidents of both commissions currently the same individual.
  - Market intermediaries: 67 companies licensed for portfolio management (43 banks managing €20 billion; 24 portfolio management firms managing €5 billion).
  - Mutual funds: industry total size €5.2 billion; 66.8 percent in money-market funds; 28.6 percent in diversified funds.
  - Main recommendations:
    - Consider merging the two commissions and confer licensing power on a more independent commission to align with IOSCO Principles.
    - Improve transparency: publish reasons for license withdrawal, increase reporting on regulatory activity, develop conflicts of interest policies.
    - Encourage formal agreements with other supervisors; extend authority to share information to CSOM and permit sharing between supervisory commissions.
    - Consider rules on valuation of illiquid securities and related party transactions; more frequent NAV calculation/publication for small funds; clearer public disclosure of accounting standards.
    - For portfolio management: consider more frequent capital reporting and develop contingency plans for firm failure; incorporate insider trading compliance in inspections.
  - Overall assessment: securities regulation system is effective within Monaco’s unique context given restricted scope of permitted securities activities and centralized government oversight.

*International Monetary Fund (Offshore Financial Centers Assessment Report for the Principality of Monaco).*

### Preface ................................................................................................................

### Preface

### Assessment scope and methodology
- The Offshore Financial Centers Assessment Report for the Principality of Monaco assesses the anti-money laundering and combating the financing of terrorism (AML/CFT) regime based on the April 2, 2002 version of the Draft Fund and Bank AML/CFT Methodology.
- The report also evaluates the regulation of portfolio management and mutual funds relative to the IOSCO Objectives and Principles of Securities Regulation.
- The assessments reflect the potential risks faced by the jurisdiction and the relative macroeconomic significance of the sectors; AML-related principles of the Basel Core Principles for Effective Banking Supervision were assessed, and the AML/CFT assessment of non-prudentially regulated institutions covered both company and trust service providers (CSPs) and gaming establishments.
- The report was updated in May 2003 to take account of legislation passed, and regulatory measures undertaken, since the mission.

### Mission and participants
- The assessments were carried out during a mission from April 22 to May 3, 2002.
- Mission members included Ms. Mary G. Zephirin (Mission Chief), Ms. Jennifer Elliott (both MFD), Messrs. Louis Forget (Consulting Counsel, LEG), Marcel Maes, and Ronald Ranochak (both consultants), and Ms. Sonia Echeverri (Mission Assistant, MFD).
- The mission met with the Minister of State, Mr. Patrick Leclercq; Mr. Franck Biancheri, Government Finance and Economic Counselor; Mr. Patrice Davost, Director of Judicial Services; Ms. Sophie Thevenoux, Director of the Budget and Treasury Division; Ms. Isabelle Rosabrunetto, Assistant to the Director of the Budget and Treasury Division; officials from public institutions; and representatives of financial institutions, auditors, and private lawyers.

### Acknowledgements
- The mission expressed gratitude to the Monegasque authorities and staff of public institutions for hospitality, cooperation, and openness.
- Special thanks to Ms. Sophie Thevenoux for assistance organizing technical activities and channeling the flow of information, and to Ms. Isabelle Rosabrunetto for logistical support and general assistance.

*Offshore Financial Centers Assessment Report for the Principality of Monaco (IMF).*

### 2.      The financial sector’s wealth management services are a crucial component of

### 2. The financial sector’s wealth management services are a crucial component of Monaco’s economic strategy

### AML/CFT assessment and supervisory focus
- Wealth management is central to Monaco’s economic strategy; minimizing reputational risk and maintaining system integrity are important supervisory goals.
- The banking system is often most vulnerable to reputational and integrity concerns.
- Banking activity in Monaco is regulated and supervised by the French supervisory system (assessed in 2000); hence, the BCP assessment focused on the AML principles for which the Monegasque authorities are responsible.
- The AML/CFT assessment:
  - was made under the Fund/Bank April 2002 Methodology;
  - covered banks, security intermediaries, company and trusts service providers, and gaming establishments;
  - included gaming establishments because of macroeconomic and reputational implications linked to the identification between casino and jurisdiction.
- The regulation and oversight of portfolio management and mutual funds were assessed.
- The assessment explicitly examined:
  - company and trust service providers (CSPs), due to their importance in supporting wealth management; and
  - cross-border cooperation and information sharing, to support the jurisdiction’s reputation and assist other supervisors.

### Political, demographic, and legal background
- Geography and population:
  - total area of about two square miles;
  - resident population in 2000 of about 32,000 persons, some 6,000 of whom are Monegasque nationals;
  - 39 percent of other residents are French nationals;
  - 25 percent of other residents are Italian nationals.
- Government:
  - sovereign state defined by the 1962 Constitution as a hereditary constitutional monarchy;
  - executive power exercised by the Prince through a Minister of State assisted by a Council of Government with three department heads: (i) finance and the economy; (ii) public works, social affairs; (iii) interior affairs, including health, the police, and general administration;
  - legislative power exercised by the Prince and a 24-member elected National Council;
  - judicial power belongs to the Prince, delegated to courts and tribunals; the Constitution states “The independence of the judges is guaranteed.” Monegasque and French magistrates sit on the courts, the French having the majority of the seats under a 1930 agreement.
- Constitution change note:
  - The Constitution was changed in April 2002 to increase the number of Council members from 18 to 24; currently, and until the next elections, there are actually 18 Councillors.

### Economic and financial relations with France
- Treaties and agreements:
  - Relationship based on a 1918 treaty (France guarantees Monaco’s sovereignty in exchange for Monaco exercising sovereignty in conformity with French interests) and on the 1919 Treaty of Versailles;
  - 1918 treaty updated and replaced by a treaty signed on October 24, 2002, to provide greater reciprocity of treatment between the two states;
  - 1930 agreement allows employment of French civil servants in security, public order, and foreign relations; under that agreement, the Minister of State is a French national chosen by the Prince from a list of three names proposed by France;
  - Several bilateral agreements signed in May 1963 cover customs, pharmaceuticals, insurance, post, and telecommunications.
- Customs and fiscal arrangements:
  - May 18, 1963 Customs Agreement formed a customs union under which French customs laws and regulations are applicable in the Principality;
  - Fiscal arrangements determined by a treaty of 1950 aimed at avoiding double taxation;
  - 1963 treaty by which French citizens resident in Monaco remain subject to French income tax;
  - A profit tax of 33 1/3 percent was imposed on industrial and commercial business which has at least 25 percent of its turnover from operations outside of Monaco;
  - Value-added tax (VAT) was put in place in Monaco on the same basis, and with the same rules, as in France.
- Financial regulatory and supervisory arrangements:
  - Based on an April 14, 1945 agreement and subsequent amendments (1963, 1987, 2001); the 1945 agreement applied then-current and future French laws and regulations for banking to Monaco.
  - May 18, 1963 exchange of letters established scope and procedures for applying French banking law.
  - November 27, 1987 exchange specified:
    - regulations concerning banks made by the French Comité de la Règlementation Bancaire (CRBF), with participation of a Monegasque representative, should apply in Monaco;
    - the French Commission Bancaire (FCB) should be responsible for supervision, including onsite inspection, of credit (i.e., banking) institutions in Monaco;
    - the Comité des Etablissements de Crédit et des Entreprises d’Investissement (CECEI) of France would license credit institutions.
  - Under these arrangements, the French Banking Act of 1984 applies to credit institutions in Monaco, but legislative provisions specific to France (e.g., criminal matters) are not applicable where Monaco has its own laws.
  - Result: Monegasque credit institutions are subject to Monegasque, not French, AML/CFT legislation and rules.
- Securities and mutual fund supervision:
  - No similar common arrangements exist for securities-related activities.
  - Law No. 1.130 of January 8, 1990 (amended in 2000) and related orders set conditions for operation of mutual funds and their supervision.
  - Prior to the French 1996 Financial Activities Modernization Act, portfolio management activity by banks was considered part of banking and supervised by the French. The Modernization Act distinguished between banking and securities, ending the FCB’s supervisory responsibility for bank securities business.
  - Monegasque Law No. 1.194 (amended in 2001) legislated conditions for portfolio management, related activities and their regulation in banks and other institutions; securities and regulation are the responsibility of the Monegasque government.
  - In practice, personnel of the French COB are relied on to carry out inspections of mutual fund companies on behalf of the mutual fund supervisory commission, CSOM.
- Currency and ECB relations:
  - Following a 1925 agreement, the French franc became legal tender in Monaco; Monaco has now adopted the Euro (Monaco is not a member of the European Union) following negotiations with France (delegated the requisite authority by the EU Council of Ministers; see Monetary Convention published with Sovereign Order (SO) 15.185 of January 14, 2002).
  - Monegasque institutions must observe the reserve requirements and statistical reporting obligations of the European Central Bank, ECB (SO 13.889 of February 18, 1999).
  - Monegasque credit institutions are subject, under this agreement, to the imposition of sanctions for failure to comply with ECB requirements.
  - Credit institutions participate in the payments system of the Euro area on the same terms as French credit institutions.

### Economy and industry structure
- 2000 estimates:
  - total private sector turnover estimated at €9.2 billion (Monaco’s GDP is not estimated separately from that of France);
  - 38 percent of turnover generated in wholesale and retail distribution (29 percent of distribution being hotel and restaurant retail);
  - 21 percent in banking and finance (the second largest sector by this measure);
  - industry at 8 percent of total turnover (49 percent of industrial turnover in pharmaceuticals and cosmetics);
  - tourism: arrivals of over 300 thousand in 2000, most visitors coming from Italy, France, the U.S.A., and the U.K.;
  - business visitors grew in the second half of the 1990s, averaging about one third of bed-nights (compared to 20–25 percent in the early 1990s).
- Tax regime:
  - No direct taxes on property, capital or the income of residents, with the exception of French nationals who became resident after 1957, whose total income is subject to French income tax.
  - Profit tax of 33 percent on industrial and commercial business which has at least 25 percent of its turnover from operations outside Monaco.

### Financial institutions, markets, and private banking dominance
- Financial system characteristics:
  - Dominated by private banking; asset management for high-net worth clients is the predominant service.
  - Significant areas of activity: portfolio management by banks, portfolio management by independent companies, and marketing of mutual funds.
- Market structure and client services:
  - Private banking and related activities have become a mainstay due to historical circumstances, the fiscal regime, geography, and response of European wealth managers to a growing market.
  - Monaco’s absence of direct tax on residents’ income and strict duty of confidentiality observed by financial institutions have been major attractions; banks also cite high personal security, lifestyle, and convenient location with good telecommunications as increasing in importance.
- Balance sheet and sector growth:
  - Managed funds are over 50 percent larger than deposits.
  - Credit is a fraction of deposits; the Monegasque banking system is a net interbank creditor.
  - Growth in the sector illustrated by deposited funds and number of employees (employees grew by a third in the four years to 2000).
  - Growth attributed to increasing wealth in countries such as the U.K., Italy, and Spain.
- Portfolio management arrangements:
  - Two forms: discretionary and advisory.
    - Discretionary: bank or company manages funds without client decisions on each transaction; clients specify risk tolerance, investment profile, and reference currency in a contract defining the mandate.
    - Advisory: client makes investment decisions on the advice of the banker.
  - There are 24 nonbank management companies; banks do most of the business.
- Mutual funds:
  - Both dedicated and general mutual funds exist; dedicated funds are essentially designed for a single holder.
  - Monegasque mutual funds have different risk profiles aimed at a range of customers and assist institutions in marketing among retail customers.
  - Investment of these funds is often sub-delegated to specialized portfolio managers, either within the group or third-party institutions.
  - Local staff and physical presence are important for relationship building and maintenance.

### Company and trust service providers; trust law accommodation
- Company and trust service providers (CSPs):
  - Contribute to Monaco’s strategy of attracting wealthy clients as new residents.
  - Need for competent wealth management, tax and estate planning advice is important to the market.
  - There are 40 company and trust service providers licensed in Monaco.
  - CSPs facilitate entry for prospective residents, particularly foreigners relocating from common law jurisdictions who hold assets in corporate form and use wills and trusts for estate distribution.
  - CSPs provide management services ensuring compliance with Monegasque law while preserving status under home country law for estate planning.
- Trusts and Law No. 214 of 1936:
  - Monaco is a civil law jurisdiction but authorizes a special category of trust under Law No. 214 of 1936 on the constitution of trusts to facilitate residence of clients from common law jurisdictions.
  - Trusts formed under Law No. 214 are unique to Monaco with in excess of 95 percent being testamentary trusts.
  - The trust is essentially a will substitute and comes into force only upon death of the person forming the trust.
  - The single purpose of Law No. 214 trusts is to permit persons (often from English-speaking jurisdictions) resident in Monaco to retain common law as the governing law for their wills, thus avoiding the forced heir-ship requirement under local civil code.

*Source: IMF assessment and financial system overview for the Principality of Monaco.*

### 24.      No insurance companies are incorporated in Monaco. There are 49 insurance brokers

### 24. No insurance companies are incorporated in Monaco. There are 49 insurance brokers

### Insurance sector: structure and licenses
- No insurance companies are incorporated in Monaco.
- Brokers and agents: 49 total agent/broker entities.
  - No. of broker licenses: 39
  - No. of agent licenses: 23
- The agents and brokers represent 44 life companies, 101 property and casualty, and 1 private retirement fund.
- Brokers and agents represent or offer the products of some 150 companies established in France.
- Brokers and agents must be authorized by the Direction de l’Expansion Economique (DEE).
- Insurance companies are among the financial institutions covered by the May 18, 1963 treaty.

### Developments in the financial sector (selected figures)
- Credit institutions (Number):
  - Sociétés Anonymes Monégasque: 20 20 (format as in source)
  - Branches of foreign banks: 34 57
  - Branches of French banks: 19 18 16 15 (as presented in table)
  - Municipal credit company: 11 11
  - Monégasque finance companies: 44 44
  - Branches of French finance companies: 22 22
- Banks (million Euro):
  - Total assets (balance sheet): 39,58050,531 56,17458,505
  - Assets under management: 20,62929,702 32,12932,602
  - Deposits: 15,84316,524 18,54920,239
  - Loans: ...... 2,9552,863
- Return on assets (average): 0.450.60 0.82...
- Return on equity (average): 13.818.2 26.1...
- Portfolio management companies (Number):
  - 18 23 28 24 (as in table headings/rows)
  - Assets under management (million euro): ...... 2,9445,015
- Investment funds (Number):
  - 49 52 52 60 (as presented)
  - Total assets (million euro): 3,2974,313 4,7135,213
  - Mutual funds: 1,3182,076 2,2702,701
  - Dedicated mutual funds: 1,9792,237 2,4432,512
- Company and Trust Service Providers (CSPs) by corporate structure (Number = 40):
  - Sociétés Anonymes Monégasques (SAM): 25
    - in general business: 19
    - managing single-family wealth: 6
  - Sociétés en nom collectif (SNC): 8
  - Sociétés en commandite simple (SCS): 2
  - Individuals: 5
- Memorandum items (Numbers):
  - Sociétés Anonymes Monégasques (SAM) 3/: 1222 1217 1180 1173 (as in table)
  - Sociétés en nom collectif (SNC): 94 102 100 98
  - Sociétés en commandite simple (SCS): 432520 553556
  - Sociétés en commandite par actions (SCA): 44 44

### Banking sector (selected table data)
- Deposits (In millions of euro):
  - By holder total: 15,81516,67118,546 20,249
  - Resident: 5,5026,1146,682 6,894
    - Of which Individuals: 3,7374,0874,615 4,873
    - Business: 1,7651,4171,547 2,021
  - Non-resident: 10,31310,55711,864 13,355
- By type total: 15,81516,67118,546 20,239
  - Sight: 3,4043,6343,632 4,080
  - Savings: 12,30912,84714,724 16,044
  - TCN 1/: 102190190 115
- FF per Euro: 6.559666.55957 6.55957 6.55957
- By currency (Percentage):
  - euro: 6258 64
  - US dollars: 2730 25
  - sterling: 76 7
  - other: 46 5
- Interbank, loans and net positions (selected):
  - Loans by nationality (Monegasque): 12,32512,16714,765 18,022
  - Loans by nationality (French): 6,2616,0406,401 3,993
  - Borrowing (Monegasque): 3,9443,7413,674 5,369
  - Borrowing (French): 3,0663,2423,729 1,299
  - Net position, all banks (Monegasque): 8,3818,42611,091 12,654
  - Credit totals: 1,9332,7632,953 2,859
  - Credit by residence (Residents): 1,0331,2191,291 1,264
    - Of which Individuals: 429568526 569
    - Business: 596635746 695
  - Non-resident credit: 9001,5441,662 1,595
- Managed portfolios, non-financial client total: 20,76629,72832,172 32,600
  - Composition: shares 4,2807,7979,060 7,800; bonds 9,81912,14412,075 13,669; mutual funds 6,3019,37410,684 10,505

### Mutual funds market structure (2001)
- Total assets (2001): 5,213 (mn Euro), Market Share 100.0 (percentage)
- Custodian bank and parent country breakdown (2001 / 2000 comparisons as presented):
  - Monaco / Switzerland: 1,705 32.7 36.8
  - Monaco / Monaco: 1,313 25.2 20.4
  - Monaco / France: 1,722 33.0 34.1
  - Monaco / France/Italy: 761.5 0.9
  - Monaco / UK: 397 7.6 7.8

### Regulatory framework, oversight, and market integrity arrangements
- Supervisory and regulatory framework adapted to manage most risks confronting Monaco’s financial sector, with important French participation.
- Two consultative commissions advise the Minister of State on securities business regulation:
  - Commission de Surveillance des OPCVM (Supervisory Commission for Mutual Funds) for mutual funds (Law No. 1.130 and SO No. 9.867 of 1990).
  - Commission de Contrôle de Gestion de Portefeuille et des Activités Boursières Assimilées (Supervisory Commission for Portfolio Management and Related Stock Market Activities) for portfolio management (Law No. 1.194 of 1997).
- Company service providers are overseen by the Department of Economic Expansion (DEE).
- AML-CFT is supervised by the Monegasque FIU: Service d’Information et de Contrôle sur les Circuits Financiers (SICCFIN).
- French legislation and regulations for credit institutions (capital requirements, operational standards, prudential ratios and deposit insurance) apply to the Monegasque banking system, with French CRBF and CECEI involvement and Monegasque government representation in Monaco-related meetings.
- Portfolio management is subject to Monegasque regulations; licensing of Monegasque credit institutions is carried out by the French CECEI following Monegasque agreement.
- FCB is responsible for supervising Monegasque credit institutions in areas outside AML and portfolio management; its disciplinary measures are applicable in Monaco and exercised by Monegasque authorities.
- The 2000 IMF-led assessment of FCB’s compliance with the Basel Core Principles for Effective Banking Supervision is broadly applicable to Monaco supervision.

### SICCFIN and AML/CFT arrangements
- SICCFIN established by SO No. 11.246 of April 12, 1994 (amended by SO No. 15.452 of August 8, 2002), pursuant to Law No. 1.162 of July 7, 1993 (AML Law).
- SICCFIN mandate (Article 2 of SO No. 11.246): gather, seek, process, and circulate information on financial circuits used to launder money.
- AML Law (as amended) designates SICCFIN responsible for monitoring the application of the AML Law and measures taken in its application (Article 26 of the AML Law).
- SICCFIN activities include:
  - AML supervision of reporting institutions, including onsite inspections.
  - Awareness-raising activities with industry associations of reporting entities (e.g., Association Monégasque des Banques).
  - Staff training.
  - Participation in local and international meetings.
  - Receiving and analyzing reports of suspicious transactions.
  - Cooperation with other FIUs.
- The AML Law makes two sets of entities subject to its provisions:
  - Financial institutions (listed in Article 1): subject to customer identification, special scrutiny, record keeping, vigilance, internal controls and suspicious transaction reporting. These include banks, insurance companies, portfolio management firms, bureaux de change, and company service providers.
  - Other professionals (listed in SO No. 14.466 of April 22, 2000, pursuant to Article 2): subject to suspicious transaction reporting requirements.

### Supervisory structure and staffing (Table 7, 2002 excerpts)
- Credit institutions: FCB; SICCFIN – AML/CFT9 (specialized staff 8); DBT6 (specialized staff 4)
- Insurance companies: not applicable
- Brokers and agents: SICCFIN – AML/CFT9 (specialized staff 8); DEE (general staff 20, specialized staff 12)
- Portfolio management:
  - Banks: CCGP, FCB; DF (CCGP - 7 members; SICCFIN – AML/CFT; DF - 9; DF - 4)
  - Other: CCGP, DF as above; SICCFIN – AML/CFT
- Mutual Funds: CSOM - 6 members; SICCFIN – AML/CFT
- CSPs: DEE, SICCFIN – AML/CFT 20 (number of staff) 12 (specialized staff)
- Notes: DBT = Division of Budget and the Treasury; DEE = Division of Economic Expansion; CCGP = Supervisory Commission for Portfolio Management; FCB = French Banking Commission; DF = Department of Finance and the Economy; CSOM = Supervisory Commission for Mutual Funds.

### Oversight of companies and trust service providers (CSPs)
- Minister of State is the competent authority for regulation and supervision of the Monegasque financial services sector.
- Operational responsibility resides with the Government Counselor for Finance and the Economy (equivalent to Minister of Finance and Economy).
- Day-to-day implementation for regulation and supervision of CSPs is delegated to the DEE.

*International Monetary Fund*

### 33.      The DEE attaches considerable importance to prevention and its current supervisory

### 33.      The DEE attaches considerable importance to prevention and its current supervisory

### Licensing and licensing standards for Company Service Providers (CSPs)
- As of April 30, 2002, there were 40 CSPs licensed to operate in Monaco.
- Licensing requirements are tiered; all applicants must meet minimum standards including:
  - a detailed client identification protocol,
  - appropriate education and experience,
  - verification of source of funds,
  - a police background check.
- For legal form Société Anonyme Monegasque (SAM), additional conditions include:
  - minimum capitalization of €150,000,
  - requirement to retain the services of a notary,
  - appointment of two statutory auditors from an approved list who must prepare an annual statement and a statutory audit report.
- Law No. 408 requires that accounts be submitted within nine months of every fiscal year.
- DEE power: conduct onsite reviews under Law No. 1.144 and nominate a CPA to inspect if accounts are not submitted as required.

### Licensing duration, audits, and supervisory responses
- Individuals and partnerships are licensed for two years, renewable upon reapplication.
- SAM entities are exempted from renewal obligation but:
  - an annual audit is required,
  - statutory auditors file a report to the DEE upon discovery of anything not in accord with the authorization.
- An auditor’s adverse filing could result in referral by DEE to a standing Monegasque ministerial commission for evaluation and possible withdrawal of license.

### Grounds for withdrawal of license (Law No. 767)
- Five tests under Law No. 767, any one of which can result in withdrawal of license:
  - if turnover within a two year period is not significant;
  - if facilities and premises do not comply with those required to conduct its authorized business;
  - deviation from authorized activity;
  - operation of another company without authorization;
  - bankruptcy.

### Oversight gaps and measures to strengthen supervision of non-SAM CSPs
- Oversight of CSPs that are not SAMs is less robust than the licensing process.
- DEE has authority under Law No. 1.144, 1991, to conduct on site reviews; this authority has been sparingly employed.
- Regulators recognized a shortfall in obtaining direct and timely information regarding the scope and activities of the 40 licensed CSPs and the foreign companies and trusts they manage, and have taken steps to remedy the gap.

### Code of Conduct and onsite-review program
- A code of conduct, Recommendations Concerning the Management and Administration of Foreign Entities, was developed in August 2001 setting customer due diligence requirements and procedures.
- All 40 CSPs were required to acknowledge receipt of, and give the DEE a written commitment to accept, apply, and enforce the Code.
- A working group of Monegasque regulator/supervisors and industry members produced written guidelines for onsite review of all 40 CSPs.
- The onsite-review program established by the Code of Conduct:
  - will permit regulators to ensure compliance with the FATF 40+8 Recommendations,
  - began in October 2002 (DEE).
- Since the July 12, 2002 amendment to the AML Law, the 40 licensed CSPs are under the same AML/CFT regulatory requirements as banks.
- SICCFIN began its supervisory program in November 2002.

### Supervisory activity and immediate outcomes
- By end-April, 2003, 18 entities had been examined: 14 by the DEE and 4 by SICCFIN.
- Outcomes by end-April, 2003:
  - 2 authorizations have been removed as a result,
  - 6 requests for authorization; 5 of which were refused.
- SICCFIN had visited two entities by end-2002 and organized a seminar for all financial institutions, including CSPs, on the new legislation in December 2002.
- A Monegasque CSP professional association is being created.

### Scale of CSP-managed offshore entities (as at April 30, 2002)
- Approximately 3,950 offshore companies are under CSP management.
- Approximately 725 trusts are under CSP management.
- The report notes that, in global terms, the number managed by CSPs is quite small.

### Recommendations specific to CSP oversight and examiner training
- Expand training for examiners who will conduct onsite examinations of company service providers, including training programs conducted by regulators in other jurisdictions.
- Continue and formalize cooperation among supervisors—cross-border and domestically—to improve access to information necessary for effective supervision and AML/CFT efforts.

### Cooperation and information sharing among supervisors (domestic and cross-border)
- Information sharing and cooperation among authorities is key for effective supervision of cross-border financial activity and for AML/CFT investigations.
- Recent initiatives have been taken to improve cross-border cooperation and information sharing; further optimization requires:
  - additional information sharing authority between the mutual funds supervisory commission and other domestic and foreign regulators,
  - specification of formalized arrangements between supervisors.
- Confidentiality requirements limit cross-border, cross-sector exchange; specific provisions of law or agreements are necessary to authorize such exchanges under appropriate safeguards.

### Formal arrangements, memoranda, and coordination mechanisms
- SO No. 14.892 (May 2001) recognized the need for consolidated supervision and confirms:
  - exchange of letters (April 6, 2001) between Monaco and France allowing Monegasque banks to transmit information to their parent institutions for consolidated supervision,
  - FCB may carry out onsite examinations in Monegasque banks on behalf of foreign supervisory authorities.
- Amendments to the portfolio management law in 2001 permit sharing information between the portfolio management supervisory commission and foreign securities supervisors if a formal information sharing arrangement is in place.
- A formal memorandum of understanding was signed with the French Commission des Opérations des Bourses (COB) in March 2002, allowing the portfolio management supervisory commission (CCGP) to obtain and share information from regulated entities for specified regulatory purposes; confidentiality is protected under the MOU.
- Negotiations have begun with securities regulators in Italy and Luxemburg for other arrangements.
- Information sharing between the FCB and the CCGP would benefit from clarification and formalization; an explicit agreement setting out precise terms of information sharing would provide clarity.
- The mutual funds supervisory commission does not have authority to share information with foreign securities supervisors; inspections of mutual funds, management companies, and custodian banks are undertaken by COB staff on behalf of CSOM pursuant to a 1992 agreement.

### AML/CFT information sharing and SICCFIN coordination
- Article 31 of the AML Law: the Minister of State may provide foreign authorities with information related to transactions linked to drug trafficking, organized criminal activity, terrorism, terrorist acts, or terrorist organizations, subject to reciprocity and absence of criminal proceedings in the Principality on the same facts.
- Planned signature of an agreement between SICCFIN and the FCB would address a major weakness in SICCFIN’s work arising from limited information sharing arrangements with foreign financial sector supervisors.
- The creation of a Coordination Committee by SO No. 15.530 (September 27, 2002) formalized the gateway for information flow among supervisory bodies. The Committee:
  - is chaired by the Government Finance and Economic Counselor,
  - comprises a member of that department (in practice the person in charge of onsite inspections for portfolio management), the Director of Budget and Treasury, the Director of the DEE, and the Director of SICCFIN,
  - may invite other qualified persons,
  - is charged with organizing information exchange and coordination among financial supervisory bodies.

### Assessments: Basel Core Principles and AML/CFT
- The mission undertook:
  - a partial review of the Basel Core Principles for Effective Banking Supervision,
  - a full assessment of IOSCO Objectives and Principles of Securities Regulation,
  - a detailed assessment of AML/CFT implementation across the financial sector under the IMF/World Bank AML/CFT Methodology (April 2002 version).
- Basel Core Principles findings (selected):
  - BCP 1.6: progress made on international cooperation and ability of Monegasque banks to provide information to parent banks for consolidated supervision; recommendation to enhance framework by providing direct formal channels of information exchange between the two supervisors of Monegasque banks.
  - BCP 15: Monegasque authorities commended for proactive action, but a key weakness is limited information sharing with foreign financial sector supervisors; the pending FCB-SICCFIN agreement expected to fill this gap. SICCFIN should adopt a more formalized approach and issue a number of policy guidelines.
- Recommendation: organize a comprehensive review of SICCFIN’s ongoing work preferably no later than the second half of 2003 to permit early detection and correction of gaps.

### AML/CFT legal requirements for financial service providers (selected)
- Customer due diligence:
  - AML Law requires financial institutions to verify identity before opening an account.
  - Financial institutions must ascertain identity of occasional customers who carry out a transaction involving an amount of more than €15,000 or who rent a safe deposit box.
  - Financial institutions must ascertain the identity of persons on whose behalf an account is opened, a safe deposit box is rented, or a transaction is carried out if the person requesting the service appears not to be acting on their own behalf.
- Record keeping:
  - Under the AML Law, financial institutions must keep for five years documentary evidence of the identity of their regular and occasional customers and documents related to transactions carried out with all their customers.

*Source: IMF mission report compiled from information provided by the Monegasque authorities.*

### 58.      Financial institutions and certain other professionals are subject to suspicious

### 58.      Financial institutions and certain other professionals are subject to suspicious

### Suspicious transaction reporting framework
- Financial institutions defined as banks, insurance companies, portfolio management firms, bureaux de change, and company service providers are subject to suspicious transaction reporting requirements.
- Financial institutions must report cases where they have refused to undertake a transaction suspected of concerning funds derived from drug trafficking or organized criminal activity.
- Financial institutions must give special attention to transactions above a certain amount (currently €150,000) which are unusual or complex and appear not to have an economic justification.
- Professions subject to suspicious transaction reporting (Sovereign Order No. 14.446 of April 22, 2000) include: financial auditors, chartered accountants, accountants and liquidators in bankruptcy, legal and financial advisers, estate agents, cash transporters, retailers in precious stones, precious materials, antiques, works of art, and other valuable objects, and company service providers (now considered financial institutions under the amended AML Law).

### Internal controls and customer due diligence
- Under the AML Law, financial institutions must be vigilant, introduce internal control procedures, and provide appropriate staff training; SO No. 11.160 of January 24, 1994, amended by SO No. 15.453 of August 8, 2002, specifies additional details.
- Customer identification and verification thresholds:
  - Minimum transaction amount of €15,000 above which financial institutions must verify the identity of occasional customers.
  - Transactions of €150,000 are required to be subjected to special scrutiny if complex, unusual, and lacking economic justification.
- In cases flagged for special scrutiny, institutions must elicit all possible information on origin and destination of funds, purpose and beneficiary, and report findings to SICCFIN.
- Financial institutions must state in writing the monitoring procedures used to verify compliance with internal control procedures.
- Special provisions address gaming houses and bureaux de change.

### Sanctions and penalties
- Administrative penalties for non-compliance include: a warning, a reprimand, a ban on carrying out certain transactions, and withdrawal of authorization to do business.
- Criminal penalties:
  - Failure to report suspicious transactions or refusal to undertake a transaction because it appeared suspicious: fines of €9,000 to €18,000.
  - Breach of certain other provisions of the Law, including record keeping: fines of €2,250 to €9,000.

### Integrity standards and licensing
- All business activities require government authorization under Law No. 1.144 of July 26, 1991, issued after examination of professional competence and integrity.
- Sector-specific integrity provisions apply:
  - French Law on Banking of 1984 excludes persons convicted of specified crimes from board or management positions in financial institutions.
  - Specific integrity requirements apply to portfolio managers and bureaux de change (set out in the AML Law).
- Regulatory authorization is required for most financial sector activities.

### Criminalization of money laundering and terrorism financing
- Money laundering criminalized under Articles 218 to 218–3 of the Penal Code; separate money laundering offense for drug offenses in Article 4–3 of Law No. 890 of July 1, 1970.
- Predicate offenses listed in Article 218–3 include forgery, forging or illegally using seals, hallmarks, stamp, and trade marks, misappropriation by persons exercising public authority, extortion, bribery, murder, procuring, kidnapping, and extortion, provided committed within organized criminal activity.
- Terrorism financing has not yet been added as a predicate offense; the list of predicate offenses may need review to ensure it includes all serious crimes.
- Terrorism financing offenses in the International Convention for the Suppression of the Financing of Terrorism were incorporated by SO No. 15.320 of April 8, 2002, including criminal liability of legal persons (excluding the State, the City, and public agencies).

### Freezing, confiscation, and investigative powers
- SICCFIN powers:
  - May freeze a transaction for up to 12 hours on its own initiative.
  - Longer freezes and sequestration of accounts may be ordered by the President of the Tribunal of First Instance.
  - Power to obtain information from all State agencies and direct access to the Monaco business registry (including nonpublic data on partnerships).
- Confiscation under Article 219 of the Penal Code:
  - Criminal court may order confiscation of assets and funds of illicit origin.
  - Confiscation does not extend to assets used in the commission of the predicate offense or which facilitated it, except in drug-related laundering.
  - Confiscation of assets of equivalent value is not provided for in the law.
- SO No. 15.321 of April 8, 2002, requires entities holding assets linked to financing of terrorism to freeze them if requested by Ministerial Order; related Ministerial Orders issued on April 9, 2002, and in July and October 2002.

### Financial intelligence unit: SICCFIN—receipt, analysis, dissemination, and structure
- SICCFIN established under SO No. 11.246 of April 12, 1994 implementing the AML Law; activities include:
  - AML supervision of reporting institutions, including onsite inspections.
  - Awareness-raising with industry associations (e.g., Association Monégasque des Banques).
  - Staff training and participation in local and international meetings.
  - Receiving and analyzing reports of suspicious transactions.
  - Cooperation with other FIUs.
- Reporting and referrals:
  - Under Article 27, when SICCFIN finds evidence of drug trafficking or organized criminal activity, it forwards a report to the Minister of State.
  - Under Article 28, when facts may give rise to criminal prosecution, SICCFIN may communicate information to the Principal State Prosecutor; in practice information is sent to the Principal State Prosecutor with a copy to the Minister of State.
  - Commentary that SICCFIN’s independence would be enhanced if required by law to make reports directly to the Principal State Prosecutor.
- Organizational status and staff protections:
  - SICCFIN is a unit of the Department of Finance and Economic Affairs; staff are civil servants appointed in the name of the State Minister.
  - Staff do not enjoy special immunity; under Law No. 975 of July 12, 1975, the State is obligated to defend civil servants and compensate them for any loss (Article 4).

### International cooperation in AML/CFT
- Monaco is party to: the Vienna Convention, the Suppression of the Financing of Terrorism Convention, the Palermo Convention, and (as of September 2002) the Strasbourg Convention; these contain mutual legal assistance provisions.
- Bilateral treaties with France, Italy, and Germany provide for mutual legal assistance, often under simplified procedures.
- Extradition:
  - Provided for in some multilateral conventions; Monaco is party to some 17 bilateral conventions providing the legal basis for extradition.
  - In absence of a treaty, extradition may be requested under Law No. 1.222 of December 28, 1999.
- SICCFIN’s international cooperation:
  - Member of the Egmont Group and exchanges information with other members.
  - Cooperates with foreign FIUs on specific cases via MOUs: entered into seven information exchange MOUs and four more are under discussion.
  - July 2002 amendment to the AML Law authorizes SICCFIN to use investigative powers to respond to requests from foreign FIUs.

### Supervisory oversight and AML/CFT assessment results
- Overall supervisory framework:
  - Supervisory authorities have regulations and guidance in place; SICCFIN has primary responsibility for AML/CFT compliance; FCB reviews all banking activity including AML/CFT but SICCFIN has full responsibility for compliance.
  - Internal audit and reputation concerns assist banks in following good AML practices.
  - Customer due diligence guidelines exist across financial sectors; verification of implementation is in place or planned by SICCFIN.
- SICCFIN supervisory enhancements:
  - Begun monitoring procedures for suspicious transaction reporting, increased onsite examinations (including client file review), and awareness-raising.
  - Circulated several FATF-related documents and issued two questionnaires to financial institutions used as basis for onsite supervision.
- Reported outcomes and operational metrics:
  - Average suspicious transaction reports per year between 1994 and 1999: 45.
  - Suspicious transaction reports: 210 in 2000 and 307 in 2001.
  - Files transmitted for prosecution: average of two per year from 1994 to 1999; 12 in 2000 and 21 in 2001.
  - From 1998 through 2001, some €37 million had been seized at the request of SICCFIN.
  - SICCFIN staff increased from three to eight persons, with a ninth person expected at end-2002; an intensive training program organized.
- International letters rogatory (ILR) activity (1998–2001):
  - Principal Prosecutor’s office received 63 ILR related to money laundering, executed 55, processing 8 (in 2002), denied none.
  - Monaco issued 32 ILRs related to money laundering, 11 executed, 21 being processed, none denied.

### Assessment of other service providers and industry sectors
- Company service providers (CSPs):
  - Direction de l’Expansion Économique (DEE) oversees 40 licensed CSPs.
  - July 2002 amendment to the AML Law placed AML/CFT supervision of CSPs under SICCFIN.
  - CSPs now under same customer identification and due diligence obligations as other financial institutions.
  - DEE issued a Code of Conduct in August 2001 addressing internal control requirements, extending expanded due diligence and AML requirements to foreign companies and trusts administered by CSPs; compliance ensured by onsite visits.
  - Record keeping: July 2002 amendment brought CSPs under same rules as other financial institutions; suspicious transaction reports from CSPs treated by SICCFIN and may lead to prosecution.
  - Many CSPs are branches or affiliates of international groups and must comply with group record retention protocols.
  - Regulators acknowledged weaknesses in timely information on scope and activities of the 40 CSPs and foreign companies/trusts they manage; a working group produced written guidelines for onsite reviews to start September 1, 2002, with periodic repetition.
- Gaming establishments:
  - Summary assessment found organizational and administrative arrangements, customer due diligence, suspicious transaction reporting, and cooperation appropriate in Monaco context.
  - Customer and transaction record retention policies needed formalization; addressed in the July 12, 2002 amendment to the AML Law.

### Recommendations to enhance the AML/CFT regime
- Improvements enacted in 2002 amendments to the AML Law:
  - Inclusion of financing of terrorism offenses in the definition of suspicious transactions to be reported to SICCFIN.
  - Inclusion of company service providers in the list of financial institutions subject to the AML Law.
  - Enactment of formal customer and transactions record-retention requirements for gaming establishments.
  - Possibility for SICCFIN to use its powers of investigation to provide information to foreign FIUs.
- Additional recommended steps:
  - Add financing of terrorism offenses as predicate offenses for purposes of the definition of money laundering in the Penal Code.
  - SICCFIN should ensure financial institutions use increased due diligence for higher-risk customers, especially politically exposed persons, their families, and their associates.
  - Introduce in legislation confiscation of assets of equivalent value and confiscation of assets used in the commission of the predicate offense or which facilitated its commission (“instrumentalities”).
  - Ensure the transition to new arrangements for oversight and AML/CFT supervision of CSPs is well executed.
  - Conduct a comprehensive review of SICCFIN’s work in the second half of 2003.

### IOSCO Objectives and Principles of Securities Regulation (assessment)
- An assessment was carried out but confined to relevant Principles due to the limited nature of permitted securities activity in Monaco.
- Securities activity in Monaco is strictly confined to mutual fund operation and portfolio management; the sector appears uniform and concentrated.
- Institutional setting:
  - Authority to regulate securities activity vested in the Minister of State.
  - Mutual fund law: Law No. 1.130 of January 8, 1990, as amended by Law No. 1.230 of July 6, 2000, and modified by SOs and Ministerial Orders.
  - Portfolio management law: Law No. 1.194 of July 9, 1997, as amended by Law No. 1.241 and two additional SOs.
  - These laws are largely modeled on French securities law and relevant EU directives.

*Source: International Monetary Fund (cr03262).*

### 88.      A supervisory commission is appointed under each law—these commissions make

### Supervisory commissions, market intermediaries, and mutual funds in Monaco

### Supervisory arrangements and governance
- A supervisory commission is appointed under each law and makes recommendations on all licensing matters to the Minister of State.
- Mutual funds supervisory commission composition:
  - Five members plus a president.
  - Three of five members are staff of the COB (acting in their personal capacity), one an academic, and one employed in industry.
  - All members are resident in Paris.
- Portfolio management supervisory commission composition:
  - Six members plus a president.
  - Members include the Director of Budget and Treasury, two staff of the Bank of France (acting in their personal capacities), a staff member of the COB (acting in his personal capacity), a representative of the Monegasque Bankers Association, and a representative of the Monegasque Chartered Accountants Association.
- Currently, the president of both supervisory commissions is the same individual.
- Day-to-day responsibilities are undertaken by the Department of Finance and Economics.
- A delegation agreement exists whereby staff of the COB carry out inspections of mutual fund companies.
- Enforcement activities are undertaken by the public prosecutor.

### Market intermediaries: scope, restrictions, and market size
- Definitions and activity restrictions:
  - Market intermediaries are portfolio management firms or banks carrying on portfolio management activity.
  - Market intermediaries do not execute orders on markets, do not offer margin accounts, and do not engage in proprietary trading, corporate finance, underwriting activities, or any activities associated with traditional full-service brokerage firms.
  - Market intermediaries are prohibited from accepting cash or securities from customers and therefore do not directly hold client accounts.
- Licensed entities and assets under management:
  - There are 67 companies in Monaco with a license to carry on portfolio management activities.
    - 43 of which are banks, managing €20 billion in assets.
    - 24 of which are portfolio management firms, managing €5 billion.

### Mutual fund sector structure and composition
- Industry size and concentration:
  - Total size of the industry is €5.2 billion including publicly available funds and “dedicated” funds (open only to one investor or institution).
  - The mutual fund business is targeted to Monegasque investors with accounts too small to justify private portfolio management fees and to portfolio managers who outsource some asset management.
  - The fund industry is concentrated—with a majority of funds under management located in three banking groups.
- Fund types and allocations:
  - 66.8 percent of funds under management are in money-market funds.
  - 28.6 percent of funds under management are in diversified funds.
  - Funds may invest in a wide range of products, depending on their approved mandates.

### Main findings and policy recommendations
- Independence and structure of regulation
  - Finding: There is no independent regulator in Monaco—responsibility remains vested in the Minister of State; two supervisory commissions provide recommendations but do not have licensing or sanctioning authority or independent rule-making power.
  - Recommendation: Consider merging the two commissions (currently coordinated through Department of Finance and Economics staff but unable to work directly together).
  - Recommendation: Increase independence by conferring licensing power on the commissions to align more closely with the IOSCO Principles (independence from political and commercial considerations, independent source of funding, ability to make final binding decisions, and authority to make rules).
  - Recommendation: Improve transparency and accountability by publishing reasons for withdrawal of licenses, increasing reporting on regulatory activity, and developing conflicts of interest policies.
- Information sharing and cooperation
  - Finding: Recent legal changes allow sharing of information and an information sharing arrangement with the French securities regulator has been implemented for the portfolio management supervisory commission.
  - Recommendation: Encourage formal agreements with other supervisors.
  - Recommendation: Extend the authority to share information to the mutual funds supervisory commission and permit information sharing between the two supervisory commissions.
  - Recommendation: Clarify in law the ability to share information with the FCB regarding the portfolio management activities of banks.
- Mutual fund regulation and supervisory enhancements
  - Finding: Mutual fund regulation includes licensing, internal control, disclosure requirements, reporting, and inspections.
  - Recommendation: Consider rules regarding valuation of illiquid securities and related party transactions.
  - Recommendation: Address minor issues such as the Minister of State’s authority to end a halt on redemptions; more frequent calculation and publication of net asset valuations for small funds; and clearer public disclosure of the accounting standards used by funds in preparing financial reports.
  - Note: Monegasque authorities have indicated a desire to have Monegasque mutual funds accepted as EU qualified UCITS and have kept up with changes to French law and EU initiatives.
- Portfolio management supervision and contingency planning
  - Finding: Portfolio management firms are subject to comprehensive laws and a full inspection system; significant improvements have been made since the portfolio management law of 1997.
  - Recommendation: Consider more frequent reporting of capital to monitor the industry more closely.
  - Recommendation: Develop a contingency plan for the failure of a portfolio management firm.
  - Note: For portfolio management carried on within banks or subsidiaries of banks, coordination with the Commission Bancaire would be required.
  - Recommendation: Future inspection programs should incorporate monitoring of compliance with the new insider trading rules.
- Scenarios for expansion of permitted securities activity
  - Finding: There appears to be very little demand within the industry for expanded activity; the present system is sufficient in the current context.
  - If increased activity were permitted, regulatory implications would include:
    - Expansion of capital rules to respond to greater risks involved in underwriting, proprietary trading, or extension of credit to clients.
    - Need for a much more robust reporting system to monitor compliance.
    - Adoption of market conduct rules and deployment of a surveillance system if trading on markets were permitted.
    - Potential requirement for a single and more independent commission with authority to grant and withdraw licenses or impose sanctions.
- Overall assessment
  - Finding: The Monegasque system of securities regulation, as currently structured, is effective within Monaco’s unique context.
  - Contextual factors:
    - Those wishing to carry out securities-related activities are subject to a rigorous and controlled company registration system in addition to separate licensing for securities activity.
    - Government size and centralization enable careful planning of commercial activity.
    - Explicit limits on permitted securities activities add an additional layer of control.
    - Authorities have deliberately chosen mutual funds and portfolio management to complement private banking and have deliberately chosen not to permit activities that would introduce greater risks and require expansion of the regulatory structure.

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_Source: https://www.imf.org/-/media/files/publications/ofca/english/cr03262.pdf_