## Detailed Assessment of Compliance with International Standards (cr03365) ## Source details **Canonical URL:** [Detailed Assessment of Compliance with International Standards (cr03365)](https://www.imf.org/-/media/files/publications/ofca/english/cr03365.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr03365.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr03365.pdf.json) --- ### Assessment purpose and methodology - Assessment completed as part of the IMF Offshore Financial Sector (OFC) assessment program. - Objectives: - benchmark current state of banking supervision and related financial sector oversight; - suggest improvements and provide input for an action plan to move toward full compliance with Core Principles. - Information and methodology used: - review of legal frameworks and sector-specific laws and regulations; - review of self-assessments against Core Principles, IAIS, IOSCO and FATF methodologies; - extensive discussions with Guernsey Financial Services Commission (GFSC), external auditors, bank management, police, Customs and Excise, Financial Intelligence Service (FIS), Attorney General’s Chambers and industry representatives. ### Banking sector — market structure, licensing, prudential framework, and supervisory practice - Market structure and activity: - 69 banks licensed to take deposits under the Banking Supervision (Bailiwick of Guernsey) Law, 1994. - Geographic origin: subsidiaries/branches from Europe; Asia; the Middle East; North America; and South Africa. - Total deposits: £71.8 billion at the end of September 2002, with fiduciary deposits the largest source. - Main activities: private banking for nonresidents, corporate banking, deposit gathering for parent operations, retail banking for local population; some banks undertake custody work for mutual funds and services to the captive insurance sector. - Licensing and prudential requirements: - Single unrestricted bank license; Schedule 3 to the BSL sets minimum licensing criteria (including integrity and skill, fit-and-proper tests, business to be directed by at least two individuals). - Minimum risk asset ratio: at least 8 percent (Basel method); absolute minimum capital policy of £1million on incorporation. - Prescribed minima distribution among Guernsey subsidiary banks: - 2 banks: 8 percent - 17 banks: 10 percent - 5 banks: 11 percent - 17 banks: 12 percent - 3 banks: 14 percent - 1 bank: 15 percent - 2 banks: 16 percent - For 2001 the weighted average risk asset ratio for the industry remained at 20.52 percent. - Overall risk asset ratio for Guernsey subsidiary banks as at the end of 2001 was approximately 20 percent. - Supervisory approach and operational outcomes: - GFSC applies blended off-site assessment and on-site visitation program; licensing policy favors parent organizations with acceptable international presence; transparency of accounting and conformance with international standards emphasized. - On-site AML/KYC visitation counts: - 2000: 15 on-site visits (covering 19 bank licenses) - 2001: 19 on-site visits - As at 31 July 2002: 22 on-site visits (covering 25 bank licenses) - Total licensed banks: 69 - Credit portfolio quality distribution: - Grade A – Satisfactory: 98.7 percent - Grade B - Watch List: 1.2 percent - Grade C - Substandard: 0.1 percent - Grade D - Loss: 0.0 percent - Total: 100.0 percent - Problem bank situations primarily arose from failure of parent institutions (examples include subsidiaries of British and Commonwealth Merchant Bank and Baring Brothers & Co); GFSC actively participated in orderly resolution decisions. - Validation and reporting: - Quarterly prudential returns (Form BSL/1) submitted; Forms BSL/1 and MA/1 due within 28 calendar days; Form LOC/1 due two months from reporting date. - Quarterly returns sample-verified annually in arrears by external auditors; GFSC selects one quarterly return per annum from each licensed bank for external auditor verification. - Section 31 of the BSL requires audited accounts to be made publicly available; Banking Supervision (Accounts) Rules, 1994 require audited accounts submission within 90 days of fiscal year-end. ### GFSC — mandate, governance, independence, funding, staffing, and operational resources - Legal mandate and objectives: - GFSC established under the Financial Services Commission (Bailiwick of Guernsey) Law, 1987; Banking Supervision (Bailiwick of Guernsey) Law, 1994 sets banking responsibilities. - General functions include development and effective supervision of finance business and “the countering of financial crime and of the financing of terrorism.” - IMF recommended amending GFSC Law to establish safety, soundness and integrity of the financial system as statutory objectives and eliminate “development” as a GFSC function. - Governance and potential intrusions: - GFSC consists of five commissioners elected for three-year terms; executives answerable to five non-executive commissioners. - Section 7 of the GFSC Law permits the Advisory and Finance Committee to give general written guidance and directions “after consulting the GFSC”; mission comment: potential intrusion on operational independence and recommended legal amendment to remove these powers, although in practice the power had not affected operational independence. - Funding and fees: - Funded by fees paid by the finance sector under the Financial Services Commission (Fees) Regulations. - In 2002 fees were raised “by more than 20 percent.” - GFSC sets its own fees after consultation with relevant political bodies. - Staffing and expertise: - Total staff as at August 30, 2002: 75 (GFSC-wide; another figure states 79 staff in later sections). - Banking Division staff increased to ten; of these five employed by GFSC for more than five years; three have professional qualifications (including one Barrister); six are graduates (three at master’s degree level). - Director: over 20 years at Bank of England and five years at GFSC; Deputy Director: 14 years at GFSC including secondment experience; both hold Masters degrees in Economics from British Universities. - GFSC spent over £31,000 on training in 2001; Banking Division spent £6,788 in 2001. - Operational reach and travel: - Banking Division supervises banks in Guernsey, Alderney and Sark and subsidiaries in Jersey and the Republic of Ireland. - Supervisory visits in 2001 to group offices/head offices in Germany and Switzerland; supervisors visited Jersey, Gibraltar, Switzerland, and the United Kingdom in 2001. - GFSC always represented at Offshore Group of Banking Supervisors annual meeting and biennial International Conference of Banking Supervisors. - Comment: “There are no cost constraints on the Banking Division traveling to carry out supervisory on-site visits as this is a part of its statutory function and as such is an expense, which cannot be avoided.” - Identified resourcing concerns and actions: - GFSC commissioned staff terms and conditions review in 2001 leading to staffing increases; Banking Division recruited an additional person in June 2003; existing manpower plan for 2003–2007 anticipates additional staff. - IMF recommended in-depth analysis of supervisory objectives and resources; assessors expressed concern about potential resource deficit to meet planned expansion of on-site safety and soundness visitations. ### GFSC powers, enforcement, licensing conditions and remedial measures (BSL and related provisions) - Enforcement powers under the BSL: - GFSC may impose conditions on licenses (BSL s.9(1)), give directions (BSL s.12), obtain information/documents (BSL s25), enter premises to obtain information (BSL s26), appoint inspectors (BSL s27), investigate suspected offenses (BSL s28), and revoke licenses (BSL s.8). - Section 8(1)(d) — GFSC may revoke a bank’s license if “The Commission has been provided with false, misleading, deceptive or inaccurate information by or on behalf of the institution or, in connection with an application for a banking license, by or on behalf of a person who is or is to be a director, controller or manager of the institution.” - License conditions require quarterly prudential returns and notification of material adverse developments. - Court injunction powers under s35 include appointment of receivers or persons to safeguard assets. - Fit-and-proper and prohibition of individuals: - Section 17A of amended BSL provides power to prohibit an individual from performing any function in connection with a bank if not fit and proper. - S14(1) BSL: prior notification and consent required before person becomes shareholder controller (15 percent or more). - S23(1): person becoming a significant shareholder (5 percent–less than 15 percent) must notify Commission within 14 days. - Due process and tribunal arrangements: - Human Rights (Bailiwick of Guernsey) Law, 2000 relevant; GFSC has resolved to establish a Financial Services Tribunal; a Shadow Tribunal has been set up pending statutory establishment. - Information sharing and confidentiality: - BSL s44 permits disclosure to foreign supervisory authorities to assist supervisory functions; FSC Law s21 provides for disclosure in specified circumstances. - GFSC has MOUs with multiple regulators and does not require an executed MOU before exchanging information with foreign supervisors. - Assessments under Basel Core Principles (selected): - Principle 1(4), 1(5), 1(6) — Compliant (as recorded). - Principles 2, 3, 22–25 — Compliant (as recorded). - Other principles range from Compliant to Largely Compliant per detailed matrix. ### AML/CFT framework, Financial Intelligence Service (FIS), STRs, and operational effectiveness - Legal and institutional framework: - Key laws include Money Laundering (Disclosure of Information) Laws (1995, 1998, 2001), Criminal Justice (Proceeds of Crime) Law, Drug Trafficking Law, Terrorism Law, Terrorism and Crime (Bailiwick of Guernsey) Law, and GFSC Guidance Notes. - Definition of Financial Institution (FI) for assessment purposes: verbatim list in Schedule to the POC Law covering lending, leasing, MSBs, issuance/management of means of payment, trading, underwriting, settlement/clearing, portfolio management, safe custody, accepting repayable funds other than deposits, and others. - FIU / Financial Intelligence Service (FIS): - FIS is the FIU: independent unit of Guernsey Police and Customs and Excise, jointly staffed. - FIS staffing and vacancies at assessment: - Headed by a director; current complement: two Senior Intelligence Officers, four Intelligence Officers, a Financial Analyst, an Office Manager and an Administrative Assistant. - At time of assessment two Intelligence Officer posts and the positions of Financial Analyst and Administrative Assistant were vacant; vacancies later filled and additional staff approvals noted. - FIS statistics — number of disclosures: - 2000: 482 - 2001: 605 - 2002: 777 - Requests for assistance (example figures): - 2000: 154 - 2001: 170 - 2002 (Half Year): 139 - Of which Internal: 84 (2000), 87 (2001), 90 (2002 Half Year) - Of which External: 70 (2000), 83 (2001), 49 (2002 Half Year) - Legal gaps and recommended legislative actions: - No legal requirement that STRs must be submitted to the FIS at the time of assessment; draft Miscellaneous Provisions Law intends to permit the Committee to prescribe form/manner for STRs. - FIS lacks statutory power to demand additional information from reporting parties without a production order; practice is to request and usually obtain such information or seek production orders from courts or Attorney General. - Recommendations included making failure to report a suspicious transaction a crime (aligning POC Law with DT Law), prescribing STR form by law, and providing FIS authority to require additional information without production order. - Suggested increase in FIS staff complement by at least two persons and enhancement of IT resources. - Confiscation, freezing and mutual legal assistance: - Confiscation and forfeiture provisions exist under POC and DT Laws and Terrorism Law; laws do not provide for confiscation of property of equivalent value. - Terrorism Law provides forfeiture and restraint provisions and freezing under relevant Orders; no statutory asset forfeiture fund exists at assessment. - Mutual legal assistance available under Fraud Investigation Law, POC Law, DT Law, Terrorism Law, CJIC Law, Terrorism Order and Al-Qa’ida Order. - Recommendation: consider amending Terrorism Law to provide for appointment of a receiver for all defendant property and consider legislation for an asset forfeiture fund and asset sharing. - Assessment of criminalization: - FT criminalized on basis of the Convention for the Suppression of the Financing of Terrorism (Sections 8–10 Terrorism Law); ML criminalized under POC Law and DT Law; predicate offenses include all serious crimes and extend to conduct in another country. - Treaty ratifications: Vienna Convention extended to Guernsey via UK on 9 April 2002; Council of Europe Convention on Laundering extended from January 2003; Palermo Convention implementation pending further legislation (e.g., corruption law, trafficking provisions). - FATF assessment summary (selected ratings): - Recommendations rated Compliant, Largely Compliant, or Not yet fully compliant in specific areas (e.g., Recommendations 10, 11 Largely Compliant; ITS SR I Largely Compliant; SR VII Not being assessed pending two-year FATF period). - Operational observations: - FIS routinely disseminates intelligence domestically and internationally; FIS operational outputs include referrals to NCIS and foreign FIUs; no domestic conviction for Money Laundering at time of assessment despite several investigations. ### Insurance supervision — market structure, licensing, solvency and on-site inspection - Market and structural statistics: - Guernsey is a leading European insurance captive domicile with 382 captives and protected cell companies licensed for insurance purposes. - At the end of 2002 there were 50 licensed PCCs with 214 cells. - Insurance sector employs nearly 1,000 persons. - Legal framework and supervisory arrangements: - Insurance Business (Bailiwick of Guernsey) Law, 2002 (IB Law) and Insurance Managers and Insurance Intermediaries Law, 2002 (IMII Law) came into effect on November 5, 2002. - GFSC’s Insurance Division staff as of 30 August: 14 staff (Director, Deputy Director, an actuary, consultant, four senior analysts, four analysts, two support staff); later increased by assistant actuary and two analysts. - Solvency and capital requirements: - Minimum capital requirements: - Licensed Insurers writing general insurance business: £100,000 - Licensed Insurers writing long-term insurance business: £250,000 - Margin of solvency calculations: - general business: higher of (i) 18 percent of first £5 million net premium income plus 16 percent of net premium income exceeding £5 million; or (ii) 5 percent of loss reserves. - long-term business: greater of (i) £250,000; or (ii) 2.5 percent of value of required fund under Section 42(1). - GFSC applies risk-based approach and in practice sets solvency requirements higher than legal minima on a case-by-case basis. - Supervision and on-site inspections: - Routine on-site inspection program: 3 year rolling program for all licensees (annual inspections for insurance intermediary sole traders); in 2001 a total of 18 inspections undertaken. - GFSC may require recovery plans within short periods where margin of solvency falls below required levels. - Governance, corporate governance code and market conduct: - Licensed Insurer’s Corporate Governance Code (LICG Code) requires boards to undertake annual compliance review and provide declarations in annual returns; compliance required by 31 December 2003. - GFSC can impose license conditions, suspend or revoke a license, require removal of directors, petition court for winding up, and appoint provisional administrators (court involvement required). - Recommended actions: - Amend FSC Law to remove Advisory and Finance Committee power to give guidance/directions to GFSC. - Consider increasing legally required solvency minimums. - Grant GFSC power to impose civil money penalties (administrative fines) to complete sanction toolkit. ### Securities regulation, collective investment schemes (CIS), and CISX (IOSCO assessment highlights) - Institutional and legal framework: - GFSC administers Protection of Investors (POI) Law; GFSC has rulemaking powers and issues guidance and Class A/B/Q rules for CISs. - As at June 30, 2002: 428 entities licensed to carry on investment business (403 companies incorporated in the Bailiwick; one Bailiwick partnership; 24 branches of international institutions). - CIS authorization, custodianship and asset segregation: - Class A, B, Q Rules regulate funds; for Class A schemes custodian must be separate and independent from manager’s group; client assets must be segregated. - Scheme Particulars/prospectus must set objectives, managers, custodian, valuation frequency and subscription/redemption arrangements. - CISX statistics and market features: - Number of securities admitted to CISX Official List as at October 31, 2002: 280. - Market capitalization as at 31 October 2002: U.S.$17 billion. - YTD and prior calendar year listing totals (Total listed securities): - YTD 31 Oct. 2002: 35 - 2001: 93 - 2000: 110 - 1999: 67 - Trading figures (pounds sterling): - Shares traded: 76,955,496 (2002 YTD to 08 Nov), 75,327,426 (2001), 31,676,148 (2000), 32,598,695 (1999) - Value: 72,102,762 (2002), 76,262,293 (2001), 47,032,605 (2000), 52,420,553 (1999) - Transactions: 672 (2002), 620 (2001), 367 (2000), 267 (1999) - CISX market features: electronic Reuters bulletin board, telephone-executed trades reported within three minutes, screen-based market, settlement T+3 standard, designated clearing systems (CREST, Cedel/EuroClear). - Supervisory powers, inspection and enforcement: - GFSC possesses broad POI Law powers: licensing, imposing conditions, suspension/revocation, request information, apply for injunctions and restitution orders, and prosecute unlicensed activity. - GFSC lacks direct statutory power of entry and search at time of assessment; Financial Services Commission (Amendment) Law, 2003 provided enabling power for site visits and anticipated Ordinance for on-site powers early in 2004. - GFSC does not have power to impose administrative fines directly (policy decision to introduce powers noted; practical concerns about public reporting/fines due to constituency size). - Recommended actions (selected): - Consider statutory powers of entry and search or equivalent arrangements. - Consider power for GFSC to prohibit misleading promotional statements administratively. - Consider powers to deal with failure of market intermediaries (rescue/administration provisions). ### Fiduciaries, trust and company service providers (CSPs) — licensing, fit-and-proper tests, systems and AML/CFT - Fiduciaries Law scope and exemptions: - Fiduciary business defined broadly (trusts, company administration, nominee services, registered offices, executorship services); many exempted activities listed in Fiduciaries Law s.3 (examples include trustee of a GFSC-authorized CIS, acting as director of a company with established place of business within Bailiwick under certain conditions, lawyers acting in ordinary course). - Fit-and-proper assessments and minimum criteria (Schedule 1): - Fitness criteria cover probity, competence, experience, diligence, qualifications, and knowledge of legal/professional obligations; specific regard to prior criminal offenses, regulatory breaches or business practices that cast doubt on competence. - Controllers defined (managing director, shareholder controller with 15 percent+ voting power, indirect controller). - Notification requirements: - s14: notification to GFSC before becoming a controller. - s22: persons becoming significant shareholders (5 percent–less than 15 percent) must notify GFSC within 14 days. - Operational standards, client asset safeguards and systems: - Codes of Practice for Trust Service Providers and Corporate Service Providers set standards: - client asset segregation, safe custody, confidentiality, client documentation retention, fee transparency, prompt client information. - “Four eyes” requirement: business to be directed by at least two individuals for full fiduciary license. - Record retention: Criminal Justice (Proceeds of Crime) Regulations, 2002 impose minimum six-year retention; GFSC requires client verification documents to be readily retrievable. - Auditors and external review: - Regulation of Fiduciaries (Accounts) Rules, 2001 requires audited financial statements within four months of accounting period end, auditor’s report, and management letters to be provided to GFSC; GFSC approves auditors and requires audits in accordance with GSCCA Guidance Notes on audit of fiduciaries. - Fiduciaries Law s.31 protects auditors communicating in good faith to GFSC. - TSP best practice and cessation of business: - GFSC monitors compliance via on-site inspections; legislative development for Office of Public Trustee and other safeguards for cessation of business noted as in progress. - Recommendations and supervisory actions: - GFSC to continue licensing, on-site inspections, and enforcement; mission suggested setting a cut-off date for transitional license processing if not completed within months to avoid reputational risk. ### Selected consolidated recommended actions (drawn from assessments) - Legal and institutional: - Amend GFSC Law to establish safety, soundness and integrity of the financial system as GFSC objectives and to remove “development” as a GFSC function. - Amend GFSC Law to remove or clarify Advisory and Finance Committee’s power to give general guidance/directions to the GFSC. - Provide explicit statutory on-site inspection and entry/search powers (or robust judicial warrant procedures) and an Ordinance for site visits as intended under the Financial Services Commission (Amendment) Law, 2003. - Supervisory resourcing and capacity: - Conduct in-depth analysis of supervisory objectives and resource needs; revisit Banking Division Manpower Plan for 2003–2007 accordingly. - Accelerate finalization of on-site examination methodology and implement focused training programs; formalize quality control/assurance processes. - Increase FIS staffing by at least two intelligence officers and improve FIS IT systems. - AML/CFT and FIU powers: - Adopt legislation to make failure to report a suspicious transaction a crime and permit the FIS to require additional information from reporting parties without a production order. - Prescribe STR form and submission procedures by regulation; permit FIS access to necessary information for analysis and dissemination. - Consider legislation to create an asset forfeiture fund and mechanisms for asset sharing with other jurisdictions. - Corporate governance, audit and external auditor engagement: - Explore increased synergies with external auditors, including trilateral meetings and quality assurance modalities; consider annual confirmations by senior management/board on compliance with corporate governance guidelines. - Formalize processes to monitor external auditor quality where GFSC relies on auditor verification of prudential returns. - Market conduct and securities: - Consider legislative powers to prohibit misleading promotional statements administratively and to provide clear powers to deal with failure of intermediaries (rescue/administration orders). - Consider transaction reporting and insider reporting requirements if market turnover increases materially. - Insurance sector: - Consider increasing legally required solvency minima over time and complete the range of sanctions by enabling GFSC to impose civil money penalties. - Fiduciary and CSP supervision: - Finalize transitional licensing and implement Office of Public Trustee and cessations safeguards; require consistent AML/CFT application and “four eyes” control enforcement. *Source: IMF staff assessment (cr03365) of Guernsey’s compliance with the Basel Core Principles, FATF Recommendations and Special Recommendations, IAIS Core Principles, IOSCO Objectives and Principles, and OGBS Statement of Best Practice as summarized from applicable laws, regulations, guidance notes, GFSC practices, FIS operations and supervisory reviews.* ### 1. Detailed Assessment of Compliance with the Basel Core Principles................................9 ### Detailed Assessment of Compliance with the Basel Core Principles ### Assessment purpose and methodology - The assessment was completed as part of the IMF Offshore Financial Sector (OFC) assessment program. - The assessment serves to: - benchmark the current state of banking supervision, recognizing extensive changes in recent years; - suggest further improvements or changes; - provide input for the development of an action plan to move toward full compliance with the Core Principles. - Information and methodology used: - review of the legal framework generally and specific to the financial sector; - review of the self-assessment of the Core Principles; - extensive discussions with staff of the Guernsey Financial Supervision Commission (GFSC), external auditors, and management of commercial banks. ### Institutional and market structure overview - The assessment notes the following market structure and institutional setting: - Number of licensed banks: 69 banks licensed to take deposits under the Banking Supervision (Bailiwick of Guernsey) Law, 1994. - Geographic origin of banks: subsidiaries or branches from Europe; Asia; the Middle East; North America; and South Africa. - Total deposits: £71.8 billion at the end of September 2002, with fiduciary deposits being the largest source. - Main banking activities: private banking services for nonresidents, corporate banking, deposit gathering for funding parent operations, and retail banking for the local population. - Additional activities undertaken by some banks: custody work for mutual funds and banking services to the captive insurance sector. - Institutional arrangements: - Financial sector supervision is undertaken by the Guernsey Financial Supervision Commission (GFSC). - The GFSC was established as a statutory body under the Financial Services Commission (Bailiwick of Guernsey) Law, 1987, as a unitary regulator responsible for the regulation of financial services business. - Oversight: The Advisory and Finance Committee of the States Assembly (Guernsey Parliament) is mandated to oversee the financial services sector and to monitor and act as the channel of communication with the GFSC. ### Legal framework for deposit-taking and licensing - Banking Supervision Law, 1994 (as amended): - provides for the regulation of deposit-taking business; - gives the GFSC the ability to set out conditions for issuing licenses; - restricts the acceptance of deposits to licensed institutions; - provides for the regulation and supervision of such institutions; - gives the GFSC the ability to impose conditions on licensees, to give directions to institutions, and to provide for penalties for breach of the legislation and for the revocation of licenses. ### Preconditions and supervisory approach - The assessment characterizes the preconditions and supervisory approach as follows: - The GFSC operates within a context of a generally strong legal and regulatory framework and effective implementation of supervisory processes. - An effective licensing authority is in place, supplemented by fair and equitable criteria to ensure a consistent approach to permissible activities, ownership, and investment criteria. - Prudential regulations and requirements compare favorably with international standards and best practices. - The GFSC applies an effective supervisory process that blends off-site assessment of internationally active banking organizations and regulatory agencies with a visitation program to confirm off-site assessment results. - Licensing policy: the GFSC grants licenses only to banks or branches that have parent organizations with an acceptable international presence in accordance with criteria established by the Commission. - The GFSC emphasizes transparency of accounting policies and practices and conformance with international standards. - Legal provisions enable the GFSC to take regulatory action against noncompliant banks. ### Key findings and implications - The assessment highlights: - A large and internationally diversified banking population (69 licensed banks from multiple regions). - Significant deposit volumes: £71.8 billion as of end-September 2002, with fiduciary deposits the largest component. - A unitary regulatory structure via the GFSC with statutory powers to license, condition, direct, penalize, and revoke licenses. - Supervisory practices that incorporate both off-site assessment and on-site visitation, and selective licensing based on parent institution presence. - Emphasis on accounting transparency and international standards conformance, supported by legal authority to act against noncompliance. *Source: IMF assessment titled "Detailed Assessment of Compliance with the Basel Core Principles."* ### 10. The GFSC has a range of gateways to enable it to share information domestically and ### The GFSC has a range of gateways to enable it to share information domestically and internationally ### Objectives, statutory mandate, and scope - The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (the FSC Law) and the Banking Supervision (Bailiwick of Guernsey) Law, 1994 (BSL) set out the GFSC’s objectives. - The GFSC is the sole agency in Guernsey responsible for banking supervision. - The GFSC’s responsibilities are divided into “general functions and statutory functions” (sections 2 and 3 of the GFSC Law). - The GFSC’s general functions include: - (a) “to take such steps as it considers necessary or expedient for development and effective supervision of finance business in the Bailiwick;” - (b) to provide reports, advice and assistance to specified local committees when requested; - (c) to prepare recommendations and schemes for statutory regulation of finance business and revision of related legislation; - (d) “the countering of financial crime and of the financing of terrorism;” where “financial crime” includes (i) fraud or dishonesty; (ii) misconduct in, or misuse of information relating to, a financial market; (iii) handling the proceeds of crime; - (e) “all other such functions as the States may by Resolution assign to the Commission.” - In exercising functions the GFSC shall in particular have regard to: - (a) “the protection of the public interest, including the protection of the public against financial loss due to dishonesty, incompetence or malpractice by persons carrying on finance business;” and - (b) “the protection and enhancement of the reputation of the bailiwick as a financial center.” - The BSL specifies that the GFSC is responsible for granting and withdrawing (revoking) banking licenses. ### Legal framework, standards, and prudential instruments - Schedule 3 to the BSL sets out minimum criteria for licensing of banks. - Supplementary regulations, rules, guidance and codes include (selected list preserved verbatim): - Principle 1/1994/24 on large exposures; - guidance on verification of prudential returns (April 1998); - guidance on trilateral discussions (March 1997); - the Banking Supervision (Bailiwick of Guernsey) Regulations 1994 as amended; - the Banking Supervision (Accounts) Rules 1994; - guidelines to Banks and their Auditors issued under s1(a) and s1(b)(ii) of the Banking Supervision (Accounts) Rules, 1994; - Guidance Note 1996/1: Flows of Information To Parent Banks; - Guidance Note 1997/1 on Bank Auditor’s Reports on GFSC returns used for prudential purposes; - Guidance Notes on the Prevention of Money Laundering and Countering the Financing of Terrorism; - guidance to prudential and statistical returns; - Code of Conduct on deposit advertisements; - principles of conduct of finance business; - principles of conduct of derivatives business; - Code of Practice for banks; and - Guidance Note 2002/1 on Procedures for On-Site Visits to Overseas Operations of Guernsey Banks. - Additional items noted: - Principles for the Management of Credit Risk; - Guidelines for Corporate Governance and Risk Management (out for consultation and to be issued some time during August 2003). ### Compliance assessment and supervisory practice - The GFSC conducted a detailed review of compliance of the Bailiwick’s law and supervisory practices with the Basel Core Principles for Effective Banking Supervision and reviews annually its performance against that plan. - The regulatory structure was subject to a major review in 1998 by the UK Home Office (‘Edwards Review’). - The GFSC is audited annually by external auditors and has undergone an internal audit by the States (of Guernsey) Audit Commission. - The GFSC’s annual report is laid before the States (Parliament) of Guernsey each year and “details not just financial information but also the current approach to topical issues and the results of the GFSC’s activities.” - The GFSC coordinates with the two other crown dependencies to achieve a consensus approach in the prevention of money laundering and has issued a position paper entitled ‘Overriding Principles for a Revised Know your Customer Framework’ (issued in February 2002) to be discussed with industry prior to redrafting relevant Guidance Notes. - Assessment for Principle 1: “Largely compliant.” ### Operational independence, governance, and potential intrusions - GFSC establishment and status: - The States resolved in April 1986 to establish the GFSC; the FSCL was passed in 1987; the GFSC came into being on February 1, 1988. - Section 4(1) of the FSCL provides that the GFSC is not a committee of the States, or a servant or agent of the States. - Governance: - The GFSC consists of five members; commissioners are elected for a period of three years and “shall be persons having knowledge, qualifications or experience appropriate to the development and supervision of financial business in the Bailiwick.” - Executives are answerable to five non-executive commissioners who meet regularly and each have particular expertise in financial services. - Potential intrusion: - Section 7 of the GFSC Law provides that the Advisory and Finance Committee may, “after consulting the GFSC, give to the GFSC: (a) written guidance of a general character; and (b) written directions of a general character, concerning the policies to be followed by the GFSC in relation to the development and supervision of finance business in the Bailiwick and the manner in which any function of the GFSC is to be carried out.” - Comment: “The Advisory and Finance Committee’s power to give guidance and directions to the GFSC has the potential of intruding on its operational independence. It is recommended that the law be amended to remove these powers.” - Assessment comment: “Notwithstanding these comments we consider that broadly speaking the existing power of general guidance and directions has not affected the GFSC’s operational independence.” ### Funding, resources, and staffing - Funding and fees: - Fees paid by the finance sector fund the GFSC. - Banks are required to pay this fee under the Financial Services Commission (Fees) Regulations. - In 2002 these fees were raised “by more than 20 percent.” - The GFSC sets its own fees, after consultation with relevant political bodies in the Bailiwick. - Staff counts and qualifications: - Total staff as at August 30, 2002 amounts to 75. - The Banking Division staff increased to ten. - Of the Banking Division staff: five have been employed by the GFSC for more than five years; three have professional qualifications (including one Barrister); six are graduates (three at master’s degree level). - The director has worked for the Bank of England for over 20 years and has worked for the GFSC for five years. - The deputy director has worked at the GFSC for 14 years, including 7 years in the Investment Business Division and an 18-month secondment to a fund management company; both director and deputy director hold Masters degrees in Economics from British Universities. - Training and budgets: - In 2001 the GFSC spent over £31,000 on training with the Banking Division spending £6,788. - One member of the Banking Division is studying for an MSc degree through the Training Agency. - The GFSC’s budget for IT costs is described as “more than adequate”; a new computer system was installed in 1999 with PCs for all staff. - The GFSC subscribes to databases such as Lexus-Nexus and the SIS (and the internet). - Travel and supervisory reach: - The Banking Division has supervisory responsibility for banks in Guernsey, Alderney and Sark and for subsidiaries in Jersey and the Republic of Ireland. - In 2001 supervisory visits were made to group offices and head offices of Guernsey banks in Germany and Switzerland. - Supervisors were visited in Jersey, Gibraltar, Switzerland, and the United Kingdom in 2001. - The Banking Division is always represented at the annual meeting of the Offshore Group of Banking Supervisors and the biennial International Conference of Banking Supervisors. - Comment: “There are no cost constraints on the Banking Division traveling to carry out supervisory on-site visits as this is a part of its statutory function and as such is an expense, which cannot be avoided.” ### Identified issues, actions taken, and recommendations - Development role and conflict risk: - The GFSC’s development function (including “development” as defined in the 2002 Amendment Law) may give rise to a possible conflict with its other functions. - The review team found no evidence that the development function has caused conflicts to date and the GFSC assures that in the event of a potential conflict, supervisory and regulatory duties would take precedence over the development function. - Recommendation: “The GFSC Law should establish safety, soundness, and integrity of the financial system as the objectives of the GFSC and eliminate ‘development’ as one of the GFSC functions. The GFSC should be able to continue its support of the activities of the Training Agency that are consistent with the revised mandate.” - Resource planning and staffing: - The GFSC commissioned a comprehensive review of staff terms and conditions in 2001 that led to recommendations and staffing increases. - The Banking Division recruited an additional person in June 2003. - The division carried out a “zero-based” analysis of staffing needs after the mission. - The existing GFSC manpower plan for 2003–2007 anticipates additional staff over the period. - Recommendation: “The case for additional resources should benefit from an in-depth analysis of the supervisory objectives and the means needed to fulfill those objectives.” Frequency and scope of on-site visitations will be pivotal and addressed under CP 16. ### Operational outcomes and supervisory experience - Problem bank situations have arisen primarily from failure of parent institutions; the GFSC actively participated in deciding when and how to affect orderly resolution in cases including subsidiaries of the British and Commonwealth Merchant Bank and Baring Brothers & Co. - The GFSC undertakes consultations with industry on guidance notes to ensure practicable implementation. - The GFSC identified the need to use limited island resources more efficiently and has initiated a survey of the finance sector to inform debate on increasing value added by the sector. *Source: Detailed Assessment of Compliance with the Basel Core Principles (Principle 1) as set out by the GFSC and related laws, regulations, guidance and assessments.* ### section 18 of the BSL to the Royal Court (of Guernsey) sitting as an Ordinary Court. ### section 18 of the BSL to the Royal Court (of Guernsey) sitting as an Ordinary Court. ### Powers, conditions, and enforcement under the BSL - The GFSC may impose conditions on bank licenses as it thinks fit (BSL s.9 (1)). - The amended BSL contains provisions for the GFSC to obtain information and documents (BSL s25) and to enter premises to obtain that information and documents (BSL s26). - All banks have a license condition requiring them to provide the GFSC with quarterly prudential returns and to inform the GFSC of material adverse developments. - The GFSC may take or require banks to take remedial actions including: - imposing conditions on a license (BSL s.9) (no constraint on the nature of the condition); - revocation of a license (BSL s.8); - giving institutions directions (BSL s.12); - obtaining information and documents and gaining entry to do so (BSL s.25 and s.26); - appointing inspectors (BSL s.27); - investigating suspected offenses (BSL s.28). ### Supervisory access, on-site work, and compliance verification - The GFSC has unfettered and routine access to all banks’ files and carries out file sampling during on-site visits. - On-site work includes verification that banks meet internal rules and limits as well as external laws and regulations, prudential meetings with management, and analysis of monthly statistical and quarterly prudential and locational returns. - Schedule 3 to the BSL sets out minimum criteria for licensing, including criteria requiring banks to conduct business in a prudent manner. - The GFSC may not grant a banking license (BSL s.6(2)) or may revoke a banking license (BSL s.8 (1)(a)) if Schedule 3 minimum criteria are not fulfilled. ### Licensing framework, application requirements, and fit-and-proper tests - There is only one type of bank license; it is unrestricted in permitted activities provided appropriate systems, expertise and controls are in place in line with the BSL and the Code of Practice. - There is only one category of banking license covering business with local residents and overseas residents; no special "offshore-only" license category exists. - The GFSC may, when granting a license or any time thereafter, impose such conditions as it thinks fit (BSL s.9). - Applicants must submit information on group structure, staff and management, financial information and business plan, external funding and comfort letter. - The GFSC requires prior consent of the home country supervisor prior to granting a license to an applicant for a banking license. - The minimum criteria for licensing in Schedule 3 include: - Integrity and skill; - Economic benefit; - Directors etc., to be fit and proper persons; - Business to be directed by at least two individuals; - Composition of board of directors; - Business to be conducted in prudent manner. - All managers, directors, money laundering reporting officers and company secretaries of banks must complete a detailed personal questionnaire (form PQ) covering personal details, relationships, experience, qualifications, other business interests and reputation. - A detailed business plan and application form (including q. 4(c)(I) of form BA/1) must be submitted and approved prior to licensing; the business plan must outline the nature and scale of proposed business, plans for future development, arrangements for management, operational policies and procedures, internal control procedures, oversight and risk management, and reflect the scope and sophistication of proposed activities. - The application requires latest audited accounts of the parent bank (shareholder) and (if different) of the ultimate parent organization, a three-year projection of estimated profits / tax, a three-year projection of the balance sheet, and details of external funding. ### Corporate governance, capital and prudential standards - The Code of Practice for Banks (September 9, 2002) summarizes principles on integrity, know your customer, competence and effective management, credit procedures, trading procedures, risk management, responsibilities of the board of directors, audit, capital adequacy and co-operation with regulatory bodies. - All Guernsey incorporated banks are required to keep a minimum risk asset ratio of at least 8 percent (most have higher minima) calculated in accordance with the Basel Capital Accord. - The overall risk asset ratio for Guernsey subsidiary banks as at the end of 2001 was approximately 20 percent. - An absolute minimum capital policy requirement of £1million applies upon incorporation. - All but two Guernsey banks have capital over £5m. - Two banks with less capital are inactive and have risk asset ratios of 18 percent and 122 percent. ### Director/officer suspension, disqualification, and legal protections - Suspension and removal of directors or officers is addressed by s67A of the Companies Law. - Applications for a disqualification order can be made by the Advisory and Finance Committee, the GFSC, the Procurer, any corporate body of which the person in question is or has been an officer, a liquidator or creditor of the corporate body, or, with leave of the Court, any other interested party. - A disqualified person may be prohibited from being a director or officer of any company or any specified company, and from participating, directly or indirectly, in the management, formation or promotion of any company or any specified company. - The FSC Law, s22 provides that no member, officer or servant of the GFSC is personally liable in any civil proceedings for actions done or omitted in the discharge (or purported discharge) of GFSC functions unless done or omitted in bad faith. - Additional ordinances and statutory provisions (Financial Services Commission (Limitation of Liability) Ordinance, 1990; Protection of Investors (Limitation of Liability) Ordinance, 1990; BSL s55; s57 of the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2000; The Insurance Business (Bailiwick of Guernsey) Law, 2002 (s93); Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 (s70)) provide that no liability shall be incurred by the States, the Committee or the GFSC for actions in the discharge of statutory functions unless done or omitted in bad faith. - The GFSC has adequate financial resources to cover the costs of defending its actions and, under the FSC Law (s15), may borrow from the government (States General Revenue Account). - Following the coming into force of the FSC Amendment Law, 2002 the GFSC will additionally be able to borrow from any person provided that it may not borrow monies at any time to the extent that the aggregate amount outstanding by way of principle in respect of monies so borrowed would exceed one third of the GFSC’s fee income for the preceding calendar year. ### Due process, Human Rights considerations, and the Financial Services Tribunal - Pursuant to the Human Rights (Bailiwick of Guernsey) Law, 2000 (the HRL), Guernsey is adopting the European Convention for the Protection of Human Rights and Fundamental Freedoms 1950 (the Convention) into domestic law; provisions of particular relevance include: - Article 6: Right to a fair trial; - Article 8: Right to Respect for Private and Family Life; - The First Protocol-Article 1: Protection of Property. - Article 6 provides entitlement to “a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law...” - The GFSC has received legal advice that it should not be “judge and jury in its own cause”; Guernsey has resolved to establish a Financial Services Tribunal. - The Tribunal has commenced by considering cases of applicants for licenses under The Regulation of Fiduciaries, Administration Businesses and Company Directors (Bailiwick of Guernsey) Law, 2000 who are dissatisfied with GFSC decisions. - The GFSC has introduced the concept of a Shadow Tribunal across all Divisions; cases where an Enlarged Assessment Committee cannot make a positive decision can, in the first instance, be heard by the Shadow Tribunal. - The statutory establishment of the Tribunal will require amendment to legislation; in the meantime the Tribunal will be established on a voluntary basis as a Shadow Tribunal chaired by an independent Chairman to ensure strict impartiality. - The Tribunal considers afresh the evidence relating to the application, issues recommendations to the GFSC pending statutory establishment, normally holds hearings in public but may hold hearings in private at its discretion. ### Information sharing, confidentiality, and inter-agency cooperation - The GFSC is the only body responsible for the soundness of the Guernsey financial system and shares information with government committees, Police, Customs and Excise and the Financial Intelligence Service where appropriate. - The BSL permits disclosure of bank information to enable or assist a relevant supervisory authority in a country outside the Bailiwick to exercise its supervisory function (BSL s44). - The FSC Law provides for disclosure of information to foreign countries in specified circumstances (FSCL s21). - Money laundering disclosure laws for Guernsey, Alderney and Sark facilitate disclosure to law enforcement and provide statutory protection to informants otherwise subject to secrecy obligations. - Regular meetings and cooperation: - At least annual meetings with the Financial Services Authority in the U.K.; frequent communication with U.K. regulators. - Annual meetings with Swiss regulators and regular meetings with Dutch regulators. - Meetings with other offshore regulators (e.g., Bermuda, Gibraltar) at the Offshore Group of Banking Supervisors annual meeting. - Close contact with the Isle of Man Financial Supervision Commission and the Jersey Financial Services Commission; an MOU has been signed with Jersey and the U.S. Federal Deposit Insurance Corporation. - Regular local meetings in Guernsey between the GFSC, Police, Customs and Excise, the Financial Intelligence Service and the office of the Attorney General in the Bailiwick Financial Crime Committee. - Financial Crime Group meetings at operational level reporting to the Bailiwick Financial Crime Committee. - A Guernsey Terrorist Finance Team includes GFSC, Financial Intelligence Service, Customs and Excise, Police Special Branch and the Attorney General’s office. - Regular meetings among the three Crown Dependencies (Jersey, Guernsey and the Isle of Man) with senior representatives of Police, Customs and Excise, FIUs, Attorneys General and commissions. ### Assessment conclusions (as recorded) - Principle 1(4) — Compliant. - Principle 1(5) — Compliant. - Principle 1(6) — Compliant. - Principle 2 — Compliant. - Principle 3 — Compliant. *Source: section 18 of the BSL to the Royal Court (of Guernsey) sitting as an Ordinary Court.* ### Section 8(1)(d) of the BSL states that the GFSC may revoke a bank’s license if: ### Section 8(1)(d) of the BSL and GFSC Supervisory Framework ### License revocation authority and documentation requirements - The BSL states that the GFSC may revoke a bank’s license if “The Commission has been provided with false, misleading, deceptive or inaccurate information by or on behalf of the institution or, in connection with an application for a banking license, by or on behalf of a person who is or is to be a director, controller or manager of the institution.” - The GFSC routinely requires “letters of comfort” from shareholders of Guernsey banks. - The banking application form requests details on external funding guarantees, indemnities or other commitments given to the applicant for a license. ### New entrants, administered/managed banks, and monitoring - The amended BSL (s36C) requires banks to review annually whether any activity has been entered into in the course of the bank’s business in respect of which no director has a sound knowledge; identified shortcomings must be immediately reported to the GFSC with remediation steps. - Progress and supervisory compliance of new entrants are monitored through monthly statistical and quarterly prudential reporting, annual prudential meetings with senior management, and on-site visits. - The administered/managed bank concept allowed banks to start on a lower-cost basis; historically seven administered banks evolved into stand-alone banks with full staff. - At the time of review there were seventeen managed banks (out of sixty-nine in total): twelve are subsidiaries and five are branches of foreign banks. - Policy for new entrants from 2002: a branch manager or managing director should be employed directly by the banking group (not seconded) and should be resident in the Bailiwick. - Assessment recorded: Compliant. ### Ownership and change-of-control requirements (Principle 4) - The BSL defines: - “Significant shareholder” as a person entitled to exercise, or control the exercise of, 5 percent or more but less than 15 percent of voting power. - “Shareholder controller” as a person entitled to exercise, or control the exercise of, 15 percent or more of voting power. - S23(1) amended BSL: a person who becomes a significant shareholder shall, within a period of 14 days immediately following the day of that event, give notice in writing of the event to the Commission. - S14(1) BSL: no person shall become a shareholder controller or an indirect controller unless he has notified the Commission in writing of his intention and the Commission has notified him in writing that there is no objection. - S14(3) BSL: the Commission may serve notice of objection if not satisfied that the person is fit and proper or that depositors’ interests would not be threatened; Schedule 3 criteria also apply. - All Guernsey banks are 100 percent subsidiaries of overseas banking groups; changes in significant shareholder/controller are transparent in the parent bank’s jurisdiction and are notified to the GFSC. - Banking Division undertakes periodic ownership surveys; shareholders are identified in annual audited accounts and discussed at prudential meetings. - Assessment recorded: Compliant. ### Investment criteria and large investments (Principle 5) - Schedule 3 (paragraph 6) sets minimum licensing criteria regarding prudence and capital adequacy, including factors (nature/scale of operations; risks inherent in those operations and group operations). - GFSC verifies new acquisitions and investments do not expose banks to undue risks or hinder effective supervision; approvals consider Schedule 3 compliance and large exposures procedures. - Investments over 25 percent of the capital base must be notified to the GFSC in advance; if entered into without prior notification, notification must be made within two working days. - Large exposures of more than 10 percent of a bank’s capital base are reported quarterly in arrears on form BSL/1. - License condition: banks “should not establish a branch outside the Bailiwick or invest in any company... without the prior consent in writing of the Commission.” - Breach of a license condition under the BSL is an offense. - Assessment recorded: Compliant. ### Capital adequacy framework and minima (Principle 6) - Banks must complete quarterly returns (Form BSL/1) which include prescribed minimum risk asset ratios; concepts and calculation methodology follow the Basel Capital Accord and UK practices. - All banks are required to keep a minimum risk asset ratio of at least 8 percent calculated by the Basel method. - The minimum risk asset ratio reflects each bank’s risk profile and that of its parent bank, taking into account on and off-balance sheet risks. - Only one Guernsey bank has a material trading book; that bank’s prescribed minimum risk asset ratio is set at 12 percent. - The minimum risk asset ratio for all banks is 8 percent but all but two banks have higher minima. Prescribed minima distribution among Guernsey subsidiary banks: - 2 banks: 8 percent - 17 banks: 10 percent - 5 banks: 11 percent - 17 banks: 12 percent - 3 banks: 14 percent - 1 bank: 15 percent - 2 banks: 16 percent - For 2001 the weighted average risk asset ratio for the industry remained at 20.52 percent. - GFSC policy is for a bank to have at least £1million in capital; the amended BSL stipulates a minimum capital of 1 million pounds sterling for Guernsey banks. - A legislative change requiring minimum capital of 1 million pounds sterling is expected to take place at the end of 2002/early 2003. - GFSC can impose penalties including license condition changes, appointing reporting accountants or inspectors, and may revoke a license if Schedule 3 criteria are or have not been fulfilled. - Banks report quarterly risk asset ratios and components; a sample of returns are externally audited. - Assessment recorded: Compliant. - Comment by assessors: Recommend GFSC monitor future developments of market risk and introduce a specific capital charge if significant changes occur. ### Credit policies, large exposures, and connected lending (Principles 7, 9, 10) - The Code of Practice for Banks requires an independent internal evaluation of credit policies, practices, procedures; GFSC discusses credit committees, reporting lines, loan book condition, and individual credit limits at prudential meetings. - GFSC practice: confirm approval of very large loans by Head Office credit committee or require specific risk transfer letters from parent banks; verification during on-site visits. - GFSC issued the Basel Committee’s “Principles for the Management of Credit Risk” to banks and endorsed their principles; implementation reviewed during on-site credit reviews. - Ten largest exposures/nonbank investments and all large exposures are reported quarterly (including ten largest money market placements). - Principle 1/1994/24 defines limits: - A bank may not incur exposures exceeding 10 percent of capital base to individual counterparties or groups of closely related counterparties which in aggregate exceed 800 percent of the bank’s capital base without prior agreement of the Commission. - Section 24 BSL requires reporting to the GFSC prior to funding where exposure would result in exceeding 25 percent of capital base; GFSC may require arrangements to protect the institution’s capital base. - GFSC selects one quarterly return per annum from each licensed bank to be verified by external auditor; any misreporting is noted and copied to the GFSC. - Connected lending: BSL s25(6) and Principle 1/1994/24 set definitions and require arm’s-length treatment; GFSC may deduct exposures from capital base if they are capital investments or concessionary terms. - Assessment recordings: Compliant (Principles 7, 9, 10). - Credit portfolio statistics (quality distribution): - Grade A – Satisfactory: 98.7 percent - Grade B - Watch List: 1.2 percent - Grade C - Substandard: 0.1 percent - Grade D - Loss: 0.0 percent - Total: 100.0 percent ### Loan evaluation and provisioning (Principle 8) - Schedule 3 requires adequate provision for depreciation, diminution in value, bad or doubtful debts, liabilities and potential losses. - Amended BSL requires annual review of individual loans, asset classification and loss provisioning (including on and off balance sheet exposures); shortcomings must be immediately reported to the GFSC with remediation steps. - Loan classifications and provisions are reported quarterly on form BSL/1; classifications and provisioning policies are reviewed by external audit and during on-site credit visitations. - GFSC analyzes provisions off-site as part of bank risk assessment; banks must report promptly any loan loss provisions or write-offs as a license condition. - GFSC can raise prescribed minimum risk asset ratio if perceived bank risk profile deteriorates; remedial action typically includes reduction of risk assets or capital injection/subordinated loan from shareholders. - Assessment recorded: Largely compliant. - Comment: GFSC may consider extending on-site reviews to assess out-of-order reporting and sample loan assessments to confirm integrity of banks’ risk rating systems and provisioning methodologies; additional staff training would be required. ### Country, market, and other risks (Principles 11, 12, 13) - Country risk: Principle 1/1994/24 advises against a common aggregate limit; GFSC may insist on limitations case-by-case; some banks have had country exposure limits imposed; transfer risk is reviewed in on-site credit reviews and annual prudential meetings. Assessment: Compliant. - Market risk: - Code of Practice requires banks to have policies/procedures for identification, measurement, monitoring and control of market risk. - GFSC requires banks with material trading books to instruct external accountants to verify adequacy of policies and procedures; procedure applied on one occasion. - Foreign exchange exposures are reported quarterly on form BSL/1 and discussed at prudential meetings. - GFSC has the power to impose a specific capital charge on market risk under s.6(2) of Schedule 3 to the BSL. - Assessment: Compliant. - Comment: Issuing additional specific guidelines or best practices on market risk management could complete the existing framework. - Other risks and comprehensive risk management: - Schedule 3 requires adequate systems of control and records. - Code of Practice requires effective processes to monitor liquidity, interest rate, foreign exchange and operational risk. - Quarterly returns require liquidity gap reports, currency exposure, interest rate and foreign exchange-related contracts, undrawn commitments and off-balance sheet liabilities; guidance states the Commission would not normally expect a maturity mismatch at one month of more than 20 percent. - External accountants verify regulatory reports on a sample basis annually; audited financial statements include interest rate sensitivity gap analysis. - Assessment: Largely compliant. - Comment: GFSC should develop on-site visitation techniques to confirm existence and application of an effective comprehensive risk management process and control culture. ### Internal control, corporate governance, and audit (Principle 14) - Guernsey law and the BSL include director liability provisions and offenses where institutional offenses are committed with consent/neglect of directors or senior officers (s49). - Amended BSL requires annual review of board responsibilities and conduct with respect to corporate governance; identified shortcomings must be reported immediately to the GFSC with remediation steps. - Code of Practice requires boards to ensure adequate internal controls for the nature and scale of the bank’s business. - Banks must have external audits by competent audit firms; external audit reports and management letters are copied to the GFSC. - GFSC monitors senior management quality and requires notification of changes to the board or senior management (s22). - GFSC issued a consultation paper “Guidelines for Corporate Governance and Risk Management” expected to articulate expectations of a sound corporate governance regime. - Assessment: Largely compliant. - Comment: Mission supports developing final guidelines and suggests annual confirmations by senior management and the board on compliance with the guideline. ### Anti-money laundering (Principle 15) - Banks must comply with a range of laws, including: - Money Laundering (Disclosure of Information) (Guernsey) Law, 1995; - Money Laundering (Disclosure of Information) (Alderney) Law, 1998; - Money Laundering (Disclosure of Information) (Sark) Law, 2001; - Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999; - Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Regulations, 2002; - Drug Trafficking (Bailiwick of Guernsey) Law, 2000; - Terrorism (United Nations Measures) (Channel Islands) Order 2001; - Al Qa’ida and Taliban (United Nations Measures) (Channel Islands) Order 2002; - Terrorism and Crime (Bailiwick of Guernsey) Law, 2002. - Banks must comply with GFSC’s Guidance Notes on the Prevention of Money Laundering and Countering the Financing Terrorism. - GFSC conducts on-site AML/KYC visits and verifies compliance with Regulations and Guidance Notes (including identity evidence, retention, and internal/external reporting procedures). - GFSC on-site visitation counts: - 2000: 15 on-site visits (covering 19 bank licenses) - 2001: 19 on-site visits - As at 31 July 2002: 22 on-site visits (covering 25 bank licenses) - Total licensed banks in Guernsey: 69 - GFSC, Jersey and Isle of Man issued a Position Paper on a Revised Know Your Customer Framework (statement of best practice the GFSC expects banks to move towards). - All banks are required to have a Money Laundering Reporting Officer and to report suspicions as required by Guidance Note 118. - GFSC shares information on suspected or actual criminal activities with domestic and foreign supervisors and law enforcement via MLDIs and relevant statutory gateways. - Past evaluations: - 1999 Offshore Group of Banking Supervisors FATF-style Mutual Evaluation Report found standards close to complete adherence with the FATF’s 40 Recommendations. - FATF Noncooperative Countries and Territories review (June 2000) stated Guernsey has “comprehensive anti-money laundering systems” and found the Island cooperative. - GFSC employs several staff with specialist expertise in financial fraud and AML. - Assessment: Compliant. - Comment: GFSC expected to amend existing guidance notes and has been commended for joint Position Paper. ### On-site and off-site supervision, management contact, resourcing (Principles 16, 17, 18) - Banking Division conducts risk-based on-site visits; a panel (Director, Deputy, Assistant Director) considers prudential inputs, FIS feedback, disclosures, fraud incidents and operational problems. - Target cycle: on-site visit to each bank once every two years, with higher-risk banks visited more frequently; higher-risk situations may result in re-visits within six to twelve months or shorter. - On-site visits are proforma-questionnaire driven for AML/KYC and credit reviews; customer files and staff at various levels are interviewed. - Off-site supervision includes annual prudential meetings (APMs), analysis of monthly and quarterly prudential/statistical returns; quarterly returns are sample-verified by external auditors in arrears. - Other off-site activities: market monitoring, information exchange with supervisors and law enforcement, meetings with head office personnel and regulators. - Assessment recorded: Largely compliant (Principle 16), Compliant (Principle 17), and details provided on off-site data collection (Principle 18). - Resourcing and process comments: - GFSC has developed a comprehensive on/off-site supervisory manual, standardized assessment/reporting processes, a portfolio approach assigning staff responsibility, a bank risk rating system with senior officer panel review, detailed questionnaires for focused visitations, statistical comparison tools and standardized reporting. - Despite progress, assessors expressed concern that Banking Division may face a resource deficit to meet planned expansion of on-site safety and soundness visitations; estimated person-day extrapolations suggest a significant shortfall. - Recommendations included accelerating finalization of on-site examination methodology, focused training programs, and formalizing quality control/assurance processes. *Source: cr03365 — IMF report summarizing the Banking Supervision (Bailiwick of Guernsey) Law and GFSC supervisory practices.* ### Section 1(a) of the Banking Supervision (Accounts) Rules, 1994 state that audited accounts of ### cr03365 - Section 1(a) of the Banking Supervision (Accounts) Rules, 1994 state that audited accounts of ### Audited accounts: required contents and standards - The Banking Supervision (Accounts) Rules, 1994 require audited accounts of Bailiwick of Guernsey incorporated banks to be “containing at least the information (including notes and statements) set out in guidelines issued from time to time by the Commission.” - GFSC guidelines provide proforma financial statements detailing how audited accounts should be produced and include guidance on producing consolidated accounts. - Guidance issued under s1(a) requires audited accounts to: - include a director’s report; and - state that the accounts show a true and fair view and that the audit was conducted “in accordance with Auditing Standards issued by the Auditing Practices Board” (GAAS). - Guidance issued under s1(a) requires valuation of investments as follows: - “Debt securities are held for long term investment and included at cost adjusted for amortization of premium and accretion of discounts. Other investments held for the long term are included at cost. Other instruments are included in the balance sheet at market value with any resultant profits and losses included in the profit and loss account.” - Profit and loss accounts are required to include provisions for loan losses. - The GFSC will consider requests to follow other internationally accepted accounting standards (e.g., IAS) if it receives a request from a banking group. ### Submission timelines, public availability, and enforcement - The Banking Supervision (Accounts) Rules, 1994 require that accounts for Bailiwick of Guernsey incorporated banks be submitted to the GFSC within 90 days of the bank’s fiscal year-end. - Section 31 of the BSL requires audited accounts to be made publicly available. - The Rules state: - audited accounts must be drawn up to dates at intervals not exceeding twelve months unless other arrangements are agreed in writing with the Commission; - not later than three months after each date to which audited accounts are drawn up, a copy shall be delivered to the Commission and either those audited accounts or abridged accounts shall be available to any person on request; - the auditor’s report shall include statements on the basis of the auditor’s opinion, whether accounts show a true and fair view and have been properly prepared in accordance with applicable accounting standards and the Law, and, for abridged accounts, a verbatim copy of the auditor’s report on the audited accounts. - For licensed institutions whose principal place of business is outside the Bailiwick, the latest audited accounts of the main group must be delivered to the Commission not later than one month following publication and be available to any person on request. - The GFSC may introduce Rules under s31(2) to prescribe the form and timing of accounts, but no such rules have been introduced to date. - The GFSC has not introduced a program that would include the possibility of fines being levied against banks for incomplete, inaccurate, or late regulatory returns. ### Prudential and routine reporting, verification, and data collection - Forms and submission deadlines: - Forms BSL/1 and MA/1 must be submitted within 28 calendar days of the reporting date. - Form LOC/1 must be submitted two months from the reporting date. - Quarterly prudential returns are verified annually in arrears on a sample basis by external audit; returns (form BSL/1) are to be verified against the bank’s books and records. - Standardized forms are used for regulatory reporting requirements. - Quarterly, monthly, and other returns are collected from all banks at the same dates representing the same periods. - A five-quarterly comparison of prudential returns is carried out and the GFSC uses a system that flags movements in figures over a percentage (e.g., 10 percent) from quarter to quarter. - Inaccurate returns must be re-submitted if errors are significant; deliberate misreporting or persistent inaccuracy could breach minimum licensing criteria. - The amended BSL requires banks to review, at least annually, whether they have effective control systems to ensure: i. all returns and documents required under the BSL are duly submitted; and ii. inaccuracies are identified, corrected and reported to the GFSC expeditiously. - If the annual review identifies shortcomings, the bank must immediately report them to the GFSC together with details of proposed remedial steps. - Returns are required to be signed by a person considered senior enough to commit the bank. ### Validation of supervisory information and use of external auditors - Principle 19 (Validation of Supervisory Information): Banking supervisors must have means of independent validation of supervisory information either through on-site examinations or use of external auditors. - The Banking Division’s Procedures Manual details the process for planning on-site visits, including scheduling, pre-visit analysis, evidence gathering, scoring, post-visit analysis and re-visits. - Proforma questionnaires are used to ensure consistent methodology and quality control; the Director and/or Deputy Director review on-site findings and proposed correspondence. - Supervisory work carried out by external auditors on behalf of the GFSC is conducted under detailed GFSC guidance and scope; only international audit firms with an appropriately skilled workforce in Guernsey will be used. - Historical guidance and communications to auditors: - July 1996: Guidance issued requiring auditors to report to the GFSC on upstreaming of information from banks to parent organizations. - February 1997 (updated April 1998): Guidance on Verification of Prudential Returns for auditors. - March 1997: Guidance on Trilateral Discussions issued to auditors covering meetings between a bank and the GFSC and other auditor-related policies. - The GFSC requires reports by auditors to be prepared, for Guernsey subsidiaries, “using the same accounting policies as those applied in the current period of statutory accounts.” - Assessment: Largely compliant. - Comments: - GFSC obtains reasonable assurance through independent audit opinions confirming accuracy of regulatory reports and uses an external auditors’ letter indicating whether anything has come to their attention suggesting noncompliance with sections of the Code of Practice. - GFSC has not established a process to monitor the quality of work carried out by external auditors (e.g., review of audit working papers) to confirm the degree of reliance placed on external audit work. - Representatives of the Guernsey Association of Chartered and Certified Accountants indicated willingness to work with the GFSC to develop a methodology for obtaining necessary quality assurance. - The mission recommends regular bilateral or trilateral meetings with external auditors to discuss systemic/industry trends and bank- or topic-specific supervisory expectations. ### Consolidated supervision and cross-border coordination - Principle 20 (Consolidated Supervision): Supervisors must be able to supervise the banking group on a consolidated basis. - GFSC practices: - All activities of banks are discussed during annual prudential meetings. - Any investment, insurance or fiduciary business carried on by banks in Guernsey requires a license from the GFSC and is regulated by the GFSC. - The Banking Division coordinates closely with other GFSC Divisions to monitor risks from nonbanking activities (including trust business carried out within a bank). - Risks of nonbanking activities carried out by the parent of a bank and non-Guernsey subsidiaries are considered for reputational and other group risks; where activities of such subsidiaries are significant, accounts of subsidiaries are required and Guernsey management are expected to know the risks. - Bilateral discussions with overseas regulators are held where subsidiaries are overseas; on-site visits to overseas nonbank subsidiaries are carried out periodically. - Under guidance issued under s1(a) of the Accounts Rules, banks are required to produce annual audited consolidated financial statements including consolidated balance sheet, consolidated cash flow statement, consolidated profit and loss account, consolidated statement of total recognized gains and losses and related notes. - The GFSC measures capital on a consolidated basis and treats significant subsidiary exposures as large investment exposures of the bank. - The GFSC may impose license conditions or, under the amended BSL (S9(4)(h)), prohibit, restrict or impose limitations on carrying on deposit-taking business without imposing a license condition. - The GFSC has established MOUs with 12 regulatory bodies and adopts a policy to enter into an MOU when requested by another regulator; a MOU is not a prerequisite for exchanging information with a “home” or “host” regulator. - The mission recommended that the GFSC obtain on an annual basis confirmation from the “home” regulator that nothing has come to their attention that could impact the operations of the regulated bank; the confirmation format could parallel that requested as part of licensing criteria. - Assessment: Compliant. ### Legal provisions on information, auditor communications and confidentiality - GFSC powers and auditor protections: - Section 25 of the BSL grants the GFSC power to obtain information and documents as required; Section 26 provides the right of entry to obtain information and documents. - Sections 25(5) to 25(8) provide additional guidance on requiring information or documents. - The power to appoint reporting accountants is detailed in s5(5) and s25(1) of the BSL; roles and responsibilities are laid out by GFSC in a scope provided prior to examination. - Section 33(1) of the BSL protects auditors communicating in good faith to the Commission and states no auditor duty is contravened by such communication. - Banking Supervision (Bailiwick of Guernsey) Regulations, 1994 require auditors to communicate to the Commission where they have reasonable cause to believe that licensing minimum criteria (Schedule 3) have not been fulfilled or where circumstances are likely to be of material relevance to the Commission’s functions. - Confidentiality and penalties: - s43 of the BSL states that persons who receive information relating to the business or affairs of any person shall not disclose the information without consent; contravention is an offense. - Penalties for breach of s43 are, on summary conviction, a fine or imprisonment not exceeding three months or both; on conviction on indictment, a fine, imprisonment not exceeding two years or both. *Source: Banking Supervision (Accounts) Rules, 1994 and GFSC guidance as summarized in cr03365.* ### Section 17A of the amended BSL provides the GFSC with powers to prohibit an individual ### Section 17A of the amended BSL provides the GFSC with powers to prohibit an individual ### Fit and proper, management responsibility, and disclosure - Section 17A of the amended BSL provides the GFSC with powers to prohibit an individual from performing any function in connection with a bank if it considers that a person is not a fit and proper person to perform that function. - The amended BSL (s36C) makes management explicitly responsible for all of this. - As all Guernsey banks are owned 100 percent by banks or holding companies in banking groups, the market price of the shares in Guernsey banks is not relevant or a consideration. - Audited accounts of Guernsey banks include (inter alia) all the requirements of the accounting standard on “Derivatives and other Financial Instruments: Disclosures,” namely FRS 13. - Audited accounts are drawn up to GAAS and are to be made available in full (or in an abridged form prescribed by the GFSC) to the public upon request. - Assessment for these provisions: Compliant. - Comment: The GFSC requires banks to publish their risk management policies and practices in the detailed pro forma annual statements. Ways should be explored to enhance synergies between the GFSC supervisory process and the operations of the external auditors, especially given the tight labor market situation of the Bailiwick. ### Remedial measures, enforcement powers and procedures (Principle 22) - Principle 22 summary: Banking supervisors must have adequate supervisory measures to bring about timely corrective action, including the ability to revoke the banking license in extreme circumstances. - Description of GFSC remedial actions: - Oral and written communication with bank management is a common form of remedial action. - GFSC powers under sections 9 and 10 of the BSL to impose conditions on licenses and to revoke a banking license. - Conditions may be imposed “at any time” after granting a banking license and may be “such conditions in respect of the license as it (the Commission) thinks fit” (s9(1)). The GFSC may vary or rescind any condition. - Examples of conditions available under s9(4) of the BSL (inter alia): - (a) require the institution to take certain steps, to refrain from adopting or pursuing a particular course of action or to restrict the scope of its business in a particular way; - (b) impose limitations on the acceptance of deposits, the granting of credit or the making of investments; - (c) prohibit the institution from soliciting deposits, either generally or from persons who are not already depositors; - (d) prohibit the institution from entering into any other transaction or class of transactions; - (e) require the removal of any director, controller or manager; - (f) specify requirements to be fulfilled otherwise than by action taken by the institution; and - (g) require the furnishing to the Commission, at such times, intervals and places as may be specified by the Commission, of such information and documents, and of accounts of such description, in such form and containing such information and particulars, as may be so specified. - Court injunctions under s35 of the BSL (inter alia): - The Court may grant an injunction on such terms and conditions as it thinks fit, including powers for appointment of a receiver or other person to exercise powers necessary to ensure assets subject to the injunction are not disposed of, including powers to locate, ascertain, hold, gather in, sequester or take possession or control of any such assets. - Additional powers and procedures: - GFSC may withhold approvals of controllers/shareholders under s14 and s15 of the BSL and of use of the words “bank,” “banker” etc., under s37. - Time scales are placed on remedial actions; electronic diary notes and periodic file reviews are used to follow up implementation. - Any institution which contravenes any condition of a banking license is guilty of an offense under the BSL (s9(5). - In serving notice to revoke a banking license the GFSC may give directions “as appear to the Commission to be desirable in the interests of the institution’s depositors or potential depositors, whether for the purpose of safeguarding its assets or otherwise.” - In refusing or revoking a banking license the GFSC must give written notice to the bank of the intention to refuse or revoke a license. - Any contravention of a direction is an offense under BSL. - GFSC may obtain information and documents (s25), appoint inspectors (s27), require a person to furnish information/documents and attend a meeting (s28), apply to the Court to have unauthorized deposits and profits repaid (s34), issue injunctions to restrain unlawful deposit taking (s35), and wind up a Guernsey or Alderney company under certain circumstances (s36). - The GFSC may impose license conditions to “require the removal of any director, controller or manager” (s9(4)(e)) and directions when serving notice to refuse or revoke a bank’s license may also “require the removal of any director, controller or manager” (s12(2)(e)). - Specific injunction power under s35(2) of the BSL: - If the Court is satisfied that a person may have been guilty of a contravention mentioned in subsection (1)(a), the Court may grant an injunction restraining him or any of his associates or controllers from disposing of or otherwise dealing with any assets or class or description of assets while the suspected contravention is investigated. - Enforcement record and timeliness: - This range of actions has been seen, over the 15 years of the GFSC existence, to be adequate and effective in enforcement. - It is an implicit requirement of the law that the GFSC should carry out its actions without unduly delaying appropriate corrective actions. This has been confirmed in writing by the Attorney General’s office. - Assessment for remedial measures: Compliant. - Comments: - Legal provisions enable GFSC regulatory action against a noncompliant bank. - GFSC has taken the policy decision to introduce powers to fine and powers to publicly report institutions or individuals found not in compliance. - Given the size of the constituency and possible reputational repercussions, public reporting/fines may be impracticable. - The revision of the Companies (Guernsey) Law, 1994 and the proposed amendment to introduce administrative provisions (administration order) is of high importance: - An administration order would direct that the affairs, business and assets of the company be managed by an administrator appointed by the court for the period of the order. - The GFSC would have the power to apply for an administration order and be entitled to receive notice of any such application made by another person such as a creditor. - On the GFSC’s application the GFSC would nominate the person to be appointed as administrator; on another person’s application the GFSC would be entitled to object to the identity of the proposed appointee. - Purpose of an administration order could include the survival of the company as a going concern or a more advantageous realization of its assets than on a winding up. - During administration, creditors or others could not force liquidation or receivership, take or continue legal proceedings against the company, or repossess goods. - The Banking Division agrees such a provision is invaluable. ### Globally consolidated supervision (Principle 23) - Principle 23 summary: Supervisors must practice global consolidated supervision over internationally active banking organizations. - GFSC authority and powers: - GFSC has authority to supervise the overseas activities of locally incorporated banks. - Powers to obtain adequate information are provided under s25 of the BSL and extend to overseas subsidiaries in subsections 5 to 8. - Relevant BSL provisions (s25 subsections summarized): - (5) Commission may exercise powers in relation to any body corporate which is or has been a holding company, subsidiary, related company, or where a shareholder controller alone or with associates controls more than 50 percent of voting power. - (6) Definition of “related company” for the Law’s purposes. - (7) Definition of “qualifying capital interest.” - (8) Presumption where institution holds a qualifying capital interest equal to 20 percent or more of nominal value of relevant shares. - Practice and oversight: - GFSC obtains information on and visits overseas subsidiaries of Guernsey incorporated banks. - There are only two active overseas subsidiaries of Guernsey banks; those companies were subject to visits in Jersey and Dublin in 2002 and are a trust company and a fund custodian. - Visits were carried out with GFSC staff from the Fiduciary Services and Investment Business Divisions respectively. - There are no banking subsidiaries of Guernsey banks; there are branches in Jersey which were subject to on-site visits by the GFSC in 2002. No other branches exist outside the Bailiwick. - Overseas on-site visits consider information reporting, compliance, internal controls and oversight. - Prudential meetings and on-site visits in Guernsey discuss oversight of foreign branches and subsidiaries. - Overseas operations are also subject to oversight by the host supervisor and external audit. - GFSC conducts bilateral meetings with the Jersey Financial Services Commission regarding these branches and subsidiaries. - For active overseas subsidiaries, GFSC ensures sufficient management information is provided to the Guernsey bank’s management; GFSC obtains information on senior management and satisfies itself they are fit and proper. - Active subsidiaries are required to submit copies of their audited accounts to the GFSC. - License conditions may be imposed “to restrict the scope of its business in a particular way” (s9(4)(a)); this could include closure of a subsidiary or branch. - All banks have the license condition: “You should not establish a sub-branch outside the Bailiwick or invest in any company, which after such investment would be a subsidiary, associate or joint venture without the prior consent in writing of the Commission.” - Assessment for globally consolidated supervision: Compliant. - Comments: (no additional comments provided in source). ### Host country supervision (Principle 24) - Principle 24 summary: Consolidated supervision requires contact and information exchange with host country supervisory authorities. - Jurisdictional scope and relationships: - Only jurisdictions where Guernsey banks have significant overseas operations are Jersey and the Republic of Ireland. - GFSC reportedly has a close and good working relationship with the Jersey Financial Services Commission. - A Memorandum of Understanding (MOU) was agreed with the Jersey Commission during October 1998. - MOU paragraph 9: “The main findings of on-site visits made by the GFSC or the JFSC to institutions in the others jurisdictions will be made available in summary form to the other authority after the conclusion of the visit.” - A good close working relationship also exists with the Irish regulators; a meeting was held with them in Dublin in 2002. - Licensing policy and information flows: - All banks have the license condition: “should not establish a sub-branch outside the Bailiwick or invest in any company, which after such investment would be a subsidiary, associate or joint venture without prior consent in writing of the Commission.” - GFSC would not give prior consent if proposed jurisdiction laws or regulations prohibit flows of information deemed necessary for adequate supervision. - Bilateral meetings are regularly held with host (and home) country supervisors concerning specific offices, the overall supervisory framework for the banking group, and significant problems if appropriate. - Assessment for host country supervision: Compliant. ### Supervision over foreign banks’ establishments (Principle 25) - Principle 25 summary: Local operations of foreign banks must meet the same high standards as domestic institutions and supervisors must be able to share information with home country supervisors. - Description and policy: - There are no domestic banks in Guernsey; all Guernsey licensed banks are supervised in the same manner. - As policy, a letter is always sent to the home country supervisor before licensing a bank in Guernsey requiring the home country supervisor to confirm (inter alia): - (a) “that you have no objection to the establishment of the branch / subsidiary in Guernsey;” (a license is never granted until the home country supervisor has confirmed it has no objection). - (c) “that in supervising the bank you will be taking into account its transactions in Guernsey and satisfying yourselves as to the overall prudential soundness of the group on a consolidated basis.” (a license is never granted prior to receiving a satisfactory response from the home supervisor). - Assessment for supervision over foreign banks’ establishments: Compliant. ### Compliance summary and recommended actions (selected) - The assessment matrix lists Core Principles 22, 23, 24, and 25 as Compliant. - Selected recommended actions relevant to the above material: - Explore increased synergies with external auditors. - The GFSC Law should establish safety, soundness, and integrity of the financial system as the objectives of the GFSC and eliminate “development” as one of the GFSC functions. The GFSC should be able to continue support of Training Agency activities consistent with the revised mandate. - The Advisory and Finance Committee’s power to give guidance and directions to the GFSC has the potential to intrude on operational independence; it is recommended that the law be amended to remove these powers. - An in-depth analysis of supervisory objectives and means to fulfill them should be made; the existing Banking Division Manpower Plan for 2003–2007 should be revisited accordingly. - Extend current on-site credit risk assessments to include additional emphasis on credit quality and provisioning levels. - Confirm formalization and distribution of Corporate Governance Guideline. - Prioritize completion of the examination methodology to allow full scope safety and soundness visitations supplemented by more defined quality control procedures; a dedicated training program for Banking Division staff would be beneficial. *Source: IMF staff assessment and description of GFSC powers and practices under the amended Banking Supervision Law (BSL), including sections 9, 10, 14, 15, 17A, 25, 27, 28, 34, 35, 36 and s36C, with assessments of Basel Core Principles 22–25.* ### 11. The authorities welcome the IMF’s assessment and confirmation that the Bailiwick of ### 11. The authorities welcome the IMF’s assessment and confirmation that the Bailiwick of Guernsey has achieved a high level of compliance with the Basel Committee Core Principles on Banking Supervision. ### Objectives (CP 1.1) - The GFSC currently has a responsibility under the Financial Services Commission (Bailiwick of Guernsey) Law, 1987 to develop and effectively supervise finance business in Guernsey. - The IMF recommended that the GFSC be provided with a statutory obligation for the safety, soundness and integrity of the financial system in place of its responsibility to develop the finance sector. - The States of Guernsey Advisory and Finance Committee and the GFSC: - Agree that formalising the GFSC’s approach in this manner better expresses the GFSC’s current and continuing objectives. - Expect this change to enhance the reputation and contribute to the continuing development of the financial system in Guernsey. - Propose to seek amendment of the law at an early stage. ### Independence (CP 1.2) - The IMF concluded that the Advisory and Finance Committee’s ability under the Financial Services Commission (Bailiwick of Guernsey) Law, 1987 to give guidance and directions of a general character to the GFSC has not interfered with the GFSC’s capacity to carry out its functions. - The Committee has never unilaterally provided guidance or directions to the GFSC. - The law permits the Committee to give the GFSC guidance and directions only of general character; both the Committee and the GFSC consider this provides proper accountability to the senior political body of Guernsey’s parliament. - The Committee and the GFSC consider the ability to give guidance and directions of general character to be in compliance with the international standard on regulatory independence. ### Staff resources and organisational action - GFSC staff resources have continued to grow in line with the size of the finance sector and GFSC responsibilities. - IMF recommendation: the GFSC’s Banking Division should carry out a “zero based” analysis of its staff needs based on the expected number of banks. - Action taken: - The “zero based” analysis has been completed. - An additional analyst has been recruited since the assessment to assist the Division in a systematic programme of corporate governance and full scope safety and soundness on-site visits to banks. ### Loan Evaluation and Loan Loss Provisioning (CP 8) - Following the Banking Supervision (Bailiwick of Guernsey) (Amendment) Law, 2003: - It is a legal requirement for all Guernsey banks to review, at least annually, their individual loans, asset classification and loss provisioning (including on and off balance sheet exposures). - If the review identifies shortcomings, the bank must report findings to the GFSC with details of how it proposes to address the shortcomings. - GFSC policy change: scope of on-site credit assessments of banks was extended in early 2003 to give additional emphasis to credit quality and provisioning levels. ### On-Site and Off-Site Supervision (CP 13 and 16) - The GFSC’s Banking Division is planning full safety and soundness on-site visits for 2004. - Additional staff training in this field will continue. - The visits will include techniques and practices to confirm the existence and application of effective and comprehensive risk management processes and control culture. - GFSC will hold more frequent meetings with external bank auditors and explore scope for increasing synergies. ### Internal Control and Audit (CP 14) - Following the Banking Supervision (Bailiwick of Guernsey) (Amendment) Law, 2003: - Each Guernsey bank must review, at least annually, the responsibilities and conduct of the bank’s board of directors with respect to corporate governance principles. - If reviews identify shortcomings, banks must report findings to the GFSC with remediation plans. - GFSC guidance notes entitled “Guidelines for Corporate Governance and Risk Management” are being revised in light of consultation comments and will be formally issued as soon as possible after consideration of consultation feedback. ### Validation of Supervisory Information (CP 19) - GFSC will hold meetings with the Guernsey Society of Chartered and Certified Accountants to explore the possibility of GFSC access to auditors’ working papers for verification of quarterly returns and preparation of audited accounts. - Where necessary, GFSC will consider bilateral and trilateral meetings with auditors. ### AML/CFT assessment — Information and methodology - A detailed assessment of Guernsey’s AML/CFT regime was prepared by a team including IMF staff and an expert not under IMF supervision. - Assessment covered AML/CFT laws, regulations, supervisory and regulatory systems for prudentially regulated financial institutions and trust and company service providers in transition toward full prudential regulation. - The expert not under IMF supervision reviewed criminal law enforcement capacity and implementation. - Assessment was based in part on discussions with: the GFSC; the Bailiff’s Chambers; Attorney General’s Chambers; Customs and Excise Department; Guernsey Police; the Financial Intelligence Service (FIS); and meetings with banks, investment management companies, fiduciaries, insurance companies, lawyers, and representative associations. - Information sources included a large number of laws and regulations, guidance notes, position papers and draft laws (for example, the 1995 Law, 1998 Law, 2001 Law, POC Law, Regulations, CJIC Law, DT Law, Banking Law, Guidance Notes, Position Paper, Fiduciary Law, Insurance Business Law, Commission Law, Companies Law, DP Law, Policy Letter dated September 26, 2002, Draft Corruption Law, and Draft Miscellaneous Provisions Law). ### Definition of Financial Institution (FI) for assessment purposes - For this assessment, FI is defined as in the Schedule to the POC Law and includes, verbatim: - Any person or body carrying on or providing services in or from within the Bailiwick of Guernsey in relation to the business of: (i) lending (including, but not limited to, consumer credit, mortgage credit, factoring with or without recourse, financing of commercial transactions (including forfeiting) and advancing loans against checks); (ii) financial leasing; (iii) money service business including money or value transmission services, currency exchange (bureaux de change) and/or cheque cashing; (iv) provision of services for, and/or the facilitation of, the transmission of money or value through an informal money or value transfer system or network; (v) issuing, redeeming, management and/or administration of means of payment (for example, credit, charge and debit cards, checks, travelers’ checks, money orders and bankers’ drafts); (vi) providing financial guarantees and/or commitments; (vii) trading for account of customers (spot, forward, swaps, futures, options etc) in: money market instruments (for example checks, bills, certificates of deposit); foreign exchange; exchange, interest rate and/or index instruments; commodity futures, transferable securities and/or other negotiable instruments and/or financial assets, including bullion; (viii) participating in securities issues, including underwriting and/or placement as agent (whether publicly or privately) and/or the provision of services related to such issues; (ix) settlement and/or clearing services for financial assets including securities, derivative products and/or other negotiable instruments; (x) providing advice to undertakings on capital structure, industrial strategy and/or related questions and/or advice as well as services relating to mergers and/or the purchase of undertakings; (xi) money broking/changing; (xii) providing individual and/or collective portfolio management services and/or advice; (xiii) providing safe custody services; (xiv) providing the services of safekeeping and/or administration of cash or liquid securities on behalf of clients; (xv) credit unions; and/or (xvi) accepting repayable funds other than deposits. - ‘Deposit taking’ as defined in Section 3 of the Banking Law. - ‘Controlled investment business’ as defined in Section 1, and Schedules 1 and 2 of the POI Law. - ‘Insurance business’ as defined in Section 2 and Schedule 1 of the Insurance Business Law and Sections 1 and 2 of the Insurance Managers and Intermediaries Law. - ‘Regulated activities’ as defined in Section 2 of the Fiduciary Law. - Section 1 above applies to lawyers, accountants and actuaries providing non-incidental financial services. ### Main institutions in AML/CFT framework - Financial Intelligence Service (FIS): independent unit of the Guernsey Police and Customs and Excise Department; FIU for Guernsey; jointly staffed. - Guernsey Police and Customs and Excise Department: investigate criminal activities. - Attorney General’s Chambers: prosecutes ML and FT, defends Guernsey authorities against suit, advises the States Assembly and government on legal issues. - GFSC: financial regulator responsible for monitoring compliance for FIs regulated by it. - Advisory and Finance Committee of the States Assembly (the “Committee”): issues regulations on AML/CFT and other matters. ### Overview of AML/CFT measures and implementation findings - Strengths: - Developed legal and institutional framework, particularly for confiscation of proceeds, exchange of information, and international cooperation. - Broad regulation of banking, investment companies, insurance business, and fiduciaries. - GFSC has devoted appropriate resources to AML/CFT; detailed Guidance Notes developed; on- and off-site surveillance program established. - Strong relationships among GFSC, FIS, Attorney General’s Chambers and prudentially regulated financial institutions. - Visits to FIs revealed high awareness and generally appropriate AML/CFT policies and procedures. - Shortcomings: - The legal and institutional framework falls short in a number of areas to be detailed in the assessment. - Areas where implementation could be strengthened are identified in the detailed assessment. ### Detailed assessment methodology and specific findings on criminal justice measures - The detailed assessment used the October 11, 2002 version of the FATF 40+8 Methodology. - Criminalization of ML and FT (compliance with criteria 1–6): - Treaties and conventions: - Vienna Convention ratified on Guernsey’s behalf by the United Kingdom on 9 April 2002. - Council of Europe Convention on Laundering, Search and Seizure extended to Guernsey from January 2003. - Guernsey requested UK ratification of the Convention for the Suppression of the Financing of Terrorism by letter dated 15 August 2002; application is with the Foreign and Commonwealth Office. - All necessary legislation to ratify the Convention has been enacted. - Palermo Convention: Guernsey laws meet most provisions but additional implementing legislation will be needed prior to ratification, specifically: - Current law concerning corruption not wide enough; States of Guernsey agreed in principle to enact a comprehensive anti-corruption law expected to be laid before it in the autumn of 2003; a Bill has been drafted and comments received from the Home Office; authorities indicated the Bill is expected to become law in early 2004. - To meet Protocol on Trafficking Persons Article 3, provisions similar to sections 30 and 31 of the English Sexual Offenses Act 1956 will be necessary. - Legislation might be required to implement the Convention Article on Extradition and the Protocol on Trafficking in Human Beings. - Authorities advised that legislation will be enacted as required to implement the Palermo Convention. - Money laundering and terrorist financing criminalization: - Drug trafficking money laundering criminalized under sections 57–59 of the DT Law. - Money laundering for terrorism criminalized by section 11 of the Terrorism Law. - Money laundering for other crimes criminalized by sections 38–40 of the POC Law. - Financing of terrorism criminalized by sections 8–10 of the Terrorism Law. - Offenses extend to proceeds of all serious offenses, including financing terrorism, and are consistent with the Vienna and Palermo Conventions and FATF Recommendations. - The definition of financing of terrorism is consistent with the Convention for the Suppression of the Financing of Terrorism. - In Guernsey courts, the intentional element of ML and FT may be inferred from the totality of evidence submitted to the court. - The ML offense extends to persons who have committed ML as well as both the laundering and the predicate offense (sections 38(1) of the POC Law and section 57(1) of the DT Law). - It is not necessary that a person be convicted of a predicate offense to establish that assets were the proceeds of a predicate offense (Sections 38–40 of the POC Law, sections 57–59 of the DT Law and Section 11 of the Terrorism Law). - All serious crimes are predicate offenses for money laundering, including the financing of terrorism (Section 1 of the POC Law, Section 1 of the DT law, Section 1 of the Terrorism Law). - The ML offense extends to any property which represents the proceeds of criminal conduct (Sections 38(1)(a), 38(2), 39(2) and 40(1) of the POC Law; sections 57(1)(a), 57(2), 58(2) and 59(1) of the DT Law; and sections 7(2)(a) and 11(1) of the Terrorism Law), with reference to property which “in whole or in part directly or indirectly represents...”. - Predicate offenses for ML extend to conduct that occurred in another country which would have constituted such an offense had it occurred domestically (Section 1(b) of the POC Law, section 1 of the DT Law and section 1(4) of the Terrorism Law). *International Monetary Fund (IMF) assessment.* ### 3. FT has been criminalized on the basis of the Convention for the Suppression of the Financing of Terrorism ### 3. FT has been criminalized on the basis of the Convention for the Suppression of the Financing of Terrorism ### Criminalization of terrorist financing (FT) and money laundering (ML) - FT is criminalized on the basis of the Convention for the Suppression of the Financing of Terrorism (Sections 8, 9 & 10 of the Terrorism Law). - The predicate offense for FT extends to terrorists or terrorist organizations located in another country and to conduct that occurred in another country (Section 1 of the Terrorism Law). - ML offenses apply to individuals and legal entities that engage in ML activities (Section 49(4)(d) of the POC Law). - FT extends to those who should have reasonable cause to suspect that money or other property may be used in terrorism activities (Sections 8(3) & 10(b) of the Terrorism Law). - In Guernsey, money laundering and terrorist financing offenses extend to all entities; Section 2 of the Interpretation Law states that ‘person’ includes a body corporate. - Sections incorporating an objective test include: Section 38(2) of the POC Law, Section 57(2) of the DT Law and Section 11 of the Terrorism Law; failure to disclose a suspicion where a reasonable person would have suspected and disclosed constitutes an offense. - Full compliance with FATF Recommendations 1, 4, 5, SR I, SR II will be achieved when the Convention for the Suppression of the Financing of Terrorism is extended to Guernsey. ### Mens rea, evidential approach and scope - Guernsey authorities indicate that in Guernsey’s courts the intentional element of ML and FT may be inferred from the totality of the evidence submitted to the court. - All ML and FT offenses apply at least to those knowingly engaged in money laundering or terrorist financing; objective liability applies where reasonable grounds for suspicion exist but are not disclosed. - (See response to criterion 64 referenced in the assessment.) ### Law enforcement capacity and organizational arrangements - Guernsey’s process is supervised by the offices of the Attorney General and Solicitor General and prosecuted by experienced personnel, some with prior Crown Prosecution Service experience. - Coordination of financial crime is directed by a Service Authority staffed by Senior Commanders of Police and Customs and Excise. - Authorized establishments: - Total authorized establishment of the police force: 177. - Total number of Customs and Excise Law Enforcement officers: 51. - Guernsey Commercial Fraud and External Affairs Department staffing and mandate: - Staffed by a D/Inspector, D/Sergeant and 2 D/Constables with part-time administrative support. - Mandate: assist external law enforcement agencies to obtain evidence in relation to financial crime within the Bailiwick; investigate serious and complex fraud and financial crime; investigate, identify and restrain proceeds of crime and drug trafficking. - Customs and Excise Fraud and International Team staffing and mandate: - Staffed by a senior investigating officer, two investigating officers, an office manager/analyst with secretarial support. - Mandate: investigate Customs and Excise related fraud and restrain proceeds of crime and drug trafficking; assist external law enforcement agencies; conduct and support local money laundering investigations; investigate suspected breaches of UN and EU sanctions. - Financial Intelligence Service (FIS) staffing and status: - Headed by a director; staffed equally by Police and Customs and Excise. - Current complement: two Senior Intelligence Officers, four Intelligence Officers, a Financial Analyst, an Office Manager and an Administrative Assistant. - At the time of the assessment two of the Intelligence Officer posts and the positions of Financial Analyst and Administrative Assistant were vacant; the FIS was advertising Analyst and Administrative positions (these posts have now been filled). The vacant Intelligence Officer positions were expected to be filled in early 2004. - The FIS aims to: provide quality financial crime intelligence (particularly ML); ensure full international cooperation; enhance coordination and development of financial crime intelligence within Guernsey; gather, collate and evaluate all Bailiwick financial crime intelligence (i.e. STRs); lawfully and properly disseminate financial crime intelligence; provide strategic and tactical intelligence with regard to financial crime. - Analysis: Guernsey falls marginally short of having an adequate number of law enforcement personnel tasked to effectively combat ML and FT; there is a shortage of personnel in the FIS at the time of the assessment. - Training: Judiciary, law officers and Crown Advocates are familiar with ML, production and freezing orders; police and customs financial investigators receive UK training and must be accredited as “Financial Investigators” by UK Home Office’ Center of Excellence. ### Confiscation, restraint and forfeiture framework - Laws provide for confiscation of laundered property, proceeds and instrumentalities used in or intended for use in Guernsey for any ML offense (Sections 2 of the POC and DT Laws). - Forfeiture of property that is the proceeds of or intended for use in FT is provided for (Section 18 of the Terrorism Law). - Parts I of the POC Law and the DT Law provide for confiscation in criminal cases of proceeds of crime and include any income gains from the proceeds of crime. - Enforcement of confiscation orders made in designated countries is provided for; Guernsey designates countries designated by the United Kingdom under the Criminal Justice Act 1988 and the Drug Trafficking Act 1994. - Laws do not provide for confiscation of property of equivalent value. - Instrumentalities of crime may be forfeited by common law and statutory powers (e.g., section 26 of the Misuse of Drugs Law 1974). - Forfeiture orders made elsewhere may be enforced locally under section 8 of the CJIC Law. - Terrorism Law provisions: - Section 18 and schedule 2 provide for forfeiture of property connected with terrorism; paragraphs 8–10 provide for enforcement of orders made elsewhere. - Section 18 and schedule 12, paragraph 3 allow restraint orders ex parte where proceedings have been instituted or an investigation commenced and a forfeiture order may be made. - Sections 20–29 and schedule 4 provide for freezing orders by the Committee if criteria met. - Article 6 of the Terrorism Order and Article 8 of the Al-Qa’ida Order allow freezing orders by the Attorney General. - Receivership and enforcement: - POC and DT Laws provide for appointment of a receiver for all property owned by a defendant and sale of such property to satisfy a confiscation order (POC and DT Laws Sections 5, 6, 29–31). - Terrorism Law lacks comparable provisions for receivership for all defendant property. - Section 29 of both the POC Law and the DT Law and Section 18 and Schedule 2 of the Terrorism Law empower the Royal Court to appoint a receiver to gather and sell a convicted person's assets to satisfy a confiscation order. - Civil forfeiture: - It is currently not possible to apply for confiscation orders using civil process; consideration is being given to introducing civil forfeiture powers based on the UK Proceeds of Crime Act or Republic of Ireland equivalent. - A victim may seek return of assets and damages through civil courts. - Production orders and warrants: - Production Orders and warrants to identify and trace property are available (Sections 45 and 46 of the POC Law; Sections 63 and 64 of the DT Law; Sections 36 and schedule 5, section 37 and schedule 6 and section 39 and schedule 7 of the Terrorism Law). - Section 37 and schedule 5 and section 39 and schedule 7 of the Terrorism Law provide for obtaining information about bank accounts and monitoring accounts respectively. - Police and Customs Officers may apply to the Court for orders to identify and trace property where sufficient grounds to suspect and public interest exist; officers have no discovery power outside judicial process. - Protections for bona fide third parties and calculation limits: - Protections for bona fide third parties in restraint orders (Section 25(5)(c) of the POC Law). - Section 2(6) of the POC Law allows the Court to limit confiscation if a victim has instituted or intends to institute civil proceedings. - When a restraint order is made under POC, DT or Terrorism Laws notice must be given to persons affected; affected persons may apply for discharge or variation (Sections 25(5)(c) and (7) of POC and DT Laws; section 18 and schedule 2 paragraphs 4(1)(c) and 4(4) of the Terrorism Law). - Only assets held by a defendant or gifts made during the previous six years may be considered when calculating the amount of a confiscation order (POC Law Section 8(1)(a); DT Law Section 8(1)(a)). - Section 31(4) of the POC and DT Laws requires a receiver enforcing a confiscation order to exercise powers to allow any person other than the defendant or recipient of a gift to retain or recover value of property held by him. - Contract voidance: - Authorities consider Guernsey courts likely to declare void any contract whose purpose was to frustrate recovery of proceeds of crime, making the value liable to inclusion in confiscation orders. - Statistics and records: - The FIS keeps statistics on amounts of property frozen, seized and confiscated relating to proceeds of crime, drug trafficking, ML and financial terrorism. - Analysis: The confiscation and asset recovery framework is generally adequate but would be improved by adoption of legislation for an asset forfeiture fund and for asset sharing with other jurisdictions. - Recommendations: - Consider amending the Terrorism Law to provide for appointment of a receiver for all property owned by a defendant to satisfy a confiscation order. - Consider adopting legislation to provide for an asset forfeiture fund and for asset sharing with other jurisdictions; the authorities indicated such consideration in connection with an amended Proceeds of Crime Act in early 2004. - Implications for FATF Recommendations 7, 38, SR III: Compliant. ### Freezing of terrorist funds and information-gathering authorities - Freezing measures exist: Article 6 of the Terrorism Order and Article 8 of the Al-Qa’ida Order. - Section 36 and Schedule 5 of the Terrorism Law allow information to be obtained in connection with terrorist investigations; Section 37 and Schedule 6 concern collection of banking information; Section 39 and Schedule 7 permit monitoring of accounts. - Section 18 and Schedule 2 provide for restraint of assets liable for forfeiture; freezing orders may be made under Section 20 of the Terrorism Law. - The Terrorism Order permits the Attorney General to obtain information (Article 10) and freeze funds (Article 6). - All provisions may apply to persons or entities not included on UN Security Council committee lists. - No statutory asset forfeiture fund exists; assets shared by other jurisdictions have been paid into accounts in the name of the Receiver General (the Attorney General) and used to fund special law enforcement projects following consultation. The Bailiwick Financial Crime Committee is considering whether legislation should formalize the fund. - No statutory asset sharing mechanism exists; Guernsey indicates willingness in appropriate cases to share a proportion of funds realized when enforcing a confiscation order made in another jurisdiction. ### The Financial Intelligence Service (FIS) / FIU, STR reporting and information handling - The FIS is the FIU and an independent unit of the Guernsey Police Force and Customs and Excise, jointly staffed by both Police and Customs officers. - Reporting parties are required to submit suspicious reports where such party knows or suspects a person is engaged in ML or FT (Regulation 6(5) of the Regulations; Sections 39(3) and 40(5) of the POC Law; Sections 58(3), 59(5) and 60(1) of the DT Law; Sections 12 & 13 of the Terrorism Law). - There is no legal requirement that STRs must be submitted to the FIS. - Guernsey has had an FIU since 1989; it became a member of the Egmont Group in 1998. On 2 April 2001 the FIU became known as the Financial Intelligence Service (FIS). - FIS mandate and mission statement (selected elements): - Stand alone from parent organizations as far as possible while remaining within Police and Customs responsibilities. - Staffed equally by Police and Customs Officers seconded for a fixed tenure under a clear line management system. - Responsible to a Service Authority constituted equally from Senior Operational Police and Customs Managers who report to their respective Chief Officers. - Own budget funded equally by Police and Customs and dedicated accommodation. - Director appointed from Police and Customs on basis of a three year contract; Director independent of both Police and Customs. - Guidance, Notes and typologies: - The GFSC has issued Notes including identification of complex and unusual transactions; the authority for GFSC to do this is unclear. - The FIS assists the GFSC in preparing the Notes by providing typologies relating to ML and FT. - The Notes provide examples of suspicious transactions and include case studies and typologies; the FIS also publishes typologies and case studies via the GFSC’s website. - Reporting form and legal authority: - There is no legal requirement in law or the Notes that a standard STR form be used; the Notes state that “[i]t would be of great assistance to the FIS if disclosures were made in standard form” (Appendix I, I.1, Part 5, first bullet). - The States Assembly has approved in principle enactment of legislation that would allow the Committee to prescribe by regulation the form and manner in which STRs may be made (Clause 5(1) of the Draft Miscellaneous Provisions Law). This law will be presented to the States Assembly for approval in early 2004. - Analysis of Effectiveness: Measures to criminalize ML and FT are generally adequate; arrangements will be enhanced when Guernsey implements legislation to give effect to the Palermo Convention and when the Convention for the Suppression of the Financing of Terrorism is extended to Guernsey. *Source: The assessment.* ### 18. The FIS does not have the power in law to demand additional information from reporting parties. According ### 18. The FIS does not have the power in law to demand additional information from reporting parties. According ### Legal authority to require information - The FIS does not have statutory power to demand additional information from reporting parties; in practice it requests such information and in most cases it is provided. - Financial Institutions (FIs), relying on Tournier v. National Provincial and Union Bank of England (1924), are permitted to disclose information to protect the public and their own interests. - Where required information is not forthcoming the FIS may seek production orders: - From the Attorney General in serious or complex fraud cases (Section 1 of the Fraud Investigation Law). - From a judge in other cases (Sections 45 and 46 of the POC Law; Sections 63 and 64 of the DT Law; Section 36 and Schedule 5 of the Terrorism Law). - To obtain a production order there must be reasonable grounds and, depending on the legislation, other criteria may need to be met prior to the order being granted. - Draft Miscellaneous Provisions Law: - Clause 5(2) states regulations may provide that STR forms may request the submitter to provide additional information — but the report notes this may not be sufficient to give FIS an express power to require additional information without a production order. ### Access to databases, records, and information sources - Real time searches are possible on Customs and Police databases because the FIS is staffed by Police and Customs Officers. - Immigration details available due to common management with Customs Department and a common Chief Officer. - The FIS can search the Police National Computer and access records such as vehicle registration, company records, court judgments, passport, land and property title documents, and many other government departments. - Draft Miscellaneous Provisions Law (Clause 21) would permit the States Income Tax Authority to disclose information for purposes including facilitating a determination of whether any criminal investigation should be initiated or terminated (Clause 21 2)(e). - The FIS subscribes to commercial databases to obtain credit reporting and other records; it can obtain an individual’s credit records for a fee. - The FIS liaises with the GFSC’s Fiduciary Services and Enforcement Division to obtain information from the GFSC. ### Sanctions, offenses, and dissemination powers - The FIS is not authorized by law to order sanctions or penalties; the GFSC may do so under its broad administrative powers with respect to FSBs. - Criminal sanctions: - Failure to disclose knowledge or suspicion of ML connected with drug trafficking is an offense punishable with up to five years imprisonment (Section 60 of DT Law). - Failure to disclose knowledge or suspicion of other crimes is not currently an offense but will become so under Sections 1 and 2 of Draft Miscellaneous Provisions Law. - Dissemination: - The FIS is authorized to disseminate financial information and intelligence to domestic authorities for investigation when there are grounds to suspect ML or FT (Section 43 of the POC Law). - The FIS routinely disseminates intelligence to various agencies within Guernsey, on its own initiative or upon request. - The FIS is authorized to share financial information outside Guernsey with respect to all crimes other than drug trafficking and terrorism (Section 44(1) of the POC Law). - Authorities state common law would allow other disclosures. - The FIS primarily exchanges intelligence with other FIUs within the Egmont Group and seeks memoranda of understanding where required by counterpart domestic law. ### Safeguards and data protection for external exchanges - Exchanges outside Guernsey under Section 44(1) of the POC Law are to competent authorities for investigation of crime or criminal proceedings, with adequate safeguards. - Information exchanges by law enforcement authorities are governed by codes of practice (e.g., Intelligence Material Code of Practice) and the DP Law. - Codes set procedures for recording and dissemination and principles to protect sources (e.g., separate records where source confidentiality is necessary). - Under the Data Protection Law, law officers must undertake risk assessments before releasing intelligence externally that consider source, subject, content, human rights and security of all concerned, and the jurisdiction to which material may be sent. - The eighth principle of the DP Law prohibits transfer of personal data outside Guernsey unless that country “ensures an adequate level of protection for the rights and freedoms of data subjects in relation to the processing of personal data” (para. 8, Part I, Schedule I of DP Law). ### Statistics, recordkeeping, and operational outputs - The FIS keeps statistics on amounts of property frozen, seized and confiscated relating to proceeds of crime, drug trafficking, money laundering and financial terrorism. - Number of Disclosures: - 2000: 482 - 2001: 605 - 2002: 777 - STR-related records and outcomes: - The FIS records STRs resulting in investigation, prosecution, or convictions. - Statistics and records are kept; there are a number of ongoing money laundering investigations but no company or person has been convicted of Money Laundering in Guernsey. - Requests for Assistance (example figures): - 2000: 154 - 2001: 170 - 2002 (Half Year): 139 - Of which Internal: 84 (2000), 87 (2001), 90 (2002 Half Year) - Of which External: 70 (2000), 83 (2001), 49 (2002 Half Year) - Referral practice: - Records kept on all referrals by the FIS. - Following examination of STRs the FIS refers most of them (50-60 percent) to NCIS. - STRs concerning residents of other jurisdictions (example: Ireland) are forwarded to the FIU in that jurisdiction. - Reporting large currency transactions: - The Bailiwick of Guernsey has no legislation requiring reporting large currency transactions. - Cash seizures occur under the Drug Trafficking (Bailiwick of Guernsey) Law 2000 covering seizure and detention of cash upon import and export; it empowers Law Enforcement/Customs and Excise to forfeit and confiscate cash on a civil standard of proof (the balance of probability) where cash is suspected to be involved in drug trafficking. - A soon to be enacted Miscellaneous Provisions Law will provide for seizure of cash on an “all crimes” basis. ### Resourcing, capacity, and effectiveness - Current capability: - The FIS as currently structured and funded is capable of performing its functions but is not at maximum capacity due to staff shortages and a dramatic increase in workload (the number of STRs rose by 100 percent over last 5 years). - The FIS requires two further Financial Investigators to reach recommended strength and also needs the support of a Financial Analyst and an administrative assistant. - Staffing and governance actions taken: - After review of the FIS’s first year, the Service Authority recommended resource increases; Chief Officers supported and obtained approval for increased FIS and Customs & Excise Fraud and International team staff. - A five year housing license was secured for a former Metropolitan Police Financial Investigator supplementing Police Fraud and External Affairs Department. - The Director of FIS is accountable to the Chief Officers of Police and Customs and Excise through the Service Authority; FIS staff from Police/Customs and Excise are on fixed tenure. - Organizational structure and work practices are characterized as high standard with very good work practices. - Where FIS becomes aware of an institution’s failure to report suspicions, the FSC is informed. - The FIS/FIU has sufficient independence and autonomy for day-to-day activity, with access to law officers and senior personnel as required. - Information management and outreach: - Procedures for recording, analyzing and disseminating information ensure protection and lawful dissemination domestically and internationally. - The FIS/FIU publishes articles in the Compliance Officers Association Newsletter and on the Guernsey Financial Commission website; submits periodic reports to the Egmont website and an annual report to the Bailiwick Financial Crime Committee (less detailed version circulated externally). - Analysis of Effectiveness: - Arrangements for processing, receiving, analyzing, and disseminating financial information are generally adequate. - Framework would be strengthened if: - Law required reporting of suspicious transactions to the FIS. - Failure to report were made a crime. - FIS were given power to require additional information from reporting parties without a production order. - Staff complement increased by at least two persons. ### Recommendations and policy comments - Legislation should be adopted along the lines of the Draft Law (Sections 1 and 2) to make failure to report a suspicious transaction a crime, rather than treat it as a defense to the crime of money laundering. - Consider legislation along lines of the Draft Miscellaneous Provisions Law (Section 5) to require STR submission to the FIS on a form prescribed by law, with appropriate penalties. The draft law is expected to be considered by the States Assembly by the end of 2003. - Consider providing explicit legal authority for the FIS to require additional information from reporting parties without the need to meet the burden of proof for a production order; the Draft Miscellaneous Provisions Law’s provision to request additional information via STR form appears insufficient for this purpose. - Consider amending relevant laws to provide explicit legal authority for the GFSC to issue guidance notes. - Implement plans to increase FIS staff by two intelligence officers as soon as practicable. ### Law enforcement and prosecution authorities — powers, duties, and practice (Criteria 25–33) - Responsibility: - Police and Customs and Excise are responsible for ensuring ML and FT offenses are properly investigated; FIS/FIU may also carry out this task as it is staffed by Police and Customs and Excise personnel. - Prior to obtaining/serving production orders or warrants, consent/authority of a Law Officer is required. - Investigative measures: - Use of covert and investigative measures is permitted by common law and governed by codes of practice issued by Police and Customs. - Courts accept a wide range of investigative techniques: controlled delivery, undercover operations, covert and intrusive surveillance. - States of Guernsey agreed in principle to enact legislation based on the UK Regulation of Investigatory Powers Act 2000 to provide interception of communications, surveillance and use of covert intelligence sources; the UK Act does not contain controlled delivery provisions and such provisions are not included in the Guernsey proposal. - FIS/FIU and other law enforcement units use all investigative techniques legally available in the Bailiwick, consulting Attorney General as needed. - Compulsion of records: - Law enforcement can compel production of bank records and other FI records through lawful process (Sections 45 & 46 of the POC Law; Sections 43 & 44 of the Terrorism Law; Sections 63 and 64 of DT Law; Section 36 of the Terrorism Law; Section 1 of the Fraud Investigation Law). - Inter-agency task forces: - FIS/FIU is an inter-agency unit; “Task Force” style enquiry teams are regularly used for complex ML/FT investigations. - A culture of partnership and understanding exists that such enquiry teams are necessary for complex investigations. - Resource reviews and IT needs: - FIS/FIU Service Authority conducts annual reviews; resources were increased but STRs and external assistance requests continue to increase annually. - FIS/FIU has secured some funding and consultants for IT development; need for rationalization and a new computer system to enhance monitoring, receipt, analysis and dissemination of STRs. - Statistics and prosecutions: - FIS records number of ML and FT investigations, prosecutions and convictions initiated on the basis of an STR. - Lack of feedback from foreign jurisdictions hinders accurate counts of convictions for ML and FT. - Despite several money laundering investigations, no domestic prosecution has taken place in Guernsey. - Preliminary financial investigation is carried out in every case where an offender is tried on indictment to gather additional evidence and ascertain assets for confiscation. - Typologies, training, and skills: - FIS and law enforcement examine typologies and trends regularly; new typologies/trends are disseminated operationally and sometimes published on the Commission’s website. - Members of the FIS are skilled in administrative, investigative, prosecutorial and judicial aspects of ML/FT enforcement. - Officers have undergone UK financial investigator training and local courses (e.g., trust funds); some have accreditations from the Home Office Center of Excellence in the UK. - Law enforcement personnel are skilled in tracing property and obtaining seizure, freezing and confiscation orders. - Governance and strategy: - The Financial Crime Committee and Financial Crime Group provide advice and guidance on best practices, based on evolving international standards. - Bailiwick law enforcement publish an annual financial crime strategy circulated to relevant parties including the Attorney General’s chambers and the Commission. - Personnel attend international conferences and use a partnership approach to identify proceeds or property used to finance terrorism. - Analysis of Effectiveness (Criteria 25–33): - General framework for powers and duties of law enforcement and prosecution is considered adequate. - Framework would be strengthened if sufficient funding were made available for FIS technical support and if planned investigatory powers legislation included provision for controlled delivery. - Recommendations (Criteria 25–33): - Consider including controlled delivery in proposed investigatory powers legislation. - Funding should be made available for development of FIS’ IT resources to address increases in STRs and support future effectiveness. *Source: International Monetary Fund* ### 34. There are laws and procedures which provide for mutual legal assistance regarding the use of compulsory ### cr03365 - 34. There are laws and procedures which provide for mutual legal assistance regarding the use of compulsory ### Mutual legal assistance framework and compulsory measures - Laws and procedures provide for mutual legal assistance regarding the use of compulsory measures including the production of records, search of persons and premises (Sections 4 & 7 of the CJIC Law). - The following laws allow for the widest possible range of mutual legal assistance in AML/CFT matters: - The Fraud Investigation Law, Section 1; - The POC Law, Sections 45 and 46; - The DT Law, Sections 63 and 64; - The Terrorism Law, Section 36 and Schedule 5, paras. 1 and 4; - The CJIC Law, Sections 4 and 7; - The Terrorism Order, Article 10; and - The Al-Qa’ida Order, Article 18. - Production orders or warrants may be issued to obtain records from FIs or private individuals (section 1 of the Fraud Investigation Law, sections 45 and 46 of the POC Law, sections 63 and 64 of the DT Law and section 36 and schedule 5 of the Terrorism Law). - If a warrant is issued, searches may be made of business premises and private dwellings. - The only restriction on issuing a warrant is that, before a warrant is issued, it must be shown that the conduct constituting the offense under investigation would have constituted a criminal offense punishable with imprisonment if it had occurred in Guernsey. ### Production, seizure, testimony and related processes - Production or seizure of information: - Section 1 the Fraud Investigation Law; - Sections 45 and 46 of the POC Law; - Sections 63 and 64 of the DT Law; - Section 36 and Schedule 5 of the Terrorism Law; and - Sections 4 and 7 of the CJIC Law. - Taking of statements: - Witnesses are required to provide information and documents under the Fraud Investigation Law (Section 1), POC Law (Section 45), DT Law (Section 63) and Terrorism Law (Section 36 and Schedule 5 (para. 4)). - Persons cannot be required to make formal witness statements under the law of the requesting state, although many FIs permit their employees to make formal witness statements under the law of the requesting state. - Evidence under oath which can be used in a foreign court can be obtained in connection with all types of criminal investigation under section 4 of the CJIC Law. - Identification, seizure, freezing and confiscation: - Identification of assets can be achieved under the legislation referred to above. - Freezing and confiscation may be achieved under Part I of both the POC and DT Laws, and Section 18 and schedule 2 of the Terrorism Law. - Section 8 of the CJIC Law may be used to freeze instrumentalities. - Assistance may be provided in connection with criminal proceedings or criminal investigations (Section 4 of the CJIC Law). - Assistance may be provided where persons have committed both money laundering and the predicate offense under sections 45 and 46 of the POC Law, sections 63 and 64 of the DT Law and sections 4 and 7 of the CJIC Law. ### Institutional capacity, cooperation, MOUs and statistics - The Guernsey FIS has procedures and structures using all available legislation to provide assistance to foreign authorities on international investigation of ML/FT. - The publication entitled “Mutual Legal Assistance” and the Bailiwick of Guernsey sets out guidelines and notes to obtain mutual legal assistance in Guernsey. - The FIS/FIU in Guernsey is capable of sharing information and intelligence with FIUs in other jurisdictions as members of the Egmont Group. - Dual criminality is not a precondition in mutual legal assistance because Guernsey legislation makes no distinction in the mental element of an offense and does not preclude assistance being given by the Bailiwick of Guernsey. - Investigation agencies take all appropriate efforts to provide a uniform and effective response to requests; investigation units respond to follow-up requests in an expeditious manner as shown by statistics maintained by the FIS and other relevant agencies. - The FIS has MOUs with TRACFIN in France and CTIF in Belgium. International cooperation is generally supported through informal mechanisms. - The GFSC has entered into a number of MOUs but does not require an MOU to exchange information with foreign supervisors/regulators or law enforcement bodies. - Law enforcement authorities are permitted under common law to exchange information with international counterparts without agreements or MOUs. - Appropriate statistics are maintained, but information on the resolution of cases is not up to date due in part to poor feedback from requesting countries. ### Cross-border operational cooperation and asset sharing - Foreign investigators may come to Guernsey and accompany local officers when production orders and warrants are served. - Controlled deliveries, particularly for drug trafficking, are used in connection with enquiries though not expressly provided by statute. - Production orders in fraud investigations are issued by the Attorney General (section 1(2) of the Fraud Investigation Law). - Production orders under section 45 of the POC Law, section 63 of the DT Law and section 36 and schedule 5, paragraph 4 of the Terrorism Law are issued by a judge. - Warrants are issued by judges (section 1(4) of the Fraud Investigation Law, section 46 of the POC Law, section 64 of the DT Law and section 36 and schedule 5, paragraph 1 of the Terrorism Law). - There is no legislation in Guernsey for automatic sharing of confiscated assets, but the Bailiwick of Guernsey has entered into case-by-case agreements to share assets with other jurisdictions (example: voluntary repatriation to the USA with a proportion shared with the Bailiwick of Guernsey). - Guernsey law enforcement has participated in joint investigation teams with other jurisdictions and executed warrants simultaneously with foreign operations. ### Extradition, immigration controls and entry monitoring - The Extradition Act 1989 (United Kingdom) as extended to Guernsey permits extradition for money laundering and terrorist financing offenses; all persons resident in Guernsey are liable for extradition under the Extradition Act 1989 if wanted in connection with criminal activity in another jurisdiction. - Immigration and entry controls: - Guernsey’s Immigration Act sets requirements for non-European nationals wishing to take up residence in the Bailiwick; applicants can be refused admission if officials are satisfied they are not conducive to the public good for permanent residency. - Special Branch and customs officers monitor arrivals and are familiar with wanted posters on criminals or known/suspected terrorists; such persons are closely monitored at points of entry. - Any person identified with residence in Guernsey who is wanted in connection with a terrorist related crime is liable to extradition under the Extradition Act 1989. - Foreign nationals from outside the EU area of common travel must seek permission to enter or leave the island and in a number of cases require a visa; prior to granting a visa, law enforcement data based on criminal/terrorism connections will be examined. ### International conventions and planned ratifications - On September 30, 2002, a letter was lodged with the Council of Europe by the United Kingdom’s representative indicating that the 1990 Convention on Money Laundering etc., will extend to Guernsey as from 1 January 2003. - On 15 August 2002, Guernsey’s authorities requested that the United Kingdom seek ratification on Guernsey’s behalf of the United Nations Convention for the Suppression of Terrorist Financing. - Ratification will be sought for the Palermo Convention, the Council of Europe Convention on Corruption and the OECD Convention on Corruption as soon as the necessary legislation has been passed by the States of Guernsey. ### Analysis of effectiveness, recommendations and overall assessment - Analysis of Effectiveness: - There is an adequate framework for international cooperation. - Recommendations and Comments: - Implications for compliance with FATF Recommendations 3, 32, 33, 34, 37, 38, 40, SR I, SR V: Compliant. - Operational capacity: - Guernsey has adequate resources committed to fully investigating and dealing with requests for assistance from other jurisdictions involved in the international fight against money laundering and financing terrorism. ### Preventive measures for financial institutions — general framework - Confidentiality and disclosure: - There is no obligation of secrecy or confidence or other restriction on the disclosure of information related to money laundering or the proceeds of criminal activity (Section 1 of the 1995, 1998 & 2001 Laws). - It is an implied contractual term that a banker will not divulge customer account information unless compelled by: a) Court order; b) circumstances giving rise to a public duty of disclosure; or c) protection of the bank’s own interests (Tournier v. National Provincial and Union Bank of England [1924] IKB461). - Guernsey laws state a person does not breach confidentiality when disclosure is made to a police officer (Sections 39(3)(b) and 40(5)(b) of the POC Law; Sections 58(3)(a) and 59(5)(a) of the DT Law; Section 16 of the Terrorism Law; and Section 1 of the 1995 Law). - GFSC powers and supervisory remit: - The Commission Law provides the GFSC with general powers to counter financial crime and the financing of terrorism, including offenses involving (i) fraud or dishonesty; (ii) misconduct in, or misuse of information relating to, a financial market; or (iii) handling the proceeds of crime. - In exercising functions the Commission shall have regard to (a) protection of the public interest against financial loss due to dishonesty, incompetence or malpractice by persons carrying on finance business; and (b) protection and enhancement of the reputation of the Bailiwick as a financial center. - The GFSC is the sole agency in Guernsey responsible for supervision of FSBs. - Analysis of Effectiveness: - Guernsey has an adequate mechanism for implementation of its AML/CFT framework. The GFSC has authority to ensure effective implementation of AML/CFT policies for all regulated FIs. - The GFSC has power under the Regulations to monitor compliance of businesses that engage in bureau de change activities, check cashing and money transmission services (“MSBs”), but it does not currently have the authority to regulate MSBs except to the extent that a bank or other regulated financial institution engages in such activities. - Recommendation: - Consideration should be given to enacting a law to regulate MSBs. - Implications for compliance with FATF Recommendation 2: Compliant. ### Customer identification (KYC) requirements and guidance - Regulatory requirements: - The Regulations require FIs to establish and maintain procedures for customer identification (Article 3), though the Regulations contain no explicit requirement that such procedures be followed (the requirement is implied). - No explicit legal prohibition on anonymous accounts or accounts in fictitious names, but Regulation 3(1) requires customer identification for: - forming a business relationship, - a significant one-off transaction (over £10,000), or - two or more linked transactions. - Paragraph 67B of the Notes states FSBs must not open or operate financial services products held in obviously fictitious names and anonymized products should not be allowed. - Identity evidence and documentation: - FIs must identify customers on the basis of evidence reasonably capable of establishing identity and record the identity (Regulation 3; Sections 38, 39 & 75 of the Notes). - Legal entities are covered by customer identification requirements (Regulation 3 and Section 2 of the Interpretation Law). - There is no explicit statutory provision for obtaining: - the legal entity’s legal form and directors; - when necessary, information on principal owners and beneficiaries to know the true identity of the customer; or - provisions regulating power to bind the entity and verification that any person acting on behalf of the customer is authorized. - Guidance on acceptable identification: - Paragraph 75: valid passports, national and armed forces identity cards and drivers’ licenses with photographs are the best forms of identification; documents easily obtained (birth certificates, credit and business cards, national health or insurance cards, provisional drivers’ licenses and student union cards) should not be accepted uncritically. - Paragraphs 84 and 85A: relevance and usefulness of documents to be carefully considered, including: certificate of incorporation; details and identification documentation of beneficial owners; Memorandum and Articles of Association; Powers of Attorney (including identification documentation); and resolution, bank mandate, signed application form or any valid account-opening authority, including full names of all directors and their specimen signatures. - Paragraph 62: verification is best completed prior to entry; verification should, wherever possible, be completed before any transaction is undertaken. - Risk-based and ongoing due diligence: - Paragraph 39: verification should primarily target parties operating the financial services product; where there are underlying principals, the true nature of the relationship between principals and signatories should be established; principals include beneficial owners, settlors, controlling shareholders, directors, major beneficiaries etc., and the standard of due diligence depends on the nature of the relationship. - Paragraphs 57–60: practices for “reliable introductions” allow an introducer to maintain introduction records but obligate supply of copies to the FSB on demand. - Paragraph 30 of the OPP: relationships should be reviewed for deficiencies in verification documentation following trigger events; Appendix 2 lists possible trigger events. - Paragraph 141C: verification should be made on holders of Powers of Attorney as well as the client; FSBs should ascertain the reason for granting the Power of Attorney. - Implementation concerns and forthcoming revisions: - The language “the relevance and usefulness ...of the following documents... should be carefully considered” does not clearly indicate the standard expected by the GFSC. - The GFSC has issued draft revised Notes intended to address this concern. - Guernsey, the Isle of Man and Jersey have jointly issued a paper on the direction of AML legal and regulatory frameworks focusing on verification of customer identity (Progressive Program). The paper envisages that an “accepting party” will hold either originals or copies of verification documents and that deficiencies in existing verification documents should be addressed on the basis of risk prioritization and trigger events. *Source: IMF assessment (cr03365).* ### 47. FIs are required to take reasonable measures to obtain information about the true identity of applicants who ### 47. FIs are required to take reasonable measures to obtain information about the true identity of applicants who ### Identification of applicants and undisclosed principals - Regulation 4(1) and Regulation 4(2) require that where an applicant “is or appears to be acting otherwise than as principal” identification procedures “shall require reasonable measures to be taken (as prescribed in the Notes) for the purpose of establishing the identity of any person on whose behalf the applicant for business is acting.” - Paragraph 38 of the Notes: a financial services business undertaking verification should establish to its reasonable satisfaction that every verification subject relevant to the application for business actually exists. - Paragraph 48 of the Notes: where a financial services business suspects an undisclosed principal (individual or corporate) it should: - monitor the customer’s activities to ascertain whether the customer is merely an intermediary; - if a principal is found, make further enquiry and treat that principal as a verification subject; - consider whether the existence of an undisclosed principal raises suspicion that the FI is dealing with the proceeds of criminal conduct. - Finding: Institutions visited generally had comprehensive procedures for verification of customer identity; most required verification of beneficial owners and stricter requirements for persons from Non-Appendix C countries. - Gap: Procedures reviewed did not cover the “progressive programme” for verification of identity for persons who were customers prior to enactment of money laundering legislation; institutions varied in approach. - Recommendation: Amend relevant laws to explicitly require that customer identification procedures be followed. - Recommendation: GFSC to redraft paragraph language (paragraphs 75, 84 and 85A) to clearly communicate the expected standard; GFSC has issued draft revised Guidance Notes for consultation to address this concern. - Recommendation: GFSC should communicate that decisions to establish relationships with higher risk customers should be taken by senior management; draft revised regulations and Notes have been issued for consultation. - Recommendation: Redraft the exception in section 63 (senior staff may authorize opening an account where identity not verified) to clarify intended circumstances for discretionary use; GFSC has issued draft revised Notes for consultation. - Implication for FATF: Full compliance will be achieved when FSBs have immediate access to all customer verification documents under the regime for introduced business (implications for FATF Recommendations 10, 11, SR VII). ### Originator information on funds transfers and related messages - Legal gap: No law requires FIs to include accurate and meaningful originator information on funds transfers and related messages that should remain with the transfer through the payment chain. - Originator information defined as including name, address, and account number (when being transferred from an account). - The Commission has issued draft revised Regulations and Notes for consultation which will incorporate provisions on funds transfers and other messages into legislation. - Notes: Section 126 refers to retention of records for electronic or wire transfers with sufficient detail to enable identification of the remitting customer and “as far as possible” the identity of the ultimate recipient; states originator’s details should remain with the transfer or related message throughout the payment chain; full records of the originating customer and address should be retained by the financial services business. - Recommendation: Notes should be clarified and strengthened to specifically require inclusion of originator information in the first place; GFSC has issued draft revised regulations and Notes for consultation to address this concern. - Recommendation: Within the two-year period referred to by FATF, amend laws to require accurate and meaningful originator information to remain with the transfer throughout the payment chain and require enhanced scrutiny of wire transfers lacking complete originator information; GFSC has issued draft revised regulations for consultation. - Implications for FATF: Compliant re Recommendations 14, 21 and 28; compliance re SR VII will be determined at the end of the two-year period established by FATF or when required laws are in place. ### Ongoing monitoring of accounts and transactions - Regulation 6(2) requires an STR be filed if there is “knowledge or suspicion that another person is engaged in money laundering or that he is providing financial assistance for terrorism . . .” but there is no explicit legal requirement that FIs give special attention to all complex, unusual large transactions, or unusual patterns of transactions that have no apparent or visible economic or lawful purpose, to examine background and purpose, to set forth findings in writing, and to keep such findings available for competent authorities; Commission has issued revised draft Regulations for consultation to address this. - Paragraph 22 of the Notes: vigilance systems should enable key staff to react effectively to suspicious occasions and circumstances (for example, complex, unusual, large transactions and all unusual patterns of transactions which have no apparent economic or visible lawful purpose) and to receive training. - Paragraph 25: financial services businesses may find it useful to delegate responsibility for maintaining vigilance policy to a prevention officer rather than reserve to the reporting officer all day-to-day responsibility. - Paragraph 92, Appendix G and Part 4 of the Notes: provide general and industry-specific examples of unusual or questionable patterns of activity that should give rise to suspicion; Appendices B and BB provide real-life case studies. - Gap: No specific legal requirement for concerns to be put in writing and kept available for competent authorities; draft revised regulations include such a requirement. - Finding: Procedures used by institutions addressed suspicious transaction reporting, but in a number of instances first understanding a customer’s likely pattern of activity was not satisfactorily addressed. - Recommendation: Amend paragraph 25 language (“may find it useful ... to delegate responsibility for maintaining vigilance policy”) to clearly indicate the expected standard; GFSC has issued draft revised notes for consultation. ### Enhanced scrutiny for cross-border and sensitive-jurisdiction business - Legal gap: No law requires FIs to give special attention to business relations and transactions with persons in jurisdictions that do not have adequate systems to prevent or deter ML or FT; draft revised Regulations will address this concern. - Appendix C and Business from Sensitive Sources Notices (BSSNs): Commission issues BSSNs from time to time; BSSN 4 was circulated on August 22, 2002 and highlights FATF’s work to identify noncooperative countries and territories (NCCTs). - Position Paper: “Overriding Principles for a Revised Know Your Customer Framework” (jointly issued by the three Crown Dependencies) acknowledges the importance of risk prioritization and monitoring; Appendix 2 gives guidance on risk profiling and trigger events including geographical origin of the customer. - Gap: No specific requirement for concerns to be put in writing and kept available for competent authorities; draft revised Notes address this. ### Record keeping requirements - Regulation 5 of the Regulations: FIs required to retain each customer verification document in its original form for at least the minimum retention period. - Regulation 10 definitions: ‘customer verification document’ and ‘minimum retention period’ defined; minimum retention period is six years. - Regulations impose requirement for all records to be maintained for such period; records must be in readily retrievable form and accessed without undue delay. - Section 125 requires maintenance of the following information on transactions: - Identity of the customer, beneficial owner, and any counterparty. - Details of financial services product including the nature of the product, valuation, memoranda of sale and purchase, destination of funds and bearer securities, memoranda of instruction, book entries, custody of title documentation, nature and date of transaction, the forms in which funds are offered and paid. - Section 127 indicates FSBs should keep all relevant records in readily retrievable form and be able to access records without undue delay. - Gaps: - Definition of ‘customer document’ does not explicitly reference customer transaction records; draft revised regulations will address this concern. - No specific requirement for records to be maintained of the currency involved and the type and identifying number of any account involved in the transaction; draft revised regulations and Notes will address this concern. - Notes do not specifically require records to be available to domestic competent authorities for AML/CFT investigations and prosecutions (GFSC has power to request information and conduct on-site inspections for licensees other than investment business). - Finding: Framework for record keeping is generally adequate, though some institutional AML guidelines lacked sufficient description of information to be maintained. - Recommendation: Consider including a reference to customer transactions in the definition of customer documents in the Regulations; Draft Law to be considered for approval by the States Assembly in September. GFSC has issued draft revised regulations and Notes for consultation. - Recommendation: Amend the Notes to require records of the currency involved and the type and identifying number of any account involved in the transaction; GFSC has issued draft revised regulations and Notes for consultation. - Implication for FATF Recommendation 12: Compliant. ### Suspicious transaction reporting (STR) framework - For drug-related crimes and terrorism-related crimes, FIs are required to report to a police officer transactions suspected of stemming from criminal activity or used to finance terrorism (Sections 58(3), 59(5) and 60(1) of the DT Law; Sections 12, 13, 14 and 15 of the Terrorism Law). - For other serious crimes covered by the POC Law, there is no provision making failure to report an offense (Sections 39(3) and 40(5) of the POC Law). - Draft Miscellaneous Provisions Law expected to be presented to the States Assembly for approval by the end of 2003. - Regulations 6(1)–(4): FIs required to institute and maintain internal reporting procedures for filing STRs. - Paragraph 102 of the Notes: if a reporting officer decides information substantiates a suspicion of money laundering he should disclose promptly to the FIS. - Paragraph 97: key staff should be required to report any suspicion of laundering either directly to their reporting officer or, if the FSB decides, to their line manager for preliminary investigation where known facts may negate suspicion. - GFSC has issued guidelines (Sections 90–93 of the Notes and Appendixes B & BB) drafted with assistance of the FIS and the Attorney General’s Chambers to assist FIs in detecting suspicious patterns of customer behavior. - Paragraph 92 and Appendix A: provide a general description of relevant laws; Appendix G provides examples of unusual or questionable patterns of activity which should give rise to suspicion; supplemented by industry-specific examples in Part 4 of the Notes. *Source: IMF assessment content unit cr03365, Regulations and Notes cited within the assessment.* ### 56. FIs are protected from any liability for breach of any restriction on disclosure of information in good faith to the ### 56. FIs are protected from any liability for breach of any restriction on disclosure of information in good faith to the FIU ### Reporting obligations, protections and tipping-off - Findings - FIs are protected from any liability for breach of any restriction on disclosure of information in good faith to the FIU (Sections 1 & 2 of the 1995, 1998 & 2001 Laws, sections 39 and 40 of the POC Law, sections 58 and 59 of the DT Law, section 16 of the Terrorism Law, Article 10 of the Al Qa’ida Order and Article 9 of the Terrorism Order). - FIs are prohibited from tipping off their customers when information relating to them is reported to competent authorities (Section 41 of the POC Law; Section 61 of the DT Law and Section 40 of the Terrorism Law). - There is no explicit requirement in law that provides legal authority for the FIS or any other competent authority to give instructions to FIs or to require FIs to observe those instructions. - All procedures reviewed at institutions included guidelines on the procedure for reporting suspicions to the MLRO and ultimately to the FIS. - Analysis of Effectiveness - The framework for the reporting of suspicious transactions is generally adequate except with respect to the criminalization of failure to submit a suspicious transaction report under the POC and Terrorism laws. - Recommendations and Comments - Legislation should be adopted along the lines of the Draft Law (Sections 1 and 2) to make it a crime to fail to report a suspicious transaction under the POC Law, as in the DT Law, rather than as a defense to the crime of money laundering. - Consideration should be given to providing the FIS with the authority to give instructions to reporting entities or to require FIs to observe instructions of the FIS. - The wording of Section 102 of the Notes should be amended to address suspicion that funds have been used to finance terrorism; the GFSC has issued draft revised Notes for consultation which will address this concern. - Amend wording in paragraph 97 of the Notes: replace “key staff” to clarify that all staff have a duty to report suspicions; the GFSC has issued draft revised Notes for consultation which will address this concern. - Implications for FATF Compliance - Implications for compliance with FATF Recommendations 15, 16, 17, 28: Full compliance will be achieved when there is legislation along the lines of the Draft Law (Sections 1 and 2) to make it a crime to fail to report a suspicious transaction, as in the DT Law, rather than as a defense to the crime of money laundering. - It is expected that the draft law will be considered by the States Assembly by the end of 2003. ### VI — Internal controls, Compliance and Audit (Criteria 58–61 and sector-specific criteria) - Description / Findings - FIs are required to establish and maintain internal procedures and policies including employee training programs (Regulations 1(1) (a) and 7 of the Regulations). - There is no explicit reference in the law to an audit function to test the system; the GFSC has issued draft revised Regulations for consultation which will include an explicit reference in law. - Regulation 7 requires that FIs “ensure that key staff receive comprehensive training in (1) the relevant laws; (2) vigilance policy (including vigilance systems); (3) the recognition and handling of suspicious transactions; and (4) the personal obligations of all key staff under the relevant laws.” - The Notes require FSBs to establish internal procedures to protect themselves from abuse through money laundering and the financing of terrorism; paragraph 20 indicates internal audit and compliance departments should regularly monitor vigilance systems. - Section 131 requires comprehensive training for both existing and new employees but contains no specific requirement to inform staff of new developments, trends and techniques of money laundering and financing of terrorism; GFSC draft revised Guidance Notes will address this. - FIs are required to institute and maintain procedures to identify a person to whom a suspicious report can be made (Article 6 of the Regulations), and to “institute and maintain clear internal reporting procedures which . . . identify a person as the reporting officer and provide the name and title of that person” (Regulation 6(1)). - Definition of ‘reporting officer’: “a senior manager . . . [with] responsibility for vigilance policy and vigilance systems, to decide whether suspicions should be reported and to report to the police if he so decides.” (Regulation 10). - GFSC licensing requires each licensed entity to have a designated Compliance Officer and a Money Laundering Reporting Officer; paragraph 24 of the Notes specifies duties and notification to the FIS and the Commission. - Investment Licensees Rules (Part 5.01(3)) require a licensee to establish systems ensuring employees are suitable, adequately trained and properly supervised, including recruitment procedures and vetting. - Financial services businesses other than investment business are not covered by those Rules; GFSC draft revised Regulations and Guidance Notes will impose similar requirements for all FSBs. - A Personal Questionnaire (Form PQ) must be completed for directors or controllers; GFSC reviews staff quality during on-site visits. - No legal requirement exists to ensure foreign branches and subsidiaries observe home-jurisdiction AML/CFT measures; GFSC draft revised Regulations will address this. - There is nothing in the law requiring branches/subs to apply the higher of home and host AML/CFT standards where these differ; draft revised Regulations will address this. Paragraph 6 of the Notes (‘Group Practice’) recommends adherence to Guidance Notes or equivalent local standards and informing branches/subs of group policy. - Most institutions have adopted adequate internal AML/CFT procedures; many provide training for new staff and annual refresher courses; MLROs and compliance staff receive more intensive training. - Most institutions screened prospective employees for suitability but did not apply specific tests to reveal past criminal activity. - Most institutions had no policy to apply AML/CFT standards globally because they generally have no foreign branches or subsidiaries. - Analysis of Effectiveness - The framework for internal controls and compliance is generally adequate. - Concerns remain regarding consolidated supervision and adequacy of employee screening. - The draft revised Regulations and Notes issued by the GFSC for consultation will address these concerns. - Recommendations and Comments - Consider amending laws to require FIs to appoint a person to receive suspicious reports and require FIs to notify the GFSC of any change in that position. - Consider amending relevant laws to require all FIs to implement adequate screening procedures for employees along the lines of Part 5.01(3) of the Investment Licensees Rules; GFSC has issued draft revised Regulations for consultation which will address this concern. - Consider requiring all Guernsey FIs to apply Guernsey legal and regulatory AML/CFT requirements to their branches and subsidiaries outside Guernsey; GFSC has issued draft revised regulations and Notes for consultation which will address this concern. - Amend the Notes to require that where minimum AML/CFT requirements of the home and host jurisdictions differ, branches and subsidiaries in host jurisdictions should apply the higher standard; GFSC has issued draft revised Notes for consultation which will address this concern. - Implications for FATF Compliance - Implications for compliance with the FATF Recommendations 19, 20: Compliant ### VII — Integrity standards (Criteria 62 and 63 and sector-specific criterion 114) - Description / Findings - No explicit provision of law prohibiting criminals from holding or controlling a significant investment in a FI, or holding qualified management functions; however, supervisory laws require individuals to be fit and proper, defined to include evidence of having “committed any offense, and in particular any offense involving fraud or other dishonesty or violence” (Schedule 3(3) to the Banking Law; Schedule 1(3) to the Fiduciary Law; Schedule 7(3) to the Insurance Business Law; Schedule 4(3) to the Insurance Managers and Intermediaries Law). - Promoters and parties connected with open-ended and closed-ended funds are similarly vetted. - Under Section 8(1) of the Control of Borrowing Ordinance, the GFSC has authority to review applications to form Guernsey companies and equity and debt offerings over £500,000. - Regulation 8(a) requires financial services businesses not regulated by the GFSC to notify the GFSC with information relating to directors, partners, senior officers, beneficial owners and controllers. - As policy, a Personal Questionnaire (Form PQ) must be submitted for any individual to be appointed as director or senior management (including compliance officers and MLROs where not on the Board). - The Commission uses internal and external databases (SIS, Lexis/Nexis, FFIN, SEC, FBI, Guernsey Police) to vet and monitor fitness and propriety; it can object where a person no longer meets fit and proper criteria. - Comprehensive due diligence checks are performed on controllers; Commission liaises with home supervisors and other regulators when licensing new FSBs. - The framework related to integrity standards is adequate. - Implications for FATF Compliance - Implications for compliance with FATF Recommendation 29: Compliant ### VIII — Enforcement powers and sanctions (Criterion 64 and sector-specific criteria) - Description / Findings - GFSC statutory powers relating to banks, investment business, fiduciaries, and insurance business include: - (i) issuance of a written directive or order (does not apply to investment business) (Sections 12 of the Banking Law; 12 of the Fiduciary Law; 16 of the Insurance Business Law; 11 of the Insurance Managers and Intermediaries Law); - (ii) issuance of a public statement (not available under Guernsey law); - (iii) placing conditions on a license, including authority “to require the institution to take certain steps . . .” (Sections 9 of the Banking Law; 9 of the Fiduciary Law; 5 of the POI Law; 12 of the Insurance Business Law; 7 of the Insurance Managers & Intermediaries Law); - (iv) suspension or removal of directors and officers via the court where a person is unfit (Section 67A of the Companies Law); conditions placed on a license may be used to remove a director (Sections 9(4)(e); 12(4)(e); 7(4)(e)); - (v) objections to controllers (15 percent or more of voting power) applicable to all regulated sectors other than investment business (Sections 14 and 15 of the Banking and Fiduciary Laws; 25 and 26 of the Insurance Business Law; 36 and 37 of the Insurance Managers Law; sections 28A and 28B of the POI Law); - (vi) appointment of a special auditor at the expense of the licensee (not applicable to investment business) (Sections 27 of the Banking Law; 24 of the Fiduciary Law; 69 of the Insurance Business Law; 46 of the Insurance Managers & Intermediaries Law); - (vii) appointment for a defined period of a provisional or temporary administrator (typically with court approval), not applicable to any FSB; - (viii) imposition of a range of civil penalties (administrative fines) on the licensee, its directors and senior managers, not applicable to any FSB; - (ix) revocation of license (Sections 8 of the Banking Law; 8 of the Fiduciary Law; 6 of the POI Law; 13 and 14 of the Insurance Business Law; and 8 and 9 of the Insurance Managers and Intermediaries Law). - Paragraph 3 of the Notes states that the Commission may take failure to follow the Notes into consideration when judging whether directors and managers are fit and proper persons. - Analysis of Effectiveness - The framework for supervisory enforcement powers is generally adequate. - It would be strengthened if the POI gave the GFSC legal authority to enter a licensee's premises for the purpose of obtaining information and undertaking an assessment of its business. - Recommendations and Comments - Consider amending the relevant laws so all FSBs are subject to the same set of sanctions, particularly (i) issuance of a written directive or order and (ii) appointment of a special auditor at the expense of the licensee, which are currently not available for investment business. - Consider amending relevant laws to provide additional powers for the GFSC in civil money penalties/administrative fines on companies and controllers and the ability to petition a court to appoint a provisional or temporary administrator or conservator for a defined period. - Consider amending the POI to provide legal authority for the Commission to enter a licensee's premises to obtain information and undertake an assessment of its business; the authorities have indicated they will promote this legislative change. *Source: International Monetary Fund assessment.* ### 65. The Policy and International Affairs Division acts as a core resource upon which the regulatory divisions can ### 65. The Policy and International Affairs Division acts as a core resource upon which the regulatory divisions can draw and it is also responsible for the drafting of relevant AML/CFT regulations and the Guidance Notes ### Institutional role and staffing - The Policy and International Affairs Division is responsible for drafting relevant AML/CFT regulations and the Guidance Notes and serves as a core resource for the regulatory divisions. - Deputy Director is assisted by a consultant at the level of Assistant Director devoted to AML/CFT issues full time; "Subsequent to the mission this officer left the GFSC." - A senior analyst has joined the Division and is devoted fully to matters related to AML/CFT. - GFSC has retained the services of an external consultant. - Regulatory staff include: - 2 ex-police officers (both in the Department of Fiduciary Services and the Enforcement Division). - 2 Certified Fraud Examiners. ### Supervisory activity and on-site reviews - The Banking Division commenced on-site assessments of licensees in 1999. - The other divisions commenced reviews in 2000. - Files were well documented and suggested that AML/CFT reviews were thorough. - Current resources devoted to AML/CFT "appear to be adequate." - AML/CFT surveillance undertaken by the FSC may have been at the expense of surveillance activity related to other areas of risk. - "However subsequent to the mission’s visit staff resources have been increased." ### Training and accreditation - The Regulations require the GFSC to train its staff on anti-money laundering issues. - GFSC has held formal in-house training for its staff; the most recent training prior to the mission took place in July 2002. - Follow-up training is scheduled for January 2003. - GFSC uses a computer based training package which regulatory staff must undertake; the package "incorporates an accreditation module where key aspects are tested to ensure adequate comprehension." ### Information sharing and legal cooperation - Section 21 of the Commission Law permits the GFSC to cooperate under certain circumstances, including "to enable the Commission to carry out any of its functions" (Section 21(2)(a)), one of which is "the countering of financial crime and of the financing of terrorism" (Section 2(2)(d). - Section 21(2)(b) and Section 21A(b) permit cooperation "for the purposes of the investigation, prevention or detection of crime with a view to the instigation of, or otherwise for the purposes of, any criminal proceedings." - GFSC also relies on broad disclosure powers contained in supervisory laws, including: - Section 34B of the POI Law - Section 4 of the Banking Law - Section 44 of the Fiduciary Law - Section 57 of the Insurance Managers and Intermediaries Law - Section 80 of the Insurance Business Law - GFSC routinely provides the FIS, Police and Customs with intelligence and routinely responds to requests for information from them where relevant. - FIS liaises with GFSC’s Fiduciary Services and Enforcement Division to obtain information from the GFSC. - GFSC provides advice to the FIS with respect to intelligence-gathering and, more broadly, the operations and commercial activities of FSBs, including on issues raised in STRs. - There are laws and procedures allowing the provision of the widest possible range of international cooperation between supervisors/regulators; GFSC relies on Commission Law provisions (including section 21A(b)) and the broad disclosure powers in the various supervisory laws. *Source: Mission report and GFSC information.* ### Section 57 of the Insurance Managers and Intermediaries Law and Section 80 of the Insurance Business Law). ### Section 57 of the Insurance Managers and Intermediaries Law and Section 80 of the Insurance Business Law ### Memoranda of Understanding and International Cooperation - The GFSC has entered into Memoranda of Understanding with: - Australian Securities Commission (1996) - United States Commodity Futures Trading Commission (1994) - De Nederlandsche Bank NV (1993) - United States Federal Deposit Insurance Corporation (1999) - International Association of Insurance Supervisors (1994) - International Organization of Securities Commissions (1991 and 1996) - Jersey Financial Services Commission (1998) - Hong Kong Securities and Futures Commission (1992 and 1994) - The London Stock Exchange (1998) - Commissione Nazionale per le Società e la Borsa (an Information Exchange Agreement in1994 replaced by an MOU in 2002) - Isle of Man Financial Supervision Commission (2002) - The GFSC was negotiating memoranda of understanding with four European regulators; two were finalized subsequent to the mission. - The GFSC does not require an executed MOU before exchanging information with foreign supervisors/regulators or law enforcement bodies. - The most frequent exchanges of information occur with the United Kingdom’s Financial Services Authority and the United States Securities and Exchange Commission, despite no MOUs in place. - Court authorization is not necessary for the exchange of information; reciprocity and secrecy obligations are not required of requesting authorities. ### Participation in International Committees and Information Dissemination - GFSC senior staff participation: - The Director General and the Deputy Director (Policy and International Affairs) sit on the Crown Dependencies Anti-Money Laundering Group (Guernsey, Jersey and the Isle of Man). - The Director of Fiduciary Services sat on FATF working group B (enhancing transparency of trusts and other corporate vehicles). - The Director of Banking participated in the joint Basel/Offshore Group of Banking Supervisors Working Group on Cross-border Banking. - The Director of Insurance served as Chairman of the Insurance Fraud Sub-Committee of the IAIS and issued “Anti-Money Laundering Guidance Notes for Insurance Supervisors and Insurance Entities” during his chairmanship. ### Analysis of Effectiveness and FATF Recommendation 26 - Analysis: - "The general framework in respect of international cooperation is generally adequate." - Implication for FATF Recommendation 26: - Rating: Compliant ### Controls and Monitoring of Cash and Cross-Border Transactions (FATF Recommendation 22, 23, and Interpretative Note) - FATF Recommendation 22 — Description: - Money above a prescribed sum (currently £10,000) suspected of being the proceeds of Drug Trafficking or intended for use in drug trafficking can be seized at the borders on import and export then detained for up to two years (section 52 of the DT Law). - Forfeiture can be sought under Section 53. - Under the DT Law ‘money’ means cash (including coins and notes in any currency) or any negotiable instrument. - Example: In August 2002, one such seizure of cash was made under the current DTL with regard to a convicted drug trafficker (case is still pending). - A comprehensive Guidance document has been issued to Customs Law Enforcement staff regarding seizure of cash in the controls. - Terrorism: - Similar provisions exist under Section 19 and Schedule 3 of the Terrorism Law; “cash” defined to include coins and notes of any currency, postal orders, checks of any kind including travelers checks, bankers drafts, bearer bonds or bearer shares, or any negotiable instrument found at any place in the Bailiwick (para. 1 of schedule 3). - Terrorist cash anywhere in the jurisdiction can be seized and detained for up to two years pending forfeiture proceedings. - Future Legislation: - Amendments to current AML legislation approved by the States of Guernsey to extend cash seizure and detention to cash believed to be the proceeds or represent the proceeds of crime or intended for use in criminal conduct (sections 6–19 of the draft Miscellaneous Provisions Law). - New law will provide for detection and forfeiture of cash which is over the prescribed amount of £10,000. - Under the draft law it will be possible to seize cash anywhere in the jurisdiction. - The law is expected to be approved by the States Assembly by the end of 2003. - FATF Recommendation 23 — Description: - There is no requirement to report currency transactions beyond a specified threshold. - Financial institutions are required by law to report suspicious transactions. - Financial sector is encouraged to report suspicious cash transactions through training and paragraph 15B of the Notes. - Interpretative Note to FATF Recommendation 22 — Description: - (a) Customs & Excise in partnership with UK counterparts conduct exercises to assess risk posed by placement of cash in the Bailiwick. Example: operation in April 2001 initiated by HM Customs & Excise in the UK failed to identify passengers carrying large quantities of cash. - (b) Requirement under the European Communities law 1973 for the Customs Department to cooperate with other Customs Services; Department exchanges intelligence worldwide on cash movements and high-value goods. ### Ratings of Compliance with FATF Recommendations (Selected entries) - Summary ratings (selected): - 1 – Ratification and implementation of the Vienna Convention: Compliant - 2 – Secrecy laws consistent with the 40 Recommendations: Compliant - 3 – Multilateral cooperation and mutual legal assistance in combating ML: Compliant - 4 – ML a criminal offense (Vienna Convention) based on drug ML and other serious offenses: Compliant - 5 – Knowing ML activity a criminal offense (Vienna Convention): Compliant - 7 – Legal and administrative conditions for provisional measures, such as freezing, seizing, and confiscation (Vienna Convention): Compliant - 8 – FATF Recommendations 10 to 29 applied to non-bank financial institutions: Largely Compliant - 10 – Prohibition of anonymous accounts and implementation of customer identification policies: Largely Compliant - 11 – Obligation to take reasonable measures to obtain information about customer identity: Largely Compliant - 12 – Comprehensive record keeping for five years of transactions, accounts, correspondence, and customer identification documents: Compliant - 14 – Detection and analysis of unusual large or otherwise suspicious transactions: Compliant - 15 – If financial institutions suspect that funds stem from a criminal activity, they should be required to report promptly their suspicions to the FIU: Largely Compliant - 16 – Legal protection for financial institutions, their directors and staff if they report their suspicions in good faith to the FIU: Compliant - 17 – Directors, officers and employees should not warn customers when information relating to them is reported to the FIU: Compliant - 18 – Compliance with instructions for suspicious transactions reporting: Compliant - 19 – Internal policies, procedures, controls, audit, and training programs: Compliant - 20 – AML rules and procedures applied to branches and subsidiaries located abroad: Compliant - 21 – Special attention given to transactions with higher risk countries: Compliant - 26 – Adequate AML programs in supervised banks, financial institutions or intermediaries; authority to cooperate with judicial and law enforcement: Compliant - 28 – Guidelines for suspicious transactions’ detection: Compliant - 29 – Preventing control of, or significant participation in financial institutions by criminals: Compliant - 32 – International exchange of information relating to suspicious transactions, and to persons or corporations involved: Compliant - 33 – Bilateral or multilateral agreement on information exchange when legal standards are different should not affect willingness to provide mutual assistance: Compliant - 34 – Bilateral and multilateral agreements and arrangements for widest possible range of mutual assistance: Compliant - 37 – Existence of procedures for mutual assistance in criminal matters for production of records, search of persons and premises, seizure and obtaining of evidence for ML investigations and prosecution: Compliant - 38 – Authority to take expeditious actions in response to foreign countries’ requests to identify, freeze, seize and confiscate proceeds or other property: Compliant - 40 – ML an extraditable offense: Compliant - SR I – Take steps to ratify and implement relevant United Nations instruments: Largely Compliant - SR II – Criminalize the FT and terrorist organizations: Compliant - SR III – Freeze and confiscate terrorist assets: Compliant - SR IV – Report suspicious transactions linked to terrorism: Compliant - SR V – provide assistance to other countries’ FT investigations: Compliant - SR VI – impose AML requirements on alternative remittance systems: Rated where applicable - SR VII – Strengthen customer identification measures for wire transfers: Not being assessed in light of the two year compliance period provided by FATF ### Summary of Effectiveness of AML/CFT Efforts (Table 8) - Criminal Justice Measures and International Cooperation: - I—Criminalization of ML and FT: Measures generally adequate; enhancements expected when Guernsey implements legislation to give effect to the Palermo Convention and extends the Convention for the Suppression of the Financing of Terrorism to Guernsey. - II—Confiscation: Framework generally adequate; would be improved by adoption of legislation for an asset forfeiture fund and asset sharing with other jurisdictions. - III—The FIU and processing of financial information: Arrangements generally adequate; would be strengthened if law required reporting of suspicious transactions to the FIS, made failure to report a crime, gave the FIS power to require additional information without a production order, and increased FIS staff complement by at least two persons. - IV—Law enforcement and prosecution: Framework considered adequate; would be strengthened by sufficient funding for FIS technical support and inclusion of controlled delivery in investigatory powers. - V—International cooperation: Adequate framework. - Legal and Institutional Framework for All Financial Institutions: - I—General framework: Adequate mechanism; GFSC authority to ensure implementation of AML/CFT policies for regulated FIs. GFSC can monitor compliance of businesses engaging in bureau de change, check cashing and money transmission services (“MSBs”), but does not currently have authority to regulate MSBs except where a bank or other regulated FI engages in such activities. - II—Customer identification: Measures generally adequate; concerns about language of the Notes, program for introduced business, and variation in verification practices. - III—Ongoing monitoring: Generally satisfactory; concerns on enhanced scrutiny for wire transfers and reporting of unusual or complex transactions. - IV—Record keeping: Generally adequate. - V—Suspicious transactions reporting: Generally adequate except criminalization of failure to submit STRs under the POC and Terrorism laws. - VI—Internal controls, compliance and audit: Generally adequate; concerns on consolidated supervision and adequacy of employee screening. - VII—Integrity standards: Generally adequate; would be strengthened if POI law allowed GFSC to consider criminal history in “fit and proper” determinations. - VIII—Enforcement powers and sanctions: Generally adequate; would be strengthened if POI gave GFSC authority to enter a licensee's premises for obtaining information and assessment. - IX—Cooperation between supervisors and other competent authorities: Generally adequate. ### Recommended Action Plan to Strengthen AML/CFT Measures (Selected actions, Table 9) - Criminalization of ML and FT: - Legislation required to implement the Palermo Convention, including: - Addressing corruption law scope (Guernsey to enact comprehensive anti-corruption law to be presented to the States Assembly for approval in September 2003). - Enacting provisions similar to sections 30 and 31 of the English Sexual Offenses Act 1956 to meet Article 3 of the Protocol on Trafficking Persons. - Legislation might be required to implement the Convention Article on Extradition and the Protocol on Trafficking in Human Beings. - Confiscation: - Consider amending the Terrorism Law to provide for appointment of a receiver for all property owned by a defendant to satisfy a confiscation order. - Consider adopting legislation for an asset forfeiture fund and asset sharing with other jurisdictions. - The FIU and information processes: - Adopt legislation along the lines of the Draft Miscellaneous Provisions Law (Sections 1 and 2) to make it a crime to fail to report a suspicious transaction. - Consider legislation (Draft Miscellaneous Provisions Law, Section 5) to require STRs be submitted to the FIS on a form prescribed by law, with appropriate penalties. - Consider providing authority in law for the FIS to require additional information from reporting parties without a production order. - Amend laws to provide explicit legal authority for the GFSC to issue guidance notes. - Increase the staff of the FIS by two intelligence officers as soon as practicable. - Law enforcement and prosecution: - Consider including controlled delivery in proposed investigatory powers legislation. - Provide funding for development of the FIS’ IT resources. - International cooperation: - Continued implementation of measures to ensure effective mutual assistance. - Legal and Institutional Framework for Financial Institutions: - General framework: - Consider enacting a law to regulate MSBs. - Customer identification: - Amend relevant laws to explicitly require customer identification procedures. - Strengthen language of the Notes (paragraphs 84, 85A, 75) to communicate expected standards; GFSC has issued draft revised Notes for consultation addressing these issues. - Clarify and strengthen requirement that originator details remain with the transfer throughout the payment chain; GFSC has issued draft revised Notes for consultation. - Communicate to banks that decisions to establish relationships with higher risk customers should be taken by senior management; GFSC draft revised Notes address this. - Redraft section 63 exception on opening accounts without verified identity to clarify circumstances for discretionary use; GFSC draft revised Notes address this. - Redouble efforts to ensure consistency in customer identification approaches by licensees. - Ongoing monitoring: - Amend relevant laws within the two-year FATF period to require accurate and meaningful originator information on funds transfers to remain with transfers throughout the payment chain, and require enhanced scrutiny of wire transfers lacking complete originator information; GFSC draft revised Notes address this. - Amend paragraph 25 of the Notes to clarify standards for delegation of vigilance policy; GFSC draft revised Notes address this. - Record keeping: - Consider including a reference to customer transactions in the definition of customer documents in the Regulations; GFSC draft revised Notes address this. - Amend the Notes to require records of the currency involved and the type and identifying number of any account in the transaction be maintained; GFSC draft revised Notes address this. - Suspicious transactions reporting: - Adopt legislation along the lines of the Draft Miscellaneous Provisions Law (Sections 1 and 2) to make failure to report a suspicious transaction under the POC Law a crime rather than a defense to money laundering; draft law to be presented to the States Assembly for approval in September. - Consider providing the FIS authority to give instructions to reporting entities or to require FIs to observe FIS instructions. - Amend Section 102 of the Notes to address suspicion that funds have been used to finance terrorism; GFSC draft revised Notes address this. - Amend paragraph 97 wording to make clear that all staff have a duty to report suspicions (avoid implication that only “key staff” must report). - Internal controls, compliance and audit: - Consider amending laws to require FIs to appoint a person to receive suspicious reports and require notification to the GFSC of changes in that position. - Consider amending laws to require all FIs to implement adequate screening procedures for employees to ensure high standards when hiring. *cr03365 - Section 57 of the Insurance Managers and Intermediaries Law and Section 80 of the Insurance Business Law* ### Part 5.01(3) of the Investment Licensees Rules, ### Part 5.01(3) of the Investment Licensees Rules ### AML/CFT application to branches and subsidiaries - Part 5.01(3) applies to investment business only. - The GFSC has issued draft revised Notes for consultation which address the issue of applying Guernsey legal and regulatory requirements in respect of AML/CFT to branches and subsidiaries outside of Guernsey. - Recommendation: require all Guernsey FIs to apply Guernsey AML/CFT requirements to their branches and subsidiaries outside of Guernsey. - Recommendation: amend the Notes to require that where the minimum AML/CFT requirements of the home and host jurisdictions differ, branches and subsidiaries in host jurisdictions should be required to apply the higher standard. - The GFSC has issued draft revised regulations and Notes for consultation which address this issue. ### Integrity standards and fit-and-proper - Consideration: amend the POI Law to allow the GFSC to take into account the criminal history of applicants for licenses, directors and senior officers as part of the definition of ‘fit and proper’ along the lines of the Banking, Fiduciary and Insurance Laws. - Authorities indicated such amendment will receive royal assent the end of July 2003. - The Protection of Investors (Bailiwick of Guernsey)(Amendment No. 2) Law, 2003 requires the GFSC to take into account the criminal history of applicants for licences, directors and officers as part of the definition of “fit and proper”. ### Enforcement powers and sanctions (regulated sectors and investment business) - Recommendation: amend relevant laws so all FSBs are subject to the same set of sanctions, particularly to provide GFSC the powers available in sectors other than investment business: - the issuance of a written directive or order; and - the appointment of a special auditor at the expense of the licensee. - Recommendation: amend laws to provide additional GFSC powers in the areas of civil money penalties or administrative fines which may be imposed on companies and controllers and the ability to petition a court to appoint a provisional or temporary administrator or conservator for a defined period. - Consideration: amend the POI to provide legal authority for the GFSC to enter a licensee’s premises for obtaining information and assessing its business. - Authorities indicated an enabling provision has recently been added to the FSC Law and they intend to proceed with an Ordinance providing for a specific power to enter licensees’ premises at an early stage. - It is intended that legislation will be promoted in 2004 to provide the GFSC with the power to issue a written directive or order in respect of persons undertaking investment business. - It is intended an amendment to the Protection of Investors (Bailiwick of Guernsey) Law, 1987 will be promoted in 2004, providing for appointment by the GFSC of inspectors to investigate investment licensees. - The GFSC will report to the States of Guernsey Advisory and Finance Committee during 2004 in respect of civil money penalties and administrative fines. - An enabling provision has been included in the Financial Services Commission (Bailiwick of Guernsey) (Amendment) Law, 2003, permitting the States Assembly to introduce by Ordinance separate, explicit, legal provisions for on-site visits; an Ordinance is expected to be laid before the States Assembly for approval early in 2004. ### Banking and Securities sector—sector-specific AML/CFT elements - Banking—Customer identification: - Banks should ensure that documented procedures stress the importance of staff understanding the nature of a clients’ business and the likely pattern of activity. - Banking—On-going monitoring of accounts and transactions: - The GFSC has issued draft revised Guidance Notes on the Prevention of Money Laundering and Countering the Financing of Terrorism for consultation which address enhancements to ongoing monitoring recommended by the IMF. - Banking—Record keeping: - Banks should ensure procedures provide detailed guidance on the type of customer transaction information that should be retained. - The GFSC has issued draft revised Guidance Notes for consultation which include the specific recommendations on record keeping made by the IMF. - Securities—Enforcement powers and sanctions: - The POI should be amended to provide for the Commission to enter a licensee's premises for obtaining information and undertaking an assessment of its business. - See paragraph 102 for the response to recommendation to provide GFSC with separate, explicit, statutory on-site inspection powers with regard to investment licensees. ### Authorities’ responses and planned legislative action (AML/CFT and related areas) - The authorities welcome the IMF’s assessment that the Bailiwick of Guernsey has a sound legal and institutional AML/CFT framework with a high level of compliance with the FATF Recommendations on Money Laundering and the Special Recommendations on Terrorist Financing. - Criminalization of ML and FT: - The Prevention of Corruption (Bailiwick of Guernsey) Law, 2003 was approved by the States Assembly in September 2003; once it has received Royal Assent it will supersede the existing common law on corruption and assist the Bailiwick to adopt the Palermo Convention. - Authorities will maintain their programme of legislation so that the Convention can be extended to Guernsey. - Confiscation and asset forfeiture: - Consideration will be given to amending the Terrorism and Crime (Bailiwick of Guernsey) Law, 2002 to provide for appointment of a receiver for all property owned by a defendant and for sale of such property to satisfy a confiscation order. - During 2004, consideration will be given to new legislation based on the UK Proceeds of Crime Act in respect of introduction of a statutory asset forfeiture fund and legislation for asset sharing with other jurisdictions. - FIU and reporting: - The States Assembly approved drafting instructions for the Criminal Justice (Miscellaneous Provisions) (Bailiwick of Guernsey) Law in 2002; this law is intended to be presented to the States Assembly for approval early in 2004 and will include provisions making it an offence if a financial services business fails to report a suspicious transaction to the Financial Intelligence Service. - The new law will replace the existing legal provision whereby reporting of a suspicion is a defence against committing the crime of money laundering. - The new law will permit the Financial Intelligence Service to prescribe the format of suspicious transaction reports. - During 2004, consideration will be given to a requirement for information to be provided by reporting entities on an intelligence basis to the Financial Intelligence Service as part of the drafting of the Guernsey equivalent of the UK Proceeds of Crime Act. - Consideration will be given to providing the Financial Intelligence Service with authority to give instructions to reporting entities and to require FSBs to observe instructions as part of the drafting of the Guernsey equivalent of the UK Proceeds of Crime Act. - Training of two investigators for the Financial Intelligence Service has been approved; an intelligence analyst and an administrative assistant were appointed earlier in 2003. - The Financial Intelligence Service has given consideration to the development of its information technology resources and tenders have been issued; work on the new computer system will commence as soon as possible. - Regulation and guidance: - The Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Regulations, 2002 provide that a court may take account of the Guidance Notes and any other guidance issued, adopted or approved by the GFSC; it is proposed to amend the Regulations to state explicitly that the GFSC must issue guidance notes under the Regulations. - The GFSC has issued draft revised Guidance Notes to the finance sector for consultation and is consulting with the finance sector in connection with publication of a statement on the FATF’s June 2003 Recommendation on introduced business. - The GFSC has issued draft revised Guidance Notes which address the enhancement to ongoing monitoring, record keeping, and the issue of the use of the term “key staff”. - Internal controls, compliance and audit: - Amendments to the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Regulations, 2002 and the Guidance Notes have been issued for consultation requiring all financial services businesses to put in place adequate screening procedures to ensure high standards when hiring employees. - Amendments include additional detail on application of AML/CFT standards to branches and subsidiaries of Guernsey financial services businesses. - Amendments issued for consultation require designation of a reporting officer who should be resident in the Bailiwick of Guernsey and whose name and title must be provided to the GFSC. ### Insurance core principles and market structure - The assessment of Guernsey’s compliance with the IAIS Core Principles was completed as part of the IMF Offshore Financial Sector (OFC) assessment program to benchmark insurance supervision and suggest strengthening measures. - Information and methodology: - Review involved comparison with the Core Principles and Core Principles Methodology, Standards and Principles already adopted, and a review of the necessary parts of the insurance laws. - Markets and institutional setting: - Guernsey is the leading European insurance captive domicile with 382 captives and protected cell companies licensed for insurance purposes. - Guernsey is number one in Europe before Luxembourg, Ireland, and the Isle of Man. - The insurance sector employs nearly 1,000 persons. - The Insurance Business (Bailiwick of Guernsey) Law, 2002 (IB Law) and the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law 2002 (IMII Law) came into effect on November 5, 2002. - Company types and supervision: - The GFSC distinguishes between international and domestic insurance companies: international insurance companies are captive, life insurance companies or protected cell companies; domestic companies are local domestic insurers or overseas insurers writing Guernsey risks. - Captive insurance companies provide insurance coverage to all or some risks of their parent; broad captives may become similar to commercial insurers. - A protected cell company (PCC) allows separate cellular assets protected from liabilities of other cells; the Protected Cell Companies’ Ordinance, 1997 allows creation and carrying of insurance business in Guernsey by these companies. - Creditors of any one cell have no entitlement to recourse to assets of any other cell, but if assets of that cell prove insufficient they may have recourse to the PCC’s noncellular (core) assets. - The capital and solvency requirements of the IB Law are applicable to insurance PCCs; if core capital and net worth is intended to support cell business, usual solvency ratios apply in a consolidated manner; where each cell will be capitalized (with a minimum in the core) each cell will have to satisfy the ratio. - The GFSC supervises PCCs on a risk basis; board of directors and management must fulfill fit and proper-test, accounting procedures, financial reporting, business plan requirements of the IB Law and additional regulations regarding the special “cell nature” of these companies. - Guernsey was the first jurisdiction to introduce by law the concept of PCCs. - Market size and management: - At the end of 2002 there were 50 licensed PCCs with 214 cells. - International insurance companies (captives and PCCs) are mainly managed by 30 management firms; the biggest among them are managing between 50 and 140 companies (Aon Insurance Managers (Guernsey) Limited, Marsh Management Services Guernsey Limited, Willis Management Guernsey Limited). - Managers need to be licensed by the GFSC under the IMII Law. - Domestic insurers: - Local insurers are organizations incorporated in Guernsey writing, wholly or primarily business for the resident market, including several mutuals dating back as far as the early 1800s. - Overseas insurers domiciled outside Guernsey (mostly from the United Kingdom) writing domestic insurance business are required to be licensed by the GFSC when they advise or arrange contracts through a branch or agent resident in Guernsey; prudential supervision of these companies, including solvency, is the responsibility of the home supervisor. - Where an insurer does not maintain a physical presence, the GFSC must be notified and that insurer is classed as a recognized insurer; an insurer cannot be added to the recognized list without being licensed in its home jurisdiction. *Source: Part 5.01(3) of the Investment Licensees Rules and accompanying sections in the referenced IMF assessment.* ### 74. Within the GFSC supervision of insurance is carried out by the Insurance Division ### cr03365 - 74. Within the GFSC supervision of insurance is carried out by the Insurance Division ### Organization of the Insurance Supervisor (Principle 1) - The Insurance supervisor in Guernsey is the GFSC, a statutory body established under the Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (as amended) (the FSC Law). The GFSC is the regulatory body responsible for all financial services (banking, insurance, investment business and fiduciary services). - The GFSC’s general functions under the FSC Law include: - to take such steps as the GFSC considers necessary or expedient for the development and effective supervision of finance business in Guernsey; and - the countering of financial crime and the financing of terrorism. - The GFSC must have regard particularly to: - The protection of the public interest, including the protection of the public against financial loss due to dishonesty, incompetence, or malpractice by persons carrying on finance business; and - the protection and enhancement of the reputation of Guernsey as a financial center. - Legal and operational independence: - Section 4 of the FSC Law provides that the GFSC is not a committee of the States, or a servant or agent of the States, and, except to the extent that this Law or any enactment otherwise provides: (a) is not subject to any rule of law relating to committees of the States; (b) does not have any right or privilege vested in committees of the States. - The States Advisory and Finance Committee may, after consulting the GFSC, give written guidance of a general character and written directions of a general character concerning policies to be followed by the GFSC (Section 7). The Insurance Division has confirmed that until now the Committee has not given guidance or directions on matters related to insurance. - The GFSC is not subject to any external controls on specific matters such as licensing or enforcement matters. - Accountability, reporting, and transparency: - The overall activity and policy of the GFSC is overseen by five commissioners. - The GFSC is required to report annually on its activities to the Parliament of Guernsey (States); the report is debated in a States meeting, published and made available to the general public free of charge, and is published on the GFSC’s website. - The supervisory process for insurance is set out in the IB Law (insurance business), the IMII Law (insurance intermediaries), and in Sections 2 and 3 of the FSC Law (financial services business generally). - Funding, budgeting, and resourcing: - The GFSC is mainly funded by fees paid by the licensees and receives a small grant from the States of Guernsey for administration of the Control of Borrowing Ordinance, 1959 (COBO), and a further grant for development of the financial services sector in Guernsey. - The GFSC has budgeting processes to predict staff and resource needs; regulatory fees are considered and adjusted following consultation with the Advisory and Finance Committee and relevant committees in Alderney and Sark. - Powers, legal protection, and use of third parties: - The IB Law and IMII Law provide supervisory authority with all rights necessary for information and intervention. - The IB Law and IMII Law protect GFSC staff from any liability in respect of anything done or omitted in the discharge of any function of the GFSC under the Laws unless it is done in bad faith. - The GFSC can appoint necessary officers and servants. The GFSC uses third parties (lawyers, accountants, actuaries) where specialist support is required; responsibility and accountability remain with the GFSC. Third parties are subject to the same confidentiality provisions as GFSC staff and a confidentiality clause is required prior to engagement if not in the contract. - Human resources and training: - As of 30 August, the GFSC employed 79 staff (9 of which have been seconded to the Training Agency), of which 20 have been employed by the GFSC for more than five years. - Fourteen staff work within the Insurance Division, comprising: a Director, Deputy Director, an actuary, a consultant, four senior analysts, four analysts, and two support staff. - Personnel within the Division possess a wide number of professional qualifications and a wide variety of finance sector and regulatory experience; senior staff are highly professionally qualified and members of relevant national and international professional bodies. - Guernsey has a Training Agency established by the GFSC and jointly funded by the GFSC and the States of Guernsey. The Agency provides training across financial and business areas. In 2001 there were 715 licensed students and 254 training events. - The GFSC’s staff costs for 2001 were £2.183million. - A human resources officer joined the GFSC in September 2002. Following a 2001 consultant survey, new remuneration structures were implemented to remain competitive with industry. - Governance of procedures and decision-making: - The Insurance Division reports directly to the Director General for matters requiring immediate action; matters may be referred to the commissioners and urgent decisions needing commissioners’ approval are dealt with by telephone, email or fax. - The Insurance Division has a comprehensive procedures manual, including documented emergency procedures. Sections 13 and 14 of the IB Law (Sections 8 and 9 of the IMII Law) set out sanctions and emergency steps. - The GFSC uses a variety of media to develop and explain operational policies, including information circulars, articles in the GFSC’s publication “Update”, and the annual report; these are available free of charge and the annual report is available via the GFSC’s website. - Assessment and comments: - Assessment: Largely observed. - Comments: The mission acknowledges that the States Advisory and Finance Committee’s power to give guidance and directions has not interfered to date with the GFSC’s capacity to carry out its functions, and that development and effective supervision can be complementary objectives. However, the current Law has the potential to compromise the judgment and independence of the supervisors. - Mission recommendations to strengthen operational independence and clarity of mandate: - Amend the FSC Law to remove the power of the Advisory and Finance Committee to provide guidance and direction to the GFSC. - The FSC Law should establish safety, soundness, and integrity of the financial system as the objectives of the GFSC, and eliminate “development” as one of the GFSC functions. - Ensure there are no provisions in the Law that could potentially compromise the stated objectives. - The GFSC should be able to continue its support of the activities of the Training Agency that are consistent with the revised mandate. - Increase Insurance Division staffing given intensified supervision needs (noting that since the mission the staff was increased by the addition of a trainee actuary and two analysts); the mission suggested further staff increases (second actuary, additional analysts) given new responsibilities and increased volatility and competition in the insurance sector. ### Licensing (Principle 2) - Legal basis and scope: - The legal mechanism for licensing insurance business, insurance managers, and insurance intermediaries in or from within Guernsey is provided by the IB Law and the IMII Law. - The IB Law provides that all persons carrying on insurance business in or from within Guernsey must be licensed by the GFSC. There is no difference between domestic and foreign insurers as to the licensing requirement or the application process, except where a foreign insurer carries on business through licensed intermediaries without a physical presence and is notified to the GFSC as a recognized insurer (then no license required and the GFSC relies on the home supervisor). - Regulations and application materials: - The information required by an applicant when applying for a license is contained in the Insurance Business Licensing Regulations, 2002 (IBL Regulations), and Insurance Intermediaries’ and Insurance Managers’ Licensing Regulations, 2002 (IIIML Regulations), which came into effect in November 2002. These regulations and guidelines are available in hard copy and from the GFSC’s website. - The Laws and Schedules contain definitions: insurance business (Schedule 5 Glossary) subdivided into long term business and general business (Sections 2(2), (3) and (4) and Schedule 1 of the IB Law). Under the IMII Law an insurance manager is defined in Section 1(3) and an insurance intermediary in Section 2(5). - Licensing process and criteria: - An Assessment Committee (Director of Insurance, Deputy Director of Insurance, and staff from the relevant team) meets regularly to consider each application and form a view on granting a license. - Schedule 7 (Minimum criteria for licensing) of the IB Law (Schedule 4 in the IMII Law) contains detailed minimum criteria; the GFSC will not grant a license unless it is satisfied the minimum licensing criteria have been met. - Legal forms are expressed as “persons” (Schedule 5 of the IB Law / Schedule 3 of the IMII Law) and include bodies corporate and unincorporated bodies; three mutual companies carry on insurance (founded before establishment of insurance supervision in Guernsey). - Fit and proper and documentation requirements: - Provisions governing fitness and propriety of key functionaries (directors, controllers, partners, managers, general representatives) are contained in the IB Law and the IMII Law. Minimum criteria cover: integrity and skill; economic benefit to the Bailiwick; fit and proper persons; business to be directed by at least two individuals; position of the board of directors; and business to be conducted in a prudent manner. - The IBL Regulations and IIIML Regulations require that each application includes names and addresses of current and proposed directors, officers, managers, general representative, and consultants; the GFSC may request details on any other person connected with the application. - The IB Law and the IMII Law require personal questionnaires (PQs) for directors and controllers; the IBL Regulations and IIIML Regulations permit the GFSC to ask for PQs for any other person connected with the application. - Transparency and applicant rights: - The general criteria for granting or denying a license are publicly available. Applicants for a license or authorization are entitled to make written or oral representations in the event of an adverse decision. - The GFSC’s policies and the insurance legislation under which it operates have been made available during consultation processes (draft laws on the GFSC’s website, workshops to explain changes); regulations and Codes have been made available on the GFSC’s website during the consultation process. - Operational practice: - The GFSC previously outsourced actuarial work prior to employing its own actuary. - Annually, the GFSC uses the services of an insurance auditor for a period of eight weeks to assist in timely review of annual insurance returns because most licensees have year-ends in December and annual insurance returns are submitted at the end of April. *Detailed Assessment of Observance of the IAIS Insurance Core Principles — mission assessment.* ### 1998. The IAIS Fit and Proper Principles were based on the Guernsey model. ### 1998. The IAIS Fit and Proper Principles were based on the Guernsey model. ### Fit and Proper, Licensing, Notifications, and Approvals - The Licensed Insurer’s Corporate Governance Code (LICG Code) requires directors to annually consider their PQs and advise the GFSC of any material changes. - The IBL Regulations and the IIIML Regulations require applicants to notify the GFSC of the names of natural and legal persons holding a direct or indirect qualifying participation in the applicant company. - The IB Law and the IMII Law require prior approval for any changes in directors, controllers, etc.; similar notification and approval procedures apply post-licensing. - The IB Law and the IMII Law confer powers on the GFSC to request and obtain any information and documents required for supervisory and regulatory functions, including material outsourcing contracts. - The GFSC routinely holds pre-approval meetings with proposed management and may obtain independent legal opinions on material contracts. - The GFSC uses internal data and commercial databases such as Lexis Nexis, regulatory websites (e.g., U.S. SEC), and certain nonpublic UK regulatory databases for vetting fit and proper status. ### Business Plan and Application Requirements - The IBL Regulations and IIIML Regulations require an applicant to produce and submit a three year regulatory business plan that, for insurance companies, must include for the first three years after licensing: - forecast profit and loss account, broken down into technical account and nontechnical account; - forecast balance sheet; - forecast statement of solvency; - for long-term insurance business, forecast statement approved by a qualified actuary. - Additional required business plan content: - Description of the nature of the risks intended to be written; - Explanation of strategy for managing risks, particularly reinsurance; - Details of any loss history and past actuarial studies (where appropriate); - Confirmation that financial projections are consistent with loss history and actuarial studies; - Rationale for setting up a company in Guernsey rather than in the parent’s jurisdiction; - Summary of any proposed portfolio transfers with actuarial valuations establishing transfer value; - Investment policy and names of investment managers where applicable; - Details of exposures to be underwritten, reinsurance arrangements and dividend policy; - Details of any fronting arrangements; - Details of parties providing services in relation to policyholder protection arrangements (long term business only); - For protected cell companies where the cell is reliant on the core for solvency, a solvency projection. - For applicants under the IMII Law, IIIML Regulations require: - financial projections for the first three years after licensing; - a narrative rationale for setting up in the Bailiwick; - for insurance intermediaries, a list of insurance companies intended to be used for the next 12 months; - details of other forms of business to be undertaken; and - details of jurisdictions in which they intend to conduct business. - The Insurance Division’s procedures manual sets out detailed submission requirements for business plans. ### Changes in Control (Principle 3) - The IB Law and IMII Law require controllers and proposed controllers to notify the GFSC of any changes in control and to seek prior approval; failure to notify is an offense under the IB Law. - “Controller” definitions (Schedule 5) include managing directors/chief executives, shareholder controllers, indirect controllers; a shareholder controller is generally a person entitled to exercise 15 percent or more of voting power (50 percent or more of cell shares for a protected cell company). - The IMII Law requires notice where any person has become or ceased to be a director, controller, manager or auditor of a licensee. - Material changes in control require submission of a new business plan; thresholds are reviewed via the annual return and on-site inspections. - GFSC assesses proposed changes by reviewing Personal Questionnaires, company accounts, and regulatory checks with other authorities; GFSC notifies acceptance or objection in writing and provides particulars for appeal. ### Corporate Governance (Principle 4) — LICG Code - The LICG Code came into effect in November 2002; failure to comply is an offense under the IB Law. - GFSC requires boards to adopt LICG Code provisions at inaugural meeting and to make an annual compliance review; compliance required by 31st December 2003. - Annual regulatory return must include a declaration certifying compliance with LICG Code; disclosure of adherence required in annual report and accounts. - LICG Code board requirements and governance measures include: - define strategic objectives and ensure adequate and timely management information; - memorandum and articles to set out procedures for election and de-selection of the board; - at least one director who is neither an employee of the shareholder, the company, nor the appointed licensed insurance manager unless GFSC waives requirement in writing; - board to ensure management takes instructions collectively from the board and to impose appropriate levels of authority and reporting where management is employed internally; - board to identify key operational risks and develop risk management systems to identify, measure, monitor, and control underwriting risk, credit risk, and other risks; - requirement for external audit and for the board or appointed committee to meet external auditors where necessary; - requirement to establish internal control procedures and procedures for handling customer complaints where policies issued to the public. - GFSC can impose conditions, suspend, or revoke licenses for non-compliance; GFSC may object to controllers or directors who are no longer fit and proper. ### Internal Controls (Principle 5) - LICG Code requires boards to establish internal control procedures proportionate to the nature and scale of business; inaugural meeting extracts identifying adopted internal controls must be provided to GFSC. - Required internal controls include: - prudential oversight for underwriting risks, valuation of technical provisions, investment and liquidity management, reinsurance and reinsurer credit status; - monitoring of capital resources; - oversight of market conduct activities; - oversight of divisions of responsibilities and custody arrangements; - oversight of compliance issues. - Bank mandate details are required at application to verify control of assets. - Policyholder Protection requirements: life companies must keep assets representing at least 90 percent of policyholder liabilities under control of an independent Guernsey trustee; trustee must report asset values quarterly and inform GFSC if assets representing more than 5 percent of market value are withdrawn in any calendar month. - Internal audit is not mandatory under Insurance Laws, but external audits by GFSC-approved auditors are required; GFSC can require substitution of external auditors or actuaries if duties not properly discharged. ### Assets and Investment Standards (Principle 6) - Legal basis: IB Law, Insurance Business (Approved Asset) Regulations, 2002, and Insurance Business (Asset and Liability Valuation) Regulations, 2002. - Approved assets principally restricted to trading assets and high quality investments readily realizable in recognized markets; LIALV Regulations impose valuation restrictions for concentration, non-realizable assets, and trading assets not realized within 90 days. - GFSC uses “recognized territory,” “recognized bank,” and “recognized stock exchange” restrictions and can amend lists quickly in response to market events. - LICG Code requires the board to consider mismatching between assets and liabilities, adopt internal guidelines, and avoid deliberate mismatch unless a mismatching reserve is set up (following Faculty and Institute of Actuaries Guidance Notes). - Investment strategy must be approved and monitored by the board at least annually and should consider regular resilience testing for a range of market scenarios. - Illiquid assets and assets without independent pricing verification are excluded from approved assets; assets under lien are unapproved. - Trading in derivatives is prohibited under Section 11(1)(b) of the IB Law without specific GFSC consent. - Licensed insurers commonly invest in bank deposits or certificates of deposit; limited diversification into equities and other markets. - GFSC may impose restrictions or require more frequent returns if investment activities are inappropriate for liability profile. - Actuarial reviews performed on life and nonlife business where appropriate; GFSC uses own actuary and independent actuaries. ### Liabilities and Actuarial Standards (Principle 7) - Valuation of liabilities detailed in Schedule 2 of the IB Law; liabilities determined in accordance with Recognized Accounting Standards. - Long-term business requires an annual actuarial investigation and report in accordance with Relevant Professional Standards of the Institute of Actuaries in London; report accompanies audited financial report and is delivered to GFSC. - GFSC may require actuarial valuation of technical provisions in general insurance and may impose additional prudent technical reserves. - Debts, including reinsurer’s share of the technical account, considered on a gross basis unless a legally enforceable right of offset exists. - Reinsurance program details required at application and for any subsequent changes; GFSC can intervene and impose conditions if arrangements are unsuitable. - Off-site monitoring tools: audited financial accounts, annual returns, and actuarial reports; GFSC can obtain additional information for review and conducts on-site inspections to analyze adequacy of technical provisions. ### Capital Adequacy and Solvency (Principle 8) - IB Law and supporting Regulations govern solvency requirements (technical provisions, assets, capital adequacy). - Section 30 of the IB Law requires maintenance of a margin of solvency (excess of assets over liabilities determined in accordance with Schedule 2); Section 32 requires paid up share capital be not less than Minimum Capital Requirement. - Minimum Capital Requirement Regulations specify: - Licensed Insurers writing general insurance business: £100,000 - Licensed Insurers writing long-term insurance business: £250,000 - A person shall not be regarded as conducting business in a prudent manner unless maintaining a capital base sufficient to safeguard policyholders’ interests; LICG Code requires continuous monitoring of capital adequacy. - Margin of solvency calculations: - For general business: higher of (i) the sum of 18 percent of the first £5 million net premium income and 16 percent of the value of its net premium income exceeding £5 million; or (ii) 5 percent of the value of its loss reserves. - For long-term business: greater of (i) £250,000; or (ii) 2.5 percent of the value of the fund required under Section 42(1) (excluding the part referred to in Section 42(2)). - Schedule 2 1(2) permits GFSC to modify solvency requirements taking into account “size, complexity of business, and business risks of the insurer.” The GFSC has applied a risk based approach since 1988 and may require higher capital in practice. - The business plan and annual return are principal prospective and retrospective supervisory tools, respectively; GFSC can require more frequent reporting under Section 12 of the IB Law. - Where an insurer’s margin of solvency falls below required level, LICG Code requires the insurer to advise GFSC within seven days of becoming aware; GFSC may require submission of a recovery plan. - GFSC monitors double/multiple gearing and loanbacks; GFSC can consult overseas authorities for transactions affecting other jurisdictions. - Comment in source: minimum capital and solvency margins are low compared with some jurisdictions (e.g., EU) but GFSC routinely raises requirements in practice; consideration should be given to increasing minima over time. ### Derivatives and Off-Balance Sheet Items (Principle 9) - Derivatives may only be traded if “Approved.” Approved derivatives include: - Exchange Traded Derivative Contracts (ETC) or equivalent arrangements if not leveraged and used to: - apply an index tracking strategy to part or all of a portfolio; - apply capital protected strategies to part or all of a portfolio; - apply efficient portfolio management techniques to a portfolio; - reduce investment risk currently employed on a portfolio. - IB Law and Insurance Business (Approved Assets) Regulations, 2002 specify criteria for approved derivatives; such assets must be disclosed as class 4 items in the annual regulatory return. - Over-the-counter derivatives are prohibited and do not qualify as approved assets. - LICG Code requires controls over derivatives and complex instruments and expects directors to ensure personnel dealing in derivatives: - fully understand the nature and risks and are suitably qualified; - have clearly documented objectives and policies for derivatives; - can analyze and monitor risk individually and in aggregate; - ensure control functions are sufficiently independent of day-to-day operators; - ensure sufficient systems and controls are in place. - LICG Code requires annual board review of overall investment strategy including derivatives and frequent reporting on investment activities and controls. - GFSC undertakes compliance reviews and on-site inspections to ensure compliance with LIALV Regulations, 2002. ### Reinsurance (Principle 10) - Reinsurance program must be included in business plan; any changes require prior notification to GFSC. - IB Law requires a declaration of reliance on reinsurers; where amount receivable from a reinsurer is more than 10 percent of the licensed insurer’s shareholder funds, the following must be submitted with the annual regulatory return: - name and address of the reinsurance company; - whether and how the insurer is connected with the reinsurer; - details of the reinsurer’s credit rating; - the amount receivable, including amount of any offset against reserves; - the due date of the amount receivable; - the amount of receivable in dispute; - treatment of the amount receivable and disputed in the audited financial statements; - status of recovery. - GFSC subscribes to Standard & Poors and Fitch rating services and uses them to check appropriateness of reinsurers; in practice licensed insurers use highly rated reinsurers. - GFSC imposes no fixed limit on ceded reinsurance but monitors arrangements and imposes individual limits where necessary. - A primary insurer actively reinsuring is supervised for entire business; a pure reinsurer carrying on or holding out as carrying on business in or from Guernsey requires a license and is subject to same regulations as a direct insurer. - At present in the source, there are no pure reinsurers licensed in Guernsey. ### Market Conduct (Principle 11) - The IB Law and IMII Law require key functionaries to be fit and proper; Principles of Finance Business require high standards of integrity, fair dealing, and due skill, care and diligence. - Codes (LI Code, LICG Code, AIR Code) set minimum standards of good practice covering advertisements, client accounts and records, fair treatment of customers, disclosure, and confidentiality. - Proposal forms must draw attention to proposer’s duty to disclose all material facts; renewal notices must warn of duty to disclose changes relevant to renewal. - Codes require procedures for complaints handling where licensed insurers issue policies to the public, with minimum timelines: - first reported to appointed managers (or management if self-managed); - if no satisfactory response within 30 days, escalate to a board member; - if no satisfactory response within 30 days of board consideration, inform complainant of rights and further procedures; - if no satisfactory response within 90 days of receipt, directors must notify GFSC. - GFSC conducts on-site inspections to assess compliance with market conduct provisions and follows up complaints with licensees; GFSC is not Ombudsman or Arbitrator but reviews complaints for regulatory concerns. - A financial services ombudsman role is in the process of being created; Advisory and Finance Committee issued a consultation paper in February 2002. ### Financial Reporting and Supervisory Reporting (Principle 12) - IB Law requires insurers to prepare annual return and financial accounts and submit these with auditor’s report and actuarial report (if applicable) to GFSC within four months of the financial period end. - IMII Law requires similar information from licensed insurance managers and intermediaries within six months of the financial period end. - GFSC may require reports on a solo or consolidated basis and may vary scope and frequency of reports as it sees fit; life insurers and certain other insurers may be required to submit management accounts quarterly. - Accounts must be prepared in accordance with Recognized Accounting Standards (U.K. GAAP or other internationally accepted standards); GFSC may specify which accounting standards are Recognized Accounting Standards. - Two directors must sign audited accounts of licensed insurer; the general representative is responsible for lodgment and must include signed declarations in the annual return confirming compliance with margin of solvency, approved assets, LI Code, LICG Code, and other codes or rules under the IB Law. *Source: GFSC/Guernsey-related material and IB Law / IMII Law descriptions as presented in the original content.* ### Section 11 of the IB Law; ### Section 11 of the IB Law ### Regulatory reporting, audit, actuarial requirements, and supervisory monitoring - The GFSC reviews submitted documents and uses them as one of its principal retrospective tools for regulating and monitoring the financial condition of a licensee. - Licensed insurers must submit with their annual regulatory return: - 12 months financial projections for general insurers; and - three years financial projections for those carrying on long-term business. - All financial information is kept on the GFSC’s computer system where certain ratio calculations provide further checks. - Annual regulatory returns and financial statements are supported by information from: - special information requests; - on-site inspections; and - communication with insurance managers, external auditors, actuaries, or other skilled persons. - Under the IB Law, a licensed insurer must notify the GFSC prior to any material changes to the business plan; material changes include, but are not limited to: excessive losses; diminution of asset values; and changes to the nature and size of premium income. - The GFSC may request any additional information and documents necessary to assist it in its review. - A licensee who fails to comply with the above requirements is guilty of an offense under the IB Law and the IMII Law. - Where a document appears to be inaccurate or deficient, the GFSC has authority to request correction and making good of any such deficiency. - The IB Law and the IMII Law require a licensee to appoint an external auditor to audit and include a report on the financial accounts periodically. - The GFSC may impose a requirement for more frequent audits where special conditions are attached to a licensee or if the GFSC has concerns over all or part of a licensee’s business. - For licensed insurers carrying on long term insurance business, the IB Law requires the appointment of an actuary who must carry out an annual investigation and report into the financial condition of the licensed insurer; this report must be submitted at the same time as the returns required under the IB Law. - Assessment: Observed. ### On-site inspection program (Principle 13) - GFSC powers and practice: - The GFSC may conduct on-site inspections at such times and intervals as it thinks fit for the protection of the interests of the public or policyholders or the reputation of Guernsey as a financial center. - Routine on-site inspections assess compliance with the IB Law, IMII Law, or any Ordinance, Regulation, Rule or Code, Condition or Direction made under the Laws. - The GFSC carries out visits on a 3 year rolling program for all licensees, except insurance intermediary sole traders who are subject to annual inspections. - Ad hoc inspections are conducted as and when necessary. - Joint inspections with other departments are coordinated to minimize duplication. - Typical on-site team composition and process: - Team usually made up of a senior analyst (or in the case of a life insurer, an actuary) and an analyst plus additional technical support as necessary. - The team completes standard forms tailored to the licensee’s business, covering areas such as: - money laundering; - captive insurance company and protected cell company; - life insurance company; - domestic insurance company; and - insurance intermediary. - For routine inspections, it is normal practice to give one-month’s advance notice and require provision of standard information prior to commencement. - A pre inspection meeting is held internally with the on-site team, Assessment Committee and representatives from other divisions to discuss key areas and initial concerns. - Assessment Committee membership depends upon the licensee and usually includes the Director, Deputy Director, and relevant staff. - At commencement, the agenda is explained to the licensee and queries are answered to promote openness and transparency. - Findings, follow-up, and remedial steps: - Detailed records are kept of all material; Summary Recommendations are drafted and the final Summary Recommendations are issued to the licensee. - The licensee is expected to provide a progress report one month after the date of issuing the Summary Recommendations; a reminder will be issued if necessary. - Licensees may be given a specific time to address Summary Recommendations, with a revisit scheduled at the end of the time given. - The Deputy Director may attend a re-inspection to review how issues have been addressed. - The on-site team refers to the Assessment Committee to form a conclusion as to whether to report the issue to the commissioners. - GFSC may require the licensee to appoint an independent third party or may appoint an independent third party at the expense of the licensee to assess remediation. - Where deficiencies are identified, the normal practice is to require remedial action within a specified time and reporting back to the GFSC. - Where serious failings are apparent, the GFSC may attach a condition to the license (for instance prohibition of new business) until rectified. - GFSC may extend inspections to parties associated with the licensee; where associated parties are in a different jurisdiction, the GFSC will liaise with the insurance supervisor in that jurisdiction for coordinated or joint inspections. - Treatment of customers, disputes/litigation, and observance of consumer regulations are part of normal on-site review procedures. - Prior to inspections, standard information requested includes details of complaints and litigation; the complaints register is examined during inspection. - The GFSC schedules planned inspections annually for implementation the following year; the program is reviewed where matters of concern arise. - The first inspection gains an overview of the licensee; subsequent inspections focus on regulatory issues from the previous inspection, regulatory environment changes, and licensee changes. - All of the above activities are evaluated as part of the on-site inspection. - Activity metric: - In 2001 a total of 18 inspections were undertaken, including 1 follow up inspection and 2 special reviews in response to specific issues which had come to the GFSC’s attention. - Assessment: Observed. ### Sanctions and remedial powers (Principle 14) - Legislative and supervisory powers: - The GFSC may refuse a license if ownership and organizational structure may hinder effective supervision. - IBL Regulations and IMIIL Regulations require applicants to submit a group organization chart and background summaries of related parties for licensing consideration. - GFSC may revoke a license where false, misleading, deceptive, or inaccurate information has been provided. - The IB Law and IMII Law authorize the GFSC to refuse or revoke a license where key functionaries are not fit and proper. - GFSC may require removal of directors, controllers, managers, partners, employees, general representatives, auditors, or actuaries to protect policyholders and the public. - GFSC powers include: suspend or revoke a license; prohibit or impose limitations on carrying on insurance business; object to someone becoming a controller; appoint inspectors at the expense of the licensee; petition the court for winding up for the protection of the public or reputation of Guernsey; require a recovery plan to be deposited within a short period in a form determined by the GFSC; impose conditions that restrict free disposal of assets or suspend payments. - A temporary administrator substituting management can be appointed only by the court on application by the GFSC; the same court procedure is necessary for transfer of a portfolio. - Enforcement approach and gaps: - The GFSC does not follow a “ladder of compliance”; remedies are case-specific and the GFSC relies on detailed information, proactive supervision, and a significant range of remedial actions. - For serious offenses, fines, prison sentences, and compulsory winding up are available but require intervention of the Royal Court. - The GFSC does not have the power to issue civil money penalties (administrative fines) itself. - Assessment: Observed. - Comment (mission recommendation): Complete the range of sanctions by granting the GFSC the power to impose civil money penalties (administrative fines) following international standards of financial services supervision; it is desirable that all supervisors have consistent enforcement powers. ### Cross-border business operations (Principle 15) - Licensing and recognized insurers: - Under the IB Law everybody carrying on insurance business in or from Guernsey must be licensed and supervised by the GFSC. - Exception: a foreign insurer carrying on insurance business in Guernsey through licensed insurance intermediaries without a physical presence in the Bailiwick is deemed a recognized insurer and is not required to be licensed; the GFSC must be notified and relies on the home supervisor for supervision. - If a recognized insurer is considered unsuitable it is excluded from the recognized insurer list and licensed insurance intermediaries cannot place business with that insurer. - A broker licensed in Guernsey may place Guernsey risks with an overseas insurer provided that insurer is on the GFSC’s recognized insurer list; that insurer cannot write business in Guernsey without being licensed in its home jurisdiction. - Licensing and information exchange for foreign insurers: - Where a Guernsey license is necessary, the GFSC will consider information supplied by the relevant overseas authority in which the insurer currently carries on business. - GFSC powers to grant or refuse licenses to foreign insurers are the same as for Guernsey-based companies; powers apply to insurance subsidiaries or branches of foreign institutions. - GFSC can impose conditions under Section 12 of the IB Law. - Overseas operations by Guernsey insurers: - A Guernsey insurer should not carry on insurance business in or from a country outside Guernsey unless: - it is licensed by the GFSC as an insurer in respect of that description of insurance business; and - that business is carried on outside Guernsey with the written consent of the GFSC and in accordance with any conditions subject to which that consent has been granted. - The GFSC will not provide consent unless it considers the licensee has necessary skills and capability and has appropriate authorization in the other jurisdiction. - The LICG Code requires the board of an insurer with head office in Guernsey and which carries on business overseas to ensure systems and controls are adequate for a sound and verifiable reporting system to its head office. - Memoranda of Understanding and cooperation: - GFSC has formal MOUs regarding cross-border information sharing with multiple supervisors (list provided in source). - MOUs apply to different regulatory activities; the GFSC is arranging two further MOUs. - Director of Insurance holds regular meetings with counterparts (Isle of Man, South African FSB, U.K. FSA) and the GFSC has been proactive in setting up these arrangements. - Where no cross-border arrangements exist, exchange of information between GFSC and other supervisory authorities is provided under the IB Law. - GFSC can cooperate with home state supervisors wishing to undertake on-site inspections within Guernsey; regulators from the Netherlands have undertaken an on-site inspection in the insurance area; the GFSC has undertaken on-site inspections in several other countries. - Assessment: Observed. ### Coordination and cooperation; confidentiality (Principles 16 and 17) - Coordination and cooperation (Principle 16): - The GFSC has statutory gateways to share information domestically and internationally and a long experience of cooperation with foreign regulators. - Within the GFSC, regulatory divisions (banking, insurance, investment, fiduciary services, company administration) identify primary regulators where institutions conduct activities in more than one sector. - Directors of divisions meet weekly to discuss cross-sector licensee issues. - GFSC’s centralized data system containing licensee details (including directors and controllers) is accessible to all divisions; correspondence relating to licensees is circulated to officers across divisions. - Domestic gateways enable GFSC to provide and receive information with domestic law enforcement agencies, Attorney General, and police where money laundering is suspected. - The GFSC may exchange information regardless of whether the other regulator is in civil or criminal investigation or at enquiry stage. - When information suggests an offense could be committed in another jurisdiction, it is sent to the GFSC division responsible for intelligence, which assesses forwarding to Law Officers or relevant overseas agency; coordination ensures information is transferred to the most appropriate external regulatory agency. - Confidentiality (Principle 17): - The FSC Law imposes duties of confidentiality on the GFSC and its staff; Section 21 states information identifying an individual or body acquired by the GFSC in carrying out its duties shall be regarded as confidential by the Commission and its members, officers and servants. - Permitted disclosures under Section 21 include: - (a) to enable the GFSC to carry out any of its functions; - (b) for investigation, prevention or detection of crime or with a view to instigation of criminal proceedings; - (c) in connection with discharge of any international obligation to which Guernsey is subject; - (d) to assist any authority outside Guernsey which appears to exercise functions corresponding to any of the GFSC’s functions; or - (e) to comply with the directions of any division of the Royal Court. - Unauthorized disclosure without reasonable excuse is an offense liable on conviction on indictment to imprisonment for a term not exceeding two years, or to a fine, or to both; and on summary conviction to a fine not exceeding £5,000, to imprisonment for a term not exceeding 3 months or to both. - GFSC staff sign an undertaking on appointment that they have read and understood the provisions of this section of the FSC Law; signed undertakings are renewed annually. - Restrictions on disclosure without consent are also contained in the IB Law and the IMII Law. - The IB Law and IMII Law set out circumstances in which information may be disclosed or shared with other supervisors, on public interest grounds, or for the purpose of investigating, preventing or detecting crime or for criminal proceedings. - Confidentiality requirements apply also to information that the GFSC receives from other insurance supervisors abroad. - Assessment (Principles 16 and 17): Observed. ### Assessment summary and recommended actions - Summary observance (Table 11): - Observed: 16 (Principles 2–17) - Largely observed: 1 - Materially nonobserved: 0 - Nonobserved: 0 - Not applicable: 0 - Recommended actions (Table 12): - ICP 1: - Amend the GFSC Law to remove the power of the Advisory and Finance Committee to provide guidance and direction to the GFSC to strengthen operational independence. - GFSC Law should establish safety, soundness, and integrity of the financial system as the objectives of the GFSC, and eliminate “development” as one of the GFSC functions; remove provisions that could compromise these objectives. - Increase number of staff of the Insurance Division. - ICP 8: - Increase the legally required solvency minimum. - ICP 14: - Complete the range of sanctions by granting the supervisor the power to impose penalties (administrative fines). - Authorities’ response to the Recommended Action Plan: Overview (section header present in source). *Source: Section 11 of the IB Law as summarized from the GFSC assessment and related IAIS ICP analysis.* ### 76. The authorities welcome the IMF’s assessment and confirmation that the Bailiwick of ### The authorities welcome the IMF’s assessment and confirmation that the Bailiwick of Guernsey has achieved a high level of compliance with the IAIS Core Principles ### Organisation (ICP 1) - The authorities welcome the IMF’s assessment and confirmation that the Bailiwick of Guernsey has achieved a high level of compliance with the IAIS Core Principles. - See paragraphs 12 and 13 for the response on the recommendations concerning the GFSC’s objectives and independence. - Since the IMF’s assessment the staff of the GFSC’s Insurance Division has increased to include an assistant actuary and two analysts. ### Prudential Rules (ICP 8) - Solvency requirements: provisions within the Insurance Business (Bailiwick of Guernsey) Law, 2002 allow the GFSC to modify solvency requirements of each insurer depending on the size, nature and complexity of the risks being written. - Solvency levels for individual insurers are set on a case-by-case basis and can be imposed at licensing and on an ongoing basis. - In practice, solvency requirements are much higher than the minimum legal levels set under the law. - The solvency of individual insurers is continually monitored by the GFSC. ### Imposition of Penalties (ICP 14) - The GFSC will report to the States of Guernsey Advisory and Finance Committee in 2004 on the recommendation concerning the imposition of penalties. ### IOSCO objectives and assessment context - The assessment of Guernsey’s compliance with the IOSCO Objectives and Principles of Securities Regulation was completed as part of the IMF Offshore Financial Sector (OFC) assessment program. - The GFSC is a statutory body acting as a single regulator for financial services in the Bailiwick and is a member of IOSCO; it was a party to the IOSCO resolution adopting the statement of Objectives and Principles in September 1998. - Company law is administered by the Law Officers; the Greffier maintains the register of companies. ### Information and methodology used for assessment - The assessment analyzed law and regulations, statements of best practice, and evidence of current practice against the 30 IOSCO Principles. - Compliance ratings used: (i) implemented; (ii) broadly implemented; (iii) partially implemented; (iv) not implemented; (v) not applicable. - The mission reviewed IMF guidance notes, IOSCO reports and resolutions, OECD publications, selected Bailiwick legislation, GFSC documents (including IOSCO self-assessments), and operational GFSC materials. - The mission had extensive discussions with government representatives, the FSC, professional bodies, industry associations, and representative firms; it did not have the opportunity to confer with independent commentators. - There were no factors that impaired the assessment process; GFSC staff provided extensive briefings and documentation. ### Institutional and market structure - Core law areas for securities and investments regulation: GFSC functions and powers; licensing and supervision of controlled investment business (including CISs); authorization and supervision of CISs; conduct of controlled investment business by licensees. - Licensing rules: a person may not carry on controlled investment business in or from within the Bailiwick unless licensed; a “Bailiwick body” may not carry on controlled investment business outside the jurisdiction without a license. - Definition notes: “restricted activity” covers activities associated with investment business including the issue of securities for subscription; “controlled investment” appears to cover the full range of securities and investment products; CIS defined broadly as “any arrangement relating to property of any description (including money).” Life insurance policies that have the character of investments are excluded and regulated as insurance products. - Most important types of investment business in the Bailiwick: - management, administration, and custody of collective investment funds (open and closed-ended); - discretionary asset management; - nondiscretionary asset management; - stock broking; - provision of investment advice. - As at June 30, 2002, there were 428 entities licensed to carry on investment business: - 403 companies incorporated in the Bailiwick; - one Bailiwick partnership; - 24 branches of international institutions. - Clients include local and overseas residents and institutions; the geographical spread of clients is diverse. ### General preconditions for effective securities regulation - The GFSC primary objective: “to regulate the Bailiwick’s finance sector to international standards and, by doing so, to protect depositors, investors, policy holders, other customers and the public.” - Market access is determined by the securities regulatory system and GFSC decisions; no particular barriers to entry or exit other than those incidental to regulation. - The Bailiwick has a conventional framework of general business law including common law, contract, tort, property, fraud/crime rules, company law and partnership law; Guernsey and Alderney have mature rules about formation and administration of companies and partnerships. - Some industry representatives consider cost of compliance higher in Guernsey (and Jersey and the Isle of Man) than in competitor jurisdictions, accepted as a trade-off for reputation. - The Bailiwick depends on quality of regulation, expertise of people, cost of doing business, and tax regime for international finance center development; authorities emphasize sound law and procedures and cooperation with equivalent authorities. - The GFSC has bilateral relations with a number of regulators under MOUs for cooperation. ### Detailed assessment — Principles relating to the regulator (selected) Principle 1: The responsibilities of the regulator should be clear and objectively stated. - Responsibilities of the GFSC are set out in the Financial Services Commission (Bailiwick of Guernsey) Law, 1987, and amendments, and restated annually in Appendix 1 of the GFSC’s annual report. - General functions include: - (a) to take such steps as it considers necessary or expedient for the development and effective supervision of finance business in the Bailiwick; - (b) to provide to the responsible Committee of the States, when requested, reports, advice and assistance on any matter connected with finance business; - (c) to prepare and submit to the responsible committee recommendations for the statutory regulation of finance business and the revision of legislation about companies and other forms of business undertakings. - The Financial Services Commission (Bailiwick of Guernsey) (Amendment) Law, 2002 adds to general functions: “the countering of financial crime and of the financing of terrorism.” - Statutory functions include administering the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (POI Law), and responsibility for regulation of deposit taking, insurance business, provision of fiduciary services, company administration, and acting as a company director by way of business. - GFSC also administers the Borrowing (Control)(Bailiwick of Guernsey) Law, 1946 in respect of: - the raising of money by the issue of shares; - the issue of company shares and debentures; - the circulation of an offer of company shares or debentures. - In exercising functions the GFSC must have regard in particular to: - “(a) the protection of the public interest, including the protection of the public against financial loss due to dishonesty, incompetence or malpractice by persons carrying on finance business; and - (b) the protection and enhancement of the reputation of the Bailiwick as a financial center.” - The 2002 Amendment Law defines “development” for GFSC’s function to include, among other things, establishment and support of bodies important to development of finance business, improvement of infrastructure, protection of the public, or protection and enhancement of the Bailiwick as a financial center. - Assessment: Implemented. - Comments and recommendations: - The Bailiwick may consider whether aspects of commitment to the three IOSCO Objectives (protection of investors; ensuring markets are fair, efficient, and transparent; reducing systemic risk) should be more explicitly recognized in its statement of responsibilities. - GFSC should review the Borrowing (Control) Law to modernize and integrate it with other powers; GFSC has proposed to review this Law in context of a more general Company Law review and should proceed. - Concerns expressed about inclusion of “development” in GFSC functions, particularly given enlarged definition; GFSC will propose a change in the law to address concerns; GFSC may continue support of Training Agency activities consistent with revised mandate. Principle 2: The regulator should be operationally independent and accountable. - Legal and institutional arrangements: - GFSC established as operationally independent and accountable; government retains roles: enactment of laws, appointment/removal of commissioners, arrange funding, afford GFSC opportunity to make recommendations, and safeguard GFSC’s independence and accountability. - GFSC has five members elected by the States from nominated persons “having knowledge, qualifications or experience appropriate to the development and supervision of finance business in the Bailiwick.” - Members hold office for three years and are eligible for reelection; Chairman selected annually by the States. Requirement that the President of the Advisory and Finance Committee be Chairman ceased to apply with effect from February 1, 2003. - Policy of the government is not to appoint a politician to the GFSC. - A member may be removed for cause by the Chairman or by the States on the recommendation of the Advisory and Finance Committee; the report queries whether the Chairman should have personal discretion to remove other members and recommends review. - Funding: - Current institutional funding arrangements appear to work well and do not affect GFSC’s independence. - Powers of guidance and directions (Section 7 of the GFSC Law): - Advisory and Finance Committee may, “after consulting the Commission, give to the Commission (a) written guidance of a general character; and (b) written directions of a general character, concerning the policies to be followed by the Commission in relation to the development and supervision of finance business in the Bailiwick and the manner in which any function of the Commission is to be carried out.” - Comments: power arguably extends to policy and manner of carrying out functions; applies to development function; any exercise of the power should be public. Nonetheless, broadly conforms with Principle 2; no evidence of lack of independence in practice. - Conflicts of interest: - There is a code of conduct for commissioners and an equivalent code in the Staff Handbook for staff, with procedures to ensure adherence. - Accountability and decision-making: - GFSC must report annually to the Advisory and Finance Committee on activities and financial affairs, including review of internal controls, management of assets and resources, and compliance with principles of good corporate governance; report is published and made available on the GFSC’s website. - Section 35 of the POI Law requires that before certain important decisions (refuse application for a license; impose a condition on a license; cancel or suspend a license otherwise than at the request of the licensee; refuse authorization to a CIS; impose any condition on a CIS authorization; revoke or suspend CIS authorization otherwise than at the request of manager/trustee/custodian) the GFSC must notify the applicant in writing of a proposed decision, offer up to 28 days to make oral or written submissions and, on request, furnish written reasons. - Applicant may appeal to the Court on grounds of ultra vires or unreasonable exercise of powers; Court may quash, confirm, or substitute any decision the GFSC could have made; Court may review administrative decisions under judicial review. - The mission queries whether a court should have general power to substitute its decision for those of an independent regulator and suggests limiting court power to referring matters back for redetermination; notes that from institution of an appeal the GFSC decision ceases to operate against the appellant unless the Court orders otherwise and recommends that GFSC decisions should continue to operate subject to any court order on application of the appellant. - Director General and staff regularly exercise delegated GFSC powers and report back to commissioners; commissioners have and have exercised powers of delegation. *Source: IMF Offshore Financial Sector (OFC) assessment of the Bailiwick of Guernsey.* ### Conclusions ### Conclusions ### Principle 2 — Operational independence and accountability - Assessment: Broadly implemented. - Findings and issues raised: - Questions about the discretion available to the Chairman of the GFSC to remove other members from office (see para 7). - Questions about the terms and conditions under which a direction or guidance may be given to the GFSC (see para 10). - Questions about the consequences of an appeal to the Court against a decision of the GFSC on the grounds that it is ultra vires or unreasonable (see para 15). ### Principle 3 — Powers, resources, and capacity - Description of statutory powers (GFSC Law and POI Law): - General corporate powers (Section 8 GFSC Law): do anything conducive to carrying out functions; obtain information on development and supervision; consult and seek advice; publish information relating to its functions; provide advice, assistance and services to secure the general well being of finance business in the Bailiwick. - Specific GFSC Law powers: - to levy fees and charges (Section 13); - to cooperate with foreign regulators including to share information which it may lawfully disclose (Section 21A); - to disclose confidential information where necessary: (a) to enable it to carry out a function under the GFSC Law; and (b) to assist an authority in another jurisdiction with functions corresponding to its own. - POI Law powers (selected): - to grant or refuse a license to carry on a controlled investment business (Section 4); - at any time on or after the issue of a license to impose such conditions as appear to the GFSC to be necessary or desirable (Section 5); - to cancel or suspend a license (Section 6); - to authorize a CIS (Section 8); - to impose conditions on an authorization (Section 9); - to revoke or suspend an authorization (Section 11); - to make rules about controlled investment business and authorized CISs (Sections 12 to 20); - to obtain information from licensees and those appearing to require a license (Sections 27 and 30); - to report an auditor to a disciplinary body (Section 27B); - to apply to the Court for an injunction (Section 33); - to apply to the Court for a restitution order (Section 33); - to request the Law Officers to apply to the Court to prohibit a company director or manager (Companies (Guernsey) Law, Section 67A); - to request the Law Officers to bring criminal proceedings against any person. - Borrowing (Control) / COBO powers exercised (transferred from Advisory and Finance Committee): - consent to the raising of money by the issue of shares; - consent to the issue of partly paid shares; - consent to the issue of securities other than shares if the body corporate is incorporated under the laws of the Bailiwick or the securities are to be registered in the Bailiwick; - consent to the circulation of a public offer of securities for sale or subscription; - authorize the registration of a limited partnership. - Operational observations: - The GFSC makes extensive use of POI Law rulemaking and operational powers for CISs and investment business. - The GFSC does not have power to issue directions to licensees explicitly, but the power to impose conditions on a license (Section 5 POI Law) is expressed in terms that render it, in substance, a power to give directions as well as to impose conditions. - The GFSC does not have power to impose administrative fines. - Powers dealing with unlicensed investment business are less effective than those applying to licensed persons. - Suggested additional useful power: statutory power to prohibit promotional statements by administrative process where, in the opinion of the GFSC, they are misleading or do not comply with the law (would apply particularly to unlicensed persons and as a supplement for uncooperative licensees). - The GFSC does not have power to make rules under the Borrowing (Control) Law; it issues administrative guidance and expects explicit power under COBO shortly to issue guidance on COBO-based policies. - The GFSC does not have an explicit power to review market practice and comment publicly on it (see Principle 8). - The GFSC cannot require a person other than a licensee to produce information for the purpose of communicating to an offshore regulator; it may only communicate information it has already acquired (see Principle 13). - The GFSC does not have full on-site inspection powers or power of entry and search (see Principle 8). - Resources and organization: - Divisions: banking, investment business, insurance, fiduciary business and enforcement, operations and personnel, and policy and international affairs; jointly funds a Training Agency. - Current complement of staff: 72. - Investment Business Division staffing: - 19 people presently, including the director. - Director expects to have an establishment of 24 people in the New Year. - Present establishment detailed as: 1 secretary, 12 analysts, 4 senior analysts, a deputy director and a director. - Division subdivided into three teams: authorizations, off-site review, and on-site inspections. - Funding arrangements appear sound and reliable. - Forward program of work for the Investment Business Division described to the mission seems robust. - Community support: mission impression that GFSC efforts are well supported in the financial services community, reinforcing capacity. - Assessment: Implemented. - Comments and recommendations: - GFSC may find it useful to have statutory power to prohibit promotional statements which in its opinion are misleading or do not comply with the law. - Further comments on GFSC powers to be addressed under Principles 8 and 13 regarding on-site inspection and entry and search; GFSC public comment on investment business management and marketing practice; and obtaining information for the purpose of communicating to an overseas regulator. ### Principle 4 — Clear and consistent regulatory processes - Assessment: Implemented. - Description and findings: - GFSC has wide power to issue rules about investment business and has made extensive use of this power. - The GFSC is required to consult under Section 13 POI Law and does so widely; there appears to be widespread support in the finance sector for the rulemaking power. - GFSC issues advice, general circulars, articles in its publication « Update », and an annual report. - Guidance notes produced include: - Investment Business in Guernsey—A Regulatory Overview; - Guidance Note—Outsourcing of Administration Functions in respect of Authorized Collective Investment Schemes; - Incorrect pricing of Authorized Collective Investment Schemes—Guidance Note on Correction and Compensation; - Guidance Notes on UK Public Offers and Promotional Activities; - Guidance Notes on the Prevention of Money Laundering and the Countering of the Financing of Terrorism. - GFSC publishes general conclusions from investigations and routine monitoring. - Appeal rights: any person aggrieved by a decision of the GFSC on designated matters relating to administration of the Law may appeal to the Court on grounds that the decision was ultra vires or an unreasonable exercise of its powers. - Procedural safeguards under POI Law: prescribed steps for licensing/authorization decisions, notice of consideration, offer to state reasons in writing on request; staff handbook provides standards of fairness for regulatory and supervisory work. ### Principle 5 — Professional standards and confidentiality - Assessment: Implemented. - Description and findings: - Section 18 GFSC Law requires annual review of compliance with generally-accepted principles of good corporate governance by appointment of appropriately qualified and independent professional persons or otherwise; commissioners must satisfy themselves about conclusions of this review. - Staff handbook sets standards for staff including confidentiality. - Avoidance of conflicts of interest: - Commissioners and staff required to be aware of actual and perceived conflicts arising from confidential information. - Must submit details of investment holdings to a designated officer and explain transactions if necessary. - A commissioner or staff member aware of a conflict must inform a Director or the Director General as soon as possible. - Staff prohibited from presenting themselves for election to significant public office including that of States Deputy. - Commissioners required at each meeting to disclose potential conflicts; disclosures are minuted. - Observance of confidentiality and data protection: - GFSC maintains confidentiality standards per standing policies. - GFSC Law protects the name of an individual or body and certain other information; GFSC subject to confidentiality provisions of the GFSC Law. - GFSC subject to the Data Protection (Bailiwick of Guernsey) Law, 2001; staff handbook contains procedures on compliance with that law. - Observance of procedural fairness: see procedures under Principle 4. ### Principles of Self-Regulation — Principle 6 and Principle 7 - Principle 6: Use of SROs - Assessment: Implemented. - Description: - One SRO: Channel Islands Stock Exchange (CISX), established March 1998 as a company limited by guarantee (LBG) with shares under the Companies (Guernsey) Law, 1994. - CISX objects include: carry on business of an investment exchange and clearing house; provide markets, clearing and settlement; provide facilities for broking, dealing, market-making, stock lending, investment management and advice; act as authority for admission of investments to be traded; provide information, depository and nominee services; provide systems for transfer of investments without a written instrument; cooperate and share information with governmental and nongovernmental authorities worldwide; promote high standards and make/administer/monitor/enforce rules governing access and conduct; establish compensation schemes; carry on business as a general commercial company. - CISX licensed by GFSC under POI Law to operate an investment exchange and is subject to GFSC regulation and supervision. - CISX has power under its Articles to make Rules (Membership Rules and Listing Rules); it monitors compliance and enforces them. - Principle 7: Oversight of SROs and standards - Assessment: Implemented. - Description and findings: - GFSC reviewed CISX constitution, structure, staffing, proposed rules and internal procedures before issuing a license and assessed them against equivalents in other jurisdictions. - CISX aims to observe standards of fairness and confidentiality; GFSC maintains on-site and off-site supervision to verify this. - CISX Articles empower rules on admission of members, disciplinary proceedings and sanctions, appeals against membership decisions, and admission of securities to the Official List. - Governance framework: - Market Authority established for managing, operating and regulating the company; powers include applying and enforcing Rules and supervising compliance. - Disciplinary Committee and Disciplinary Appeals Committee exist; rights of appeal are provided. - Market Authority functions as senior management responsible for operational and compliance matters without formal separation at decision-making level; Board acts as appeal authority without formal internal separation; committees are sub-committees of the Board. - Procedure appears to work well in practice and has confidence of the finance sector. - CISX governance and staff requirements: - Directors have clear rules on conflicts of interest, confidentiality, and duty to act in good faith. - Staff sign an annual employee code of conduct pursuant to employment contracts. - Investment Exchange (Notification) Rules 1998 require CISX to notify GFSC of specified persons (chairman, chief executive, board members, persons responsible for compliance and finance, members of delegated rule-making bodies, disciplinary bodies, arbitrators, complaints bodies) about: change of name; convictions for fraud or dishonesty; convictions under finance legislation; initiation of bankruptcy; refusal, revocation or suspension of licenses; disciplinary measures by regulatory authorities; Court orders disqualifying the person from acting as director or manager. - CISX required to submit draft annual regulatory plan, annual budget, proposals to change rules or constitutional documents, and any proposal to delegate monitoring to an external body to the GFSC. - GFSC monitors CISX by off-site review and on-site inspections. - Comment: Further remarks on CISX structure and operations to be addressed under Principles 25 and 26. ### Principle 8 — Inspection, investigation, and surveillance powers - Assessment: See description and comments below (findings imply gaps). - Description of statutory powers (Section 27 POI Law): - GFSC may require a licensee and certain other persons: - (a) to attend before the GFSC and answer questions and otherwise furnish information; - (b) to furnish the GFSC with such information as it may reasonably require about any specified matter; - (c) to produce books or papers. - Obligation to comply extends to any person who appears to the GFSC to be carrying on controlled investment business (Section 30). - It is an offense to provide a misleading response to an enquiry by the GFSC under Sections 27 and 30. - GFSC conducts on-site visits to ensure licensee compliance; all licensees are subject to on-site visits. - Limitations and recommended remedies: - GFSC does not have statutory on-site inspection powers and powers of entry and search; these powers are particularly useful for urgent action against unlicensed operations or uncooperative entities. - It may be difficult to deal efficiently with such situations under the present law. - A 2003 amendment to the GFSC Law (received royal assent after the mission) allows the States by Ordinance to provide for the making by the Commission of site visits in respect of licensees and any other class of person. - While GFSC may not itself require power of entry and search, an associated regulator such as the Law Officers should be able to act on its behalf in appropriate circumstances. - The GFSC indicated expectation that the Ordinance enabling site visits would be made in early 2004. *The IMF mission* ### Section 27(A) of the POI Law requires audit firms to report to the GFSC on any matter relating ### cr03365 - Section 27(A) of the POI Law requires audit firms to report to the GFSC on any matter relating ### Section 27(A) reporting duty and GFSC review powers - Section 27(A) of the POI Law requires audit firms to report to the GFSC on any matter relating to a licensee, to a fund or to a client which appears to the auditor to be of material significance for determining whether a person is fit and proper to carry on controlled investment business, or whether the GFSC should exercise its powers under the POI Law to protect investors from significant risk of loss. - The GFSC does not have an explicit statutory power to review investment business management and market practice and to comment publicly on it; statutory backing for such a power would: - afford backing to the GFSC’s practice of publishing conclusions arising from its investigation and monitoring work; - empower the GFSC to undertake case studies and publish reports where an intermediary has engaged in an undesirable practice short of a breach of the law or a license term; - support effective public reporting of institutions or individuals found not in compliance with regulatory or legal requirements. - In the absence of statutory on-site inspection powers and powers of entry and search the Bailiwick has not fully implemented Principle 8. - Assessment: Partially implemented. - Recommendation: The Government should review the GFSC’s powers and secure statutory powers of on-site inspection and entry and search. The GFSC should consider whether to seek a general power to comment on investment business management and market practice. ### Enforcement powers (Principle 9) - The GFSC has power under the POI Law to attach conditions to, suspend, cancel or revoke a license or authorization and to compel the production of information about a controlled investment business or a CIS. - The power to impose conditions can have the character of a power to issue a direction to licensees (see Section 5 of the POI Law). - Examples of prohibitions or requirements the GFSC may impose on a licensee: - prohibit entering into transactions; - prohibit soliciting business; - prohibit carrying on business in a specified manner; - prohibit disposing of or otherwise dealing with any asset; - require a licensee to transfer assets to a trustee; - require a licensee to maintain assets in the Bailiwick. - The GFSC Rules about investment business and CISs appear comprehensive and enforceable as they apply to individual licensees. - Criminal offenses and enforcement: - It is a criminal offense to conduct a controlled investment business without a license, or to operate an unauthorized fund. - It is a criminal offense to provide misleading information to the GFSC in response to a statutory request. - The GFSC may request the Law Officers to prosecute those who do not comply with the law. - The GFSC considers failure to respond to an information request when assessing a licensee’s status as a fit and proper person. - The GFSC may commence court proceedings for a restitution order where there has been a breach of named laws and profits have accrued or an investor has suffered loss. - The GFSC may request the Law Officers to apply to the Court to prohibit a person from acting as a company director or manager. - CISX powers: investigate and discipline members, levy fines and administrative sanctions, and direct the suspension of individual trading in securities. - Assessment: Implemented. ### Inspection, supervision and compliance program (Principle 10) - Investment Business Division staffing and plans: - Current staff: 19 people. - Expected to increase to 24 in 2003. - Supervision program: - The Division plans and implements an annual supervision program for investment business licensees and CISs, using both off-site and on-site supervision. - Off-site supervision monitors compliance with rules made under the POI Law, including: - The Collective Investment Schemes Rules 1988; - The Collective Investment Scheme (Class A) Rules 2002; - The Collective Investment Schemes (Class B) Rules 1990; - The Collective Investment Schemes (Designated Persons) Rules 1988; - The Collective Investment Schemes (Qualifying Professional Investor Funds) (Class Q) Rules 1998; - The Licensees (Financial Resources, Notification, Conduct of Business and Compliance) Rules 1998; - The Licensees (Conduct of Business and Notification) (Non-Guernsey Schemes) Rules 1994; - The Investment Exchange (Notification) Rules 1998; - The Investor Protection (Designated Countries and Territories) Regulations 1989; - The Investor Protection (Designated Countries and Territories) (Republic of Ireland) Regulations 1992. - Licensee notification requirements include routine notifications, annual compliance reports, audited annual reports and analyses of investor complaints; licensees must notify the GFSC if their financial resources fall below the prescribed minimum. - On-site inspections and visits: - In 2001, a total of 21 inspection visits were undertaken: 11 to designated managers and 6 to designated custodians/trustees; visits included two follow-up visits and one special review. - From January to mid-September 2002, the GFSC made 18 on-site inspections, including one inspection to a firm in a foreign jurisdiction that is a subsidiary of a Guernsey financial institution. - The GFSC is not obliged to give advance notice of an inspection, although it is normal practice to do so. - Inspectors generally request copies of: - minutes of board meetings; - compliance reports; - management accounts; - procedures manuals; - complaints procedure; - disaster recovery plans; - anti-money laundering and counter terrorist financing policy; - report on staff awareness. - There are additional information categories specific to the type of business under review (e.g., stockbroker, designated custodian/trustee, designated manager). - Process: pre-visit meeting with senior management to discuss key areas and initial concerns; closing meeting after inspection; significant matters notified in writing to the board; less significant procedural matters referred to senior management; detailed records kept. - Remedial action: GFSC requires licensees to take remedial action within a specified time and report back; GFSC maintains a diary system to monitor timetables; where serious control failings are apparent, GFSC may attach a condition to the license and has done so on a number of occasions. - Notice periods for non-routine inspections have tended to be short. - Prioritization and frequency of visits take account of: nature of the licensee’s business and its clients, risks associated with the business, quality and timeliness of statutory notifications, and incidence of complaints. - Assessment: Implemented. ### Cooperation in regulation (Principles 11–13) - Principle 11: authority to share information - The Bailiwick does not have secrecy laws. - Information held by the GFSC is subject to Section 21 of the GFSC Law: “any information from which an individual or body can be identified” shall be regarded as confidential. - The GFSC may disclose confidential information if it appears necessary: - to enable the GFSC to carry out any of its functions; - for investigation, prevention or detection of crime or with a view to instigation of, or for the purposes of, any criminal proceedings; - in connection with discharge of any international obligation to which the Bailiwick is subject; - to assist, in the interests of the public or otherwise, any authority outside the Bailiwick exercising functions corresponding to any GFSC functions; - to comply with directions of the Royal Court. - Section 21A of the GFSC Law requires the GFSC to “take such steps as it considers appropriate to cooperate with any person or body: - (a) who or which appears to the Commission to exercise in a place outside the Bailiwick functions corresponding to any of the functions of the Commission; or - (b) for the purposes of the investigation, prevention or detection of crime or with a view to the instigation of, or otherwise for the purpose of, any criminal proceedings.” - The GFSC has wide powers to disclose information and does not require an MOU to share information, although MOUs are an increasingly common feature of arrangements. - The Law Officers have powers under the Insider Dealing Law to obtain information and share it with other regulators. - Assessment: Implemented. - Principle 12: information-sharing mechanisms and MOUs - The GFSC has entered into MOUs in relation to investment business with: - Australian Securities Commission (1996); - United States Commodity Futures Trading Commission (1994); - De Nederlandsche Bank NV (1993); - International Organization of Securities Commissions (1991 and 1996); - Jersey Financial Services Commission (1998); - Hong Kong Securities and Futures Commission (1992 and 1994); - London Stock Exchange (1998); - Commission Nazionale per le Societa e la Borsa (an Information Exchange Agreement in 1994 replaced by an MOU in 2002); - Isle of Man Financial Supervision Commission (2002). - The GFSC was negotiating MOUs with four other regulatory bodies at the time of the mission; two of these were finalized subsequent to the mission. - MOUs typically aim “to establish a framework for mutual assistance and to facilitate the exchange of information between the commissions to enforce or secure compliance with any laws or regulations of their respective jurisdictions.” - Under the Data Protection (Transfer in the Substantial Public Interest) Order 2002, the GFSC is required to obtain an undertaking that personal information will be kept confidential but may agree to disclosure where it considers it is in the substantial public interest. - Assessment: Implemented. - Principle 13: assistance to foreign regulators - At the time of the mission the GFSC did not have explicit statutory powers to require production of information for communication to an offshore regulator; statutory powers were limited to sharing information already in its possession. - A 2003 amendment to the FSC Law contains suitable powers; it received royal assent in July 2003. - The Law Officers have power under the Company Securities (Insider Dealing) (Bailiwick of Guernsey) Law, 1996 to appoint inspectors where circumstances suggest an insider dealing offense under another country’s laws may have been committed and to transmit material obtained under statutory authority to prosecuting or supervisory authorities in the other country. - The mission considered the Bailiwick had partially implemented Principle 13 at the time of the visit and that it has now fully implemented the principle with the 2003 amendment to the FSC Law. - Assessment: Implemented. ### Principles for issuers, disclosure and market conduct (Principles 14–16) - Principle 14: disclosure of financial results and material information - Disclosure requirements for public offerings arise by: - GFSC discretion through COBO for offerings other than Guernsey open-ended funds; - POI Rules for offers of interests in Guernsey open-ended funds; - CISX listing rules about disclosure. - Securities other than Guernsey open-ended funds offered in or from within the Bailiwick must have GFSC consent under COBO. - The GFSC was conferring with the finance industry on terms of a detailed guidance note on disclosure for closed-ended funds. - Directors of the issuer take responsibility for prospectus content; for open-ended fund approvals a lawyer’s certificate is required confirming disclosure requirements have been met. - Promotion to private investors must be under the authority of a Guernsey licensee who takes responsibility for local presentations; under COBO the GFSC cannot supervise the issuer but may take action against the responsible licensee (e.g., impose a condition). - Companies (Guernsey) Law, 1994 and Companies (Alderney) Law, 1994 provide for accounting records, appointment of auditors, preparation and distribution of financial statements. - The GFSC will not permit a public offer without an issuer undertaking in the prospectus to provide for regular disclosure, including timely audited financial statements. - Disclosure requirements for open-ended funds are set out in the relevant class rules; no offering may proceed until GFSC consent is issued. - The GFSC maintains an active compliance program for issuer obligations as described under Principle 10. - There is a Closed-Ended Fund Working Party comprising GFSC and finance sector representatives that prepared detailed proposals for ongoing reporting by closed-ended fund managers; the GFSC expects to formalize these shortly in a formal policy statement. - CISX listing rules require regular and timely reporting of financial information and significant matters; listed companies must publish annual and semi-annual reports, backed by Guernsey company law audit and distribution requirements. - Assessment: Implemented. - Principle 15: fair and equitable treatment of security holders - Companies Laws contain provisions to ensure holders of securities are treated fairly and equitably. - GFSC involvement under COBO at time of issue of securities provides investor benefit; investment company managers based in the Bailiwick hold an investment business license and are subject to GFSC supervision. - The Companies (Guernsey) Law, 1994 contains provisions material to treatment of holders of securities (constitution, corporate governance, reporting to shareholders). - Rules on insider dealing establish an offense and powers of investigation; the London City Code on Takeovers and Mergers applies to listed companies resident in Guernsey, Jersey, the Isle of Man and the United Kingdom. - Assessment: Implemented. - Principle 16: accounting and auditing standards - Except for ‘dormant companies’ and ‘asset holding companies’, companies are required under Companies (Guernsey) Law, 1994 and Companies (Alderney) Law, 1994 to prepare and deliver annual financial statements audited by an external auditor. - FNCC Rules 1998 require licensees to maintain accounting records and prepare audited annual financial statements; they regulate appointment of qualified auditors and changes of auditors. - Collective Investment Schemes Rules (Class A, B, Q) contain rules on preparation of annual reports and auditing by qualified auditors. - Auditors’ report must state whether financial statements are properly prepared in accordance with the law and give a “true and fair” view. - Bailiwick companies will normally adopt UK GAAP; under a Statement of Channel Islands Accounting Practice, companies incorporated outside the Channel Islands may prepare statements in accordance with their jurisdictional standards (e.g., United States GAAP, International Accounting Standards); the accounting standards adopted will be identified in the audit report. - Audit qualification requirements: a person is not qualified for appointment as auditor unless a member of: - the Institute of Chartered Accountants in England and Wales; - the Institute of Chartered Accountants of Scotland; - the Institute of Chartered Accountants in Ireland; - the Chartered Association of Certified Accountants, and eligible for appointment under the rules of the body as an auditor. - Qualified auditors who are members of the above bodies are subject to their independence and audit rules and to their disciplinary authority. - The GFSC should continue to review policy on the source of authority for audit standards and review of auditor performance; the mission considers it appropriate for the Bailiwick to maintain standards through existing institutional links with the profession and with affiliates in the United Kingdom and elsewhere. - Assessment: Implemented. - Comment: The source of authority for financial reporting and audit standards and for review of auditor performance is under careful review internationally; the GFSC, the accounting profession and others should continue ongoing consideration. ### Collective investment schemes eligibility (Principle 17) - Any person who carries on restricted activities in connection with a collective investment scheme as defined by the POI Law must have a license. This includes the promoter, the administrator, the manager and the trustee or custodian of a collective investment scheme. *Source: IMF assessment cr03365.* ### Section 4 of the POI Law sets out the criteria which the GFSC must apply in considering an ### Section 4 of the POI Law sets out the criteria which the GFSC must apply in considering an ### Licensing criteria and GFSC powers - The GFSC must apply the following criteria when considering an application: - (a) the general nature and specific attributes of the controlled investment business to which the application relates; - (b) whether or not the applicant is a fit and proper person to carry on that business; - (c) the manner in which it is proposed to organize the carrying on of controlled investment business to which the application relates, the number of persons who will be responsible for carrying on each aspect of that business and the relationship between those persons; - (d) what, if any, economic benefit the Bailiwick is likely to derive from the carrying on of that business; and - (e) any other factors which the GFSC thinks it appropriate to consider. - The GFSC may grant or refuse a license and may attach conditions to a license. - The GFSC has made Rules relating to the conduct of investment business and the operation of the various classes of CISs. - The Rules are supplemented by published guidance on certain aspects of fund operations, often based on matters observed in the course of GFSC monitoring programs. - Assessment recorded: Implemented. ### Conduct, resource and compliance requirements for licensees - Licensees must have appropriate resources and experience to act and meet requirements under the Collective Investment Schemes (Designated Persons) Rules 1988 in connection with: - financial records, financial statements, financial resources, audit, financial notifications; - best execution, arrangements for indirect payment for services, product bias, gifts, benefits in kind and reciprocal arrangements; - the allocation of transactions, records relating to transactions, contract notes, the inspection of records, client money, compliance arrangements and complaints and other notifications. - Licensees must also comply with equivalent requirements under the Licensees (Financial Resources, Notification, Conduct of Business and Compliance) Rules 1998 in connection with: - financial resources, notifications and records, fitness and properness, and compliance arrangements. ### Authorization and classes of collective investment schemes (CIS) - Section 8 of the POI Law requires that Bailiwick collective investment schemes must be authorized by the GFSC. - The GFSC has made rules – the Class A Rules, the Class B Rules and the Class Q Rules – which regulate the operation of funds. - The Class A Rules are the most detailed. - Less detailed arrangements apply to Class B and Class Q funds, which are normally offered to more sophisticated or institutional investors. - The scheme-based Rules do not apply to closed-ended funds promoted under the authority of COBO. - The GFSC maintains an active compliance program in respect of those who market or operate a CIS; the program is described under Principle 10. - Assessment recorded: Implemented. ### Market access and designated territory status - In December 1988 the Bailiwick was granted “designated territory status” under Section 87 of the United Kingdom Financial Services Act. - As a result, Class A funds are freely marketable in the United Kingdom. - Similar arrangements are in place with Australia, Belgium, Hong Kong, Isle of Man, Japan, Jersey, the Netherlands, the Republic of Ireland, South Africa and Switzerland. ### Legal forms, Protected Cell Companies (PCC) and segregation of client assets - Collective investment schemes may be formed as trusts, bodies corporate, or as limited partnerships under: - The Trusts (Guernsey) Law, 1989; - The Companies (Guernsey) Law, 1994; and - The Limited Partnerships (Guernsey) Law, 1995. - The POI Law and the rules made under it establish additional controls on the legal form and structure of schemes; the Rules provide for the segregation and protection of client assets. - The GFSC attributes the following characteristics to the PCC: - is one legal entity; - provides, for each cell, legal segregation and protection of assets and liabilities; - may create its own core shares and cell shares, providing two classes of assets—core (or noncellular), attributable to the PCC directly, and cellular attributable to the cells; - can provide an unlimited number of cells; - can be converted from an existing company; - offers flexibility in the allocation of capital between the core and individual cells; and - offers a wide range of potential applications. - Creditors of an individual cell of a PCC have no recourse to the assets of another cell, but will have recourse to the core assets. - Provision for PCCs is made in the Protected Cell Companies Ordinance, 1997, allowing incorporation or conversion with the consent of the GFSC; the Ordinance allows for the PCC to be a CIS. - The GFSC allows for umbrella funds subject to the Rules and considers the PCC a more secure investment vehicle than the umbrella fund. - For all CISs client assets must be held in a segregated pool under the control of a separate custodian. - For Class A schemes the custodian must be separate and independent from the manager’s group. - The Collective Investment Schemes (Designated Persons) Rules 1988 require subscription monies received from investors and redemption monies due to investors to be segregated from the assets of the fund. - Custodian duties: - For Class A and Class B Rules (but not Class Q) the custodian’s duties extend to overseeing the operation of the fund by the manager and administrator and satisfying itself that the manager and administrator operate the fund in accordance with the POI Rules and the objectives disclosed to investors. - This trustee-like function applies irrespective of the legal form of the fund. - The GFSC evaluates segregation and protection of client assets during on-site visits to administrators, managers and custodian/trustees of CISs. - Assessment recorded: Implemented. ### Disclosure, reporting and investor information (Principle 19) - Every fund authorized under the POI Law must offer to investors a prospectus or statement of scheme particulars or equivalent document setting out prescribed information, including: - the objectives and policies of the fund; - the names of the manager, custodian, registrar, auditor and any other functionaries appointed to operate the fund; - the manner and frequency of valuations; - subscription and redemption arrangements; - the fees and charges to be paid by investors and the level of fees and charges which will be met by the fund; - other information such as suitable risk warnings. - Detailed requirements are specified at Schedule 4 to the Class A Rules, the Schedule to the Class B Rules and the Schedule to the Class Q Rules. - The GFSC is required to approve the Scheme Particulars. - The manager must revise the Scheme Particulars annually and any changes must be submitted to the GFSC for consideration before implementation. - The manager (and, for company-based schemes, the directors) are responsible to ensure the prospectus/scheme particulars do not contain any untrue or misleading statements. - CIS Rules require scheme annual reports and financial statements (and interim reports for Class A schemes) to be prepared and distributed to investors. - Reports and accounts must be published within six months of the end of the period to which they relate. - For Class A and B schemes, the designated custodian/trustee must report on the management of the scheme. - The CIS Rules provide for periodic valuation of property on both offer and bid basis and for pricing of units; the Scheme Particulars must describe the arrangements for this. - The GFSC maintains an active compliance program in respect of those who market or operate a CIS. - Assessment recorded: Implemented. ### Valuation, pricing and redemption (Principle 20) - The CIS Rules set out the requirements for valuation of CISs and the arrangements for pricing, subscription and redemption of units in a scheme. - The pricing basis must be disclosed in the Scheme Particulars or equivalent document. - The GFSC has issued guidance on steps to be taken by operators and custodians to ensure valuation and pricing are conducted in an efficient and controlled manner to minimize the risk of error. - Compliance with rules and guidance on asset valuation and pricing are monitored by the GFSC during on-site visits. - The CIS Rules set out the requirements for redemption of units; the Scheme Particulars must describe redemption procedures and the circumstances in which redemption may be suspended. - The GFSC must be informed of any suspension of redemption rights. - Fund administrators’ policies on redemption are monitored by the GFSC during on-site visits. - Assessment recorded: Implemented. ### Market intermediaries (Principle 21) - All market intermediaries and investment advisers require a license under the POI Law. - The minimum entry standards are set out in the Law as noted under Principle 17. - The GFSC requires as a matter of policy that new entrants demonstrate: - an already established track record in their sphere of activity; - that they are persons of integrity, honesty and competence; - that they have adequate financial resources; - that they have an appropriate business plan. *Source: Excerpt from GFSC and Bailiwick legislative and regulatory framework (POI Law, CIS Rules, and related Ordinances and Rules).* ### Section 4(3) of the POI Law states: ### Section 4(3) of the POI Law states: ### Licensing standards, fit-and-proper and competence - Section 4(3) requires the Commission, in deciding applications under Section 3, to have regard to: - the need to protect the public and the reputation of the Bailiwick as a financial center; - (a) the general nature and specific attributes of the controlled investment business to which the application relates; - (b) whether or not the applicant is a fit and proper person to carry on that business; - (c) the manner in which it is proposed to organize the carrying on of the controlled investment business, the number of persons who will be responsible for carrying on each aspect of that business and the relationship between those persons; - (d) what, if any, economic benefit the Bailiwick is likely to derive from the carrying on of that business; - (e) if the applicant proposes to carry on controlled investment business in, or from within, Alderney or Sark, any opinion expressed, in response to a notice given under subsection (2), by the Policy and Finance Committee of the States of Alderney or by the Greffier (registrar of companies) of Sark as the case may be; - (f) any other factors which the Commission thinks it appropriate to consider. - Licensees must be “fit and proper” and, per a GFSC policy paper, must have: - integrity; - solvency; and - competence. - To meet the competence requirement the business must among other things be directed by at least two individual people (the “four eyes” policy). ### FNCC Rules, prudential and conduct requirements (Principles 21–24) - The Licensees (Financial Resources, Notification, Conduct of Business and Compliance) Rules 1998 (the FNCC Rules) apply to market intermediaries and investment advisers and require, among other things: - appointment of a qualified independent auditor; - production of annual audited financial statements including a statement of financial resources certified by the auditor. - Principle 22 (capital and prudential requirements) - Paragraph 8 of Schedule 2: “A licensee should ensure that it maintains adequate financial resources to meet its investment business commitments and to withstand the risks to which its business is subject.” - Part 2 sets minimum capital requirements for investment business categories. - Client money and client assets must be segregated from a firm’s assets at all times. - GFSC reviews and evaluates capital/prudential standards during on-site visits. - Assessment: Implemented. - Principle 23 (internal organization and conduct) - Market intermediaries and investment advisers must observe the 10 Principles in Schedule 2: (a) integrity; (b) skill, care and diligence; (c) conflicts of interest; (d) information about customers objectives; (e) information for customers; (f) segregation of customer assets; (g) high standards of market conduct; (h) adequacy of financial resources; (i) internal organization; (j) relations with GFSC. - FNCC conduct obligations include: customer agreements; suitability of investment; disclosure of risks and charges; inducements; complaints; order priority; best execution; timely and fair allocation; churning and switching; contract note content; safekeeping of customer assets and client money. - Licensees must undertake an annual review of compliance effectiveness, maintain written complaints procedures, and submit an annual report to the GFSC on significant complaints. - Assessment: Implemented. - Principle 24 (failure of market intermediary) - GFSC may impose license conditions where a licensed investment business has insufficient financial resources, including directions to not dispose of assets or to transfer assets into a trust account (see Section 5 of the POI Law). - An investor compensation scheme exists for Class A CISs (schemes for offer to the general public). - GFSC is conferring with the Law Officers on possible Companies Law corporate rescue amendments. - GFSC does not have special powers to intervene to deal with a failure. - Assessment: Partially implemented. - Recommendation: The Bailiwick should consider the powers which should be available to the GFSC to deal with the failure of an intermediary. ### Exchange and secondary market framework (Principles 25–30) — CISX features and supervision - Regulatory authorization and oversight - Operating an investment exchange is a restricted activity requiring a GFSC license under the POI Law; applies to exchanges and alternative trading systems. - One exchange established in Guernsey: the CISX (established March 1998 as a company limited by guarantee, with shares) and licensed by the GFSC. - GFSC monitors the CISX through on-site and off-site supervision. - Market size and trading statistics (exact figures preserved) - Number of securities admitted to the CISX Official List as at October 31, 2002: 280. - Market capitalization as at 31 October 2002: U.S.$17 billion. - YTD and prior calendar year listing totals (Total listed securities): - YTD 31 Oct. 2002: 35 - 2001: 93 - 2000: 110 - 1999: 67 - Trading figures (In pounds sterling) YTD 08 Nov 2002 and prior years: - Shares traded: 76,955,496 (2002), 75,327,426 (2001), 31,676,148 (2000), 32,598,695 (1999) - Value: 72,102,762 (2002), 76,262,293 (2001), 47,032,605 (2000), 52,420,553 (1999) - Transactions: 672 (2002), 620 (2001), 367 (2000), 267 (1999) - Trading system key features - electronic bulletin board maintained by Reuters for two-way prices and real-time orders; - all trading done by telephone; - trades must be reported to the exchange using the bulletin board and published within three minutes of execution; - continuous dissemination via Reuters of corporate actions, net asset value, historical price (12 month), recent trade history and background information; - all quotes, orders and trades stored at the exchange for market surveillance and historical record; - market is screen-based with no trading floor; - trading hours: 8.00am until 4.30pm, Monday to Friday; - all securities transactions must be reported to the Market Authority within three minutes, including trade, counter-party ID, security, price, date, time and size. - Clearing, settlement and financial resources - CISX does not provide clearance and settlement facilities; Market Authority designates an approved clearance system for each security. - Available systems: Crest or Crest Residual International for local company shares; Cedel Bank or EuroClear for debt and other eligible securities, unless otherwise agreed. - Standard settlement generally follows London market practice; current practice for domestic and foreign equities is T+3. - As at December 31, 2001: CISX net assets GBP869,167; operating expenditure for the year GBP612,286. - Elected members have undertaken to contribute up to GBP10,000 each in event of winding up; maximum aggregate present undertakings GBP320,000. - Supervision, membership and listing responsibilities - CISX must notify GFSC under Investment Exchange (Notification) Rules 1998 of material information (key individuals; regulatory plans and rules; auditors; fees; annual report, accounts and budgets; directors’ annual statement on financial resources; quarterly accounts; constitution; delegation; complaints; trading hours; force majeure; listings; membership; investigations; defaults; insolvency and legal proceedings). - CISX continuing obligations: sufficient financial, human and technical resources; monitoring and enforcement; complaint investigation; promotion and maintenance of standards. - Membership: a member may be Trading Member or Listing Member. As at September 30, 2002 there were 32 Members (3 Trading Members and 29 Listing Members). Trading Members listed: Collins Stewart (CI) Ltd (regulated by the GFSC), Dresdner Kleinwort Wasserstein Securities Ltd and Winterflood Securities Ltd (regulated by the UK Financial Services Authority). - Listing Members: requirement to be established as an entity in the Channel Islands and have suitably qualified staff; sponsors perform due diligence and prepare listing applications and disclosure documents. - Market conduct, transparency and market abuse - Listing Rules impose continuing disclosure obligations on listed issuers to inform the public, the CISX and holders of material information. - FNCC Rules and Membership Rules impose obligations on client order priority, timely execution, best execution, timely and fair allocation, churning and switching, and dealing ahead of published research. - Insider dealing is a criminal offense under the Company Securities (Insider Dealing) (Bailiwick of Guernsey) Law, 1996; Law Officers administer the Law and may appoint inspectors (GFSC officers may be appointed). - The Protection of Investors (Bailiwick of Guernsey) (Amendment) Law, 2003, established offenses relating to misleading statements and practices and a new offense of market abuse and extended GFSC power to obtain information in circumstances of suspected offense. - Assessment for dealing with manipulation and unfair trading: Implemented. Comment: consider transaction reporting requirements for directors and other insiders if equity turnover increases significantly. - Large exposures, default risk and market disruption - FNCC rules include minimum solvency requirements and segregation of client assets and money. - Three broker/dealers domiciled in Guernsey: two branches of UK firms subject to UK FSA capital adequacy; the third provides GFSC monthly statements on a UKFSA basis on solvency and large exposures control. - GFSC preparing consultation and intends to issue new rules during 2004. - Assessment: Partially implemented. ### Overall assessments, recommendations and planned actions - Summary of observance (Table 14) - Implemented: 26 Principles (1, 3, 4, 5, 6, 7, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 25, 26, 27, 28, 30) - Broadly implemented: 1 Principle (2) - Partially implemented: 3 Principles (8, 24, 29) - Not implemented: ... - Not applicable: ... - Selected recommended actions (extracts from Table 15) - CP 1: GFSC should consider whether aspects of its commitment to the three IOSCO Objectives (protection of investors; markets fair, efficient, transparent; reducing systemic risk) should be more explicitly recognized; GFSC should review the Borrowing (Control) Law in the context of Company Law review. - CP 8: Government should consider whether GFSC should have access to powers of entry and search, directly or through another agency; GFSC should consider seeking a general power to comment on investment business management and market practice. - CP 16: GFSC, accounting profession and others should continue consideration of authority for financial reporting and audit standards and auditor performance review. - CP 24: Bailiwick should consider powers to make available to the GFSC to deal with the failure of an intermediary. *Source: IMF assessment of securities regulation and supervision in the Bailiwick as presented in the cited IMF report.* ### 98. The authorities welcome the IMF’s assessment and confirmation that the Bailiwick of ### The authorities welcome the IMF’s assessment and confirmation that the Bailiwick of Guernsey has achieved a high level of compliance with the IOSCO Objectives and Principles of Securities Regulation ### Principles Relating to the Regulator (Principle 1) - The authorities welcome the IMF’s assessment and confirmation of high-level compliance with IOSCO. - Response to the recommendation concerning the GFSC’s objectives: see paragraph 12 (reference retained from source). - Company law / Control of Borrowing: - The Control of Borrowing regime is being reviewed as part of a review of company law. - A consultation document will be issued in 2004. ### Principles Relating to the Regulator (Principle 2) - Response on the recommendation concerning the GFSC’s independence: see paragraph 13 (reference retained from source). ### Principles for the Enforcement of Securities Regulation (Principle 8) - On-site inspection powers and enforcement framework: - The States Assembly approved drafting separate, explicit, statutory on-site inspection powers with regard to investment licensees in 2002. - The Financial Services Commission (Bailiwick of Guernsey) (Amendment) Law, 2003 provides the States Assembly with an enabling power to make an Ordinance covering on-site inspection powers. - It is intended that the States Assembly will consider the Ordinance in early 2004. - The Protection of Investors (Bailiwick of Guernsey) Law, 1987 already provides the GFSC with comprehensive powers to obtain information and interview investment licensees’ staff; on-site inspections have been conducted since 1989. - Intention to promote an amendment to the Protection of Investors (Bailiwick of Guernsey) Law, 1987 to provide the GFSC with powers of entry and search after obtaining a warrant from the Bailiff; similar provision exists in other GFSC-administered regulatory legislation. - GFSC may comment on investment business management and market practice; GFSC will report to the States of Guernsey Advisory and Finance Committee on the recommendation in 2004. - Current legal framework does not prohibit the GFSC from commenting on investment business management and market practice. ### Principles for Issuers (Principle 16) - Accounting and auditing standards: - The Bailiwick of Guernsey does not issue its own accounting or auditing standards; it follows internationally recognised accounting standards. - The GFSC monitors changing international standards and will continue to liaise with the local accounting profession, investment industry and other interested parties on accounting and auditing matters impacting the Guernsey investment industry. ### Principles for Market Intermediaries (Principle 24) - Failure of intermediaries: - The GFSC intends to liaise with the finance sector to promote an Ordinance under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 in 2004 that will include specific legislative provisions for dealing with the failure of a market intermediary. ### Principles for Secondary Market (Principles 29) - Market risk and disruption rules: - The GFSC intends to publish a consultation document on the management of large exposures, default risk and market disruption and to issue new rules during 2004. ### Review Against the OGBS Statement of Best Practice for Trust and Company Service Providers — General - Background: - In August 2002, a Working Group established by the Offshore Group of Banking Supervisors (OGBS) produced a draft “Statement of Best Practice” for trust and company service providers (CSP). - The Fund agreed with the Commission that the Statement would be used for the review of trust and company service providers in Guernsey. Subsequent to the mission the Statement was formally adopted by the OGBS. - The assessment was undertaken by Neville Grant (footnote from source). - Methodology and scope: - The OGBS Working Group did not develop a methodology to accompany the Statement; Fund reviewers developed the methodology used for the review. - The Statement applies to CSPs whether or not based in jurisdictions with formal licensing and supervisory regimes; it does not require licensing or ongoing supervisory/enforcement procedures. - Despite Guernsey licensing and supervising CSPs, the mission limited review of regulator independence, accountability, licensing process, ongoing supervision or enforcement except where necessary to review compliance with the Best Practice Statement—to ensure consistency with reviews of jurisdictions lacking formal regimes. - The mission made certain interpretative assumptions due to the Statement being general principles rather than detailed criteria. - The mission provided an indication of how fiduciary regulation in Guernsey compares with the Best Practice Statement but did not attempt to provide a specific measure of compliance as used for Basle, IAIS, and IOSCO Principles. - Areas covered by the Statement: - fit-and-proper criteria; - conduct of business; - the holding and sharing of information; - cessation of business; - misleading statements. - Note: - The assessment team examined regulation of trust and company service providers in Guernsey and provided recommendations to the Commission; the report should not be considered an assessment in the same manner as other standards-based assessments. ### Review Against the OGBS Statement — Detailed Assessment (selected findings) - Definition of Trust and Company Service Business (Principle 1) - The Fiduciary Law (s.2) defines fiduciary business to include: - formation, management or administration of trusts and advice related thereto, including acting as corporate or individual trustee or protector and provision of trustees or protectors; - company or corporate administration, including formation, management or administration of companies, partnerships or other unincorporated bodies and advice related thereto, whether under Bailiwick law or elsewhere; - provision of corporate or individual directors; individuals or companies acting as company or corporate secretary or other officer (other than director); - nominee services, including acting as or providing nominee shareholders; - registered offices or accommodation addresses (including postal, telecommunication or electronic addresses); - acting as director of any company or unincorporated body, or as partner of any partnership, whether under the laws of the Bailiwick or elsewhere; - provision of executorship services including acting as, or accepting appointment as, executor of a will or administrator of an estate. - A significant number of persons are exempted from licensing requirements; a detailed list of exempted activities is provided under Fiduciaries Law s.3 (enumerated in source). - Registered agent / registered office (Additional Criteria 1.2) - There is no requirement in Guernsey for companies to appoint a registered agent. - There is a requirement to have a registered office and the provision of that is regulated (Fiduciaries Law s.2(1)(b)(ii)). - Protectors, enforcers, custodians (1.3) - Provision of protectors is covered in Fiduciaries Law section 2(1)(a). - Exemptions (Explanatory note and Exempted activities) - Fiduciary Law s.3 lists extensive exemptions where regulation is not appropriate or necessary; examples include: - (a) acting as trustee or custodian of a collective investment scheme authorized by the GFSC under section 8 of the Protection of Investors (Bailiwick of Guernsey) Law, 1987; - (b) acting as a director of a company which has an established place of business within the Bailiwick provided no regulated services are supplied other than acting as director; - (c) acting as a director of a company which is quoted on a stock exchange recognized by the GFSC for the purposes of this paragraph; - (d) acting as a director where more than half in nominal value of the equity share capital of that company is held by (i) the director as beneficial owner; (ii) any close relative of the director as beneficial owner; or (iii) the trustees of a trust of which such person is a beneficiary; - (e) acting as a director of a supervised company; - (f) acting as a director of a subsidiary of a company described in (b), (c), (d) or (e); - (g) acting, where the person is an individual, as a director of not more than six companies subject to GFSC discretion and Schedule 1 fitness considerations; - (h) acting as bookkeeper or company secretary of a company with an established place of business within the Bailiwick provided no regulated activities are supplied other than those roles; - (i) acting as partner of a partnership with an established place of business within the Bailiwick provided no regulated activities are supplied other than that role; - (j) acting as partner of a partnership which holds a license to carry on controlled investment business under section 4 of the Protection of Investors (Bailiwick of Guernsey) Law, 1987 or is exempt under section 29, or which holds an authorization under section 8 of that Law; - (k) acting as a limited partner in a limited partnership; - (l) acting as bookkeeper of a partnership with an established place of business within the Bailiwick provided no regulated activities are supplied other than that role; - (m) acceptance of money on terms where the money is an advance/part payment repayable if property/services not provided, or paid as security for contract performance or delivery of property (with further sub-items (i), (ii), (iii)); - (n) acting as guardian appointed and supervised by Royal Court/Court of Alderney/Court of the Seneschal; - (o) acting as executor or administrator where the person was resident or domiciled in the Bailiwick and the person acting is a lawyer; - (p) acting as trustee of testamentary trusts created by a will of a person resident or domiciled in the Bailiwick where the person acting is a lawyer; - (q) provision of advice or drafting of documents by a lawyer, accountant or actuary in ordinary course of profession; - (r) incorporation of companies by an advocate and drafting of minutes by a lawyer, accountant or actuary; - (s) preparation and auditing of accounts; - (t) activities incidental to a profession or business undertaken without separate or additional remuneration and not held out as such; - (u) activities of the Ecclesiastical Court and Registrar in relation to probate and letters of administration; - (v) provision of accommodation addresses by specified public bodies or service providers, or where address provided solely for service of process or contract notice; - (w) activity carried under license, registration or authorization under any regulatory Laws; - (x) specified activities when carried on by a registered insurance intermediary within section 49A of the Insurance Business (Guernsey) Law, 1986 (sub-items (i) and (ii)); - (y) any activity specifically exempted by written instrument of the GFSC, with application, fee, conditions, and revocation provisions described. - Fit-and-Proper Criteria (Principle 2) - Key persons and licensing: - Fiduciary Law Section 6 implies certain persons are “key persons”; for a full fiduciary license, the GFSC must be satisfied that criteria are met by the applicant and anyone to be a director, controller, partner or manager. - Controller includes: - a managing director or chief executive of the applicant; - a shareholder controller—someone who, alone or with associates, controls or is entitled to control at least 15 percent of voting power at general meeting; - an indirect controller—someone in accordance with whose instructions the directors are accustomed to act. - Minimum criteria for licensing are contained in Schedule 1 to the Fiduciary Law and cover: - integrity and skill; - economic benefit to the Bailiwick (full fiduciary license holders); - fit-and-proper persons; - business to be directed by at least two individuals (full fiduciary license holders); - business to be conducted in a prudent manner. - The GFSC does not have power to vary the standards applied in determining whether an applicant meets these criteria but will determine whether conditions should be attached to a license (for example restricting activities). - Verification and supervision: - All applications are independently verified by the GFSC, involving a detailed review including database checks. - Each controller, director and manager must submit a personal questionnaire providing background, experience, employment history, disciplinary action history, and membership/licensing by other regulators; references are taken up with those regulators. - GFSC conducts on-site visits to applicants before granting a license in approximately one third of cases; visits verify information and probe competence of applicant/staff. - Licensed applicants are subject to an on-site inspection program. *International Monetary Fund assessment of the Bailiwick of Guernsey.* ### 2.1 In assessing whether a key person is fit and proper, the country/jurisdiction should ### 2.1–3 Conduct and Fitness Requirements for Key Persons and Service Providers ### Fitness and propriety criteria (principle 2.1) - In assessing whether a key person is fit and proper, the country/jurisdiction should consider his: - honesty, integrity and reputation; - competence and capability; and - financial soundness. - The assessment requires consideration of all relevant matters including the specific criteria set out in principles 2.2, 2.3 and 2.4. - The Fiduciaries Law (Schedule 1) subsections 3(2) and 3(3) are relevant and require regard to: - (a) probity, competence, experience and soundness of judgment for fulfilling licensed fiduciary responsibilities or the responsibilities of a particular position; - (b) the diligence with which he is fulfilling or likely to fulfill those responsibilities; - (c) whether the interests of clients of the applicant or licensed fiduciary are, or are likely to be, in any way threatened by his holding a fiduciary license or that position; - (d) educational and professional qualifications, membership of professional or other relevant bodies and any evidence of continuing professional education or development; - (e) knowledge and understanding of the legal and professional obligations to be assumed or undertaken; and - (f) procedures for the vetting of clients and record of compliance with any provision contained in or made under the Criminal Justice (Fraud Investigation) (Bailiwick of Guernsey) Law, 1991 or the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999. - Subsection (3) permits regard to previous conduct and activities in business or financial matters, in particular evidence that the person has: - (a) committed any offense, and in particular any offense involving fraud or other dishonesty or violence; - (b) contravened any provision contained in or made under this Law, the regulatory Laws or any other enactment appearing to the GFSC to be designed for protecting members of the public against financial loss due to: - (i) dishonesty, incompetence or malpractice by persons concerned in the provision of regulated activities, banking, insurance, investment or other financial services; or - (ii) the conduct of discharged or undischarged bankrupts or persons who are otherwise insolvent; - (c) engaged in business practices appearing to the GFSC to be deceitful or oppressive or otherwise improper (whether unlawful or not) or which otherwise reflect discredit on his method of conducting business or his suitability to carry on regulated activities; - (d) engaged in or been associated with any other business practices or otherwise conducted himself in such a way as to cast doubt on his competence and soundness of judgment. ### Honesty, integrity and reputation (principle 2.2) - Matters relevant to honesty, integrity and reputation include: - (a) any criminal offense of which he has been convicted or any criminal charges outstanding, particularly where the offense concerned is an offense of dishonesty or an offense relating to financial crime or committed under any financial services legislation. - Description: The Fiduciaries Law (Schedule 1 para. 3(3)(a)) permits regard to prior offenses, especially fraud or other dishonesty or violence. - Comments: The GFSC considers pending charges as raising questions of integrity, probity or soundness of judgment under para. 3(2)(a) of Schedule 1. - (b) any adverse finding, settlement or fine in civil proceedings, particularly in connection with a company or a financial services business. - Description: Schedule 1 para. 3(2)(c) requires consideration of conduct and activities in business or financial matters, including contraventions designed to protect members of the public against financial loss. - (c) any association, past or present, with a firm, company or other person that is or has been the subject of a regulatory investigation or disciplinary or enforcement proceedings. - Description: See Schedule 1 para. 3(3)(d) reference. - (d) any disciplinary, enforcement, disqualification or similar proceedings to which he has, or may be, subject or any professional or administrative reprimands. - Description: See Schedule 1 para. 3(3)(d) reference. - (e) any previous regulatory breaches committed by him or by a person with whom he is or has been associated and any complaints made against him. - Description: Breaches are covered by Schedule 1 para. 3(3)(b). Complaints history is relevant under Schedule 1 para. 5(9)(c) when determining prudent business conduct. - (f) whether he has been candid and truthful in his dealings with the Director and/or any other regulatory body. - Description: The Fiduciaries Law s.46(1) creates an offense for providing misleading information in connection with a fiduciary license application or related requirements; s.46(2) creates an offense for a licensed fiduciary failing to provide relevant information to the GFSC where withholding is likely to mislead the GFSC. ### Competence and capability (principle 2.3) - Relevant matters to assess competence and ability: - (a) the extent of the person’s relevant experience; and - (b) where the person is an individual, his or her knowledge and professional and other relevant qualifications. - Description: Schedule 1 para. 3(2) requires regard to probity, competence, experience and soundness of judgment; para. 3(2)(d) refers to educational and professional qualifications, membership of professional bodies and evidence of continuing professional education or development. ### Financial soundness (principle 2.4) - Relevant matters to assess financial soundness: - (a) any insolvency proceedings that have been instituted against the person. - Description: The GFSC requests this information on its application form. - Comments: The GFSC looks at resources under Schedule 1, para. 5 and would become concerned about any relevant matter. Question 27 of the PQ asks for confirmation that there was no pending winding up application or any receivership or composition with creditors. - (b) where the person is an individual, any adverse credit rating. - Description: The GFSC does not routinely make credit rating enquiries. - Comments: The GFSC would refuse an applicant on resources grounds using the prudent business criteria under Schedule 1, para. 5. ### Additional criteria for controllers and owners (principle 2.5) - Jurisdictions should require persons holding a legal or beneficial interest in a service provider to be fit and proper applying criteria in paragraphs 2.1–2.4 with suitable modifications for corporate bodies. - Description and GFSC practice: - The GFSC considers this essential because someone not fit and proper could otherwise control a licensee. - Application forms for a full fiduciary license require information on directors, partners, managers and beneficial ownership/control; all such persons must submit a detailed personal questionnaire (Fiduciaries Law, Schedule 1). - Fiduciaries Law s.14 requires notification to the GFSC of intention to become a controller (or partner). A controller for a company is someone holding at least 15 percent of a company’s shares. - The GFSC requires completion of a personal questionnaire and may request additional information or documents after notification to determine whether to serve a notice of objection. - The GFSC’s criterion for issuing a notice of objection is whether the GFSC is satisfied that: - the person is fit and proper; - the interests of the clients of the service provider would not be threatened by that person becoming a controller; and - the minimum criteria for licensing of the service provider will continue to be met. - Section 22 requires anyone becoming a significant shareholder (i.e., holding between 5 percent and 15 percent) to notify the GFSC within 14 days of becoming so. ### Conduct of Business — Corporate governance and AML (Principle 3) - Principle 3 overview: - All countries/jurisdictions should require trust and company service providers to exhibit evidence that their business will be or is being conducted in accordance with proper corporate governance, customer due diligence, conduct of client business, financial soundness, and systems and controls requirements. - Corporate governance (3.1) - Application forms for a full fiduciary license require information on strategic and operating plans, including succession and disaster recovery plans, and staff training and development. - The GFSC pays close attention to whether the applicant meets the “four eyes” requirement; it considers relative experience and ownership interests of persons proposed to fulfill that test and has refused licenses where “four eyes” was not satisfied until additional executive personnel were appointed. - On-site visits examine procedures, controls and reporting lines, with particular reference to the director or trustee applying the GFSC’s judgment. - Comments: Some fiduciaries operate under transitional provisions; the GFSC is progressing licensing and has set up a Shadow Financial Services Tribunal. Delays in completing the transitional licensing process could risk the jurisdiction’s reputation; the mission would recommend setting a cut-off date if transitional processing is not complete within the next few months. - AML/CFT compliance (3.2) - Service providers are subject to: - Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999; - Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Regulations, 2002; - Guidance Notes on the Prevention of Money Laundering and Countering the Financing of Terrorism issued under those Regulations; and - Terrorism and Crime (Bailiwick of Guernsey) Law, 2002. - These have been supplemented by the Position Paper on Overriding Principles for a Revised Know Your Customer Framework. - Suspicious transactions must be reported to the Financial Intelligence Service (FIS) and also to the GFSC where they might cause regulatory concern. - Application forms require a full account of the applicant’s procedures for complying with AML requirements; copies of procedures manuals are often obtained and reviewed before licensing decisions. - Noncompliance with the law or a regulation is a criminal offense and may result in regulatory discipline, including license revocation; breach of Guidance Notes may also be grounds for regulatory action. - The GFSC obtains and reviews applicants’ AML/CFT procedures and examines adequacy and practical implementation during on-site inspections. - Financial regulatory standards and statutory obligations (3.3–3.4) - Fiduciaries Law s.29 authorizes the GFSC to make rules prescribing the form and content of licensed fiduciary accounts and auditors’ reports and the timing for preparation and submission. - On-site visits review compliance with financial regulatory standards and all relevant domestic statutory obligations governing formation and administration of companies. - Responsibilities of directors and trustees (3.5) - The GFSC has published a Code of Practice for Company Directors under Fiduciaries Law s.35 requiring directors to understand and act in accordance with legal duties and to act in good faith and in the best interests of the company; separate Codes exist for Trust Service Providers and Corporate Service Providers. - Internal controls and “four eyes” (3.6) - Adequate internal controls providing at least “four eyes” control are a statutory criterion for full licensees. - For a full fiduciary license, at least two individuals, resident in the Bailiwick and of appropriate standing and experience, shall effectively direct the business of the licensed fiduciary (Fiduciaries Law, schedule 1 para.). - The GFSC considers independence of senior management and may require additional appointments before granting a license; on-site inspections review compliance with legal obligations, Codes of Practice and adequacy of internal review systems, reporting lines and business controls. - Customer due diligence (3.7–3.8) - Providers must satisfy requirements equivalent to the Basel Committee’s CDD Paper (October 2001) where relevant to nonbanks; applicants and licensees must satisfy the GFSC’s Guidance Notes on the Prevention of Money Laundering and Countering the Financing of Terrorism. - CDD procedures should cover: - (a) customer identification; - (b) verification of identity of customer; - (c) risk profile (e.g., politically exposed persons); - (d) source of wealth; - (e) source of funds; and - (f) ongoing monitoring. - Description: These matters are covered in the AML/CFT review and by the money-laundering Guidance Notes. *Source: IMF content unit cr03365 summarizing the Fiduciaries Law (Schedule 1), related Fiduciaries Law sections, and GFSC practices and guidance.* ### 3.9 Trust and company service providers should be required to have systems and ### 3.9 Trust and company service providers should be required to have systems and procedures in place for the conduct of client business covering: ### (a) Identification and segregation of clients’ assets - TSP Code of Practice para. 4 requirements: - Treat the interests of beneficiaries as paramount subject to legal obligations to other persons or bodies. - Invest, distribute or otherwise manage each trust’s assets in accordance with the law and the trust deed. - Manage the investment and custody of trust assets professionally and responsibly. - Maintain confidentiality except where disclosure is required or permitted by applicable law or GFSC guidance, or authorized by the person(s) to whom the duty of confidentiality is owed. - Provide promptly to clients information to which they are entitled about a trust. - Ensure that the funds of different trusts are kept separately from each other and from the TSP’s own funds. - Agree a clear fee structure in advance and charge fees in a fair and transparent manner. - Notify clients that the TSP is licensed by the GFSC. - Avoid setting up or participating in discretionary trusts where trustees merely carry out the settler’s instructions and exercise no significant discretion. - Deal in a timely manner and in the best interests of beneficiaries with any transfer to other trustees. - CSP Code of Practice para. 6 requirements: - Staff should identify and act in each client company’s best interests and avoid or deal properly with any conflict of interest between clients or between the CSP and a client. - Keep the funds of each client company separate from each other and from the CSP’s own funds. - GFSC oversight and enforcement: - GFSC monitors compliance during on-site visits. - Inadequacies of systems can be tied to the general licensing criterion in the Fiduciaries Law Schedule 1 requiring adequate accounting and other records and adequate systems of control. - External auditors must identify and report to the GFSC any clients’ assets not segregated from each other or from the licensee. ### (b) Effective handling of clients’ assets (safe custody and proper management) - Description: See response to principle 3.9.a above (TSP/CSP Codes and GFSC monitoring). - GFSC reviews custody and management during on-site visits. ### (c) Maintenance of adequate and orderly accounting records of clients’ affairs - Description: See response to principle 3.9.a above. - Guernsey Society of Certified and Chartered Accountants’ Guidance Note requires auditors to “make preliminary assessment of control risk by reviewing client administration controls” including client accounting. - Auditors examine client accounting controls and report inadequacies to the GFSC. ### (d) Maintenance of adequate client documentation (e.g. trust deeds) - Description: See responses to principles 3.9.a and 3.9.c above. - GFSC examines client documentation during on-site visits. ### (e) Appropriate authorization and handling of transactions and decisions by suitably qualified persons - Description: Reviewed during on-site reviews as part of client assets questions. - Explanatory examples: - Where discretion is exercised, reasonable steps should be taken to obtain sufficient information to exercise discretion properly and only for a proper purpose. - Actual or perceived conflicts of interest should be avoided or handled via disclosure, internal confidentiality rules, rules on when to act, or otherwise as appropriate. - All business, including establishing, transferring or closing customer relationships, should be transacted expeditiously. - GFSC comments: - Adequacy of information: see principle 3.4. - Conflicts of interest: CSP Code para. 6 and TSP Code para. 5 require identification and proper handling of conflicts. - Expeditious transacting: covered under general competence criterion or adequacy of systems if delays arise from system failures. ### Financial soundness requirements (Principle 3.10) - (a) Maintain adequate and orderly accounting records of business and clients’ affairs: - Fiduciary Law, Schedule 1, para. 5(6) requires adequate accounting and other records and adequate systems of control; auditors to identify deficiencies. - (b) Maintain adequate financial resources including paid up capital and liquid capital: - Fiduciaries Law Schedule 1, para. 5(2) requires capital base and insurance cover: - “of an amount commensurate with the nature and scale of his operations;” - “of an amount and nature sufficient to safeguard the interests of his clients and any other factors appearing to the GFSC to be relevant.” - For trust companies GFSC requires paid up share capital of at least £25,000 and there is a three months’ expenditure test. - GFSC monitors capital annually via submission of annual accounts and considers it able to impose appropriate capital/resource levels under the law. - (c) Comply with relevant financial regulatory standards and international accounting standards: - Audits must follow Auditing Practice Board standards. - Financial statements must be prepared in accordance with U.K., U.S. or International Accounting Standards unless GFSC agrees another standard; GFSC has not agreed any other standard to date. - (d) Maintain adequate professional indemnity insurance cover: - Fiduciaries Law, Schedule 1, para. 5 requires capital base and insurance cover commensurate with nature and scale of operations and sufficient to safeguard clients’ interests. - GFSC has generally required full licensees to have cover of the greater of £1million and three times turnover, and personal licensees £1million or, where small-scale activities only, £500,000. ### Systems and procedures (Principles 3.11–3.14) - 3.11(a) Effective compliance functions and a designated compliance officer: - No explicit legal requirement for such an appointment, but in practice most Money Laundering Reporting Officers act as compliance officers. - Board responsibility for regulatory compliance remains; designation of an individual at director or other level would not change the responsibility. - 3.11(b) Effective reporting requirements and appointment of an appropriately skilled anti-money laundering reporting officer: - Criminal Justice (Proceeds of Crime) Regulations, 2002 require appointment of a MLRO. - No explicit statutory experience requirement, but GFSC will comment if MLRO is insufficiently experienced. - 3.11(c) Effective complaints handling system with records of complaints and actions taken: - TSP Code para. 5 and CSP Code para. 6 require staff to record, investigate and act on complaints. - GFSC reviews complaints records during on-site visits. - 3.11(d) Maintain adequate, orderly, up-to-date records of all business transactions and instructions locally, including: - Accounting records of the business and of clients’ affairs. - Records of internal organization and risk management systems. - Client documentation (e.g. client requirements). - GFSC expects communications with settlors/beneficiaries/beneficial owners to be on files and reports inadequate records when found on visits. - 3.12 Record retention: - Criminal Justice (Proceeds of Crime) Regulations, 2002 impose a six-year period for retention. - GFSC questions licensees on retention during on-site inspections. - 3.13 Maintain a manual of appropriate policies and procedures (business take-on, systems to safeguard business and client assets, authorization procedures): - Fiduciaries Law, Schedule 1, para. 5(6) requires adequate accounting and other records and adequate systems of control. - GFSC reviews procedures before visits and compliance during on-site visits. - 3.14 Adequate span of control and minimum relevant experience/qualifications: - Fiduciaries Law, Schedule 1, para. 4: at least two individuals of appropriate standing and experience shall effectively direct the business of the licensed fiduciary. - GFSC must be satisfied directors and managers are sufficiently experienced and qualified (Fiduciaries Law, Schedule 1, paras. 3(2)(a) and (b)). - Levels of experience factor into GFSC risk-profiling for post-licensing visits. - Explanatory note: exceptions may apply for sole practitioners where an individual trustee function is controlled by the court. - 3.15 Professional development: - GFSC considers professional and industry associations responsible for ensuring professional development requirements are met. - 3.16 Staff understanding of legal duties: - Fiduciaries Law para. 3(2) requires GFSC to consider individuals’ knowledge and understanding of legal and professional obligations when licensing. ### Holding and sharing of information (Principle 4) - 4.1 Ultimate beneficial owner/control information: - Money laundering Guidance Notes require licensees to keep information on ultimate beneficial owners/controllers and trustees/settlor/protector/beneficiaries. - 4.2 Monitoring changes of client control/ownership: - Guidance Notes on Prevention of Money Laundering and Countering the Financing of Terrorism, para. 39 require verification of a new beneficial owner, particularly for “shelf” companies, bearer shares or nominee holdings. - 4.3 Mechanisms to make information available to relevant authorities: - Fiduciaries Law s.23 enables GFSC to obtain information and documents. - Fiduciary Law s.43 sets confidentiality rules: - Persons receiving information for the purposes of the Law shall not disclose without consent of the person to whom it relates and (if different) the person from whom it was obtained. - Disclosure in contravention is an offense. - Fiduciary Law s.44 provides gateways for onward transmission to other regulators, investigating and prosecuting authorities. - 4.4 No barriers to appropriate flow of information: - No general legal barrier (for example, no requirement for Attorney General’s consent before disclosure to GFSC). - Section 44(1) requires Attorney General consent in very limited circumstances where information has gone from GFSC to the Police and the Police want to disclose for investigation and prosecution outside Guernsey. - Fiduciary Law s.44 lists permitted disclosures, including: - Information already public from other sources. - Summaries/collections not enabling identification of any particular person. - Disclosure to enable or assist the GFSC to discharge functions under the Law. - Disclosure to auditors of licensed fiduciaries where helpful to GFSC functions or public interest. - Disclosure to qualified advisers for GFSC to obtain professional advice. - Disclosure in interests of clients or the public interest. - Disclosure to supervisory authorities outside the Bailiwick to enable them to exercise functions. - Disclosure for investigation, prevention or detection of crime or for criminal proceedings. - Disclosure to a person/body responsible for a compensation scheme if GFSC considers it would assist and the recipient gives a written undertaking not to further disclose without GFSC consent. - 4.5 Local retention of client information: - Criminal Justice (Proceeds of Crime) Regulations, 2002 Regulation 5 requires licensees to retain customer documents and verification documents “in a manner that makes their retrieval readily practicable.” - Fiduciary Law Schedule 1, para. 5(6) obligation on records and systems of control is relevant. - 4.6 No legal barrier to supply verification documents to recipient introducers: - GFSC does not prevent financial services businesses in the Bailiwick from supplying verification documents to other jurisdictions. *Source: IMF staff extract summarizing GFSC requirements and Fiduciaries Law provisions (cr03365).* ### 5.1 External auditors with relevant experience and appropriate track record should be ### 5.1 External auditors with relevant experience and appropriate track record should be appointed to carry out a full audit of the trust and company service providers’ businesses in accordance with international standards. ### Appointment and qualifications of external auditors - The Regulation of Fiduciaries (Accounts) Rules, 2001, para. 10.1 requires: - a person shall provide to the GFSC financial statements for each accounting period at any time during which it held a full fiduciary license; - the statements shall be provided to the GFSC within four months of the end of the accounting period to which they relate; - the financial statements shall be accompanied by: - an auditor’s report on the financial statements; - any report prepared by an internal or external auditor which is available to the licensed fiduciary and addresses a relevant matter; - brief details of any report prepared by an accountant or consultant, which is available to the licensed, fiduciary and addresses a relevant matter (relevant matter means a breakdown or material weakness in a licensed fiduciary’s internal control procedures); - a licensed fiduciary shall forthwith provide to the GFSC a copy of any management letter received from his external auditor. - The Fiduciary Law s.58 defines an auditor as one approved by the GFSC. - The GFSC only approves auditors who confirm that they will perform audits of fiduciary licensees in accordance with the GSCCA Guidance Notes on the audit of fiduciaries. - The Guidance Notes require the auditor to review client files and to form a view on risks facing the licensee. - The Companies Law s.63(1) states: - “A person is not qualified for appointment as an auditor unless he is (a) a member of (i) the Institute of Chartered Accountants in England and Wales, of Scotland or in Ireland; (ii) the Chartered Association of certified Accountants; or (b) for the time being authorized by the Committee to audit the accounts of companies as having similar qualifications obtained outside the United Kingdom.” - The Companies Law further states: - “The audit must be conducted in accordance with Auditing Standards issued by the Auditing Practices Board and the financial statements must be prepared in accordance with U.K., U.S., or International Accounting standards, unless the GFSC agrees to a different standard.” ### Comments / implications - Auditors used for fiduciary licensees must meet prescribed professional membership/authorization criteria and adhere to specified auditing and accounting standards. - Auditors approved by the GFSC must follow GSCCA Guidance Notes including client-file review and risk assessment. --- ### 5.2 External auditors should have the statutory authority and protection necessary to report to the competent authorities any breaches of relevant legislation or other material concerns. ### Legal protection and reporting authority for auditors - Auditors are protected by Section 31, which provides that communications of information relevant to the GFSC’s functions do not constitute a breach of any duty by the auditor, whether or not the communication is in response to a request from the GFSC. - The Fiduciaries Law s.31 states: - “No duty to which an auditor of a licensed fiduciary is subject is contravened by reason of his communicating in good faith to the GFSC, whether or not in response to a request made by it, any information or opinion on a matter relevant to any function of the GFSC. The section applies to any matter of which he becomes aware in his capacity as auditor and which relates to the business or affairs of the licensed fiduciary.” - The protection also applies to the auditor of a former licensed fiduciary as it applies in relation to the auditor of a licensed fiduciary. ### Comments / implications - Statutory protection enables auditors to report breaches or material concerns to the GFSC without breach of duty liabilities. - Protection covers both current and former licensed fiduciary auditors. --- ### 5.3 Adequate procedures should be implemented to ensure that regular independent reviews are conducted of compliance with the Statement. ### Independent reviews and supervision - The GFSC reviews compliance during on-site visits. ### Comments / implications - On-site inspections are the mechanism for regular independent review of compliance with the Statement. --- ### Cessation of Business and Misleading Statements (Principle 6) ### Safeguards when a service provider ceases business - Principle 6: All countries/jurisdictions should have proper provisions for the ceasing of business and for prohibiting misleading statements. - 6.1 The interests of customer/clients should be able to be adequately safeguarded when the service provider is no longer able to carry on the business for any reason. - Description: This is currently not covered. - Legislative development: Legislation introducing the Office of Public Trustee has been agreed by Guernsey, Alderney, and Sark legislatures and sent to the Privy Council in the week of November 4, 2002 for the Royal Sanction. ### Prohibition of misleading information and advertising - 6.2 Trust and company service providers should not provide false or misleading information (including advertisements). - The Fiduciary Law s.20 gives the GFSC the power to make regulations on fiduciary advertisements. - The Regulation of Fiduciaries (Fiduciary Advertisements and Annual Returns) Regulations, 2001 prohibit personal fiduciary licensees from advertising but do not impinge on advertising by holders of full licenses. - Under Section 20(7) the GFSC can give a direction prohibiting a fiduciary advertisement or requiring its modification. - The GFSC may: - make regulations in respect of the issue, form, and content of fiduciary advertisements and may prohibit the issue of advertisements of any description; - make provision as to the matters which must or which may not be included in fiduciary advertisements; - provide for exemptions from any prohibition or requirement imposed by the regulations. - A person who issues or causes to be issued an advertisement the issue of which is prohibited by regulations under s.20 or which otherwise contravenes any provision of such regulations is guilty of an offense. - In addition to the annual return, pursuant to section 46(2), the service provider is required to provide the GFSC with any information in its possession that is relevant to the GFSC in the exercise of its powers; failure to do so is an offense. - The Codes of Practice for Trust Service Providers and Corporate Service Providers set out events about which the GFSC would expect to be notified, including commencement of proceedings against the service provider in any country and serious or prolonged breakdown of the service provider’s administrative systems. - The guidance accompanying the Code confirms the list is not exhaustive but indicative of events the GFSC would expect to be notified about. - The GFSC reviews whether on-site inspections reveal that any matter, such as a complaint, should have been but has not been notified to the GFSC. - Other requirements in the Fiduciary Law for notification to or approval by the GFSC are set out elsewhere in the law. ### Comments / implications - Advertising by personal fiduciary licensees is prohibited; full licensees retain advertising ability subject to GFSC powers and directions. - Statutory powers and Codes of Practice impose notification obligations and potential offenses for non-compliance. --- ### Authorities’ response to the Review against the OGBS Statement of Best Practice for Trust and Company Service Providers - The authorities welcome the IMF’s assessment and confirmation that the Bailiwick of Guernsey’s standards of trust and company service provider regulation are fully consistent with the OGBS Statement of Best Practice for Trust and Company Service Providers. (Paragraph 116) --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr03365.pdf_