## cr03366 - Preface ## Source details **Canonical URL:** [cr03366 - Preface](https://www.imf.org/-/media/files/publications/ofca/english/cr03366.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr03366.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr03366.pdf.json) --- ### Mission, scope, and methodology - The IMF conducted a Module 2 assessment of the Isle of Man. - The assessments were carried out during a mission conducted October 21–30, 2002. - Mission leadership and participants: - Mission led by Mr. R. Barry Johnston (Monetary and Financial Systems Department (MFD)). - Team comprised Messrs. Neville Grant (Deputy Mission Chief, Consultant, MFD); Ian Carrington (MFD); John Darwood (Consultant, MFD); Ross Delston (Consulting Counsel LEG); John Farrell (Consultant, MFD); Jack Heyes (Consultant, MFD); and Marcel Maes (Consultant, MFD). - Detective Chief Superintendent, Felix McKenna, served as the independent anti-money laundering expert (IAE) for the AML/CFT assessment. - The mission reviewed current legislation and practices and held discussions with regulatory authorities, government officials, and a cross-section of private sector practitioners. - Report organization: - Volume I: overview and summary findings. - Volume II: detailed assessments against the Basel Core Principles, IAIS Insurance Core Principles, IOSCO Objectives and Principles of Securities Regulation, FATF 40+8 Recommendations, and OGBS Best Practice review for Trust and CSPs. ### Executive summary — overall assessment and strengths - Overall conclusion: - The IMF mission concluded that the Isle of Man’s financial regulatory and supervisory system "complies well with the assessed international standards." - Jurisdiction assessed to have a "high level of compliance with the four key standards." - Noted strengths: - "the comprehensive, if somewhat complex, regulatory framework"; - "the proactive approach of the regulators to achieve high standards in the financial services sector"; - "an off-site and on-site supervisory process that addresses key reputational risks." - Legal framework: - The legal framework for company and trust service providers (TSPs) is fully consistent with the Offshore Group of Banking Supervisors (OGBS) Statement on Best Practices. ### Identified shortcomings and recommended priorities - Shortcomings identified: - Independence and accountability of the Financial Supervision Commission (FSC) and Insurance and Pensions Authority (IPA). - Need to apply more robust supervisory tools in selective areas of the banking sector; concerns about adequacy of supervisory resources. - Weaknesses in the legal framework for AML/CFT and in the coverage of guidance notes in some areas. - Need to complete implementation of the licensing regime for TSPs. - Mission recommendations (selected): - Adopt legislation to provide for appropriate independence and accountability of the financial regulators. - Upgrade the on-site supervisory process. - Amend the legal framework on AML/CFT and broaden the coverage of the guidance notes in certain areas. - Enact the Fiduciary Services Bill quickly. - Observed risk: - The mission noted these shortcomings have not been a major concern to date but could become more significant as the financial sector develops. ### Financial system overview — structure and scale (as reported) - Financial services sector accounts for "some 41 percent of national income." - Financial sector structure (end of June 2002 unless otherwise noted): - "59 licensed banks and 2 licensed building societies." - "Total bank deposits were £27.1 billion." - "128 collective investment schemes established with licensed fund managers and third-party fund administrators." - "The value of collective investment funds was £5.2 billion (March 2002)." - "87 license holders are authorized to undertake investment business." - "17 authorized life assurance companies ... manage some £14.7 billion of policyholders funds." - "Annual premium income for 2001 was £4.9 billion" (life assurance). - "165 captive insurance companies and 22 captive insurance management companies." - "Funds under management were £6.1 billion and annual premium income in 2001 was £1 billion" (captives). - "35,514 registered companies, of which private companies are the vast majority." - "115 licensed CSPs, which provide a full range of corporate formation, management and administration services, and an additional number of TSPs." - Comprehensive range of supporting professionals—accountants, lawyers, and other professionals—serve the sector. ### Supervisory bodies and institutional arrangements - Financial Supervision Commission (FSC): - Established in July 1983 under the Financial Supervision Commission Order 1983; governed by the Statutory Boards Act of 1987. - Responsible for licensing and supervision of banks; building societies; investment business; collective investment schemes and CSPs; and for initiation of related legislation. It will shortly become responsible for licensing and supervision of TSPs. - Under the Financial Supervision Order 1983, the FSC’s functions include taking "such steps as appear to it to be necessary or expedient for the effective supervision of the private financial and commercial sector in the jurisdiction, but with the exception of the insurance industry." - FSC has focused supervisory efforts on areas judged to pose the greatest reputational risk to the Isle of Man. - Governance and accountability features: - FSC constituted as a statutory board with eight commissioners appointed by the treasury, subject to approval by Tynwald; the chairman is a member of Tynwald and the treasury; the Chief Executive of the FSC is also a commissioner. - Commissioners can be removed at any time by the council of ministers; both the council of ministers and the treasury can direct the board. Treasury determines statutory boards’ budgets annually. These provisions effectively make the FSC and the IPA departments of government. - Companies registry: - In 2000 responsibility for maintaining the companies registry was transferred to the FSC from the general registry, and the FSC became responsible for companies legislation. - "As at May 2003, the FSC had a complement of some 58.5 staff, of which 20 are assigned to maintaining the companies registry." ### Actions already taken by the authorities (selected) - Supervisory enhancements: - Major project completed to implement a new approach to supervisory techniques to upgrade the on-site inspection process. - FSC issued a consultative paper on corporate governance to banks and started a pilot program of supervisory visits to banks focusing on corporate governance, and safety and soundness issues, to be followed by a full program covering all banks. - Detailed guidance being developed on specific areas of risk for banks, such as credit risk and market risk. - AML/CFT legal framework: - "The Anti-Money Laundering Code 1998 has been comprehensively revised to include a number of the mission’s recommendations for amending the legal framework on AML/CFT. The revised draft Code was issued for consultation in the jurisdiction at the start of July 2003." ### Governance and institutional arrangements — IPA - Treasury, subject to the approval of Tynwald, appoints members of the Board of the IPA. - The Chairman of the IPA currently is a member of Tynwald and its chief executive is a member of the board. - The treasury consists of the treasury minister, the FSC Chairman, and the IPA Chairman. All are members of Tynwald. The treasury minister is a member of the council of ministers. - The IPA has a complement of 12 staff. - IPA responsibilities include: - Authorization and ongoing supervision of companies carrying out insurance business in or from The Isle of Man, and insurance companies incorporated in the jurisdiction; - Regulation of pension schemes; - Registration of insurance management companies and insurance intermediaries carrying on general business. ### Legal and regulatory framework (selected statutes) - Isle of Man is a Crown Dependency, self-governing, and a separate legal jurisdiction from the United Kingdom; Tynwald is the legislature; the jurisdiction is common law. - Under Protocol 3 to the Treaty of Accession related to the United Kingdom’s entry into the common market: - Isle of Man is part of the customs territory of the EU, subject to the common customs tariff and measures relating to trade, and enjoys free movement of goods in trade between the jurisdiction and the EU; - no other EU rules apply. - Key financial legislation listed includes: - Statutory Boards Act 1987; Financial Supervision Commission Order 1983; Insurance Act 1986; Retirement Benefits Schemes Act 2000; - Banking Act 1998; Building Societies Act 1986; Financial Supervision Act 1988; Companies Acts 1931–1993; - Corporate Service Providers Act 2000; Fiduciary Services Bill to extend framework to TSPs; - Credit Unions Act 1993; - Insurance Act 1986; Insurance Intermediaries (General Business) Act 1996; - Investment Business Act 1991; - Anti-money laundering statutes including Drug Trafficking Act 1996; Prevention of Terrorism Act 1990; Criminal Justice Act 1990; Criminal Justice Act 1991; Criminal Justice (Money Laundering) Act 1998; Anti-Money Laundering Code 1998. ### Strengths and vulnerabilities in regulatory and supervisory arrangements - Compliance: - Financial regulatory system generally complies well with assessed international standards, using assessments against Basel Core Principles; IAIS Insurance Core Principles; IOSCO Objectives and Principles; OGBS Draft Statement of Best Practice for Company and TSPs; FATF 40+8 Recommendations. - Strengths: - FSC achieved a high standard of compliance with Basel and IOSCO Principles; well-established regulator with proactive stance. - IPA achieved a high degree of compliance with IAIS Principles; small but competent supervisory office. - Off-site supervisory process: FSC requires external auditors to provide reasonable assurance on regulatory returns at least annually, and obtains an annual certificate from senior management of licensed banks confirming compliance with the Regulatory Code. - On-site AML/CFT arrangements: FSC prioritized AML/CFT and conducted special-purpose on-site visits to all licensed banks over the past three years. - Vulnerabilities and concerns: - Questions about capacity of FSC and IPA to maintain independence due to statutory powers for government to issue general and individual directions on policy, licensing, and inspections. - FSC’s core responsibilities not clearly stated in its founding statute. - FSC and IPA not required to prepare comprehensive annual reports; FSC’s report lacks meaningful financial information; IPA prepares no report — implications for public accountability. - Both regulators part of general government planning and budget process and subject to periodic internal and external audit, but these processes do not provide effective public accountability. - With limited resources, safety and soundness issues in banks have not been adequately addressed because of the priority given to AML/CFT. ### Sectoral assessment summaries (selected) - Basel Core Principles: - Assessed as achieving a high level of compliance; concerns related to FSC operational independence and resources and practical application of framework. - IAIS Core Principles: - High level of compliance; concerns about operational independence and accountability of supervisor and issues related to legal framework for derivatives and off-balance-sheet items. - IOSCO Principles: - High level of compliance; some Principles not applicable (no secondary market or self-regulatory organizations); concerns about regulator independence and accountability and lack of procedure for dealing with failure of a market intermediary. - AML/CFT Standards (FATF): - High level of compliance; regime generally satisfactory with developed legal framework and industry awareness. - Strengths: developed legal and institutional framework for confiscation of proceeds, exchange of information, and international cooperation; broad regulation of financial sector; high awareness and effort by industry; FSC and IPA oversight generally satisfactory with on-site and off-site surveillance and visits to most licensed institutions over last three years. - Areas for improvement: legal and institutional framework could be strengthened in several areas; principal instruments for compliance — FSC guidance notes and IPA Common Trading Practices (CTP) — could be improved; since assessment both have been revised and CTP re-titled the Anti-Money Laundering Standards for Insurance Businesses. ### Company and trust service providers (CSPs/TSPs) - Isle of Man was among the first jurisdictions to apply a comprehensive regulatory regime to CSPs; regulatory regime consistent with OGBS Statement of Best Practice and in some respects exceeds it. - Regulatory regime for TSPs was not yet in place at the time of assessment; framework for CSPs provides a satisfactory base for TSP regulation under the Fiduciary Services Bill. - Licensing progress and measures: - Some CSPs were operating under “transitional registration provisions” while licensing process incomplete. - CSP Codes extended to all CSPs, including unlicensed applicants, effective May 1, 2003. - Deadline of July 31, 2003, set for completion of CSP licensing; Commissioners considered all CSP license applications by the July 31 deadline. - Small number of applications pending resolution of investigation or litigation; remaining unapproved applicants withdrawing per programs agreed with the Commission. - For TSPs, until legislation and vetting process are complete, FSC will not know whether all can meet OGBS standards; FSC expects majority of TSP applications to come from CSP license holders who have met fitness and propriety criteria. ### Banking activity and deposits (selected figures) - Banks mainly provide private banking services to nonresidents; deposit-taking with funds on-lent primarily in international interbank markets; some banks act as custodians and trustees to collective investment schemes; others conduct trade finance and treasury operations. - Table 1. Bank Deposits (in billions of £): - 31/12/98 — Sterling: 14.98; Non-Sterling: 7.33; Total Bank Deposits: 22.31 - 31/12/99 — Sterling: 15.20; Non-Sterling: 7.76; Total Bank Deposits: 22.96 - 31/12/00 — Sterling: 17.83; Non-Sterling: 6.86; Total Bank Deposits: 24.69 - 31/12/01 — Sterling: 17.72; Non-Sterling: 9.27; Total Bank Deposits: 26.99 - 31/03/02 — Sterling: 18.08; Non-Sterling: 8.80; Total Bank Deposits: 26.88 - 30/06/02 — Sterling: 18.48; Non-Sterling: 8.54; Total Bank Deposits: 27.02 - 30/09/02 — Sterling: 18.31; Non-Sterling: 8.80; Total Bank Deposits: 27.11 ### Criminal justice, FIU, and international cooperation (AML/CFT) - Criminalization and conventions: - Isle of Man’s framework for criminalizing money laundering (ML) and the financing of terrorism (FT) is generally adequate; money laundering extends to proceeds of criminal conduct and appears generally consistent with the Vienna and Palermo conventions. - Prevention of Terrorism Act and the UN Order contain provisions criminalizing the financing of terrorism. - Vienna Convention and Council of Europe Convention on Laundering, Search, Seizure and Confiscation have been extended to the Isle of Man. - UN Convention for the Suppression of the Financing of Terrorism and the UN Convention Against Transnational Organized Crime (Palermo Convention) have not been extended to the Isle of Man (extension contingent on Anti-Terrorism and Crime Bill). - Confiscation and forfeiture: - Laws provide for confiscation of assets upon conviction and forfeiture of instrumentalities of crime; attorney general may apply for court orders to restrain dealing with realizable property; police may seize property to prevent removal from the Isle of Man. - Provision enabling terrorist funds to be frozen on suspicion. - Civil forfeiture currently applies in respect of import and export of drug proceeds cash and cash-related to other crimes (other than terrorism); Anti-Terrorism and Crime Bill will address terrorism crimes. - FIU / FCU: - Isle of Man Financial Crimes Unit (“FCU”) of the Isle of Man Police is the FIU. - Reporting parties are required by law to make disclosures to “a constable”; there is no legal requirement to report directly to the FCU. - FCU keeps records and statistics of investigations, prosecutions, and convictions on its ML/FT cases and a statistics database enabling identification of investigations originating from STRs or other sources. - To date, there are no ML convictions in the Isle of Man; authorities have assisted in numerous ML investigations with other jurisdictions that resulted in prosecutions and convictions elsewhere. - FCU structure: personnel dedicated to intelligence (statistics, analysis and dissemination), an international cooperation team, and an investigative team specializing in fraud, ML and FT investigations. Isle of Man Customs and Excise also carry out ML and FT investigations. - Main functions include investigation of all serious financial crime involving the finance sector in the jurisdiction; investigation where jurisdiction is unclear; initial investigation where jurisdiction lies outside the Isle of Man but evidence needs securing. - FCU functions are extensive and the unit has become overburdened; FCU not authorized to obtain from reporting parties additional documentation needed to assist in its analysis of financial transactions. - Law enforcement and international cooperation: - FCU and Customs and Excise are responsible for ensuring ML and FT offences are properly investigated; close liaison exists between the Attorney General’s Chambers, the FCU, and Customs and Excise. - Laws and procedures exist for mutual legal assistance for ML, drug trafficking, prevention of terrorism, and other crimes, regarding compulsory measures including production of records, searches, seizure, and obtaining evidence for investigations and prosecutions and related actions in foreign jurisdictions. - FSC and IPA may disclose information to foreign authorities under certain provisions; no statutory prohibition preventing IPA from disclosing information gained from on-site inspections. ### Principal AML/CFT areas of concern and recommended actions (selected) - Principal concerns: - Implementing legislation, in particular the Anti-Terrorism and Crime Bill, should be adopted so that the UN Convention for the Suppression of the Financing of Terrorism and the Palermo Convention may be extended to the Isle of Man. - Staffing levels of the FIU are considered inadequate and should be increased. - Prevention of Terrorism Act does not provide for forfeiture of property of corresponding value when property subject to confiscation is not available. - Consideration should be given to amending laws to provide for civil forfeiture for crimes other than FT. - No explicit provisions currently allow authorities to share assets other than drug assets with other jurisdictions. - FATF 40+8 selected recommended actions: - Provisional measures and confiscation (FATF 7): Consider adoption of a civil forfeiture law for crimes other than FT. - Customer identification and record-keeping rules (FATF 10–13): Amend laws to explicitly require that customer identification procedures be followed by reporting parties; redouble FSC work directing FIs toward the customer identification standards proposed by the Position Paper. - Measures to cope with countries with insufficient AML measures (FATF 20–21): Consider requiring all Isle of Man FIs to apply Isle of Man AML/CFT requirements to their branches and subsidiaries outside of the Isle of Man; ensure institutions test compliance of AML/CFT systems against home and host country standards. - Special recommendations on terrorist financing (selected): Implement Anti-Terrorism and Crime Act so UN instruments may be extended; criminalize financing of terrorism and associated money laundering; amend laws on wire transfers to preserve originator information and require enhanced scrutiny. ### Authorities’ responses and action plans (selected) - CP 1 — Operational independence and adequate resources: - Isle of Man Treasury undertaking a full review of the jurisdiction’s regulatory bodies (scheduled for completion by June 2004) with full regard to independence, accountability and proposed legislative changes. - CP 16 — On-site and off-site supervision: - Examination methodology for full scope examinations completed; formalized quality control procedures put in place. - Reorganization of Supervision Division to assign one senior individual responsibility for consistency and quality control; creation of a validation panel to validate/challenge risk assessments and supervisory programs. - Meetings with external auditors of banks have taken place; formal half-yearly meetings agreed. - FATF / AML/CFT: - Anti-Terrorism and Crime Bill passed all parliamentary stages and royal assent announced in June 2003; new Act gives significantly more powers to combat FT and enables forfeiture of assets of corresponding value. - Interim review of the Anti-Money Laundering Code 1998 completed; revised draft 2003 Code issued for consultation at the start of July 2003, with principal new provision making the ongoing obligation to operate identification procedures clearer. - New notes and revised Standards require branches and subsidiaries outside the Isle of Man to undertake AML procedures no less strict than those operated by the relevant businesses. - S4.04 of the notes references FATF recommendation on inclusion of originator information on funds transfers; license holders required to conduct enhanced scrutiny and monitor transfers lacking complete originator information; program for outgoing fund transfers by December 2003. - CSPs/TSPs and OGBS: - Licensing of CSPs: Completed on July 31, 2003 (subject to cases which cannot be determined for legal and human rights reasons). - Fiduciaries Services Bill: Introduction to House of Keys in Autumn 2003; estimated licensing to start in 2004. - IPA / IAIS-related: - Insurance (Amendment) Bill 2003 includes provisions to set out IPA regulatory objectives, transfer power to make secondary legislation from Treasury to IPA, revise appeals process, and enable IPA to make regulations or statutory codes and update powers of inspection, investigation, and sanctions. - Review of Tynwald representation on the Board of the IPA scheduled for completion by June 2004. - IOSCO-related: - Review of the Island’s regulatory bodies scheduled for completion by June 2004; review of company law and reporting procedures in progress; legislation to address Chief Minister’s consent to disclose customer information has been drafted. - Implementation status highlights (action plan items noted as Completed, In progress, or Scheduled): - Examination methodology, quality control procedures, validation panel, meetings with external auditors, revised AML guidance notes (April 2003), Anti-Terrorism and Crime Act (Royal Assent June 2003), revised Anti-Money Laundering Code 2003 issued for consultation (July 2003), CSP licensing completed July 31, 2003, Fiduciary Services Bill introduced Autumn 2003 (estimated). *Source: IMF mission report Preface and Executive Summary (Module 2 assessment of the Isle of Man).* ### Preface ................................................................................................................ ### cr03366 - Preface ### Mission, scope, and methodology - The IMF conducted a Module 2 assessment of the Isle of Man. - The assessments were carried out during a mission conducted October 21–30, 2002. - The mission was led by Mr. R. Barry Johnston (Monetary and Financial Systems Department (MFD)) and comprised Messrs. Neville Grant (Deputy Mission Chief, Consultant, MFD); Ian Carrington (MFD); John Darwood (Consultant, MFD); Ross Delston (Consulting Counsel LEG); John Farrell (Consultant, MFD); Jack Heyes (Consultant, MFD); and Marcel Maes (Consultant, MFD). Detective Chief Superintendent, Felix McKenna, served as the independent anti-money laundering expert (IAE) for the AML/CFT assessment. - The mission reviewed current legislation and practices and held discussions with regulatory authorities, government officials, and a cross-section of private sector practitioners. - The report is organized in two volumes: Volume I (overview and summary findings) and Volume II (detailed assessments against the Basel Core Principles, IAIS Insurance Core Principles, IOSCO Objectives and Principles of Securities Regulation, FATF 40+8 Recommendations, and OGBS Best Practice review for Trust and CSPs). ### Executive Summary — overall assessment and strengths - The IMF mission concluded that the Isle of Man’s financial regulatory and supervisory system "complies well with the assessed international standards." - Noted strengths: - "the comprehensive, if somewhat complex, regulatory framework"; - "the proactive approach of the regulators to achieve high standards in the financial services sector"; - "an off-site and on-site supervisory process that addresses key reputational risks." - The jurisdiction was assessed to have a "high level of compliance with the four key standards." - The legal framework for company and trust service providers (TSPs) is fully consistent with the Offshore Group of Banking Supervisors (OGBS) Statement on Best Practices. ### Identified shortcomings and recommended priorities - Shortcomings identified include: - the independence and accountability of the Financial Supervision Commission (FSC) and Insurance and Pensions Authority (IPA); - the need to apply more robust supervisory tools in selective areas of the banking sector, and concerns about the adequacy of supervisory resources; - weaknesses in the legal framework for AML/CFT and in the coverage of guidance notes in some areas; - the need to complete the implementation of the licensing regime for TSPs. - The mission recommended that the authorities: - adopt legislation to provide for appropriate independence and accountability of the financial regulators; - upgrade the on-site supervisory process; - amend the legal framework on AML/CFT and broaden the coverage of the guidance notes in certain areas; - enact the Fiduciary Services Bill quickly. - The mission noted these shortcomings have not been a major concern to date but could become more significant as the financial sector develops. ### Financial system overview — structure and scale (as reported) - The financial services sector accounts for "some 41 percent of national income." - Financial sector structure (end of June 2002 unless otherwise noted): - "59 licensed banks and 2 licensed building societies." - "Total bank deposits were £27.1 billion." - "128 collective investment schemes established with licensed fund managers and third-party fund administrators." - "The value of collective investment funds was £5.2 billion (March 2002)." - "87 license holders are authorized to undertake investment business." - "17 authorized life assurance companies ... manage some £14.7 billion of policyholders funds." - "Annual premium income for 2001 was £4.9 billion" (life assurance). - "165 captive insurance companies and 22 captive insurance management companies." - "Funds under management were £6.1 billion and annual premium income in 2001 was £1 billion" (captives). - "35,514 registered companies, of which private companies are the vast majority." - "115 licensed CSPs, which provide a full range of corporate formation, management and administration services, and an additional number of TSPs." - A comprehensive range of supporting professionals—accountants, lawyers, and other professionals—serve the sector. ### Supervisory bodies and institutional arrangements - The Financial Supervision Commission (FSC): - Established in July 1983 under the Financial Supervision Commission Order 1983; governed by the Statutory Boards Act of 1987. - Responsible for licensing and supervision of banks; building societies; investment business; collective investment schemes and CSPs; and for initiation of related legislation. It will shortly become responsible for licensing and supervision of TSPs. - Under the Financial Supervision Order 1983, the FSC’s functions include taking "such steps as appear to it to be necessary or expedient for the effective supervision of the private financial and commercial sector in the jurisdiction, but with the exception of the insurance industry." - The FSC has focused supervisory efforts on areas judged to pose the greatest reputational risk to the Isle of Man. - Governance and accountability features: - The FSC is constituted as a statutory board with eight commissioners appointed by the treasury, subject to approval by Tynwald. The chairman is a member of Tynwald and the treasury; the Chief Executive of the FSC is also a commissioner. - Commissioners can be removed at any time by the council of ministers, and both the council of ministers and the treasury can direct the board. The treasury determines the statutory boards’ budgets annually. These provisions effectively make the FSC and the IPA departments of government. - Companies registry: - In 2000 responsibility for maintaining the companies registry was transferred to the FSC from the general registry, and the FSC became responsible for companies legislation. - "As at May 2003, the FSC had a complement of some 58.5 staff, of which 20 are assigned to maintaining the companies registry." ### Actions already taken by the authorities (as reported) - Supervisory enhancements: - A major project to implement a new approach to supervisory techniques was completed to upgrade the on-site inspection process. - The FSC issued a consultative paper on corporate governance to banks and started a pilot program of supervisory visits to banks focusing on corporate governance, and safety and soundness issues, to be followed by a full program covering all banks. - Detailed guidance is being developed on specific areas of risk for banks, such as credit risk and market risk. - AML/CFT legal framework: - "The Anti-Money Laundering Code 1998 has been comprehensively revised to include a number of the mission’s recommendations for amending the legal framework on AML/CFT. The revised draft Code was issued for consultation in the jurisdiction at the start of July 2003." *Source: IMF mission report Preface and Executive Summary (Module 2 assessment of the Isle of Man).* ### 9. The treasury, subject to the approval of Tynwald, also appoints the members of ### 9. The treasury, subject to the approval of Tynwald, also appoints the members of the Board of the IPA ### Governance and institutional arrangements - The treasury, subject to the approval of Tynwald, appoints members of the Board of the IPA. - The Chairman of the IPA currently is a member of Tynwald and its chief executive is a member of the board. - The treasury consists of the treasury minister, the FSC Chairman, and the IPA Chairman. All are members of Tynwald. The treasury minister is a member of the council of ministers. - The IPA has a complement of 12 staff. ### Mandate and responsibilities of the IPA and FSC - The IPA is responsible for: - authorization and ongoing supervision of companies carrying out insurance business in or from The Isle of Man, and insurance companies incorporated in the jurisdiction; - regulation of pension schemes; - registration of insurance management companies and insurance intermediaries carrying on general business. - The FSC mission statement includes: - to protect investors’ and depositors’ interests; - to promote the financial stability of financial institutions; - to promote the highest standards of competence and professional qualification; - to protect the integrity of the financial community; - to protect the reputation of the Isle of Man. ### Legal and regulatory framework - The Isle of Man is a Crown Dependency, self-governing, and a separate legal jurisdiction from the United Kingdom; Tynwald is the legislature; the jurisdiction is common law. - Under Protocol 3 to the Treaty of Accession related to the United Kingdom’s entry into the common market: - the Isle of Man is part of the customs territory of the EU, subject to the common customs tariff and measures relating to trade, and enjoys free movement of goods in trade between the jurisdiction and the EU; - no other EU rules apply. - Key financial legislation (as listed) includes: - Statutory Boards Act 1987; Financial Supervision Commission Order 1983; Insurance Act 1986; Retirement Benefits Schemes Act 2000; - Banking Act 1998 (constrains banking business to licensed entities; confers licensing power to the FSC; provides supervisory, disciplinary, and enforcement powers); - Building Societies Act 1986; - Financial Supervision Act 1988 (collective investment schemes); - Companies Acts 1931–1993; - Corporate Service Providers Act 2000 (powers over CSPs; Fiduciary Services Bill to extend framework to TSPs); - Credit Unions Act 1993; - Insurance Act 1986; Insurance Intermediaries (General Business) Act 1996; - Investment Business Act 1991; - Anti-money laundering statutes including Drug Trafficking Act 1996; Prevention of Terrorism Act 1990; Criminal Justice Act 1990; Criminal Justice Act 1991; Criminal Justice (Money Laundering) Act 1998; Anti-Money Laundering Code 1998. ### Strengths and vulnerabilities in regulatory and supervisory arrangements - The financial regulatory system generally complies well with assessed international standards, using assessments against: - Basel Core Principles for Effective Banking Supervision; - IAIS Insurance Core Principles; - IOSCO Objectives and Principles of Securities Regulation; - OGBS Draft Statement of Best Practice for Company and TSPs; - FATF 40+8 Recommendations. - Strengths: - FSC has generally achieved a high standard of compliance with Basel and IOSCO Principles and is a well-established regulator with proactive stance to attract and maintain a reputable international financial center. - IPA has achieved a high degree of compliance with IAIS Principles; a small but competent supervisory office regulates the insurance industry. - Off-site supervisory process: FSC requires external auditors to provide reasonable assurance on regulatory returns at least annually, and obtains an annual certificate from senior management of licensed banks confirming compliance with the Regulatory Code. - On-site supervisory arrangements on AML/CFT: FSC prioritized AML/CFT and conducted special-purpose on-site visits to all licensed banks over the past three years. - Vulnerabilities and concerns: - Questions about capacity of the FSC and IPA to maintain appropriate levels of independence in all circumstances due to statutory powers for government to issue general and individual directions on policy, licensing, and inspections. - FSC’s core responsibilities are not clearly stated in its founding statute. - FSC and IPA are not required to prepare comprehensive annual reports; FSC’s report lacks meaningful financial information; IPA prepares no report — implications for public accountability. - Both regulators part of general government planning and budget process and subject to periodic internal and external audit, but these processes do not provide effective public accountability. - With limited resources, safety and soundness issues in banks have not been adequately addressed because of the priority given to AML/CFT. ### Sectoral assessment summaries - Basel Core Principles: assessed as achieving a high level of compliance; concerns related to FSC operational independence and resources and practical application of framework. - IAIS Core Principles: high level of compliance; concerns about operational independence and accountability of supervisor and issues related to legal framework for derivatives and off-balance-sheet items. - IOSCO Principles: high level of compliance; some Principles not applicable (no secondary market or self-regulatory organizations); concerns about regulator independence and accountability and lack of procedure for dealing with failure of a market intermediary. - AML/CFT Standards (FATF): high level of compliance; regime generally satisfactory with developed legal framework and industry awareness. - Strengths cited: - developed legal and institutional framework for confiscation of proceeds, exchange of information, and international cooperation; - broad regulation of financial sector; - high awareness and effort by industry to implement AML/CFT practices; - FSC and IPA oversight generally satisfactory with on-site and off-site surveillance and visits to most licensed institutions over last three years; most institutions visited had comprehensive AML documentation. - Areas for improvement: - legal and institutional framework could be strengthened in several areas; - principal instruments for compliance — FSC guidance notes and IPA Common Trading Practices (CTP) — could be improved; since assessment both have been revised and CTP re-titled the Anti-Money Laundering Standards for Insurance Businesses. ### Company and trust service providers (CSPs/TSPs) - Isle of Man was among the first jurisdictions to apply a comprehensive regulatory regime to CSPs; regulatory regime consistent with OGBS Statement of Best Practice and in some respects exceeds it. - Regulatory regime for TSPs was not yet in place at the time of assessment; framework for CSPs provides a satisfactory base for TSP regulation under the Fiduciary Services Bill. - Licensing progress issues: - Some CSPs were operating under “transitional registration provisions” while licensing process incomplete. - Measures taken to reduce risk: - CSP Codes extended to all CSPs, including unlicensed applicants, effective May 1, 2003; - Deadline of July 31, 2003, set for completion of CSP licensing; Commissioners considered all CSP license applications by the July 31 deadline. - A small number of applications pending resolution of investigation or litigation; remaining unapproved applicants withdrawing per programs agreed with the Commission. - For TSPs, until legislation and vetting process are complete, FSC will not know whether all can meet OGBS standards; FSC expects majority of TSP applications to come from CSP license holders who have met fitness and propriety criteria. ### Actions recommended to strengthen observance of standards - Continue updating supervisory and regulatory framework to reflect changing international environment and standards. - Key actions to consider for establishing independent and accountable financial supervisors: - enact appropriate legislation to establish independent and accountable financial supervisors; - revoke powers of the council of ministers and the treasury to give directions to the FSC and IPA, and discontinue the practice of appointing members of Tynwald or the treasury to the FSC and the IPA; - introduce general provisions relating to qualifications and experience of commissioners; - require the FSC and IPA to publish annual reports containing full information about their financial affairs and performance, and to present the reports to parliament. - Additional specific recommended actions provided in the document for each of the four assessed standards. ### Banking activity and deposits (selected figures) - The majority of banks provide private banking services to nonresidents; services directed toward deposit taking with funds on-lent primarily in international interbank markets; some banks act as custodians and trustees to collective investment schemes; others conduct trade finance and treasury operations. - Table 1. Bank Deposits (in billions of £): - 31/12/98 — Sterling: 14.98; Non-Sterling: 7.33; Total Bank Deposits: 22.31 - 31/12/99 — Sterling: 15.20; Non-Sterling: 7.76; Total Bank Deposits: 22.96 - 31/12/00 — Sterling: 17.83; Non-Sterling: 6.86; Total Bank Deposits: 24.69 - 31/12/01 — Sterling: 17.72; Non-Sterling: 9.27; Total Bank Deposits: 26.99 - 31/03/02 — Sterling: 18.08; Non-Sterling: 8.80; Total Bank Deposits: 26.88 - 30/06/02 — Sterling: 18.48; Non-Sterling: 8.54; Total Bank Deposits: 27.02 - 30/09/02 — Sterling: 18.31; Non-Sterling: 8.80; Total Bank Deposits: 27.11 *Source: the assessment and mission report contained in the document.* ### 38. The detailed assessment of compliance show that the financial regulatory system of ### 38. The detailed assessment of compliance show that the financial regulatory system of ### Overall assessment of banking supervision - The Isle of Man generally complies well with the Basel Core Principles for Effective Banking Supervision. - The Financial Services Commission (FSC) mission statement includes: - to protect investors’ and depositors’ interests; - to promote the financial stability of financial institutions; - to promote the highest standards of competence and professional qualification; - to protect the integrity of the financial community; and - to protect the reputation of the Isle of Man. ### Objectives, autonomy, powers and resources (CP 1) - Collective banking laws, orders, and guidance notes constitute a generally appropriate legal and regulatory framework for banking supervision. - Observed deficiencies: - Regulator’s operational independence. - Adequacy of resources. - These deficiencies raise questions about practical application of the framework, with implications noted across other principles. ### Licensing, structure, prudential regulations and supervisory methods (CPs 2–25) - Licensing and Structure (CPs 2–5): The Isle of Man achieves a high degree of compliance with these CPs. - Prudential Regulations and Requirements (CPs 6–15): - FSC developed comprehensive guidance covering corporate governance for banks, including references to sound credit policies, loan evaluation, and loan-loss-provisioning techniques and practices. - FSC requested banks to refer to Basel Committee guidance on international “best practices” for credit risk. - FSC indicated additional focus on credit risk as part of the extended on-site visitation program going forward. - Gaps identified: comprehensive standards on internal control should be developed and best practices regarding internal audit should be elaborated. - Anti-money laundering legislation provides a developed legal framework for preventing banks from becoming involved in money laundering. - Methods of Ongoing Supervision (CPs 16–20): - Recommendation to increase synergies with external auditors. - A more in-depth on-site visitation program requiring additional resources should enhance validation of supervisory information. - Accounting (CP 21); Remedial Measures (CP 22); Cross-Border Banking (CPs 23–25): The Isle of Man achieves a high degree of compliance with these CPs. ### Table of recommended actions to improve compliance with the Basel Core Principles - CP 1(2) – Operational independence and adequate resources: - The existing framework of government dependence and the lack of budgetary autonomy should be addressed. - Perform an in-depth analysis of the resources required to fulfill the supervisory objectives and as a consequence, establish a change plan for the business process of banking supervision. - CP 16 – On-site and off-site supervision: - Prioritize the completion of the examination methodology for full scope examinations supplemented by formalized quality control procedures. - Explore increased synergies between FSC and external auditors. ### Authorities’ response to the Basel CP assessment - CP 1 (2) – Operational independence and adequate resources: - The Isle of Man Treasury is currently undertaking a full review of the jurisdiction’s regulatory bodies (scheduled for completion by June 2004). This review will have full regard to independence, accountability and proposed changes to the legislative framework. - CP 16 – On-site and off-site supervision: - The examination methodology for full scope examinations has now been completed. - Formalized quality control procedures have been put in place. - Within the reorganization of Supervision Division there will be one senior individual assigned responsibility for consistency of approach and quality control for both on-site and off-site supervision. - There will be a validation panel, consisting of experienced supervisors, to validate / challenge risk assessments and supervisory programs for individual license holders. - Since the IMF visit, two meetings have taken place with the external auditors of banks. Each audit firm was represented at partner level at both meetings. - It was agreed that formal half-yearly meetings will take place. - The Commission and the auditors agreed to enhance cooperation on specific issues and to consider more regular bilateral or trilateral meetings. - The Commission will also consider making greater use of the Reporting Accountants regime. ### FATF 40+8 AML/CFT assessment: scope and methodology - The Report on the Observance of Standards and Codes covers the FATF 40 Recommendations for Anti-Money Laundering and 8 Special Recommendations Combating the Financing of Terrorism. - Prepared by an IMF team and an independent expert; assessment was undertaken by Messrs. Ian Carrington (MFD) and Ross Delston (Consulting Counsel LEG), with assistance from Mr. Stuart Yikona (Technical Assistance Officer LEG), and Detective Chief Superintendent Felix McKenna (Criminal Asset Bureau Ireland), the independent anti-money laundering expert. - The independent expert’s portions appear in italicized text in the source. - Information reviewed included relevant AML/CFT laws and regulations, supervisory and regulatory systems for prudentially regulated financial institutions, regulatory systems for CSPs (some fully licensed, some under application/transitional provisions), and early-stage framework for TSP regulation. - The mission comprised two visits: October 30, 2002 and February 13, 2003. ### Criminal justice measures and international cooperation - Criminalization: - Isle of Man’s framework for criminalizing money laundering (ML) and the financing of terrorism (FT) is generally adequate. - Money laundering extends to proceeds of criminal conduct and appears generally consistent with the Vienna and Palermo conventions. - The Prevention of Terrorism Act and the UN Order contain provisions criminalizing the financing of terrorism. - Vienna Convention and Council of Europe Convention on Laundering, Search, Seizure and Confiscation have been extended to the Isle of Man. - The UN Convention for the Suppression of the Financing of Terrorism and the UN Convention Against Transnational Organized Crime (Palermo Convention) have not been extended to the Isle of Man. - The Convention for the Suppression of the Financing of Terrorism cannot be extended until the Anti-Terrorism and Crime Bill is passed. - Confiscation and forfeiture: - Laws provide for confiscation of assets upon conviction and forfeiture of instrumentalities of crime. - The attorney general may apply for court orders to restrain dealing with realizable property; police may seize property to prevent removal from the Isle of Man. - There is provision for seizure and forfeiture of proceeds of criminal conduct with respect to cash moving across the jurisdiction’s borders. - There is provision enabling terrorist funds to be frozen on suspicion. - For drug crimes and other crimes (other than terrorism), laws provide payment of a sum corresponding in value to the benefit to the defendant and are not limited to specific property; the Anti-Terrorism and Crime Bill will extend this to terrorism crimes. - Civil forfeiture currently applies in respect of import and export of drug proceeds cash and cash-related to other crimes (other than terrorism); Anti-Terrorism and Crime Bill will do so for terrorism crimes. - Rights safeguarding: a right exists for any person to apply to the high bailiff for release of detained cash. - FIU (Financial Intelligence Unit) and FCU structure: - Isle of Man Financial Crimes Unit (“FCU”) of the Isle of Man Police is the FIU. - Reporting parties are required by law to make disclosures to “a constable” (police or customs officer); there is no legal requirement to report directly to the FCU. - FCU is the recognized authority responsible for keeping statistics on ML and FT; it keeps records and statistics of investigations, prosecutions, and convictions on its ML/FT cases and a statistics database enabling identification of investigations originating from STRs or other sources. - To date, there are no ML convictions in the Isle of Man; authorities have assisted in numerous ML investigations with other jurisdictions that resulted in prosecutions and convictions elsewhere. - Detailed records are kept of requests for assistance received by the FCU and other competent authorities and the number of responses provided. - Although no legal requirement exists, it is normal practice for Isle of Man financial institutions to make STRs on large currency transactions. - The officer in charge of the FCU is a detective inspector appointed by the Chief Constable and answerable to him. - FCU operates with personnel dedicated to intelligence (statistics, analysis and dissemination), an international cooperation team, and an investigative team specializing in fraud, ML and FT investigations. Isle of Man Customs and Excise also carry out ML and FT investigations. - FCU functions and limitations: - Main functions include investigation of all serious financial crime involving the finance sector in the jurisdiction; investigation where jurisdiction is unclear; initial investigation where jurisdiction lies outside the Isle of Man but evidence needs securing. - As currently structured, the FIU’s functions are too widespread and the unit has become overburdened. - FCU is not authorized to obtain from reporting parties, either directly or through another competent authority, additional documentation needed to assist in its analysis of financial transactions. - Laws and procedures exist for production of records by financial institutions, search of persons and premises, seizure, and obtaining evidence for investigations and criminal proceedings. - FCU is authorized to share information on its own volition for prevention or detection of crime or for institution of criminal proceedings. - Law enforcement and prosecutions: - FCU and Customs and Excise are responsible for ensuring ML and FT offences are properly investigated. - Ongoing ML and FT investigations exist and authorities are taking necessary steps to reach successful conclusions. - Close liaison exists between the Attorney General’s Chambers, the FCU, and Customs and Excise; Chambers provide advice when required. - International cooperation: - Laws and procedures exist for mutual legal assistance for ML, drug trafficking, prevention of terrorism, and other crimes, regarding compulsory measures including production of records, searches, seizure, and obtaining evidence for investigations and prosecutions and related actions in foreign jurisdictions. - FSC may disclose information for a range of purposes including criminal proceedings in other countries and to assist foreign authorities exercising corresponding functions. - There is no statutory prohibition preventing the IPA from disclosing information gained from on-site inspections; IPA may disclose certain categories of information to foreign authorities exercising corresponding functions. - Principal areas of concern identified: - Implementing legislation, in particular the Anti-Terrorism and Crime Bill, should be adopted so that the UN Convention for the Suppression of the Financing of Terrorism and the Palermo Convention may be extended to the Isle of Man. - Staffing levels of the FIU are considered inadequate and should be increased. - The Prevention of Terrorism Act does not provide for forfeiture of property of corresponding value when property subject to confiscation is not available. - Consideration should be given to amending laws to provide for civil forfeiture for crimes other than FT. - No explicit provisions currently allow authorities to share assets other than drug assets with other jurisdictions. ### Preventive measures for financial institutions and supervisory practice - FSC and IPA programs: - FSC and the Isle of Man Post Authority (IPA) have established comprehensive programs for implementing AML/CFT standards among prudentially regulated institutions (banking, insurance, investments). - CSP regulation process was well advanced at assessment time; plans in place to commence regulation of TSPs. - Both regulators issued detailed guidance notes and maintain strong rapport with the financial services industry. - Both undertake on- and off-site surveillance of regulated institutions and have visited most banks, fund and investment managers, and insurance companies; regulators have been actively involved in training initiatives for the industry. - Role of company registration: - Company registration role undertaken by the FSC is critical; FSC’s companies registry function enables detailed due diligence on all companies, including prospective licensed financial institutions. - On-site reviews and enforcement: - On-site reviews are thorough; in several cases licensees were directed to undertake remedial action to meet required standards. Some concerns were referred to the attorney general for consideration of specific action. - IPA staffing and planning: - No IPA staff are employed full time on AML/CFT; two staff members devote significant portions of their time to AML/CFT and can call on other IPA staff when required. - All supervisory staff have some AML/CFT experience; refresher training is undertaken. - IPA intends all life assurance companies will be visited at least once in every two years, with follow-up and additional visits if appropriate. Over the last two years, all but one insurance company have been visited. - FSC staffing and activity: - An enforcement officer at the FSC devotes the vast majority of his time to AML/CFT issues and can call upon other FSC staff as required. - All FSC staff attend training on AML/CFT annually. - Over the last three years, the FSC has visited most licensed banks and fund and investment managers, and 27 CSPs. - AML/CFT reviews are also undertaken through off-site surveillance. - Regional initiative on customer identification: - In December 2000, Isle of Man, Guernsey and Jersey developed the consultation document “Overriding Principles For a Revised Know Your Customer Framework.” - Based on responses, the Commissions issued a paper outlining direction for AML legal and regulatory frameworks, focusing on verification of customer identity. - Key features addressed include introduced business, verification for customer relationships predating all-crimes AML legislation (progressive program), and shifting the accepting party to always hold originals or copies of verification documents. - The progressive program envisages remedial work on deficient existing verification records based on risk prioritization and trigger events. - IPA implemented Overriding Principles appropriate to insurance sector within the CTP, including a requirement for all license holders to have a retrospective review program. - Industry preparedness: - Visits indicated a high level of awareness of AML/CFT issues, policies, and procedures; most institutions visited had well-documented policies and procedures, including a graduated range of measures applied on the basis of perceived risks. *Report prepared by the International Monetary Fund and associated expert mission (assessments based on visits of October 30, 2002 and February 13, 2003).* ### 70. At the time of the assessment, the FSC had commenced the process of regulating ### 70. At the time of the assessment, the FSC had commenced the process of regulating ### Regulation of CSPs and TSPs - The FSC had commenced the process of regulating CSPs and plans were in place to commence the regulation of TSPs. - Deadline set by the FSC for completion of the licensing process for CSPs: July 31, 2003. - Both CSPs and TSPs are captured by the AML/CFT legal framework. - CSPs are included in the FSC’s surveillance activities; TSPs will be included once the licensing regime is in place. - At the time of the assessment, 27 CSPs had been visited by the FSC. - Note recorded in the assessment: the FSC does not regulate TSPs yet and, therefore, has no powers to oversee AML/CFT compliance by TSPs. ### Principal areas of concern — preventive measures for financial institutions - The FSC does not have the statutory authority to regulate or monitor compliance for MSBs; this responsibility rests with Customs and Excise — considered a potential weakness. - On-site visits revealed a wide range of KYC practices in relation to the issues addressed by the Overriding Principles Paper. - FSC should continue efforts to achieve greater uniformity in practices used by license holders. - Particular need for uniformity in matters related to introduced business and retrospective verification of customer identity. - While the FSC and the IPA have undertaken on-site visits to most institutions over a two-year period, this has been to some extent at the expense of adequate surveillance of other areas of risk faced by licensees. - Current level of resources available to the FSC’s Supervision Division are considered insufficient to enable a comprehensive surveillance function across all financial institutions. ### Summary assessment against the FATF recommendations - The Isle of Man has a comprehensive legal and institutional AML/CFT framework with high levels of compliance observed amongst regulated institutions. - The report makes a number of recommendations for further strengthening of the regime. - Table 5 (referenced) summarizes actions required in relation to the 40+8 recommendations. ### Recommended Action Plan — key recommended actions (selected highlights) - Provisional measures and confiscation (FATF 7): - Consideration should be given to the adoption of a civil forfeiture law for crimes other than FT. - Customer identification and record-keeping rules (FATF 10–13): - Relevant laws should be amended to explicitly require that customer identification procedures be followed by reporting parties. - The FSC’s work directing FIs toward the customer identification standards proposed by the Position Paper should be redoubled to ensure greater consistency among licensees. - Measures to cope with countries with insufficient AML measures (FATF 20–21): - Consideration should be given to requiring all Isle of Man FIs to apply Isle of Man legal and regulatory AML/CFT requirements to their branches and subsidiaries outside of the Isle of Man. - Consideration should be given to ensuring institutions test compliance of AML/CFT systems against home and host country standards. - Special recommendations on terrorist financing (selected): - I. Ratification and implementation of UN Instruments: Implementing legislation, in particular the Anti-Terrorism and Crime Act, should be adopted or implemented so that the UN Convention for the Suppression of the Financing of Terrorism, and the UN Convention Against Transnational Organized Crime (Palermo Convention) may be extended to the Isle of Man. - II. Criminalizing the financing of terrorism and associated money laundering: The Anti-Terrorism and Crime Act should be implemented so that the financing of terrorism and associated money laundering may be fully criminalized. - VII. Wire transfers: Within the two-year period referred to by FATF, relevant laws should be amended to require that accurate and meaningful originator information on funds transfers remain with the transfer through the payment chain, and that FIs give enhanced scrutiny to wire transfers that do not contain complete originator information. ### Authorities’ response — actions taken or to be taken (selected) - Provisional measures and confiscation (FATF 7): - The Anti-Terrorism and Crime Bill passed all parliamentary stages and royal assent was announced in June 2003. The new Act gives significantly more powers to combat FT and enables forfeiture of assets of corresponding value. - Customer identification and record-keeping rules (FATF 10–13): - Interim review of the Anti-Money Laundering Code 1998 completed; revised draft 2003 Code issued for consultation at the start of July. - Principal new provision: make the ongoing obligation to operate identification procedures clearer. - Initiatives to incorporate Overriding Principles Paper provisions relating to professional intermediaries into the legal framework and notes to be completed following FATF decision. - Notes to be reviewed regarding the requirement to undertake periodic re-verification of personal customers under certain circumstances. - IPA comment: The CTP includes explicit requirements for verification standards for the Insurance Business and requires every Insurance Business to have a program in place to retrospectively review all existing client files. - Revised draft 2003 Code: continuing obligation to verify evidence of identity as soon as reasonable practicable after the relevant person becomes aware of anything causing doubt about identity. - Measures to cope with countries with insufficient AML measures (FATF 20–21): - New section S2.08 included in notes to cover requirement to impose standards of AML/CFT to branches outside the Isle of Man. - IPA comment: CTP requires all branches and subsidiaries to apply, as a minimum, the Isle of Man standards wherever situated. - Revised draft 2003 Code: relevant businesses must ensure branches and subsidiaries outside the Isle of Man undertake AML procedures no less strict than those operated by the relevant businesses. - Wire transfers (Special Recommendation VII): - S4.04 of the notes references FATF recommendation to require inclusion of originator information on funds transfers. - FSC acknowledges a global problem of absence of originator information due to IT limitations. - New notes require license holders to conduct enhanced scrutiny and monitor funds transfers lacking complete originator information. - License holders should have a program in place to comply with FATF’s recommendations in respect of outgoing fund transfers by December 2003. ### IAIS Core Principles — assessment overview - Assessment conducted as part of the IMF Offshore Financial Center (OFC) assessment program; undertaken by John Darwood (Consultant MFD). - Purposes of formal assessment: - Benchmark current state of insurance supervision given extensive recent changes. - Suggest further improvements or changes to develop an action plan toward full compliance with the Core Principles. - Methodology: - Comparison of standards and practices of insurance supervision with the Insurance Core Principles and Methodology promulgated by the IAIS. - Meetings held with insurance market associations and some individual companies. - Institutional setting: - Isle of Man Insurance and Pensions Authority (IPA) is responsible for supervision of all insurance activity on the Island except life insurance intermediaries (registered with the FSC for life business only). - IPA Mission Statement objectives: provide security for investors; prevent and deter Isle of Man being used for financial crime; preserve international reputation; ensure a flourishing environment for Isle of Man businesses. ### General preconditions and market structure (IAIS) - Three major strands of insurance business on the Island: international life business, captive insurance business, and domestic general and life business. - International life companies account for some £14 billion of policyholders’ funds. - Captive insurance sector has collective premium income of some £1.05 billion. - There is only one locally incorporated company writing domestic business. - Employment: nearly 2,500 persons engaged in the industry, about 5.5 percent of the entire workforce. - Infrastructure and preconditions in place: - Legal framework functioning but recognized as in need of updating; planned introduction of an insurance (amendment) bill by October 2003. - Court system efficient and reliable. - Applied accounting standards are internationally accepted. - Actuarial and auditing services available and apply recognized principles. - Sound and effective macroeconomic policies provide a stable environment. - IPA resources: - Establishment of 12 full-time staff comprising a director, managers, supervisors, and analysts. - Two positions currently unfilled. - Actuarial services available by way of consulting actuaries. ### Principle-by-principle assessment — key findings and recommendations - Overall: jurisdiction has achieved a reasonable degree of compliance with the IAIS Insurance Core Principles. - Organization (Principle 1): - IPA operates under the umbrella of the Isle of Man Treasury; Treasury appoints IPA members subject to approval of Tynwald; chairman is a member of Tynwald. - IPA cannot be considered operationally independent from political authorities. - Recommendation: steps to distance the IPA from possible political influence; the Board of the IPA should not have Tynwald representation. - Appeals process: - Insurance Act allows supervisor’s licensing decisions to be appealed to the Treasury; revised legislation will place appeals with the council of ministers (via the chief secretary) which will appoint an independent committee. - Licensing and Changes in Control (Principles 2 and 3): - Licenses granted under the Insurance Act and Regulations, together with supervisor guidelines. - Business plans and capital provisions are required and commensurate with exposures and volumes of business. - Fit and proper requirements apply to applicants and ongoing licensed entities; supervisor may consult other regulators and access police checks, databases, and FSC resources. - Corporate Governance and Internal Controls (Principles 4 and 5): - Principle 4 not applicable in current legislation because the Insurance Act does not address corporate governance specifically; supervisor does take an interest and can satisfy himself on roles/responsibilities of directors and senior management. - Amendment bill will include enabling provisions to extend IPA powers to make regulations or statutory codes. - Recommendation: Principle 4 should be fully recognized within insurance legislation. - Principle 5 applicable: Act gives supervisor wide powers of enquiry and remedial action; supervisor recognizes need for more specific legislative reference to internal controls and this is being addressed in the amendment bill; a code of practice likely to be issued to set expectations. - Prudential Rules (Principles 6–10): - Standards for valuations of assets and liabilities set out within the Act and Regulations; provide adequate framework for basic supervision. - All insurers required to file full analysis of assets covering technical provisions, with detailed annual actuarial valuations for life companies; all companies subject to annual external audit. - Supervisor can review liabilities and matching assets and discount relevant assets for solvency purposes. - On-site inspection program needs to become fully operational. - Statutory minimum capital requirements are low compared to EU but typical for captive insurance; solvency margin provisions are tracked and require case-by-case recognition of business mix and risk exposures; actual capital is always adequate and there is no case for raising minima. - Act has no specific detailed provisions regarding derivatives; supervisor issued guidance notes (updated April 2002) to the life sector and can track such investments; recommendation to expand reporting requirements under existing regulations. - Reinsurance arrangements must be fully declared in business plans and annual returns; supervisor considers all aspects of arrangements and can access rating agencies’ reports; no professional reinsurer currently licensed in the jurisdiction. - Market Conduct (Principle 11): - On-site inspections must be fully implemented. - Supervisor can ensure high levels of integrity and business standards through the Insurance Act, the Insurance Intermediaries (General Business) Act 1996, respective regulations, and the Common Trading Practices issue of March 2003. - Complaints reviewed within the IPA; guidance from the Office of Fair Trading endorsed for license holders to deal with policyholder complaints. - Unresolved complaints may be referred to the recently established Financial Services Ombudsman Scheme. *Assessment conducted as part of the IMF Offshore Financial Center (OFC) assessment program.* ### 103. The separation of supervisory responsibilities between the IPA and the FSC (which ### cr03366 - 103. The separation of supervisory responsibilities between the IPA and the FSC (which ### Separation of supervisory responsibilities - The separation of supervisory responsibilities between the IPA and the FSC (which licenses life intermediaries who also offer advice on investment matters) is not unique to the jurisdiction and, as a practical matter, seems sensible. - There are a few general insurance intermediaries representing U.K. insurers who are not required to be registered, provided the insurers recognize in writing their responsibility for their agents’ actions. - Recommendation: These general insurance intermediaries not currently required to be registered should be brought within the scope of the Intermediaries Act. ### Monitoring, inspection, and sanctions (Principles 12–14) - The Act requires all authorized insurers to file comprehensive annual returns, including audited annual accounts; life companies must also include an actuarial valuation report within six months of the close of the company’s financial year. - Intermediaries file similar information and must verify continuation of their PI cover. - The relatively small number of active managers will be subject to regular and detailed review via on-site inspections. - Recommendation: Insurance managers should be required to file an annual return comprising audited accounts and a list of managed companies. - Accounts are normally drawn up in accordance with U.K. GAAP. - The supervisor is empowered to obtain required information and to inspect and investigate. Anti-money laundering inspections of international life companies are carried out on a regular basis; other companies are inspected on an as-needed basis. An across-the-board inspection program has only just been introduced and needs to be tested over time. - Recommendation: Staff resources should be carefully monitored as these inspection programs are developed. - The Act provides for a significant range of remedial actions: licenses may be revoked, remedial actions taken, and conditions imposed. Insolvency and winding-up provisions are available under the Insurance Act together with the Companies Act. - Civil penalties and fines are currently not provided for but are to be covered within the proposed amendment bill. ### Cross-border operations, supervisory coordination, cooperation, and confidentiality (Principles 15–17) - All persons carrying on insurance business in the jurisdiction must be licensed and comply with ongoing reporting requirements. - New subsidiaries or branches of foreign companies are always subject to consultation between the respective supervisors. - The supervisor has the power to, and will cooperate with, any home country supervisor who may wish to conduct an on-site visit within the jurisdiction. - The supervisor has good working relationships with the U.K. FSA and with other members of the IAIS, supported by formal MOUs. - The Act imposes duties of confidentiality on the supervisor and staff; failure is an offence. The Act sets out cases when the supervisor may disclose or share information, but these provisions are not considered entirely adequate and are to be updated as part of the proposed amendment bill. ### Recommended Action Plan for Observance of IAIS Insurance Core Principles (selected recommendations) - CP 1, Organization - To strengthen the operational independence of the supervisor, the Board of the IPA should not have any representation from Tynwald, and powers for making secondary legislation should be transferred from the treasury to the IPA. - Efforts to amend the existing legislation should be expedited. - CP 4, 5 Corporate governance and Internal controls - These principles should be fully recognized in legislation by developing appropriate regulations; internal controls and on-site inspections depend on this. - CP 6 and 7, Assets and Liabilities - On-site inspection procedures should be carefully reviewed to ensure all appropriate checks are covered. - CP 9 Derivatives - Existing guidelines should be reviewed and reporting requirements under existing regulations expanded to take the Principle fully into account. - CP 11 Market conduct - Consideration should be given to bringing general insurance intermediaries not currently required to be registered within the scope of the Intermediaries Act. - CP 12 Financial reporting - Insurance managers should be required to file an annual return for their own business (audited accounts and list of managed companies). ### Authorities’ response to the assessment (selected actions Taken/To Be Taken) - CP 1, Organization - The treasury has undertaken to review the question of Tynwald representation on the Board of the IPA. - The amendment bill sets out a clear statement of the IPA’s regulatory objectives and the division of responsibilities between its board and executive. - The appeals process will be revised by the Insurance (Amendment) Bill 2003 and the treasury will be removed from it. Under the Bill, the power to make secondary legislation will also be transferred to the IPA. - CP 4, 5 Corporate governance and Internal controls - The Insurance (Amendment) Bill includes enabling provisions to allow the IPA to make regulations or statutory codes and to update the IPA’s powers of inspection, investigation, and sanctions. - CP 6 and 7, Assets and Liabilities - This will be addressed as the on-site inspection program develops. - CP 9 Derivatives - The matter will be reviewed to ensure the Principle is taken fully into account in a manner appropriate to the business involved. - CP 11 Market conduct - The IPA will consider this matter, taking into account developments in the UK market and in the EU. - CP 12 Financial reporting - This point is accepted and consideration will be given to the appropriate way of implementing it. ### IOSCO Objectives and Principles of Securities Regulation — General findings and market context - The report was prepared in the course of a formal assessment by the IMF of the regulatory and supervisory arrangements of the Isle of Man for its financial sector and their conformity with international standards and best practice. - Methodology: The mission analyzed rules of law, statements of best practice, and evidence of current practice against the 30 IOSCO Principles, determining for each principle whether it was implemented, broadly implemented, partially implemented, not implemented, or not applicable. - Institutional and market structure highlights: - Core rules of law relate to the functions and powers of the FSC; licensing and supervision of investment business; authorization and supervision of CISs; and offers of securities and investments. - The FSC administers and enforces these rules; prosecution of criminal offences under the Companies Acts is the attorney general’s responsibility. - “Investment” is defined to include the full range of securities and investment products; principal investment products subject to regulation are interests in CISs; life insurance policies with an investment character are regulated as insurance products elsewhere in the report. - CIS classifications: authorized schemes, recognized schemes, international schemes, exempt schemes. Authorized schemes are available for offer to the general public in the Isle of Man. - Funds under management in CISs as at June30, 2002 were £5.12 billion. - In addition, there were £3.5 billion in funds under discretionary management. - There were 87 investment business licenses current. - There is no stock exchange in the Island; listings of Isle of Man–based schemes or companies occur in other jurisdictions. ### Principle-by-principle assessment (summary) - Overall: The Isle of Man has achieved a high standard of compliance with the IOSCO Principles. The FSC has a good range of regulatory powers, appears appropriately resourced for authorization and supervision of investment business, and seems able to maintain consistent supervisory standards. - Regulator (Principles 1–5) - The FSC has adequate powers and proper resources, clear processes, and high professional standards for staff. Principles 3, 4 and 5 are implemented. - Concerns: Government may give directions on licensing, inspection, and public interest matters, which risks FSC operational independence. Rules of law about FSC accountability are not strong and the FSC does not publish comprehensive financial information. The FSC’s responsibilities are not clearly stated in law. - Self-Regulatory Organizations (Principles 6–7) - There are no SROs; these principles do not apply. - Enforcement (Principles 8–10) - The FSC has wide powers of inspection, investigation, and surveillance and makes effective use of them; it has implemented an effective compliance program. - Cooperation (Principles 11–13) - The FSC has wide powers to share public and nonpublic information with domestic and foreign counterparts. Disclosure of customer information under the Investment Business Acts, but not the Insider Dealing Act, is subject to the chief minister’s consent. The FSC has entered into six MOUs with foreign counterparts. - Issuers (Principles 14–16) - Some rules of law about periodic reporting are not rigorous enough and should be tightened. Subject to that, issuers are committed to full, accurate, and timely disclosure and fair treatment for investors. Accounting and auditing standards are of an internationally acceptable quality, though further review of accounting and auditing standards and auditor performance is encouraged. - Collective Investment Schemes (Principles 17–20) - The Isle of Man has extensive rules for CISs covering operators, legal form and structure, segregation and protection of client assets, disclosure, asset valuation, and unit pricing. The FSC maintains an active regulatory and supervisory program. - Market Intermediaries (Principles 21–24) - Minimum entry standards, ongoing capital and prudential requirements, and standards for internal organization and operational conduct exist. Principles 21 to 23 have been implemented. - Concern: The FSC does not have adequate statutory powers at present and has not prepared a clear contingency plan for dealing with the failure of a market intermediary. - Secondary Market (Principles 25–30) - (Assessment continues beyond the supplied text.) *Source: IMF assessment of the regulatory and supervisory arrangements of the Isle of Man.* ### 135. There is no stock exchange or other securities trading system in the Isle of Man. ### 135. There is no stock exchange or other securities trading system in the Isle of Man ### Summary findings - There is no stock exchange or other securities trading system in the Isle of Man. - Principles 25 to 27, 29, and 30 are not applicable. - There is an offence of insider dealing. - The treasury, but not the FSC, has wide-ranging inspection and investigation powers; these powers can be used to assist other regulators. - The burdens of proof are such that it may be very difficult to secure a conviction within the Isle of Man. - The law does not apply explicitly to market manipulation. ### Recommended actions to improve observance of the IOSCO Objectives and Principles of Securities Regulation (Table 5) - CP 2 Principles Relating to Regulator - The FSC and the government should review the relevant laws, policies, and practices with a view to providing for the FSC to become a more independent and more accountable financial services regulator and supervisor. - CP 10 Principles for the Enforcement of Securities Regulation - The FSC should review its template for its on-site inspection report, and ensure that the purpose is clearly and accurately stated. - The FSC should review its procedures for inspecting the arrangements between the IFA and the scheme manager; in particular, in relation to the supply and use of offer documents and promotional literature, and consider whether they are adequate for ensuring that customers are well informed and advised. - CP 14 Principles for Issuers - The government and the FSC should review the powers of intervention in the Companies Act in respect of a registered prospectus. - The FSC should review the reporting requirements for the international, experienced investor and professional investor schemes. - CP 16 Principles for Issuers - The FSC should review the reporting procedures under the Companies Act. - The FSC should continue its review of policies on the authority for financial reporting and audit standards and the review of auditor performance. - CP 24 Principles for Market Intermediaries - The government should secure the enactment of rules of law for dealing with the failure of a market intermediary. - The FSC should prepare and disseminate a guidance note or other suitable procedure for dealing with the failure of a market intermediary. - CP 28 Principles for the Secondary Market - The government should review aspects of the insider dealing law. ### Authorities’ responses to the assessment (selected) - CP 2 Principles Relating to the Regulator - The Isle of Man Treasury is currently undertaking a full review of the Isle of Man’s regulatory bodies (scheduled for completion by June 2004). The scope of the review has full regard to observations concerning independence, accountability, and will identify any changes required to the legislative framework, including any clarification of the Commission’s statutory responsibilities. - CP 10 Principles for the Enforcement of Securities Regulation - The FSC is currently reviewing its template for its on-site inspection reports and the comments made will be taken into account in this process. - The Commission has an established regime of detailed on-site inspections for FSC regulated IFAs. Any generic issues relating to IFAs will be the subject of half-yearly meetings with the Insurance Brokers Association which has agreed to take responsibility for the IFA industry. - CP 14–16 Principles for Issuers - The Commission will consider powers of intervention in the Companies Acts 1931–1992 and related legislation in respect of a registered prospectus as part of a fundamental review of Company Law to be commenced shortly. - The FSC is currently drafting revised reporting procedures relating to international, experienced investor, and professional investor schemes. - The Commission will consider annual reporting procedures under the Companies Acts as part of the forthcoming review of Company Law referred to above. - The Commission is currently considering the question of financial and audit standards, and auditor performance. Any required changes will be progressed in line with the forthcoming consolidation legislation. - Regular meetings with the large audit practices have been instigated to explore synergies between the FSC and the external auditors. - CP 24 Principles for Market Intermediaries - The Commission intends to consider the question of rules of law for dealing with the failure of a market intermediary within the forthcoming consolidation legislation. - The Commission will also develop guidance for the industry in this area. - CP 28 Principles for the Secondary Market - As part of the review of the Isle of Man’s regulatory bodies, the question of insider dealing legislation will also be considered. ### Authorities’ action plans — key measures and schedules - Basel Principles / Supervision - Full review of the Island’s regulatory bodies. Review is scheduled for completion by June 2004. - Review of the examination methodology for full scope of on-site examinations. Completed. Methodology has been fully tested and implemented. - Formalize quality control procedures for on-site and off-site supervision. Completed. On-site review procedure has been updated; off-site review procedure will be completed with the delivery of the consolidated license holder database. - Assign one senior individual with responsibility for consistency of approach and quality control for both on-site and off-site supervision. Completed. - Creation of a validation panel to validate/challenge risk assessments and supervisory programs. Completed. - Meetings with external auditors of banks to identify synergies and discuss industry issues. Meetings have already taken place. Ongoing formal half-yearly meetings have now been agreed. - FSC will make greater use of the Reporting Accountants Regime. Completed. - Guidance note on corporate governance for banking institutions issued; review of implementation will form part of on-site visits. Completed. - FATF / Anti-Money Laundering - Anti-Terrorism and Crime Bill gained Royal Assent in June 2003; the Act gives significantly more power to combat FT. - Review of Anti-Money Laundering Code 1998; production of the 2003 Code with revisions. Review completed. Issued a revised 2003 Code for consultation in July 2003. - Updated anti-money laundering guidance notes issued to the industry in April 2003 (multiple items noted as Completed). - The Anti-Money Laundering Code 2003 contains provisions imposing a continuing obligation to verify identity and related standards; it is currently with the industry for consultation. - Provisions contained in the Insurance (Amendment) Bill 2003 include power to remove or disqualify an auditor and the power to impose civil money penalties against individuals and legal persons. Completed for certain items; other enhancements under consideration in the financial services consolidation legislation. - Consideration of an asset forfeiture fund: Ongoing consideration. - Consider clarifying the legal requirement for STR to be submitted to the FCU: Ongoing consideration; for insurers this has been included within the revised Standards (CTP) now in operation. - Authority to issue AML guidance notes (IPA): Completed. Contained in the Insurance (Amendment) Bill 2003. - FCU staffing level increase: In progress. - FCU structure: Two staff dedicated to ML/FT operations/investigations. Completed. - Memorandum of understanding between the police and Customs covering ML/FT investigations: Completed. MOU was signed in April 2003. - IAIS Principles (Insurance) - The Insurance (Amendment) Bill has had its first reading in Tynwald and will be progressed when Tynwald reconvenes after the summer recess 2003. - Review of Tynwald representation on the board of the IPA. Review is scheduled for completion by June 2004. - Legislation to set out IPA regulatory objectives and division of responsibilities: Completed, provisions contained in the Insurance (Amendment) Bill 2003. - Revision of the appeals process and removal of Treasury from it: Completed, provisions contained in the Insurance (Amendment) Bill 2003. - Transfer power to make secondary legislation from Treasury to IPA: Completed, provisions contained in the Insurance (Amendment) Bill 2003. - Legislative provisions to allow the IPA to make regulations or statutory codes and update powers of inspection, investigation, and sanctions: Completed, provisions contained in the Insurance (Amendment) Bill 2003. - Ongoing reviews: on-site inspection procedures, derivatives reporting requirements, bringing general insurance intermediaries within the Intermediaries Act, and changes to reporting requirements for insurance managers following passage of the Insurance (Amendment) Bill. - IOSCO Principles - Full review of the Island’s regulatory bodies with regard to independence and accountability. Review is scheduled for completion by June 2004. - Review template for on-site inspection reports and clarify statement of purpose. Currently under review as part of the reorganization of the Supervision Division. - Review powers of intervention in the Companies Act in respect of a registered prospectus. Review of Company law now being commenced. - Review reporting requirements for the international, experienced and professional investor schemes. PIF reporting requirements were amended to include a requirement for the annual audit of accounts; further reporting requirements will be reviewed as part of the Company law review. - Review Chief Minister’s consent to disclose customer information with domestic and foreign counterparts. Legislation to implement has been drafted. - Review of reporting procedures under the Companies Act. Review of Company law now being commenced. - Review of policies on the authority for financial reporting and audit standards and review of auditor performance. Provisions to be considered in consolidation of financial services legislation; ongoing meetings with external auditors. - Review enactment of rules of law for dealing with the failure of a market intermediary. Provisions to be considered in consolidation of the financial services legislation. - Issue guidance note or procedure for dealing with failure of a market intermediary. Procedures are being reviewed and will be amended to include such guidance. - Review of the insider-dealing legislation. Review is scheduled for completion by June 2004. - OGBS - Licensing of CSPs: Completed on July 31, 2003 (subject to cases which cannot be determined for legal and human rights reasons). - Fiduciaries Services Bill: Introduction of the Bill to House of Keys in Autumn 2003. Estimated licensing to start in 2004. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr03366.pdf_