## Detailed Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision (cr03367) ## Source details **Canonical URL:** [Detailed Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision (cr03367)](https://www.imf.org/-/media/files/publications/ofca/english/cr03367.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr03367.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr03367.pdf.json) --- ### Purpose, methodology, and institutional overview - Assessment conducted by Jack Heyes and Marcel Maes (consultants of MFD) as part of an IMF Offshore Financial Center assessment. - Methods: - Examination of legal framework and sector-specific law. - Review of Core Principles self-assessment. - Extensive discussions with Financial Supervision Commission (FSC) staff, external auditors, and commercial bank management. - Isle of Man financial sector profile: - 59 licensed banks. - 2 licensed building societies. - Total bank deposits were £27.1billion. - Banks originate from Europe, Ireland, South Africa, United Kingdom, and the United States. - Business models: majority private banking to nonresidents; deposit-taking with lending primarily in international interbank markets; custodial/trust roles; trade, finance, and treasury operations. ### Legal and supervisory framework, powers, and prudential rules - Institutional and legal features: - FSC established July 1983 under the Financial Supervision Commission Order, 1983; governed by Statutory Boards Act 1987. - Insurance supervision by Insurance and Pensions Authority (IPA) established from 1986. - Banking Act, 1998 (BA) requires a license to carry on banking business in or from the Isle of Man and confers licensing and supervisory powers to the FSC. - Supervisory tools and enforcement: - BA grants FSC power to grant/refuse licenses (Section 6) and revoke licenses (Section 7); Section 11 allows recommendations and directions; Section 12 permits requests for information and directions to secure compliance. - Range of sanctions up to license revocation; power to impose penalties under consideration. - Prudential and reporting requirements: - Minimum risk-based capital ratio of not less than 10 percent; components/methodology generally in accordance with the Basel Capital Accord. - Minimum absolute paid-up capital of £1 million for all banks (Code Section 2). - Risk-asset ratios set individually and may vary between 10 and 18 %; required ratios vary between 10 and 18 %. - Banks must prepare annual financial statements in accordance with U.K. accounting standards adopted by the United Kingdom Accounting Standards Board or other FSC‑approved standards. - Quarterly prudential returns required; Banking Return due no later than 21 calendar days after quarter-end. ### Key supervisory findings and operational weaknesses - Overall legal framework and prudential alignment: - Collective body of laws, orders and guidance constitutes a generally appropriate legal framework; prudential framework aligned with international standards (minimum capital requirement 10 percent; Basel methodology used). - Market and supervisory focus: - Heavy orientation toward offshore/private banking and interbank market lending implies supervisory emphasis on offshore/private-banking exposures, custodial/trust activities, and treasury operations. - Operational independence and resources (Principle 1(2)): - Assessment: Materially noncompliant. - Legal constraints on autonomy include: - Commissioners appointed by the treasury subject to approval of Tynwald; chairman is a politician and member of the treasury. - Council of ministers may give directions to the FSC on public interest matters and FSC must comply (Statutory Boards Act Sched.2 clause 12). - FSC expenses defrayed out of money provided by Tynwald (Section 8 of Financial Supervision Commission Act 1984). - Treasury may give directions with respect to exercise/performance of certain BA powers and FSC shall comply (Section 30 of BA referenced). - Resource indicators and staffing: - FSC staff headcount referenced as 54.5 with 7.75 in banking supervision team; staff turnover 2001/2002: seven persons (out of 54.5) left the FSC; three out of the seven staff members were part of the banking supervision team (on a total of 7.75). - FSC Direct Costing of Supervisory Responsibilities (percent): Total Banking Inv. Bus CIS CSP — 100 28 24 21 27 - Recommendations: in-depth analysis of supervisory objectives and resource needs; review and streamline business processes; revisit timetable for consolidation of primary supervisory legislation. - On-site and off-site supervision (Principle 16): - Assessment: Largely compliant. - Observations: - Off-site supervision based on detailed quarterly Banking Return and desk-based analyses; enhanced Financial Reporting System (FRS) undergoing acceptance testing. - On-site program historically prioritized AML/KYC; full-scope safety-and-soundness visitations limited during the focused AML/KYC program. - Draft on-site methodology paralleling risk-rating system exists; implementation hampered by resource shortfalls. - Supervision Division staffing concerns: projected person‑day requirements for scheduled on- and off-site supervision indicate a significant shortfall; turnover within Supervision Division for year ending March 31, 2002 was 17 percent; for period ending September 30, 2002 turnover was 7 percent. - Recommended actions: - Finalize and implement on-site examination methodology. - Implement training programs and formalized quality control/assurance. - Implement time accounting to track supervisory resource allocation. - Reorganize Supervision Division to assign senior responsibility for consistency and establish a validation panel. ### Specific prudential topics and supervisory assessments (selected Core Principles) - Capital adequacy (Principle 6) — Assessment: Compliant - Minimum risk asset ratio not less than 10%; components and methodology generally conform to Basel Capital Accord; minimum absolute paid-up capital £1 million. - Required ratios may be higher than 10% and range between 10 and 18 %; out of thirty-four bank subsidiaries, eight must comply with a capital ratio that exceeds the 10 % minimum. - Credit policies and provisioning (Principles 7–8) — Assessments: Largely compliant - Section 8 of Code and Appendix D require internal credit policies and provisioning policies; FSC had not conducted independent reviews of asset quality; total loans and advances represented 18.6 percent of total assets at end‑August 2002. - Recommendations: strengthen on-site credit quality reviews, establish FSC credit risk rating system, use independent credit reviews and capacity-building for staff. - Addendum action: banks requested to provide documented Credit, Loan Grading and Provisioning Policy Statement(s) by December 31, 2002, with feedback by March 31, 2003. - Large exposures and connected lending (Principles 9–10) — Assessments: Largely compliant / Compliant - Large exposure defined as exposure > 10 percent of adjusted capital base; reporting required; aggregate large exposure limit 800 percent of adjusted capital base; exposures > 25 percent require advance notification. - Related-party lending must be arm’s-length; capital treatment includes additional 50 percent weighting or deduction from adjusted capital base. - Market, liquidity, interest rate and FX risks (Principles 12–13) — Assessment: Compliant / Largely compliant - Banks must submit board‑approved policies on liquidity, interest rate and FX risk; net open FX positions added to risk-weighted assets; FX capital charge between 10 and 18 percent of net open FX position depending on required risk-asset ratio. - FSC focuses on short-maturity mismatches and credits only marketable assets that are marketable in adverse conditions. - Validation of supervisory information and external auditors (Principle 19) — Assessment: Largely compliant - Section 13 of BA allows inspections and appointment of external officers; Section 21 permits Reporting Accountants; Section 20 obliges external auditors and Reporting Accountants to report matters of material significance to the FSC. - Weakness: external auditors have not provided the opinion required under section 8.4 on processes of control; FSC has not implemented quality-monitoring procedures for external auditors’ work. - Remedial measures (Principle 22) — Assessment: Compliant - Section 11 BA empowers recommendations and directions; criminal sanctions reinforce directions; powers to attach license conditions and ultimately revoke; appeals mechanism via council of ministers’ Review Committee exists. - FSC lacks explicit power to suspend dividends but can issue directions to suspend under Section 11; FSC seeking legislative augmentation to impose penalties and appoint administrators. ### Consolidated and host supervision (Principles 20, 23–25) - Consolidated supervision (Principle 20) — Assessment: Compliant - BA Section 12 empowers FSC to seek information on group members and apply consolidated prudential requirements. - MOUs in place or being completed for nine jurisdictions; annual standardized confirmation sought from home supervisors regarding parent bank condition and consolidated supervision. - Supervision over foreign banks’ establishments and host country supervision (Principles 24–25) — Assessment: Compliant - Branches/subsidiaries must comply with same prudential requirements; FSC requires prior approval/consultation with home supervisor and cooperates closely with home regulators. --- ### AML/CFT and Criminal Justice Assessment (cr03367) ### AML/CFT assessment methodology and institutional framework - AML/CFT assessment employed the FATF 40+8 Methodology (October 11, 2002 version). - Assessment team included IMF staff and external experts; Fund-led mission visited October 21–30, 2002; additional law‑enforcement expert visited February 11–13, 2003. - Key institutions: - Financial Crimes Unit (FCU) — part of Isle of Man Police, functions as the FIU. - Police and Customs and Excise — investigatory staff and support to FCU. - Attorney General’s Chambers — prosecutes ML and FT and advises government. - Financial Supervision Commission (FSC) and Insurance and Pensions Authority (IPA) — financial sector regulators. ### Criminalization of ML and FT; conventions - Conventions extended to the Isle of Man include: - UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna Convention); - Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime; - European Convention on Mutual Assistance in Criminal Matters 1959 (Strasbourg). - UN Security Council Resolution 1373 implemented by Article 10 of the UN Order. - Gaps noted: - UN Convention for the Suppression of the Financing of Terrorism and Palermo Convention had not been extended to the Isle of Man at time of assessment. - Limitations in POTA definition of terrorism and financing; Anti-Terrorism and Crime Act 2002 expected to consolidate and remedy gaps (not yet in force at time of some sections). - Criminal sanctions for ML: - Summary conviction: imprisonment not exceeding six months or fine not exceeding 5000 pounds. - Conviction on information: imprisonment not exceeding fourteen years or a fine or both (CJA Sections 17A(6), 17B(9) and 17C(4); Drug Act Section 51(1); POTA Section 11(1)). ### Confiscation, freezing and forfeiture - Confiscation provisions: - Proceeds of criminal conduct: Sections 1 and 2 of CJA; Section 2 of Drug Act; Sections 11 and Schedule 4 of POTA. - Civil forfeiture applies to imported/exported cash (Sections 23A–23F of CJA; Sections 39–44 of Drug Act). - Court powers: - High Court may grant freezing injunctions (“Mareva Orders”) (High Court Act 1991 Section 56A as amended). - Police and customs have powers to obtain information and trace assets (Drug Act Sections 52–54A; CJA Sections 17J and related). - Recommendations: - Amend legislation to provide for forfeiture of property of corresponding value in connection with terrorist activities when specific property unavailable. - Consider adoption of a civil forfeiture law for crimes other than FT. - Explicitly provide authority to share assets other than drug assets with foreign jurisdictions. ### Financial Crimes Unit (FCU) — capacity, STRs, information flows - FCU staffing (authorized and current personnel as indicated in assessment): - One Detective Inspector. - Three Detective Sergeants (one active indicated). - Nine Detective Constables (eight indicated). - Two Customs and Excise Officers (Part-time). - One Analyst (Civilian). - One Administration Manager (Civilian). - One Administration Assistant (Civilian). - One Accountant (Civilian). - FCU functions include intelligence receipt/analysis, investigation support, international liaison, financial profiling, and acting as reception point for financial disclosures. - STR statistics (STRs received by FCU and other competent authorities): - 1998: 1,021 - 1999: 1,214 - 2000: 1,012 - 2001: 1,642 - 2002: 1,836 - Observations and weaknesses: - No statutory requirement to submit STRs directly to FCU (reports may be made to “a constable”); in practice STRs are sent to FCU. - FCU not authorized to require additional documentation from reporting parties. - FCU lacks statutory authority to order sanctions or penalties. - FCU cannot access all government databases in real-time without fulfilling Data Protection Act section 27 requirements. - Recommendations for FCU: - Consider legal amendments to require STRs to be submitted directly to FCU and in writing on an FCU form. - Permit FCU to require additional information from reporting parties and provide real-time access to public and nonpublic databases for crime prevention/detection. - Increase FCU staffing to authorized strength and evaluate organizational structure to prioritize ML/FT; consider amalgamating Customs financial investigation team with FCU. - Increase support staff so law enforcement personnel focus on investigations. ### Prevention, KYC, record keeping and supervisory roles - Legal and regulatory framework: - Anti-Money Laundering Code 1998 (the “Code”) with Guidance Notes; AML guidance notes updated April 2003. - Banking Code, CTP for insurance, CSP Codes and other regulatory instruments require KYC, MLROs, record retention and internal controls. - Banks: Banking Code requires board-approved written policies on liquidity, interest rate and FX risk (Section 3.2). - Record retention: - Code para.7: identity and verification records retained for five years after termination of relationship. - CTP (insurance): records at least six years; POTA Section 15(2) requires full auditable records in relation to suspicions to be retained in perpetuity. - Customer identification and introduced business: - Notes and Codes set out identification requirements, acceptable documents, and thresholds for exempt one-off transactions (Exempt one‑off transactions: Less than Euros 3,000 for bookmaking/casino; Less than Euros 15,000 in any other case). - Introducer regime allows eligible introducers (licensed/regulatory bodies in EEA/FATF countries, advocates, accountants) to perform KYC under undertakings; concerns exist about verification when introducer retains documents. - Recommendations: - Amend laws to explicitly require customer identification procedures be followed and consider requiring re-verification of existing customers. - Consider limiting AML exemptions to entities regulated in EU States rather than to entities covered under EU AML Directive. - Require accurate originator information on funds transfers to remain with transfers (within FATF two‑year period); require enhanced scrutiny of wire transfers lacking complete originator information. - Internal controls, MLROs and training: - Banks legally required to appoint MLROs; CTP requires MLRO for insurance and notification to IPA within 28 days. - FSC and IPA to consider extending MLRO appointment requirements to all FIs; FSC planned Code amendments to require MLRO appointment. - Training budgets exist; industry generally has substantive training programs and MLROs appointed in most visited institutions. - Supervisory responsibilities and gaps: - FSC and IPA perform on-site and off-site surveillance and have visited majority of licensed institutions recently. - FSC lacks statutory authority to regulate or monitor MSBs (Money Services Businesses) — responsibility of Customs and Excise — potential weakness; Anti-Money Laundering (Money Service Businesses) Regulations 2002 introduced August 2002 to register/monitor MSBs. - Recommendations: consider rationalizing MSB regulation by transferring responsibilities to FSC. ### Mutual legal assistance (MLA), international cooperation and operational capabilities - MLA practices: - Requests for assistance processed through mutual legal assistance; no general dual criminality prerequisite except for fiscal offences. - Attorney General’s Chambers evaluates requests and transmits to relevant authorities; detailed statistics kept. - Bilateral treaties exist with Bahamas, Saudi Arabia, Spain, Sweden, Ukraine, and the United States. - Operational tools: - No explicit legal basis for controlled deliveries or undercover operations though law does not restrict them; legislation to regulate undercover techniques planned in 2003. - Interception of communications controlled by Interception of Communications Act 1988. - Extradition procedures available (Extradition Act 1989). - Effectiveness and recommendations: - Framework for international cooperation considered adequate. - Recommend enactment of legislation to explicitly regulate undercover techniques and to enable extension of UN FT Convention and Palermo Convention to Isle of Man. --- ### Confiscation and Asset Forfeiture (cr03367) ### Legal powers, procedures and recommendations - Confiscation regime: - Proceeds of criminal conduct covered by CJA Sections 1–2, Drug Act Section 2, POTA Sections 11 and Schedule 4. - Civil forfeiture limited to imported/exported cash under Drug Act and CJA provisions. - Seized Assets Fund (SAF) administered by Isle of Man treasury holds confiscated property; drug proceeds may be shared; non-drug confiscated assets fall to General Revenue. - Courts and freezing powers: - High Court may grant freezing injunctions and appoint receivers; Section 42 High Court Act 1991 allows receiver appointment where just and convenient. - Recommendations: - Provide for forfeiture of property of corresponding value for terrorist activities where subject property not available. - Provide explicit authority to share assets other than drug assets with other jurisdictions. - Consider adoption of a civil forfeiture law for crimes other than FT. - Implication for FATF compliance: - Full compliance with FATF Recommendations 7, 38, SR III will be achieved when laws allow for forfeiture of property of corresponding value. --- ### Financial Supervision Commission and Cross‑sectoral Supervision (securities, CIS, CSP/TSP, insurance) — Key findings and action plans ### Securities, CIS and investment business (IOSCO-related assessment) - FSC structure and resources: - Approved staff establishment 58.5; current employment 56.5. - 8.4 percent of the FSC’s total resource is allocated to securities and investment work. - Supervision Division: 15 staff of which 13 are professional officers; 7.5 full-time equivalents committed to securities and investment work. - Supervision targets: low risk inspected every two years; medium risk every 18 months; high risk every year; Division reports achieving target. - Market statistics: - Funds under management in CISs as at June 30, 2002 were £5.12 billion. - Additional £3.5 billion in funds under discretionary management. - 87 investment business licenses current. - Assessments and recommendations: - FSC has implemented or broadly implemented 20 of the IOSCO Principles; partially implemented Principles 1, 2 and 24. - Recommended: government and FSC secure by statute a clear authoritative statement of FSC’s responsibilities and review laws to enhance FSC independence and accountability; enact rules for dealing with failure of market intermediaries. ### Corporate Service Providers (CSPs) and Fiduciary Services Bill (TSP regime) - CSP regulatory features: - CSP Act and GR Code define regulated activities and fit-and-proper requirements; four‑eyes principle generally applies. - Transitional licensing process in place with a July 31, 2003 deadline for completion; CSP Annual Compliance Return due within 4 months of year end. - Minimum safeguards and solvency requirements: corporate CSPs supply audited accounts; sole traders/partnerships may provide independently verified accounts or maintain £10,000 in a segregated account. - Professional indemnity insurance guidance: expectation of 2.5 times turnover with minimum cover £250,000 and excess not more than 3 percent of turnover (guidance flexible). - Fit-and-proper and governance: - Personal Questionnaires (PQs) and Banker’s Questionnaires (BQs) required; FSC verifies convictions, regulatory refusals, disciplinary findings, insolvency history and references. - CSPs must identify beneficial owners of client companies, perform KYC, and retain client identification records. - Supervisory powers for CSP failures and wind‑down: - CSP Act provides for injunctions, public statements, requirement for reporting accountant reports, and petition to High Court for receiver and manager (s.16). - CSP must give not less than 28 days’ notice before cessation and detail arrangements for orderly winding up or transfer (GR Code para.12.10). - Recommended actions: - Ensure July 31 licensing deadline met. - Enact Fiduciary Services Bill promptly to extend regulatory/supervisory regime to Trust Service Providers (TSPs) and address disclosure/reciprocity issues for information sharing. ### Insurance supervision (IAIS Core Principles assessment) - Market structure: - International life business, captive insurance, domestic general and life business. - Total estimated international life funds around £14 billion; largest company holds £3.2 billion of policyholders’ funds. - 165 captives listed; total premium income for captives 2001 approximately £1.05 billion. - IPA supervisory findings: - IPA is statutory board under Insurance Act 1986; CP1 (Organization) assessed Non‑observed due to political involvement at Board level and appeals process; Amendment Bill proposed to transfer appeal process and regulatory powers to IPA. - Most IAIS Principles observed or largely observed; exception: CP9 (Derivatives and off-balance sheet) Materially non‑observed. - Planned Insurance (Amendment) Bill expected to come into effect by October 2003 to address many gaps including secondary legislation powers, sanctions and confidentiality gateways. - Recommendations: - Distance IPA from political influence; remove Tynwald representation on board. - Expand reporting requirements to capture derivatives and off‑balance sheet exposures. - Consider bringing more intermediaries within the Act’s scope and monitor staff resourcing as supervisory programs expand. --- ### Selected numeric facts and deadlines preserved exactly - 59 licensed banks; 2 licensed building societies; total bank deposits £27.1billion. - Minimum risk-based capital ratio of not less than 10 percent. - Minimum absolute paid-up capital of £1 million for all banks (Section 2 of the Code). - Required risk-asset ratios vary between 10 and 18 %; eight out of thirty-four bank subsidiaries must comply with a capital ratio exceeding the 10 % minimum. - Total loans and advances represented 18.6 percent of total assets (end of August 2002). - FSC staff turnover: seven persons (out of 54.5) left 2001/2002; three of the seven were in banking supervision (on a total of 7.75). - FSC Direct Costing of Supervisory Responsibilities (percent): Total Banking Inv. Bus CIS CSP — 100 28 24 21 27 - STRs received: 1998: 1,021; 1999: 1,214; 2000: 1,012; 2001: 1,642; 2002: 1,836. - FCU staffing as listed (Detective Inspector; three Detective Sergeants — one indicated; nine Detective Constables — eight indicated; two Customs and Excise Officers (Part-time); one Analyst; one Administration Manager; one Administration Assistant; one Accountant). - FSC resource allocation to securities and investment work: 8.4 percent. - Funds under management in CISs as at June30, 2002 were £5.12 billion; £3.5 billion in funds under discretionary management. - 87 investment business licenses current. - Asset valuation for authorized CISs: at least twice-monthly; investors receive half-yearly and annual reports (Part 7 of the Financial Supervision (Authorized Collective Investment Schemes) Regulations). --- *Source: IMF country report and Offshore Financial Center assessment (cr03367).* ### 1. Detailed Assessment of Compliance with the Basel Core Principles for Effective Banking ### Detailed Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision ### Purpose and methodology of the assessment - The assessment benchmarks the current state of banking supervision, recognizes extensive changes in recent years, and provides input for the development of an action plan to move toward full compliance with the Core Principles. - The assessment was conducted by Jack Heyes and Marcel Maes (both consultants of MFD). - Information and methodology used: - Examination of the legal framework, both generally and as specifically related to the financial sector. - Review of the self-assessment of the Core Principles. - Extensive discussions with staff of the Financial Supervision Commission (FSC), external auditors, and management of commercial banks. ### Institutional and market structure overview - The Isle of Man financial sector composition: - 59 licensed banks. - 2 licensed building societies. - Total bank deposits were £27.1billion. - Geographic origins of banks include Europe, Ireland, South Africa, United Kingdom, and the United States. - Primary business models and activities: - Majority of banks provide private banking services to nonresidents. - Services directed toward deposit taking with funds on loan primarily in the international interbank markets. - Some banks act as custodians and trustees to collective investment schemes. - Other banks conduct trade, finance, and treasury operations. ### Legal and institutional framework for supervision - Financial Supervision Commission (FSC): - Established in July 1983 under the Financial Supervision Commission Order, 1983. - Governed by the Statutory Boards Act of 1987. - Originally regulated deposit-taking institutions and insurance business and later investment business. - Eight commissioners, appointed by the treasury and subject to approval of Tynwald, oversee the FSC’s work. - Insurance supervision: - A separate insurance authority was established in 1986 and has evolved into the Insurance and Pensions Authority (IPA), also constituted as a statutory board governed by the Statutory Boards Act of 1987. - Banking Act, 1998 (BA): - Regulates banking business; banking business may not be carried on in or from within the island without a license. - The BA confers licensing power to the FSC. - The BA provides substantial powers for supervisory, disciplinary, and enforcement purposes. ### Supervisory powers, practices, and prudential requirements - Licensing and enforcement: - The BA gives the FSC the power to grant and refuse licenses. - A range of sanctions is available to the FSC where a bank is noncompliant, including recommendations, directions to a bank, and revocation of a license as the ultimate enforcement sanction. - Supervisory methods: - The FSC uses both off-site surveillance and on-site visits in its supervision of banking entities. - Capital and accounting requirements: - All banks must maintain a minimum risk-based capital ratio of not less than 10 percent. - Components of capital and the methodology used are generally in accordance with the Basel Capital Accord. - All banks incorporated in the Isle of Man are required to draw up annual financial statements prepared in accordance with U.K. accounting standards adopted by the United Kingdom Accounting Standards Board or other accounting standards approved by the FSC. ### Key findings and implications - The collective body of banking laws, orders, and guidance notes constitutes a generally appropriate legal framework for banking supervision. - The FSC has statutory authority, supervisory tools, and enforcement sanctions consistent with licensing and oversight responsibilities. - Prudential framework aligned with international standards: - Minimum capital requirement set at 10 percent. - Use of Basel Capital Accord methodology for capital components and measurement. - Market concentration and business model considerations: - Heavy orientation toward private banking for nonresidents and use of international interbank markets for lending imply specific supervisory focus areas (offshore/private-banking exposures, custodial/trust activities, treasury operations). *Detailed Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision (IMF Offshore Financial Center assessment).* ### 12. The Financial Supervision Act, 1988, permits the disclosure by the FSC of ### cr03367 - 12. The Financial Supervision Act, 1988, permits the disclosure by the FSC of ### Principle 1 — Objectives, Autonomy, Powers, and Resources (overview) - Purpose: Clear responsibilities and objectives for each agency involved in supervision; operational independence and adequate resources; suitable legal framework for authorization and ongoing supervision; powers to address compliance and safety and soundness; legal protection for supervisors; arrangements for sharing information and protecting confidentiality. - Assessment framework: Detailed Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision. ### Principle 1(1) — Clear responsibilities and objectives - Description: - The Financial Supervision Commission Order, 1983, established the FSC as responsible for licensing and supervision of the finance sector (except insurance and pensions) in the Isle of Man. - Detailed responsibilities and powers are outlined in the Banking Act 1998 (BA). - Prudential framework includes the Banking (General Practice) Regulatory Code, 1999 (“the Code”). - FSC policy function: ensure regulatory framework aligns with international standards; FSC identifies needed measures and proposes legislation and guidance. - July 2001: FSC conducted a detailed review of law and supervisory practice compliance with the Basel Core Principles. - December 2001: FSC revised Anti-Money Laundering Guidance Notes in response to new FATF recommendations and the Basel Committee report “Customer Due Diligence for Banks.” - FSC objectives: set out in its mission statement and medium-term plan; annual review of performance against the plan. - Ongoing medium-term project: review and consolidation of primary supervisory legislation (Banking Act, 1998; Investment Business Act, 1991; Building Societies Act, 1986; Financial Supervision Act, 1988; Corporate Service Providers Act, 2000; Fiduciary Services Bill) with industry working group. - FSC coordinates with other crown dependencies on money laundering prevention; draft position paper “Overriding Principles for a Revised ‘Know-Your-Customer Framework’” issued February 2002 for industry discussion. - Assessment: Compliant - Comments: - FSC is proactive in enhancing regulatory and supervisory regime and meeting international standards. - FSC holds industry discussions to ensure practicable implementation of guidance notes. - Identified need to rationalize and clarify supervisory powers; one-license system (similar to UK Financial Services and Markets Acts 2000) will be explored to address duplication and inconsistencies. - Consolidation bill cannot be introduced for another two to three years; recommendation that Isle of Man authorities explore revisiting the time schedule. ### Principle 1(2) — Operational independence and adequate resources - Description: - FSC is a statutory body established 1983 by the Financial Supervision Order 1983 (Section 3). - FSC composition: Section 3(2) provides no less than three persons appointed by the treasury, subject to approval of Tynwald. Currently eight commissioners, seven non-executive; chief executive is the only executive member. Chairman is a politician and member of the treasury; tenure determined by Statutory Boards Act, 1987 (SBA). - Post-Edwards Report: composition considered; December 2001 appointment of political chairman with treasury minister still considering whether to appoint a nonpolitical chairman. - Board meets formally monthly. - Section 8 of the Financial Supervision Commission Act, 1984: FSC expenses are defrayed out of money provided by Tynwald. - Business planning: council of ministers establishes government aims, objectives, corporate indicators, targets; provided to statutory boards with budget and resource allocation. - Internal audit 2001: undertaken by government’s internal audit division; no major issues identified. - January 25, 2001: FSC approved a code of conduct for commissioners on conflicts of interest. - Funding: FSC costs met from annual license fees and companies’ registry charges; discretion to appoint staff within headcount and budget agreed with treasury. - Staffing: majority have regulatory/private financial services experience and professional qualifications (mainly accountancy and law); high priority on staff training with individual annual training programs. - Staff turnover 2001/2002: seven persons (out of 54.5) left the FSC; three out of the seven staff members were part of the banking supervision team (on a total of 7.75). - Job evaluation held to restore/maintain competitive pay; pay bands adapted. - FSC can hire outside experts; has done so on one occasion. - Budget allocations for training, technological equipment, and on-site/off-site supervision. - Assessment: Materially noncompliant - Comments: - Legal circumstances limiting independence, arising because FSC is a “Board” governed by Statutory Boards Act 1987 (SBA): - A member may be removed from office by a resolution of Tynwald (Section 3 (4) of the SBA). - Council of ministers may give directions to the FSC on matters affecting the public interest, and FSC shall comply (Section 12 (1) of the SBA). - FSC must supply the chief minister information and permit inspection and copying of accounts, books, documents and papers (Section 12(2) of the SBA). - Treasury may give directions with respect to exercise/performance of powers under sections 4 to 7 and 13(1) to (3) of the BA or SBA and FSC shall comply. - Section 8 of the Financial Supervision Commission Act 1984: FSC expenses defrayed out of money provided by Tynwald; council of ministers establishes aims and budget allocations. - Although no signs of government intervention in regulatory decision making have been observed (except resource limitations), the legal powers for government intervention represent a potential impediment to autonomy. - Budgetary restrictions prevent FSC from fully achieving supervisory objectives; annual report 2001/2002 notes growing workload and limited resources. - FSC Direct Costing of Supervisory Responsibilities (percent): - Total Banking Inv. Bus CIS CSP - 100 28 24 21 27 - Recommendation: in-depth analysis of FSC supervisory objectives and means needed to achieve them; continue review of business process of prudential supervision to enhance efficiency and agree appropriate change process soon. - Isle of Man should continue to monitor international standards developments. ### Principle 1(3) — Legal framework for authorization and ongoing supervision - Description: - Section 6 of the BA: power to grant and refuse licenses. - Section 7 of the BA: power to revoke licenses in certain circumstances. - Section 30: treasury right to give directions to the FSC regarding licensing powers. - Licensing policy: Isle of Man considered too small/vulnerable for high risk banking operations; encourages branches or locally incorporated subsidiaries of banks incorporated outside Isle of Man that meet criteria and are licensed in jurisdictions judged to exercise proper licensing and supervision and subscribe to International Concordat on Banking Supervision principles. - Licensing policy revised: emphasized importance of credit rating of banking group and jurisdiction of home regulator; removed reference to world’s top 500 banks as overriding criterion. - Section 10 of the BA: FSC can make prudential rules (Regulatory Codes) administratively; if Tynwald fails to approve them they cease to have effect. - Prudential rules approved by Tynwald are contained in Banking (General Practice) Regulatory Code 1999; cover capital requirements, auditing standards, ownership, acquisitions, mergers, and management. - Guidance notes appended to a Code give guidance to banks; Notes are not part of the Code; extensive consultation with industry is a rule when formulating guidance and best practice. - Section 12 of the BA: FSC can seek whatever information from banks required for performance of functions; form and frequency of prudential banking returns outlined in Section 2.3 of the Code. - Licensing assessment process: initial executive-level “fit and proper” enquiries; review by chief executive’s licensing committee; recommendation to Licensing Committee (Board members not involved in initial review); applicant receives recommendation and may attend, be represented and make representations when application is considered. Procedures introduced to ensure compliance with Human Rights Act 2001 (not yet in force). - August 1, 2000: FSC issued guidance note on responsibilities and duties of directors under the Laws of the Isle of Man (Appendix N). - Assessment: Compliant - Comments: (none provided in the source) ### Principle 1(4) — Powers to address compliance, safety, and soundness - Description: - Section 6 of the BA: power to revoke licenses in certain circumstances. - Range of sanctions available for noncompliance; Section 7 allows FSC to impose conditions on a license at any time. - FSC can make recommendations and issue directions under Section 11; ultimate sanction is revocation under Section 7. - Section 10: FSC power to set prudential rules administratively; guidance notes explain best practice and provide basis for regulatory action (including imposition of conditions); guidance notes are not legally binding but courts may take them into account. - Section 12: FSC can seek whatever information from banks required for performing functions; prudential returns described in Section 2.3 of the Code. - Supervisory information collection methods: - off-site supervision — requiring information from banks and their auditors, assessing it and discussing it with management; - on-site visits. - Assessment: (Assessment label in source: Compliant) - Comments: (none provided in the source) *Detailed Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision.* ### Section 12 of the BA states that the FSC may request such information from a banking ### Section 12 of the BA and related supervisory, legal, and licensing provisions ### FSC information powers and enforcement under Section 12 - Section 12 of the BA: the FSC may request such information from a banking institution or former banking institution or a manager or past manager of a banking institution that it may reasonably require for the performance of its functions. - The FSC may issue directions to any banking institution to secure that effect is given to any such request. - Assessment: Largely compliant. - Comment: The range of sanctions available to the FSC is to be augmented by the power to impose penalties. - Comment: Consideration during the past year was given to developing the FSC’s powers to appoint managers or administrators to problem license holders; it was agreed such powers would be desirable and necessary legislative changes will be considered further. - Comment: The need to obtain prior treasury agreement for the Regulatory Codes developed by the FSC might represent an impediment to the development of necessary secondary legislation. Tynwald must approve the Regulatory Codes of the FSC after they are issued; this has not caused problems in practice but the rigidity and workload of Tynwald procedures could at some point hamper efficiency and required speed. - The FSC must apply to the High Court for the appointment of a temporary manager or administrator. ### Proactive identification of illegal financial activities and emergency remedies - The FSC has specific powers to enter premises and seize relevant documents where it has reasonable grounds to suspect illegal activity. - The FSC can apply to the High Court for the appointment of a provisional liquidator, deemed official receiver, enabling rapid Court-approved action to protect the interests of investors or depositors. ### Legal protection and indemnity for supervisors (Principle 1(5)) - The FSC and its officers have statutory immunity from suit under Section 15A of the Investment Business Act 1991 and Section 19 of the Corporate Service Providers Act 2000; they are protected from liability in damages for, or in respect of, acts done or omitted in conducting their statutory supervisory functions unless shown to be acting in bad faith. - Officers are indemnified for acts or omissions under Schedule 2 (paragraph 11) to the Statutory Boards Act 1987, provided that they acted reasonably and honestly. - The FSC has the discretion to indemnify officers for any damages or costs which they have been ordered to pay, provided it is satisfied that the officers honestly believed they had acted within the scope of their functions. - Assessment: Compliant. ### Information sharing and confidentiality (Principle 1(6)) - Section 24 of the Financial Supervision Act 1988 permits disclosure by the FSC of confidential information to other governmental agencies within the Isle of Man and to external agencies with statutory functions corresponding to the FSC, provided the disclosure is for the purpose of enabling those bodies to exercise their statutory functions. - The legal provisions are drafted so that disclosure by the FSC is permissive and not mandatory. - When releasing information under Section 24, the FSC specifies that the information must remain confidential to the receiving agency and must not be passed on without the FSC’s written consent. - The FSC has signed and is in the process of completing a number of MOUs with foreign regulators. - The disclosure of information about the affairs of individual customers is prohibited except in very limited circumstances (Section 24(6)); the FSC is proposing to government that this provision be dispensed with. - Assessment: Compliant. ### Permissible activities and use of the word “bank” (Principle 2) - “Banking Business” is defined in Section 1 of the BA; this definition primarily covers the taking of deposits (from the public). - Section 2 makes it an offence to conduct such business without a banking license. - Section 9 makes it an offence to use the word “bank” without the written consent of the FSC. - Activities other than taking deposits or receipt and payment of checks are not explicitly specified in legislation, nor are they specified in the banking license. - The FSC’s approach has been to give a letter of consent to a bank for the conduct of additional activities, in accordance with the requirements of the Code. - Assessment: Largely compliant. - Comment: Expanding the definition of “banking business” to include other activities and altering banking licenses to state more specifically the activities that holders are allowed to conduct will be considered in a future review of the banking law, possibly in conjunction with the proposal to have a composite financial services law. The requirement to have a banking license will still be based on deposit taking. - Comment: Given the currently limited range of activities conducted by banks, the absence of full transparency through a listing of allowable activities is not considered material. ### Licensing criteria and supervisory assessment (Principle 3) - The FSC’s policy for banking license applicants is outlined in the Regulatory Guide to Banking Business in the Isle of Man; policy favors applications from banks incorporated outside the Isle of Man that are licensed in their principal place of business in a jurisdiction that, in the FSC’s judgment, exercises proper licensing and supervision and subscribes to the Core Principles for Effective Banking Supervision. - Basic licensing criteria are set out in Section 5 of the BA; the FSC cannot grant a license unless these criteria are met. - Section 4(2) of the Act allows the FSC to prescribe the form of a license application and to request whatever specific information and documentation it requires from the applicant; the FSC has a formal application form setting out detailed information required. - The Code details general regulatory requirements, including minimum capital requirements (see also CP 6 para1). - The FSC is required to examine operating plans, internal controls and proforma accounts of proposed banks. - A “fit-and-proper” assessment is applied to the applicant, its shareholders, directors and senior management; fit and proper is both an initial test at licensing and a continuing test. - Section 5 of the Code requires disclosure of all shareholders holding more than 5 percent of the applicant’s shares. - As a matter of policy the FSC prefers Isle of Man banks to be directly held, wholly owned subsidiaries of banks to facilitate parental oversight; intermediate holding companies that are not banks may be permitted but must not complicate communication and control or dilute responsibility. - Where an intermediate holding company is interposed, the FSC requires that the intermediate holding company has positive free resources and that the parent bank provides a Letter of Comfort in terms acceptable to the FSC. - Positive free resources requirement: obliges a holding company to have sufficient equity (including convertible unsecured loan stock) to fund its assets and contingent liabilities without recourse to third parties for new resources; this is an ongoing minimum requirement. - If the intermediate holding company is itself a bank, FSC requirements are influenced by the requirements of the home supervisor of that bank. - If the intermediate holding company is owned directly by a bank that has provided a satisfactory Letter of Comfort, the FSC may relax financing-of-equity requirements for the subsidiary provided it is satisfied there is no danger to the Isle of Man subsidiary from third party creditors. *Source: IMF report cr03367.* ### Section 7 of the BA allows the FSC to revoke a license should it subsequently emerge that the ### cr03367 - Section 7 of the BA allows the FSC to revoke a license should it subsequently emerge that the applicant provided false information. ### Licensing and ongoing supervision - Section 7 of the Banking Act (BA) allows the Financial Supervision Commission (the FSC) to revoke a license if it subsequently emerges that the applicant provided false information. - The FSC consults with the home supervisor where an applicant is a foreign bank proposing to establish a branch or subsidiary in the Isle of Man. - Following issue of a license, the FSC’s on-site and off-site procedures ensure continuous compliance with licensing criteria and other supervisory requirements. - Assessment: Compliant ### Principle 4 — Ownership - Requirement: Prior written consent of the FSC for transfers of voting shares of 5 percent or more of a licensed bank’s total voting shares, and for lesser transfers that would have a material effect on beneficial ownership or control (Section 5 of the Code). - Disclosure: Ultimate beneficial ownership of all shares in excess of 5 percent of the issued capital must be disclosed to the FSC (Section 5.2 of the Code). - Quoted banks must inform the FSC in writing within seven days of discovery of any transfer of 5 percent or more of voting shares or any lesser transfer materially affecting beneficial control (Section 5.2 of the Code). - The FSC must be informed in writing not less than 21 days in advance of any proposed change in the ownership structure between it and its ultimate parent company (Section 5.2 of the Code). - Guidance note: Changes to intermediate companies in the ownership chain that are material must be notified; such changes are covered by the annual certificate from senior bank management. - Connected parties are treated as one shareholder for control assessments. - In licensing assessments the FSC must be satisfied owners are “fit and proper” and that ownership is appropriate and suitable, including absence of conflicts with other business interests and owners’ capacity and moral responsibility to support the bank. - Accuracy checks: FSC checks information on significant shareholders against annual financial statements of license holders and their parents. The FSC does not receive a periodic return on controllers/significant shareholders. - Annual review: Supervision division verifies with the Company Registrar that there have been no material changes in ownership. - Assessment: Compliant ### Principle 5 — Investment Criteria - Authority: Banking supervisors must be able to establish criteria for reviewing major acquisitions or investments and ensure corporate affiliations/structures do not expose banks to undue risks or hinder supervision. - Assessment: Compliant ### Principle 6 — Capital Adequacy - Minimums: Section 2 of the Code specifies a minimum absolute paid-up capital of £1 million for all banks. - Risk asset ratio: All banks must maintain a minimum risk asset ratio of not less than 10% (Section 2.2 of the Code). - Methodology: Components of capital and methodology are generally in accordance with the Basel Capital Accord (Section 2.2 of the Code); risk weightings apply to on- and off-balance-sheet risks; interest rate and foreign exchange mismatches are included. - Individual settings: Risk asset ratios are set individually and may be higher than the 10% minimum; required ratios vary between 10 and 18 %. - Scale: Out of a total of thirty-four bank subsidiaries, eight have to comply with a capital ratio that exceeds the 10 % minimum. - Trigger ratios: FSC employs "trigger ratios" set higher than required minima to signal approaching need for more capital; banks must notify the FSC immediately if they breach minimum risk asset ratio (Code Section 11.1). - Calculation: Required risk asset ratios must be maintained on a solo and, where applicable, on a consolidated basis. - Supervisory attention: FSC pays close attention to reported earnings and calculates ratios to measure profitability and strength/source of earnings. - Dividends: FSC has no explicit power to suspend payments to shareholders but can issue a direction to suspend under Section 11 of the BA; if dividend payment results in breach of risk asset ratio, FSC can require immediate rectification. - Reporting: Banks submit detailed quarterly prudential returns to the FSC. - Assessment: Compliant ### Principle 7 — Credit Policies - Requirement: Section 8 of the Code and Appendix D require banks to have internal controls, policies and procedures for assessment/granting of loans and ongoing management of credit risks; Appendix D Paragraph 4 requires policies for evaluating asset quality and adequacy of loan-loss provisions/reserves. - Supervisory practice: Assessment of compliance may be covered in future on-site programs under Section 13 of the Act. Consideration will be given to more prescriptive requirements (e.g., quarterly reporting of loan classifications and arrears, prescribed levels of specific provisions). - Current approach: FSC’s requirements are general rather than detailed; reliance in part on group policies of larger U.K. entities. - Resource focus: Priority given to AML issues has limited on-site assessment of credit policy areas; CPs 7–10 treated as inter-linked and review of the Code was underway but not completed at mission time. - Independent evaluation: FSC does not review scope/quality of external auditors’ work to ensure consistent independent evaluation of credit risk policies, credit quality and provisioning. - On-site program: No formal ongoing program for independent assessment of banks’ credit risk policies, practices and procedures; between November 2000 and December 2001 three focused reviews were carried out; Reporting Accountants were used once to confirm compliance with a bank’s own credit risk policies. - Guidance: No industry-wide guidance on generally accepted credit risk policies and procedures had been provided; FSC recognized the gap and planned to address it in Code review. - Recommendation: Consider reinforcing international credit risk “best practices” by distributing Basel Committee guidance on credit risk best practices with a covering letter indicating FSC support and intention to seek compliance during on-site visits. - Addendum actions: FSC developed a letter to industry emphasizing sound credit risk practices and referenced Basel Committee guidance; FSC plans to develop industry-specific guidance and extend on-site visitation program to include in-depth assessments where appropriate. - Assessment: Largely compliant ### Principle 8 — Loan Evaluation and Loan-Loss Provisioning - Observation: FSC had not carried out a single independent review of asset quality in a bank nor appointed outside professionals to do so. - Context: At end of August 2002, total loans and advances represented only 18.6 percent of total assets. - Home supervision reliance: FSC is home supervisor for only two independent banks (one with a restricted license) and has relied on home supervisors for loan evaluation and provisioning assessments for subsidiaries. - Audit reliance: FSC places additional comfort on “true and fair” opinions by external auditors on annual audited financial statements. - On-site program: No independent assessment of credit quality and provisioning in on-site visitation program; program primarily focused on AML/KYC over past three years. - Reporting Accountants: Power exists to employ Reporting Accountants; one engagement confirmed application of a bank’s provisioning policies but did not opine on overall asset quality or adequacy of provisioning. - Guidance gap: No specific guidance on identification/recording of impaired assets or valuation of collateral to net realizable value. - Supervisory development recommendations: - Ensure FSC staff have sufficient knowledge and understanding of credit risk assessment processes. - Establish an FSC credit risk rating system for consistent application and to assess integrity of licensees’ rating systems. - Select loan samples to confirm quality/application of bank credit policies, administration, trend identification, and reporting of out-of-order conditions. - Use independent credit reviews to assess processes for identifying deteriorating situations to ensure timely provisioning for both known loss and deteriorating performing portfolios. - Consider capacity-building for staff to perform specialized reviews. - Addendum: FSC requested banks provide by December 31, 2002, their documented Credit, Loan Grading and Provisioning Policy Statement(s) for review with feedback by March 31, 2003; action reflected in assessment. - Assessment: Largely compliant ### Principle 9 — Large Exposure Limits - Management information: Appendix D Paragraph 3 requires banks have MIS to manage exposures and identify concentrations. - Definition: A “large exposure” is an exposure of more than 10 percent of the bank’s adjusted capital base. - Reporting/notification: All large exposures must be reported to the FSC; only exposures of more than 25 percent of adjusted capital base require advance notification before granting the facility. - Aggregate limit: Banks may not incur large exposures in aggregate exceeding 800 percent of the adjusted capital base. - Reporting frequency: Large exposures are reported as part of quarterly returns. - Connected counterparties: Exposures to connected counterparties must be aggregated; concessions (e.g., group “take-out” agreements) are granted in limited circumstances. - Supervision: FSC monitors approved concessions and confirms accuracy of regulatory returns; FSC acknowledges need to formalize policy on concessions, particularly group “take-out” arrangements. - Assessment: Largely compliant ### Principle 10 — Connected Lending - Requirement: Appendix D Paragraph 5 requires lending to related parties on an arm’s-length basis only and MIS to monitor such credits. - Capital treatment: FSC imposes an additional 50 percent weighting for capital adequacy on such credits or may deduct the exposures from a bank’s adjusted capital base. - Reporting: Related party exposures must be reported in the quarterly Banking Return; large exposure limits from Principle 9 also apply to related party transactions. - Practice: Transactions must be nonconcessionary, monitored and reported regularly by bank management; banks’ internal procedures in this area have not yet been subject to on-site review. - Consideration: Whether FSC should impose more prescriptive limits on amounts banks may lend to related parties remains open. - External audit: See comments in CP 19 regarding independent reviews by external auditors. - Assessment: Compliant - Comment: Issuance of credit risk guidance would add clarity. ### Principle 11 — Country Risk - Requirement: Appendix D Paragraph 6 requires banks to have policies/procedures for identifying, monitoring and controlling country and transfer risk and for maintaining adequate reserves against such risks. - FSC stance: No detailed requirements issued for provisions against these risks; FSC imposes bank-by-bank limits on exposures to certain countries (e.g., interbank or intercompany placements). - Audit reliance: FSC believes adequacy/recoverability of provisions would be assessed by external auditors in the annual audit. - Exposure profile: Banks are not exposed to country and transfer risk to any significant extent; FSC does not consider more prescriptive requirements necessary at present. - Case-by-case: FSC addresses issues through conditions or directions where needed. - Assessment: Compliant ### Principle 12 — Market Risks - Requirement: Appendix D Paragraph 7 requires banks to have systems to measure, monitor and control market risks. - FSC practice: FSC measures, monitors and discusses banks’ exposure to interest rate and exchange rate movements as part of supervision and prudential interviews. - Reporting/arrangements: Different arrangements exist for Isle of Man incorporated banks and branches of foreign banks, but both participate in the same reporting system. - Responsibility: FSC views primary responsibility for foreign currency exposure control as resting with bank management; FSC requires knowledge of management methods, extent of exposure, relation to other risks and to capital. - Assessment: (No explicit assessment line provided in content for Principle 12) *Source: Financial Supervision Commission assessments and Code provisions as described in the cited IMF mission material.* ### Section 3.2 of the Code requires banks to submit to the FSC their written policies (approved ### cr03367 - Section 3.2 of the Code requires banks to submit to the FSC their written policies (approved ### Liquidity, interest rate and foreign exchange (FX) risk policies and reporting - The Code requires banks to submit to the FSC their written policies (approved by their boards) on liquidity, interest rate and foreign exchange risk, including limits for overall currency positions against reporting currency position and for individual currencies. - The FX operations of banks must be covered by appropriate systems and controls. - The Regulatory Code requires banks to have internal controls adequate for the nature and scale of their operations; systems of internal control procedures and management information systems are required to be documented and approved by the board of directors (see CP14). - The Code’s requirements must be covered by an annual compliance certificate from each bank’s “4 eyes” (see CP14). - External auditors are required to provide annually reasonable assurance as to the accuracy of a regulatory return. - Interest rate and foreign exchange mismatch positions are reported in the quarterly Banking Return and attract risk weightings for capital adequacy purposes. - The FSC requires banks’ net open FX positions to be added to their risk-weighted assets when their risk-asset ratios are calculated. - This results in capital for FX risk in line with a bank’s risk-asset ratio; the amount will be between 10 and 18 percent of its net open FX position depending on the required risk-asset ratio. - Only four banks demonstrate FX-exposures and interest rate exposures, which combined, exceeded 1 percent of their respective capital requirements (from 3.40 percent to 1.33 percent)]. - Assessment: Compliant ### Liquidity management practices, supervisory approach, and limits - Banks incorporated in the Isle of Man must provide the FSC a board-approved written statement detailing policies for liquidity management. - Policy statements must stipulate cumulative maximum mismatches for each time band detailed on Form SR-3 of the Banking returns and for cumulative time bands (Section 3.1 of the Code). - Statements must include a bank’s internal limits for funds placed with other banks including those in the same banking group. - Banks incorporated outside the Isle of Man must provide a written statement detailing liquidity policy for their branch(es) in the Isle of Man. - The FSC focuses on mismatch between maturing liabilities and assets in various time bands, with primary attention to short maturities, particularly time bands up to one month. - The FSC has not established general overall limits for mismatching; limits are set case by case, though it may seek industry-wide limits if established in major financial centers. - In assessing mismatch, the FSC credits marketable assets only if they are marketable in adverse market conditions at a price not far removed from book value (typically assets central banks deal in regularly). - The FSC examines inter-bank limits and may impose placement limits on individual banks, including limits on placements with parent banks. - Standby and other borrowing facilities are allowed in liquidity assessments only on the assumption they are available in fair weather markets, except where provided by a parent bank whose standing and financial condition satisfy the FSC. - The FSC’s desk-based analysis of liquidity management is part of off-site supervision and supplemented by discussion with management based on returns. - The FSC promotes a “stand alone” supervisory policy and considers license holders should create independent liquidity by placing funds outside their own group, but has not introduced an industry-wide requirement to create independent liquidity. - The FSC identifies reputation risk (other than limited market risk) as the primary risk and undertook focused AML/KYC visitations during the past three years to assess exposure. ### Other risks (Principle 13) - Banking supervisors must ensure banks have comprehensive risk management processes (including board and senior management oversight) to identify, measure, monitor, and control all material risks and hold capital where appropriate. - Description refers to comments under CP12 addressing liquidity, interest rate and foreign exchange risk. - A liquidity gap report is required as part of the quarterly prudential returns. - Section 9.2 of the Code requires banks to seek the prior consent of the FSC before making any addition or material change to services or products (including unregulated services or products); the FSC considers banks’ ability to introduce and sustain new products or services as part of approval. - Assessment: Largely compliant - Comments: Introduction of a more in-depth visitation program will allow the FSC to confirm existence and application of comprehensive risk management policies and procedures. ### Internal control and audit (Principle 14) - Paragraph 2 of Appendix D of the Code requires banks to have internal controls adequate for the nature and scale of their businesses. - Section 8.4 of the Code requires internal control systems, procedures and management information to be documented, board-approved, and in accordance with the Code and relevant legislation. - Section 8 requires day-to-day operations to be effectively controlled by at least two individuals (the “four-eye” principle) and at least two directors to be Isle of Man resident with at least one being non-executive. - The FSC requires prior notification of appointments of directors and senior officers to assess fitness and properness; appointment of certain officers (e.g., compliance officers and money laundering reporting officers) is obligatory. - Banks incorporated in the Isle of Man must comply with Companies Acts; the FSC receives an annual compliance certificate from each bank’s “4-eyes” confirming compliance with the Code. - The FSC receives external auditors’ management letters and external auditors/reporting accountants have an obligation under Section 20 of the Act to report matters coming to their attention relevant to the FSC’s statutory functions. - The FSC reviews Internal Audit reports and meets with Internal Auditors where appropriate. - A guidance note on directors’ responsibilities and duties under Isle of Man law was issued by the FSC in August 2000, including a definition of “Good Corporate Governance.” - The FSC plans to implement a more extensive on-site visitation process during fiscal year 2002–2003. - Assessment: Largely compliant - Comments: Expanded visitation techniques and practices will provide additional supervisory confidence. - Addendum: The FSC developed comprehensive corporate governance guidance entitled, “Corporate Governance for Banking Institutions,” subsequent to the IMF mission; when in force it will articulate accountabilities and fiduciary responsibilities of senior management and the board. The annual certificate by senior management provides acknowledgement of fiduciary responsibilities to the FSC. ### Money laundering (Principle 15) - Section 12.5 of the Code requires banks to have adequate policies and procedures to ensure high ethical standards and to prevent use by criminal elements; banks are required to comply with anti-money laundering legislation. - The main legislation is the Anti-Money Laundering Code 1998. - The FSC issued comprehensive anti-money laundering guidance notes, kept under continuous review; most recent guidance notes were issued in April 2003. - Guidance notes link into the regulatory framework through Section 12.5 of the Code and Section 6.1 of the Financial Supervision (Conduct of Business) Regulatory Code under the Investment Business Act 1991, both stating license-holders shall have adequate policies and procedures in place, including strict “know-your-customer” rules, ensuring compliance with money laundering legislation in force. - The FSC recognizes license-holders may have systems at least equal to the guidance notes and will take this into account when assessing adequacy. - Banks are required to appoint money laundering reporting officers and are obliged by law to report suspicious transactions to a constable (including Isle of Man Constabulary and Isle of Man Customs and Excise). - During the last three years the FSC conducted on-site visits in all banks specifically to test KYC procedures and compliance with anti-money laundering legislation. - Assessment: Compliant ### On-site and off-site supervision (Principle 16) - Off-site supervision centers on the submission of a detailed quarterly Banking Return checked for compliance with prudential supervisory requirements (see CP18). - Follow-up on noncompliance or unusual situations is performed. - Historically, on-site supervision consisted of Annual Review Meetings (ARMs) with senior management to review significant operations; ARMs review off-site supervision results and other supervisory issues. - Over the last three years the FSC prioritized AML/KYC assessments with selected ARM meetings when risk profile warranted. - The FSC formulates an annual on-site program for ARM visits; focus determined by internal risk assessment (CAMELB.COM methodology). Issues from ARMs are monitored off-site. - Assessment: Largely compliant - Comments and observations: - External auditors are required to provide reasonable assurance annually on accuracy of regulatory returns. - Annual certificates from senior management confirming compliance with the Regulatory Code add accountability and possible liability for senior management. - The FSC obtains letters from home supervisors confirming no issues of significant concern that would adversely impact the FSC as a host supervisor. - Progress toward enhanced on- and off-site supervision includes: - Introduction of an organizational structure for a consolidated supervisory approach when fully implemented and staffed; - A risk-rating system for banks applied on an ongoing basis; - A draft on-site methodology paralleling the risk-rating system; - An existing technology platform providing statistical comparisons and unusual-item follow-up; a more advanced platform was undergoing acceptance testing at the time of the mission; - Standardized, focused reporting formats with timely production and provision of reports to boards and parent banks where appropriate. - Focused AML/KYC visitation program was effective; on-site work was well documented. - As a result of focused AML/KYC visits, no full-scope safety-and-soundness visitations were carried out during this period; three visitations focused on credit-risk policies and procedures but did not assess credit quality or reasonableness of loan-loss provisions. - The overall corporate governance regime in banks has yet to be subject to independent assessment during visitations. - The on-site visitation program must be expanded to assess significant risk areas and corporate governance consistent with risk appetite and profile. - The draft on-site methodology is sound but the format will be difficult to implement; the FSC will reformat to support risk-based assessments. - Concerns about achieving departmental objectives for safety-and-soundness visitations due to: - Resource deficit in the Supervision Division despite well-qualified staff; - Dynamic knowledge gap from accelerated industry changes; - Extrapolated person-day requirements for scheduled on- and off-site supervision indicate a significant shortfall. - Additional issues affecting Supervision Division effectiveness: - Industry feedback generally positive about staff quality, but concerns on FSC’s ability to assess new products, services, and required control practices; - No prescribed quality control procedures to support on-site observations and judgments; - Turnover at management level: turnover within the Supervision Division for the year ending March31, 2002 was 17 percent; for the period ending September 30, 2002 turnover was 7 percent. - Recommended additional discipline and actions: - Accelerate finalization of the on-site examination methodology (see CP8 for guidance); - Implement training programs focused on expectations of the enhanced on-site methodology; - Formalize quality control or assurance processes; - Implement a time accounting process to provide quantitative and qualitative data on division time allocation as supervision moves toward fully integrated on- and off-site processes. - General concern: unless the Supervision Division is adequately resourced, progress made may not be sustained. ### Bank management contact (Principle 17) - The FSC has formal contact with senior management through Annual Review Meetings (ARMs) and holds “ad hoc” meetings at the request of either the FSC or the bank to ensure understanding of a bank’s business. - ARMs have focused on results of off-site surveillance activities and other supervisory issues. - Banks are required to notify the FSC of any significant changes in their operations (Section 9.2 and other Code provisions referenced elsewhere). *Source: cr03367 (IMF).* ### 9.2 of the Code). The FSC conducts an ongoing assessment of the quality of a bank’s ### Assessment of Isle of Man Banking Supervision — Off‑Site Supervision to Supervision Over Foreign Banks’ Establishments ### Principle 18 — Off‑Site Supervision - Description: - Section 2.3 of the Code requires banks to submit a quarterly Banking Return (calendar basis) in a format prescribed by the FSC. - Where a bank’s year-end is different from the calendar quarters a bank is required to provide a further return to take into consideration the period to the calendar year-end. - Banking Returns consist of 4 distinct sections—(1) Balance Sheet, (2) Profit and Loss, Related-Party Transactions and Capital, (3) Liquidity, and (4) Foreign Currency and Interest Rate Exposure (off-balance sheet data). - A less detailed reporting regime applies where a subsidiary or associate company exists or a branch operates in the jurisdiction. - Returns must be on a consolidated and solo basis where applicable. - Prudential returns must be signed by a recognized director or senior manager. - Section 12 of the BA permits the FSC to seek information on entities related to the bank. - The Banking Return must be submitted to the FSC no later than 21 calendar days after the quarter-end date. - The reporting process is monitored for timeliness and anomalies; queries are sent and followed up where warranted. - An internal procedures document ensures consistency of assessment over regulatory returns. - An internal data base provides validation checks and is available to the banking team and other selected staff. - An enhanced “Financial Reporting System” (“FRS”) is undergoing acceptance testing; development driven by the Operations Division with Isle of Man government ISD Division involvement and representation from the Banking Team and two other FSC representatives. - FRS is expected to allow expanded institution-specific analysis and more focus on broader trends and systemic issues. - Assessment: Largely Compliant - Comments / Findings: - The relationship and ownership of the technology platform between the FSC and the Isle of Man government ISD Division should be reassessed. - Confirmation should be obtained from the government that the data provided by banks is “ring-fenced” from possible access by other government departments. - A more in-depth, on-site examination process addressing safety and soundness issues would allow the FSC to assess compliance with regulatory requirements and obtain evidential confirmation of the quality of management. ### Principle 19 — Validation of Supervisory Information - Description: - Section 13 of the BA provides for FSC inspections (on-site visits) and the FSC may appoint external officers to conduct such inspections. - Section 21 permits the FSC to appoint “Reporting Accountants” to report on any aspect of a bank’s business. - Banks must have an annual audit by external auditors; Section 20 obliges auditors and Reporting Accountants to report to the FSC if they become aware of facts of material significance. - External auditors must submit a letter to the FSC confirming, to the best of their knowledge and belief, that the banking institution has complied with sections: 4.2(b), 4.5, 4.6, 4.7, 7.1, and 8.4 of the Code. - External auditors have not agreed to provide an opinion relating to section 8.4e—existence and application of a sound process of control. - Auditors must verify the accuracy of supervisory returns with underlying accounting records at least once per year and provide an opinion as to their accuracy. - Isle of Man Society of Chartered Accountants issued an “Explanatory Memorandum” dated February 2000 for auditors and Reporting Accountants. - Assessment: Largely Compliant - Comments / Findings: - The FSC obtains reasonable assurance through independent audit opinions confirming the accuracy of regulatory reports; required letters from external auditors add supervisory value. - Weakness: external auditors are not providing an opinion on internal controls as prescribed in section 8.4 of the Regulatory Code; issue remains under discussion. - The FSC has not implemented a process to monitor the quality of work performed by external auditors to establish if reliance can be placed on it (e.g., review of audit working papers or Reporting Accountant work). - The Isle of Man Society of Chartered Accountants indicated willingness to work with the FSC to develop a methodology for necessary quality assurance. - The FSC has not exercised its power to conduct on-site safety and soundness examinations to any great extent, nor used Reporting Accountants extensively for special purpose or systemic reviews. - Without a more in-depth on-site examination process focused on a bank’s process of control or agreement with external auditors to fulfill section 8.4, an element of supervisory responsibility is not fulfilled. ### Principle 20 — Consolidated Supervision - Description: - Section 12 of the BA empowers the FSC to seek information on activities of any member of a group of which a licensed bank is a part; prudential requirements apply to licensed banks and their subsidiaries (on a consolidated basis). - No impediments exist to direct and indirect supervision of affiliates and subsidiaries of licensed banks. - A bank or banking group must seek FSC consent, under Section 9 of the Code, for any expansion of its activities. - Memoranda of Understanding (MOUs) have been or are being put in place for nine jurisdictions, associated with significant “home” jurisdictions. - On an annual basis the FSC obtains a standardized confirmation from all “home” supervisors covering operations of banks licensed on the Isle of Man; the annual request seeks confirmation that: - the parent bank is compliant with regulatory requirements; - there are no special conditions applied to the parent bank; - the home supervisor has no objections to the continuation of the bank’s operations on the isle of Man; - the home supervisor undertakes consolidated supervision; and, - there are no specific supervisory issues that could impact the bank’s Isle of Man operations. - Almost all banks regulated by the FSC fall within a host supervisory regime. - Assessment: Compliant - Comments: (No additional comments provided in source) ### Principle 21 — Accounting Standards - Description: - Section 4 of the Code places onus on management to ensure accounting records reflect the bank’s financial position. - All banks incorporated in the Isle of Man must draw up annual financial statements in accordance with U.K. Accounting Standards adopted by the United Kingdom Accounting Standards Board or other FSC‑approved standards; must account for disclosure requirements in Appendix B to the Code and any additional FSC requirements. - Annual financial statements must be audited by a member of one of the accounting bodies mentioned in section 14(1)(a) of the Companies Act 1982. - The auditor must have professional indemnity insurance, acceptable to the FSC, of at least £20 million. - Audited accounts must be submitted to the FSC within four months of the end of the accounting period and must be accompanied by a detailed profit and loss account, consolidated accounts if appropriate, and a compliance certificate (Appendix F of the Code). - Branches of banks not incorporated in the Isle of Man must submit a copy of the bank’s audited annual accounts plus a detailed profit and loss account relating to the Isle of Man branch and a compliance certificate within four months of period end. - All banks must submit computerized and hard copy Banking Returns as at the end of each calendar quarter within 21 days of the date to which they relate. - The FSC examines significant differences between figures reported and audited accounts. - License holders must arrange annually for their auditors to verify to accounting books and records a set of quarterly returns chosen by auditors (unless FSC specifies particular returns). - Auditors must report that accounting books and records are properly kept (Section 4.2 of the Code); FSC can inspect or commission reporting accountants under Sections 13 or 21 of the Act. - Section 4.8 of the Code requires banks to file audited financial statements with the Registrar of Companies within four months and make them available at registered offices and branches in the Isle of Man. - No specific BA provision grants the FSC power to revoke appointment of an external auditor; in practice the FSC could request/direct a bank to remove its auditor via Section 11 of the BA and shareholder action. - Under Section 20 of the BA, auditors must report matters of material significance to the FSC; Section 22 enables auditors to communicate with the FSC without breaching confidentiality. - Assessment: Compliant - Comments: (No additional comments provided in source) ### Principle 22 — Remedial Measures - Description: - Section 11 of the BA empowers the FSC to make recommendations to a bank, including suspension or discontinuance of part or all operations; powers extend to banks whose license has been revoked, lapsed or surrendered and to managers and past managers. - Direction-making powers are reinforced by criminal sanctions for failure to comply; directions can render banks and their directors, managers and officers liable to fines and imprisonment. - FSC may attach special conditions to a bank’s license; breach of such conditions is a criminal offence. License conditions are open for public inspection, so the FSC chooses them cautiously. - Section 24 of the BA provides a procedure for a bank aggrieved by directions to apply to the chief secretary for review by the council of ministers; a Review Committee of 3 independent persons is appointed. - The Review Committee may confirm, vary, or revoke the direction; until it decides, the direction remains in force. - FSC would initially seek informal resolution (verbal or written communication) for noncompliance with prudential requirements or depositor‑threatening situations; if not rectified, statutory powers to impose conditions (Section 7(3)), issue recommendations (Section 11(1)), or issue directions (Section 11(2)) may be used. - Failure to comply with enforcement actions entitles the FSC to revoke the license (Section 7(1)/Section 33(2)). - Sections 25 to 29 of the BA cover offences leading to fines, custodial sentences, or revocation of licenses. - Appeals under Section 24 to the council of ministers’ Review Committee are available where license revocation or conditions/directions are imposed. - FSC has no explicit power to suspend payments to shareholders, but could issue a direction under Section 11 to suspend such payments. - If dividend payments result in breach of capital requirement, FSC can require immediate rectification (such breaches reported under Section 11.1 of the Code). - FSC could request/direct removal of an external auditor under Section 11 if necessary (see CP 21). - Assessment: Compliant - Comments / Findings: - Legal provisions enable the FSC to take regulatory action against noncompliant banks; actions can apply to any or all elements of a bank’s business. - The FSC keeps a log of regulatory breaches and action taken. - FSC made a policy decision to introduce fining initially for administrative breaches and to seek legislative amendments to grant this power. - FSC agreed to publicly “name and shame” persons deemed not “fit and proper” under Section 16 of the Act. ### Principle 23 — Globally Consolidated Supervision - Description: - Banks in the Isle of Man have limited overseas operations; legal instruments exist to supervise these operations on a consolidated basis (banking returns on both solo and consolidated basis and, for some operations, individual branch or subsidiary returns). - In the recent past one bank used to have subsidiaries outside the IOM. - Assessment: Compliant - Comments: - The principle currently has no application in the Isle of Man but is being complied with. ### Principle 24 — Host Country Supervision - Description: - As per CP 23, IOM licensed banks presently have no branches or subsidiaries in other jurisdictions so the FSC does not act in the role of home supervisor. - The FSC has signed MOUs with a number of foreign regulators and is in the process of signing others. - Assessment: Compliant - Comments: (No additional comments provided in source) ### Principle 25 — Supervision Over Foreign Banks’ Establishments - Description: - Local branches and subsidiaries of foreign banks licensed in the Isle of Man must comply with the same prudential and regulatory requirements as domestic banks. - Many IOM‑licensed banks are subsidiaries or branches of overseas operations; FSC has demonstrated close cooperation with other regulators. - In licensing a foreign subsidiary or branch the FSC requires prior approval of the home supervisor and needs to be satisfied that the home supervisor exercises global consolidated supervision. - FSC cooperates in exchange of information with home supervisors (formally at least annually); powers to exchange confidential information are in Section 24 of the Financial Supervision Act 1988. - Visits by home supervisors to local subsidiaries and branches for supervisory purposes are permitted and take place. - Home supervisors are advised of regulatory action taken by the FSC in respect of local subsidiaries or branches and copies of on-site inspection reports are sent to home supervisors as a matter of course. - Assessment: Compliant - Comments: (No additional comments provided in source) *Assessment by the IMF of the Isle of Man Financial Supervision Commission (FSC).* ### 1. Objectives, Autonomy, Powers, and Resources ### 1. Objectives, Autonomy, Powers, and Resources ### Supervisory objectives and institutional setup - The document presents a structured assessment of the Isle of Man’s supervisory framework across multiple areas: Objectives; Independence; Legal framework; Enforcement powers; Legal protection; Information sharing; Permissible Activities; Licensing Criteria; Ownership; Investment Criteria; Capital Adequacy; Credit Policies; Loan Evaluation and Loan-Loss Provisioning; Large Exposure Limits; Connected Lending; Country Risk; Market Risks; Other Risks; Internal Control and Audit; Money Laundering; On-Site and Off-Site Supervision; Bank Management Contact; Off-Site Supervision; Validation of Supervisory Information; Consolidated Supervision; Accounting Standards; Remedial Measures; Globally Consolidated Supervision; Host Country Supervision; Supervision Over Foreign Banks’ Establishments. - Core Principle ratings are summarized using the scale: C: Compliant; LC: Largely compliant; MNC: Materially noncompliant; NC: Noncompliant; NA: Not applicable. ### Key weaknesses identified (operational independence and resources) - Government dependence and lack of budgetary autonomy for the supervisory authority were identified as issues to be addressed. - Recommended action: perform an in-depth analysis of the resources required to fulfill supervisory objectives and establish a change plan for the business process of banking supervision. ### Supervision methodology and quality control (CP 16) - Recommended actions: - Prioritize completion of the examination methodology for full scope examinations supplemented by formalized quality control procedures. - Explore increased synergies between the Financial Supervision Commission (FSC) and external auditors. ### Recommended actions (Table 3 highlights) - CP 1(2) - Operational independence and adequate resources: - Address existing framework of government dependence and lack of budgetary autonomy. - Conduct resource requirement analysis and establish a change plan for banking supervision business processes. - CP 16 - On-site and off-site supervision: - Complete examination methodology for full scope examinations and implement formalized quality control procedures. - Explore greater cooperation with external auditors. ### Authorities’ response and actions taken - CP 1(2) – Operational independence and adequate resources: - The Isle of Man treasury is undertaking a full review of the Island’s regulatory bodies, scheduled for completion by June 2004; the review will consider independence, accountability and proposed legislative changes. - CP 16 – On-site and off-site supervision: - The examination methodology for full scope examinations has been completed. - Formalized quality control procedures have been put in place. - Reorganization of the Supervision Division will assign one senior individual responsibility for consistency of approach and quality control for both on-site and off-site supervision. - A validation panel of experienced supervisors will validate/challenge risk assessments and supervisory programs for individual license holders. - Since the IMF visit, two meetings took place with banks’ external auditors (each audit firm represented at partner level) to identify synergies and discuss industry-wide auditing and supervisory issues; formal half-yearly meetings were agreed. - The Commission and auditors agreed to enhance cooperation, consider regular bilateral or trilateral meetings, and to consider greater use of the Reporting Accountants regime. ### AML/CFT assessment methodology and team - The AML/CFT assessment used the October 11, 2002 version of the FATF 40+8 Methodology. - Assessment team composition and visits: - Ian Carrington (MFD) and Ross Delston (Consulting Counsel, LEG) were part of a Fund-led mission to the Isle of Man during October 21–30, 2002. - The independent law enforcement expert was Detective Chief Superintendent Felix McKenna of Ireland’s Criminal Assets Bureau, who visited during February 11–13, 2003. - Washington-based assistance from Stuart Yikona (Technical Assistance Officer, LEG) supported the mission. ### Legal and institutional AML/CFT framework overview - Main institutions in AML/CFT: - Financial Crimes Unit (FCU) — part of Isle of Man Police and serves as the FIU. - Police and Customs and Excise — provide staff to the FCU and investigate criminal activity. - Attorney General’s Chambers — prosecutes ML and FT, defends authorities, and advises Tynwald and government on legal issues. - Financial Supervision Commission (FSC) and Insurance and Pensions Authority (IPA) — financial regulators monitoring compliance of regulated financial institutions. - The Isle of Man has developed legal and institutional measures for confiscation of proceeds of crime, information exchange, and international cooperation, and broad regulation of the financial sector is identified as a strength. - Shortcomings in the legal and institutional framework are noted and detailed elsewhere in the assessment. ### Implementation and supervisory practice - FSC and IPA oversight is generally satisfactory; both regulators employ on-site and off-site surveillance and have visited the majority of licensed institutions in the last two years. - Most institutions visited had comprehensive AML policies and procedures in their documentation. ### Sources of legal and supervisory material reviewed (selected instruments and documents) - Instruments and documents reviewed include (but are not limited to): Anti-Money Laundering Code 1998 as amended (the “Code”); Corporate Service Providers (General Requirements) Regulatory Code 2000 (“CSP Code”); Banking (General Practice) Regulatory Code 1999 (“Banking Code”); Financial Supervision Commission Conduct of Business Regulatory Code (“Conduct of Business Code”); Criminal Justice Act 1990 as amended (“CJA”); Criminal Justice Act 1991 (“CJA2”); Drug Trafficking Act 1996 as amended (“Drug Act”); Banking Act 1998 (“Banking Act”); Insurance Act 1986 (“IA”); Companies Acts 1931-1993 (“Companies Acts”); European Communities (Money Laundering Directive)(Application) Order 2002 (“Directive”); Corporate Service Providers Act 2000 (“CSP Act”); Anti-Money Laundering (Money Service Businesses) Regulations 2002 (“Regulations”); Prevention of Terrorism Act 1990 (“POTA”); Terrorism (United Nations Measures) (Isle of Man) Order 2001 (“UN Order”); other relevant Acts, Orders, Regulations and Guidance referenced in the assessment. - Notes and guidance (e.g., Anti-Money Laundering Guidance Notes; IPA Guidance Notes, and Conduct of Business/CTP guidance) were reviewed but identified as non-mandatory guidance that does not meet the Methodology’s definition of ‘law’ and therefore are not treated as legal requirements in the detailed assessment. ### Criminalization of ML and FT (key findings) - The Isle of Man is a crown dependency; the United Kingdom is responsible for its international affairs and Conventions are extended to the Isle of Man under standard procedures. - Conventions extended to the Isle of Man include: UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna Convention); Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime; European Convention on Mutual Assistance in Criminal Matters 1959 (Strasbourg) — operational between the Isle of Man and specified states. - UN Security Council Resolution 1373 is implemented by Article 10 of the UN Order. - 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. - Money laundering provisions extend to proceeds of criminal conduct and are generally consistent with Vienna and Palermo conventions; ML and FT provisions criminalize financing of terrorism in POTA and the UN Order. - Certain legal drafting gaps and limitations noted: - No specific provision requiring inference of an intentional element from objective factual circumstances in all cases, though Isle of Man legal practice typically ascertains knowledge/suspicion by reference to objective factual circumstances. - Some ML and FT provisions specify reasonable grounds (or cause) for suspicion rather than specific knowledge (examples cited: CJA Section 17(C)(2); Drug Act Section 45(2); POTA Sections 7, 8 and 9; UN Order Articles 4 and 5). - The offence of money laundering extends to persons who have committed the predicate offence and does not require conviction of the predicate offence to establish laundering under certain CJA provisions (Sections 17A, 17B, 17C) and Drug Act provisions (Sections 45–47). - Predicate offences for money laundering include all serious crimes (Section 17A(7) of the CJA) and drug trafficking offences (Sections 45–47 of the Drug Act). - A gap exists in POTA relating to acts of terrorism committed on the island; definition of terrorism in Section 18 of POTA lacks reference to “the use or threat is made for the purpose of advancing a political, religious or ideological cause.” The UN Order contains a broader definition (Article 3(1)) covering acts committed on the island and the “use or threat” element. - Consolidation and implementation: the Anti-Terrorism and Crime Act 2002 was enacted by Tynwald and will consolidate POTA and UN Order provisions but will not be in force until later in 2003. *Source: IMF assessment of the Isle of Man’s supervisory and AML/CFT framework.* ### 4. The offences of money laundering in the CJA (Sections 17A-C), the Drug Act (Sections 45-47) and POTA ### 4. The offences of money laundering in the CJA (Sections 17A-C), the Drug Act (Sections 45-47) and POTA (Sections 7-9) ### Tests of knowledge and scope of offences - Sections 17B(1) and 17C(1) CJA and 45(1) and 47(1) of the Drug Act apply to persons that know that property is the proceeds of criminal conduct (drug trafficking or terrorist financing). - Sections 17C(2) of CJA, 45(2) of the Drug Act and 7 of the POTA require knowledge or reasonable grounds to suspect. - Sections 17A(1) of CJA, 46(1) of the Drug Act and 8 and 9(1) of the POTA are silent on the point but it is a defense to prove that there was no knowledge or suspicion that the arrangement related to proceeds of crime (drug trafficking or terrorist financing). - There is no specific provision regarding inference of an intentional element from objective factual circumstances in all cases; authorities state that under the Isle of Man legal system knowledge, suspicion or grounds for suspicion are normally ascertained by reference to objective factual circumstances. - Acts of Tynwald are construed by reference to Section 3 of the Interpretation Act 1976 under which references to “person” include a body corporate or incorporate; the offences therefore apply to bodies corporate as well as individuals. ### Criminal sanctions - Persons (including corporations) found guilty of engaging in money laundering: - On summary conviction: imprisonment for a term not exceeding six months or a fine not exceeding 5000 pounds. - On conviction on information: imprisonment for a term not exceeding fourteen years or a fine or both (Sections 17A(6), 17B(9) and 17C(4) of the CJA; Section 51(1) of the Drug Act; Section 11(1) of the POTA). - Under the Code, persons may be found liable for offenses that do not involve money laundering (Para. 3(2) of Code): - On summary conviction: same as above. - On information: imprisonment of up to two years and/or an unlimited fine (Section 17F of CJA). - Section 42 of High Court Act 1991: court may by order appoint a receiver where it appears to be just and convenient to do so. ### Resources, structures and activity for ML/FT investigations - Attorney General’s Chambers: - One dedicated legal officer responsible for Mutual Assistance Requests, ML and FT; review underway to recruit an assistant to the dedicated legal officer due to heavy demands. - Ongoing investigations: Isle of Man authorities conducting a number of investigations into suspected Money Laundering involving millions of pounds in assets. - Investigation structure is divided between Police and Customs and Excise. - Isle of Man Police Force: 248 Police Officers. - Customs and Excise Officers: 54 Officers. - Isle of Man Financial Crime Unit (FCU) authorized and current personnel (as indicated): - One Detective Inspector — One Detective Inspector - Three Detective Sergeants — One Detective Sergeant - Nine Detective Constables — Eight Detective Constables - Two Customs and Excise Officers (Part-time) — Two Customs and Excise Officers (Part-time) - One Analyst (Civilian) — One Analyst (Civilian) - One Administration Manager (Civilian) — One Administration Manager (Civilian) - One Administration Assistant (Civilian) — One Administration Assistant (Civilian) - One Accountant (Civilian) — One Accountant (Civilian) - FCU functions include: - Investigation of all serious financial crime involving the finance sector on the island. - Investigation of serious financial crime involving the Isle of Man where jurisdiction is unclear. - Initial investigation into serious financial crime where jurisdiction lies outside the Isle of Man but evidence needs to be secured or obtained on the Island. - Gathering of evidence for other jurisdictions for financial aspects of crime (fraud, drug trafficking, murder, extortion, corruption, theft, or other serious crime). - Gathering evidence under the Drug Trafficking Acts, POTA and Criminal Justice Acts through police-to-police liaison. - Financial profiling of drug traffickers with a view to asset forfeiture. - Provision of expert skills, advice and assistance to uniform colleagues and other specialist police departments. - Provision of awareness training on fraud and money laundering, advice and assistance to the financial sector. - Acting as the reception point for “Financial Disclosures” reported by the finance sector via statutory obligations under Money Laundering legislation; dissemination of disclosure information. - Undertaking international police investigations of a financial nature routed via Interpol. - Provision of computer data recovery service, technical advice and guidance in relation to computer crime. - Assisting Senior Investigating Officers in serious criminal investigations by undertaking appropriate financial enquiries. - Observations on FCU capacity and structure: - The FCU’s broad functions lessen its ability to focus on ML/FT; functions are over-broad and over-burden the FCU. - Workload has increased steadily over the last few years. - Customs and Excise resources dedicated to ML/FT: six investigators and two intelligence officers working part-time with the FCU. - Recommendation: streamline FCU set-up and structure so a particular number of personnel are wholly and fully engaged on ML/FT investigations. ### Training and international cooperation - FCU has a budget specifically for training personnel. - Training undertaken by members includes: - National Terrorist Financial Investigation Course (London Metropolitan Police). - Development Course for Financial Investigators (London Metropolitan Police). - Assets Forfeiture/Money Laundering Course (U.S. Drug Enforcement Administration). - Customs and Excise Officers receive financial investigation and intelligence training from HM Customs and Excise. - Ongoing in-house training and external seminars on constructive trust, trust funds, banking and on-line gaming. - Prosecutorial and judicial authorities attend seminars and conferences in the Isle of Man and the United Kingdom on freezing, seizing and confiscation of assets. - Isle of Man authorities regularly participate in joint investigations with other countries to investigate and prosecute ML/FT. ### Analysis of effectiveness (ML/FT criminalization) - Framework for criminalizing money laundering: generally adequate. - Gap identified for criminalizing financing of terrorism: - Limited scope of terrorist activities covered by POTA. - Inadequate definition of financing of terrorism in POTA. - Gap expected to be remedied once the Anti-Terrorism and Crime Act is implemented. - Need to implement legislation to allow the UN Convention for the Suppression of the Financing of Terrorism and the UN Convention Against Transnational Organized Crime (Palermo Convention) to be extended to the Isle of Man. ### Recommendations and comments (ML/FT criminalization) - Implement or adopt the Anti-Terrorism and Crime Act so 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. - Increase staffing level in the FCU to its authorized strength. - Re-evaluate the organizational structure/functions of the FCU so resources are permanently dedicated to ML/FT operations/investigations. - Pursue appointment of an assistant to the dedicated legal officer in the Attorney General’s Chambers. - Implications for FATF compliance: Full compliance with FATF Recommendations 1, 4, 5, SR I, SR II will be achieved when implementing legislation for the UN Convention for the Suppression of the Financing of Terrorism is adopted and implemented and the Convention is extended to the Isle of Man. --- ### II — Confiscation of proceeds of crime or property used to finance terrorism (criteria 7–16) ### Legal framework for confiscation and forfeiture - Laws provide for confiscation of assets upon conviction: - Proceeds of criminal conduct: Sections 1 and 2 of the CJA; Section 2 of Drug Act; Section 11 and Schedule 4 of the POTA. - Forfeiture of instrumentalities of crime: Section 16 of the Criminal Law Act 1981; Section 32 of the CJA. - Attorney General may apply for a Court order to restrain a person from dealing with realizable property held by a defendant; police seize property to prevent its removal from the Isle of Man (Section 7(1), 7(5) and 7(10) of the CJA). Similar provisions: Section 26 of the Drug Act and Paragraph 3, Schedule 4 of the POTA. - Seizure and forfeiture provisions for imported or exported cash: - Sections 23A and 23B of the CJA (crime proceeds cash). - Sections 39–44 of the Drug Act (drug proceeds cash). - Anti-Terrorism and Crime Bill (Sec.17) will provide for seizure and forfeiture of terrorist cash in the Isle of Man whether or not being imported or exported. - Article 6 of the UN Order enables terrorist funds to be frozen on suspicion. Sections 8 and 11 and Schedule 4 of POTA enable confiscation of funds of proscribed terrorist organizations. - For all crimes and drug crimes, laws provide for payment of a sum corresponding in value to the benefit to the defendant and are not limited to specific property (Section 1 of CJA; Sections 2 and 4 of Drug Act). - No direct equivalent in POTA: Section 11 of POTA limited to forfeiture of money or property in possession of a person convicted of an offence under sections 7–9 of POTA. - Civil forfeiture currently applies in respect of: - Import and export of drug proceeds cash (Section 39–44 of the Drug Act). - Crime proceeds cash (Section 23A-23F of the CJA). ### Freezing injunctions and court powers - Isle of Man High Court may grant freezing injunctions (“Mareva Order”) to prevent defendants removing assets from jurisdiction or dealing with assets within jurisdiction; applications normally ex parte. - Section 56A of the High Court Act 1991 (as amended by the Civil Jurisdiction Act 2001) allows such an order pending a civil trial or pending determination of an appeal where High Court has jurisdiction or where civil proceedings are to be or have been commenced in a country or territory outside the Isle of Man. ### Information-gathering powers - Police and customs officers authorized to obtain information about money laundering, including power to identify and trace property suspected of being proceeds of crime or used for FT. - Sections 52-54A of the Drug Act provide powers to obtain information about drug trafficking (includes money laundering — Sections 1(2) and (3)(f)). These provisions also have effect in respect of all crimes money laundering under section 17J of the CJA. - Paragraph 2 of Schedule 7 of the POTA deals with orders for production of material for purposes of terrorist investigations (defined in section 15(1)), which includes FT offences under sections 7–9 of the POTA. - Article 10 of the UN Order confers power on the Isle of Man treasury to obtain information and documents to implement the Order or prevent evasion; failure to comply with a treasury request for information is an offence. ### Safeguards for third parties and priority obligations - Safeguards for third parties affected by restraint orders: section 7(7) of CJA; section 26(10) of Drug Act; paragraph 3(4) of Schedule 4 to the POTA. - Right to apply for release of cash detained under import/export provisions: section 39(8) of the Drug Act; section 23A(8) of the CJA. - Priority obligations (e.g. mortgage) to be deducted from value of realizable property for confiscation: section 6(1) of the Drug Act. Inherent in section 6(2) that property acquired by a third party for full payment is not available for confiscation. Equivalent provisions in CJA: sections 4(1) and (3). - High Court has inherent power to hear and determine competing claims in respect of property and to make appropriate orders (e.g. return of property, damages) if property not frozen, seized or confiscated strictly in accordance with statutory powers. ### Contracts and illegality - No explicit authority to void contracts or render them unenforceable where parties knew or should have known that contract would prejudice recovery of financial claims under AML/CFT laws; authorities indicate a contract to achieve an illegal purpose would be void under Isle of Man law. ### Statistics, training and freezing powers - Isle of Man authorities record all statistics relating to amounts of property frozen, seized and confiscated relating to ML, predicate offences and FT. - FCU has a training budget; members have attended multiple relevant international courses and in-house/external training. - Laws provide for freezing of funds or other property of terrorists, those who finance terrorism and terrorist organizations: Article 6 of the UN Order; Article 4 Iraq (United Nations Sanctions) (Isle of Man) Order 2000; Article 8 of Al-Qa'ida and Taliban (United Nations Measures) (Isle of Man) Order 2002. - Authorities keep statistics of property frozen relating to FT and the number of individuals or identities examined by the evaluator. - Authorities have power to identify and freeze property of suspected terrorists and financiers whose names may not appear on UN Security Council lists; UN Order provides power to obtain information under Article 10 and to freeze funds under Article 6. ### Seized Assets Fund and asset sharing - Seized Assets Fund (SAF) administered by the Isle of Man treasury exists to deposit confiscated property relating to all crimes. Assets used by Government for AML and CFT initiatives in law enforcement, health, education or other appropriate purposes. - Statutory authority exists to provide for asset sharing both prior to (as part of plea bargains after a seizure) and following confiscation. - Attorney General handles letters of request seeking repatriation and sharing of assets; voluntary repatriation/sharing is used where possible. - Assets confiscated that are the proceeds of drugs offences: paid into a seized assets fund administered administratively but may be shared and used for law enforcement. - Assets confiscated that are not proceeds of drugs offences: fall to General Revenue. - Section 2 of the Finance Act 1958 allows moneys to be paid out of General Revenue where voted or appropriated by resolution of Tynwald with the concurrence of the treasury for Isle of Man Government purposes. - Isle of Man is seeking extension of the Treaty between the Government of the United Kingdom and the Government of the United States on Mutual Legal Assistance in Criminal Matters with Exchange of Notes, Treaty Series No. 14 (1997); Article 16 of the Treaty addresses disposition and transfer of forfeited assets or proceeds of sale. ### Analysis of effectiveness (confiscation) - Framework for confiscation of proceeds of crime or property used to finance terrorism: generally adequate. - Enhancements identified: - Legislation should provide for forfeiture of property of corresponding value in connection with terrorist activities where property subject to confiscation is not available. - Authority to share assets other than drug assets with other jurisdictions should be explicitly provided. - Limited scope for civil forfeiture noted; consideration should be given to adoption of a civil forfeiture law for crimes other than FT. ### Recommendations and comments (confiscation) - Amend relevant legislation to provide for forfeiture of property of corresponding value in connection with terrorist activities in the event subject property is not available. - Consider passage of a law establishing an asset forfeiture fund into which all or a portion of confiscated property will be deposited and used for management of seized and confiscated property and for law enforcement, health, education or other appropriate purposes. - Amend relevant laws to explicitly provide for authority to share assets other than drug assets with other jurisdictions along the lines of Section 63(4) of the Drug Act. - Consider adoption of a civil forfeiture law for crimes other than FT. - Implications for FATF compliance: Full compliance with FATF Recommendations 7, 38, SR III will be achieved when laws allow for the forfeiture of property of corresponding value. *International Monetary Fund — cr03367* ### 17. The Isle of Man FCU is the FIU. However, under the relevant Acts and the Code, police and customs officers ### 17. The Isle of Man FCU is the FIU. However, under the relevant Acts and the Code, police and customs officers ### Legal framework for STRs and guidance - Reporting parties are required by law to make disclosures to “a constable,” which includes a Customs Officer for the purposes of the relevant laws (Sec. 17J, CJA and Sec. 58, Drug Act, although not under POTA). - There is no reference in the relevant Acts and the Code to the FCU as the mandatory recipient of STRs; in practice all disclosures are made to the FCU though there is no law requiring this. - The FSC and the IPA have issued guidelines for the identification of unusual transactions in the form of the Notes and the CTP. - The authority of the FSC to issue the Notes is unclear. - The IPA’s authority to issue the CTP is pursuant to section 24A of the IA, a provision not designed for that purpose (section 24A provides that the IPA may publish information or give advice to insurance licensees). - An Insurance (Amendment) Bill has been provided by the authorities; enactment would explicitly provide for authority to issue binding guidance notes with explicit sanctions for noncompliance. - The Notes and the CTP provide guidelines for: - identification of complex and unusual transactions or patterns of transactions, and suspicious patterns of behavior (Notes Sec. 6.01; CTP Sec. 8.4). - There is no legal provision specifying the manner in which STRs are to be made. - Disclosure may be made on the Isle of Man Disclosure Form (Notes Section 6.04 and Appendix H; CTP Section 8.1 and Appendix 4), but there is no legal requirement to use that form. - The Notes and the CTP do not apply to all parties required to file STRs by the relevant laws. ### FCU powers, information access, and inter-agency information flows - The FCU is not authorized to obtain from reporting parties, directly or through another competent authority, additional documentation needed to assist its analysis of financial transactions. - There exist laws and procedures for production of records, searches, seizure and obtaining evidence for investigations and criminal proceedings (Sections 11–25 of the PPP Act; Sections 17J, 24 and 25 of the CJA; Section 15 of the POTA; Sections 52 and 53 of the Drug Act). - Under the FSA, the FSC may disclose information “to any constable for the purpose of enabling or assisting the Isle of Man Constabulary to discharge its functions.” (Section 24(1)(aa)) — allowing the FSC to provide information in its possession to the FCU (principally staffed by constables). - For insurance business, an ‘Agreement on the dissemination of information from suspicious transaction reports to the Insurance and Pensions Authority’ between the FCU and the IPA permits: - FCU requests to be passed to the IPA; once information obtained from the licensee (Sections 21 and 22 of the IA), such information may be passed to the FCU (Section 24 of the IA). - The IA Bill will expand IPA disclosure powers to include: - “any criminal proceedings on the island or elsewhere (new Section 24(1)(a))”; - “facilitating a determination of whether any such investigation should be initiated (new Section 24(1)(c))”; - “any criminal investigation (new Section 24(1)(d))”. - The Customs Amendment Act creates legal gateways allowing exchange of information between Customs and other Isle of Man Government bodies (Income Tax, DHSS, FSC, IPA, Gambling Control, Office of Fair Trading and the Police) as it relates to the discharge of their relevant functions. - FCU access to government databases: - Full direct access to the companies’ registry and vehicle licensing database of the Isle of Man government main frame and land records on an expedited basis. - No legal authority for access to other government databases, such as social security; information may be made available on an expedited basis if Section 27 of the Data Protection Act 1986 requirements are fulfilled (request for the prevention or detection of crime). - Customs officers attached to the FCU have access from Custom House to certain information from the VAT Office rates and voters roll and Income Tax and direct access to intelligence and accounting databases run by the United Kingdom's HM Customs and Excise. - The FCU is not authorized to order sanctions or penalties. - The FSC and the IPA have broad authority to order administrative sanctions (Section 7 of the Banking Act; Section 4 of the CSP Act; Sections 6 and 9 of the IA; Section 3 of the IBA). - Failure to report could lead to a breach of Paragraph 12 of the Code. - A financial institution that fails to report risks committing a money laundering offence under CJA or Drug Act if there are reasonable grounds for suspecting ML and the institution undertakes transactions. - The FCU is not a body created by statute; a police or customs officer is authorized to disseminate financial information and intelligence to domestic authorities for investigation (Section 17H of the CJA). ### International and domestic information sharing - Information sharing and intelligence dissemination: - Authorized under Section 17I(1) of the CJA: FCU may pass information off the Island of its own volition for prevention or detection of crime, or for institution of or otherwise in connection with criminal proceedings. - FCU has negotiated memoranda of understanding to facilitate exchange of information, including with the United Kingdom, and is in negotiations with Australia, Belgium, Republic of Ireland and Thailand. - Consent of the chief minister under Section 17I(2) of the CJA is required where information is for purposes other than investigation and prosecution of crime. - Restrictions on use of information disclosed by the police to domestic authorities (Section 17G(1) of the CJA). - FCU may impose conditions on use of information passed to foreign counterpart FIUs under Section 17I(1) of the CJA; in practice conditions align with those accepted by the Egmont Group as part of the Egmont generic MOU. ### STR statistics, operational structure, and practices - STRs received by the Isle of Man FCU and other competent authorities (statistics recorded include number analyzed and disseminated): - 1998: 1,021 - 1999: 1,214 - 2000: 1,012 - 2001: 1,642 - 2002: 1,836 - Records are kept relating to STRs resulting in investigation, prosecution or convictions. - To date there are no ML convictions in the Isle of Man, though 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 from foreign and domestic authorities and of responses provided. - The Isle of Man spontaneously refers all STRs to NCIS and, after preliminary evaluation, refers STRs to competent authorities domestically and abroad. - It is normal practice, though not legally required, for financial institutions to make STRs on large currency transactions; statistics are kept on such activity. Large cash transactions are generally unusual and therefore raise suspicion. - FCU leadership, staffing, and resources: - Officer in charge: Detective Inspector, appointed by the Chief Constable and answerable to him. - FCU operates with personnel dedicated to Intelligence (statistics, analysis and dissemination), International Cooperation team and an Investigative Team specializing in Fraud, ML and FT investigations. - Investigations into ML and FT are also carried out by an Isle of Man Customs and Excise Team; close relationship between FCU and Customs and Excise avoids conflict in investigations. - The FCU is currently operating below capacity; staffing levels outlined in Criterion No. 6. - FCU funding is “ring fenced” and under control of the chief constable; funds are specially allocated and do not impinge on the rest of the Isle of Man Police Force budget. - IT facilities are sufficient but are being upgraded to facilitate sharing information with Customs and Excise. - FCU established as a unit within the Isle of Man Police Force, accountable to the chief constable who has delegated responsibility of ML/FT investigations; operational structure enables limited independence and general freedom from unauthorized outside influence or interference. - The head of the FCU maintains regular contact with the attorney general and other authorities. - Operational practice: FCU recognized as the venue for receipt of all STRs despite legislation authorizing STRs to any Constable. - Information and intelligence are securely protected and disseminated according to Isle of Man legislation. - FCU submits statistics to enable the chief constable to prepare a publicly available Annual Report on the performance of the Isle of Man Constabulary; quarterly statistics, trends and typologies produced at crown dependency meetings. - Public warnings on trends and typologies are sent to the FSC, which alerts the financial industry via public website postings and direct email/post to authorized industry contacts. - FSC arranges conferences and seminars attended by the financial sector and government agencies; FCU and Customs and Excise lecture on Anti-Money Laundering issues and participate as speakers in industry events and JAMLAG quarterly meetings. ### Analysis of Effectiveness — STR handling and FCU capabilities - Arrangements for receiving, analyzing, and disseminating financial information are generally adequate. - Identified weaknesses: - Absence of a legal requirement for STRs to be submitted to the FCU. - Inability of the FCU to access all government databases on a real-time basis. ### Recommendations and comments — STRs, FCU powers, guidance, and structure - Consideration should be given to amending relevant laws to: - require that the report be made directly to the FCU; - require that reports be made in writing on a form to be issued by the FCU; - permit the FCU to require submission of additional information by reporting parties; - provide expeditious or real-time access to public and nonpublic databases without the need for a court order. - Consideration should be given to amending relevant laws to provide explicit legal authority for the FSC to issue guidance notes. - Enactment of the Insurance (Amendment) Bill should be considered to explicitly provide the IPA authority to issue binding guidance notes with explicit sanctions for noncompliance. - Operational and resourcing recommendations: - Evaluate the operational structure of the Isle of Man FCU to prioritize and focus on ML/FT. - Increase staffing levels to authorized strength. - Consider amalgamating the financial investigation team of Customs and Excise with the FCU to improve effectiveness and streamline enquiries into ML/FT. - Increase the number of support staff in the FCU so law enforcement personnel can dedicate themselves to investigative processes of ML/FT. *IMF Country Report cr03367.* ### 35. The Isle of Man requires that requests for assistance from foreign jurisdictions be processed through mutual ### 35. The Isle of Man requires that requests for assistance from foreign jurisdictions be processed through mutual ### Mutual legal assistance (MLA) procedures and practice - The Isle of Man requires that requests for assistance from foreign jurisdictions be processed through mutual legal assistance as its laws and procedures require. - There is no prerequisite of dual criminality to provide mutual legal assistance other than in relation to fiscal offences. - In practice, lack of a dual criminality prerequisite does not prevent assistance because the conduct in the requesting jurisdiction invariably constitutes the same or a similar offence in the Isle of Man. - All requests for Mutual Assistance are evaluated in the attorney general’s chambers, which transmits them to the relevant investigative authorities for execution. - Detailed statistics are kept on all requests, made or received, for mutual legal assistance relative to ML/FT and the predicate offences; records include date, source, nature and outcome of the request. - The Isle of Man has successful structures in place to facilitate timely and effective follow up to requests for mutual legal assistance. - Analysis of Effectiveness: The framework for international cooperation is considered to be adequate. - Implications for compliance with FATF Recommendations 3, 32, 33, 34, 37, 38, 40, SR I, SR V: Largely Compliant. ### International agreements, networks, and informal cooperation - Bilateral mutual legal assistance treaties exist with the Bahamas, Saudi Arabia, Spain, Sweden, Ukraine, and the United States. - A small number of bilateral agreements extend to investigation of crime and the restraint and confiscation of proceeds and instrumentalities of crime or drug trafficking; these agreements do not affect the giving of assistance or the level of assistance given. - Memberships and points of contact: - Member of the European Judicial Network; the legal officer (Financial Crime) is a contact point and regularly attends meetings. - Attorney general’s chambers are a member of the International Association of Prosecutors. - The legal officer (Financial Crime), officers from the FCU Unit, and officers from Customs and Excise attend national and international conferences and meetings to advise how assistance may be obtained from the Isle of Man. ### Information exchange and legal bases for disclosure - Section 17I of the Criminal Justice Act (CJA) allows provision of information to overseas authorities for the prevention or detection of crime or for institution or other use in criminal proceedings. - The FCU has negotiated memoranda of understanding to facilitate exchange of information where necessary. - Information is exchanged either directly or through Interpol where the information refers to subjects of investigations in other jurisdictions. - Customs Amendment Act: provides for disclosure of information or documents held for purposes of, or in relation to, any Customs and Excise assigned matter to any agency for criminal investigation or proceedings, or for initiating or bringing to an end such matters (section 174B(2)). - Many EC Regulations governing exchange of information on customs, excise and VAT fraud apply due to the Island’s special relationship with the EU and Customs membership of the Customs Union; other applicable Conventions include the Nairobi Convention, the 1998 Vienna Convention, the Naples II Convention and the CIS Convention. - Drug Act restrictions on disclosure (section 50) are limited to: - Restrictions on publishing or broadcasting details in relation to STRs. - Restrictions on compelling witnesses in civil or criminal proceedings to give evidence about the existence of an STR or the identity of the disclosing person. - The POTA does not contain any restrictions on disclosure. ### Controlled deliveries, undercover operations, and interception - There is no explicit legal basis for controlled delivery or undercover operations, but current Isle of Man law does not restrict them. - Interception of communications is controlled by the Interception of Communications Act 1988. - Official legislative program ending in July 2003 includes a proposal for a bill to regulate certain undercover techniques such as covert surveillance; anticipated to coincide with the Human Rights Act 2001 coming into operation in mid-2003. - Isle of Man Customs may carry out investigations involving controlled deliveries of money, monetary instruments, restricted or prohibitive goods; such operations must be authorized by treasury line management at the appropriate level. - Voluntarily, UK’s Regulation of Investigatory Powers Act authorization is also completed if the modus operandi requires it to ensure Human Rights compliance (proportional, legal, authorized and necessary). - There is no requirement or provision for judicial authorization for these operations; in unusual cases it is standard practice to seek legal advice from H.M. attorney general’s chambers. ### Asset sharing, seizure, forfeiture, and extradition - The Isle of Man has no objections to the issue of asset sharing; each case is dealt with on an individual basis. - The Isle of Man regularly participates in investigations with international dimensions to coordinate seizure and forfeiture of ML/FT assets; some problems related to asset sharing are discussed under criterion 16. - Procedures exist to extradite individuals charged with money laundering, drug trafficking and terrorism offences (Sections 7–15 of the Extradition Act 1989 (Act of Parliament)). - The Isle of Man ensures the Island is not a safe haven for individuals charged with FT; extradition procedures are in place with other jurisdictions so persons sought on charges relating to ML/FT can be extradited. - FCU, Police Special Branch and Officers of Customs and Excise regularly liaise with U.K. and U.S. authorities on identity and movement of suspected terrorists. - Geographic location of the Isle of Man is not conducive to a “safe-haven” for terrorists. ### Funding, resourcing, and operational workload - Isle of Man authorities generally provide adequate funding to ensure the FCU is staffed and properly supported by technical resources. - Investigation of ML/FT is overseen by a Detective Inspector who is subject to advice from the attorney general. - There is a current resource issue that could be resolved by allocation of additional personnel as identified in Criterion No.6. - Mutual Assistance Requests from International Law Enforcement Agencies to the FCU/Customs and Excise account for approximately 60% of their workload. - These requests are processed, evidence uplifted and responses given in a prompt manner. ### Assessing preventive measures for financial institutions — General framework (criteria 43–44) - Section 43: Disclosure of information related to a suspicious transaction does not constitute a breach of any restriction imposed by statute or common law (Sections 17A(3)(a), 17B(5)(a) and 21 of the CJA; Sections 46(3)(a), 47(5)(a) and 48(4) of the Drug Act; Sections 10(1) and 16A(4) of POTA). - Section 44: No law or government authority explicitly designates a supervisor/regulator to ensure effective implementation of AML/CFT policies across all financial institutions; in practice: - The Financial Services Commission (FSC) takes responsibility for FIs regulated by it. - The Insurance and Pensions Authority (IPA) takes responsibility for FIs regulated by it. - FSC does not currently have authority to regulate or monitor compliance of businesses engaging in bureaux de change, check cashing and money transmission services (“MSBs”), except to the extent a regulated FI engages in such activities. - Regulation and monitoring of MSBs is done by Customs and Excise under the Anti-Money Laundering (Money Services Businesses) Regulations 2002. - Analysis of Effectiveness: Framework generally effective, but FSC’s lack of statutory authority to regulate or monitor MSBs is considered a potential weakness. - Recommendation: Consider rationalizing regulatory arrangements for MSBs by enacting legislation to transfer statutory responsibilities of Customs and Excise with respect to MSBs to the FSC. - Implications for compliance with FATF Recommendation 2: Compliant. ### Customer identification framework and implementation (criteria 45–48 and sectoral notes) - The Code requires FIs to establish and maintain procedures for customer identification (Article 3); the Code contains no explicit requirement that such procedures be followed, although such a requirement is implied. - Insurance-specific: Section 3.1 of the CTP requires verification of identity for each applicant for a policy with no exception. - Notes and Codes require license holders to satisfy themselves as to customer identity and list identity information required. - FIs must seek satisfactory evidence of identity when establishing business relations or conducting one-off transactions (Sections 4(1) and 5(1) of the Code); the Code does not specify what constitutes satisfactory evidence. - The Notes provide identity information to establish an individual’s identity: name and aliases, address, date of birth, nationality, purpose of account; acceptable documents include Passport, driving license, government issued National Identity Card (Section 3.02(a) and (b) of the Notes). - No requirement to renew identification when doubts appear in the course of the business relationship, though recording of identity is required (Section 7 of the Code). - Exemptions from identification under Sections 4 and 5 of the Code where there are reasonable grounds to believe the potential FI is a regulated person, covered by EU Money Laundering Directive, an authorized credit or financial institution in a FATF member country with approved AML requirements, a registered legal practitioner or an accountant where professional body rules embody Code-equivalent requirements (Sections 4(2), 4(3), 5(2), 5(3)). - CSP obligations: Paragraph 4 requires identification of client and beneficial owner of each of its companies; ongoing obligation. - Banking and investment business Codes require banks and investment business license holders to know their customers and comply with AML legislation (Paragraph 12.5 Banking Code 1999; Paragraph 6.1 Conduct of Business Code). - Corporate customers: Notes require verification of beneficial owners, legal existence, nature of business including sources of funds, account signatories, and for CSPs evidence of identity of at least two directors and a Board Resolution (Sections 3.03(a) and (b) of the Notes). - No explicit prohibition of numbered accounts; no exemption from identification requirements for numbered accounts. - Insurance implementation: Section 4.1.2 of the CTP requires insurers to receive Passport or National Identity Card (with photograph) plus documents confirming address; where not possible, two other formal documents with verifiable reference numbers may be accepted. - If doubts arise at any stage of a policy, Section 8.3 CTP requires reporting to the Money Laundering Reporting Officer; the Officer may take steps to verify identity and, if suspicion, report as detailed in Section 8.2 (may include reporting to the FCU). - Retrospective reviews: Section 5.1 CTP indicates relationships not yet reviewed on a risk basis should be reviewed after a “trigger” event (examples: subsequent business transaction; surrender or redemption request). - Acceptable identification documents listed in Section 3.02(a) of the Notes: - (i) current valid “full” passport; - (ii) Armed Forces ID card; - (iii) known employer ID card bearing photograph and signature; - (iv) provisional or full driving license bearing photograph and signature; - (v) government-issued National Identity Card bearing photograph and signature. - Documents without photographs or signatures or easily obtainable are not appropriate as sole evidence (examples: birth certificate, credit cards, NHS cards, non-Isle of Man provisional driving license, student union cards). - Exempt one-off transactions (Section 3.06 of the Notes): - Less than Euros 3,000 (or the equivalent) for transactions or linked transactions in bookmaking or casino businesses; - Less than Euros 15,000 (or the equivalent) in any other case. - Verification of identity is required for all other one-off transactions. - Periodic checks for corporate information suggested (Section 3.03); no provisions for reverification of personal customers, though addressed in the Overriding Principles Paper. - Introduced business regime: - Introducers categorized as eligible or non-eligible. - Eligible introducers broadly include persons licensed under various Acts, authorized credit/financial institutions in EEA or FATF-member countries with approved AML requirements, advocates, registered legal practitioners, accountants where professional body rules are equivalent to the Code. - Eligible introducers may retain identity verification documents under undertakings to supply evidence on request, permit compliance checks/visits, and supply documents if relationship terminated. - CTP requires introducers to provide original or certified copies of identity documents under Terms of Business. - Overriding Principles Paper envisages a revised framework where license holders will always hold originals or copies of identity verification documents. - Weakness: Existing framework for introduced business creates some weaknesses in verification of customer identity because license holders may not always have immediate access to verification documents; greater concern where introducers are accountants or attorneys not subject to prudential regulation. - There is no legal requirement for FIs to verify the identity of a person on whose behalf an applicant may be acting. - Notes indicate expectations to obtain satisfactory evidence of identity of beneficial owners and persons on whose instruction signatories act (Section 3.03). - For trusts, Section 3.05 recommends obtaining and verifying identity of principal beneficiaries where practical; license holders expected to obtain evidence of trustee/fiduciary capacity, identity of settlor, protector and any controller with power to remove trustees, and evidence as to source or origin of assets under control. *Institutional assessment and findings by the assessment team of the Isle of Man authorities* ### Section 3.05 of the Notes indicates that where the applicant for business is a trustee, or a person acting in a ### Section 3.05 of the Notes indicates that where the applicant for business is a trustee, or a person acting in a ### Trustee and fiduciary applicant identification requirements - Section 3.05 of the Notes: where the applicant for business is a trustee, or a person acting in a fiduciary capacity in relation to a third party and is a regulated financial institution in the Isle of Man, the EEA or from a FATF member country with AML requirements approved by FATF, the Commission expects license holders to obtain: - (i) satisfactory evidence of the nature of his trustee or fiduciary capacity or duties; - (ii) satisfactory evidence of identity of the settlor (and the person providing the funds where not the settlor), protector, and any controller or similar person who has power to appoint or remove the trustee. - License holders may wish to obtain copies of satisfactory evidence from the trustee or fiduciary showing the verification of identity of any and every party (including discretionary and contingent beneficiaries). ### Insurance Business Procedures for trustees (CTP Section 4.4) - The insurance business must satisfy itself that Trustees have been identified in accordance with appropriate verification requirements for corporate applicants or individuals. - Where more than one Trustee exists, appropriate identification must be obtained for each. - Provided trustees have been identified to the satisfaction of the Insurance Business and satisfactory evidence of proper appointment of the Trustees has been received (e.g. extracts of the Deed of Trust), and: - the nature and purpose of the trust is known; - the source or origin of the assets under the trust is known and the Insurance Business considers it satisfactory; - the persons from whom the Insurance Business is to take instructions have been identified and specimen signatures have been obtained (although their identity need not be verified); - then the trustees may provide details of the parties to the trust at the time the application is being made. - Parties whose details should be provided: - the settlor(s): full name(s), date(s) of birth and, if still living, current addresses of any individuals; if deceased, date of death; where settlor is not an individual, sufficient information to identify the settlor(s); - any protector(s): full name(s), date(s) of birth and current addresses of any individuals; - all beneficiaries (as and when defined). ### Nominee arrangements (CTP Section 4.5; Notes) - Insurance business must satisfy itself that Nominees have been identified per verification requirements for corporate or individual clients and that satisfactory evidence of appointment of the Nominees has been received. - The persons from whom the Insurance Business is to take instructions must be identified and specimen signatures obtained (identity need not be verified). - Provided Nominees have been identified to the Insurance Business’ satisfaction, Nominees may provide details of the parties to the arrangement: - the beneficial owner of the assets; - the ‘settlor’ or original source of the assets under the nominee arrangement. - The Notes do not specifically address nominee shareholders; such persons are usually company or trust service providers regulated by the FSC. This does not address instances where nominees are resident outside the jurisdiction. ### Originator information on funds transfers and wire transfers - There is no legal requirement for FIs to include accurate and meaningful originator information and related messages on funds transfers that should remain with the transfer through the payment chain. - Section 6.3 and 6.4 of the CTP: where the Insurance Business does not receive complete originator information from the remitting bank, it must review the information provided and consider whether additional information should be sought; a risk-based approach may be used in deciding whether to seek additional information. - Section 6.2 of the CTP: Insurance Business must establish how payments are to be made, from where and by whom; where monies are remitted from accounts other than in the name of the Applicant, the Insurance Business must be satisfied that reasons are understood and, where necessary, verify the identity of the account holder; otherwise terminate the application process. - The CTP does not clearly indicate criteria for the “risk based approach” in determining when additional originator information is required; Notes do not specifically address this issue. ### Ongoing monitoring of accounts and transactions (Criteria 49-51) - No legal requirement for FIs to scrutinize all complex or unusual transactions/patterns with no apparent economic or lawful purpose, but paragraph 4(4) of the Code requires procedures to verify identity where a transaction is significantly different from normal patterns; paragraph 12 requires filing STRs, making monitoring implicit. - Section 6.01 of the Notes: transactions inconsistent in amount, origin, destination, or type with a customer’s known activities must be considered unusual and put “on enquiry” — enquiries may lead to filing an STR. Appendix G provides examples of suspicious transactions. - Section 8.4 of the CTP: all complex or unusual transactions/patterns with no apparent economic or lawful purpose must be scrutinized; background and purpose ascertained; if not satisfied, Insurance Business must not proceed and must report suspicion; full details and decisions should be recorded on the file. - Section 8.3 of the CTP: suspicions may be aroused by unexplained changes in a client’s investment pattern or sudden changes in intermediary transaction patterns. - The Notes require reporting of suspicious transactions but do not require findings to be recorded; CTP requires recording. ### Transactions involving jurisdictions with inadequate AML/CFT systems - No legal requirement to scrutinize transactions with persons in jurisdictions lacking adequate systems to prevent/deter ML or FT or to ensure FIs are advised of weaknesses in other countries’ AML/CFT systems. - Notes address this only for correspondent banking (Section 3.13): banks should refuse correspondent relationships with shell banks; pay attention to respondent banks in jurisdictions with poor KYC standards or identified as “noncooperative”; ensure respondent banks have due diligence standards at least equal to their own; employ enhanced due diligence for transactions through correspondent accounts. - Appendix D of the Notes lists NCCT countries and other countries subject to advisories; FIs must treat business from these countries as requiring further scrutiny. - Section 3.17 of the CTP: Insurance Business must have procedures to examine Applicants with connections to any country on FATF Non Cooperative Countries list and consider whether additional verification of identity or source of funds is necessary. ### Record keeping (Criteria 52-54) - Code para. 7: FIs required to maintain records of a person’s identity indicating nature of evidence and a copy of the evidence for a period of five years commencing from the date when all activities relating to a one-off transaction or series of linked transactions were completed, or business relationship was formally ended, or if not formally ended, when the last transaction was carried out; documents available to competent authority to inspect. - For FT: Section 15(2) of the POTA requires full auditable records in relation to any suspicion reported to be retained in perpetuity. - CTP Section 9.1: records maintained by an Insurance Business should enable competent third parties to assess observance of ML policies and procedures; reconstruct transactions; and satisfy enquiries or court orders within a reasonable time. All documentary items relevant to Client identity and transaction history must be maintained and retrievable. - CTP Required Period: at least six years from the date when all activities relating to a one-off transaction or series of linked transactions were completed, or the business relationship was formally ended, or if not formally ended, when the last transaction was carried out. If a report has been made to the FCU or a matter is under investigation, retain all relevant records for as long as required by the FCU. - Notes Section 7.01: records of identification, verification and transactions should be retained for the period of the business relationship plus five years. - Section 7.01 of the Notes recommends maintaining records of: - Volume, origin and destination of funds; - The form in which the funds were offered or withdrawn and the identity of the person undertaking the transaction; - The form of instruction and authority received and the name and address (or identification code) of the counterparty; - The security dealt in, including price and size; - The account details from which the funds were paid; - The form and destination of payment made by the business to the customer; - Whether the investments were held in safe custody by the business or sent to the customer or to his/her order and, if so, to what name and address. - Sections 9.1 and 9.4 of the CTP cover transaction records. - Laws and procedures exist regarding production of records, search, seizure and obtaining evidence (Secs. 11 - 25 of the PPP Act; Sections 17J, 24 and 25 of the CJA; Section 15 of the POTA; Sections 52 and 53 of the Drug Act; Section 24 of the CJA2). For insurance, Section 22 of the IA gives IPA power to investigate transactions and inspect books and documents. - Section 13 of the Banking Act and Section 8 of the IBA give the FSC power to inspect books, accounts and documents and investigate transactions. ### Analysis of effectiveness and identified concerns - Institutions visited generally had good customer identification requirements and employed more onerous requirements for higher-risk customers. - Less consistency across institutions on: - Holding of identity documents by introducers; - Status of the Progressive Program. - Concerns noted about requirements related to satisfactory evidence of identity, identity requirements for legal entities, and reverification of existing customers. - Arrangements for customer identification and ongoing monitoring are generally adequate, but: - The Notes lack clarity/guidance on nominee shareholders and on broadened focus regarding business relationships with persons from jurisdictions with inadequate AML/CFT systems. - Concerns exist about enhanced scrutiny of wire transfers and reporting of unusual or complex transactions. ### Recommendations and required legal/regulatory changes - Amend relevant laws to explicitly require that customer identification procedures be followed by reporting parties. - Consider imposing a requirement for the re-verification of existing customers. - Consider amending relevant laws to limit the availability of the AML exemption to entities regulated in EU States rather than to entities covered under the EU AML Directive. - Amend the Notes to require licensees to exercise care in initiating transactions with companies that have nominee shareholders. - FSC should redouble efforts to direct FSBs towards the customer identification standards proposed by the Position Paper to ensure greater consistency. - Within the two-year period referred to by FATF: - Amend relevant laws to require that accurate and meaningful originator information on funds transfers remain with the transfer through the payment chain; - Require that FIs give enhanced scrutiny to wire transfers that do not contain complete originator information. - Expand the Notes to require FIs to give special attention to business relationships and transactions with persons from countries that do not have adequate AML/CFT systems, beyond correspondent banking circumstances. *Source: the report.* ### Section 10 of the CSP Act provides that the FSC may inspect the books, accounts and documents and ### cr03367 - Section 10 of the CSP Act provides that the FSC may inspect the books, accounts and documents and ### Record keeping (Section 10 of the CSP Act) - Section 10 of the CSP Act provides that the FSC may inspect the books, accounts and documents and investigate transactions of a CSP or a former CSP. - The section gives the FSC the power of entry and access to books, accounts and documents. - Visits to financial institutions indicated that procedures are maintained requiring that records be maintained for a period of six years after the termination of a business relationship. - Analysis of Effectiveness: The overall framework in respect of record keeping is generally adequate. - Recommendations and Comments: (no specific numbered recommendations provided in the text). *Assessment by the jurisdictional AML/CFT review* ### V — Suspicious transactions reporting (Criteria 55–57; sector specific 101–104 for insurance) - Legal framework for disclosure: - Where an FI has reason to suspect that assets are derived from criminal activity, it is an offence not to disclose the information to a constable (Section 17J of the CJA; Sec. 48 of DTA; Sec. 16A of POTA). - Section 16A of POTA requires that suspicions of FT be reported to a constable and makes it an offence to fail to disclose information. - Section 14 of the Anti-terrorism and Crime Bill requires the reporting of suspicions of terrorism. - Section 48 of the Drug Act deals with the disclosure of information relating to drug trafficking proceeds. - Disclosure of information related to a suspicious transaction does not constitute a breach of any restriction imposed by statute or common law (Section 17A(3)(a) of the CJA). Similar provisions: section 48(6) of the Drug Act and section 16A(6) of POTA. - FIs including their staff are prohibited from tipping off their customers when information relating to them is reported to authorized government officials (Section 17D(1) of the CJA). Similar provisions: section 49 of the Drug Act and section 15(2) of POTA. - Guidance, institutional responsibilities and procedures: - FIs are required to put procedures in place to identify an “appropriate person” to whom a suspicious report can be made (Section 12(1)(c) of the Code). - The FSC has issued guidelines for the identification of unusual transactions, but there is no explicit legal basis for doing so; the Code makes reference to the court taking into account compliance with the Notes and the CTP (Section 3(3)(a) of the Code). - The IPA has issued guidelines in the form of the CTP based on section 24A of the IA as cited by the authorities. - Section 8.2 of the CTP requires a senior officer resident on the Isle of Man to be appointed by the Board as Money Laundering Reporting Officer and that the name be notified to the Insurance and Pensions Authority within 28 days of appointment. - Section 8.5 of the CTP provides examples of suspicious activity, details on the reporting procedure, and guidelines for reporting to the FCU. - Section 5. of the Notes requires the appointment of an MLRO. Section 6 addresses identifying and reporting suspicious transactions. Appendix G provides a list of suspicious transactions. - Tipping off is addressed in 6.01 and Appendix N of the Notes and Section 8.7 of the CTP. - Observed practices: - All institutions visited have internal procedures for reporting suspicious transactions usually to the person designated as MLRO; in one instance reports were required to be sent initially to the supervisor, manager or director. - Institutions had guidelines addressing the issue of the tipping-off offence. - Analysis of Effectiveness: The framework in respect of the reporting of suspicious transactions is generally adequate. - Recommendations and Comments: - Consideration should be given to providing the FCU with the authority to give instructions to reporting entities and to require FIs to observe instructions of the FCU. - Implications for compliance with FATF Recommendations: Compliant for Recommendations 15, 16, 17, 28. ### VI — Internal controls, Compliance and Audit (Criteria 58–61; sector specific criteria 89–92, 109–110, 113) - Legal and regulatory requirements: - Regulated FIs are required to establish procedures of internal control and communication to forestall and prevent money laundering (Section 3(1)(a)(iv) of the Code); the Code applies to terrorist financing as well (definition of “money laundering requirements” in Paragraph 2(1) of the Code). - FIs are required to make employees aware of anti-money laundering procedures and enactments (Section 13 of the Code) and to provide training in recognition and handling of suspected money laundering (Sections 3(1)(b), 3(1)(c) and 14 of the Code). - The Notes and the CTP cover internal procedures, policies and training. - The issue of an audit function for AML/CFT systems is not specifically addressed; the IPA requires auditors of licensees to provide annual certification of compliance with regulations made under Insurance Act, including compliance with CTP. Under the IA and the Insurance regulations it is a requirement that all insurance companies appoint external auditors. - Insurance-specific training and MLRO duties (CTP): - Section 10.1 of the CTP requires Insurance Business to provide education and training so staff are aware of: - their personal obligations under the anti-money laundering requirements; - their personal liability for failure to report information or suspicions in accordance with the anti-money laundering requirements; - the internal procedures for reporting suspicious transactions within the Insurance Business; and - the identity of the Money Laundering Reporting Officer and Deputy Money Laundering Reporting Officer. - Additional training to assist staff: - in the recognition and handling of transactions carried out by or on behalf of, any person who is, or appears to be, engaged in money laundering; - in dealing with customers where such transactions occur; and - in procedures to be adopted where transactions have been reported to the FCU. - Section 10.2 details additional training for senior, specific and key staff. Section 10.4 requires all new employees to undergo training as soon as reasonably practicable. - Appointment and designation of MLROs and compliance officers: - While FIs are required to put procedures in place to identify an “appropriate person” for STRs (Section 12(1)(c) of the Code), except for banks there is no explicit legal requirement to appoint or designate such person, although implied by the Code. - For banks only, Section 11.12 of the Banking (General Practice) Regulatory Code 1999 requires appointment of a senior executive as MLRO and notification of such appointment and any change to the FSC within 14 days. - Section 8.2 of the CTP indicates the MLRO must be a senior officer resident on the Isle of Man with specified oversight, reporting and record-keeping functions; the name must be notified to the IPA within 28 days of appointment. - Neither the Notes nor the CTP specifically require the appointment of a compliance officer; the CTP assigns oversight functions to the MLRO. - Employee screening and branches/subsidiaries: - There is no requirement in law, Notes or CTP that FIs be required to put in place adequate screening procedures to ensure high standards when hiring employees. Insurance industry standard requires references for all employees. - The law and Notes are silent on requirements that foreign branches and subsidiaries observe home jurisdiction AML/CFT measures, inform home supervisor when unable to observe measures, or apply the higher standard where home and host differ. - For insurance business, section 1 of the CTP requires practices and procedures consistent with the CTP to be operated throughout all parts of the organization; where local jurisdiction requirements differ the higher of the requirements must be applied. - Section 8.2 of the CTP allows appointment of a local officer for associated operations in other jurisdictions; the MLRO must remain aware of and include details of local suspicion reports in Isle of Man records and reports. - Observed practices: - All but one of the institutions visited have substantive training programs in place for staff. - With one exception institutions visited have appointed MLROs; AML/CFT compliance generally came under the main compliance function. - Institutions generally assess prospective employees on the basis of a CV and references (usually two); in general there was no specific mechanism for investigating past criminal activity of prospective employees. - Analysis of Effectiveness: The framework for internal controls, compliance and audit is generally adequate but would be strengthened by requirements in the Notes for institutions to test compliance of AML/CFT systems against home and host country standards. Concerns exist about requirements for designation of an MLRO, application of AML/CFT standards to foreign branches and subsidiaries, and adequacy of employee screening. - Recommendations and Comments: - Consideration should be given to the imposition of a requirement that all Isle of Man FIs apply Isle of Man legal and regulatory requirements in respect of AML/CFT to their branches and subsidiaries outside of Isle of Man. - Consideration should be given to ensuring institutions test compliance of AML/CFT systems against home and host country standards. - Consideration should be given to imposing a requirement to appoint or designate an MLRO for FIs other than banks; authorities have indicated the Code will be amended to require such appointment. - Consideration should be given to amending the appropriate laws to require banks and insurance companies to report any change in such position to the FSC and IPA, as is already required for trust and investment company businesses. - Consideration should be given to amending relevant laws to require all FIs to put in place adequate screening procedures to ensure high standards when hiring employees. - Implications for compliance with the FATF Recommendations 19, 20: - Full compliance will be achieved when the AML/CFT framework ensures that all FIs apply Isle of Man standards to branches and subsidiaries in other jurisdictions. *Assessment by the jurisdictional AML/CFT review* ### VII — Integrity standards (Criteria 62–63; sector specific criterion 114) - Licensing, fit and proper requirements: - Laws require that FIs be licensed and that controllers and certain officials of regulated FIs be fit and proper on entry and on a continuing basis, but do not define what fit and proper means (Sections 4(1) and 16 of the Banking Act; Sections 3(3) and 10 of the IBA; Section 20 of the IA; Sections 3(3) and 9 of the CSP). - For banking, any person wishing to hold more than 5% of the share capital of an FSC-regulated FI must receive prior consent of the FSC (Para. 11.5 of the Banking Code). - For CSPs, see definition of “controller” in section 27(1) of CSP Act and requirement for Controllers to be fit and proper under section 3(3). - The laws do not explicitly address prohibition on criminals being involved in FIs; they address failure to meet fit and proper criteria or other reasons as basis for refusal to permit control or service as director/officer. - This issue is not addressed in either the CTP or the Notes. - Charities, foundations and customer due diligence: - Under the Charities Act, an institution which holds itself out as a charity is guilty of an offence unless it is registered (Section 1 of the Charities Act); “Institution” includes any institution wherever established (Section 15(1)). The chief registrar may refuse registration if not established for charitable purposes or lacking substantial and genuine connection with the Island. - A company wishing to establish for charitable purposes may apply under the Companies Act 1931 (Section 18) to the attorney general for a license to carry on business without using the word "limited"; the attorney general will not grant such a license unless satisfied of particular charitable and profit-application conditions (Section 18 of the Companies Act). - The Code requires CSPs to put procedures in place to identify customers (Paras. 4, 5 and 6 of the Code). Paragraph 4 of the CSP (General Requirements) Code requires a CSP to identify its client and identify the beneficial owner of each of its companies. - For licensees of the FSC and the IPA, there is a requirement to conduct client due diligence of all customers, including shell companies and incorporated and unincorporated charities and other businesses (Section 3 of Notes and Section 4 of CTP). - Para. 3.03 (a) (ii) of the Notes expects license holders to obtain details of nature of the applicant’s business, reason for the account or client company being established, indication of expected turnover and anticipated usage, source of funds and source of wealth, and a copy of last available accounts where appropriate. - Section 3.14 of the Notes requires license holders to undertake extra due diligence on nonprofit organizations and foundations; be especially vigilant for unusual transaction patterns or sizeable transactions; and ascertain geographical activity and business partners. - Section 4.11 of the CTP requires that where an application is received in the name of a charity the insurance business must satisfy itself that: (i) The charity exists and the investment is legitimately made on behalf of the charity; and (ii) The application is being made with the knowledge of the charity. - Documentation and verification requirements for charities and foundations under the CTP include evidence of registered office, list of directors (and verification where not on an acceptable register), list of officers from whom the insurance business will take instructions, certified extract from public registry for foundations, satisfactory evidence of appointment of the Foundation Council, nature and purpose of the foundation, source of origin of assets under the foundation, and identity of persons from whom instructions are to be taken. *Assessment by the jurisdictional AML/CFT review* ### Section 4.2 and 4.3 of the CTP sets out identification requirements for corporate clients. ### cr03367 - Section 4.2 and 4.3 of the CTP sets out identification requirements for corporate clients ### Identification requirements for corporate clients - Section 4.2 and 4.3 of the CTP sets out identification requirements for corporate clients. - Analysis of Effectiveness - The legal framework is generally adequate except in respect of the need to expand the definition of “fit and proper” to include conviction for a serious crime. - Recommendations and Comments - Consideration should be given to amending the Code to explicitly prohibit involvement of criminals in FIs and to define minimum standards for ‘fit and proper,’ in a manner consistent with Isle of Man human rights and other relevant legislation. - Implications for compliance with FATF Recommendation 29 - Compliant ### Enforcement powers and sanctions (coverage of Criteria 64, sector-specific Criteria 93-96, 115-117) - Description — statutory administrative and criminal authorities available to FSC and IPA: - Administrative powers: - issuance of a written directive or order (Sections 11 of Banking Act; 9 and 9A of IBA, 6 of FSA; 7 of CSP Act; 24A of IA) - issuance of a public notice or statement (Section 17 of Banking Act; 12 of IBA, 22 of FSA, 14 of CSP Act; 5.7 of IA Bill) - placing conditions on the license with respect to specified lines of business or activities (Sections 6 of Banking Act; 3 of IBA; 3 of FSA, 3 of CSP Act; 6 and Schedule 4(6) of the IA) - suspension or removal of directors, officers and controllers (Sections 16 of Banking Act; 10 of IBA; 18(1) of FSA; 9 of CSP Act; 7(3) of the IA Bill) - removal and disqualification of external auditor (6(2) of FSA) - appointment of a special auditor or reporting accountant at expense of licensee (Sections 21 of Banking Act; 8 of IBA; 19 of FSA; 25 of CSP Act) - appointment for a defined period of a provisional or temporary administrator or conservator (explicitly provided for CSPs — Section 16 of CSP Act; High Court may appoint a receiver under Section 42 of High Court Act 1991) - imposition of civil money penalties (administrative fines) on licensees for investment business and CSPs (Sections 6A of IBA and 8 of CSP Act; 5.9 of the Insurance Bill) — limited to legal persons except sole traders and partnerships - revocation of license (Sections 7 of Banking Act, 3(6) of IBA, 4 and 14 of FSA; 4 of CSP Act; 9 of the IA) - FSC may petition a court to wind up a company in the public interest (Sections 162(6) and 164(d) of the Companies Act 1931) - FSC/IPA may petition the High Court to disqualify a person from acting as a director or manager (Section 26 of Companies Act 1992) - Criminal and summary conviction penalties: - Banking Act violations: summary conviction — imprisonment not exceeding six months or fine not exceeding 5000 pounds, or both; conviction on information — imprisonment not exceeding three years or to a fine or to both; or have a banking license revoked upon conviction (Section 29 of the Banking Act) - Insurance Act (IA) violations: summary conviction — imprisonment not exceeding six months or fine not exceeding 5000 pounds, or both; conviction on information — imprisonment not exceeding two years or to a fine or to both (Section 31 of the IA) - CSP Act violations: summary conviction — imprisonment not exceeding six months or fine not exceeding 5000 pounds, or both; conviction on information — imprisonment not exceeding two years or to a fine or to both (Section 21(1) of the CSP) - Contravention of an FSC order relating to appointment of an individual who is not fit and proper: CSP liable on summary conviction to a fine not exceeding 5000 pounds (Section 21(2) of the CSP) - Investment Business Act violations: summary conviction — imprisonment not exceeding six months or fine not exceeding 5000 pounds, or both; conviction on information — imprisonment not exceeding three years or to a fine or to both (Section 19 of the IB Act) - CTP and fitness/propriety: - Under Section 1 of the CTP, companies are warned that in addition to possible sanctions under Sections 12 and 31 of the IA, failure to comply with the CTP will also result in the IPA examining the fitness and propriety of the company. ### Analysis of Effectiveness — enforcement powers - Identified weaknesses and gaps: - Power to remove or disqualify an auditor for malfeasance or criminal conduct is available only with respect to collective investment schemes under the FSA and is not currently operative because the FSC has not issued regulations. - This power is not available under current law to the IPA. - Authority to appoint a provisional or temporary administrator is limited (explicit for CSPs only); recommendation that relevant laws be amended to provide this authority to FSC and IPA, with court approval if necessary. - Civil money penalties: - under current law, none of the available powers under the IBA and CSP Act have been implemented through secondary legislation; - inability to impose penalties against individuals (directors, officers, controllers) under such Acts; - Banking Act lacks comparable civil penalty provision; - the range of penalties has not been set forth in secondary legislation and should be sufficiently large to discourage wrongdoing. - Trust Service Providers Bill, as indicated by authorities, will allow imposition of such penalties on banks, investment business and CSPs, but will incorporate the same weaknesses as under current law. ### Recommendations and Comments — enforcement powers - Consideration should be given to adding the following to the legal framework: - expand the power to remove or disqualify an auditor to apply to all regulated FIs (not just collective investment schemes) and issue the regulations for such schemes; - provide the power to appoint a provisional or temporary administrator, with court approval if necessary; - provide the power to impose civil money penalties or administrative fines against individuals (directors, officers, controllers) as well as legal persons; - empower the FSC and the IPA to disqualify principal persons from regulated activities; - explicitly refer to ML and FT as grounds for imposition of these sanctions; - ensure sanctions are uniform across all financial sectors so that the same rules apply to every FI. ### Cooperation between supervisors and other competent authorities (Criteria 65-67, 97-100, 118-120) - Description — staffing, supervision, training, and cooperation: - IPA staffing and supervision: - No members of the IPA staff are employed full time on AML/CFT, but 2 members of staff spend a significant proportion of their time on AML/CFT matters and can call upon assistance of other IPA staff as required. - All members of supervisory staff have some experience of AML/CFT matters and refresher training is undertaken. - Intention of the IPA is that 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 of the insurance companies have been visited. - FSC staffing and supervision: - An enforcement officer at the FSC devotes the vast majority of his time to AML/CFT issues and can call upon assistance of other FSC staff as required. - All 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. - Reviews by both regulators appear thorough; in a number of cases licensees were required to undertake remedial action. - In some instances concerns from on-site reviews were referred to the attorney general to determine if specific action should be taken. - Resource implications: - While both the FSC and the IPA have undertaken a good level of surveillance of licensed institutions in relation to AML/CFT over the last three and two years respectively, this may have impacted on resources available to cover other categories of risk. - Legal disclosure authorities and international cooperation: - FSC disclosure authorities under FSA: - authority to disclose information “to any constable for the purpose of enabling or assisting the Isle of Man Constabulary to discharge its functions.” (Section 24(1)(aa)) - authority to disclose information “with a view to the institution of or otherwise for the purposes of criminal proceedings whether in the island or elsewhere.” (Section 24(1)(a)) - IPA disclosure authorities under IA: - no statutory prohibition preventing IPA from disclosing information gained from on-site inspections and reports submitted by licensees to other domestic competent authorities. - explicit statutory authority to disclose certain categories of information to the FSC (Section 24(2)(bb) of the IA) and “with a view to the institution of, or otherwise for the purposes of, any criminal proceedings, whether under this Act [the IA] or otherwise” (Section 24(2)(d)). - no statutory prohibition preventing the IPA from disclosing information gained from on-site inspections and reports submitted by licensees to other foreign authorities; IPA may disclose information “to authorities which appear to the Supervisor [IPA] to exercise in a country or territory outside of the Island functions corresponding to those of the Authority and the Supervisor.” - IA Bill will substantially expand disclosure to include certain additional purposes. - Customs and disclosure: - Customs Service authority to disclose information in aid of criminal investigations, domestic and foreign (Section 174B of Customs Amendment Act) and allows financial regulators to disclose information to Customs (Section 174C). - Cooperation examples and MOUs: - Authorities report close cooperation with other domestic competent authorities including lending of expertise among financial supervisors, the FSC and IPA, and the FCU, Police and Customs. - Example: a task force made up of enforcement and banking officials of the FSC, FCU officers, and an official from the attorney general’s chambers relating to a specific ML investigation. - The FSC has entered into MOUs with the United Kingdom, Ireland, Jersey, Guernsey, and South Africa. Negotiations are ongoing with the Cayman Islands. - Foreign supervisors have undertaken on-site visits to FSC regulated financial institutions in the Isle of Man and have had access to information at the institutions visited. - The FSC and the IPA cooperate with other regulators outside the Isle of Man. - There is strong coordination amongst the FSC, IPA Customs, the FCU and the attorney general’s chambers. *Source: CTP (Sections 4.2–4.3) and related assessment excerpts.* ### 67. With respect to banking, investment business and CSPs, the FSC may disclose information for a range of ### cr03367 - 67. With respect to banking, investment business and CSPs, the FSC may disclose information for a range of ### Disclosure powers for banking, investment business and CSPs - The Financial Services Commission (FSC) may disclose information: - for criminal proceedings in other countries (Section 24(1)(a)); - for the purpose of discharging its functions under the laws administered by it (Section 24(1)(e)); - to assist an authority in other countries to exercise functions that correspond to the FSC’s functions (Section 24(5)(b)). - For disclosure of information about an individual customer, the chief minister must provide written concurrence that: - the disclosure is in the public interest; and - it is likely to be of substantial value to the authority to which it is made (Section 24(6)). ### Insurance supervision disclosures (IA and IA Bill) - According to the Isle of Man authorities: - Under the IA, there is no statutory prohibition preventing the Insurance and Pensions Authority (IPA) from disclosing information gained from on-site inspections and reports submitted by licensees to other foreign authorities. - The IPA may disclose information “to authorities which appear to the Supervisor [IPA] to exercise in a country or territory outside of the island, functions corresponding to those of the Authority and the Supervisor” (Section 24(2) of the IA). - The IA Bill will expand disclosure powers to include: - any criminal proceedings on the island or elsewhere (new Section 24(1)(a)); - facilitating a determination of whether any such investigation should be initiated (new Section 24(1)(c)); - any criminal investigation (new Section 24(1)(d)); - disclosure to all financial regulators, as well as those exercising functions similar to the IPA (new Section 24(2)(b)); - assistance to any foreign or domestic public authority specified in a treasury order to be issued (new Section 24(4)). - Note: The authorities interpret the provision on facilitating determinations (new Section 24(1)(c)) as including disclosures to the FCU (footnote 11). ### Analysis of effectiveness (supervisory cooperation and resources) - The framework for cooperation with supervisory authorities is generally adequate. - The FSC does not appear to have an adequate level of resources to cover AML/CFT as well as all other areas of risk. ### Recommendations and comments (supervisory resourcing) - Recommendation: - Increase the level of resources in the FSC’s Supervisory Division to ensure that all areas of risk related to the operation of licensed institutions are adequately covered. ### Implications for FATF Recommendation 26 - Assessment: Compliant ### Controls and monitoring of cash and cross-border transactions (FATF Recommendations 22–23 and Interpretive Note) - FATF Recommendation 22 — Description: - Powers exist to enable law enforcement to carry out intelligence-led or structured risk testing examinations at ports and airports. - Purely random checks are not provided for in law; authorities need reasonable grounds for searches. - Customs and Police share facilities at the ports and maintain close links with port security personnel for examining and searching passengers and baggage prior to embarkation. - Security personnel can notify customs/police of detections of significant sums of currency or negotiable instruments. - Unaccompanied baggage is subject to examination, either intelligence-led or under structured risk testing. - Historical exercises: - During 1999 a national exercise involving the United Kingdom and Isle of Man Customs Services tested physical cross border movements of cash and bearer negotiable instruments between the United Kingdom and the Isle of Man. - For several months in 2001, customs officers examined all movements of persons and goods into the Island. On neither occasion was any cash or negotiable instrument found to be the proceeds of or intended for use in drugs, crime or terrorism. - Extensive intelligence networks exist with agencies outside the Isle of Man to ensure information relating to smuggling reaches competent authorities. - The Island’s recent introduction of a registration regime for money service businesses has further enhanced the ability to gather intelligence on persons who may be or may become involved in the transportation of currency. - FATF Recommendation 23 — Description: - The reporting system on the Isle of Man is suspicion based; there is no requirement to report transactions purely in relation to a certain threshold. - Authorities consider electronic funds transfers a greater threat than cash transactions but require institutions to pay appropriate attention to cash transfers. - Authorities view the suspicion-based reporting approach as a focused and efficient means of monitoring and identifying transactions relating to crime. - Interpretive Note to FATF Recommendation 22 — Description: - See response to 23. - Movements of all goods into and out of the EU including high value goods such as gold or diamonds transported commercially or privately must be declared to customs. Powers under the Customs and Excise Management Act 1986 enable examination of all such movements. ### Ratings of compliance with FATF Recommendations (selected entries from Table 7) - Selected FATF Recommendation ratings (Based on Criteria — Rating): - 1 – Ratification and implementation of the Vienna Convention: 1 — Compliant - 2 – Secrecy laws consistent with the 40 Recommendations: 43 — Compliant - 3 – Multilateral cooperation and mutual legal assistance in combating ML: 34, 36, 38, 40 — Compliant - 8 – FATF Recommendations 10 to 29 applied to nonbank financial institutions: See answers to 10 to 29 — Largely compliant - 10 – Prohibition of anonymous accounts and implementation of customer identification policies: 45, 46, 46.1 — Largely compliant - 11 – Obligation to take reasonable measures to obtain information about customer identity: 46.1, 47 — Largely compliant - 12 – Comprehensive record keeping for five years: 52, 53, 54 — Compliant - 15 – If financial institutions suspect funds stem from criminal activity, required to report promptly to the FIU: 55 — Compliant - 20 – AML rules applied to branches and subsidiaries located abroad: 61 — Largely compliant - 26 – Adequate AML programs in supervised banks, financial institutions or intermediaries; authority to cooperate with judicial and law enforcement: 66 — Compliant - 38 – Authority to take expeditious actions in response to foreign requests to identify, freeze, seize and confiscate proceeds or other property: 11, 15, 16, 34, 34.1, 35.2, 39 — Largely Compliant - SR II – Criminalize the FT and terrorist organizations: 2.3, 3, 3.1 — Largely Compliant - SR VII – Strengthen customer identification measures for wire transfers: 48, 51 — Not being rated in light of the two year compliance period provided by FATF. ### Summary of effectiveness of AML/CFT efforts (Table 8 — selected headings) - Criminal Justice Measures and International Cooperation: - I — Criminalization of ML and FT: - Framework for criminalizing money laundering is generally adequate. - Gap in criminalizing the financing of terrorism relating to the limited scope of terrorist activities covered by the POTA and inadequate definition of financing of terrorism; will be remedied once the Anti-Terrorism and Crime Act is implemented. - The Isle of Man needs to implement legislation to allow the UN Convention for the Suppression of the Financing of Terrorism and the UN Convention Against Transnational Organized Crime (Palermo Convention) to be extended to the Isle of Man. - Effectiveness would be enhanced by expanding statutory enforcement sanctions available to the FSC and IPA. - II — Confiscation of proceeds of crime or property used to finance terrorism: - Framework is generally adequate. - Would be enhanced by provision for forfeiture of property of corresponding value in connection with terrorist activities and authority to share assets other than drug assets with other jurisdictions. - Concern about limited scope for civil forfeiture. - III — The FIU and processes for receiving, analyzing, and disseminating financial information: - Arrangements are generally adequate. - Potential weaknesses: absence of a requirement for STRs to be submitted to the FCU and the inability of the FIU to access all government databases on a real-time basis. - IV — Law enforcement and prosecution authorities, powers and duties: - Framework is generally adequate. - Would be enhanced by an explicit legal basis for the use of controlled delivery and other undercover operations. - V — International cooperation: - Framework considered adequate. - Legal and Institutional Framework for All Financial Institutions: - I — General framework: - Generally effective, but the FSC does not have statutory authority to regulate or monitor compliance for MSBs (responsibility of Customs and Excise), which is a potential weakness. - II — Customer identification: - Generally adequate, but concerns about satisfactory evidence of identity, identity requirements for legal entities, and reverification of existing customers. - III — Ongoing monitoring of accounts and transactions: - Generally adequate. - Strengthening suggested: broaden guidance on business relationships and transactions with persons from countries with inadequate AML/CFT systems; concerns on enhanced scrutiny to wire transfers and reporting of unusual or complex transactions. - IV — Record keeping: Generally adequate. - V — Suspicious transactions reporting: Generally adequate. - VI — Internal controls, compliance and audit: - Generally adequate. - Strengthening suggested: require testing of AML/CFT systems against home and host country standards; concerns about designation of an MLRO, application to foreign branches/subsidiaries, and adequacy of employee screening. - VII — Integrity standards: - Generally adequate except need to expand “fit and proper” to include conviction for a serious crime. - VIII — Enforcement powers and sanctions: - Framework generally adequate but gaps in coverage and uniformity for administrative sanctions; could be strengthened by addition of a range of administrative sanctions. - IX — Cooperation between supervisors and other competent authorities: - Framework generally adequate; FSC lacks adequate resources to cover AML/CFT as well as all other areas of risk. ### Recommended Action Plan (selected entries from Table 9) - Criminal Justice Measures and International Cooperation — Recommended Action: - I — Criminalization of ML and FT: - Implementing legislation, in particular the Anti-Terrorism and Crime Act, should be adopted or implemented by the Isle of Man 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. - The Isle of Man authorities should increase the staffing level in the FCU to its authorized strength. - Authorities should re-evaluate the organizational structure/functions of the FCU so that resources are permanently dedicated to ML/FT operations/investigations (workload is too widespread; FCU required to investigate all financial related frauds etc.). - The appointment of an assistant to the dedicated legal officer in the attorney general’s chambers should be pursued. - II — Confiscation of proceeds of crime or property used to finance terrorism: - Amend relevant legislation to provide for confiscation of assets of equivalent value in connection with the financing of terrorism. - Consider passage of a law establishing an asset forfeiture fund into which all or a portion of confiscated property will be deposited and used in the management of seized and confiscated property and for other appropriate purposes. - Consider amending relevant laws to explicitly provide for the authority to share assets other than drug assets with other jurisdictions. *Source: IMF assessment (cr03367).* ### Section 63(4) of the Drug Act. ### Section 63(4) of the Drug Act. ### III—The FIU and processes for receiving, analyzing, and disseminating financial information and other intelligence at the domestic and international levels - Consideration should be given to amending the relevant laws to require that the report be made directly to the FCU, and that it be made in writing on a form to be issued by the FCU. - Consideration should be given to amending relevant laws to permit the FCU to require the submission of additional information by reporting parties. - Consideration should be given to providing the FCU expeditious or real-time access to public and nonpublic databases without the need for a court order. - Consideration should be given to amending the relevant laws to provide explicit legal authority for the FSC to issue guidance notes. - With respect to the IPA, consideration should be given to enactment of the Insurance (Amendment) Bill to explicitly provide for authority to issue binding guidance notes with explicit sanctions for noncompliance. - Operational structure and resourcing recommendations for the Isle of Man FCU: - The operational structure of the Isle of Man FCU needs to be evaluated in order to prioritize and focus on the subject of ML/FT. - Staffing levels should be increased to the authorized strength. - The financial investigation team of Customs and Excise could be amalgamated with the FCU to improve effectiveness and streamlining of enquiries into ML/FT. - Increase the number of support staff working in the FCU so Law Enforcement personnel can dedicate themselves to the investigative process of ML/FT. ### IV—Law enforcement and prosecution authorities, powers and duties - Consideration should be given to passage of the existing bill to regulate undercover techniques to provide an explicit legal basis for controlled delivery and other undercover operations. ### Legal and Institutional Framework for Financial Institutions — I—General framework - Consideration should be given to rationalizing existing regulatory arrangements for MSBs by enacting legislation under which the statutory responsibilities of Customs and Excise with respect to MSBs would be transferred to the FSC. ### Legal and Institutional Framework for Financial Institutions — II—Customer identification - Relevant laws should be amended to explicitly require that customer identification procedures be followed by reporting parties. - Consideration should be given to imposing a requirement for the re-verification of existing customers. - Consideration should be given to amending relevant laws to limit the availability of the AML exemption to those entities regulated in EU States rather than to entities covered under the EU AML Directive. - The Notes should be amended to require licensees to exercise care in initiating transactions with companies that have nominee shareholders. - The FSC should redouble efforts to direct FIs towards the customer identification standards proposed by the Position Paper to ensure greater consistency in approach by licensees. ### Legal and Institutional Framework for Financial Institutions — III—Ongoing monitoring of accounts and transactions - Within the two-year period referred to by FATF, relevant laws should be amended to require accurate and meaningful originator information on funds transfers remain with the transfer through the payment chain. - FIs should give enhanced scrutiny to wire transfers that do not contain complete originator information. - The Notes should be expanded to require financial institutions to give special attention to business relationships and transactions with persons from countries that do not have adequate systems to prevent money laundering, in circumstances other than those related to correspondent banking. ### Legal and Institutional Framework for Financial Institutions — V—Suspicious transactions reporting - Consideration should be given to providing the FCU with the authority to give instructions to reporting entities and to require FIs to observe instructions of the FCU. ### Legal and Institutional Framework for Financial Institutions — VI—Internal controls, compliance and audit - Consideration should be given to imposing a requirement that all Isle of Man FIs apply Isle of Man legal and regulatory requirements in respect of AML/CFT to their branches and subsidiaries outside of Isle of Man. - Consideration should be given to ensuring institutions test compliance of AML/CFT systems against home and host country standards. - Consideration should be given to requiring appointment or designation of an MLRO for FIs other than banks. (Authorities indicated the Code will be amended to require such appointment.) - Consideration should be given to amending laws to require banks and insurance companies to report any change in MLRO position to the FSC and IPA, as is already required for trust and investment company businesses. - Consideration should be given to amending relevant laws to require all FIs to put in place adequate screening procedures to ensure high standards when hiring employees. ### Legal and Institutional Framework for Financial Institutions — VII—Integrity standards - Consideration should be given to amending the Code to explicitly prohibit involvement of criminals in FIs and to define minimum standards for ‘fit and proper,’ consistent with Isle of Man human rights and other relevant legislation. ### Legal and Institutional Framework for Financial Institutions — VIII—Enforcement powers and sanctions - Consideration should be given to adding the following to the legal framework for the FSC and IPA: - Expand power to remove or disqualify an auditor to apply to all regulated FIs and not just collective investment schemes, with regulations issued by the FSC. - Power to appoint a provisional or temporary administrator, with court approval if necessary. - Power to impose civil money penalties or administrative fines against individuals, such as directors, officers, and controllers; as well as legal persons. - Empower the FSC and the IPA to disqualify principal persons from regulated activities. - Explicitly refer to ML and FT in the grounds for imposition of these sanctions. - Ensure sanctions are uniform across all financial sectors so the same rules apply to every FI. ### Legal and Institutional Framework for Financial Institutions — IX—Cooperation between supervisors and other competent authorities - The level of resources in the FSC’s Supervisory Division should be increased to ensure that all areas of risk related to the operation of licensed institutions are adequately covered. ### Sector-Specific: Banking, Insurance, Securities — II—Customer identification - The FSC should redouble efforts to ensure a greater degree of consistency in the approach adopted by licensees with regard to the KYC issues addressed in the Position Paper (Banking, Insurance, and Securities sectors). ### C. Authorities’ Response to the Assessment — Action Taken/To Be Taken I—Criminalization of ML and FT - The Anti-Terrorism and Crime Bill has passed through all its parliamentary stages in the Isle of Man and Royal Assent was announced in June. The Act gives significantly more powers to combat FT. - Consideration will be given to the recommendation to amend the legal framework to enhance the FSC’s statutory enforcement sanctions, specifically powers to: remove or disqualify an auditor; appoint a provisional or temporary administrator, with court approval if necessary; and impose civil money penalties (administrative fines) against individuals, such as directors, officers and controllers, as well as legal persons. - Under the Insurance (Amendment) Bill 2003, the IPA has included the power to remove or disqualify an auditor and the power to impose civil money penalties (administrative fine) against individuals, such as directors, officers and controllers, as well as legal persons. - The staffing level in the FCU has been increased to its authorized strength. - The organizational structure of the FCU has been evaluated with two staff dedicated to ML/FT operations/investigations. II—Confiscation of proceeds of crime or property used to finance terrorism - The Anti-Terrorism and Crime Bill has passed through all its parliamentary stages in the Isle of Man and Royal Assent was announced in June. The Act gives significantly more powers to combat FT and will enable the forfeiture of assets of corresponding value. III—The FIU and processes for receiving, analyzing, and disseminating financial information and other intelligence at the domestic and international levels - S4.01 of new Notes explicitly provide for the identification of complex and unusual transactions, and suspicious patterns of behavior. - Consideration is being given to amending relevant laws to clarify the legal authority for the FSC to issue guidance notes. - Explicit legal authority for the IPA to issue guidance notes and regulation on AML matters is included within the Insurance (Amendment) Bill 2003. - Legal clarification to provide an affirmative obligation that STRs must be submitted to the FCU will be considered as part of the review of the Code. - The obligation that STRs must be submitted to the FCU by all persons required to submit STRs is included within the CTP. - FCU authority to access all government databases: still to be considered. - The organizational structure of the FCU has been evaluated with two staff dedicated to ML/FT operations/investigations. - The staffing level in the FCU has been increased to its authorized strength. - The Chief Officers of the Police and Customs and Excise Division have signed an MOU seeking to encourage a closer working relationship between the two organizations, covering ML/FT investigations and other law enforcement issues. IV—Law enforcement and prosecution authorities, powers and duties - New legislation regulating undercover techniques will be introduced in 2003. V—International cooperation - No recommended action made by the IMF. Legal and Institutional Framework for Financial Institutions — Actions Taken/To Be Taken I—General framework - The Anti Money Laundering (Money Service Businesses) Regulations 2002 were introduced in August 2002. These provide for the registration and monitoring of all MSBs (bureau de change, check cashing, and money transmission services) operating from the Island, including powers to enter, inspect, etc., and also amend the AML Code 1998 to bring MSBs within its cover. II—Customer identification (actions) - Points regarding amendments to laws for KYC requirements and AML exemption limited to those regulated in EU States will be considered under the review of the AML Code. - Language used in S3, S3.02, S3.03 and S3.04 of the new revised Notes has been strengthened as suggested by the IMF team. - Language used in S3.07 regarding postal and telephone applicants will be reviewed. - For higher risk customers, S3.16 of the Notes has been amended to require senior management or board level to review decisions to commence the business relationship and to review on at least an annual basis. - Apart from PEPs, S3.16 of the new Notes provides that a license holder should not accept or continue a business relationship with other high risk customers if it knows or suspects that funds derive from corruption or a misuse of public assets. - Notes will be reviewed regarding the requirement to undertake periodic re-verification of personal customers under certain circumstances. - The IPA’s requirement for the re-verification of existing customers is included within the CTP. - S4.04 of the Notes refers to the FATF recommendation to establish a requirement for the inclusion of originator information on funds transfer. The FSC accepts there is a global problem of absence of originator information due to IT limitations. - New Notes require a license holder to conduct enhanced scrutiny of and monitor funds transfers that do not contain 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. - S3.03 of the new Notes formally requires license holders to establish and verify the identity of beneficial owners of companies. - Initiatives to incorporate the provisions of the Overriding Principles Paper regarding professional intermediaries into the legal framework and the Notes will be completed, in particular following a decision by FATF on its treatment of such persons. III—Ongoing monitoring of accounts and transactions (actions) - Re: wire transfers. S4.04 of new Notes has been enhanced, recognising that compliance may only be 100% possible at a future date, as the ability to comply is based on international acceptance in this area. - Re: business relationships with countries that do not have adequate systems. This will be considered in the review of the Code. - S4.01 of the Notes has been rewritten to reflect the IMF’s suggestions regarding language needed to effectively communicate the standards required by the FSC. V—Suspicious transactions reporting (actions) - Will be considered as part of the review of the Code. - The IPA details the offence of tipping off within the CTP. VI—Internal controls, compliance and audit (actions) - The IPA specifies the requirement that Isle of Man institutions apply Isle of Man legal and regulatory requirements in respect of AML/CFT to their branches and subsidiaries outside of Isle of Man in the CTP. - A new section, S2.08, has been included in the new Notes to cover the requirement to impose standards of AML/CFT to branches etc outside Isle of Man. - The Banking Code requires the appointment of Compliance Officer. The AML Code requires license holders to appoint a Money Laundering Reporting Officer to whom suspicious transaction reports should be made by staff. - This is being considered in the review of the Banking Code for the appointment of an individual responsible for AML/CFT compliance. - The IPA already has a requirement to appoint a Money Laundering Reporting Officer. A requirement already exists for insurance companies to report the appointment of an MLRO within 28 days of appointment. As Insurance Business must at all times have an MLRO the IPA considers that this meets the requirements for any change to be notified. - Consideration will be given to the recommended requirement for banks to implement systems for testing of AML/CFT compliance against home country KYC standards; this will be considered with a view of application to all license holders. VII—Integrity standards (actions) - The prohibition of involvement of criminals in FIs is already being applied in practice by the FSC through the application of the fit and proper criteria. Further consideration will be given in a review of the Code and an amendment of the licensing policy. - The IPA considers the “fit and proper” status of persons connected with a firm is of wider significance than AML and so this issue is best dealt within more general regulatory provisions. Individual consideration is given to each prospective appointment. VIII—Enforcement powers and sanctions (actions) - The power for the IPA to impose civil money penalties or administrative fines, and to disqualify principal persons from regulated activities, is included within the Insurance (Amendment) Bill 2003. - Consideration will be given to further strengthening the FSC’s enforcement sanction powers including the power to impose civil money penalties or administrative fines, and powers to disqualify principal persons from regulated activities, with a view to application to all license holders. IX—Cooperation between supervisors and other competent authorities (actions) - The IPA has undertaken to increase its complement of staff as necessary to ensure adequate monitoring and supervision. - The FSC has undertaken to ensure it has sufficient resources to undertake adequate supervision of its license holders and ensure sustainability of comprehensive surveillance of all financial institutions with regard to all areas of risk, including AML/CFT. - An increase of two supervisory staff has already been agreed with effect from April 2003. Sector-specific actions (summarized) - Banking Sector: - S3.01 of the Notes advises risks of business relationships established prior to December 1998 and includes a need to review such relationships; KYC issues relating to pre 1998 business will be further considered following a FATF decision. - S3.16 amended for senior management/board review and annual review for higher risk customers. - Insurance Sector: - Following the IMF visit the CTP were revised and the wording strengthened. - CTP details the requirement for an MLRO to be appointed and any subsequent appointment notified to the IPA. - CTP require that as a minimum Isle of Man standards are applied in all branches and subsidiaries. - IPA assesses “fit and proper” status on a case by case basis. - Securities Sector: - S3.01 advises review of relationships established prior to December 1998; related KYC issues to be considered after FATF decision. - S3.16 amended for senior management/board review and annual review for higher risk customers. ### III. IAIS CORE PRINCIPLES — A. General - The assessment of the Isle of Man’s compliance with the IAIS Core Principles was completed as part of the IMF Offshore Financial Center (OFC) assessment program. - The assessment was undertaken by John Darwood (Consultant MFD). - The assessment benchmarks the current state of insurance supervision, recognizes extensive changes in recent years, and suggests further improvements to develop an action plan to move toward full compliance with the Core Principles. *IMF Offshore Financial Center assessment (cr03367).* ### 24. This assessment has been conducted by comparison of the standards and practices of ### Assessment of Insurance Standards and Practices ### Institutional and macroprudential setting - The assessment has been conducted by comparison of the standards and practices of insurance supervision with the Insurance Core Principles and Insurance Core Principles Methodology promulgated by the International Association of Insurance Supervisors (IAIS). - Meetings were held with various insurance market associations and some individual companies. - The Isle of Man government Insurance and Pensions Authority (IPA) is the responsible body for the supervision of all insurance activity on the Island with the exception of life insurance intermediaries who are registered with the FSC for life business only. - The IPA Mission Statement: - The IPA exists to maintain and develop an effective regulatory framework for insurance and pension business which will: - provide security for investors; - prevent and deter the Isle of Man being used for the purposes of financial crime; - preserve the international reputation of the Isle of Man; - ensure a flourishing environment for Isle of Man businesses. ### Structure of the insurance market: three major strands - The Isle of Man insurance market comprises three major strands: - international life business; - captive insurance business; - domestic general and life business. ### International life business - Characteristics and market focus: - Locally incorporated subsidiaries of mainly United Kingdom and other European companies write international business through a variety of international intermediaries who are usually outside Isle of Man regulatory purview. - The IPA is the home prudential regulator of these locally incorporated companies. - The U.K. Financial Services Authority (FSAUK) is directly involved only if the company does business in the United Kingdom, or the U.K. parent does Isle of Man domestic business. - Training, development and compliance tend to follow U.K. standards and cultures. - In April 2002, the education subcommittee of the Manx Insurance Association issued “Best Practice Guidelines,” which has been signed off by all members. - Product mix and markets: - The original thrust was the U.K. expatriate market; it has broadened to persons interested in insurance/investment linked products. - Major markets are the United Kingdom, Middle East, Far East (HK) and Latin America, not the EU or the United States. - About 85 percent of products sold are single premium type unit linked investments where the investment risk rests with the policyholder rather than the insurer. - Industry concentration and funds under management: - The same 16 companies (the seventeenth has only just been licensed) have been writing this business for many years. - Total funds are estimated to be around £14 billion. - The largest company holds £3.2 billion of policyholders’ funds. ### Captive insurers - Scale and history: - 165 captives are listed by the IPA; the number includes a few companies not “captive” in the narrow sense but writing special reinsurance business or extended warranty business, and one locally incorporated general insurer writing business in the domestic market. - The first captive was established on the Island in 1981. - Total premium income of these captives in 2001 was approximately £1.05 billion. - Quality and management: - The captive business is of very good quality, comprised mainly of subsidiary operations of major blue chip U.K. parents, and of considerable size. - Captive insurers rely on captive insurance managers, of whom there are 22 registered, although the bulk of the business rests with the top four or five of them. - These managers are mostly local subsidiaries of major international insurance broking and captive management businesses, one of which controls its entire worldwide captive operations from the Island. ### Domestic general and life business - Market participants and distribution: - There is only one domestic general insurer, which estimates it has about a 25 percent market share. - All other domestic business is served by U.K. authorized insurers that need to register with the IPA if they have a fixed place of business on the Island (i.e., branch operation). - If U.K. authorized without a branch there is no need to register; in such circumstances business will usually be through a local registered intermediary. - For life business, the local community is served by registered intermediaries who place the business with a variety of U.K. life insurers or with representatives of U.K. life insurers. On-site visits are now the norm for these companies. ### Intermediaries and insurance managers - Intermediaries: - Life intermediaries dealing in domestic business are registered only with the FSC for this business. - The only general business intermediaries who need to be registered are independent persons or companies (i.e., not answerable under a written agreement to one or more insurers) dealing in domestic business. - There are some 22/25 of these independent general business intermediaries, some of which may also be registered with the FSC for investment activity. - On-site visits are now the norm for these intermediaries. - Insurance managers: - There were about 27 insurance managers at peak; consolidations and mergers have reduced the current number to 22. - A recent increase in fees led to a cleaning out of some dormant companies; previously only one fee was paid on registration, now an annual fee applies. - These 22 managers are now subject to on-site visits and corporate governance is included. ### Supervisory practices and life supervisory issues - Increased supervisory activity: - Supervisory work has increased significantly due to prudential and compliance issues, including on site inspections, which spin off from anti-money laundering considerations. - On site visits for AML will be on a two-year basis—13 of the 16 companies have already been visited—but no regular system yet set up for other inspections, which have been on a focused “as needed” basis. - Prudential focus: - Solvency problems, if any, have revolved around reserving policies and control of management expenses; business plans have to be carefully checked. - Corporate governance is touched on during on site visits, and also when changes in control or directors occur. - The Manx Insurance Association members are aware of the need to attend to corporate governance considerations; governance expectations flow down from parent companies and fit with compliance and internal risk management procedures and the impact of external auditors. ### Legal framework and planned legislative reform - Principal legislation and guidance: - The principal legislation is the Insurance Act 1986, as amended, and the associated Insurance Regulations 1986 (as amended) together with the Insurance Intermediaries (General Business Act) 1996 and Insurance Intermediaries (General Business) Regulations 1996. - Also relevant are the Life Assurance (Compensation of Policyholders) Regulations 1991, Guidance Notes for Insurance Business and Guidance on the use of Derivative Instruments, April 2002. - Planned reform: - The Insurance (Amendment) Bill is expected to come into effect by October 2003. - The bill will reflect the outcome of an extensive review of the present legislation and powers in relation to the IAIS Core Principles, and should, when effected, enable almost all the principles to be fully observed. *Assessment conducted by comparison with IAIS Insurance Core Principles and Insurance Core Principles Methodology; supervisory findings and market data pertain to the Isle of Man and its Insurance and Pensions Authority (IPA).* ### 40. The preconditions for an effective insurance supervision in Isle of Man are given. The ### 40. The preconditions for an effective insurance supervision in Isle of Man are given ### Preconditions for effective insurance supervision - The infrastructure is well developed because: - the legal system in place is functioning well; - the applied accounting standards (internationally recognized standards) are comprehensive; - the actuarial and auditing profession apply recognized standards; - an efficient financial market (banks, investment funds ) exists; - sound and effective macroeconomic policies are in place so that insurance companies can operate within a stable environment. ### Detailed assessment: overview of IAIS Insurance Core Principles - Principle 1 (Organization of an Insurance Supervisor): Non-observed. - Description highlights IPA as an independent Statutory Board established under the Insurance Act 1986 but operating under the umbrella of the Isle of Man treasury; treasury appoints Members of the IPA subject to approval of Tynwald. - Non-observance driven primarily by political involvement at Board level and the Insurance Act S10 provision allowing appeals to the treasury (to be addressed in proposed Amendment Bill which will transfer appeal process to the council of ministers via the chief secretary and create an independent committee). - Proposed transfer of powers for making secondary legislation (regulations) from the treasury to the IPA. - Recommendation: Steps should be taken to ensure that the IPA is distanced from any possible political influence; the board should not have any representation from Tynwald. - Principle 2 (Licensing): Observed. - Licensing follows Insurance Act and Regulations; process is thorough and expeditious, applicants submit Business Plan and suitability of owners/directors/senior management is assessed. - Comments: New applicants typically consult supervisor ahead of filing; guidance notes assist process. - Principle 3 (Changes in Control): Observed. - Insurance Act S20 covers Changes in Control; “controller” defined; notifications required; suitability of new controllers and business plans reviewed case by case. - Principle 4 (Corporate Governance): Not applicable (technically). - Insurance Act does not address principle; Companies Acts have some bearing. - In practice supervisor takes interest and requires statements of director responsibilities and auditor countersignature; Amendment bill will include enabling provisions for IPA to make regulations or statutory codes. - Recommendation: Principle should be fully recognized in legislation via appropriate regulations; consider Offshore Group of Insurance Supervisors’ guidelines. - Principle 5 (Internal Controls): Largely observed. - Insurance Act S21 and S22 provide wide powers of enquiry and remedial action; Internal Controls addressed via On-site inspection program and published guidelines (Common Trading Practices). - Comment: New enabling provisions in Amendment bill recommended; consider special nature of international life insurers and managers. - Principle 6 (Assets): Largely Observed. - Insurance Act and Regulations provide framework for assets covering technical provisions; detailed annual actuarial valuations for life companies; external actuarial consultants assist. - Comment: On-site inspections need to be fully operational; annual reporting for Life companies being updated and should be finished by mid 2003. - Principle 7 (Liabilities): Largely Observed. - Act and regulations cover format of annual accounts and technical provisions; actuary addresses Life company specifics; supplementary liability information required including claims development analysis. - Comment: On-site inspections and updated guidance notes pending; reinsurance credit addressed via actuarial valuation and gross/net reporting. - Principle 8 (Capital Adequacy and Solvency): Observed. - Act S17 requires solvency at all times; actuary certifies annually for life companies; guidance notes require agreed levels of capital and free reserves reflecting size, complexity, products and risks. - Comment: Automated review system (MISS) assists staff; consulting actuaries provide input. - Principle 9 (Derivatives and “Off-Balance Sheet” Items): Materially non-observed. - Act has no detailed provisions on derivatives; supervisor can set requirements and has issued Life insurer guidance (updated April 2002) and admissibility tests; off-balance sheet items need disclosure. - Assessment: Materially non-observed. - Recommendation: Reporting requirements under existing regulations should be expanded to take the principle fully into account. - Principle 10 (Reinsurance): Observed. - Insurance definition includes reinsurance; full disclosure and assessment of reinsurance arrangements at application and annual review; supervisor has online access to a major rating agency’s reports; information sharing with other supervisors possible. - Principle 11 (Market Conduct): Largely observed. - Covered by Insurance Act, Insurance Intermediaries (General Business) Act 1996, respective regulations, and Common Trading Practices. - Intermediary registration split: life investment-advising intermediaries registered with FSC; general insurance intermediaries representing U.K. insurers not required to be registered if insurers accept responsibility; remaining intermediaries (~22) registered with IPA (and FSC if dealing in life). - Intermediaries required to have at least £250,000 Professional Indemnity. - Comments: Two intermediaries account for 70 percent of all local general business; Amendment bill expected to provide more specific powers (disclosure to customers, conflicts of interest, code of practice). Recommendation: Consider bringing all intermediaries within scope of the Act. - Principle 12 (Financial Reporting): Observed. - Insurance Act and regulations require comprehensive reports including audited annual accounts; life companies submit actuarial valuation and report; six month filing deadline from company year-end (most file earlier). - Staffing: Two and a half staff plus consulting actuary handle 17 international life insurers; another two staff handle 165 general (mainly captive) insurers. - Comment: Exemption of insurance managers from reporting of concern; recommendation that managers file audited annual returns and lists of managed companies. - Principle 13 (On-Site Inspection): Largely observed. - Insurance Act Ss 21/22 empower supervisor to obtain information, inspect and investigate; program includes specific company inspections and anti-money laundering visits to International life insurers; program extended to general insurance intermediaries and captive managers. - Comment: Practical implementation in development; staff resources will likely need strengthening in the medium term. - Principle 14 (Sanctions): Largely observed. - Insurance Act provides many sanction powers: license revocation, remedial actions, conditions; recovery plan required within 30 days if company in unsound state; Companies Act S162 addresses insolvency; schedule 3 of Insurance Act contains insolvency/winding up provisions for life companies. - Gaps: civil penalties and fines for breaches of regulations not fully covered—proposed Amendment bill will introduce these powers. - Principle 15 (Cross-Border Business Operations): Observed. - Insurance Act requires licensing and reporting for all persons carrying on insurance business on the Island; foreign companies, local subsidiaries and intermediaries covered; branches of U.K. insurers have certain exemptions; new subsidiaries/branches subject to consultation between supervisors; information treated confidentially. - Principle 16 (Coordination and Cooperation): Observed. - Supervisor can liaise with other supervisors; agreements in place with FSAUK and party to IAIS general information sharing MOU; membership in Offshore Group of Insurance Supervisors facilitates exchange. - Principle 17 (Confidentiality): Largely observed. - Section 24 of the Act provides confidentiality with some gateways considered not entirely adequate; no freedom of information provisions override confidentiality. - Comment: Provisions under review and to be updated in proposed Amendment bill. ### Summary observance counts (from Table 11) - Observed: 7 — CP 2, 3, 8, 10, 12, 15, 16. - Largely observed: 7 — CP 5, 6, 7, 11, 13, 14, 17. - Materially non-observed: 1 — CP 9. - Non-observed: 1 — CP 1. - Not applicable: 1 — CP 4. ### Recommended Action Plan (from Table 12) - Organization of an Insurance Supervisor (CP 1) - Steps should be taken to ensure the IPA is distanced from any possible political influence; the board should not have any representation from Tynwald. - Review proposed Amendment bill to resolve outstanding issues. - Corporate Governance and Internal Controls (CPs 4–5) - Fully recognize principle within legislation by developing appropriate regulations and statutory codes; review Amendment bill accordingly. - Prudential Rules (CPs 6–10) - Carefully review on-site inspection procedures to ensure all appropriate checks are covered. - Expand reporting requirements under existing regulations to incorporate the principle on derivatives/off-balance sheet items. - Market Conduct (CP 11) - Consider bringing all intermediaries within the scope of the Act. - Monitoring, Inspection, and Sanctions (CPs 12–14) - Carefully monitor staff resources as programs are developed. ### Authorities’ response / Action Taken or To Be Taken - Organization of an Insurance Supervisor (CP 1) - 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 division of responsibilities between board and executive. - The appeals process will be revised by the Insurance (Amendment) Bill 2003 removing the treasury from it; power to make secondary legislation will be transferred to the IPA. - Corporate Governance and Internal Controls (CPs 4–5) - The Insurance (Amendment) Bill includes enabling provisions to allow the IPA to make regulations or statutory codes and update IPA’s powers of inspection, investigation and range of sanctions. - Prudential Rules (CPs 6–10) - Noted and accepted. - Market Conduct (CP 11) - The IPA will give consideration to bringing all intermediaries within scope, taking into account developments in the UK market and EU regulation. - Monitoring, Inspection, and Sanctions (CPs 12–14) - Noted and accepted. *Source: IMF detailed assessment of observance of the IAIS Insurance Core Principles for the Isle of Man.* ### 41. This report has been prepared in the course of a formal assessment by the IMF ### cr03367 - 41. This report has been prepared in the course of a formal assessment by the IMF ### Scope and methodology of the IMF mission - The mission was a formal IMF assessment of the regulatory and supervisory arrangements of the Isle of Man for its financial sector, evaluating conformity with international standards and statements of best practice. - The assessment was undertaken by John Farrell (Consultant to MFD). - The mission reviewed rules of law, statements of best practice, and evidence of current practice against the 30 IOSCO Principles. - For each IOSCO Principle the mission judged whether it was: (a) implemented; (b) broadly implemented; (c) partially implemented; (d) not implemented; or (e) not applicable. - The mission used background material including IMF guidance notes, IOSCO reports and resolutions, OECD publications, Isle of Man legislation/regulations/orders/codes/guidance notes, FSC website documents, IOSCO self-assessments prepared by the FSC, and various FSC operational documents. - The mission had extensive discussions with government representatives, the FSC, professional bodies, industry associations, and a number of supervised firms; it did not have the opportunity to confer with independent commentators. - No factors impaired the assessment other than limited time available. ### Institutional, market, and legal setting - Core Isle of Man rules for securities and investments regulation relate to: - the functions and powers of the FSC; - licensing and supervision of those undertaking investment business (dealing, arranging, managing investments, giving investment advice, operating/administering collective investment schemes (CIS)); - authorization and supervision of CIS’s; - the offer of securities and investments to members of the public and others. - Administration and enforcement of these rules is by the FSC; prosecution of criminal offences under the Companies Acts is a matter for the attorney general. - “Investment” is defined to include the full range of securities and investment products; principal regulated investment products are interests in CIS’s. Life insurance policies with the character of investments are regulated as insurance products and are dealt with elsewhere in the mission’s report. - CIS categories: authorized schemes, recognized schemes, international schemes, and exempt schemes. - Authorized schemes are available for offer to the general public in the Isle of Man. - Authorized schemes that meet certain U.K. law requirements may be offered to the general public in the United Kingdom. - Recognized schemes are established outside the Isle of Man but are “recognized” by the FSC for marketing within the Island. - International schemes are intended for more experienced or professional investors and, in practice, are not offered to the general public in the Island. - Market structure and statistics: - Funds under management in CIS’s 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; any listing of securities in Isle of Man based schemes or companies will be in another jurisdiction. ### Preconditions for effective securities regulation and reputational context - The Isle of Man has substantial constitutional independence in domestic affairs, political stability, and willingness to adapt to changing conditions; this has enabled independent legislative frameworks and financial market development policies. - The FSC mission statement: “To promote and secure high standards of integrity, solvency and competence within the Isle of Man financial services industry, to protect investors’ and depositors’ interests and to engender an environment in which financial institutions provide quality products and services for the economic benefit of the Island.” - Market access is determined by the securities regulatory system and FSC decisions; the mission is not aware of particular barriers to entry/exit beyond regulatory ones. - The Isle of Man has conventional general business law including a common law system; securities law is backstopped by contract, tort, property, fraud, company, partnership, and building society law. - Reputation is a key determinant for success as an international finance centre; authorities consider it important to have and be seen to have soundly based law and supervisory procedures and to cooperate with equivalent authorities abroad. - The Isle of Man works directly with organizations such as the OECD and the UN, is party to tax information agreements, and the FSC has bilateral MOUs with the FSAUK, the SEC (United States), and several other overseas regulators on cooperation in regulation. ### Principle-by-principle summary and overall findings - The mission finds the Isle of Man has implemented or broadly implemented 20 of the IOSCO Principles. - The mission finds the Isle of Man has partially implemented 3 Principles: - Principle 1: the responsibilities of the regulator should be clear and objectively stated - Principle 2: the regulator should be operationally independent and accountable in the exercise of its functions and powers - Principle 24: There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk - The mission notes 7 remaining Principles do not apply because there is no secondary market or because there are no Self-regulatory Organizations (SROs). ### Key recommendations (overview) - On the three partially implemented Principles the mission recommended: - that the government and the FSC secure by statute a clear, complete and authoritative statement of the FSC’s responsibilities; - the government and the FSC review the relevant rules of law, policy and practice with a view to providing for the FSC to become a more independent and more accountable financial services regulator and supervisor; - the government secure the enactment of rules of law for dealing with the failure of a market intermediary. - The mission made further operational recommendations recorded in Table 1 and summarized in Table 3 of the detailed assessment. ### Detailed assessment excerpts for Principles 1–3 - Principle 1 (Responsibilities clear and objectively stated) - Legal basis: FSC established by the Financial Supervision Commission Order 1983; the Order requires the FSC to take “such steps as appear to it to be necessary or expedient for the effective supervision of the private financial and commercial sector in the Island, but with the exception of the insurance industry”. - FSC holds responsibilities of Registrar of Companies under the Companies Acts and various other Acts transferred by the Companies (Transfer of Functions) Act 2000. - The mission considers a statutory, authoritative, readily available statement of responsibilities is required; current transfer provisions give a general indication but do not provide a clear or complete statement (eg, responsibility to recommend law reform or to cooperate/communicate with other regulators is not clearly stated). - Assessment: Partially implemented - Comment/recommendation: Government and FSC committed to a review of statute law administered by the FSC; the mission recommends using the opportunity to establish a clear, complete and authoritative statement of the FSC’s responsibilities. - Principle 2 (Operational independence and accountability) - The FSC is established to be operationally independent and fully accountable but relies on government for: - enactment of rules about establishment/constitution and regulation of markets and institutions; - appointment and removal of commissioners; - securing sources and levels of funding; - opportunity to make recommendations on laws it administers; - concern for reputation and good standing and ensuring standards of independence and accountability. - Specific legal powers raising independence concerns: - treasury power to give directions on licensing matters generally and in particular cases (IBA section 3(12)); - treasury power to give directions on inspection and investigation matters generally and in particular cases (IBA section 8(6)); - council of ministers’ power to appoint a Review Committee to review an FSC decision in particular cases (IBA section 15); - council of ministers’ power to give directions as to exercise of FSC functions in relation to a public interest matter and to require FSC to supply information (Statutory Boards Act Schedule 2 clause 12). - The mission considers these powers put FSC independence at risk and create gateways for disclosure of confidential information; section 24(1) and (2) of the Financial Supervision Act 1988 on disclosure exceptions is relevant. - The mission recommends restating policy on allocation of powers to make regulations, regulatory codes, orders or exemptions between the treasury and the FSC and reviewing whether legal powers reflect that policy. - Accountability and transparency: - FSC publishes an annual report but is not required to do so; current report provides limited financial information and is confusing. - The mission recommends the FSC be required to produce and publish an annual report meeting high standards, including statements of financial performance, financial position, cash flows, stakeholders’ equity, service performance, comparative figures and budgets, and commissioner qualifications/interests; the report could be presented to the treasury and tabled in Tynwald. - Statutory indemnities and inconsistencies: - IBA section 15A confers an indemnity for FSC and staff for acts done in exercise of functions; Statutory Boards Act 1987 Schedule 2 clause 11 appears inconsistent regarding liability of FSC officers and should be reviewed. - Conflict of interest and governance practices: - The mission found no practical problems in day-to-day dealings on conflict of interest matters; a code of conduct exists for commissioners and staff; Board delegation procedures are in place with chief executive reporting back. - Assessment: Partially implemented - Comment/recommendation: Government and FSC should jointly review relevant rules of law, policies and practices with a view to providing for the FSC to become a more independent and more accountable financial services regulator. - Principle 3 (Adequate powers, resources and capacity) - The FSC has powers to: - issue/refuse/suspend/revoke investment business licenses; impose/alter conditions; exempt persons or classes from provisions of the IBA and withdraw exemptions; - make regulatory codes (subject to Tynwald approval) and regulations regarding trust treatment of money held by permitted persons (subject to Tynwald approval); - inspect books/accounts/documents and investigate transactions of permitted persons; - require attendance and production of documents (subject to justice of the peace authorization); - enter/search premises and take possession of documents (subject to court warrant); - make recommendations or issue directions to permitted persons; direct that a person shall not be or continue as a director/principal officer of a permitted person; - require assets be transferred to a trustee; apply to the Court to remove/replace a manager or trustee; - issue public statements concerning a person; enter into mutual assistance agreements with recognized regulators; obtain information for recognized regulators; apply to Court for injunction or restitution; request Attorney General to initiate regulatory or criminal prosecutions; publish information or give advice on law and investor rights/enforcement. - Organizational structure: - Divisions: operations, enforcement, policy, companies and supervision; none exclusively responsible for securities and investments work. - Staffing: - The FSC has an approved staff establishment of 58.5 and currently employs 56.5. *IMF mission assessment of the Isle of Man’s securities and investment regulatory framework, as prepared in the course of a formal IMF assessment.* ### 8.4 percent of the FSC’s total resource is allocated to securities and investment work. The ### cr03367 - 8.4 percent of the FSC’s total resource is allocated to securities and investment work. The ### Resource allocation, staffing, and program of work - 8.4 percent of the FSC’s total resource is allocated to securities and investment work. - The FSC relies on appropriation of funds each year by Tynwald on the recommendation of treasury. - The forward program of work of the FSC as described by divisional staff may be adequate for the jurisdiction. - Supervision Division staffing and deployment: - Supervision Division has a staff of 15 persons of which 13 are professional officers. - A total of 7.5 full-time equivalents (FTEs) is committed to securities and investment work. - The Division supervises 55 general investment businesses, 6 stock broking firms, 22 CIS managers, 4 third-party fund administrators, 59 banks, and 2 building societies. - Target inspection frequency: every low risk license holder every two years, every medium risk holder every 18 months, every high risk holder every year; the Division reports it is achieving this target. - Enforcement Division has a complement of 5 professionals; some 40% of its work relates to investigation of unauthorized investment business. - On specialist work (e.g., supervision of a U.K. stock exchange member firm) the FSC will be assisted by an outside professional firm while retaining full responsibility. ### Company law review and markets - There are 134 Isle of Man public companies. - There were 8 public offerings in 2001 and there has been no public offer to date in 2002. - The Companies Acts govern offers of company securities (shares and debentures) by Isle of Man public companies and contain powers of intervention during the securities offering period that are less extensive than those in the IBA and FSA. - The FSC will undertake a review of company law; the mission considers the review very timely and a major task requiring special resources. - The Companies Act 1931 requires filing of prospectuses and prescribes prospectus content; prospectus intervention powers are limited and should be reviewed in the company law reform. - Companies Act periodic reporting: financial statements must be filed within nine months of a company’s year end; the mission suggests this nine-month requirement should be reviewed as too long. ### Regulatory processes, codes, and guidance - The FSC is empowered to issue regulatory codes, orders and regulations subject to Tynwald approval and has made extensive use of this power. - Regulatory codes are in force in respect of: - financial resources and reporting; - clients’ money; - clients’ investments; - conduct of business; - audit requirements; - general requirements; - advertising. - Orders and Regulations include those relating to: - clients’ money; - financial supervision (promotion of unregulated schemes); - financial supervision (authorized persons); - financial supervision (authorized collective investment schemes) (international collective investment schemes) and (scheme particulars); - exemptions from the law. - The FSC publishes guidance notes and very extensive On-line Handbooks for investment businesses and collective investment schemes that bring together statute law, regulations, orders, regulatory codes, guidance notes, licensing introductions, procedures, and application forms. - Any person aggrieved by certain FSC decisions may apply to the Court on a Petition of Doleance. The council of ministers may appoint a Review Committee to review certain licensing decisions. ### Professional standards, confidentiality, and conflict management - All staff must comply with the staff handbook, which contains rules about confidentiality, security, conflicts and personal dealings/investments. - Disclosure requirements and restrictions: - Staff must disclose to the Secretary any significant relationship with a license holder or applicant and holdings of shares and related investments. - Staff are not permitted to hold shares and “related investments” in an organization regulated by the FSC. - Legal protections and obligations: - Unauthorized disclosure of restricted information as defined in the FSA without consent is an offence. - FSC staff are subject to an Official Secrets Act. - Commissioners’ conflicts rules under the FSC’s Code of Conduct require disclosure of relevant personal interests and withdrawal from deliberations and voting on related matters. - The mission’s view: the FSC adheres to and enforces its policies on confidentiality and conflicts. ### Inspection, investigation, surveillance, and enforcement powers - Inspection and investigative powers: - FSC may inspect and take possession of “the books, accounts and documents” of a permitted person and investigate its transactions; it has a power of entry. - With Court authority the FSC may require any person under investigation to attend before the FSC to answer questions and produce documents. - With a Court warrant the FSC may enter and search premises and take possession of documents, using force if necessary. - The Court on application of the FSC may appoint inspectors to investigate and report on the affairs of an operator, manager or trustee of a CIS; equivalent company law power exists. - Enforcement powers: - The FSC may issue directions, withdraw or suspend an investment business license, revoke a CIS authorization, direct an overseas scheme to cease recognition, withdraw exemptions, direct a CIS operator to cease issue or redemption of units, and issue public statements about any person. - The FSC may, with the consent of the Attorney General, prosecute for furnishing false or misleading information and for making misleading statements or engaging in conduct creating a false or misleading impression as to the market, price or value of investments. - The Court may issue injunctions and restitution orders on application of the FSC. - The FSC may impose a requirement that assets be transferred to and held by a trustee. - Limitations noted: - Provisions in the IBA empowering the FSC to impose summary penalties have not been implemented pending a broader review; obtaining consent of the Attorney General is necessary to bring prosecutions. - The mission nevertheless considers the FSC has a wide range of enforcement powers and has implemented Principles 8 and 9. ### Supervision, compliance program, and recommended improvements - Supervision Division activities: - Conducts on-site inspections, manages off-site reporting (monthly, quarterly, annual returns, audited accounts), and handles complaints which inform compliance planning. - Undertakes surveillance work for permitted persons and CISs and has developed risk profiles (low, medium, high). - The mission’s recommendations: - The FSC should describe its proposed program of supervision work for each budget year more fully in its business plan. - The FSC should review its template for on site inspection reports to ensure the purpose is clearly and accurately stated. - The FSC should review procedures for inspecting practical arrangements between scheme manager and the IFA regarding offer documents and promotional material to ensure offshore investors are well informed and advised. - The mission suggests the FSC consider doing more to promote timely, balanced, clear and accurate information and advice to the offshore investor to address mis-selling concerns. ### Cooperation, information sharing, and international engagement - Legal powers and limitations: - The FSC has power under the IBA to enter into mutual assistance agreements and to exercise its supervisory, inspection and investigation powers to obtain information for assisting corresponding authorities. - The FSC may share information under the FSA about information obtained performing functions under the IBA and FSA. - The FSC’s powers to obtain and share customer information are limited: such powers do not apply unconditionally to customer affairs except as necessary for inspection and investigation of a license holder, and sharing customer information is subject to the approval of the chief minister who must be satisfied disclosure is in the public interest. - The FSC can obtain and share information about the source of customer funds under anti-money laundering law; the limitation does not apply under the Insider Dealing Act. - The chief minister’s consent under the IBA has very rarely been needed and, in the FSC’s recollection, has never been withheld. - Because of the customer-information limitation in the IBA, the FSC is not eligible to become a party to the IOSCO multilateral MOU; Government review of FSC powers under the IBA and other Acts is required for participation. - Existing MOUs and memberships: - The FSC has entered into MOUs with Bermuda, Guernsey, Ireland, Jersey, South Africa, United Kingdom. - The Isle of Man is a member of IOSCO, the Enlarged Contact Group of Collective Investment Scheme Supervisors, the International Association of Insurance Supervisors, the Offshore Group of Insurance Supervisors and the Offshore Group of Banking Supervisors. - Domestically, the FSC has close relationships with treasury, the Insurance and Pensions Authority, the Office of Fair Trading and the Police; there is a formal agreement between the FSC and the Financial Crimes Unit. ### Issuers, disclosure, accounting and investor protection - Disclosure and reporting for CISs and companies: - Treasury may make regulations requiring record-keeping, periodical reports to participants and the FSC, and scheme particulars for schemes. - The FSC may make regulatory codes on advertisements, disclosure of commissions or inducements, and financial statements and returns. - Regulations and codes provide detailed regulation for CIS financial and other information. - The FSC has set requirements for information types and the mission recommends a deadline for reporting to the FSC. - Companies Acts and financial reporting: - Companies Acts 1931 and 1982 require public companies to file and publish audited financial statements annually; those statements must be filed with the Registrar of Companies within nine months of a company’s year end. - Auditors’ reports must state whether financial statements have been properly prepared in accordance with the law and whether they provide a “true and fair” view. - Isle of Man companies normally adopt United Kingdom GAAP; companies incorporated elsewhere may adopt other standards (United States GAAP or International Accounting Standards). - Under Companies Act 1982, auditors of a public company must be members of recognized accounting bodies listed in the law. - Investor protections and remedies: - No secondary market operates in the Isle of Man; market regulation for listed securities is typically in the jurisdiction where they trade. - The Office of Fair Trading administers the Financial Services Ombudsman Scheme (mediation and adjudication); a Scheme adjudicator may require payment up to BP.100,000. The Scheme is funded by the government. - Managers of authorized schemes must participate in Compensation Regulations; the maximum payable in respect of any claim is BP.48,000. The scheme is funded by contributions of authorized persons. ### Collective Investment Schemes (CIS) regulation and investor information - Eligibility and licensing: - It is an offence under the IBA to carry on investment business without a license. Investment business includes dealing in investments, arranging deals, managing investments, giving or offering advice, and operation and administration of CISs. - When considering CIS operator license applications the FSC must be satisfied the applicant is fit and proper based on competence, integrity, and solvency; the FSC expects transparent corporate structures and proven track records. - License holders must comply with regulatory codes (financial resources and reporting, clients’ money, clients’ investments, conduct of business, audit requirements, general requirements, advertising) and are subject to ongoing supervision. - Scheme form, asset segregation, and disclosure: - Treasury may make regulations about constitution and management, operator and trustee duties, directors’ powers and duties, and participants’ rights and obligations. The constitution of an authorized CIS must comply with the Financial Supervision (Authorized Collective Investment Schemes) Regulations 1988 and offering documents must comply with the Financial Supervision (Scheme Particulars) Regulations 1988. - Trustees hold scheme assets in trust; for international CISs trustees may be licensed in prescribed territories (Guernsey, Jersey, the United Kingdom). - Client money regulations and regulatory codes about client money and client assets are in place. - Regulation 3 of the Financial Supervision (Scheme Particulars) Regulations 1988 and Schedule 1 require disclosure equivalent to a scheme prospectus, covering service providers, constitution and objectives, sale and repurchase of units, valuation, frequency and basis of valuation, and sale/purchase disclosures. - Assessments by the mission: - The mission considers that the FSC has implemented Principles 17, 18 and 19. - For Principle 20, Paragraph 9 of Schedule 1 requires disclosure of the frequency and basis of valuation of assets and Paragraph 10 deals with sale and purchase disclosures (description continues beyond provided excerpt). *Source: IMF mission report and related assessments contained in cr03367.* ### Part 7 of the Financial Supervision (Authorized Collective Investment Schemes) ### Part 7 of the Financial Supervision (Authorized Collective Investment Schemes) ### Asset valuation and investor reporting - Asset valuations must take place at least twice-monthly. - Managers must provide investors with half-yearly and annual reports giving detailed information on the constituents of the scheme and its performance in accordance with Schedules 3 and 4 of the Financial Supervision (Authorized Collective Investment Schemes) Regulations 1988. - The mission considers that the Isle of Man has implemented Principle 20. - Assessment: Implemented ### Principles for Market Intermediaries (Principles 21–24) - Principle 21 (minimum entry standards) - Section 3 of the IBA sets criteria for license applicants, including a “fit-and-proper person” test on integrity, solvency and competence of the applicant, its directors and senior managers. - Section 3 of the Financial Resources and Compliance Reporting Code sets out minimum capital requirements; Section 6 outlines license categories. Licenses may be issued subject to conditions; failure can lead to enforcement up to revocation. - The mission considers that the FSC has implemented Principle 21. - Assessment: Implemented - Principle 22 (initial and ongoing capital prudential requirements) - Five categories of investment business license are available with differing minimum capital depending on activities and risks. Detailed reporting and capital calculation methodology depend on firm category and are contained in the Financial Resources and Compliance Reporting and the Stockbrokers Regulatory Codes. - Detailed capital adequacy requirements were updated in 2002; some prescribed minimum amounts were increased. - The mission considers that the Isle of Man has implemented Principle 22. - Assessment: Implemented - Principle 23 (internal organization and operational conduct standards) - Regulatory Codes under the IBA set internal control and operational requirements, including conduct of business rules, holding of client money or investments, financial resources and compliance reporting, and audit. The Conduct of Business Regulatory Code addresses integrity, conflicts of interest, and proprietary/employee trading. - Responsibility is placed with directors and senior managers. - The mission considers that the Isle of Man has implemented Principle 23. - Assessment: Implemented - Principle 24 (procedures for intermediary failure) - The FSC has extensive on-site and off-site supervisory powers, client money and assets protections, an Investor Compensation Scheme for investors in authorized collective investment schemes, and powers to give directions. - There are no formal and explicit procedures in law for dealing with the failure of a market intermediary. - The FSC is preparing a proposal for statutory powers related to appointment of a manager or administrator following the Corporate Service Providers Act 2000, but the mission does not consider Principle 24 fully implemented. - Assessment: Partially implemented - Recommended action: The government should secure the enactment of rules of law for dealing with the failure of a market intermediary. ### Principles for the Secondary Market (Principles 25–30) - General - There is no stock exchange or other trading system in the Island. The Isle of Man and the mission consider Principles 25, 26, 27, 29, and 30 not applicable. - Principle 25 (regulatory authorization of trading systems) - Assessment: Not applicable - Principle 26 (ongoing supervision of exchanges and trading systems) - Assessment: Not applicable - Principle 27 (transparency of trading) - Assessment: Not applicable - Principle 28 (detect/deter manipulation and unfair trading) - Licensed brokers in the Island may be members of the London Stock Exchange or the Channel Islands Stock Exchange; such brokers are subject to supervision. Issues of market manipulation on overseas markets may arise. - Insider trading is an offence under the Insider Dealing Act 1998 administered by the treasury, which has inspection and investigation powers including obtaining written and oral explanations and requiring production of documents. These powers may be exercised where there may have been contravention of laws of another country relating to insider dealing, and the treasury can communicate information in its possession to an overseas authority. - The law does not apply to market manipulation. The mission suggests the government consider establishing an offence of market manipulation and extending prosecution and investigation powers. - To the extent Principle 28 applies, the mission considers it broadly implemented. - Assessment: Broadly implemented - Comment: The FSC believes burdens of proof under the law for bringing a prosecution are great and convictions may be difficult; it is unclear why the law is administered by the treasury rather than the FSC. Recommendation: the law should be reviewed. - Principle 29 (management of large exposures, default risk and market disruption) - No stock exchange or trading system in the jurisdiction. Generally licensed stockbrokers do not take principal risk; where they do they must have capital to cover such positions (addressed under Principle 10). - Assessment: Not applicable - Principle 30 (clearing and settlement oversight) - Assessment: Not applicable ### Summary observance (Table 14) - Assessment Grade counts: - Implemented: 18 - Broadly Implemented: 2 - Partially Implemented: 3 - Not applicable: 7 - Principles by assessment: - Implemented: Principles 3,4,5,8,9,10,11,12,13,15,16,17,18,19,20,21,22,23 - Broadly Implemented: Principles 14,28 - Partially Implemented: Principles 1,2,24 - Not applicable: Principles 6,7,25,26,27,29,30 ### Recommended Plan of Actions (Table 15 highlights) - Principles Relating to the Regulator (CP 1–5) - Principle 1: That the government and FSC secure by statute a clear complete and authoritative statement of the FSC’s responsibilities. - Principle 2: That the government and FSC review the relevant rules of law, policy and practice with a view to providing for the FSC to become a more independent and more accountable financial services regulator and supervisor. - Principles for the Enforcement of Securities Regulation (CP 8–10) - Principle 10: That the FSC review its template for its on-site inspection report and ensure that the purpose is clearly and accurately stated. - That the FSC review its procedures for inspecting arrangements between the scheme manager and offshore IFAs in relation to the supply and use of offer documents and promotional material, and consider whether they are adequate for ensuring that offshore customers are well informed and advised. - Principles for Issuers (CP 14–16) - Principle 14: - That the government and FSC review the powers of intervention in the Companies Act in respect of a registered prospectus. - That the FSC review the reporting requirements for international, experienced investor and professional investor schemes. - That the FSC review the annual reporting procedures under the Companies Act. - Principle 16: That the FSC continue to review its policies on the authority for financial and audit standards and the review of auditor performance. - Principles for Market Intermediaries (CP 21–24) - Principle 24: We recommend that the government secure the enactment of rules of law for dealing with the failure of a market intermediary. - Principles for the Secondary Market (CP 25–30) - Principle 28: That the government and the FSC review aspects of the insider dealing law. ### Authorities’ response to the assessment - Principles Relating to the Regulator (CP 1–5) - The Isle of Man Treasury is undertaking a full review of the Island’s regulatory bodies (scheduled for completion by June 2004). The review will consider independence, accountability and any changes required to the legislative framework including clarification of the Commission’s statutory responsibilities. - Principles for the Enforcement of Securities Regulation (CP 8–10) - Principle 10: - The FSC is reviewing its template for on-site inspection reports and will take comments into account. - The Commission has detailed on-site inspections for FSC regulated IFAs; generic issues will be subject to half-yearly meetings with the Insurance Brokers Association which agreed to take responsibility for the IFA industry. - Principles for Issuers (CP 14–16) - Principle 14: - 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 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. - Principle 16: - The Commission is considering financial and audit standards and auditor performance; required changes will be progressed in line with forthcoming consolidation legislation. - Regular meetings with the large audit practices have been instigated to explore synergies between the FSC and external auditors. - Principles for Market Intermediaries (CP 21–24) - Principle 24: - The Commission intends to consider rules of law for dealing with the failure of a market intermediary within the forthcoming consolidation legislation and will develop guidance for the industry. - Principles for the Secondary Market (CP 25–30) - Principle 28: - As part of the review of the Island’s regulatory bodies, the question of insider dealing legislation will be considered. ### Review of compliance with OGBS Statement of Best Practice for Trust and Company Service Providers - Background and methodology - In August 2002, an OGBS Working Group produced a draft “Statement of Best Practice” for trust and company service providers. The Fund agreed with the Commission that the Statement would be used for assessment of trust and corporate service providers in the Isle of Man. - The OGBS Working Group did not develop a methodology; the Fund reviewers developed a methodology for application of the Statement. - The Statement is expressed as general principles and does not require licensing or ongoing supervision; the Isle of Man has chosen to license and supervise trust and corporate service providers. - The FSC intends to proceed with licensing Trust Service Providers (TSPs) under a new Fiduciary Services Bill (FSB) to be introduced in the next session of the legislature. The mission recommends prompt enactment of this legislation. - Additional findings - The regulatory regime for Trust Service Providers (TSPs) is not yet in place; the existing CSP framework provides a good foundation for the TSP regime. - Detailed assessment against the Statement was carried out for the Corporate Service Provider (CSP) regime, except for principles relating only to trusts or trust service providers. - Definition of Trust and Company Service Business (Principle 1) - The Statement lists activities that should be covered when provided in the course of business (company service provider and trust service provider roles). - In the Isle of Man, a “company service provider” is referred to as a Corporate Service Provider (CSP) and is defined as a person who, by way of business, undertakes any of “the regulated activities” listed in Schedule 1 (CSP Act, s1). - “Regulated activities” include: - the provision of services with respect to the formation of companies; - the sale, transfer or disposal of companies; - acting as, and arranging for others to act as director, alternate director or secretary and within the meaning of the Limited Liability Companies Act 1996, the company’s manager and the registered agent; - the provision of premises for use as a registered office for a company; - the provision of accommodation address facilities for a company; and - providing a registered office or accommodation address for an Isle of Man nonresident company within the meaning of s.2 (1) of the Non-resident Company Duty Act 1986. - In April 1999, Tynwald approved placing a moratorium on Isle of Man companies making non-resident declarations (for tax purposes). Companies that became non-resident before that date may continue to be non-resident but are required, as a result of the CSP Act, to have a registered office provided by a CSP. - Comment: The definition of company (corporate) service provider should include the role of “partner in a partnership.” The mission understands this omission will be remedied in the Fiduciary Services Bill currently being drafted. *Source: Part 7 of the Financial Supervision (Authorized Collective Investment Schemes) Regulations 1988 and related assessment content in cr03367.* ### 1.2 Many jurisdictions provide that companies must appoint a registered agent. It is ### 1.2–2.3 Company and Trust Service Business: Registered Agents, LLCs, Trust Roles, Exceptions, and Fit-and-Proper Criteria ### Registered agents and company service business - The Companies Acts 1931 to 1993 for the Isle of Man do not include the concept of “agent” for an Isle of Man incorporated company; management and control rest with directors and, for administrative matters, the company secretary. - A foreign company which establishes a place of business in the Isle of Man (“F Company”) is required, under Part XI of the Companies Act 1931 (CA 1931), to register with the Companies Registry (which is part of the FSC). - Information about F Companies is held on the public record at Companies Registry. - An F Company is required to appoint a registered agent, who must accept service of documents and notices on behalf of the company (CA 1931, s.313 (c)). - The Companies (Amendment) Bill will introduce a requirement for an F Company to file an annual return to record changes in information held on the public register. - The function of a registered agent for an F Company, whose name is on the public record, includes certain company administration functions and is covered by the regulated activities. (Para 28, Schedule 1, Companies (Amendment) bill adds a new s.313(1)(d) to CA 1931 s.313). ### Limited liability companies (LLCs) - LLCs are governed by the Limited Liability Companies Act 1996 (“LLCA”). - LLCs are constituted as a separate legal entity but with the characteristics of a partnership. - Members are responsible for management unless they appoint a manager. - An LLC must have a registered agent (LLCA, s.5). - Acting as a registered agent or manager of an LLC is a regulated activity (Schedule 1, Para 6(c)). ### Trust roles: enforcers, protectors, custodians, and trust service business - The draft FSB definition of “trustee” includes: - an enforcer within the meaning of s.1(1)(d) of the Purpose Trusts Act 1996; and - a protector, defined as a person who, under the terms of a trust, has fiduciary or personal powers vested in him and to which the trustee is subject (draft FSB, Schedule 1, Para 2). - The role of a custodian is specifically included in the definition of regulated activities. - The draft FSB’s regulated activities explicitly include: - the provision of trust administration and management services in relation to an express trust, but not restricted to the keeping of accounting records; - the preparation of trust accounts; - the preparation of trust instruments or other documents relating to an express trust; - the administration or management of, or the investment, transfer, disposal or other dealings with, the assets of an express trust; - the distribution of the assets of an express trust; - the payment of expenses or remuneration out of a trust; and - the provision of services with respect to the creation of express trusts. - Comments state these matters are addressed in the draft FSB and will be consistent when the FSB comes into force. ### Limited exceptions to methodology requirements and FSC comments - Countries and jurisdictions may provide for limited exceptions in respect of company service providers that do not provide director or nominee shareholder services and that do not handle or manage client assets or funds. Exceptions could include lesser standards covering: - the span of control covering the number of persons engaged in the business; - the level of qualifications/experience of the persons engaged in the business; - the capital/professional indemnity insurance requirements; and - the audit requirements. - FSC notes: - A few licensees are exempt from full regulatory requirements and fall into the category: “A CSP which is not a body corporate and acts only as a director or alternate director of companies and does not undertake any other regulated business.” (Corporate Service Providers (General Requirements) Regulatory Code 2000 (“the GR Code”) para 3(2)). - There are currently six such entities and four applications are outstanding. - These “Category 2” license holders are vetted for integrity and competence to the same standard as directors and key staff of other license holders and are required to have Professional Indemnity Insurance cover. - The only exceptions to the normal regulatory regime for Category 2 license holders: - There is no four-eyes requirement (to avoid creating a shadow director under company law). - There is only a general solvency requirement, as Category 2 license holders are natural persons and are not allowed to hold client money. - As they are individuals, there is no audit requirement. ### Licensing transition status and timelines - Existing CSPs and new applicants are subject to the introduced licensing regime. - Some CSPs are operating under “transitional provisions” while licensing is completed; these entities have applied for licenses and are covered by enforcement provisions but some have not yet been licensed because the license process is not yet fully complete. - Existing CSP Codes were extended to CSP applicants with effect from 1st May 2003 so that all CSPs including transitional cases are subject to the requirements. - A deadline for completion of the licensing process was imposed by July 31, 2003. - The FSC expects transitional risks to be removed when the licensing process is complete. ### Principle 2: Fit-and-proper criteria overview and procedures - Principle 2: All countries/jurisdictions should require that those individuals holding key positions in a trust or company service provider (“key persons”) should be fit and proper. - The license application procedure addresses these criteria early via Personal Questionnaires (“PQs”) and checking of references and other information; a pre-license visit is carried out where necessary. - Verification of information is performed after licensing by visits to the license holder and other evidence gathered during ongoing supervision. Visits are arranged on a risk-prioritized basis. - The FSC’s statutory test (CSP Act s.3) requires the FSC not to issue a CSP license unless satisfied that: - the applicant is a fit and proper person; and - any controller, director, chief executive or manager of the applicant is a fit and proper person to act as such; and - in the case of an application by a partnership, each of the partners is a fit and proper person to act as such; and - such other persons as appear to the FSC to have significant powers or responsibilities with respect to any regulated activity undertaken by the applicant are fit and proper persons. - The GR Code (para 1(2)) defines “key staff” as: - in the case of a sole trader, the CSP himself; - in the case of a CSP which is a body corporate, any controller, chief executive, director, or manager; - in the case of a partnership, each of the partners; and - in all cases, any person described in section 3(3)(d) of the Act. - The GR Code requires: - all key staff must remain fit and proper (para. 6); - every CSP must give the FSC 28 days’ notice in advance of the prospective appointment of key staff (para. 12). - The FSC has published “Guidance notes on licensing policy for corporate service providers” (“CSP Licensing Policy”) (under CSP Act s3.8). The key areas of the fit and proper test are integrity, competence and solvency (going concern). - The FSC requires each key person to complete and submit a Personal Questionnaire (“PQ”) and Banker’s Questionnaire (“BQ”). - Providing false information in a material particular is a criminal offence (CSP Act s 20). - The FSC verifies information by contacting former employers, professional bodies, other regulatory authorities, the Isle of Man Police records and searching its own and other databases; information is summarized on a checklist and reminders are sent until all available references have been collected. ### Principle 2.1–2.3: Specific assessment factors and documentary requirements - Principle 2.1: In assessing whether a key person is fit and proper, consider: - honesty, integrity and reputation; - competence and capability; and - financial soundness. - The PQ requires disclosure of litigation, judgments, findings of civil liability in respect of fraud, misfeasance or other misconduct, and associations with entities that ceased to trade or made arrangements with creditors (PQ question numbers referenced below). - Principle 2.2 (honesty, integrity and reputation): Relevant matters and how FSC addresses them: - (a) Criminal convictions or outstanding criminal charges: - The FSC license application requires information on any conviction by a court in the Island or in another jurisdiction and any failure to comply with a direction or order of a court in the Island or in another jurisdiction. - As an ongoing requirement a licensed CSP must notify the FSC of: - any legal proceedings against the CSP, including civil proceedings in connection with the conduct of CSP business in any jurisdiction, where the amount claimed or disputed exceeds or is likely to exceed £10,000, and criminal proceedings triable on information against the CSP or any group company of the CSP. (GR Code para 12(3)) - the conviction of the CSP or any group company of the CSP or any of its employees or professional associates for an offence relating to fraud or dishonesty, financial crime, or committed under any financial services legislation. (GR Code para. 12(4)) - the conviction of the CSP or any group company of the CSP or any of its employees or professional associates for any offence under the Companies Acts 1931 to 1993 or legislation having similar effect in any country or territory outside the Isle of Man or any offence relating to the formation, management or administration of companies in any jurisdiction; or insolvency. (GR Code para. 12(4)) - The PQ requires disclosure of: - any outstanding litigation and details of any current proceedings (question 19); - any judgments (question 20); - any findings by a court of civil liability in respect of fraud, misfeasance or other misconduct (question 31); - any body corporate, partnership or unincorporated institution with which the person was associated and which has ceased to trade or made an arrangement with its creditors and has not paid its creditors in full (question 32). - (b) Adverse findings, settlements or fines in civil proceedings, particularly related to company or financial services business: - The FSC must have regard to any refusal by a regulator of the relevant licensable activity, whether in the Island or elsewhere, of an application for an investment business license, banking business license, corporate service provider license, trust service provider (fiduciary) license or any similar license in any jurisdiction (CSP Licensing Policy Para 2.7.4). - The CSP must notify the FSC of specified matters including service of a notice concerning suspected serious or complex fraud, criminal proceedings instituted outside the Island where the act would constitute an offence in the Island, investigations into drug trafficking, and investigations of terrorist activities. - The GR Code (para 12.7) requires notification where criminal proceedings triable on information are brought against any client company or officer or beneficial owner of a client company. - The PQ requires disclosure of any investigation by a governmental, professional or other regulatory body (question 24) and past applications to a regulator for a license (question 21). - (c) Association with entities subject to regulatory investigation or enforcement proceedings: considered on a case by case basis using the Findex record system. - (d) Disciplinary, enforcement, disqualification or similar proceedings: - CPS Licensing Policy requires regard for disqualification under Companies Act provisions or equivalent legislation and expulsion or disciplinary findings by professional bodies (Para 2.7.4). - The GR Code requires a CSP to notify the FSC of any application for disqualification or any disqualification relating to conduct making a person unfit to be a director or secretary, etc. (Companies Act 1992 s.26) and matters concerning insolvency (Companies Act 1982 para 12.5). - The CSP must inform the FSC of serious disciplinary action against key staff (GR Code para 12(8)). - PQ questions address disciplinary enquiries and disqualifications (PQ questions 23, 25, 26, 27, 28). - (e) Previous regulatory breaches and complaints: - CPC Licensing Policy requires regard for information from law enforcement or other supervisory agencies under established “gateways” and refusals of personal applications by other regulators (Para 2.7.4). - PQ questions require disclosure of past regulator applications (question 21), investigations by governmental/professional/regulatory bodies (PQ 24), censure, discipline or public criticism by professional bodies (PQ questions 23 and 25), suspensions, resignations, dismissals and barring from professions (PQ questions 26 and 27). - Complaints made about a CSP to the FSC are recorded and raised with applicants or license holders as part of licensing or ongoing supervision. - (f) Candor and truthfulness in dealings with the Director and other regulatory bodies: - The licensing policy requires applicants to complete forms and supply information to the FSC in an honest manner and to cooperate openly and promptly with regulators (Paras. 2.7.7 and 2.7.8). - Principle 2.3 (competence and ability): Relevant matters and how FSC addresses them: - (a) Extent of relevant experience; (b) For individuals, knowledge and professional or other relevant qualifications. - CSP Licensing Policy states key staff should possess appropriate experience and/or academic and/or professional qualifications relevant to CSP business, with particular reference to company law, company secretarial practice, company management and accountancy. - Where key staff do not hold relevant qualifications, they must demonstrate accumulation of sufficient pertinent knowledge through relevant work experience, normally over a period of five years. - The organization is assessed as a whole; a key staff member lacking qualifications may be considered competent if receiving adequate technical support from other staff (Paras 2.8.2, 2.8.5, 2.8.6, 2.8.7 and 2.8.8). - Appropriate training is required for all staff performing regulated activities (Para 2.8.4). - The FSC’s assessment of competence includes consideration of the organization’s controls, systems and procedures, maintenance of records, documentation of actions taken and instructions received, and business resumption/contingency arrangements (Para 2.8.1). - GR Code requirements: - all key staff must be fit and proper (para 6); - a CSP shall organize and control its internal affairs responsibly and take steps to ensure client companies comply with statutory and common law obligations (para 9); - guidance notes state that unfamiliarity with relevant law requires obtaining legal advice and that failure to comply with relevant laws may indicate lack of competence or integrity. - if providing directors, CSP must take reasonable steps to ensure individuals have suitable competence for that office (GR Code para 10); guidance notes caution against holding more directorships than can be competently undertaken. - In assessing institutional competence, the FSC considers: - past experience of the institution and key staff; - how long it has been established; - how many companies it serves; - the size of the staff; and - the experience and qualifications of management and key staff. - For individuals, controllers, directors, managers and key staff must complete PQ and BQ, which request references about integrity, competence, disciplinary history and diligence. The FSC also enquires into academic qualifications at degree level or above, professional qualifications and membership of professional bodies, and may interview applicants. *Source: International Monetary Fund (extract).* ### 2.4 In the case of a person’s financial soundness, the following matters are relevant and ### 2.4 In the case of a person’s financial soundness, the following matters are relevant and should be considered: ### Financial soundness criteria (financial soundness of a CSP) - The FSC requires a CSP to satisfy the going concern requirement (CSP Licensing Policy para 2.9, GR Code para 11). - For a corporate CSP, the FSC requires audited accounts; in the absence of independently verified accounts, the FSC will generally require that £10,000 be placed in a segregated bank account, which must be maintained free of any charge or encumbrance or right of set-off. - A CSP must notify the FSC if it is no longer able to meet the going concern requirement. (GR Code, para 12.11) - A CSP must have professional indemnity insurance cover to insure against extraordinary risks (GR Code para 16). - The FSC may take into account any judgment obtained against the CSP; such judgments should be disclosed as part of the application process. (CSP Licensing Policy, Para 2.9.8) - Individuals are required to disclose any past or present bankruptcy and any money judgments that have not been paid in full. (PQ questions 29, 30) ### Adverse credit and banking enquiries (where the person is an individual) - The banking questionnaire (BQ) asks the bank: - whether it considers itself to be the person’s principal bank, - how long the relationship has been maintained, and - whether the account has been maintained in a satisfactory manner. - If the bank does not answer that the relationship has been in place for five years and “yes” to the other two questions, the matter is pursued further (for example, by interviewing the person or identifying a previous bank and sending them a BQ). ### Additional criteria — fit and proper for controllers and shareholders - Jurisdictions are advised to require persons who hold a legal or beneficial interest in a service provider to be fit and proper, applying criteria in paragraphs 2.1 to 2.4 with suitable modifications for corporate bodies. - Definition of “controller” (CSP Act s.27) includes: - an individual in accordance with whose directions or instructions one or more of the directors of a CSP act, and - an individual who either alone or with any associate(s) is entitled to exercise or control the exercise of 15 percent or more of the voting power at any general meeting of the CSP or of another body corporate of which it is a subsidiary. - A controller must be a fit and proper person (CSP Act s.3) and must be vetted and reported on to the FSC similarly to directors and key staff. - The FSC looks through intermediate structures (such as holding companies) to ascertain who controls, has significant influence over management, and/or is the ultimate beneficial owner (CSP Licensing Policy Para 2.2.1). - The FSC’s prior written approval is required for any proposed change to control (Para 2.2.2). - Where a trust is involved, the FSC vets trustees and all persons having influence on the trustees; if trustees are corporate trustees, the directors of the corporate trustee will be vetted. Persons of influence may include settlors; beneficiaries are normally identified and may be vetted depending on identity and perceived influence. ### Conduct of Business — corporate governance requirements (Principle 3) - CSPs must comply with recognized standards of corporate governance for both the business itself and clients’ corporate vehicles, trusts and other legal entities. - Codes and regulatory instruments referenced: - FSC can make codes concerning “the conduct of business by a CSP.” (CSP Act s.6) - GR Code governs general conduct of CSP business. - Corporate Service Providers (Clients’ Money) Regulatory Code 2000 (“the Clients’ Money Code”) governs handling and segregation of clients’ money. - Specific CSP obligations: - avoid conflicts of interest and deal appropriately with those that arise (GR Code, para 4); - enter into client agreements or ensure clients are aware of terms of service (GR Code para 5); - meet a 4-eyes test and/or have a locum to run the operation in absence of owners (exception for Category 2 license holders) (GR Code, Paras. 7 and 8); - organize and control internal affairs responsibly and ensure each client company complies with applicable statutory and common law obligations (GR Code para. 9(1) and para 9.2). - Directors of CSPs and Isle of Man incorporated client companies are subject to the Isle of Man Companies Acts 1931-1993 and FSC guidance on directors’ responsibilities. - For client companies incorporated elsewhere, the FSC requires CSPs to take responsibility for the competence and diligence of persons supplied as officers (GR Code para 10). - Supervisory measures to address governance and filing failures: - supervisory visits examining minutes of meetings for license holder and client companies; - Companies Registry and CSP team monitor filing performance and instigate supervisory visits where deficiencies are identified. ### Anti–money laundering and customer due diligence (Principle 3.2, 3.7–3.8) - All CSPs are required to: - comply with the Anti Money Laundering Code 1998, as amended by the Anti-Money Laundering (Amendment) Codes 1999 and 2001 (“AMLC”) and Anti Money Laundering Guidance Notes (AMLGN) issued by the FSC; - identify their client in each case and identify the beneficial owner of each client company, including the ultimate beneficial owner (GR Code para 4). - Application form includes Question 16: “Does your business comply with the Anti-Money Laundering legislation, including paragraph 4 of the Code?” - Verification of compliance is obtained via on-site visits; the FSC enquires about jurisdictions of business origin and seeks additional due diligence for higher risk jurisdictions. - During compliance visits FSC staff check samples of client company files for: - eligible introducer certificate (if introduced business); - evidence of customer identity; - evidence of customer address; - appropriate references; - evidence of source of funds; - nature of business and expected turnover; - reason for establishing the business; - presence of the client agreement. - Ongoing monitoring evidence checked during visits includes: - checking source of funds at acceptance and for subsequent funds; - actual turnover being in line with expected figure and compared with level indicated to the CSP; - file reviews to ascertain nature of activity; - minutes/correspondence demonstrating activity consistent with stated reason for establishment; - bank statements, which should be reconciled. - Staff use standardized checklists marking information as “present,” “missing” or “present but deficient” and cross-reference to detailed comments. - CSPs were required to undertake “retrospective” KYC for clients taken on before December 1998 by identifying beneficial owners of all client companies (GR Code para 4); this is supported by supervisory visits. - The AML/CFT assessment discusses weaknesses with respect to beneficial ownership; nonetheless, the CSP (GR) Code’s obligation to identify customers and underlying beneficial owners is consistent with FATF requirements. ### Financial regulatory standards and statutory obligations (Principles 3.3–3.5) - The FSC requires: - for a corporate CSP that has previously traded, the application must be accompanied by audited accounts (CSP Licensing Policy, para 2.9.2); - the Annual Compliance Return must be accompanied by audited accounts (GR Code, para 11(2)); - sole traders or partnerships to supply financial statements accompanied by a reporting accountant’s report (CSP Licensing Policy, para 2.9.3 and GR Code, para 11(3)). - Accounts are examined for solvency using a review checklist. - During compliance visits the FSC checks presence and accuracy of documents relevant to statutory obligations, including: - minutes of general and board meetings; - registers of members and directors; - bank mandates; - filings of Manx companies with Companies Registry; - powers of attorney (specific and limited period); - presence of accounting records (a statutory requirement for Isle of Man companies); - declarations of trust for nominee shareholdings. - Companies Registry alerts the CSP team to CSPs with high rates of document rejection due to inaccuracy; such reports have instigated supervisory visits that identified underlying system problems and led to recommendations, remedial action and staff training. - The FSC may investigate CSP standards following complaints or past incidents that cast doubt upon KYC standards or corporate governance of client companies. ### Responsibilities of directors, trustees and internal controls (Principles 3.5–3.6) - CSPs must take responsibility for competence and diligence of persons supplied as company officers for client companies (GR Code para 10). - Where the FSC has doubts about qualifications or suitability of key staff intended as directors of client companies, the person is interviewed and documentation is checked during compliance visits. - The FSC requires that: - all CSPs meet the “four-eyes” criterion: business conducted by at least two individuals who are key staff, who must be resident in the Island (GR Code para 7); - the “four-eyes” are sent a letter to sign and return setting out responsibilities; - if the four-eyes criterion cannot be met, the CSP must have appropriate locum arrangements approved by the FSC; a locum is treated as key staff and must be approved as a fit and proper person (GR Code para 8). - The applications process establishes the basic CSP structure; visits examine procedures and actual operation to confirm compliance. ### Conduct of client business — clients’ money, custody, records, documentation, authorization (Principles 3.9 and subparts) - Identification and segregation of clients’ assets from business assets: - Clients’ Money Code requires clients’ money to be held on trust (para 3), identified (para 5), and segregated (para 4). - The FSC enquires whether clients’ money accounts are to be maintained, at what banks, and requires a letter from banks confirming trust account status and no claims or rights of offset (Clients’ Money Code para 5.1.c). - Clients’ accounts are examined during visits and audited; the auditor must certify whether the CSP maintained systems to comply with the Clients’ Money Code, whether it complied, and whether it conducted reconciliation of its clients money account at least monthly. (CSP Act s.24 and GR Code para 11.4) - Effective handling of clients’ assets (safe custody and management procedures) is covered by the Clients’ Money Code para. 5 and general duties of CSPs and their provided officers. - Maintenance of adequate and orderly accounting records of clients’ affairs is covered by Clients’ Money Code para 5 and GR Code para 9.2; compliance is examined during visits. - Maintenance of adequate client documentation (e.g., trust deeds): - CSPs must ensure clients are made aware of terms of business or enter into a written client agreement (GR Code para 5). - Where shares in a client company are held by a nominee supplied by a CSP, a nominee agreement must be in place (GR Code para 5.4). - Directors’ obligations in relation to administration and accounts of companies they serve are reinforced by guidance notes for directors (para 7). - Appropriate authorization and handling of transactions and decisions: - CSPs must organize and control internal affairs responsibly and have documented control systems and procedures (GR Code para 9). - CSPs must ensure client companies comply with legal obligations and that staff perform regulated activities diligently and properly (GR Code 9.2 and 9.3). - CSPs must ensure the directors they provide are competent (GR Code para 10); guidance notes emphasize that ultimate control should remain with directors and inappropriate delegation is not acceptable. - Presence of sufficient, competent and qualified staff is established during application, examined on notification of staff changes and via the Annual Compliance Return; procedures, signature mandates and transaction handling are examined during visits. - Explanatory examples of appropriate conduct: - exercise of discretion for clients should be based on sufficient information and only for proper purposes; - actual or perceived conflicts of interest should be avoided or managed by disclosure, confidentiality rules, or other internal controls; - business including establishing, transferring or closing relationships should be transacted expeditiously. - FSC coverage of these issues references GR Code para. 10 and guidance notes, KYC requirements (GR Code para 4), visit procedures (principles 3.2, 3.7 and 3.8), avoidance of conflict of interest (GR Code para. 14), general duties to operate properly and efficiently (GR Code para 9.3), and rules on termination and transfer of business relationships (GR Code para 17). *Source: IMF staff summary of FSC regulatory requirements and codes as presented in the cited content unit.* ### 3.10 Trust and company service providers should be required to: ### 3.10 Trust and company service providers should be required to: ### (a) Maintain adequate and orderly accounting records of their business and their clients’ affairs - During the licensing process: - the FSC obtains independently verified accounts for CSP applicants (CSP Licensing Policy. Para 2.9.1). - Thereafter: - CSPs that are bodies corporate must provide audited accounts with their annual compliance return, which is due within 4 months of their year end. (GR Code para. 11) - A sole trader or partnership must either submit independently verified accounts or otherwise satisfy the FSC that it is a going concern. - client companies must comply with relevant statutory and common law provisions. (GR Code para 9.2) - Visits check whether accounts are kept for each company. - Comment: See comments under Principle 2 above. ### (b) Maintain adequate financial resources including adequate paid up capital and adequate liquid capital - Solvency is monitored through the financial information submitted. This includes: - audited annual accounts for all CSPs that are bodies corporate; - unaudited, but independently verified, accounts for other CSPs (GR Code, para. 11); - a declaration of solvency annually for all CSPs; - notifying the FSC of the inability to meet the going concern requirement. (GR Code para 12); - notifying the FSC of events that could impact upon solvency (GR Code para 12), including legal proceedings against the CSP and any criminal proceedings against the CSP, its staff or its client companies. - Where a sole trader or partnership CSP is unable to provide independently verified accounts, it may instead maintain the sum of at least £10,000 in a segregated bank account for the purpose of ensuring an orderly winding up of the business in the event of insolvency (GR Code, para 11.3.b and CSP Licensing Policy, para 2.9.4). - Comment: See comments under Principle 2 above. ### (c) Comply with any relevant financial regulatory standards and international accounting standards - CSPs that are bodies corporate provide audited accounts with their annual compliance return, which is due within 4 months of their year end. (GR Code para 11) - FSC staff review the audited accounts. Late Annual Compliance Returns are chased. - Generally auditors in the Isle of Man are U.K. qualified accountants and apply the U.K. standards. The FSC expects a recognized international standard to be used and would enquire into the application of any other standard. - Comment: See comments under Principle 2 above. ### (d) Maintain adequate professional indemnity insurance cover - All CSPs must maintain PII cover appropriate to the nature and size of their business. (GR Code para 16) - Guidance sets out an expectation of cover of 2.5 times turnover (minimum cover £250,000) and an excess of not more than 3 percent of turnover. - Guidance is used because a rigid formula would not always be appropriate and might, for example, leave a fast-growing business under-insured. - The FSC: - obtains documentary evidence of cover at the time of application and annually thereafter with the Annual Compliance Return; - examines any limitations upon the territorial and jurisdictional scope of the PI cover, with a view to ensuring that the CSP does not have customers that are excluded from cover (typically in North America); - where CSPs are owned by a large bank and covered by a group policy, examines any limitations upon the territorial and jurisdictional scope of the PI cover, with a view to ensuring that the CSP does not have customers that are excluded from cover (typically in North America). In these cases, a letter of comfort from the parent organization is accepted. - Recent tightening of the PII market has meant that smaller CSPs have found it difficult to comply with the 3 percent of turnover guidance on excess. In such circumstances the FSC reviews the financial resources of the organization and, where appropriate, requires an injection of capital, for example a subordinated loan, to ensure that the excess on any claim or claims may be met without putting the solvency of the business at risk. - Comment: See comments under Principle 2 above. ### Systems and Procedures (3.11–3.16) - (a) Effective compliance functions and designation of an appropriately skilled compliance officer: - CSPs must have compliance systems and procedures in place (GR Code para. 9) and these are checked during visits. - The regime does not include a requirement to have a designated post of Compliance Officer for small operations; larger applicants are expected to have a designated compliance function. In smaller operations the directors are held responsible. - Comment: See comments under Principle 2 above. - (b) Effective reporting requirements and designation of an appropriately skilled anti-money laundering reporting officer (MLRO): - The AMLC requires CSPs to have an MLRO who is an “appropriate” person in terms of the AMLC. - The FSC checks the identity and competence of the MLRO and may require applicants to change the MLRO if not sufficiently qualified. - During visits the FSC examines the register of disclosures to the Financial Crimes Unit. - Comment: See comments under Principle 2 above. - (c) Effective complaints handling system: - CSPs are required to have a complaints procedure as set out in GR Code paragraph 13. - Visits check whether the complaints procedure includes a decision point for notifying the CSP’s PII insurers of claims. - Comment: See comments under Principle 2 above. - (d) Maintain adequate, orderly and up to date records of all business transactions and instructions at an appropriate location in the jurisdiction, including accounting records of the business and clients’ affairs, records of internal organization and risk management, and client documentation: - All Isle of Man companies are required to maintain accounting records (Companies Act 1982, s.1) that are subject to audit for bodies corporate and an accountant’s report for partnerships and sole traders. - Statutory accounting records must be maintained at the registered office and, if not so kept, copies sufficient to enable the company to comply with statutory obligations must be sent to the registered office (Companies Act 1982 s.1.6, s.1.7, s.1.8). - Visits examine bank statements and brokerage accounts of client companies and check whether accounting records are being kept; visits do not check the accuracy of accounting records of client companies at this stage. - CSPs are required to have: - sufficient and suitably qualified staff (GR Code, Paras. 6 and 9); - a disaster recovery plan (GR Code, para 18); - complaints procedures and a complaints register (GR Code, para 13); - records of staff training, both for anti money laundering and professional development purposes (GR Code, para 9, guidance note); - customer identification and examination of proposed and ongoing business, including enhanced scrutiny of business that carries politically exposed person risk (GR Code, Paras. 4 and 9, guidance Note). - CSPs must enter into terms of business with their clients or notify clients of their terms of business (GR Code, para 5). - Comment: See comments under Principle 2 above. - 3.12 Record retention: - No specific requirement in CSP legislation for record retention, but statutory requirements exist for Isle of Man companies (Companies Acts 1931-1993) and a requirement to comply with statutory obligations under relevant law in respect of client companies (GR Code para. 5). - There is a statutory requirement for record retention under the Anti Money Laundering Code. - Visits check standards of record keeping for live files and recently closed files (closed within the last six months). - Comment: See comments under Principle 2 above. - 3.13 Manual of policies and procedures: - CSPs are required to have compliance systems and procedures in place (GR Code para 9). - Guidance notes relating to paragraph 9 include a list of procedures the FSC may examine, including procedures to deal with assets held by client companies, anti-money laundering procedures and clients’ money. Presence of these procedures is checked during visits and rated as part of the visit report. - Comment: See comments under Principle 2 above. - 3.14 Adequate span of control and minimum relevant experience/qualifications: - The four-eye criterion (GR Code para. 7) requires key staff to meet the FSC’s fit and proper test including competence requirements. - Minimum competence levels are set out in the CSP Licensing Policy. - Licensing process covers these issues and changes to key staff are notified to the FSC (GR Code para.12.1) and their impact is monitored; if a problem arises it is reported to the Board of commissioners. - Explanatory Note: Exceptions may apply to sole practitioners where an individual trustee function is controlled by the Court. - FSC’s Comments: A CSP sole practitioner must have locum arrangements approved by the FSC to deal with CSP business in his absence. Court appointed trustees will be exempted from TSP licensing requirements under the FSB (Schedule 1, Para 2 – Part 1A, Para 8). - 3.15 Professional development requirements: - Staff training and professional development are covered by the competence element of the fit and proper test under the licensing policy. - FSC staff examine the training log to establish what training has been carried out. - Comment: See comments under Principle 2 above. - 3.16 Understanding duties under relevant laws: - A CSP must ensure that its key staff and other employees carry out their duties in a diligent and proper manner (GR Code para. 9.3). - Guidance states it is important that all staff understand and comply with the CSP’s systems and procedures (GR Code para 10). - FSC staff examines the training log to establish what training has been carried out. - Comment: See comments under Principle 2 above. ### Holding and Sharing of Information (Principle 4) - 4.1 Information on ultimate beneficial owners and trustees: - In addition to the requirements under the Anti Money Laundering Code, a CSP is required to identify its client and the beneficial owner of each of its client companies (if not the same person as the client) (GR Code para. 4). - FSC staff examine client company files to establish what information has been recorded and retained. - Comments: None. - 4.2 Monitoring changes of client control/ownership: - The requirement to identify the client/beneficial owner is continuing; any change of control represents a new customer and must be handled in accordance with the CSP’s new customer take-on procedures. - Applies equally to “shelf” companies; when a company is sold the new controllers are new clients and must be handled as such. - Where the client company has issued share warrants to bearer, the CSP may require the warrants be held in safe custody to enable compliance with the GR Code; Companies (Amendment) bill contains provisions that will effectively lead to the abolition of share warrants to bearer. - Where nominees hold shares and the nominees are provided by the CSP the latter must enter into nominee agreements in writing and must retain copies in its records (GR Code para 5.4). Even if nominees are not provided by the CSP, the CSP must know the identity of the ultimate beneficial owner. - FSC staff examine client company files to establish what information has been recorded and retained. - Comments: None. - 4.3 Mechanisms for information availability to relevant authorities: - The FSC has powers to inspect CSPs, to request and require information and to conduct searches (CSP Acts s10–13), and exercises its powers on a regular basis to undertake supervisory visits. - The expected number of visits on the basis of present staffing levels is 35 in 2002, 60 in 2003 and 80 in 2004. - The FSC has exercised its powers under ss.11 and 12 for enforcement purposes. - Comments: None. - 4.4 No barrier to appropriate flow of information: - Release of information obtained by the FSC generally requires the consent of the person to whom it relates. - CSP Act 2000, s.24 allows disclosure for defined purposes to relevant authorities thereby removing the barrier to the appropriate flow of information. Sub-section (5) specifies to whom information may be disclosed. - Comment: The principal area of difficulty at present is exchange of information in relation to TSPs; since disclosure provisions depend on reciprocity of regulation, the FSC is unable to share TSP related information until TSPs are regulated. This will be addressed when the FSB is passed. - 4.5 Information regarding clients should be kept in the jurisdiction: - The FSC has not encountered barriers to obtaining information required for regulatory purposes; difficulty in sharing TSP information due to lack of reciprocity is to be remedied by the FSB. - Comments: None. - 4.6 No legal barrier to flow of information necessary for an introducer arrangement: - A CSP must keep identification details on its clients in the jurisdiction and retain them for five years after the relationship ceases, unless the client has been introduced by an “eligible introducer” who is regulated in a FATF member or EU country, in which case the verification of identity may be carried out by the introducer and details provided to the CSP on request. (FSC’s Anti Money Laundering Guidance Notes). - In the case of multi-national CSPs acceptable procedures complying with the Anti Money Laundering Guidance Notes are required prior to licensing. - The AMLC requires any eligible introducer arrangement to include an undertaking that the customer information will be made available. - FSC staff examine client company files to ensure that the correct information has been recorded and retained. A visit identified an instance in which an introducer did not give the appropriate undertaking and the FSC took action. - Comment: See comments under Principle 2 above. ### Audit and Compliance Reviews (Principle 5) - 5.1 External auditors with relevant experience: - The accounts of an applicant for a CSP license and a CSP license holder must be audited (for a CSP which is a corporate body) or independently verified (for a sole trader or partnership CSP). (CSP Licensing Policy and GR Code). - Auditors of Isle of Man companies must be appropriately qualified in accordance with the Companies Acts (CA 1982, s.14). In practice they must be accountants qualified to practice in the United Kingdom or must be approved by the FSC. - Comments: None. - 5.2 External auditors’ authority and protection to report breaches: - Auditors of CSPs are required to report breaches of the CSP Act, the CSP Codes and any license conditions or directions or requirements of the FSC and in doing so they have a statutory protection contained in s.24(2) of the Act. - Comments: None. - 5.3 Regular independent reviews of compliance: - The FSC undertakes supervisory visits and has the power to appoint reporting accountants (CSP Act s.25). - The FSC undertakes visits to examine the compliance of CSPs with their obligations under the CSP Act and the GR Code, the Clients’ Money Code and the AMLC. - An outline of the scope of visits is given in the response to principle 3. - Comments: None. *Source: IMF country report cr03367.* ### 6.1 The interests of customer/clients should be able to be adequately safeguarded ### 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 of legal powers and duties - Where there is a reasonable likelihood that any person will contravene any provisions of the Act, any conditions placed on a CSP license, a regulatory code or any direction given by the FSC, the FSC can apply to the High Court for an injunction restraining the contravention. (CSP Act s.15) - The legislation provides that: - The FSC may issue public statements if it has reasonable grounds for believing that a person is acting or holding himself out to be a CSP in contravention of the Act or of any regulatory code, any condition on his license or any direction given by the FSC. (CSP Act s.14) - The auditor of a CSP, if in the course of his work he becomes aware of any matter which gives him reasonable cause to believe that the CSP may be in contravention of the Act, any regulatory code, any condition on a license or any direction or requirement imposed under the Act, he must report it in writing to the FSC. (CSP Act s.24) - Where the FSC has particular concerns about any aspect of a CSP’s business, it may service notice on a CSP requiring the CSP to provide the FSC with a report by an accountant or other person with relevant professional skill on any aspect of, or any matter relating to the affairs of the CSP. (CSP Act s.25) - The FSC can petition the High Court for the appointment of a receiver and manager in respect of the affairs, business and property of a CSP or former CSP. (CSP Act s.16) - In relation to the cessation of business, the CSP must give the FSC not less than 28 days notice before the decision is implemented giving details of the arrangements to be made to ensure an orderly winding up or transfer of its clients’ business. (GR Code para. 12.10) ### Practical supervisory and enforcement actions available to the FSC - Obtain an undertaking from a CSP that the business would be wound down in an orderly manner (typically used where a CSP is part of a larger regulated institution or has ongoing non-CSP business). - Issue a direction as to how the business is to be wound down. (CSP Act s.7.2) This may be used where there are grounds to believe a CSP might fail to arrange an orderly disengagement. - Apply to the Court for the appointment of a receiver and manager under section 42 of the High Court Act. (CSP Act s.16) This remedy has been used in one case by the Enforcement Division in relation to unlicensed CSP business. ### Obligations on auditors and reporting lines - Auditors must report in writing to the FSC where, in the course of their work, they become aware of matters giving reasonable cause to believe the CSP may be in contravention of the Act, regulatory codes, license conditions, or directions/requirements imposed under the Act. (CSP Act s.24) ### Comments - None --- ### 6.2 All countries/jurisdictions should ensure that trust and company service providers do not provide false or misleading information (including advertisements) ### Advertising and representations - Any advertisement the CSP publishes must not damage the good image of the Isle of Man and must contain a fair and accurate indication of the services the CSP provides. (GR Code para 15) ### Supervisory monitoring and responses - The FSC’s Enforcement Division searches the Internet for key words that may indicate the carrying on of unauthorized business which is, or holds itself out as being, from the Isle of Man. Appropriate warning notices are then posted on the FSC’s website (examples cited: warning notices on GAP and PEG, Secure Solutions). - The CSP team refers doubtful cases to Enforcement for investigation. ### Comments - None --- ### Table 17. Action Plan — Selected recommended actions (excerpt) - Principle 2 — The FSC should ensure that the July 31 deadline for completion of the licensing process for CSPs is met. - Principle 2 — The island should also enact quickly the Fiduciary Services Bill to extend the regulatory and supervisory regime to TSPs. - Principle 3 — Same as above (require that those providing trust or company services exhibit evidence 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). --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr03367.pdf_