## Detailed Assessment of Jersey’s Financial Supervision (cr03369) ## Source details **Canonical URL:** [Detailed Assessment of Jersey’s Financial Supervision (cr03369)](https://www.imf.org/-/media/files/publications/ofca/english/cr03369.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr03369.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr03369.pdf.json) --- ### Banking supervision — institutional framework and overall assessment - The IMF assessment concluded Jersey has "a sound and generally effective framework for the regulation and supervision of banking activity." - The Jersey Financial Services Commission (the Commission): - established under the Financial Services Commission (Jersey) Law 1998 (FSCL); - accountable to the States of Jersey through the Finance and Economics Committee (F&E); - is the sole regulator of banks in Jersey. - Banking sector structure (as of end-June 2002 unless otherwise noted): - 62 banks registered (70 a year earlier). - 38 subsidiaries and 24 branches from 16 different countries. - IMF assessment outcome on Basel Core Principles (BCP): - Jersey assessed as compliant or largely compliant with 29 of the 30 Basel Core Principles; one principle (market risk) assessed as materially noncompliant. - Key legal instruments: - Banking Business (Jersey) Law, 1991 (BBL) — licensing and supervision regime for deposit‑taking. - Planned consolidation: transfer of deposit‑taking regulation into Financial Services Law (FSL) (intended 2004), enabling Codes of Practice and additional powers. ### Prudential standards, capital, licensing and supervisory practice - Capital and licensing thresholds and policies: - Minimum risk based capital requirement prescribed by the Commission: 10 percent (Basel method). - Basel (BCA) minimum cited: 8 percent. - Guidance note minimum capital for Jersey incorporated deposit‑takers: "normally be £5 million or equivalent"; nine licensed banks below £5 million but at or in excess of £2.5 million and with capital ratio in excess of 10 percent. - One bank historically subject to a 12 percent capital ratio under Article 10(1). - Licensing policy for new banks: only subsidiaries/branches of the world’s largest 500 banks (by capital) or equivalent financial conglomerates accepted. - Requirement: Jersey incorporated subsidiary must maintain a real presence in Jersey and be subject to appropriate consolidated supervision by a satisfactory home supervisor; parental "letter of comfort" required. - Large exposures and reporting: - Large exposure threshold: exposure ≥ 10 percent of capital base. - Prior consent required for exposures in excess of 25 percent of capital base (Fourth Schedule of the GPO). - Overall large-exposure aggregate limit equivalent to 800 percent of capital base. - Returns for exposures and prudential returns required within 20 working days of reporting period end. - Quarterly reporting includes the 10 largest interbank exposures. - Supervisory toolkit and practices: - On‑ and off‑site supervision under Article 25 (BBL); on‑site "route planners" developed for corporate governance, credit risk, AML, and other areas. - The Commission prescribes "true and fair" audited accounts from Jersey incorporated banks. - Remedial powers include issuing conditions (Article 10), appointing inspectors (Article 27), revoking registration (Article 9), and issuing public statements (Article 45B). The Commission seeks power to impose civil or administrative money penalties. - Supervisory resource allocation (Commission Direct Costing of Supervisory Responsibilities, In percent): - Total 100 - Funds 30 - Trust Companies 28 - Inv. Bus 18 - Banks 16 - Insurance 8 ### Risk assessment, credit policies, loan evaluation, and market risk - Credit risk and provisioning: - For 75 percent of banks, lending to customers accounts for less than 15 percent of total assets. - Guidance notes and draft Codes of Practice cover risk management; no market‑risk related capital requirement currently imposed. - Supervisory assessments: CP7 (Credit Policies) Largely compliant; CP8 (Loan Evaluation and Loan‑Loss Provisioning) Largely compliant. - Suggested supervisory enhancements: distribute Basel credit‑risk guidance, enhance route planners, consider internal credit risk rating and sample loan reviews, and formalize loan impairment/collateral valuation guidance in Codes. - Market risk: - Commission view: market risk generally not significant given licensing policy and 10 percent capital minimum. - IMF assessment: Principle 12 (Market Risks) — Materially noncompliant. - Gaps: no specific capital charge for market risk, no detailed market‑risk guidelines; IMF recommended introduction of a market risk capital charge and related guidance given growing product complexity. - Other risks and internal controls: - Principle 13 (Other Risks) assessed Largely compliant; Commission developing draft Codes of Practice and corporate governance route planner for liquidity, interest rate and operational risk. - Principle 14 (Internal Control and Audit) assessed Largely compliant; Commission emphasizes independence/access of internal audit and uses external auditors (policy to use one of the "big four"). ### On‑site/off‑site supervision, validation, external auditors - On‑site program: - Pre‑visit questionnaire issued 6–8 weeks prior; route planners used; target: visit all regulated entities on average every two years; visit reports within three weeks of completion. - Off‑site supervision: analysis of quarterly prudential returns, large exposure reports, STRs, annual financial statements. - Performance and quality control recommendations: time accounting, risk rating systems, quality assurance for visit reports. - Validation and external audit interaction: - External auditors required to certify accuracy of prudential returns extraction; Commission can request reporting accountants under Article 25. - Commission has no explicit power to monitor external auditors’ work under present legislation; mitigation: policy for bank audits to be conducted by one of the "big four." - Assessment: Validation of supervisory information — Largely compliant. ### Key numeric supervisory parameters (explicit figures preserved) - Banks registered: 62 (end‑June 2002). - Subsidiaries: 38; branches: 24. - Minimum capital "normally": £5 million. - Nine licensed banks below £5 million but at or in excess of £2.5 million. - Prescribed minimum risk asset ratio: 10 percent. - Basel BCA minimum: 8 percent. - One bank set at 12 percent historically under Article 10(1). - Lending <15 percent of total assets for 75 percent of banks. - Large exposure = 10 percent of capital base; aggregate limit 800 percent of capital base. - Prior consent threshold: 25 percent of capital base. - Returns deadline: within 20 working days of period end. --- ### AML/CFT framework — legal, institutional, operational findings ### Institutional framework and principal bodies - Principal institutions: - Commission — financial regulator for supervised FIs. - Jersey Financial Crimes Unit (JFCU) — FIU, a unit of the Jersey Police. - Police and Customs and Excise — law enforcement and investigations. - Attorney General’s Office — prosecutions for ML/FT. - JFCU staffing and resources: - JFCU permanent staff: 15 positions (mainly police officers and customs officers); approved strength 17.5 positions. - Additional personnel: seven persons (U.K. police officers and civilians) attached to major investigations, giving total manpower of 22 for ML/FT investigations at that time. - STR workload increased 600 percent since 1999. - Recommendation: increase permanent staffing of JFCU to approved strength of 17.5 positions and improve IT/data systems. ### Criminalization, asset recovery and investigative powers - Criminalization: - Money laundering criminalized as a serious offense; predicate offenses include drug trafficking and FT and crimes punishable by more than one year (POCL, DTOL, TL provisions cited). - Financing of terrorism criminalized consistent with Convention for the Suppression of the Financing of Terrorism; Convention not yet ratified on Jersey’s behalf at assessment time. - Confiscation and freezing: - POCL and DTOL provide for confiscation, freezing, appointment of Viscount as receiver; Terrorism Law lacks comparable receiver provisions and civil forfeiture is generally unavailable except for cash in FT cases. - Recommendation: amend Terrorism Law to permit appointment of a receiver for corresponding value/confiscation. - Investigative powers and procedures: - Interception of communications under warrant by the Attorney General (Interception of Telecommunications Law). - Law enforcement can compel production of bank account records, transaction records, customer ID and other records through lawful process (POCL Articles 40–41; DTOL Articles 19–20; TL Articles 31–33). ### Preventive measures, customer due diligence, wire transfers, and reporting - Customer identification and record keeping: - MLO requires FIs to seek satisfactory evidence of identity; Notes define identity elements; records retention: five years from date business completed (MLO Article 8). - No explicit statutory requirement to re‑verify identity except proposed Board amendment; Notes provide guidance on introduced business, trusts and introducer certificates. - Wire transfers (FATF SR VII): - No statutory requirement at assessment time to include originator information that remains with transfer through payment chain. Commission expected full compliance by December 2003 and advised FIs to have a program in place by December 2003 per Update No. 5 to the Notes. - Recommendation: amend laws within FATF two‑year allowance to require originator information remain with transfers. - Suspicious Transaction Reporting (STR): - For drug trafficking (DTOL) and terrorism (TL) there is an affirmative obligation to report; under POCL reporting is a defense rather than an explicit affirmative obligation. - Recommendation: amend POCL to impose an affirmative obligation to report suspicious transactions; consider requiring reporting directly to the JFCU on a JFCU form. - Record‑keeping and audit trail: - MLO Article 8 requires identity and transaction records for five years; recommendation to require records be sufficient to enable investigators to compile a satisfactory audit trail (FATF Recommendation 12). - Internal controls and compliance officers: - Trust company and investment company Codes require a compliance officer; deposit‑taking and other Codes under consultation to require compliance officers for banks and insurance. - Recommendation: require designation/registration of AML/CFT compliance officers for all FSBs and require senior management sign‑off on AML compliance declarations. ### JFCU access, analysis and dissemination gaps - Gaps identified: - No explicit legal requirement to submit STRs directly to JFCU in writing; JFCU lacks real‑time access to public and nonpublic databases without court orders. - No explicit statutory power for JFCU to require reporting parties to submit additional documentation. - Recommendation: amend laws to provide JFCU real‑time database access, authority to require additional information, and direct written reporting. - Effectiveness and statistics: - JFCU keeps statistics on STRs, disseminations, ML/FT investigations and mutual assistance; STR workload increased 600 percent since 1999. - Recommendation: improve JFCU IT systems and staffing to the approved 17.5 permanent positions. ### AML/CFT ratings and summary outcomes - Selected FATF Recommendations scoring (as per IMF summary): - Recommendation 1: Compliant - Recommendation 2: Compliant - Recommendation 10: Largely Compliant - Recommendation 11: Largely Compliant - Recommendation 12: Compliant - Recommendation 15: Largely Compliant - Recommendation 19: Compliant - SR I: Largely Compliant - SR VII: Not being rated pending FATF two‑year period - Overall IMF recommendations (selected high‑priority): - Extend Convention for Suppression of the Financing of Terrorism, the Council of Europe Convention and the Palermo Convention to Jersey. - Amend POCL to impose affirmative STR reporting obligation. - Amend TL to permit receiver appointment for confiscation enforcement. - Improve JFCU staffing to 17.5 permanent positions and IT capability. - Amend MLO and other laws to require originator information for wire transfers within FATF two‑year period. --- ### Insurance supervision — IAIS assessment highlights - Assessment context: - IAIS Insurance Core Principles assessment done under IMF OFC program; Commission is an integrated supervisor for insurance, banking and funds. - Market and structural figures (Category B insurers, year 2001, all figures in £ millions): - Long‑term insurance: gross premiums 132.4; assets covering technical provisions and solvency 306.4; total assets 350.6; technical provisions 271.4. - General insurance: gross premiums 163.9; assets covering technical provisions and solvency 515.4; total assets 573.7; technical provisions 379.5. - Key findings and recommendations: - Nearly all IAIS Insurance Core Principles observed; some "largely observed" or with resource caveats. - Issues: Insurance Division understaffed; increase number of supervisors recommended. - Licensing: permits typically one year; six‑monthly reporting of accounts and technical information. - Solvency and capital: - Minimum solvency margins: life/pensions greater of £50,000 and 2.5 percent of the long‑term fund; general business 17.5 percent of premium income. - Minimum capital requirement: £100,000 for all insurance companies; Commission can set higher via license conditions. - Derivatives and off‑balance sheet: - Derivatives not generally admissible assets; authorization possible by license condition; auditors must review and report six‑monthly if authorized. - On‑site inspections and sanctions: - Need to intensify on‑site inspections; Commission lacks power to impose administrative fines—recommendation to grant power to impose monetary penalties. --- ### Securities/CIFs and market intermediaries — IOSCO assessment highlights - Institutional context: - CIFs valued at BP 106.2 billion as at June 30, 2002; financial assets under direct administration estimated BP 31 billion. - Commission administers CIFL and is statutory single regulator. - Summary of assessments: - 21 of 23 relevant IOSCO Principles implemented or broadly implemented. - Two Principles partially implemented (Codes of Practice finalization for fund functionaries; contingency arrangements for failure of market intermediaries). - Key supervisory features and recommendations: - Codes of Practice used extensively; completion for CIF functionaries recommended (public consultation underway). - Recommendation: consider power for Commission to levy administrative fines; review Article 11 FSCL guidance by F&E Committee and Article 18 fee transfers. - Issuer disclosure and prospectus rules in Companies Law and Borrowing Control Law apply; timeframes for annual accounts filing (seven months) may be tightened. --- ### Trust and company service providers (FSL / OGBS best practice) — assessment highlights - Definition and scope: - Trust company business defined in Article 2(3) of the FSL; includes company formation, acting as director/secretary/partner, registered office provision, trusteeship, nominee shareholder/unit holder functions. - Licensing, fit‑and‑proper, and span of control: - Principal persons (directors, >10 percent shareholders, controllers) must complete personal questionnaires; police and other checks undertaken. - Codes require an "adequate span of control"; trust company businesses controlling trust company business assets required to be controlled by at least three appropriately skilled and experienced individuals. - Transitionals: many transitional applicants subject to remediation or refused; recommendation to impose final deadlines for transitional compliance. - Financial and operational standards: - Accounts Order requires annual declaration of compliance and auditor negative assurance; audited statements in U.K. Accounting Standards; records to be kept in Jersey for at least 10 years (Codes). - Minimum financial resource metrics in Codes: - minimum paid up share capital: £25,000 (or evidenced net assets for non‑incorporated entities); - professional indemnity insurance minimum: greater of (a) three times relevant fees and commissions, (b) thirty times relevant fees from single largest customer, or (c) £5,000,000 per claim (subject to £10,000,000 cap). - Liquidity: rolling three months expenses in liquid assets; liquidity recalculation at least every three months. - Records, client files, and AML scope: - Recommendation: align definition of "financial services business" in POCL to FSL to ensure all trust company businesses fall under MLO criminal regime. - Codes require client records, but mission recommended explicit Code amendment to state client record applicability and 10‑year retention. - Compliance functions and manuals: - Codes require appointment of compliance officer and MLRO; recommendation to require policy and procedures manual and extend personal questionnaire coverage to key nondirector employees. --- ### Consolidated action plans, legislative reforms and authorities’ response - Authorities accepted many IMF recommendations and set out planned reforms and consultations: - Consolidation of deposit‑taking into FSL; Codes of Practice for deposit‑taking, insurance, CIF functionaries to be finalized and intended to come into force in 2004. - Planned legislative changes (subject to consultation and legislative approval) include: - explicit legal basis for Codes of Practice enforceability; - powers to direct and to appoint a manager for banks once deposit‑taking subsumed into FSL; - consideration of civil/administrative penalty powers for the Commission. - AML/CFT specific commitments: - consult on amendment of POCL to require direct reporting to JFCU and to provide JFCU with enhanced access and powers; - seek extension of international conventions to Jersey (e.g., request UK to extend Convention for Suppression of the Financing of Terrorism with effect from September 1, 2003 noted by authorities). - Resourcing: - Commission Compliance Division staff increased from 27 to 40 positions; 35 in post at time of reporting. - Commission objective to build reserves equal to six months’ costs; negotiated contribution to States’ Treasury in 2001 amounted to £3.5 million (Commission contribution to States). - JFCU planned IT upgrade and staffing improvements; Commission to continue regular review of staffing requirements. --- *Assessment content and recommendations are those of the IMF assessment chapter "Detailed Assessment of Compliance with the Basel Core Principles" and related AML/CFT, IAIS, IOSCO, and OGBS evaluations as summarized from the IMF mission report (cr03369).* ### 1. Detailed Assessment of Compliance with the Basel Core Principles....................................9 ### Detailed Assessment of Compliance with the Basel Core Principles ### Purpose, scope, and methodology - The assessment of Jersey’s compliance with the Basel Core Principles for Effective Banking Supervision was completed as part of the IMF offshore financial sector (OFC) assessment program. - Purposes of the assessment: - Benchmark the current state of banking supervision, recognizing extensive changes in recent years. - Suggest further improvements or changes and provide input for an action plan to move toward full compliance with the Core Principles (CP). - 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 CPs. - Extensive discussions with staff of the Jersey Financial Services Commission (Commission), external auditors, and management of commercial banks. - The Basel Core Principle assessment was conducted by Jack Heyes and Marcel Maes (Consultants MFD). ### Institutional and market structure - Key characteristics of Jersey’s financial system: - Dominated by private banks providing asset management for high-net-worth individuals attracted by low taxes, a secure legal environment, convenient location near main European financial markets, and experienced private sector professionals. - Banking sector size and composition (as of end-June 2002 unless otherwise noted): - 62 banks were registered compared with 70 a year earlier. - 38 subsidiaries and 24 branches of banks from 16 different countries. - Note on departmental renaming: - The IMF’s Monetary and Exchange Affairs Department (MAE) was renamed the Monetary and Financial Systems Department (MFD) as of May 1, 2003. The new name has been used throughout the report. ### Legal and institutional framework for supervision - Regulatory institution: - The Commission is a statutory body corporate established under the Financial Services Commission (Jersey) Law 1998 (FSCL). - The Law established the Commission as an independent body with a Board of Commissioners as the governing body. - The Commission is accountable for its overall performance to the States of Jersey through the Finance and Economics Committee (F&E). - Banking legislation: - Banking Business (Jersey) Law, 1991 (BBL) sets out licensing and supervision regime for deposit-taking business. - The BBL gives the Commission the ability to impose conditions on licensees, provides for penalties for breaches, and for revocation of licenses. ### Prudential standards and supervisory practices - Capital requirements: - The Commission prescribes that banks maintain minimum risk based capital requirement of 10 percent and where appropriate a higher minimum requirement can be imposed on individual institutions. - Supervisory guidance and approach: - The Commission has developed guidance in the form of route planners to ensure a consistent approach for conducting its inspections. - Route planners have recently been developed for corporate governance and credit risk. - The Commission’s approach requires close attention to internal controls applied by banks, including consideration of: - Independence of internal audit. - Access of internal audit to senior management and the Board. - Internal audit risk assessment and quality control processes. - Technical experience and training programs. - Accounting and reporting: - Jersey incorporated banks must produce “true and fair” audited accounts to the Commission. - Remedial and enforcement powers: - Common remedial action includes informal oral and written communication with management. - Statutory powers include imposing conditions, appointing inspectors, and revoking registration. ### Overall assessment summary points - The assessment finds that Jersey has a sound and generally effective framework for the regulation and supervision of banking activity. - The Commission functions as an effective licensing authority supplemented by comprehensive criteria to ensure a consistent understanding of permissible activities and requirements. *Source: Detailed Assessment of Compliance with the Basel Core Principles (assessment of Jersey’s banking supervision).* ### 12. The Commission has wide gateways for the sharing of information with home and ### 12. The Commission has wide gateways for the sharing of information with home and host country supervisors ### Principle 1 — Objectives, Autonomy, Powers, and Resources: summary findings - Assessment for overall Principle 1: Largely compliant. - The Commission (through its Board of Commissioners) is the sole regulator of banks in Jersey and took over responsibilities of the Financial Services Department on July 1, 1998. - Statutory and regulatory framework: - FSCL and the Banking Business (Jersey) Law (BBL) set out the Commission’s objectives and responsibilities. - Article 7 of the Commission Law highlights: reduction of risk to the public from dishonesty/incompetence/malpractice or financial unsoundness; protection and enhancement of Jersey’s reputation and integrity; and the best economic interests of Jersey. - Article 5 of the Commission Law assigns responsibility for supervision and development of financial services, advisory/reporting roles to States of Jersey bodies, and legislative recommendations. - The BBL is based on the U.K. Banking Act 1987 and first introduced in 1991; amended seven times, most recently in March 2002. Banking legislation was expected to be further amended in 2003 via expansion of the FSL to deposit-taking business and revocation of the BBL. - Licensing and enforcement powers under the BBL include (inter alia): - issuing conditions on a license (Article 10 of the BBL); - removal of a shareholder/controller (Article 14); - removal of a director or manager (Third Schedule of the GPO); - restriction on sale of shares (Article 16); - appointment of reporting accountants (Article 25); - appointment of inspectors (Article 27); - revocation of registration (Article 9); - issue of a public statement (Article 45B). - Planned legislative changes (via extension of FSL) would add: - power to petition the royal court to appoint managers for registered persons; - express ability to issue Codes of Practice for deposit-takers, updateable without primary legislation amendment; - identical powers for banks, investment business, and trust company business. ### Principle 1(1) — Responsibilities and objectives - Assessment: Largely compliant. - Observations: - Commission’s annual report states key purpose: maintain Jersey’s position as an international finance center with the highest regulatory standards by reducing risk to the public; protecting and enhancing Jersey’s reputation and integrity; safeguarding Jersey’s best economic interests; and contributing to the fight against financial crime. - The Commission is sole supervisor; majority of banks are branches/subsidiaries of international parents (U.K., France, Germany, Canada, United States). - The Commission can apply to the royal court for winding up of a Jersey incorporated bank under Companies (Jersey) Law 1991 (power never exercised). - Guidance notes and policy statements (Guide to the Banking Business (Jersey) Law 1991) and Article 9 of the BBL set minimum licensing criteria; guidance notes to be superseded by Codes of Practice for deposit-taking under expanded FSL. ### Principle 1(2) — Operational independence and resources - Assessment: Largely compliant. - Governance and appointment: - Board: nine non-executive members; one executive director general. - Commissioners appointed by the States for three-year renewable terms; appointment process overseen by the independent Commission of Appointments. - Article 11 of the Commission Law permits the Finance and Economic (F&E) Committee to give guidance (non-binding) and general directions; Committee has no role in regulatory decisions; guidance/directions historically not given. - Staff, skills, and training: - Staff qualifications include Institute of Chartered Secretaries; Association of Chartered Certified Accountants; Institute of Bankers; Institute of Chartered Accountants of England and Wales; Securities Institute. - As at March 31, 2002: 26 members of staff held professional qualifications; 10 members held technical qualifications; a further six staff were studying for professional qualifications. - The Compliance Division’s staff complement increased to 40 staff in the business plan for 2003, with 35 currently in post (including one additional senior manager with significant banking industry experience). - Use of secondees and external consultants (examples: KPMG International secondment of four weeks per year; a 12-month Ernst & Young statistician secondment; two consultants for AML guidance note re-writing). - Annual training budget, in-house courses, mandated professional development reviews every six months. - Resourcing and funding: - Fees from finance sector fund the Commission; F&E Committee sets fee levels on Commission’s recommendation. - Commission objective to build reserves equal to six months’ costs. - A negotiated contribution is paid to the States’ Treasury; in 2001 the Commission’s contribution to the states amounted to £3.5 million. - Commission audited annually by PricewaterhouseCoopers; Board has instigated an audit committee. - Resource concerns: - Noted significant qualitative and quantitative resource deficit (see BCP 16 commentary). - Commission Direct Costing of Supervisory Responsibilities (In percent): - Total 100 - Funds 30 - Trust Companies 28 - Inv. Bus 18 - Banks 16 - Insurance 8 - Recommendation: conduct an in-depth analysis of supervisory objectives and required means; review prudential supervision business processes to enhance efficiency; recognize diversification and growing complexity of financial products. - Mission welcomes Commission’s recent review of resource requirements and increase in Compliance Division staff. ### Principle 1(3) — Legal framework for authorization and ongoing supervision - Assessment: Largely compliant. - Description: - Under Article 6 of the Commission Law, the Commission is solely responsible for granting and withdrawal (revocation) of banking licenses. - BBL empowers Commission to set policy and provide administrative guidance without primary legislation amendment. Article 10 allows conditions to be imposed on registration; Article 9 allows revocation where improper conduct is likely. - Guidance notes/Codes of Practice address: application information; financial risk (capital adequacy, large exposures, liquidity); operational risk assessment (corporate governance, internal controls). - Comments: - Current guidance notes are directly relevant to regulated status; noncompliance is regarded as an indication of improper conduct under Article 9, but guidance notes alone do not expressly authorize revocation or public statements unless framed within improper conduct. - Extension of FSL to deposit-taking will provide a firmer legal basis to issue and enforce prudential rules as Codes of Practice; Codes will be transferable into law enabling refusal/revocation where a registered person fails to follow a Code. ### Principle 1(4) — Powers to address compliance, safety, and soundness - Assessment: Largely compliant. - Supervisory toolkit: - On- and off-site supervision using information powers under Article 25 of the BBL. - Compliance Division conducts on-site visits and off-site prudential analysis; Enforcement Division investigates suspected breaches. - Article 25 provides unfettered access to all banks’ files; Article 27 permits appointment of others to conduct investigations. - Article 9(1)(b) permits refusal or revocation where improper conduct is suspected. - Remedial actions available (examples): - issue of a condition on the license (Article 10); - removal of shareholder/controller (Article 14); - restriction on sale of shares (Article 16); - appointment of inspectors (Article 27); - public statements (Article 45B); - revocation of registration (Article 9). - Comments on missing powers and planned additions: - The range of sanctions is to be completed by power to impose civil or administrative money penalties (the Commission will seek powers to fine). - Missing powers include issuance of directions (license conditions can have equivalent effect) and appointment of a temporary manager (though unlikely to be used under strict licensing criteria). - Ongoing legislative review will address modern procedures enabling business rescue rather than insolvency. ### Principle 1(5) — Legal protection for supervisors - Assessment: Compliant. - Provisions: - Article 8A of the Commission Law and Article 6A of the BBL provide immunity from liability in damages for acts or omissions in discharge of functions unless in bad faith. - Commission has insurance arrangements to cover defence costs for actions arising during discharge of duties, including coverage for staff acting in proper performance of duties. ### Principle 1(6) — Information sharing and confidentiality protections - Assessment: Compliant. - Cooperation arrangements: - High levels of cooperation with law enforcement: Jersey Financial Fraud Information Network comprises representatives of the Commission; Law Officers’ Department (headed by the attorney general); Joint Financial Crimes Unit (Jersey’s financial intelligence unit); Viscount’s Department; Regulation of Undertakings Department; Comptroller of Income Tax. - Statutory gateways: - Article 8 of the Commission Law permits seeking and exchanging information relating to supervision, development and promotion of financial services in Jersey and similar services outside Jersey; consulting/advising persons/bodies inside or outside Jersey; publishing information related to its functions; providing advice/assistance/services to secure efficient and effective provision of financial services in or from within Jersey. - Article 45A of the BBL allows the Commission to assist another supervisor, including obtaining information/documents under Article 25 and undertaking investigations under Article 27. - MOUs: Commission has entered into a number of MOUs with overseas regulatory bodies; MOUs typically contain confidentiality provisions but are not required prior to information sharing. - Confidentiality restrictions and penalties: - Article 41 of the BBL restricts disclosure of restricted information unless permitted by gateways; unauthorized disclosure is punishable by imprisonment for a term not exceeding two years, or a fine, or both. - Article 44(2) permits information disclosed for criminal investigation/prosecution to be passed to a police officer in Jersey or the Attorney General; police may disclose information to overseas authorities for prosecution with prior permission of the Attorney General. - The Commission can deny information requests where it considers information would be used inappropriately or would not be held confidentially. - Comment: The Commission has appropriate statutory and practical gateways to cooperate with foreign regulators and law enforcement while enforcing confidentiality obligations. ### Principle 2 — Permissible Activities - Assessment: Compliant. - Key points: - Scope of BBL: “deposit-taking business” as defined in Articles 2 and 3 of the BBL (based on U.K. Banking Act 1987). - Licensing process considers intended activities; GPO requires prior consent of the Commission for licensees wishing to undertake new activities in Jersey. - Article 37 of the BBL restricts use of “bank” or “banking” to registered persons unless authorized under Article 38; similar restrictions exist under Companies (Jersey) Law 1991 and Registration of Business Names (Jersey) Law 1956. - Comment: Commission proposes to rely on registrar powers under Companies (Jersey) Law 1991 and Registration of Business Names (Jersey) Law 1956 instead of continuing to restrict sensitive words under regulatory legislation. After revocation of the BBL and inclusion of banking activities in the FSL, duplication is proposed to be removed. ### Principle 3 — Licensing criteria - Summary: - Article 9 of the BBL (refusal and revocation) together with Commission’s Guide to the Banking Business (Jersey) Law 1991 (guidance notes) and policy statements set out minimum licensing criteria. - Article 9 allows refusal where (inter alia): - required information not provided; - circumstances likely to lead to improper conduct or reflect discredit on the applicant or its employees; - not in the best interests of depositors or Jersey; - applicant provided false or misleading information. *Source: Table 1. Detailed Assessment of Compliance with the Basel Core Principles.* ### Appendix VII of the guidance notes contains the policy towards new banks. This includes the policy ### Appendix VII of the guidance notes contains the policy towards new banks. This includes the policy ### Licensing policy for new banks and entry criteria - Licenses are granted only to financial institutions of international status and reputation: subsidiaries or branches of the world’s largest 500 banks by reference to capital base, or financial conglomerates with equivalent own funds. - Applicants must: - maintain a real presence on Jersey; - be subject to appropriate consolidated supervision by a satisfactory supervisory body responsible for the whole financial institution in its country of origin; the home country supervisor will be asked to confirm its agreement to the applicant bank setting up in Jersey; - supply a “letter of comfort” from its parent confirming acceptance of full responsibility for the liabilities of the Jersey subsidiary/branch; - for a Jersey incorporated subsidiary, confirm the subsidiary will have sufficient capital and reserves to maintain a risk asset ratio of at least 10 percent calculated in accordance with Basel Committee guidelines. - The Commission has reaffirmed this policy through a Board of Commissioners decision and applies the same principles to issuing licenses and to ongoing supervision; additional reporting obligations apply under ongoing supervision. - Grounds for refusal and appeals: - Article 9 of the BBL sets out grounds for refusal to grant registration, including failure to provide information. - Written confirmation is provided when an application is refused. - Appeals procedure for refusals under Article 9 and revocations under Article 10 is set out under Article 17 of the BBL. ### Ownership, controllers, and fit-and-proper requirements - The Commission considers ownership and control structure; opaque structures are not permitted. - The Commission requires disclosure of beneficial ownership and intermediate shareholders; applicants must notify the Commission of the identity of shareholder/controllers. - All controllers, directors and senior managers must complete personal questionnaires (PQs) on application or on subsequent appointment to assess “fit and proper” status. - PQs cover qualifications and experience, criminal or regulatory history, and authorize police checks. - For branches, a senior officer in the headquarter jurisdiction must complete a PQ and act as the Commission’s point of contact outside Jersey. - Article 13 of the BBL: no person shall become a minority, majority, principal, or indirect controller of a Jersey-incorporated Registered Person without notifying the Commission in writing and receiving written confirmation of no objection. - Dominant-controller categories (Article 1 of BBL): - executive controller (e.g., managing director or chief executive officer); - shareholder controller: thresholds for voting-power-based thresholds are 15-50 percent (minority), 50–75 percent (majority), and over 75 percent (principal); - indirect controller (person on whose instructions the directors act). - The Commission’s “Dominant Shareholder (Controllers)” policy statement (2000) requires PQs for controllers covering probity, competence, soundness of judgment, and diligence, and checks on mechanisms preventing undue influence. ### Capitalization and capital adequacy requirements - The guidance notes state: “The minimum requirement for the capitalization of a Jersey incorporated deposit-taker will normally be £5 million or equivalent in another currency. However, this could be higher depending upon the nature of the business plan, and the level of capital required to support an acceptable risk asset ratio.” - Nine licensed banks currently have capitalization below £5 million due to prior licensing; all nine have capital at or in excess of £2.5 million and a capital ratio in excess of the 10 percent requirement. - Minimum risk asset ratio: - prescribed minimum risk asset ratio for Jersey incorporated subsidiaries is at least 10 percent, calculated by the method established in the BCA (Basel Capital Accord). - The capital ratio is significantly in excess of the BCA requirement of 8 percent. - The Commission may set a higher rate; Article 10(1) has been used once to set a capital ratio of 12 percent for one bank. - Quarterly prudential returns (Article 25 of the BBL) are required to monitor capital ratios; guidelines for measurement are provided in the Reporting Guide to the BBL. - Components of capital are defined in the quarterly prudential return and are calculated using the formula laid down by Basel. - The Commission expects notification if capital falls below the minimum and will meet management to decide remedial action; management should have accurate management information systems to monitor capital adequacy. - Assessment recorded: Largely compliant (comments note guidance notes lack force of law and no market-risk related capital requirement currently). ### Supervisory process, application requirements, and information needed - The Commission requires a detailed business plan prior to registration; in practice a business plan is mandatory. - Business plan must cover the first three years: source and types of business envisaged, balance sheet and profit and loss projections for each year, staffing, control of the institution, and assumptions underlying business projections. - Additional application requirements: - three-year projection of estimated profits/tax and three-year balance sheet projections; - latest audited accounts of the parent bank (and ultimate parent if applicable); - details of external funding. - Application handling and supervision: - Authorization Division handles applications; Compliance Division handles ongoing supervision. - Commission obtains written consent from parental supervisor and confirmation that parental supervisor will exercise consolidated supervision; the Commission liaises actively with the home supervisor to confirm there are no regulatory issues. - Article 21 of the BBL makes it an offence to make a statement that is false to one’s knowledge; Article 9 allows revocation if false or misleading information was provided. ### Credit policies, loan evaluation, and loan-loss provisioning - Emphasis on licensee corporate governance to address existence and sustainability of sound credit risk policies and procedures. - Current status and tools: - Guidance notes cover risk management at a high level; a Code of Practice in “draft” form will be issued for consultation in 2003. - No formal program or substantive compliance tests presently exist for independent assessment of banks’ credit risk policies, practices and procedures. - The Commission can commission an Article 25 report (Reporting Accountants “Special Purpose” audit) where credit risk is significant; this has been used once for credit-risk assessment. - The Commission has developed a credit-risk route planner to review credit risk when deemed significant. - Observations on lending activity and rationale: - For 75 percent of banks, lending to customers accounts for less than 15 percent of total assets. - Commission’s reliance on licensing policy, 10 percent capital minimum, and group credit policies as mitigants. - Areas for supervisory enhancement (suggested by the source): - promote international credit-risk practices by distributing Basel guidance and indicating Commission support and intent to seek compliance during onsite visitation; - enhance route planners and onsite programs to verify existence and sustainability of sound credit policies and procedures; - consider establishing an internal Commission credit risk rating system and sample loan reviews to verify licensee policies and provisioning methodologies. - Loan-loss provisioning practices: - Total provisions reported in quarterly prudential returns; credits classified by sector and split between domestic and nondomestic exposure; analysis of security held against credits. - No specific industry guidance yet on identification and recording of impaired assets nor valuation of collateral to reflect net realizable value; an appendix to the draft Codes of Practice is planned to address this. - Assessment recorded: Largely compliant (comments call for more prescriptive guidance and supervisory capability). ### Large exposures, reporting, and limits - Definition and measurement: - Closely related groups: where one party has direct or indirect control over the other(s), or are connected such that failure of one would cause failure of others; such parties counted as one facility for large-exposure measurement. - Exposure includes loans, interbank placements, guarantees, and off-balance sheet items (per EU Large Exposures Directive). - Limits and reporting: - A large exposure = exposure equal to or greater than 10 percent of capital base. - The Commission requires details of all loans in excess of 10 percent of capital base at quarterly intervals (Article 25 powers). - A general overall limit on total value and number of large exposures over 10 percent has been set equivalent to total value of 800 percent of the capital base. - Under the Fourth Schedule of the GPO, banks must obtain prior consent for all exposures in excess of 25 percent of capital base. - Banks must report exposures over 10 percent of capital base quarterly; the 10 largest interbank exposures must also be reported quarterly. - Returns are required within 20 working days of the reporting period end. - Exposure reports are logged on a Commission database and reviewed by a Compliance Division manager. - Sectoral exposures are collected via quarterly prudential returns; geographic exposure beyond domestic/nondomestic breakdown is not collected regularly due to limited lending activities. - Assessment recorded: Compliant. ### Connected lending and conflicts of interest - Definitions and reporting: - BBL defines “associate”; guidance notes define “connected parties” (subsidiaries, sister companies, companies with common directors). - Assets and liabilities with associated, holding and subsidiary companies are reported in quarterly returns. - Policy and supervision: - No prescriptive provisions specifying terms or amounts for connected-party exposures in existing guidance notes. - Draft Codes of Practice (Section 2) require registered persons to avoid conflicts of interest or address them by disclosure, confidentiality rules, decline to act, or other measures. - Expectation that management will provide appropriate oversight and have clearly stated exposure limits. - Assessment recorded: (implicit) supervisory approach focuses on governance and licensing mitigants rather than prescriptive limits beyond large-exposure and GPO requirements. ### Overall supervisory assessments and notable numeric parameters - Key numeric thresholds and figures: - world’s largest 500 banks (by capital) — licensing population reference; - minimum capital normally required for Jersey incorporated deposit-takers: £5 million; - nine licensed banks below £5 million but at or in excess of £2.5 million and with capital ratio in excess of 10 percent; - prescribed minimum risk asset ratio: 10 percent (Basel method); - Basel (BCA) minimum: 8 percent (comparison cited); - one bank historically subject to 12 percent minimum capital ratio under Article 10(1); - lending to customers accounts for less than 15 percent of total assets for 75 percent of banks; - large exposure threshold: 10 percent of capital base; - overall large-exposure aggregate limit set at 800 percent of capital base; - prior consent required for exposures in excess of 25 percent of capital base (Fourth Schedule of the GPO); - returns required within 20 working days of reporting period end. - Assessment summaries pulled from the source: - Principle 4 Ownership: Compliant - Principle 5 Investment Criteria: Compliant - Principle 6 Capital Adequacy: Largely compliant - Principle 7 Credit Policies: Largely compliant - Principle 8 Loan Evaluation and Loan-Loss Provisioning: Largely compliant - Principle 9 Large Exposure Limits: Compliant *Guidance notes (Appendix VII) and Commission statements as summarized in the IMF document.* ### Section 2 of the “draft” Codes of Practice provides guidance wherein a registered person is expected ### Section 2 — Draft Codes of Practice: Guidance for Registered Persons ### Conflicts of interest: expectations and measures - Registered persons are expected to avoid any conflicts of interest, or where conflicts arise, to address them in disclosure, internal rules of confidentiality, declining to act, or otherwise as appropriate. - Guidance notes expect management to have accurate and reliable management systems in place, and to monitor the quality of assets. ### Legal powers and prudential tools (Article 10 of the BBL) - Article 10 of the BBL gives the Commission the power to: - require a given bank to set limits for loans to connected and related parties, - deduct such lending from capital when assessing capital adequacy, and - require collateralization of such loans. ### Emerging issue: global liquidity management pools in offshore jurisdictions - Some major international banks are establishing global liquidity management pools in offshore jurisdictions for particular business purposes. - In mission discussions with a major bank, it was advised that the Jersey licensee had assumed this role for the bank’s global operations. - Assuming this role will bring about material connected and large lending implications albeit at limited risk to the jurisdiction. ### Accounting and disclosure requirements - Banks are required to adhere to U.K. Accounting Standards, or equivalent. - These standards require banks to maintain adequate records and to provide for the disclosure of all material related party transactions and balances. *Source: draft Codes of Practice; Article 10 of the BBL; mission discussions.* ### Section 3 of the draft Codes of Practice requires banks to maintain records to enable management to ### cr03369 - Section 3 of the draft Codes of Practice requires banks to maintain records to enable management to ### Section 3 / Related counterparties and records - Section 3 of the draft Codes of Practice requires banks to maintain records to enable management to identify, monitor and control exposures by related counterparties across all products. - Assessment: Largely compliant. - Comments: - Refer to comments in CP 9. - Formalization of the Code of Practice for Banks will make the Commission compliant with this CP. - An enhanced onsite credit assessment process should address specific special risks. - The Commission may consider implications of the introduction of global liquidity pools on existing legislation and guidance covering connected and large exposures. ### Principle 11 — Country Risk - Principle: Banking supervisors must be satisfied that banks have adequate policies and procedures for identifying, monitoring, and controlling country risk and transfer risk in international lending and investment activities, and for maintaining appropriate reserves against such risks. - Description / supervisory practice: - Refer also to description provided in CP 7 regarding the Licensee’s Corporate Governance regime and the process of licensing. - Draft Codes of Practice section 3.2.1.6: “management is able to identify and regularly assess liquidity, credit, country, transfer and market risk.” - Section 3.5.2.3: need for maintaining details associated with aforementioned risks. - Section 3.5.2.4: need for exposure limits associated with the same risks. - As part of licensing, the Commission considers significant areas of country risk; specific issues raised during on-site visits. - Adequacy of information systems reviewed as part of the revised corporate governance route planner. - The Commission does not set prescribed provisioning levels nor conduct independent asset quality assessments; banks generally set provisioning levels, often following their group’s ultimate home regulator. - Article 10 of the BBL gives the Commission power to require a bank to set provisioning percentages if necessary. - Guidance notes require banks to make provision against both on and off-balance sheet risks; a statement of provisions is made on a quarterly basis to the Commission. - External auditors are required annually to report whether a bank’s financial statements provide a “true and fair” view; audits extend to consideration of asset quality. - Quarterly information reported to the Commission: - A breakdown of deposits by country/geographic or political region; - an analysis of domestic and nondomestic lending; - an analysis of market loans, highlighting group loans (those with head office and fellow subsidiaries), OECD banks, and the public sector. - Supervisory cooperation: - Where appropriate, the Commission will contact other regulators to discuss country risk on a consolidated or individual exposure basis. - Assessment: Compliant. - Comments: Refer also to comments in CP 9. ### Principle 12 — Market Risks - Principle: Supervisors must be satisfied banks have systems to measure, monitor, and control market risks; supervisors should have powers to impose specific limits and/or a specific capital charge on market risk exposure, if warranted. - Description / supervisory practice: - Commission insists on corporate governance standards to ensure management assesses and manages principal risks. - Existing guidance notes cover risk management; draft Codes of Practice enhance this guidance. - Corporate governance route planner ensures consideration during on-site visits; Commission investigates management information systems and internal procedures for assessing, monitoring, and controlling risks. - Licensing policy results in presence only of banks in the world’s top 500 on the Island; Commission has a “letter of comfort” for Jersey subsidiaries. - Commission insists on a 10 percent risk asset ratio to provide an additional margin of safety. - Commission adopts a risk-based approach and, given licensing policy, the nature of banking business and the 10 percent minimum risk to asset ratio, does not consider market risks generally significant to a bank or the Island. - Foreign exchange exposures are reported quarterly through quarterly prudential returns. - Article 10 of the BBL gives the Commission wide powers to impose conditions on registration in the interest of depositors. - To date, no specific capital charge for market risk or specific limits on market risk exposure have been imposed. - Commission will ensure sufficient expertise, in-house or resourced externally, to supervise regulated activities. - Assessment: Materially noncompliant. - Comments: - Commission relies unilaterally on banks’ corporate governance standards to manage principal risks. - September 1995 Guidance Note to the Banking Business Law 1991 acknowledges the Capital Adequacy Directive (CAD), including measurements for inclusion of trading risk in the risk asset ratio calculation; before implementing CAD in Jersey, earlier Department wished to consider its implications. - No specific market risk related capital requirement has been imposed yet; no specific guidelines or best practice papers issued on managing these risks. - Presence in Jersey of a number of banks for which the Commission acts as home supervisor increases need to act without delay. - Growing diversification and complexity of financial intermediation in Jersey argue for addressing this gap. - Introduction of a market risk based capital charge should not confront the Jersey banking industry with insurmountable logistic or administrative problems given their international group related character. - Market exposure is already addressed in the consolidated position of parent banks, resulting presently in two different capital requirements calculations for some banks. - Introducing a market risk capital charge would enhance Commission staff understanding of risk assessing techniques. ### Principle 13 — Other Risks - Principle: Supervisors must ensure banks have a comprehensive risk management process (including Board and senior management oversight) to identify, measure, monitor, and control all other material risks and, where appropriate, hold capital against these risks. - Description / supervisory practice: - Refer to CP 7 description emphasizing Corporate Governance regime and licensing process. - Commission believes exposure to other significant risks are not material; Letters of Comfort and MOUs considered appropriate. - Draft Code of Practice and revised Corporate Governance Route Planner developed to direct supervisory assessment. - Draft Code establishes minimum management practices for liquidity and interest rate risk. - Pre-visitation material requires licensee to provide Commission with a copy of its liquidity policy. - Corporate Governance route planner provides suggested assessment techniques and practices to assess risk management over significant risks. - Commission has not established standards related to liquidity, operational, interest rate and foreign exchange risks; guidance notes are planned to be developed through the draft Codes of Practice. - Commission has not established a capital charge for market or other risks (see CP 6 and CP 12). - Assessment: Largely compliant. - Comments: - Assessment reflects degree of progress in identifying need for enhanced industry guidance on sound risk management practices. - Completion of the draft code of practice and development of corporate governance route planner are positive steps. - Commission must continue developing guidance documents and complement them with effective on- and offsite visitation programs capable of critically assessing risk management practices. - Commission should consider applying a capital charge for market risk. ### Principle 14 — Internal Control and Audit - Principle: Supervisors must determine that banks have internal controls adequate for the nature and scale of their business, including delegation arrangements, segregation of functions, reconciliations, asset safeguarding, independent audit and compliance functions. - Description / supervisory practice: - Commission’s supervision pays close attention to internal controls; Article 9 of the BBL makes improper conduct grounds for revocation of a license; Commission may attach conditions on a license. - Route planners for compliance visits focus on Corporate Governance regime and control processes during on-site visits. - Focus areas: structure, management and supervision, segregation of duties and functions, personnel and training, compliance and external review, operational controls (including business resumption), and management information. - Article 23 of the BBL: no person shall become a director or manager without Commission approval; each person must complete a PQ. - Commission considers whether procedures ensure only “fit and proper” persons are employed and whether management is continually aware of operational and financial position regarding qualitative and quantitative risks. - Commission may refuse or revoke a bank’s license for persons not “fit and proper” or for improper conduct. - Third Schedule of the GPO allows Commission to require removal of any director, controller or manager appointed under Article 23(1) if not “fit and proper.” - Commission considers compliance and audit functions as part of corporate governance route planner, assessing independence, reporting structure, capabilities, access to records, risk assessment, quality control and technical experience. - Copies of internal audit reports requested as part of pre-visit work; Commission regularly meets with internal auditors, including off-Island internal audit when it visits Jersey. - Draft Codes of Practice establish minimum standards for compliance and internal audit. - Commission policy: audit of banks to be conducted by one of the ‘big four’ accounting firms; under Article 25 of the BBL, Commission has access to audit reports. - Assessment: Largely compliant. - Comments: - Completion and distribution of the Code of Practice should be expedited to reinforce fiduciary responsibilities of management and Boards. - Consider obtaining annual confirmation from senior management and the Board that they understand and acknowledge fiduciary responsibilities by confirming their bank has a corporate governance regime appropriate for its risk appetite and business operations. - Reinforce need for sound internal control environment in industry guidance notes; guidance could be obtained from Basel Committee documents. ### Principle 15 — Money Laundering (AML/CFT) - Principle: Supervisors must determine that banks have adequate policies, practices, and procedures, including strict “know-your-customer” rules, to prevent use by criminal elements. - Description / legislative framework: - Jersey legislation includes: - Proceeds of Crime (Jersey) Law 1999 (POC Law); - Money Laundering (Jersey) Order 1999 (the MLO); - Drug Trafficking Offences (Jersey) Law 1988; - Prevention of Terrorism (Jersey) Law 1996 (an updated law is expected to come into force during 2003). - The MLO provides for development of internal AML procedures, verification of customer identity, record keeping, and staff training on identification of suspicious activity. - Financial institutions required to designate a money laundering reporting officer (MLRO) to whom reports of suspicious activity must be made; banks are subject to these requirements. - Banks expected to follow AML guidance notes, updated periodically; recent updates covered “introduced” business and politically exposed persons. - Position Paper on “overriding principles” indicates best practice in verification of identity for existing business (not yet translated into guidance). - Supervisory activity and route planners: - Commission checks banks’ compliance with AML provisions primarily through an AML route planner on on-site inspection visits. - Assessment of AML procedures given a high priority; all banks were subject to a focused AML assessment over the past two years. - By law, financial services businesses required to obtain satisfactory evidence of identity for all applicants and retain documents and records of individual transactions for prescribed periods. - AML route planner considers written acceptance policies, use of written checklists, internal reporting procedures, staff awareness of MLRO identity and formal written AML policy communicated to staff. - AML route planner assesses: - status, autonomy, quality, reporting line, and resources of the MLRO; - volume of reports; - quality of reporting; - training; - procedures for handling cash; - hold all mail procedures; - identification of unusual transactions. - Commission reviews suspicious transaction reports (STRs) submitted to the JFCU to identify reporting trends and activity. - AML guidance notes recommend MLRO registration with the Commission. - Role of MLRO may be combined with internal audit, fraud or compliance departments depending on scale; in smaller organisations role might be assigned to operations manager or similar. - Draft Codes of Practice provide for appointment of a compliance officer responsible for ensuring policies and procedures meet legal and regulatory requirements, including AML provisions. - Reporting, cooperation and enforcement: - Suspicious transactions are reported to the JFCU; gateways exist from the JFCU to the Commission so the Commission may be kept aware of issues or trends. - Commission receives analysis of all STRs received by the JFCU and has access to original reports; Commission meets with the JFCU as required and is a member of Jersey’s Financial Fraud Information Network (meets quarterly). - Registrants must immediately advise the Commission of significant matters affecting safety, soundness or reputation. - Draft Codes of Practice establish a formal requirement to deal with the Commission and other authorities in an open and cooperative manner. - Disclosure protections: Articles 32(5) and 33(8) of the POC Law protect staff making disclosures; similar provisions exist for drug trafficking and anti-terrorist legislation. - Where a bank fails AML obligations, Commission can: - Revoke registration under Article 9 of the BBL; - Set conditions on registration under Article 10 of the BBL; - Issue a public statement under Article 45B of the BBL summarizing failure to comply with AML requirements (Commission has done so on one occasion). - Criminal prosecution reserved for Jersey’s attorney general. - For suspected criminal activities by a customer subject to an STR, JFCU handles investigations; upon application to the Bailiff, access to relevant accounts is given to the JFCU; Commission has gateways to share information with police. - Commission considers in parallel the extent to which a bank’s internal systems were at fault and has assessed several such situations; Commission shares conclusions and regulatory actions with home state supervisory authorities and can respond to requests for assistance or information. - Assessment and supervisory emphasis: - The Commission verifies compliance with the MLO and AML guidance notes as part of ongoing visit program. - As part of the AML route planner, the Commission examines internal reporting procedures and considers whether there is a formal written AML policy communicated to staff. *Assessment and descriptions attributed to the Commission as presented in the assessment.* ### Section 1 of the draft Codes of Practice requires banks to act with integrity, and failure to do so “will ### cr03369 - Section 1 of the draft Codes of Practice requires banks to act with integrity, and failure to do so “will ### Ethics, Professional Behavior, and AML Governance - Section 1 of the draft Codes of Practice requires banks to act with integrity; failure to do so “will be considered amongst the most serious of breaches of the Codes.” - The draft Codes require banks to have a policy statement on ethics and professional behavior. - Laws are reviewed at regular intervals to maintain compliance with international standards, including the relevant Forty FATF Recommendations; the Position Paper on “overriding principles” manifests this commitment. - The Order requires ongoing training of all those involved in the conduct of financial business; guidance notes specify the AML/CFT training expected of staff. - As part of the AML route planner, the Commission considers: - whether training has been provided to all staff; - the frequency of training; - the appropriateness of training; - the quality of training. - Under Article 10 of the ML Order, the supervisor must report suspicions to the JFCU. - Information on suspected or actual criminal activities can be shared with Jersey’s Law Officers’ Department and the JFCU, and both can share with foreign law enforcement and judicial authorities where appropriate. - Enforcement responsibilities: - Enforcement Division investigates alleged insider dealing offences and suspected AML-control weaknesses. - The Division has cooperated with overseas regulators including the Department of Trade and Industry (U.K.), the SEC (U.S.A), the British Columbian Securities Commission, and authorities in France, Germany and South Africa. - The Commission has investigated AML issues including those relating to Sani Abacha. - Recent capacity-building steps: - Two consultants appointed to assist in re-writing AML guidance notes (one lawyer experienced with Jersey AML legislation; one responsible for issuing similar guidance in the U.K. and elsewhere). - Formation of an AML Steering Group comprising lawyers, practitioners, and compliance officers to assist in the re-write. - Regular meetings with regulators in Guernsey, Jersey, the U.K., and Switzerland. - Membership of a U.K. working party on FATF Special Recommendation VII (British Bankers Association, the FSA, and HM Treasury). - Commission’s chairman represents the Offshore Group of Banking Supervisors (OGBS) at FATF meetings and co-chaired the Basel Committee’s Working Group on Cross-border Banking (customer due diligence paper). - Assessment: Largely Compliant - Comments: - The Commission is commended for developing an AML compliance program. - Jersey would become compliant depending on: - the adoption of the codes; - the enhancement of the visitation process. - Note: there is no legal requirement to register an MLRO with the Commission. ### On-Site and Off-Site Supervision (Principle 16) - Description: - Compliance Division carries out both on-site and off-site supervision. - Historically, off-site supervision has been the core; on-site visitation process is evolving and expected to be beneficial when fully implemented. - Route planners are used for on-site visits; pre-visit questionnaires issued some 6–8 weeks prior to the on-site visit. - Route planners in use or development include: - corporate governance (currently in draft) — considers internal controls, risk management, personnel and training, compliance, internal audit; - AML — considers MLRO role, reporting suspicious transactions, staff training, client identification, general controls, retention of records; - collective investment funds (CIF) and investment business; credit and treasury route planners are being developed; references exist to UN and EU sanctions and information technology. - Pre-visit questionnaire requests (inter alia): - group and staff structure charts; - an activity schedule, including any internet services; - details of internal and external reviews; - compliance and procedures manuals; - a copy of its complaints register. - Performance targets in the Commission’s business plan for 2002: - all regulated entities will be visited, on average, every two years; - report of a visit will be issued within three weeks of completion of the visit. - Off-site supervision includes analysis of: - quarterly prudential returns; - large exposure reports as and when made; - suspicious transaction reports (made to the JFCU) in respect of ML; - annual financial statements. - Prudential-return checklist considers (inter alia): - consistency of financial instruments with Commission’s understanding of activities; - significant movements in deposits; - whether large exposures in excess of 25 percent of capital base have been approved by the Commission; - make-up of the loan book (including sector concentration); - loan/deposit mismatch; - risk asset ratio; - number of internal suspicious transactions reports. - Additional supervisory controls: - risk indicators sheet comparing each bank to a “model” figure or ratio to highlight deviations. - annual financial statements are subject to external audit; one quarterly prudential return audited each year. - Assessment: Largely Compliant - Comments and recommended enhancements: - Organizational structure to focus on a portfolio approach when fully implemented and staffed. - Risk rating system introduced and validated through on- and off-site work. - Continue development and prioritization of route planners, including a specific route planner to assess the Process of Control (internal controls, compliance, internal audit) to evaluate corporate governance effectiveness. - Training programs on documentation and preparation of visit findings for staff. - Develop and implement a quality control/assurance process to ensure consistent application of supervisory process with supporting evidence. - Implement a time accounting process to provide quantitative and qualitative data on departmental time allocation (noting October 1, 2002 integration of on- and off-site supervisory activities for banking and trust services). - Use international “best practice” documents (Basel Committee, Federal Reserve Bank Examination Manual) to expedite methodology development. - Concern: unless Compliance Department is adequately resourced with appropriate tools and techniques, progress may not be sustained. - Industry feedback during the mission: - differing opinions on benefits of trilateral meetings between banks, external auditors and Commission personnel; - generally positive feedback on Commission personnel quality, but concerns about ability to assess some new products and services and required control practices, especially in treasury, credit and structured product areas. ### Bank Management Contact (Principle 17) - Description: - Frequency of on-site visits and meetings depends on a bank’s risk profile, size and activities. - Commission meets periodically with banks to discuss strategic objectives and significant changes or outstanding regulatory issues. - Commission staff are in regular contact with the industry, supported by regular visit program and supervisory returns. - Regulatory notification and approval requirements: - GPO requires a bank to obtain Commission consent before undertaking any new activity in Jersey; subsidiaries prevented from establishing/acquiring representative offices, branches or subsidiaries outside Jersey without prior Commission consent. - Article 13 of the BBL requires notification to the Commission of any change to a minority, majority, or principal shareholder, or an indirect controller. - Article 14 of the GPO requires auditors (and reporting accountants where applicable) to communicate directly to the Commission matters of material significance not reported by the bank. - Article 23 of the BBL: no person shall become a director or manager without Commission approval (must first complete a PQ); experience and qualifications are important. - Draft corporate governance route planner assesses fit-and-proper procedures and management awareness of operational and financial positions. - Commission may refuse or revoke a bank’s license if management or control persons are not “fit and proper.” - Third Schedule of the GPO: Commission may require removal of directors, controllers, or managers appointed under Article 23(1) of the BBL if not “fit and proper.” - Commission meets regularly with home and host supervisors and related supervisors to discuss common issues. - Assessment: Largely Compliant - Comments: - Commission is generally respected with ongoing useful dialogue with industry participants. - Enhanced on- and off-site supervisory process should complement historical communication channels. ### Off-Site Supervision and Reporting (Principle 18) - Legal and reporting framework: - Article 25 of the BBL authorizes the Commission to require completion of quarterly returns by all banks (solo or consolidated); data based on Basel requirements. - Fourth Schedule of the GPO requires audited financial statements prepared in line with generally accepted accounting standards (typically U.K. standards). - Article 25(13) of the BBL: failure to supply requested information is an offence punishable by imprisonment for a term not exceeding 6 months or a fine not exceeding £2,000 or both. - Reporting requirements: - Quarterly prudential returns signed by two directors (or one director and a manager where not two resident directors); branch manager signs for branches; year-end report signed by senior officer approved under Section A (1) of Fourth Schedule to the GPO. - Prescribed reports standardized on a calendar quarter basis and include detailed balance sheet, off-balance sheet exposures, risk asset ratio calculation, profit and loss account, provisions, loans, fiduciary accounts, total deposit liabilities, lending by sector analysis, maturity analyses, foreign currency exposure, parent/group accounts, directors’ details, directors’ interests, statement of large exposures, large deposits, interest rate and exchange rate contracts, analysis of placements, and others as required. - Separate reporting formats for branches, clearing banks and subsidiaries. - Other reports: - Large exposure reports as and when made; large exposures expected to exceed 25 percent of the bank’s capital base must be notified to the Commission before exposure is made. - Annual audited financial statements in accordance with generally accepted accounting standards. - Analytical processes: - Commission performs analytical tests and “Model Bank” comparisons; deviations investigated and followed up. - Assessment: Compliant - Comments: - Reporting guide and technology-based reporting formats generally allow appropriate assessment of banks’ operational activities. - Article 25 of the BBL provides authority for ad hoc information requests to remain cognizant of risks from new or proprietary products and services. ### Validation of Supervisory Information (Principle 19) - On-site visit program objectives: - Every bank to be visited at least once every two years. - Pre-visit information expected at least one week before the visit; visits commence with an opening meeting; route planners, staff interviews, and documentation review used; closing meeting held generally within one week. - Draft report usually issued within 3 weeks of the visit; final report issued after bank response with deadlines for outstanding issues; letter to directors issued; report suggested to be provided to external auditors. - Commission meets annually with entities for which it acts as “home” state regulator to discuss external audit. - External reporting accountants and auditors: - Article 25 gives Commission power to nominate or approve persons appointed to provide requested reports. - Commission lacks explicit legislative power to oppose an auditor’s appointment under Articles 31 to 33 of the BBL for annual financial statements, but could insist on removal using power under Article 10 to impose conditions on a license. - Articles 25 & 27 provide power to appoint persons (lawyers, chartered accountants) to conduct investigations; Articles 6 and 25 provide legal rights of access to bank records and personnel. - External auditors required to certify accurate extraction of data in prudential returns and to confirm presentation in accordance with reporting instructions. - Auditor reporting requirements include: - any departures in the quarterly return from the accounting policies used in latest published accounts; - treatment of transactions not fully or clearly catered for by reporting instructions; - extent to which consolidated report information extracted from records/systems not examined because they relate to a group company. - Audit and Regulatory Group (ARG) established to meet periodically on regulatory and market interest issues. - Assessment: Largely compliant - Comments: - Commission has no authority to monitor the work of external auditors under present legislation. - Article 1(1) states an auditor must be a member of specified Institutes or otherwise approved by the Commission; no legislative reference to required industry experience beyond professional qualifications. - Mitigation: policy for bank audits to be conducted by one of the “big four” accounting firms. - Commission does not place excessive reliance on external auditors and does not view access to auditing working papers as necessary, but recognizes need for a more in-depth on-site program. - Recommendation: for Article 25 review engagements, consider reviewing supporting working papers as part of acceptance of report findings. ### Consolidated and Global Supervision (Principles 20–23) - Consolidated supervision (Principle 20): - Compliance Division staff have access to activities of other regulated disciplines; inclusion of fiduciary supervision within the Compliance Division remit will enhance access. - Commission maintains contact with home state supervisors and host supervisors; all bank activities (including investment, insurance, fiduciary, nonregulated activities) considered during on-site visits. - Article 25(6) of the BBL authorizes review of activities in other jurisdictions and to request information from holding companies, subsidiaries, related companies, and fellow subsidiaries; authority to impose prudential standards on a consolidated basis. - Consent required for new activities in Jersey and for establishing/acquiring representative offices, branches, or subsidiaries outside Jersey; compliance with prudential standards may be a condition of consent. - Assessment: Compliant - Comments: - Commission supportive of consolidated supervision with legislative authority to request access to all books and records. - Licensing emphasis on granting licenses only to the 500 largest banks. - Approximately 13 MOUs established with “home” supervisors. - Effective October 1, 2002 the Commission will enhance consolidated supervisory activities through integration of banking and trust service supervisory activities. - Globally consolidated supervision (Principle 23): - Article 25(6) extends information request authority to group entities. - Commission responsible for 14 banks with overseas activities (majority in Guernsey and Jersey); most are part of larger groups under consolidated supervision elsewhere. - Two banks particularly significant; one with operations throughout the Middle East—on-site visits to overseas branches on average every 18 months (including regional head office); reporting accountants used in relevant jurisdictions. - Commission meets formally with counterparts in Guernsey (on average twice annually) and Jersey (once in the last 18 months); informal discussions are frequent. - Corporate governance route planner considers management information reporting, effectiveness of compliance and audit functions, and management awareness of operational position. - Fourth Schedule to the GPO requires Commission consent before establishing or acquiring representative offices, branches or subsidiaries outside Jersey; consent not granted unless satisfied with host supervision quality. - Article 10 allows Commission to require closing of an overseas office or impose limitations via license conditions. - Under Article 25(6) Commission may conduct overseas on-site visits on a risk-based basis; budget exists for such visits and history of them being undertaken. - Assessment: Compliant ### Host Country Supervision and Supervision over Foreign Establishments (Principles 24–25) - Host country supervision (Principle 24): - Commission has gateways for sharing information with home and host supervisors. - MOUs established with some 13 home supervisors, including regulators in Germany, Gibraltar, Guernsey, Isle of Man, Mauritius, South Africa and the U.K. - Commission meets periodically with regulators in other host countries (e.g., United Arab Emirates) to discuss hosted operations and group issues. - Home supervisors visit Jersey regularly; formal gateways used to exchange information; bilateral meetings held with host/home supervisors. - Assessment: Compliant - Supervision over foreign banks’ establishments (Principle 25): - Local branches and subsidiaries of foreign banks are subject to the same prudential, inspection, and reporting requirements as domestic banks. - Before registering an institution, a letter is sent to the home country supervisor requesting confirmation of knowledge of and agreement with the proposed Jersey operation and the supervisor’s consolidated supervision role. - Article 45A permits sharing information with home country supervisors spontaneously or on request. - Home country supervisors are given on-site access to local offices and subsidiaries for safety and soundness purposes. - Commission advises home country supervisor promptly of any material action regarding a bank’s operations. - Commission monitors market information, group annual accounts, visits head offices, and holds bilateral meetings to gather information. - Assessment: Compliant ### Accounting Standards (Principle 21) - Legal and audit framework: - Fourth Schedule to the GPO 1991 and Article 11(2) require “True and Fair View” audited accounts in accordance with generally accepted accounting principles; accounts must be published within three months of the balance sheet date. - Quarterly prudential returns are subject to external review annually; non-compliance is an offence. - GPO permits use of U.K. accounting standards or parent-equivalent standards judged equivalent. - Audits must be conducted in accordance with the Auditing Guideline – Banks issued by the U.K. Auditing Practices Committee of the Consultative Committee of Accounting Bodies. - Article 25 enables the Commission to scope external reviews; Article 10 allows imposition of prior approval conditions on financial statements. - Jersey incorporated subsidiary banks must produce “true and fair” audited accounts to the Commission and may publish full accounts or summarized financial statements with limited disclosure based on IAS30 and U.K. standards. - Commission can revoke appointment of an external auditor by imposing a condition under Article 10 of the BBL. - Commission does not rely on external auditors’ work; reporting accountants approved by the Commission will be considered for skills and independence. - Commission uses website and publications to communicate information, including public statements under Article 45B of the BBL. - Assessment: Compliant - Comments: - Descriptive comments support essential criteria; CP 16, 18 and 19 comments outline where cooperation and understanding of external auditors’ work could be enhanced. ### Remedial Measures (Principle 22) - Remedial authority and actions: - Commission uses informal communications and statutory powers under the BBL to impose conditions, appoint inspectors, and revoke registration. - Two inspectors appointed under Article 27 of the BBL; 13 reports carried out under Article 25 of the BBL. - Article 45B of the BBL authorizes public statements; one statement made for a licensed bank; three for other regulated activities; 11 concerning banks claiming to be carrying on deposit taking activities in Jersey. - Powers include (inter alia): - imposing conditions under Article 10 to restrict activities; - denying permission for new activities or acquisitions under the GPO; - restricting or suspending payments to shareholders or share repayments under Article 10; - restricting asset transfers under Article 10; - requiring removal of directors, controllers or managers under the GPO; - imposing conditions to facilitate a takeover or merger under Article 10; - applying to the Court for winding up where just and equitable grounds exist; once deposit taking subsumed into the FSL, Commission can petition royal court to appoint a manager to a bank. - Timeframes for remedial action reflect nature, complexity and volumes involved. - Sanctions can be applied to banks and to management/board members; Article 10 may impose conditions including removal of senior individuals; Third Schedule to the GPO may require removal of directors/controllers/managers. - Article 49 of the BBL states corporate bodies and implicated officers are guilty of offences where offences proved to be with consent, connivance or neglect attributable to officers. - Only where Commission acts in “bad faith” could it be subject to a royal court petition for unnecessary delay in corrective actions. - Assessment: Compliant *Source: IMF mission report content unit cr03369.* ### 1. Objectives, Autonomy, Powers, and Resources ### 1. Objectives, Autonomy, Powers, and Resources ### Objectives, autonomy, and resourcing - The authorities state the Commission has a risk-based approach that prioritized corporate governance, conduct of business, and ML risk over detailed prudential guidance for credit and market risks. - The Commission increased staff in its Compliance Division from 27 to 40 positions; 35 are now in post, including an additional senior manager to support the Division’s banking team. - The Commission will continue ongoing reviews of staffing requirements to support supervisory objectives and a comprehensive on-site supervision program. - The Commission seeks to consolidate Jersey’s regulatory legislation into the Financial Services Law (FSL), which would: - Provide an explicit legal basis for issuing Codes of Practice and attach penalties for non‑compliance. - Provide powers to direct, to appoint a manager, and for restitution on behalf of customers, subject to consultation and legislative approval and transfer of deposit-taking regulation to the FSL (intended in 2004). ### Legal framework, powers, and enforcement - Existing mechanisms: - Failure to follow existing banking guidance notes may indicate a business is not “fit and proper” and can attract regulatory sanctions. - Conditions can be set on a license, which have force of law and attract penalties for non‑compliance. - Identified gaps and intended actions: - The Banking Business (Jersey) Law 1991 (BBL) lacks explicit powers to issue directions or to appoint a manager; however, license conditions are used as an equivalent tool. - The Commission will undertake a general review of existing powers and sanctions to identify inconsistencies and recommend legislative consolidation into the FSL (subject to consultation and legislative approval). ### Market, credit, and other risks; capital - The Commission assesses credit and market risk as low for Jersey banks based on quarterly returns and mitigating factors: - A 10 percent risk capital requirement (compared with the international norm of 8 percent). - Licensing restricted to banks in the top 500, measured by capital. - Requirement for a letter of comfort from the parent company. - The Commission will consider the introduction of market risk capital requirements as part of its assessment of the second Basel Capital Accord. - Codes of Practice for banks (to be finalized in 2004) are intended to address: - Best practices for management of credit, market, and other risks (including loan evaluation and loan-loss provisioning). - Internal controls and internal audit. - Review of capital requirements as part of implementation of the second BCA. ### Internal control, management declarations, and audit validation - Current requirement: only trust company businesses are required to submit a declaration that they have complied with relevant regulatory and AML legislation and Codes of Practice (Article 6 of the Financial Services (Trust Company Business (Accounts, Audits and Reports)) (Jersey) Order 2000). - The Commission intends to review whether directors (and senior management of branches) of all regulated businesses should be required to make such declarations; any change subject to consultation and legislative approval. - The Commission intends to review whether it should be permitted to approve the appointment (and continued appointment) of auditors of all licensed persons (subject to consultation and legislative approval). - The Commission will review use of external experts in validation of supervisory information, including access rights to working papers, and any consequential regulatory amendments (subject to consultation and legislative approval). ### Supervision: on-site and off-site, quality control, and validation - The Commission has enhanced its on-site visit program with support from outside consultants: - Developed a new risk model to better identify higher‑risk operations. - Implemented a comprehensive set of on-site visit programs (route planners). - Adopted a revised report format to better reflect materiality of on-site findings and enhance internal review procedures. - Improved quality control checks are being incorporated into the on-site visit process. - A revised on-site credit risk program (route planner) now: - Specifies testing to verify management representations during visits. - Requires evaluation of appropriateness of credit risk and provisioning policies and procedures. - Will be assessed for the merits of developing a credit risk rating system. - Banks proposing global liquidity pools have notified and met with the Commission to determine impacts, as required by the BBL. ### Assessment outcomes and planned follow-up - The Fund assessed Jersey as compliant or largely compliant with 29 of the 30 Basel Core Principles (and sub-principles); one principle (market risk) was assessed as materially noncompliant. - The authorities note the Commission’s assessment that market risk and credit risk are low and that supervisory priorities were driven by the nature of banking business in Jersey; nevertheless, the Commission will address prudential risks identified by the Fund. - A consolidated action plan prepared by the authorities is appended to Volume I of the assessment. - Codes of Practice for deposit-taking business will be issued for consultation in 2003 and are intended to come into force during 2004; these Codes will, inter alia, lay out capital adequacy requirements and incorporate requirements governing connected lending. ### AML/CFT assessment scope and methodology (overview) - The AML/CFT assessment was prepared by IMF staff and an independent expert (IAE) selected from a roster of experts; work was undertaken over two visits (September 11–25, 2002 and January 13–21, 2003). - Legal and supervisory frameworks reviewed include: Money Laundering (Jersey) Order 1999 (MLO); Proceeds of Crime (Jersey) Law 1999 (POCL); Terrorism (Jersey) Law 2002 (TL); Terrorism (United Nations Measures) (Channel Islands) Order 2001 (Terrorism Order); Al-Qa’ida and Taliban (United Nations Measures) (Channel Islands) Order 2002 (Al-Qa’ida Order); Drug Trafficking Offenses (Jersey) Law 1988 (DTOL); Collective Investment Funds (Jersey) Law 1988 (CIFL); Banking Business (Jersey) Law 1991 (BBL); Insurance Business (Jersey) Law (IBL); Financial Services (Jersey) Law (FSL); Financial Services Commission (Jersey) Law 1998 (Commission Law); Criminal Justice (International Cooperation)(Jersey) Law 2001 (CJL); Criminal Justice (Forfeiture Orders)(Jersey) Law 2001 (CJFOL); U.K. Extradition Act 1989 (Extradition Act); Police Force (Jersey) Law 1974 (PFL); Customs and Excise (Jersey) Law 1999 (CEL); Investigation of Fraud (Jersey) Law 1991 (Fraud Law); Interception of Communications (Jersey) Law 1993; Companies (Jersey) Law 1991 (Companies Law); Borrowing (Control)(Jersey) Law 1947 (Borrowing Control Law); AML guidance notes for the finance sector (the “Notes”); Investment Business Codes of Practice (Investment Codes); Codes of Practice for Trust Company Business (Trust Company Codes); Mutual Evaluation Report of the OGBS of 1999 (MER); EU Decision (Joint Action dated June 19, 1998); and Self-Assessment Questionnaire: FATF Special Recommendations on Terrorist Financing (April 2002). - The assessment included discussions with the Commission; the Bailiff’s Chambers; the Attorney General’s Chambers; the Law Officers Department; the Police; the JFCU; and Customs and Excise. - For the assessment, financial institutions (FIs) were defined broadly to include deposit-taking business (Article 1(1) of the BBL), insurance business (Article 4 of the Insurance Business (Jersey) Law 1996), CIF functionaries (Article 1(1) of the CIFL), investment business (Article 1(1) of the FSL), trusteeship services, company formation and administration, bureau de change, check-cashing, wire transfer services, and a range of activities listed in Article 36(1) and Schedule 2 of the POCL and the Annex to the Second Banking Coordination Directive (No. 89/646/EEC). - The authorities conclude Jersey has a strong legal and institutional framework for implementation of major treaties and measures to combat terrorism and terrorist financing; confiscation of proceeds of criminal conduct; law enforcement and prosecution powers; customer identification; and international cooperation. *Source: IMF assessment chapter "1. Objectives, Autonomy, Powers, and Resources" (cr03369).* ### 44. The main institutions in Jersey in the AML/CFT area are the JFCU, which is a unit of ### The main institutions in Jersey in the AML/CFT area ### Institutional framework and roles - Main institutions: - The JFCU, which is a unit of the Jersey Police and is the FIU for Jersey. - The Police and the Customs and Excise Department, which investigate criminal activities. - The Attorney General’s Office, which prosecutes ML and FT. - The Commission, which is the financial regulator and responsible for monitoring compliance for FIs that are regulated. - Strength noted: - Broad regulation of the financial sector (banking, insurance, investment companies and trust companies) consolidated in a single independent regulator, the Commission. ### Recommendations: legal and institutional improvements - JFCU enhancements: - Augment permanent complement of human resources. - Strengthen powers, particularly to obtain information from reporting entities and access public and nonpublic databases. - Payments/wire transfers: - Strengthen legal framework to ensure originator information remains with the transfer through the payment chain, and enhance scrutiny of wire transfers that do not contain complete information, taking into account the two-year period referred to by FATF. - Home regulator and employment screening: - Improve framework for Jersey’s role as a home regulator (applicable to a limited number of FIs) and improve screening of applicants for employment by banks, insurance companies and CIFs. ### Criminalization of ML and FT — key findings (criteria 1–6) - Treaty status and implementation: - The Vienna Convention was ratified by the U.K. on behalf of Jersey in July 1997. - The Convention for Suppression of the Financing of Terrorism has not been ratified on behalf of Jersey; implementing legislation due to be brought into force in 2003. - The Council of Europe and Palermo Conventions have not been ratified on Jersey’s behalf; implementing legislation due to come into force in 2003. - Jersey has fully implemented the provisions of these conventions relevant to AML/CFT through its domestic law. - Scope of ML and FT offenses: - Money laundering criminalized as a serious offense extending to all proceeds of criminal conduct (Articles 32, 33, and 34 of the POCL, and Article 16, 16A, 17, and 17A of the DTOL). - Financing of terrorism criminalized consistent with the Convention for the Suppression of the Financing of Terrorism (Articles 15–18 of the TL). - ML offense extends to both laundering and the predicate offense (Articles 32–34 and 40 of the POCL; Articles 16, 16A, 17, and 17A of DTOL; Articles 15–18 of TL; paragraphs 4 and 5 of Terrorism Order). - Predicate offenses include drug trafficking (DTOL Articles 16, 16A, 17, and 17A), FT (TL Articles 15–18), and all other crimes with a punishment of more than one year (POCL Articles 32–34 and the First Schedule). - ML extends to assets representing proceeds of criminal conduct, including extraterritorial crimes that would constitute an offense if they had occurred in Jersey (POCL Article 1(1); DTOL Article 1; TL 2(4)(a)). - Application to legal persons and sanctions: - ML and FT offenses apply to individuals or entities that knowingly engage in ML and FT (POCL Articles 32–34; TL Articles 15–18; DTOL Articles 16, 16A, 17, and 17A). - Offenses extend to legal entities under Article 9 of the Interpretation Law. - Both individuals and FIs are subject to criminal laws including unlimited fines and imprisonment of up to 14 years (POCL Articles 32–35, and 37; TL Articles 12–18, 20, 23, and 35; DTOL Articles 16A, 17, 17A, 18A, 18B, and 21). - Article 63 and paragraph 8 of Schedule 6 of the TL, and Article 37(5) of the POCL, provide for offenses of legal entities to flow through to directors. - Resources and capacity: - Prosecutorial side: a number of lawyers permanently attached to the Attorney General’s Office to manage and direct ML investigations; use of externally financed lawyers and Forensic Accountants/Analysts from the U.K., financed by the States of Jersey and under the control of the Attorney General. - JFCU staffing: 15 permanent staff positions (mainly police officers supported by customs officers and civilian staff); approved strength 17.5 positions; additional seven persons (U.K. police officers and civilians) attached to ongoing major ML investigations, for a total manpower operating in Jersey re ML/FT of 22 people. - JFCU IT systems consist of several databases currently under evaluation to be streamlined. - Assessment and recommendation: - Jersey has a generally adequate legal framework for criminalization of ML and FT, but the Convention for Suppression of the Financing of Terrorism, the Council of Europe Convention and the Palermo Convention have not been extended to the jurisdiction. - Recommendation: The Convention for Suppression of the Financing of Terrorism, the Council of Europe Convention and the Palermo Convention should be extended to Jersey. - Implication: Full compliance will be achieved when the Convention for Suppression of the Financing of Terrorism is ratified on Jersey’s behalf. - Implications for FATF: Recommendations 1, 4, 5, SR I, SR II. ### Confiscation, freezing, seizure and asset recovery (criteria 7–16) - Legal powers: - Laws provide for confiscation of proceeds and instrumentalities of criminal conduct and for freezing or seizure of assets prior to a confiscation order where reasonable grounds exist (POCL Articles 15 and 16; TL Schedule 3 Paragraphs 4–7 of Schedule 4 and Paragraphs 1–3 of Schedule 5; DTOL Articles 3–6, 16B and 16C). - Laws provide for confiscation of assets of organizations found to be primarily criminal in nature following conviction (POCL Articles 3, 38, and 39; DTOL Articles 16C and 18; TL Articles 2, 26, and 27). - Receiver and corresponding value: - AML laws provide for appointment of the Viscount as receiver to satisfy confiscation orders (POCL Articles 3–5, 15–21; DTOL Articles 3–12). - The Terrorism Law (TL) does not contain comparable provisions for appointment of a receiver. - Civil forfeiture is not available under current Jersey law, except with respect to cash used in connection with FT (TL Article 27 and Schedule 4). - Discussions are taking place regarding an appropriate civil forfeiture law. - Asset tracing and protection: - Orders may identify and trace assets suspected of being proceeds of criminal conduct or used for FT (POCL Articles 40 and 41; DOTL Articles 19 and 20; TL Schedule 5 Paragraph 6 of Schedule 6 and Paragraph 15 of Schedule 4; CJL Article 5; Investigation of Fraud Law Article 2). - Rights of innocent or bona fide third parties are protected (POCL Article 16(7); DTOL Article 9(7); TL Article 26(7)). - Courts will not enforce illegal contracts as a matter of common law. - Statistics, training and funds: - JFCU records statistics on property frozen, seized and confiscated relating to ML, predicate offences and FT. - All police and Customs Officers attached to the JFCU have undergone training including company and trust law, the U.K. national model for standard and advanced financial investigation courses, compliance procedures, and Home Office training with Centre of Excellence Certificates. - Jersey has established two funds: the Criminal Offences Confiscations Fund and the Drug Trafficking Confiscations Fund (POCL Article 24; DTOL Article 14A; TL Schedule 4 paragraph 10). No comparable terrorism fund exists; terrorist assets go to the government budget. - Jersey has mechanisms to share confiscated property with other jurisdictions for crimes generally and drug trafficking (POCL Article 24; DTOL Article 14A). No comparable provision for terrorist assets, but case-by-case agreements have been reached. - Analysis and recommendation: - Jersey has a generally adequate legal framework for confiscation, freezing, seizure, tracing and protecting third parties, but TL lacks comparable provisions for corresponding value/confiscation by receiver; civil forfeiture limited. - Recommendation: Consider amending the Terrorism Law to provide for appointment of a receiver for all property owned by a defendant to satisfy a confiscation order. - Implications for FATF: Recommendations 7, 38, and SR III. ### FIU (JFCU) functions, reporting, analysis, dissemination (criteria 17–24) - JFCU composition and reporting obligations: - JFCU consists of staff from the States of Jersey Police and Customs, including the serious fraud unit. - Police and customs officers may be assigned to JFCU typically up to six years. - Reporting requirements: - For terrorism, terrorist financing and drug crimes, reporting parties are required to disclose all suspicious reports to a police or customs officer (TL Articles 21 and 34). - The Commission is required to report to the police where they have information relating to ML (MLO Article 10). - For other crimes, only that procedures be maintained to ensure information in a report is disclosed to a police officer (MLO Article 9(d)). - There is no explicit statutory manner for STR submission, but the Notes provide a standard format (Notes Paragraphs 9.23–9.26); the Commission has authority only to require regulated FIs to comply with the Notes. - Access to additional information and databases: - No authority in law requiring reporting parties to provide additional documentation to the JFCU. - Police can seek additional information by obtaining a production order from the Bailiff where suspicion of criminal activity exists (POCL Article 40; DTOL Article 19), and for terrorist acts/financing by production/customer information/account monitoring orders under TL Articles 32 and 33 and Schedules 5, 6 and 7. - JFCU does not have access to other databases on a real time basis; must send officers to obtain publicly available information from other agencies. - JFCU cannot access nonpublic databases on a timely basis other than via production order; relevant laws should be amended to permit such access on a real-time basis. - Reporting offenses and sanctions: - No explicit provision for an offense of failure to report with respect to predicate crimes other than drugs or terrorism. DTO Article 18(a) and TL Articles 20 and 23 create such offenses for drug ML and terrorist acts respectively. - Attorney General may prosecute failures; the Commission may impose regulatory sanctions on regulated FIs; other FIs (e.g., MSBs) are not under the Commission’s jurisdiction. - POCL and MLO could be interpreted to provide equivalent failure-to-report offenses, but not explicit. - Information disclosure and international cooperation: - Information obtained from police cannot be disclosed except in accordance with POCL Articles 30 and 31 (POCL Article 29; PFL Article 2). Persons receiving information must not disclose it without Attorney General consent (POCL Articles 31(2) and 31(4)). - DTOL and TL lack the same restrictions; police may disclose information to other police agencies for investigation without Attorney General reference. - Attorney General may give general or specific consent for JFCU sharing information with foreign counterparts, unconditionally or subject to conditions. - JFCU statistics, structure, staffing and resources: - JFCU keeps records/statistics on: - STRs received, analyzed and disseminated; - STRs that led to investigations, prosecutions or convictions; - requests for assistance and responses provided; - spontaneous referrals by the JFCU to the U.K. National Criminal Intelligence Service and other competent foreign authorities; - STRs arising from large currency transactions. - Leadership and organization: - Headed by a Detective Inspector appointed by the Chief Officer of the Jersey Police and answerable to him. - Sub-divided into Intelligence and Operational units. - Intelligence: 1 Detective Sergeant, 3 Detective Constables, 3 civilian personnel including a financial analyst. - Operational: 1 Detective Sergeant, 4 Detective Constables, 2 Senior Customs Officers. - Staffing levels and support: - Currently supported by seven personnel from the U.K. and local police for increased workload. - Approved and recommended strength: 17.5 positions. - Permanent staff levels are judged less than adequate to effectively implement aggressive investigations into ML and FT. - IT and workload: - Information technology includes multiple databases; steps taken to streamline into a single system. - STR workload increased 600 percent over the last two years (since 1999). - Funding for JFCU investigations provided from the annual police budget and Attorney General’s schemes. - Outreach and reporting: - JFCU does not publish periodic reports on statistics, typologies and trends, but regularly disseminates information to the financial industry via lectures, presentations and broadcasts. - Jersey’s annual Police Report includes information on JFCU activities. - Analysis and recommendations: - Framework for reporting STRs is generally adequate, but absence of explicit legal requirement to report directly to JFCU and lack of real-time access to public and nonpublic databases are potential weaknesses. - Current permanent staff levels at JFCU are less than adequate given a 600 percent increase in STRs since 1999 and increased requests for foreign assistance. - Recommendations: - Amend laws to require reports be made directly to the JFCU in writing on a JFCU-issued form. - Amend laws to permit JFCU to require submission of additional information by reporting parties. - Amend laws to provide expeditious or real-time access to public and nonpublic databases without need for a court order. - Amend laws to provide explicit legal authority for the Commission to issue guidance notes. - Increase permanent staffing of the JFCU to the approved strength of 17.5 positions. - Improve JFCU IT/Data systems to increase benefits to users. - Implications for FATF: Recommendations 14, 28, 32 — compliant (subject to recommendations above). *Source: Assessment of Jersey’s AML/CFT legal and institutional framework and the operations of the Joint Financial Crimes Unit.* ### 25. The JFCU and the attorney general’s office have responsibility for ensuring ML and FT offences are ### The JFCU and the attorney general’s office have responsibility for ensuring ML and FT offences are ### Ongoing investigations and investigative powers - There are a number of ongoing major investigations, some of which arose from STRs while others were identified by the investigation of other criminal activity, e.g., serious fraud or drug trafficking. - The authorities are taking all necessary steps to ensure that these investigations reach a successful conclusion. - The Interception of Telecommunications Law provides an adequate legal basis for interception of telephone communications under a warrant issued by the attorney general (Article 3). - A Regulation of Investigatory Powers proposal has been drafted and is expected to be placed before the States Assembly (Island Parliament) shortly; this law will give statutory authority for covert activity going beyond interception of telecommunications. - Authorities indicate the Court has discretion under existing law to allow the prosecution to rely on illegally obtained evidence. - The JFCU uses controlled delivery and other undercover operations in pursuit of ML and FT investigations. - The interception of telephone communications is permitted under warrant issued by the attorney general. - The Police and the Customs and Excise Office are responsible for investigating ML and FT offences. - Law enforcement can compel production of: - bank account records, - financial transaction records, - customer identification records, - other records maintained by financial institutions and other entities or persons, through lawful process (for example, subpoenas, summonses, search and seizure warrants, or court orders) as necessary to conduct investigations of ML, FT, and predicate offences (POCL Articles 40 and 41; DTOL Articles 19 and 20; TL Articles 31 and 32 and Schedules 5 and 6; Fraud Law, Article 2). ### Task force format, management, and IT - Major investigations use a task force format with personnel from Police, Customs, lawyers from Jersey and the U.K., and forensic accountants. - Management is under the control of the Detective Inspector in charge of the JFCU and a representative of the attorney general’s office to ensure cooperation and information sharing. - The JFCU and other investigation teams are provided with a reasonable standard of IT facilities (for example enabling them to scan documentary material seized), giving easy access to all investigators. - Law enforcement and prosecution services are taking reasonable steps to provide necessary resources for investigation and prosecution of ML and FT. ### Statistics, dissemination, and training - The JFCU is responsible for keeping statistics on ML and FT and maintains records and statistics of all investigations, prosecutions and convictions on ML/FT cases. - The JFCU statistics database enables identification of investigations originating from STRs or other sources and establishes statistics on criminal, civil or administrative sanctions. - The only civil/administrative sanctions available to Jersey authorities to attack profits of suspected criminal activity is the use of Revenue powers, i.e. Income Tax. - The JFCU database identifies STRs referred to Revenue but, due to a lack of feedback, statistics are silent on any Revenue action taken (tax collected). - The JFCU actively disseminates information to concerned persons/agencies through seminars, conferences and police information databases. - Jersey has provided special training/certification for police and customs investigators attached to the JFCU to achieve the recommended standard of excellence required by the U.K. to conduct ML, FT and predicate offence investigations. - Jersey’s law enforcement agencies are making reasonable efforts to investigate, prosecute, convict, freeze, seize and confiscate proceeds of crime or property to be used to finance terrorism. - A number of STRs received by the JFCU were generated by suspicion of terrorism related activities; the JFCU has dedicated personnel to work closely with American authorities on this matter. - Any problems encountered are addressed by the attorney general’s office. - Jersey has enacted numerous pieces of legislation to combat financing of terrorism and the JFCU is in regular contact with U.S. investigators regarding FT. ### Analysis of effectiveness; recommendations; FATF implication - Analysis of Effectiveness: - The States of Jersey law enforcement agencies are making reasonable efforts to investigate, prosecute, convict, freeze, seize and confiscate the proceeds of crime or property to be used to finance terrorism. - Recommendations and Comments: - Passage of the Regulation of Investigatory Powers bill should occur without delay. - Jersey’s law enforcement agencies should prepare a 3-5 year corporate action plan to enable continued investigation and prosecution of ML and FT, setting goals, targets, strategy, implementation plans, etc. - Implications for compliance with the FATF Recommendation 37: Compliant ### International cooperation (criteria 34–42) - Laws and procedures exist for mutual legal assistance in ML and FT regarding production of records, search and seizure, seizure and obtaining evidence for use in investigations and criminal proceedings (CJL Articles 4–7; TL Articles 31–34; Fraud Law Article 2 and Schedules 5–7). - Seizure and forfeiture by enforcement of external confiscation orders is possible (Article 16B and Article 18, DOTL; Articles 15 and 16 and 39 of POCL; and Schedule 3 of TL). - Asset sharing is authorized with respect to drug trafficking and serious crimes; there are no explicit provisions concerning asset sharing in terrorism legislation. - Sharing of assets confiscated under terrorism legislation currently occurs on a case-by-case basis; authorities are considering an asset sharing agreement with the U.S. Department of Justice and with the Canadian authorities. - Jersey requires requests for assistance from foreign jurisdictions to be processed through mutual legal assistance in accordance with their laws and procedures. - Jersey has no dual criminality test to affect their ability to provide mutual legal assistance. - Jersey has structures to allow timely and effective follow up to requests for mutual legal assistance. - Statistics are kept on all requests made or received for mutual legal assistance relative to ML/FT and predicate offences, categorized by Fraud Notices, International Cooperation Notices, Evidence Orders, Proceeds of Crime Orders, Terrorism Orders, Drug Trafficking (Confiscation Order) and Saisies Judiciaire Orders; records include nature and result of the request. - International cooperation is supported through bilateral and multilateral means; Articles 29–31 of the POCL and Article 3 of the Fraud Law allow for informal disclosure with consent of the attorney general. - Jersey has a treaty on information exchange with Belgium and is in discussions on five other treaties. - Pursuant to the EU Decision, Jersey is included within the European Judicial Network and has regular access to U.K. liaison magistrates in EU member states. - The Jersey Police use INTERPOL facilities; information is exchanged by the attorney general with other law enforcement agencies including the U.K. Serious Fraud Office, the U.S. Department of Justice and the District Attorney’s Office in New York; authorities record number, source, purpose and resolution of such information exchanges. - Cooperative investigations occur under powers in Article 3 of the Fraud Law and Article 5 CJL, and active cooperation between Customs, Jersey Police and counterparts in the U.K. and France takes place informally on a regular basis. - Coordination of seizure and forfeiture actions is dealt with case by case; when an international dimension is identified early, the policy is to work in a joint investigation with other jurisdictions. - Under Jersey’s terrorism legislation there is no legal basis for asset sharing, but case-by-case agreements have been reached with other jurisdictions. - Extradition procedure is the same as for the U.K.; it is possible to extradite individuals charged with ML or FT offenses (Articles 7–15 of the Extradition Act). - Jersey does not provide a safe haven for individuals charged with FT due to restrictions on residency, employment or housing and in place extradition procedures; law enforcement takes an aggressive approach to locating such individuals through partnerships, in particular with the U.S.A. - The workload of the JFCU has increased significantly in the last two or three years; human resources attached to the JFCU have remained static and additional personnel have been seconded. - With secondments the JFCU has an adequate level of resources, though these are not permanent positions within the FCU. - Analysis of Effectiveness: - The legal framework is generally adequate for mutual legal assistance in ML and FT regarding production of records, search, seizure and obtaining of evidence. - Jersey has structures in place to effectively follow up requests for mutual legal assistance. - Recommendations and Comments: - Jersey authorities should consider revising terrorism legislation to allow for the sharing of confiscated assets with jurisdictions that contributed to the investigation leading to confiscation. - Implications for compliance with FATF Recommendations 3, 32, 33, 34, 37, 38, 40, SR I, SR V: Compliant ### Assessing preventive measures for financial institutions — General framework and customer identification - General Framework (criteria 43–44): - Disclosure protections: - Where a person discloses to a police officer a suspicion or belief that any property represents another person’s proceeds of criminal conduct, the disclosure is not treated as a breach of any restriction upon disclosure and will not give rise to any liability (POCL Articles 32(3) and 33(5); TL Articles 21 and 24; DTOL Articles 17, 17A, and 18A). - Disclosure related to terrorism financing is not to be taken to breach any restriction on disclosure however imposed (TL Article 34(7)). - The Commission has authority to ensure effective implementation of AML/CFT policies (Article 6, Commission L) for all regulated FIs. - Gaps in regulatory authority: - The Commission does not currently have authority to regulate or monitor compliance of businesses that engage in bureau de change activities, check cashing and money transmitters (except to the extent a bank or other regulated FI engages in such activities), although MSBs are covered by AML/CFT laws. - The Commission has written to all MSBs it is aware of (in particular banks and bureaux de change) to develop accurate statistics and intends to propose in the next six months to the relevant committee of the States Assembly a law to regulate these businesses. - Statistics collected indicate there are less than ten MSBs that are not regulated and whose turnover is more than £10,000. - Companies that engage in lending or financial leasing, such as finance houses, are covered under the AML/CFT framework but are not regulated or monitored for compliance by the Commission except to the extent the activity is performed by a regulated entity. - There are seven activities that fall within the definition of trust company business under the FSL that do not appear covered by the definition of ‘financial service business’ under the MLO; the definition of financial service business in the MLO should be amended to cover these activities. - Analysis of Effectiveness: - Although the Commission can ensure implementation of AML/CFT policies for regulated FIs, it lacks authority to regulate or monitor bureau de change activities, check cashing and money transmitters in some cases; authorities indicate MSB activity outside the regulated sector is minimal. - Finance houses are covered by AML/CFT framework but not regulated or monitored by the Commission unless performed by a regulated entity. - Recommendations and Comments: - Consider enacting a law to regulate MSBs and to monitor compliance for companies that engage in lending or financial leasing. - Amend the definition of ‘financial service business’ in the MLO to cover the seven activities currently omitted (trust company business under the FSL). - Implications for compliance with FATF Recommendation 2: Compliant - Customer identification (criterion 45): - The MLO requires FIs to maintain procedures for customer identification (Article 2 of the MLO); the MLO contains no explicit requirement that such procedures be followed although such a requirement is clearly implied. - Paragraph 4.13 of the Notes indicates that identity of the ‘applicant for business’ must be obtained and verified when establishing a business relationship or undertaking a significant one-off transaction or series of linked transactions. - Paragraph 4.34 of the Notes (referring to Article 5 of the MLO) indicates a bank or building society should establish to its satisfaction that it is dealing with a real person or organization and verify identity of those with power to operate any bank or investment account; similar provisions exist for investment firms, insurance companies and trust and company service providers. - Some banks use numbered accounts but are required to hold identification documentation related to these accounts. *Source: States of Jersey authorities and the JFCU.* ### 46. FIs are required to seek satisfactory evidence of identity of a prospective customer, either occasional or usual, wh ### Customer Identification and Ongoing Monitoring (Sections 46–51) ### Customer identification (legal framework and practice) - The MLO requires FIs to seek satisfactory evidence of identity of a prospective customer, either occasional or usual, when establishing business relations or conducting one‑off transactions (Article 3 of the MLO). - The MLO does not specify what constitutes satisfactory evidence; it provides that evidence must be reasonably capable of establishing that the customer is the person he claims to be (Article 7(1) of the MLO). - The Notes define an individual’s identity as: name and all other names used, the address at which he/she can be located, and date of birth (Paragraphs 4.04 and 4.35 of the Notes). - Photographic evidence is of value only for face‑to‑face customers (Paragraphs 4.04 and 4.35 of the Notes); in practice, most “remote” relationships rely on certification of photographic evidence (see Sec. 4.84). - There is a requirement to record the identity of all customers (Article 8 of the MLO). - Exemptions from identification procedures exist under Article 3, Article 5(5), Appendix D, and Article 6 of the MLO for: - persons covered by Article 2 of the MLO, - persons covered under the EU Money Laundering Directive in one‑off transactions with or for a regulated third party based in an “equivalent” jurisdiction (Article 5(5) and Appendix D), - long‑term insurance cases where the policy contains no surrender clause, may not be used as collateral, or the premium does not exceed 1,750 British pounds (Article 6 of the MLO). - There is no explicit statutory requirement to re‑verify identity, although Article 2 of the MLO requires maintenance of appropriate internal control procedures. - The Commission Board approved a proposal to amend the MLO to require identity to be reverified where there is reason to believe that a customer’s identity is different to that established in the records held by an FSB. ### Corporate and non‑resident customer identification - For Jersey‑registered companies, Paragraph 4.119 of the Notes indicates documents to be obtained: - (i) the original or certified copy of the Certificate of Incorporation, and Memorandum and Articles of Association - (ii) the resolution of the Board of Directors to open an account and confer authority on those who will operate it - (iii) for established businesses - a copy of the latest report and accounts (audited where applicable) - (iv) a search of the file at the Companies Registry or an enquiry via a business information service, or an undertaking from a firm of lawyers or accountants confirming the documents submitted to the Registrar of Companies. - Paragraph 4.121: where the company’s directors are not known to the institution, the identity of at least two directors/company secretary/shareholders and/or at least two persons authorized to operate the account should be verified in line with requirements for personal customers. - Paragraph 4.124: Non‑Jersey registered companies: similar requirements plus attention to place of origin of documents and the background against which they are produced; there is no requirement that institutions check provisions regulating power to bind. ### Introduced business, trusts, and introducer obligations - Where a customer acts on instructions of a third party, the identity of the third party must be established and verified (Article 5 of the MLO). - Paragraph 4.103: trustees/nominees should indicate the capacity in which they operate; reasonable measures for trust identification may include reliance on an introduction certificate from a professional trustee or other regulated financial sector business based in an Appendix D equivalent jurisdiction. - Concerns exist about the introduction certificate at Appendix G2 of the Notes, which offers an option under which introducers are not required to assert documentary evidence is held or to undertake that such documentation will be available on demand. - Paragraph 4.104: banks should obtain written confirmation that trustees/managers are aware of the true identity of settlors/beneficiaries. - Paragraph 4.105: for regulated trustees/managers, enquiries should establish that no bank secrecy or confidentiality constraints will restrict access to documentary evidence of identity for a Jersey investigation; preferably, introduction certificate should be supported by copies of documentary evidence. - Paragraph 4.106: where trustees are not regulated or not based in an Appendix D equivalent and the FI has no current relationship with them, the identity of all settlors/named beneficiaries should be obtained and verified by reference to appropriate independent local professional advisers, unless those persons have no authority to operate the account or give relevant instructions. ### Wire transfers and originator information (FATF SR VII) - There is no explicit statutory requirement to include “accurate and meaningful originator information on all funds transfers and related messages” or for that information to remain with the transfer through the payment chain. - Footnote 1 of the Interpretative Note to Special Recommendation VII allows jurisdictions up to two years after adoption to make relevant legislative or regulatory changes; the Notes alone would not meet FATF VII requirements. - The Commission expects full compliance with FATF VII by December 2003 and advised FIs to have a program in place to meet this requirement by December 2003 (Update No. 5 to the Notes). - Paragraph 8.29 of Anti‑Money Laundering Guidance Notes Update No 5: FSBs should have a program in place to meet the requirement by December 2003; SWIFT expected the MSB 103 message format by November 2003. - The Commission is reviewing wire transfer provisions following the interpretative note to FATF SR VII. ### Ongoing monitoring, suspicious transaction reporting, and enhanced scrutiny - Article 9 of the MLO requires internal reporting procedures for reporting matters giving rise to knowledge or suspicion of ML; the Notes provide guidance on identifying suspicious transactions (Paragraphs 9.01–9.05). - Article 9 broadly requires procedures to report suspicious activities; there is no explicit legal requirement to report business turned away. - For drugs (DTOL Article 18A) and terrorism (TL Article 20), there is an affirmative obligation to report suspicious activities. - Paragraph 9.04: identification of transaction types listed in Appendix H should prompt further investigation and initial enquiries about source of funds; Appendix H lists examples including unusually large or complex transactions and unusual patterns with no visible economic or lawful purpose. - Paragraph 9.02: FSBs should know enough about a customer to recognize that a transaction or series of transactions is unusual; Paragraph 9.05: staff guidance should enable recognition of suspicious transactions and updating of internal instructions as needed. - The Board‑approved legislative amendment proposal includes procedures for FSBs to apply special attention to unusual transactions that have no apparent economic or visibly lawful purpose. - There is no explicit legal requirement to scrutinize transactions with persons in jurisdictions lacking adequate AML/CFT systems, although Appendix D incorporates FATF Recommendation 21 and the Notes include a list of jurisdictions of concern (including FATF NCCT list). The Commission may issue guidance and the Enforcement Division issues updates. - Paragraph 8 of Update No. 5: FSBs should establish a profile for incoming wire transfers for customers, know the transaction size consistent with normal activities, be satisfied transactions are rational in context, and determine if patterns change. - Institutions visited generally had graduated customer acceptance policies, required senior management sign‑off for higher risk acceptances, and included beneficial ownership verification; some lacked clear re‑verification policies and manual systems sometimes needed automation. ### Analysis of effectiveness (aggregate findings) - Measures for verification of identity are generally adequate, although: - relevant laws do not explicitly require that customer identification procedures be followed; - concerns exist about re‑verification of existing customers; - Notes alone are insufficient to meet FATF SR VII requirements without legislative amendment within the two‑year allowance. - The legal framework is generally adequate for monitoring and reporting, but gaps include: - lack of explicit statutory requirements for enhanced scrutiny of wire transfers without complete originator information; - absence of explicit legal provisions requiring special attention to unusual or complex transactions with no apparent economic or lawful purpose; - lack of explicit statutory requirement to report business that was turned away. ### Recommendations and policy implications - Amend the relevant laws to explicitly require that customer identification procedures be followed. - Consider imposing a requirement to reverify existing customers where doubts arise regarding previously established identity. - Amend the law to limit the availability of the exemption (Article 6(1)(b) / EU AML Directive coverage) to entities regulated in EU states, to address the widening exemption that now covers additional unregulated activities (e.g., legal services, accounting, high‑end dealers). - Within the two‑year FATF period, amend laws to require that accurate and meaningful originator information on funds transfers remain with the transfer through the payment chain. - Redouble Commission efforts to direct FSBs toward the customer identification standards required by the Position Paper to ensure greater consistency among licensees. - Amend the introduction certificate example (Appendix G of the Notes) to make mandatory for introducers to verify they hold verification documents and that such documents will be available on demand by the service provider. - Require FSBs to take decisions on high‑risk customers at senior management level. - Require verification of identity where claims and other payments are made to persons other than policy holders. - Require FIs to give enhanced scrutiny to wire transfers lacking complete originator information within the FATF two‑year period. - Require banks to aggregate and monitor significant balances and activity on customer accounts on a fully consolidated basis. ### Implications for FATF compliance - Implications for compliance with FATF Recommendations 10, 11, SR VII: full compliance will be achieved when laws are amended to explicitly require customer identification procedures and provide timely access to customer identification records under introduced business regimes. - Implications for FATF Recommendations 14, 21, and 28, SR VII: - Compliant with Recommendations 14, 21 and 28. - Compliance with SR VII will be determined at the end of the two‑year FATF period or when required laws are in place. *Source: IMF assessment (content unit cr03369).* ### 52. FIs are required to maintain records of a person’s identity that indicate the nature of the evidence and comprise a ### 52. FIs are required to maintain records of a person’s identity that indicate the nature of the evidence and comprise a copy of the evidence, for a period of five years commencing with the date on which the relevant business was completed ### Record-keeping: identity and transaction records - Legal requirements: - FIs must maintain records of a person’s identity that indicate the nature of the evidence and comprise a copy of the evidence for a period of five years commencing with the date on which the relevant business was completed (Article 8(1)(a) and (2)(a) of the MLO). - FIs must maintain records containing details relating to all transactions carried out by their customers and keep the record for a period of five years commencing with the date on which all activities taking place in the course of the transaction in question were completed (Article 8(1)(b) and (2)(b) of the MLO). - Records are available for inspection. Article 8 of the MLO requires retention of customer identification and transaction records for use as evidence in any investigation into ML (under Articles 40 and 41 of the POCL; and TL and DTL equivalents). - The Commission has access to records and information, and the right of on-site inspection under the BBL (Articles 25 and 26), FSL (Article 29), CIFL (Article 8), and IBL (Article 9). - Notes and guidance: - Paragraph 8.06: records containing evidence of identity must be kept for a period of at least five years after the relationship with the customer has ended. - Paragraph 8.19: overriding objective is for financial sector businesses to be able to retrieve relevant information without undue delay. - Paragraph 8.08: reiterates five-year retention for transaction records from completion of all activities comprising the transaction. - Paragraph 8.09: transaction records must be maintained in a form from which investigating authorities can compile a satisfactory audit trail for suspected laundered money and establish a financial profile of any suspect account. - Paragraph 8.02: records should be maintained so that competent third parties can assess observance of ML policies and procedures, transactions can be reconstructed, and institutions can satisfy enquiries or court orders within a reasonable time. - Observed practices and gaps: - Institutions visited generally had documented measures in place to maintain identification and transaction records; one institution had no documented policy on retention of transaction records. - Analysis of Effectiveness: - Framework is generally adequate, although existing legislation would be strengthened by adding an explicit requirement for records to be sufficient to enable investigating authorities to compile a satisfactory audit trail. - Recommendations and Comments: - Consider imposing a requirement that records of financial institutions be sufficient to enable investigating authorities to compile a satisfactory audit trail for suspected ML and establish a financial profile of any suspect account. - Implications for compliance with FATF Recommendation 12: - Compliant. ### Suspicious transactions reporting (Criteria 55–57 and sectoral criteria) - Legal framework and defenses: - For all serious crimes other than drug trafficking and terrorism, there is no affirmative obligation to report suspicious activities (POCL Articles 32–34). - For drug trafficking and terrorism there is an affirmative obligation to report suspicious activities (DTOL Articles 17, 17A and 18; TL Article 23). - Reporting to a police or customs officer of a suspicion provides a defense against Commission of a ML offence under the three laws; for terrorism financing reporting to a committee of the States Assembly or its designee (the JFCU) is a defense (TO Article 9(b)). There is no reference in Jersey law to the JFCU. - Article 9 of the MLO requires internal procedures so reports are disclosed to a police officer (MLO Article 9(d)); FIs must identify an “appropriate person” to whom a suspicious report can be made (Article 9(a) of the MLO). - The Commission is authorized to issue guidelines for identification of complex or unusual transactions and has done so in the Notes (Articles 5, 6, 7 and 8 of the Commission L; and Article 37(1) of the POCL). - Notes and guidance highlights: - Paragraph 9.03: consider transaction size, consistency with normal activities, rationality relative to business/personal activities, changes in transaction patterns, and international nature/reasons for cross-border counterparties. - Paragraph 9.06: obligation on all staff to report suspicions of ML. - Paragraph 9.07: FSBs must ensure each relevant employee knows to whom to report; clear reporting chain to the MLRO. - Paragraphs 9.13–9.18: reporting lines should be short; supervisors aware of obligations; all suspicions documented; MLRO acknowledges receipt and reminds of “tipping off” prohibition; internal enquiries and reasons for disclosure decisions documented; MLRO informed of communications with investigators; retention periods for records of suspicions specified (five years for internal suspicions not disclosed; similar period for reports of no interest; suspicions that assist investigations retained until informed otherwise by investigating officer). - Appendix H of the Notes contains examples of suspicious transactions; Appendix A contains ML case examples. - The Commission reviews suspicious transaction reports submitted to the JFCU and is kept informed of FSB activities in this regard. - Legal protections and prohibitions: - Disclosure to a police officer of suspicion that property represents proceeds of criminal conduct is not a breach of disclosure restrictions and will not give rise to liability (Articles 32(3) and 33(5) of the POCL; Articles 17, 17A, and 18A of the DTOL; Article 21(3) of the TL). - FIs are prohibited from disclosing to any other person information likely to prejudice an investigation (Article 35 of the POCL; Article 18B of the DTOL; Article 35 of the TL). - No explicit legal authority for the JFCU or any competent authority to give instructions to FIs or to require FIs to observe those instructions. - Observed practices and gaps: - All institutions visited had measures for reporting suspicious activity and awareness of protections and tipping-off offence; however reporting levels by some institutions are considered low relative to their activity. - Analysis of Effectiveness: - Legal framework generally adequate except absence of affirmative obligation to report suspicious transactions under the POCL. - Recommendations and Comments: - Amend the POCL to provide an affirmative obligation on FIs to report suspicious transactions rather than making reporting solely a defense. - Consider providing the JFCU authority to give instructions to reporting entities and require FIs to observe JFCU instructions. - Amend Appendix H of the Notes to include examples of suspicious transactions relevant to the insurance sector. - Implications for compliance with FATF Recommendations 15, 16, 17, and 28: - Full compliance will be achieved when the POCL is amended to require an affirmative obligation to report all suspicious transactions. ### Internal controls, compliance and audit (Criteria 58–61 and sectoral criteria) - Legal and guidance requirements: - FIs are required to establish procedures for internal controls and communication to forestall and prevent ML (Article 2 of the MLO). - Paragraph 3.01: FSBs required to establish clear responsibilities to ensure policies, procedures and controls are introduced and maintained to deter ML. - Paragraph 3.03: FSBs should have procedures for prompt validation of suspicions and reporting to the MLRO; provide MLRO access to systems and records; maintain good working relationships with law enforcement. - Paragraph 3.04: FSBs recommended to verify regularly compliance with policies, procedures and controls relating to ML activities. - Paragraph 10.07: guidance on staff training addressing categories: New Employees, MLROs, Supervisors and Managers, Processing Staff, Account Opening/New Customer Personnel, Domestic and Foreign Exchange Cashiers/Dealers and Sales Persons/Advisory Staff. - Compliance officer and appointment practices: - MLO requires procedures to identify an “appropriate person” for reporting (Article 9(a)); MLO contains no explicit requirement such procedures be followed though implied. - Trust company and investment company business require designation of a compliance officer (Sections 3.5 of Trust Company Business Code and 3.6 of Investment Business Code). - No current requirement for banks, insurance companies, CIFs or MSBs to appoint a compliance officer; Codes of Practice drafted for these sectors will introduce this requirement when brought into force. - Codes require the Compliance Officer to report to the “Jersey Management Board” of licensees. - Proposal for legislative amendments approved by the Board includes provision for appointment of a compliance officer. - Employment screening and fit-and-proper: - No general requirement for screening applicants for employment to prevent use of institutions by money launderers or terrorists other than for investment and trust company business; existing Codes of Practice (FSL Article 17) require partners, directors, senior managers and employees be fit and proper for trust/investment businesses. - Codes for banking, insurance or CIF management were not in place at the time; codes for insurance business and CIF functionaries were out for consultation; deposit-taking codes to be released for consultation during 2003. - Codes are provided for in primary legislation and failure to follow a Code is grounds for license revocation, public statement, or direction (Article 17(4) of the FSL makes the Code admissible in evidence). - Cross-border branches and subsidiaries: - Jersey is generally a host regulator but is home regulator for a number of institutions with branches/subsidiaries in other Crown Dependencies. - No requirement that FIs ensure foreign branches observe Jersey’s AML/CFT laws; Jersey entered agreement with other Crown Dependencies that AML/CFT defenses will be of an equivalent standard among Crown Dependencies (does not cover branches/subsidiaries outside Crown Dependencies). - Paragraph 3.06: where a Jersey financial services business is a branch or subsidiary of an international group with policies and procedures to the same or higher standard as Jersey law, it is recommended group policies are followed; where conflict exists local Jersey law must be adhered to. - Proposal for legislative amendments approved by the Board includes requirement for provisions equivalent to those in the order to be applied to branches and subsidiaries of FSBs outside of Jersey. - Observed practices and gaps: - Institutions generally had clear AML policies and training programs; some weaknesses observed in verifying staff understanding and in screening prospective employees to reveal past criminal conduct. - Several institutions applied group policies to overseas branches/subsidiaries and were conscious of home and host regulator requirements. - Analysis of Effectiveness: - Framework generally adequate except for consolidated supervision where subsidiaries are outside the Crown Dependencies, the appointment of a compliance officer, supervision of standalone MSBs by the Commission, and adequacy of employee screening. - Recommendations and Comments: - Consider ensuring foreign branches and subsidiaries observe appropriate AML/CFT measures consistent with Jersey requirements to the extent local laws permit. - Consider ensuring institutions test compliance of AML/CFT systems against home and host country standards. - Consider imposing a requirement to designate an AML/CFT compliance officer for FSBs; consider requiring banks and insurance companies to report any change in such position to the Commission. - Consider adopting codes for banking, insurance and CIFs to strengthen screening requirements for employees. - Implications for compliance with FATF Recommendations 19 and 20: - Full compliance will be achieved when the AML/CFT framework ensures that all FIs apply Jersey standards to branches and subsidiaries in other jurisdictions. ### Integrity standards (Criteria 62 and 63 and sectoral criterion) - Legal provisions and scope: - Laws prohibit applicants for a license from employing individuals convicted under the relevant law or of an offense involving dishonesty, and prohibit individuals not found fit and proper by the Commission from holding significant investment or management functions in a regulated FI (Articles 8, 11 and 12 of the FSL; Articles 9, 13, 14, 23 and 24 of the BBL; Articles 6 and 22 of the IBL; Articles 5 and 12 of the CIFL). - Current drafting is narrow: crimes cited are limited to offences under the relevant law or involving dishonesty; laws should be amended to insert reference to conviction for a serious crime (over one year imprisonment). - The Commission has authority to remove principals not found fit and proper, a concept broader than specific convictions. - Freestanding MSBs are not regulated; there are no comparable provisions for them—should be remedied if regulatory laws for such businesses are adopted. - Specific provisions and enforcement: - Article 9 BBL allows refusal or revocation of license where applicant/registered person or associated person has been convicted of an offence involving dishonesty in the British Islands or an extradition partner jurisdiction, or where the Commission considers licensing not in best interest of persons conducting business with the applicant or to protect Jersey’s reputation and integrity. - Similar provisions in Article 8 of the Financial Services Law, Article 5 of the CIFL and Article 6 of the IBL. - Paragraphs 3.1.1 of Trust Company Business and Investment Business Codes require directors, management and employees be fit and proper. - The Commission requires submission of personal questionnaires by senior management and directors of FSBs and performs detailed screening based on information received; such persons are subject to Police checks. *Source: IMF assessment text of Jersey AML/CFT framework (extractes of Articles, Paragraphs, Notes, observations, analyses and recommendations as supplied).* ### 63. With respect to companies, limited liability partnerships, limited partnerships and unit trusts, doing business in ### 63. With respect to companies, limited liability partnerships, limited partnerships and unit trusts, doing business in Jersey ### Requirements for entities doing business in Jersey - Under the Borrowing Control Law (Schedule, 2(1)), for any issuance of shares, other evidences of ownership or for any borrowing, the Commission has the authority to require the submission by such entity of any information on the entity or its business. - In practice, every entity of this type (including charities and nonprofit organizations) that intends to raise equity or debt must complete a standard form disclosing: - the identity of the beneficial owner; and - the intended activities of the entity. - For foreign-owned entities (i.e., tax-exempt companies), any changes in ultimate beneficial ownership must be reported to the Commission at the time of such change. - Certain entities have conditions placed on their registration requiring prior approval by the Commission for changes in ownership or activity. - Failures to report changes in ownership or business for entities on whom such conditions have been placed are subject to unlimited fines and imprisonment of up to five years (Borrowing Control Law, Schedule 2(5)). - Nonprofit organizations that do not fall within the first category (i.e., trusts or unincorporated associations) run by trust companies regulated by the Commission as company service providers are subject to the AML/CFT framework and their records to possible on-site inspection by the Commission. - Unincorporated nonprofit organizations or charities are not required to submit information to any governmental authority; hence there are no measures in place to protect such organizations at this time. ### Guidance and verification expectations (Notes referenced) - Paragraph 4.116: exercise particular care to verify the legal existence of applicants that have corporate form and ensure persons purporting to act on behalf of the applicant are fully authorized; FSBs should look behind the corporate entity to identify those who have ultimate control and avoid “brass plate company where the principles cannot be identified.” - Paragraph 4.102: trust, nominee and fiduciary accounts are popular vehicles for criminals wishing to avoid identification procedures. - Paragraph 4.95: apart from standard account opening procedures, verification of the authority to act in the name of the charity is also necessary. ### Analysis of Effectiveness - The framework is generally adequate but would be enhanced by: - expanding the definition of “fit and proper” to include conviction for a serious crime; and - requiring unincorporated nonprofit organizations or charities to submit information to a governmental authority. ### Recommendations and Comments - Consideration should be given to the imposition of a requirement to include conviction for a serious crime (over one year imprisonment) as an element of fit and proper. - For unincorporated nonprofit organizations or charities, consider amending the legal framework to require the same type of review by a governmental entity as occurs under the Borrowing Control Law. ### Implications for compliance with FATF Recommendation 29 - Compliant ### VIII — Enforcement powers and sanctions (overview) - The Commission, and in some cases the attorney general, have administrative or civil sanction powers concerning CIFs and fund functionaries, banks, insurance companies, investment businesses and trust company businesses, including: - removal of a principal owner or director (and, in some cases, a senior manager) (CIF Article 12; BBL Articles 14 and 23 Article 11(1)(b) of the Banking Business (General Provisions) (Jersey) Order 2002; IBL Article 22; FSL Article 11); - petitioning a court to disqualify for a period of up to fifteen years a director or the management of any Jersey company, the management of any foreign company operating in Jersey or the management of a branch operating in Jersey (Company Law Article 78); - placement of a condition on the registration or license of the concern (CIFL Article 6; BBL Article 10; IBL Article 6; FSL Article 9); - appointment of an investigator to report to the Commission (CIFL Article 19; BBL Article 27; IBL Article 10; FSL Article 30); - issuance of directions to a concern (CIFL Article 12; IBL Articles 34 and 39A(1); FSL Article 20); - issuance of a public statement concerning a regulatory lapse (CIFL Article 14A; BBL Article 45B; FSL Article 22); - appointment of a reporting accountant (CIFL Article 8(1A); BBL Article 25(1)(b); IBL Article 9(1)(b); FSL Article 29(4)); - revocation of the license (CIFL Article 6; BBL Article 9; IBL Article 6; FSL Article 8); - appointment of a manager by court order for trust company and investment business (FSL Article 10A; Financial Services (Appointment of a Manager) (Jersey) Order 2000); - petitioning a court to issue injunctions or remedial orders and to make companies subject to supervision, restraint or conditions (FSL Article 21; FSL Article 23); - petitioning a court to issue a restitution order relating to unauthorized deposits (BBL Articles 34 and 35) — banks only; - removal of an external auditor (by withdrawing its approval) for trust company businesses (Financial Services (Trust Company Business)(Jersey) Order 2000). ### Gaps and limitations in enforcement - The grounds for some administrative sanctions do not always explicitly refer to failure to observe relevant laws, and to ML or FT. - The Commission lacks the legal authority to issue directions with respect to banks; for insurance companies authority to issue directions is limited to directions about advertising. In both cases the Commission can impose conditions on a license. - The Commission does not have authority to impose a range of civil money penalties (administrative fines) against individuals and FIs in amounts sufficiently large to discourage continued noncompliance. - MSBs are defined as financial services business and are covered by the MLO; however, stand-alone MSBs are not regulated by the Commission and therefore are not covered by any of the laws administered by the Commission. Consequently, enforcement mechanisms described above (other than company law authority) do not apply to stand-alone MSBs. ### Analysis of Effectiveness (sanctions) - There are gaps in coverage and uniformity across sectors with respect to administrative sanctions the Commission may impose. ### Recommendations and Comments (sanctions) - Consideration should be given to strengthening: - authorizing the Commission to impose civil money penalties or administrative fines; - providing in relevant laws that the grounds for imposition of these sanctions explicitly refer to ML and FT; - ensuring sanctions are uniform across all financial sectors so the same rules apply to every FI. ### IX — Cooperation between supervisors and other competent authorities - Principal responsibility for AML/CFT rests with the Commission’s Director of Policy and Legal Division. The Authorization, Compliance and Enforcement Divisions also have AML/CFT responsibilities appropriate to their principal mandates. - There is no one at the Commission whose time is fully devoted to AML/CFT; work in this area is undertaken along with other responsibilities. - The Commission has access to external assistance for specialized projects such as revision of the Notes, systems reviews and investigations. - The Commission formed an AML Steering Group, consisting of lawyers, compliance officers, and financial executives, to assist in the revision of the Notes. - Over a 24-month period the Commission was able to undertake on-site inspections of most licensed institutions which included a focus on AML/CFT procedures and practices; inspection reports were comprehensive and follow-up correspondence established clear deadlines for remedial action. - These inspections absorbed virtually all the resources of the Compliance Division and it was considered unlikely the Division could have continued an appropriate level and frequency of on-site inspections covering all areas of risk, including AML/CFT, with these levels of resources. - The Commission identified that further resources were needed to maintain this level of on-site supervision and recruited additional compliance managers during 2002 and 2003 to meet the resource requirements of the risk-based supervision program. - The Compliance Division’s manpower resources are expected to increase further in 2004. - Jersey has a Financial Fraud Information Network, an informal group of domestic agencies including the Commission, the JFCU, the Customs Office, the Law Officers’ Department, the Regulation of Undertakings Department, and the Trading Standards Department. - The Commission has regular meetings with the Law Officers’ Department and JFCU concerning possible prosecutions. - All regulatory laws allow disclosure of relevant information to the Law Officers’ Department and the Police to assist in a criminal investigation. *International Monetary Fund — IMF assessment excerpt* ### 67. There are a number of gateways through which the Commission can share information with “relevant supervisory ### Cooperation, AML/CFT Effectiveness, Ratings, and Recommended Actions (cr03369) ### Information sharing and supervisory cooperation - The Commission can share information with “relevant supervisory authorities” through gateways in: - Article 45 (a) of the Banking Business (Jersey) Law - Article 33 of the Financial Services (Jersey) Law - Article 31 of the Insurance Business (Jersey) Law - Article 19C of the CIFL - Over the past two years the Commission has received 25 requests for international cooperation and has responded to all of them. - The Commission has offered information to foreign authorities without receiving a prior request. - The jurisdiction has MOUs with authorities in Australia, Belgium, Bahrain, Bermuda, Germany, Guernsey, the Isle of Man, Mauritius, Netherlands, South Africa, the U.K., and the U.S.A. - The Commission participates in quarterly meetings with counterparts in the U.K., Guernsey and the Isle of Man on AML/CFT and regulatory issues. - The Commission meets bi-monthly with the FSA, the home regulator for a large proportion of branches and subsidiaries based in Jersey. - Some institutions reported visits from foreign regulators who had free access to their files. - Analysis of Effectiveness: “There is a good framework in relation to cooperation with other supervisory authorities.” - Implications for compliance with FATF Recommendation 26: Compliant ### Controls and monitoring of cash and cross-border movements - Customs Department operational objective: monitoring physical cross-border transportation of cash and bearer negotiable instruments at all ports and the Post Office. - The Customs Department does not consider physical cross-border transportation of cash and bearer negotiable instruments a significant problem in Jersey. - Jersey Authorities have not instituted a reporting system based on currency transactions beyond a prescribed threshold amount. - If movements of cash or negotiable instruments are identified they would be investigated and referred to the JFCU. - Under the Drug Trafficking Offences (Jersey) Law 1988 and the Terrorism (Jersey Law) 2002, police and customs officers can seize cash they reasonably believe to be directly or indirectly the proceeds of drug trafficking or terrorist cash; these powers do not extend to other crimes, creating a potential loophole. ### Ratings of Compliance with FATF Recommendations (selected items) - Recommendation 1 (Ratification and implementation of the Vienna Convention): Compliant - Recommendation 2 (Secrecy laws consistent with the 40 Recommendations): Compliant - Recommendation 3 (Multilateral cooperation and mutual legal assistance in combating ML): Compliant - Recommendation 8 (FATF Recommendations 10 to 29 applied to nonbank financial institutions): Largely Compliant - Recommendation 10 (Prohibition of anonymous accounts and customer identification policies): Largely Compliant - Recommendation 11 (Obligation to take reasonable measures to obtain information about customer identity): Largely Compliant - Recommendation 12 (Comprehensive record keeping for five years): Compliant - Recommendation 14 (Detection and analysis of unusual large or otherwise suspicious transactions): Compliant - Recommendation 15 (Requirement to report suspicions to the FIU): Largely Compliant - Recommendation 16 (Legal protection for reporters to the FIU): Compliant - Recommendation 17 (Not to warn customers when they are reported to the FIU): Compliant - Recommendation 18 (Compliance with instructions for suspicious transactions reporting): Compliant - Recommendation 19 (Internal policies, procedures, controls, audit, and training programs): Compliant - Recommendation 20 (AML rules applied to branches and subsidiaries located abroad): Largely Compliant - Recommendation 21 (Special attention to transactions with higher risk countries): Compliant - Recommendation 26 (Adequate AML programs in supervised banks, authority to cooperate): Compliant - Recommendation 28 (Guidelines for suspicious transactions’ detection): Compliant - Recommendation 29 (Preventing criminal control/participation in financial institutions): Compliant - Recommendation 32 (International exchange of information relating to suspicious transactions): Compliant - Recommendation 33 (Bilateral or multilateral agreements when legal standards differ): Compliant - Recommendation 34 (Bilateral and multilateral agreements and arrangements for mutual assistance): Compliant - Recommendation 37 (Procedures for mutual assistance in criminal matters): Compliant - Recommendation 38 (Authority to take expeditious actions in response to foreign requests to identify, freeze, seize and confiscate): Compliant - Recommendation 40 (ML an extraditable offense): Compliant - SR I (Ratify and implement relevant United Nations instruments): Largely Compliant - SR II (Criminalize FT and terrorist organizations): Compliant - SR III (Freeze and confiscate terrorist assets): Compliant - SR IV (Report suspicious transactions linked to terrorism): Compliant - SR V (Provide assistance to other countries’ FT investigations): Compliant - SR VI (Impose AML requirements on alternative remittance systems): Not Rated - SR VII (Strengthen customer identification measures for wire transfers): Not being rated in light of the two year compliance period provided by FATF ### Summary of Effectiveness of AML/CFT Efforts (by heading) - I — Criminalization of ML and FT: - Jersey has a generally adequate legal framework for criminalization of ML and terrorism financing, but the Convention for Suppression of the Financing of Terrorism, the Council of Europe Convention and the Palermo Convention have not been extended to the jurisdiction. - Legal resources enable effective implementation of AML and CFT laws. - II — Confiscation of proceeds or property used to finance terrorism: - Generally adequate framework for confiscation, freezing and seizure, and protecting innocent third parties’ rights. - Confiscation of property of corresponding value can be achieved under AML Laws; the Terrorism Law does not contain comparable provisions. - Civil forfeiture is not available under current Jersey law, except with respect to cash used in connection with FT. - Discussions are taking place for an appropriate civil forfeiture law. - III — The FIU (JFCU) and processes: - Framework for reporting suspicious transactions generally adequate, but absence of an explicit legal requirement for reports to be made to the JFCU and lack of real time access to public and nonpublic databases are potential weaknesses. - Current permanent staff levels at the JFCU are less than adequate for aggressive investigations. - Since 1999 the workload of the JFCU has increased 600 percent due to increased number of STRs and increased requests for assistance from foreign law enforcement agencies. - IV — Law enforcement and prosecution: - States of Jersey law enforcement agencies are making reasonable efforts to investigate, prosecute, convict, freeze, seize and confiscate proceeds of crime or property used to finance terrorism. - V — International cooperation: - Legal framework generally adequate for mutual legal assistance in ML and FT; Jersey has structures to follow up requests effectively. - Legal and Institutional Framework for All Financial Institutions: - I — General framework: The Commission has authority under Art. 6, Commission L to ensure implementation of AML/CFT policies for regulated FIs, but lacks authority to regulate or monitor compliance of businesses engaging in bureau de change, check cashing and money transmitters (MSBs) except where performed by a regulated entity; authorities indicate MSB activity outside regulated sector is minimal. - Companies engaged in lending or financial leasing are covered under the AML/CFT framework but not regulated or monitored by the Commission except when activity performed by a regulated entity. - II — Customer identification: Verification measures generally adequate though laws do not explicitly require customer identification procedures; concerns about re-verification of existing customers. - III — Ongoing monitoring: Legal framework generally adequate though concerns over enhanced scrutiny of wire transfers, absence of legal provisions requiring attention to unusual/complex transactions with no apparent economic or lawful purpose, and handling of turned-away unusual business. - IV — Record keeping: Generally adequate but would be strengthened by an explicit requirement that records enable authorities to compile a satisfactory audit trail. - V — Suspicious transactions reporting: Generally adequate except absence of affirmative obligation to report suspicious transactions under the POCL. - VI — Internal controls, compliance and audit: Generally adequate except for consolidated supervision where subsidiaries are outside the Crown Dependencies, appointment of a compliance officer, supervision of standalone MSBs by the Commission, and adequacy of employee screening. - VII — Integrity standards: Generally adequate but could be enhanced by expanding “fit and proper” to include conviction for a serious crime, and requiring unincorporated nonprofit organizations or charities to submit information to a governmental authority. - VIII — Enforcement powers and sanctions: Gaps in coverage and uniformity for administrative sanctions the Commission may impose. - IX — Cooperation between supervisors and other competent authorities: Good framework. ### Recommended Action Plan (selected, exact measures and numeric targets) - Criminal Justice Measures and International Cooperation - I — Criminalization of ML and FT: - Extend the Convention for Suppression of the Financing of Terrorism, the Council of Europe Convention and the Palermo Convention to Jersey. - II — Confiscation of proceeds or property used to finance terrorism: - Consider amending the Terrorism Law to provide for appointment of a receiver for all property owned by a defendant to satisfy a confiscation order. - III — The FIU and processes: - Consider amending laws to require reports be made directly to the JFCU and in writing on a form to be issued by the JFCU. - Consider amending laws to permit the JFCU to require submission of additional information by reporting parties, and to provide expeditious or real-time access to public and nonpublic databases without the need for a court order. - Consider amending relevant laws to provide explicit legal authority for the Commission to issue guidance notes. - Jersey should take immediate steps to increase the permanent staffing levels of the JFCU to the approved strength of 17.5 positions. - The JFCU’s IT/Data systems should be improved to increase its benefits to users. - IV — Law enforcement and prosecution: - Passage of the drafted Regulation of Investigatory Powers bill should occur without delay. - Jersey’s law enforcement agencies should prepare a 3–5 year corporate action plan to enable continued investigation and prosecution of ML and FT. - V — International cooperation: - Authorities should consider revising terrorism legislation to formally address sharing of confiscated assets with jurisdictions that have contributed to the investigation leading to confiscation. - Legal and Institutional Framework for Financial Institutions - I — General framework: - Consider enacting a law to regulate MSBs and to monitor compliance for companies that engage in lending or financial leasing. - Amend the definition of ‘financial service business’ to cover seven activities that fall within trust company business under the FSL but are not currently covered. - II — Customer identification: - Amend relevant laws to explicitly require customer identification procedures be followed. - Consider imposing a requirement for re-verification of existing customers where doubts arise. - Amend law to limit availability of the EU-AML-exemption to entities regulated in EU states. - Redouble Commission efforts to direct FSBs towards customer identification standards required by the Position Paper. - Amend Appendix G example to make introducer verification mandatory and require documents be available on demand. - Consider requiring FSBs to take high-risk customer decisions at senior management level. - III — Ongoing monitoring of accounts and transactions: - Within the two-year period provided by FATF, amend laws to require FIs give enhanced scrutiny to wire transfers that do not contain complete originator information. - IV — Recordkeeping: - Consider imposing a requirement that records be sufficient to enable investigators to compile a satisfactory audit trail and financial profile of suspect accounts. - V — Suspicious transactions reporting: - Amend the POCL to provide financial institutions with an affirmative obligation to report suspicious transactions rather than using reporting only as a defense against ML. - Consider providing the JFCU authority to give instructions to reporting entities and require FIs to observe JFCU instructions. - VI — Internal controls, compliance, and audit: - Consider ensuring foreign branches and subsidiaries observe AML/CFT measures consistent with Jersey’s requirements, to the extent local laws permit. - Consider requiring institutions to test compliance of AML/CFT systems against home and host country standards. - Consider imposing requirement to designate an AML/CFT compliance officer for FSBs and requiring banks and insurance companies to report any change in such position to the Commission. - Consider adopting codes for banking, insurance and CIFs to strengthen employee screening requirements. - VII — Integrity standards: - Consider imposing a requirement to include conviction for a serious crime (over one year imprisonment) as an element of fit and proper, consistent with human rights concerns. - For unincorporated nonprofit organizations or charities, consider amending the legal framework to require the same type of governmental review as under the Borrowing Control Law. - VIII — Enforcement powers and sanctions: - Consider strengthening sanctions by: (i) authorizing the Commission to impose civil money penalties or administrative fines, (ii) explicitly referring to ML and FT as grounds for sanctions in relevant laws, and (iii) ensuring sanctions are uniform across all financial sectors. - Banking sector: - Consider requiring banks to aggregate and monitor significant balances and activity on customer accounts on a fully consolidated basis. - Insurance sector: - Require verification of identity where claims and other payments are made to persons other than policyholders. - Amend Appendix H of the Notes to include examples of suspicious transactions relevant to the insurance sector. *Source: IMF assessment text (cr03369).* ### 47. The authorities welcome the Fund’s confirmation that Jersey complies or largely ### 47. The authorities welcome the Fund’s confirmation that Jersey complies or largely complies with all of the FATF 40+8 Recommendations against which it has been assessed ### Compliance with FATF standards - The authorities welcome the Fund’s confirmation that Jersey "complies or largely complies" with all of the FATF 40+8 Recommendations assessed. - The authorities state they are committed to following the standards set by the recently revised FATF 40 Recommendations. ### Status of and authority for the Guidance Notes - The authorities do not accept that the assessment has properly reflected the status of the Commission’s Anti-Money Laundering Guidance Notes (Guidance Notes). - The authorities contend the Fund’s approach is inconsistent with the revised FATF 40 Recommendations, which the authorities describe as permitting basic obligations under three Recommendations to be set out in law or regulation while allowing detailed elements or other obligations to be required by law, regulation, or other enforceable means issued by a competent authority. - The authorities assert the Guidance Notes are: - mandatory in effect and enforceable by the Commission through Jersey’s regulatory legislation; - relevant to determinations of whether regulated financial services business are "fit and proper" to be licensed; - formally recognized in Codes of Practice for trust company business (though not yet explicitly for other regulated sectors). - Legal bases cited for the Commission’s authority to issue and rely on Guidance Notes: - Proceeds of Crime (Jersey) Law 1999: Article 37(8) anticipates guidance may be issued, adopted or approved by the Commission and "shall be taken into account by the Royal Court" in determining compliance with anti-money laundering legislation. - Financial Services Commission (Jersey) Law 1998: Article 8(2)(c) provides for publication of such information relating to the Commission’s functions as it "thinks fit"; Article 5(1)(a) identifies supervision and development of financial services as a function. - Regulatory powers include requests for information and conduct of compliance visits, and where a business is not "fit and proper" direct regulatory sanctions are available. - The authorities note the Proceeds of Crime (Jersey) Law 1999 provides no explicit legal basis for issuing Guidance Notes but argue its provisions anticipate Commission-set standards. ### Review of AML framework and recent/upcoming reforms - The authorities state Jersey’s framework to counter ML and FT is "constantly under review and being updated" in line with changing international standards. - Recent and planned actions: - Terrorism (Jersey) Law 2002 updated the definition of terrorism and criminalized financing of terrorist activities consistent with the Convention for the Suppression of the Financing of Terrorism. - The Commission consulted on an oversight regime for bureaux de change and money transmitters (money services businesses) in line with FATF Special Recommendation VII. - Publication of a paper in February 2002 outlining direction on AML aspects, including treatment of professional intermediaries (FATF 10-13). - Establishment of an industry Steering Group to assist updating the Commission’s Anti-Money Laundering Guidance Notes for the Finance Sector; consultation on issuing Guidance Notes under the FSCL is planned "later in 2003". - Guidance Notes intended to set out legislative and regulatory requirements, describe Jersey’s legal framework, discuss typologies and trends in ML and terrorist financing, and include hypothetical and illustrative cases. - A consolidated action plan prepared by the authorities is appended to Volume I of the assessment. ### Criminal justice measures and international cooperation I. Criminalization of ML and FT; International conventions - Legislation addressing the ML provisions of the Palermo Convention and Council of Europe Convention on Mutual Legal Assistance is in place. - FT is criminalized as a serious offence consistent with the Convention for the Suppression of the Financing of Terrorism. - The authorities have requested the United Kingdom government to extend its ratification of the Convention for the Suppression of the Financing of Terrorism to Jersey with effect from "September 1, 2003". - The authorities expect to make similar requests for the 1959 Council of Europe Convention and the Palermo Convention. II. Sanctions and enforcement powers - The authorities do not accept that absence of uniform powers across all regulated sectors is a barrier to effective supervision; examples: - No power under the Banking Business (Jersey) Law 1991 for the Commission to issue directions, and limited provision under the Insurance Business (Jersey) Law 1996, but both provide wide powers to impose conditions on a license equivalent to direction. - Planned review and prospective changes: - A general review of existing powers and sanctions available to the Commission will be undertaken in 2004 to identify any "gaps" and determine appropriateness of changes; any changes would be subject to consultation and legislative approval. - The authorities will make a firm statement that the integrity of a person working within the regulated sector will be questioned where that person has been convicted of a serious offence (defined as one which has resulted in a term of imprisonment exceeding "one year"). - Subject to consultation, the Commission will amend regulatory Codes of Practice to include a requirement to comply with legislation to counter ML and FT, and principles in the Guidance Notes, where such a requirement does not already exist. - The authorities note the Commission may refuse an application to be licensed or revoke a license where a person is not "fit and proper", or where a business has not followed a Code of Practice issued under a regulatory law. III. Confiscation of proceeds of crime or property used to finance terrorism - FATF Recommendations revised in Berlin in "June 2003" state that countries may consider measures allowing forfeiture without requiring a criminal conviction. - The authorities will consult on inclusion of such a provision in Jersey’s AML framework. - Judicial precedent: Re Illinois District Court JLR 1995, approved in Re Batalla-Esquival 2001 (Jersey Legal Review 160, at page 165), held the Royal Court of Jersey had jurisdiction to enforce a forfeiture order made abroad after civil proceedings in rem; Jersey is able to assist enforcement of external civil forfeiture orders. - Existing provisions: - Proceeds of Crime (Jersey) Law 1999: Articles 15 to 21 provide for appointment of the Viscount as receiver pursuant to a confiscation order (saisie judiciare). - Drug Trafficking Offences (Jersey) Law 1988: Articles 3 to 12 provide similar measures. - Consideration will be given to amending the Terrorism (Jersey) Law 2002 to make similar provision for appointment of a receiver. IV. Cross-border cash movements - Police and customs officers are authorized to seize money being imported or exported where reasonable grounds exist to suspect it represents proceeds of drug trafficking or terrorist cash. - The authorities will consult in 2004 on changes to the Proceeds of Crime (Jersey) Law 1999 to introduce provisions allowing authorized officers to seize and detain cash suspected to represent any person’s proceeds of criminal conduct. V. The FIU (JFCU) and information handling - Reporting obligations: - Article 18A of the Drug Trafficking Offences (Jersey) Law 1988 and Article 23 of the Terrorism (Jersey) Law 2002 already establish an affirmative obligation to report knowledge or suspicion of laundering drug or terrorist proceeds. - The authorities will consult in 2004 on changes to the Proceeds of Crime (Jersey) Law 1999 to require financial services businesses to report knowledge or suspicion directly to the Joint Financial Crimes Unit (JFCU). Reporting already serves as a defense against commission of a ML offence. - Consultation will consider whether the JFCU should be able to: - compel submission of additional information by reporting parties; - have access to public and nonpublic databases without a court order; and - give instructions to financial services businesses. - Authority for Guidance Notes: - Consultation in 2004 will include proposals to provide the Commission with explicit authority under AML legislation to issue Guidance Notes; presently Guidance Notes are issued under the FSCL. - Resourcing and IT improvements: - The authorities reaffirm they will ensure the JFCU has sufficient resources to meet domestic and international obligations. - The JFCU is testing a prototype replacement IT system to enhance analysis capability, speed data processing, and allow electronic archiving; the Unit has upgraded its computer link with the United Kingdom’s National Criminal Intelligence Service; the Unit intends to update existing systems in 2003 following satisfactory testing. - Corporate action planning: - A high level plan for the JFCU is produced as part of the States of Jersey Police annual business plan. - In 2004 the Unit and the Attorney General will consider developing a more detailed plan including overseas requests for assistance and serious and complex fraud. VI. International cooperation and asset sharing - Proceeds of Crime (Jersey) Law 1999: Article 24 and Drug Trafficking (Jersey) Law 1988: Article 14A provide for sharing of confiscated assets. - Where no legislative provision exists (e.g., Terrorism (Jersey) Law 2002), Jersey may reach case-by-case agreements and has opened preliminary negotiations with Canada and the United States of America regarding an asset sharing agreement. - Consideration will be given to amending the Terrorism (Jersey) Law 2002 to introduce provisions facilitating sharing of assets. ### Legal and institutional framework for financial institutions I. General framework and money services business - The Commission is considering legislation to provide oversight of money services business. - The Commission intends to review whether oversight of compliance with AML requirements should extend to other nonregulated sectors such as lending and nonfinancial leasing; any changes would be considered in 2004 as part of consultation on AML framework changes. II. Definition of trust company business - Jersey’s AML legislation, through application to trust company business, already exceeds the international standards assessed. - The authorities accept certain persons regulated under the FSL are not subject to the Money Laundering (Jersey) Order 1999. - Subject to consultation and legislative approval, an amendment to the Second Schedule of the Proceeds of Crime (Jersey) Law 1999 in 2004 will extend the scope of the Money Laundering (Jersey) Order 1999 to cover all trust company business regulated under the FSL. III. Customer identification - Article 3 of the Money Laundering (Jersey) Order 1999 requires customer identification procedures to be maintained (procedures both in place and operating). - The Guidance Notes establish identification practices to be followed by all financial services businesses. - Consultation on AML framework changes will consider proposals to: - require financial services businesses to re-verify identity of customers when doubts appear as to identity; - re-examine basis for allowing concessions to businesses subject to the European Union Money Laundering Directive; - ensure ready access by financial services businesses to identification documentation for underlying beneficial owners held by third parties; - require decisions concerning high risk customers be taken at senior management level. IV. Wire transfers, ongoing monitoring, and record-keeping - Wire transfers and Special Recommendation VII: - Following publication of United Kingdom and European Union proposals, the Commission will consult with industry on action necessary to comply with Special Recommendation VII within the two year period referred to by the FATF (which ends in "January 2005"). - Consultation will consider action on provision of accurate and meaningful originator information on funds transfers and scrutiny of incoming transfers lacking complete originator information. - Ongoing monitoring proposals: - Consultation will consider an explicit requirement for financial services businesses to pay special attention to complex or unusual transactions, and to establish procedures for reporting business that has been turned away. - Consultation will consider an explicit legal requirement to scrutinize transactions with persons in jurisdictions lacking adequate systems to deter ML or terrorist financing (noting Guidance Notes already refer to "higher risk" jurisdictions). - Record-keeping: - Article 8 of the Money Laundering (Jersey) Order 1999 requires retention of records concerning customer identification and transactions for use as evidence in any ML investigation. - The Commission’s Guidance Notes state records should enable legal requirements to be met, permit competent third parties to assess observance of ML policies and procedures, allow reconstruction of transactions, and enable responses to enquiries or court orders within a reasonable time. *Source: Authorities’ response and action plan as set out in the Jersey assessment.* ### 84. Notwithstanding this, consultation on changes to Jersey’s AML framework, which is ### cr03369 - 84. Notwithstanding this, consultation on changes to Jersey’s AML framework, which is ### V. Suspicious transactions reporting — Review of AML framework - Consultation on changes to Jersey’s AML framework, which is already well underway, will consider a proposal to amend the Proceeds of Crime (Jersey) Law 1999 to require financial services businesses to report knowledge or suspicion of ML to the Joint Financial Crimes Unit, in line with existing provisions in the Drug Trafficking Offences (Jersey) Law 1988 and Terrorism (Jersey) Law 2002. - Reporting levels in Jersey are higher than in many jurisdictions. ### V. Suspicious transactions reporting — On-site supervision - The Commission has adopted revised compliance “route planners” to ensure that levels of reporting are considered during on-site visits in light of the nature of a financial services business’s activities and customer base. ### VI. Internal controls, compliance, and audit — Review of AML framework - Consultation on changes to Jersey’s AML framework, which is already well underway, will consider proposals: - to require financial services businesses to apply AML standards equivalent to those in place in Jersey to subsidiary and branch operations outside Jersey (though in practice the majority of such operations are in either Guernsey or the Isle of Man and already covered by a pan-Island agreement that AML standards should be consistent in each jurisdiction); and - to require financial services businesses to establish a compliance officer role (as opposed to just investment and trust company businesses as is currently the case), and to register that officer (along with the ML reporting officer) with the Commission. - Existing legislation already requires customer identification procedures to be followed by all financial services business; no changes are considered necessary in this respect. ### VI. Internal controls, compliance, and audit — On-site supervision and Codes of Practice - The Commission’s revised compliance “route planners” will ensure an assessment is made of how financial services businesses determine the effectiveness of staff training on ML. - Codes of Practice: - Codes establishing requirements to vet and monitor competence and probity of employees are already in place for investment and trust company business. - Draft Codes for insurance business and fund functionaries have been issued for public consultation. - Draft Codes for deposit-taking business are to be issued for consultation in 2003. - It is intended that all Codes of Practice will be brought into force in 2004, when finalized. ### VII. Integrity standards — Fit-and-proper test - Existing regulatory laws permit the Commission to determine “fit and proper” status with respect to factors such as conviction for a serious crime. - The Commission will make a formal statement that the integrity of a person working within the regulated sector will be questioned where that person has been convicted of a serious offence (i.e. one which resulted in over one year of imprisonment). ### VII. Integrity standards — Combating the use of nonprofit organizations - The Commission already has access to information on any nonprofit organization or charity administered by a trust company business or which issues securities. - The Commission has established a working party to consider proposals for oversight arrangements for nonprofit and charitable organizations. ### IX. Cooperation between supervisors and competent authorities — Resources and staffing - The Commission will continue to focus supervisory effort on identified higher-risk areas rather than all risk areas. - Staffing adjustments: - The Compliance Division staff complement has been increased from 27 to 40 staff, of whom 35 are now in post. - The Commission will continue to review staffing requirements on an annual basis. - Given the Commission’s functional structure, it does not plan to have one overall AML/CFT specialist; instead, it proposes to have at least one AML/CFT specialist in each division, with appropriate back up. ### Banking sector — Ongoing monitoring of accounts and transactions - Consultation on changes to Jersey’s AML framework will address the need for banks to monitor customer activity on a consolidated basis and will address issues arising from application of such a requirement to operations outside Jersey, noting limits to legislating for “gateways” in other jurisdictions. ### Insurance sector — Customer identification and suspicious transaction guidance - Consultation on changes to Jersey’s AML framework will consider a proposal to verify the identity of recipients of insurance payments where the recipient is a person other than the policy-holder. - Consultation will also consider providing examples of suspicious transactions relevant to the insurance sector. ### III. IAIS Insurance Core Principles — Assessment overview - The assessment of Jersey’s compliance with the IAIS Insurance Core Principles was completed as part of the IMF OFC assessment program. - Purposes of the assessment: - benchmark current state of insurance supervision given extensive recent changes; - suggest further improvements or changes; and - provide input for an action plan toward full compliance with the CPs. - Information and methodology used: - IAIS Insurance Core Principles Methodology, ICP Self Assessment Principles, Standards and Guidelines of the IAIS; - Laws, Orders, Codes of Practice, Guidelines etc. of Jersey; - Interviews with the Commission and the industry. - Institutional context: - The insurance industry in Jersey is relatively new compared to Guernsey. - The Insurance Business (Jersey) Law 1996 came into force in 1996 and provided for efficient and flexible supervision. - Nearly all the Insurance Core Principles of the IAIS are fully observed. - The Commission is an integrated supervisory authority for banks, insurance companies and investment funds. ### IAIS ICP findings and recommendations (summary) - ICP 1 (organization) is observed with two exceptions: - the staff of the insurance division is too small; the number of supervisors should be increased; - the possibility that the F&E Committee may give general directions to the Commission potentially impairs the independence of the insurance supervisor. - Licensing and ongoing supervision: - An insurance license is given only for one year, allowing the supervisor to reconsider decisions on renewal promptly. - Insurance companies must provide accounts and other information including a balance sheet and a profit and loss account on a six monthly basis. - Corporate governance, solvency, enforcement: - Corporate governance requirements, internal controls and prudent use of derivatives are in place; consolidation into Codes of Practice is welcomed. - Legal minimum solvency requirements comply with international standards; actual solvency is much higher than the legal minimum. - The Commission should continue to review minimum solvency standards in light of recent European developments. - On-site inspections should be more frequent; increase the number of insurance supervisors. - The Commission has a wide range of sanctions, except the power to impose penalties (administrative fines); it is desirable that all financial services supervisors have consistent enforcement powers including the power to impose penalties. - Transparency: - Regulation and guidelines for day-to-day supervision are clearly defined, explained and publicly disclosed. ### General preconditions for effective insurance supervision - Preconditions in place and supporting infrastructure: - 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 insurance companies can operate within a stable environment. - Corporate governance rules: - Rules are not consolidated and require extension; Codes of Practice are being introduced. - Codes of Practice have been issued for industry consultation and the Commission intends for them to come into force during 2003. ### B. Detailed Assessment — Key descriptive and quantitative points (Insurance sector) - Legal and organizational framework: - The specific insurance regulatory regime is laid down by the IBL (amended in 1998, 1999 and 2000), Insurance Business (General Provisions) Order 1996 and Insurance Business (Solvency Margin) Order 1996. - The Insurance Business (Amendment No.4) (Jersey) Law 2003, prepared by the Commission, came into force on March 28, 2003. - Publication and consultation: - During 2002, the insurance division intends to reinforce supervision by preparing and issuing Codes of Practice that reflect the IAIS Insurance Core Principles. - Market structure and permitting: - Article 4 (2) of the Insurance Law: no person shall carry on insurance business without a permit. - Two permit kinds: “Category A” and “Category B.” - Category A is relevant when the applicant grants a license by virtue of its authorization in a jurisdiction outside Jersey; Category B is for companies establishing their head offices in Jersey (the Commission then being the home supervisor). - Number of insurers: Category A insurers 160 and Category B 18. - The motor liability insurance market is primarily covered by U.K. Category A companies. - Key figures of the Category B insurers for the year 2001 (all figures in £ millions): - Long-term insurance: - gross premiums 132.4 - assets covering technical provisions and solvency 306.4 - assets covering technical provisions and solvency 306.4 - total assets 350.6 - technical provisions 271.4 - General insurance: - gross premiums 163.9 - assets covering technical provisions and solvency 515.4 - total assets 573.7 - technical provisions 379.5 ### Principle 1 — Essential criteria and observations (summary) - Responsibilities and legal basis: - The duties and powers of the Commission concerning insurance business are set out in the IBL 1996 and its amendments and orders. - Part II of the law prohibits carrying on insurance business without a permit and sets out licensing, conditions, withdrawal, appeals, and ongoing supervision rules. - Independence and accountability: - The Insurance Division is part of the Commission; the budget is funded by fees from supervised companies and incorporated within a business plan shown to members of the F&E Committee. - The F&E Committee may give guidance or general directions to the Commission; this possibility potentially impairs independence though no such direction has been given to date. - The Commission is accountable to the Parliament; the Annual Report 2001 was published in April 2002. - Powers, resources and processes: - The Commission has wide enforcement powers including information requests, investigations (including on-site inspections for Category B), and sanctions. - Supervision is undertaken by the Insurance Division (the Director of the Insurance Division, supported by a Finance Manager and a Finance Officer); on-site compliance visits are led by the Insurance Division and supported by the Compliance Division; enforcement action is led by the Insurance Division and supported by the Enforcement Division. - The Division appears under-resourced given other responsibilities and the need to increase on-site inspections. - Transparency and publication of guidance: - Under regulatory legislation, after consultation the Commission may prepare and issue Codes of Practice and guidance notes; Codes and guidance notes are distributed and made publicly available, with hard copies available at no charge and also on the Commission’s internet web site. - Rejection of an application must be in writing with clearly stated reasons (Article 6 of the IBL). *Source: IMF OFC assessment of Jersey’s AML/CFT and insurance supervisory framework* ### 5. The decision-making lines of the insurance supervisor are structured so that action can be taken ### 5. The decision-making lines of the insurance supervisor are structured so that action can be taken immediately in the case of an emergency situation ### Decision-making authority and emergency powers - The Board of Commissioners has formally delegated most regulatory, supervisory and enforcement powers to the executive directors. - In most cases of emergency, the relevant executive director has the power to take the necessary action. - In the absence of that director, or where powers have not been specifically delegated, other directors and/or the director general (who is also a Commissioner) have the necessary powers. - The executive Board of Directors meets every week to discuss items of concern and to take appropriate decisions. - The Board of Commissioners meets monthly to agree higher level matters of policy, regulation and (sometimes) enforcement. - In urgent cases, Board of Commissioners meetings can be convened quickly outside the normal time frame, or be conducted by conference telephone meeting. ### Confidentiality, conflicts of interest, and professional standards - On commencement of employment, all staff (including Commissioners) are required to sign a declaration regarding confidentiality and conflicts of interest, and to disclose to the Commission any interests that they may have in respect of any business or undertaking with which the Commission is in, or may become engaged in, communication. - The Commission’s terms and conditions of employment set out procedures to be followed in the event of misconduct. - Under the regulatory legislation, any breach of confidentiality other than through a permitted gateway is a criminal offence. - The Commission’s policy on conflicts of interest has been published and is available on its internet web site. - Assessment: Largely observed. - Comment: It is necessary to increase the staff of the insurance division. - Comment: The independence of the supervisor is potentially impaired by an Article 11, FSCL. ### Staffing, training, and remuneration - The Commission prepares and maintains a rolling training program to ensure that all staff is aware of, and proficient in, current international regulatory standards and practices, and their application to Jersey. - Training courses are run partly in house, and partly through external professional training organizations. - The Commission keeps the remuneration levels for staff at all grades of seniority under constant review, and uses independent remuneration surveys to ascertain that its remuneration policy is in line with that of other employers in Jersey. - Staff receive a work performance review annually; this, together with other factors such as inflation rates and the remuneration surveys, largely determine the level of staff remuneration. ### Financial flexibility and budgeting - The Commission produces a detailed annual budget, which is a realistic assessment of its spending needs for the short to medium term. - The Commission’s stated policy is to set regulatory fees at a level that allows, as far as possible, a balance between income and expenditure, subject to the need to build up a contingency reserve against unforeseen costs. - There have been no reported cases where necessary activities have not been carried out for budgetary reasons. ### Outsourcing and third-party use - If its own capacities are not sufficient, the supervisor should be able to outsource supervisory tasks (e.g., on-site inspections, monitoring solvency, sufficiency of technical provisions) to third parties such as auditors and actuaries. - Where functions are outsourced, the insurance supervisor is able to: - assess the competence; - monitor the performance (for instance, through reviewing working papers); and - ensure the independence from the company and the consideration third parties give to the protection of policyholders’ interests. - Third parties are subject to the same legal requirements, in particular concerning confidentiality, as the insurance supervisor. - The supervisor must have the ability to take actions against third parties either directly or through the appropriate professional body. - The Commission supplements its work with specialists (lawyers, accountants, actuaries) and has a formal contract with the Government Actuary’s Department in London (GAD) for actuarial services and advice. - The Commission has published a policy statement regarding the use of third party services, including requirements of independence and confidentiality. ### Additional rules on staff conduct - Gifts and hospitality policy: Gifts should not be accepted, and hospitality should generally be declined unless for genuine business reasons; all such offers must be notified to, and recorded by, the Commission secretariat. Any breach of the rules is a disciplinary offence. - Staff must take steps to ensure actions are unaffected by conflicts of interest and must not wrongly or improperly use information received while employed by the Commission. --- ### Principle 2. Licensing ### Licensing framework and scope - Companies wishing to underwrite insurance in the domestic insurance market must be licensed. - A license is given only for one year. - The Insurance Business Law (IBL) contains comprehensive provisions on licensing and prohibits any person from carrying on in or from Jersey insurance business unless authorized by a permit. - Article 3 of the IBL confers powers and duties to the Commission; licensing requirements are contained in Article 6. - The Commission issues Guidelines covering application procedures, licensing requirements, ongoing supervisory regime and regular reporting requirements; these Guidelines are available in hard copy upon request and included in full on the Commission’s internet web site. - A definition of insurance business exists through common law established by court practice and decisions. ### Fit and proper assessments; ownership and management - Owners, directors and key senior managers must each complete and sign a personal questionnaire assessing fitness and propriety, covering complete employment history, professional qualifications and other personal details, including certification of no convictions for a range of offences. - The supervisor is to be informed of natural and legal persons holding a direct or indirect qualifying participation in the applicant company. - The supervisor can refuse to issue a license if qualifying participants: - are in an economic situation hazardous to the applicant’s soundness; - lack sufficient resources to keep the company solvent; - are or have been involved in illegal transactions affecting suitability or intend to abuse the insurer for criminal purposes (e.g., ML); or - are connected to the applicant in a way that would obstruct or render effective supervision impossible. - For legal persons, suitability is applied to the persons running the company; the supervisor may request audit reports and statutory record extracts. - The IBL and the Companies Law 1991 require disclosure to the Commission of all persons having beneficial ownership of all or a proportion of a Jersey registered company. ### Application documentation and business plan - Applicants must submit a complete curriculum vitae and provide declarations confirming that no criminal proceedings are or have been pending against proposed owners and directors/senior managers. - Applicants must deliver any necessary document to the Commission (Article 5 and 9 IBL and published guidance notes); designated directors must complete a Long Form Personnel Questionnaire with company confirmation. - Applicants are required to submit a business plan outlining proposed business for at least three years; guidance notes state a business plan for the next five years is required. - The business plan must provide information on: - types of obligations to be incurred (life insurance); - types of risk to be covered (nonlife insurance); - basic principles of insurance and reinsurance program; - estimated setting-up costs and financial means for these costs; - projected development of business and capital or solvency margins. ### Capital, specialization, and supervisory rights - A minimum amount of capital is required for all insurance companies: £100,000. - The Commission requires information about auditors (Article 16 – 20, Insurance Business Law 1996) and actuaries (Article 24, Insurance Business Law 1996). - The Commission does not allow composite companies (principle of specialization); a life license should not also be licensed to operate non-life unless risks are handled separately on an ongoing concern and winding-up basis. - The supervisor has the right to require information necessary for decisions (Article 9 IBL); outsourcing contracts must be presented to the Commission. - The applicant must set out what risks will be written and what new products will be introduced; any change needs prior consent of the supervisory authority (Insurance Business (General Provision) Order 1996, Schedule to Article 5). - The Commission has the right to suspend and to withdraw the license (Articles 6 and 7 of the Insurance Business Law, 1996). ### Refusal and information exchange - Article 6 of the IBL gives the Commission authority to refuse an insurance permit where: - directors and officers are not fit and proper; - the declared purpose is suspect; - the five year business plan does not make financial sense; - proposed levels of capital are inadequate; - financial resources are inadequate to meet minimum solvency requirements; - or for any other reason the Commission considers valid, provided reasons are given in writing. - For corporate applicants the Commission may obtain audited accounts and any other information it considers necessary, including details of directors and officers. - If the applicant is a regulated entity in another jurisdiction, Article 32 of the IBL provides gateways to exchange information with regulators in other jurisdictions, subject to confidentiality obligations. ### Institutional arrangements - The Commission is the only insurance supervisor; there is no separate authority granting licenses distinct from ongoing supervision. *Source: cr03369 — Assessment of the Commission (Insurance Supervisor).* ### 16. The insurance supervisor provides insurers with information detailing the documents they are ### 16. The insurance supervisor provides insurers with information detailing the documents they are required to submit to the insurance supervisor. This information is given in the form of published guidelines. ### Document submission, checks, and reliance on other bodies - Published guidelines set out documents insurers must submit. - When checking submitted documents, the insurance supervisor refers to reports on checks made by other bodies such as auditors and other regulatory bodies. - All documents available are checked, especially auditors’ reports and information from other supervisors. - It is the policy of the Commission to require that an actuary has no other duties that can involve a conflict of interest. - The insurance supervisor, in permitting access to the domestic market, may choose to rely on the work carried out by an insurance supervisor in another jurisdiction if the prudential rules of the two jurisdictions are broadly equivalent. (Text repeats this sentence verbatim.) ### Information sharing and confidentiality (Essential criteria) - Insurance supervisors of competent authorities share information when foreign insurers are to be licensed. - Under the provisions of Articles 29, 31 and 32 of the IBL of 1996, the Commission may provide to insurance supervisors in other jurisdictions, and receive from such supervisors, information in connection with applications from foreign regulated insurers; such information is given and received in strict confidence. - It is standard practice for the Commission to seek such information when an application is received from a foreign regulated entity. - When licensing a foreign insurer, the host supervisor may choose to rely on information supplied by the home supervisor, provided that the host supervisor treats the information as confidential and protects it appropriately. - The Commission often requests and receives information, including copies of the annual returns submitted to regulators in other jurisdictions, as part of its supervision of foreign insurers’ local business; such information is required to be kept confidential by Article 28 of the IBL of 1996. - Assessment: Observed ### Principle 3 — Changes in Control (Description and legal powers) - The supervisor should review changes in control of licensed companies and establish clear requirements for changes in control, including notification/approval and assessment criteria (suitability of new owners, new directors/senior managers, soundness of new business plan). - Essential criteria: - The IBL requires any change to the owner, shareholder controller, chief executive or directors of an insurance company be notified in writing to the Commission. - Article 22 (4) requires a written statement of the reasons for the change. - Article 22 (5) empowers the Commission to obtain additional documents and information to accept or reject the change. - Failure to notify or provide requested information is a criminal offence under Article 22 (10). - Article 22 (6) provides the power to accept or reject any change in control; Article 22 (3) permits treating the change as a new license application. - Article 22 (9) sets out grounds for an appeal in the royal court against refusal. - Additional criteria and practice: - Supervisor regularly obtains shareholder/participation information exceeding a designated threshold via reports or on-site inspections. - Annual license renewal form requires formal declaration that there have been no changes in persons having an interest in the company; Companies Law 1991 annual return requires a complete list of all shareholders—updates received twice a year. - Changes of control are assessed on the same basis as new license applications (Article 22 (3) of the IBL). - Assessment: Observed ### Principle 4 — Corporate Governance (Overview and legal basis) - There are no explicit corporate governance sections in legislation, but IBL and Companies Law 1991 contain special requirements and powers enabling observation of most essential and additional criteria. - The Commission has included corporate governance criteria in draft Codes of Practice under Article 39 of the IBL; the draft is in discussion with industry and expected to come into force during 2003. - Essential criteria (supervisor authority powers preserved verbatim in scope): - Authority to require Boards to set out responsibilities, strategic objectives, means of attaining objectives, nomination and appointment procedures, distinction of roles (Board, chairman, CEO, management), clear division of responsibilities to avoid unfettered powers, independent risk management functions, external audit functions, strong internal controls, and complaints procedures. - Specific legal provisions: - IBL Articles 17 and 18: auditor’s report must be provided annually within defined timescales and must state auditing standards used, confirm financial statements give a true and fair view, confirm proper books and records, and that necessary information and explanations were obtained. - Articles 19 and 20: give power to the auditor to report to the Commission if false or misleading information is found or if the license holder breaches license conditions. - Articles 33 and 34: Commission has power to ensure complaints procedures are included in customer literature and are reasonable. - Companies Law 1991 Article 74: Boards must act honestly and in good faith and exercise necessary care, diligence and skill. - Companies Law 1991 Article 75: requires Board policy regarding conflicts of interest and empowers the Commission to ensure policies are in place and complied with. - Additional corporate-governance criteria include policies on conflicts of interest, private transactions/self-dealing, protection from undue influence, disclosure of corporate governance adherence, appointing a compliance officer, and remuneration policies for directors and senior management. - Current assessment and path forward: - The other elements are largely observed through conditions attached to insurance licenses. - Assessment: Largely observed - Comment: The Mission welcomes the Commission’s initiative to incorporate corporate governance issues in the Codes of Practice; when realized, the Principle will be fully observed. ### Principle 5 — Internal Controls (Authority, criteria, and practice) - Supervisor should be able to review and require strengthening of internal controls and require Boards to provide suitable prudential oversight (underwriting standards, quantitative/qualitative investment and liquidity standards). - Essential criteria (1–10 preserved in scope): - Authority to review internal controls and request strengthening; controls should be adequate for nature and scale of business. - Authority to require Board oversight of underwriting, valuation of technical provisions (policy liabilities), investment, liquidity management and reinsurance. - Authority to require oversight of market conduct activities (fair treatment, proper disclosure, conflicts of interest, handling clients’ money, separation of principal and agent activities). - Authority to require internal controls addressing organizational structure, duties and responsibilities, delegation of authority, separation of critical functions (new business, claims, reconciliation, risk management, accounting, audit, compliance). - Authority to require accounting procedures, reconciliation, control lists and management information. - Authority to require checks and balances (segregation of duties, cross-checking, dual control of assets, double signatures). - Authority to require safeguarding of assets and investments, including physical control. - Authority to require an ongoing audit function appropriate to nature and scale of business, with specifications on access, independence, resources, and methodology. - Authority to require formal procedures to recognize potential suspicious transactions. - Authority to require established lines of communication to management, law enforcement and/or the supervisor for reporting irregular and suspicious activities. - Additional criteria: - Encouragement to appoint experienced non-executive directors in unicameral Boards. - Encouragement and access to internal audit function reporting to an Audit Committee. - Authority to require Audit Committee composition (majority experienced non-executive directors) in unicameral Boards. - Requirement for actuarial reporting where called for by applicable law or nature of operations; Article 24 of the IBL requires every long-term insurer to appoint a qualified actuary responsible for long-term reserving and defines qualifications. - Practice and reinforcement: - Internal controls are reviewed through regular six monthly reporting requirements, auditors’ reports, on-site visits and ad hoc reviews. - Auditors must report to the Commission any significant failings found during annual audit. - Special conditions attaching to licenses (Article 6 of the IBL) may reinforce compliance for initially issued licenses; auditors must formally report compliance with such conditions on a six monthly basis. - Example: Long-term insurers licensed in Jersey that market into the U.K. automatically have special license conditions for safeguarding of assets and investments and their physical control. - Money Laundering Order 1999 applies to all financial services companies, including insurers, setting procedures for recognition and reporting of suspicious transactions and Articles regarding management responsibilities, internal systems and training, record keeping, and internal reporting. - Assessment: Largely Observed - Comment: Internal controls are increasingly important; management needs encouragement to introduce efficient control systems. The Code of Practices will be constructive. ### Principle 6 — Assets (scope introduction) - Standards should be established with respect to assets of licensed companies at least applying to an amount of assets equal to the total of the technical provisions and addressing: - diversification by type; - any limits or restrictions on amounts held in financial instruments, property, and receivables; - the basis for valuing assets included in financial reports; - safekeeping of assets; - appropriate matching of assets and liabilities; - liquidity. - (Description and Essential criteria for Principle 6 continue beyond the supplied extract.) *Source: Assessment text referencing the Commission, the Mission, IBL of 1996, Companies Law 1991, Financial Services Law 1998, and Money Laundering Order 1999.* ### 1. Legal provisions on asset management are in place. These legal provisions may define the ### cr03369 - 1. Legal provisions on asset management are in place. These legal provisions may define the ### Legal framework for asset management - Legal provisions are contained in the IBL and its associated Orders, the Insurance Business (General Provisions) Order 1996 and the Insurance Business (Solvency Margin) Order 1996. - These provisions cover the essential criteria No. 1-7 and the additional criteria No. 1–3. - Article 2 of the Insurance Business (Solvency Margin) Order 1996 lists in detail the types of asset in which an insurance company may invest (essential criteria no.1). - Under Article 6 of the IBL, the Commission may amend (extend or limit) permitted investments for each insurance company through special conditions attaching to the insurance license. ### Asset valuation and reporting - Assets are valued on a basis prescribed by or acceptable to the insurance supervisor. - The valuation basis used by the company must be declared in its accounts; the supervisor reviews this as standard practice. - The Commission can require a company to adopt a different basis if the basis used is inappropriate. - Accepted bases include U.K. GAAP, U.S. GAAP, IAS, and for captives the GAP of the jurisdiction of the owner( after approval of the Commission). ### Strategic investment policy requirements - The supervisor can require insurers to have an overall strategic investment policy, formulated and approved by the Board of Directors, addressing: - determination of the strategic asset allocation (long-term asset mix over main investment categories); - establishment of limits for allocation of assets by geographical area, markets, sectors, counterparties and currency; - restrictions where holding some asset types is ruled out or limited (illiquidity, lack of external price verification); - conditions under which the company can pledge or lend assets; - overall policy on the use of financial derivatives or structured products (including explicit exclusion of certain types); - framework of accountability for all asset transactions. ### Risk management for investment activities - The supervisor requires comprehensive risk management policies and systems to identify, measure, report and control investment-related risks affecting coverage of technical provisions and/or solvency margins. Main risks include: - market risk (adverse movements in, for example, stocks, bonds and exchange rates); - credit risk (counterparty failure); - liquidity risk (inability to unwind a position at any price near fair market value); - operational risk (system/internal control failure); - legal risk; - safekeeping of assets. ### Internal controls, governance and audit - The supervisor checks that insurers have adequate internal controls to ensure management of assets in accordance with investment policy and legal/regulatory requirements. - Controls should ensure documented investment procedures, proper oversight, and segregation between front office functions and functions measuring, monitoring, settling and controlling asset transactions. - Oversight and clear management accountability for investment policies and procedures remain ultimately with the Board of Directors, regardless of delegation or outsourcing. - The supervisor checks that insurers have rigorous audit procedures covering investment activities; internal audits must be independent. - Auditors are required to review investment policies as part of their work (essential criteria no. 7) and report to the Commission if failings are found. - If specific license conditions are imposed, auditors must formally report to the Commission at six monthly intervals that these conditions have been complied with. ### Asset/liability management and resilience testing (Additional criteria) - The supervisor checks that insurers have effective procedures for monitoring and managing their asset/liability position to ensure investment activities and asset positions are appropriate to liability profiles. - The Board of Directors must review the adequacy of the overall investment policy at least annually in light of the company’s activities, overall risk tolerance, long-term risk requirements and solvency position. - The supervisor encourages regular resilience testing for a range of market scenarios and changing conditions to assess appropriateness of asset allocation limits. - Insurers are obliged to submit a solvency calculation to the Commission on a six monthly basis; additional supporting analyses (e.g., currency matching reports, reserving calculations) may be required. - The Commission may require resilience testing if solvency calculations give cause for concern. - Loans are prohibited under the Insurance Business (Solvency Margin) Order 1996 without prior consent of the Commission. ### Technical provisions and liabilities (Principle 7) - Legal provisions for establishing technical provisions are in the IBL, Insurance Business (General Provisions) Order 1996 and Insurance Business (Solvency Margin) Order 1996. - Article 24 of the IBL requires every long-term insurance company to appoint a qualified actuary responsible for establishing long-term technical provisions in accordance with actuarial principles. - Article 15 requires insurers to prepare annual financial statements showing a true and fair view; Article 17 requires auditors to report to the Commission accordingly. - The Commission may prescribe standards and methods for establishing technical provisions via license conditions authorized by Article 6 of the IBL. - The Commission can check sufficiency of technical provisions and require increases if necessary; assessments are made through on-site and off-site inspections and review of six monthly returns. - Reinsurance: the Commission can review and approve reinsurance arrangements, stipulate maximum amounts retained, and set limits on placements with any one reinsurer. - Accounting practice requires premiums, claims and technical liabilities disclosed gross and net of reinsurance in the accounts. - The Commission may intervene against specific reinsurance contracts if conditions are unsuitable. ### Capital adequacy and solvency (Principle 8) - Legal provisions address the three components of solvency: level of technical provisions; adequate coverage of technical provisions by assets; an additional buffer (required minimum solvency margins). - Relevant provisions are in the IBL, Insurance Business (Solvency Margin) Order 1996 and Insurance Business (General Provisions) Order 1996. - All insurers must provide the Commission at six monthly intervals with financial returns fully disclosing technical provisions and solvency margin position (Article 5 of the Insurance Business (General Provisions) Order 1996). - Minimum solvency margin requirements: - life and pensions business: the greater of £50,000 and 2.5 percent of the long-term fund; - general business: 17.5 percent of premium income. - The Commission has power under Article 6 of the IBL to amend minimum solvency margins for individual insurers via special license conditions. - Minimum capital requirement: - The Commission requires a minimum capital of £100,000 for all insurance companies; Article 6 of the IBL allows enforcing a higher level if warranted. - Companies must assess available solvency margins at six monthly intervals and report to the Commission (Article 5). - If capital reaches or falls below control levels, the supervisor has authority to intervene or impose restrictions. - Under Article 6 (5) of the IBL the Commission can demand an increase in capital; under Article 6 (6) it can restrict business if additional capital is not forthcoming. - If margin of solvency falls below the required amount, the Commission requires a short-term financial scheme to remedy the shortfall within thirty days. - The Commission ensures, through license conditions, that capital supporting insurance liabilities is only applied once (prevention of double/multiple gearing) within insurance groups. - Additional criteria: - The Commission can require minimum capital be covered by unencumbered assets. - The Commission may disclose information on solvency status on a confidential “Regulator to Regulator” basis. ### Derivatives and off-balance-sheet items (Principle 9) - Article 2 of the Insurance Business (Solvency Margin) Order 1996 does not approve derivatives as admissible assets. - If an insurer’s margin of solvency is sufficiently strong, the Commission may authorize limited use of derivatives by special license condition under Article 6 of the IBL. - If authorized, derivatives remain inadmissible for solvency purposes and there will be a restriction on the maximum percentage of total assets that may be held in this form. *Assessment: Observed. Attributed to the Commission and the Insurance Business legislation (IBL; Insurance Business (General Provisions) Order 1996; Insurance Business (Solvency Margin) Order 1996).* ### 2. Disclosure requirements should be established for derivatives and other off-balance sheet items. ### 2. Disclosure requirements should be established for derivatives and other off-balance sheet items ### Disclosure and licensing conditions - In cases where authorization to use derivatives is granted, disclosure requirements are laid down in the license condition. - Where approval is given, it is an essential requirement contained within the license condition that auditors fully examine and review the insurer’s derivatives activities and controls, and report in writing to the Commission at six monthly intervals that derivatives business has been properly managed in accordance with the license conditions. - A license to carry on derivatives business will only be given if the Commission is satisfied that the insurer has the necessary qualified staff to manage such business. ### Board-approved derivatives policy - The insurance supervisor requires insurers using derivatives to have an appropriate policy for their use, formulated and approved by the Board of Directors. - The policy should be consistent with the company’s activities, its overall strategic investment policy and asset/liability management strategy, and its risk tolerance. - The policy should address: - the purposes for which derivatives can be used; - the establishment of appropriately structured exposure limits for derivatives taking into account the purpose of their use and the uncertainty caused by market, credit, liquidity, cash flow, operations and legal risk; - the extent to which the holding of some types of derivatives is restricted or not authorized (for example where potential exposure cannot be reliably measured, closing out or disposal could be difficult due to lack of marketability or illiquidity, or where independent (i.e., external) verification of pricing is not available); - the delineation of lines of responsibility and a framework of accountability for derivatives functions. ### Risk management systems and integration - The insurance supervisor requires insurers to have comprehensive systems, forming part of their wider investment risk management systems, capable of identifying, measuring, controlling, and reporting (both internally and to the supervisor) the risks from derivatives activities. - These systems must ensure that the risks arising from all derivatives transactions undertaken by the insurer can be: - analyzed and monitored individually and in aggregate; and - monitored and managed in an integrated manner with similar risks arising from non-derivatives activities so that exposures can be regularly assessed on a consolidated basis. ### Internal controls, segregation of functions, and independent pricing - The insurance supervisor checks that insurers have in place adequate internal controls to ensure derivatives activities are properly overseen and that transactions are entered into only in accordance with approved policies, procedures, and legal and regulatory requirements. - Controls must ensure that functions responsible for measuring, monitoring, settling and controlling derivatives transactions are distinct from the front office functions. - The Board of Directors must ensure the company has the appropriate capability to verify pricing independently where the use of ‘over-the-counter’ derivatives is permitted under the company’s policy. - Approval for OTC derivative use will only be given where the Commission is satisfied that the insurer has proper policies, adequate systems and controls, and staff with necessary qualifications and experience. ### Audit and review requirements - The insurance supervisor requires that insurers have rigorous audit procedures that include coverage of their derivatives activities to ensure timely identification of internal control weaknesses and operating system deficiencies. - If the audit is performed internally it should be independent. - The Board of Directors of an insurer is required to review the adequacy of its derivatives policies and procedures at least annually in light of the company’s activities, its overall risk tolerance and market conditions. - The Board of Directors has to review its derivatives policies and procedures at six monthly intervals to comply with license conditions and the auditors’ review. ### Capital, unencumbered assets, and supervisory powers - The insurance supervisor has the authority to require that the minimum amount of capital be covered by unencumbered assets (i.e., not pledged amount assets). If exceptions are permitted, they are closely monitored by the insurance supervisor. - The insurance supervisor is entitled to disclose information—case-by-case or in aggregated form—to other insurance supervisors about the solvency status of the insurers under its supervision. - The Commission can require an insurance company to increase or decrease the amount of reinsurance ceded, and can require an insurer to spread its risk if it is considered the company is over-exposed to one reinsurance company. ### Board and staff competence - The insurance supervisor requires the board of directors to satisfy themselves that collectively the board has sufficient expertise to understand issues related to the use of derivatives, and that all individuals conducting and monitoring derivatives activities are suitably qualified and competent. - A license to carry on derivatives business will only be given if the Commission is satisfied that the insurer has the necessary qualified staff to manage such business. ### Assessment and supervisory comments - Assessment: Largely observed - Comments: The circumstances under which derivatives are supervised are not mentioned directly in the legal framework; however, legislation prevents unapproved assets being taken into account for solvency purposes. The Mission welcomes the Commission’s initiative to include the present practices of the Insurance Division with respect to derivatives in the Codes of Practice. --- ### Reinsurance (summary of related supervisory requirements) - The insurance supervisor must be able to review reinsurance arrangements, assess the degree of reliance placed on these arrangements, and determine the appropriateness of such reliance. - Supervisory requirements address: - the amount of credit taken for reinsurance ceded, reflecting an assessment of the ultimate collectability of the reinsurance recoverable and supervisory control over the reinsurer; and - the amount of reliance placed on the insurance supervisor of the reinsurance business of a company incorporated in another jurisdiction. - Essential powers and practices: - authority to review reinsurance arrangements and ensure recoverability of claims from reinsurers; - ensuring the reinsurance program is appropriate to the insurer’s capital and risk profile; - ensuring reinsurers’ protection is secure (e.g., collateral, trust, letters of credit, funds withheld, or direct supervision of reinsurers). - Additional criteria include supervisory tools for professional reinsurers, ability to intervene (including cease and desist orders and winding up), and cooperation with other supervisors to assess reinsurer financial position. - Under the IBL, all reinsurance companies are treated the same as insurance companies regarding authorization, supervisory control, reporting, minimum solvency margin provisions and internal control requirements. - Assessment: Observed ### Market Conduct (selected points relevant to disclosure and supervision) - Insurers and intermediaries should: - act honestly and in a straightforward manner; - act with due skill, care, and diligence; - conduct business with prudence and treat customers fairly; - seek reasonable information from customers before advising or contracting; - avoid conflicts of interest and deal openly with regulators. - Regulatory instruments and supervisory capabilities: - Financial Services Law 1998 and legally enforceable Codes of Practice regulate intermediaries and insurers dealing directly with the general public for long-term insurance products. - Codes of Practice require disclosure to customers of relevant, meaningful and understandable information covering insurer, intermediary, product, risks, benefits, obligations, charges and estimated returns. - The Commission has authority to carry out on-site inspections, though lack of staff has limited the number conducted. - Codes require intermediaries to seek all relevant information from customers (Code 2.3) and to have effective complaints procedures (Code 3.7). - Article 10 of the Financial Services Law 1998 empowers the Commission to stop persons carrying on unauthorized business quickly and effectively. - Assessment: Observed ### Financial Reporting (opening summary) - The insurance supervisor should obtain financial and statistical reports, actuarial reports, and other information on a regular basis, supported by special information requests, on-site inspections, and communications with actuaries and external auditors. - A process should be established for: - setting the scope and frequency of reports requested and received from all licensed companies; - setting accounting requirements for financial reports in the jurisdiction; - ensuring external audits of insurance companies are acceptable; - setting standards for the establishment of technical provisions or policy and other liabilities to be included in financial reports. - Distinctions may be made between: - standards for reports prepared for disclosure to policyholders and investors vs. those prepared for the insurance supervisor; and - reports prepared for companies incorporated in the jurisdiction vs. branch operations of companies incorporated elsewhere. *Source: cr03369 - 2. Disclosure requirements should be established for derivatives and other off-balance sheet items.* ### 1. The insurance supervisor has the legal authority to require companies to submit information on ### cr03369 - 1. The insurance supervisor has the legal authority to require companies to submit information on ### Legal authority and statutory basis for reporting - The IBL provides the Commission with the authority to require insurance companies to provide accounts and information on a six monthly basis (Article 15). - Article 5 (5) of the Insurance Business (General Provisions) Order 1996: “The permit holder shall furnish to the Commission at six monthly intervals such information relating to its business as may be determined by the Commission.” - Article 5 (6) of the Order: “The permit holder shall furnish to the Commission at six monthly intervals financial statements including a balance sheet and profit and loss account in a form determined by the Commission.” - The scheme (scope, forms, etc.) for Category B companies has been determined following the EU Insurance Accounting Directive. - Article 9 of the IBL gives authority to the Commission to obtain such information as it may require from an insurer or reinsurer, either in writing or by a visit. - Article 10 permits investigations by the Commission into the nature, conduct and state of an insurance business and its integrity, competence, financial standing and organization. ### Scope, frequency, consolidation and content of reports - Reports may be either on an individual basis, or consolidated, or both. - The Commission sets the scope and frequency of reports requested and received from all companies licensed in the jurisdiction, including financial reports, statistical reports and actuarial reports. - Information must be provided at six monthly intervals and within three months of the end of the relevant financial period. Such information must be properly signed by a director of the insurer. - The information mentioned in Article 5 IBL will include off-balance sheet activities if appropriate. - The application process includes a requirement to produce a five year plan; subsequent six monthly returns must include an updated, amended plan, giving full details of significant variations arising from actual trading conditions. ### Accounting standards, valuation and technical provisions - The accounting techniques used by insurers must consistently be in accordance with one of the following: - International Accounting Standards (IAS) - Generally Accepted Accounting Practice (GAAP) of: The United Kingdom; The United States; The domicile of the beneficial owner (if applicable) - Valuations are required to be prudent, realistic and consistent. These requirements are tested by auditors and, for long-term insurance, also by appointed actuaries. - Article 6 of the IBL provides the power to issue principles for establishing technical liabilities (policy liabilities); in practice the Commission follows principles accepted in the United Kingdom. ### Verification, audits and on-site inspection framework - Article 16 of the IBL requires all insurance companies to appoint independent external auditors, who will carry out a review of each company annually. If special conditions are attached to a license, or if the supervisor has concerns, such an audit may be carried out at six monthly intervals. - The Commission may carry out on-site visits and inspections as part of the ongoing supervisory regime. - On-site inspection powers include investigation of books, records, accounts and other documents (Article 9 and Article 10 authority). - Full-scale on-site inspection activities include at least: evaluation of the management and internal control system; analysis of the company’s activities; evaluation of the technical conduct of insurance business; analysis of relationships with external entities; and evaluation of the company’s financial strength. - Supervision was extended to include on-site as well as offsite supervision in 2000. - It is expected that a normal on-site inspection will have a duration of one week. - The visit schedule is determined by the risk assessment of each insurance business; higher risk businesses receive more frequent visits. - Each Category B company should have an on-site inspection every 2 -3 years (captives every 5 years). From time to time the Commission will inspect also Category A companies, where increased risk is identified. - On-site visits may be either full scope, or limited to areas of specific concern. Findings are discussed with the insurance company (usually a discussion of a draft report) and valid feedback will be included in the final version of the report. - A timetable for any remedial action is included in the report, and the Commission takes steps to ensure necessary actions are taken in accordance with agreed time scales. - The Commission has authority to extend on-site inspections to other companies within the same group and will liaise with supervisors in other jurisdictions for joint or delegated visits. The Commission does not have blanket authority to inspect outsourced service providers unless those companies are regulated entities, but can usually make such a visit by mutual agreement. - The treatment of customers, disputes/litigation, and observance of consumer regulations are part of the normal on-site review. - Comment in assessment: It is necessary to intensify on-site inspections by Insurance Division staff; to do so it is necessary to increase the number of supervisors in the Division. Recommendation: introduce a legal provision allowing the supervisor to inspect on-site companies or persons that carry out functions outsourced from an insurer. ### Remedial powers, sanctions and enforcement - Article 6 (4) of the IBL authorizes the Commission to refuse or revoke a license, inter alia, if it appears that the organization or structure reflects discredit on the method of conducting business or may lead to improper conduct of business. - Article 22 of the IBL requires all the directors and officers of an insurer to be approved by the Commission under fit and proper criteria; the Commission can demand replacement of directors or officers as a condition of continuance of the license. - Article 6 of the IBL authorizes the Commission to impose on an insurer conditions that may require remedial action or restrict business. - Sanctions available under the IBL include restrictive license conditions, and full or partial cancellation of a license; the Commission may “name and shame” insurers not in compliance. - For serious offences, fines and prison sentences, compulsory winding up or portfolio transfer are available, but these require the direction of the royal court. The Commission does not have the power to impose monetary penalties. - Remedial-action practices: Commission requests remedial action in writing, providing full details, reasons, and expected timescale; the insurer’s progress is monitored and progress reports are required in writing. - Recovery plan expectations: the ailing company is asked to submit a recovery plan within a relatively short period, e.g., one month, which should list proposed financial or administrative measures and quantify expected effects and time needed to obtain visible results. - Safeguards the supervisor may use when not trusting management or when a plan is refused/not implemented include: restrictions on the freedom to dispose of assets; appointment of a temporary administrator; suspension of payments. - If no external support can be found and deterioration threatens policyholders, the supervisor must stop the company writing new business and consider forcing a transfer of portfolio, withdrawal of all licenses and liquidation. - Additional criterion: sanctions may be applied to directors and officers; however fines and prison sentences require the royal court. - Assessment comment: It is recommended to complete the range of sanctions by granting the Commission the power to impose monetary penalties (administrative fines) to align with international standards. ### Cross-border business operations and group supervision - Law requires that all insurance establishments of international insurers, insurance groups and conglomerates operating within the jurisdiction be subject to continuing effective prudential supervision – irrespective of any licensing requirement. - For insurance subsidiaries of foreign parent companies and insurance joint ventures where parent institutions are in a different jurisdiction, the law requires supervision of their capital adequacy/solvency in the host jurisdiction where they are incorporated. - For foreign branches that are an integral part of an insurer incorporated elsewhere, either the law provides for continuing direct supervision in the host jurisdiction or the supervisor must demonstrate a sound basis to believe the home supervisor exercises continuing effective prudential supervision over the company as a whole, including branch operations. - The standard licensing procedure for a subsidiary of a foreign insurer, a joint venture with foreign insurer parents, or a branch of a foreign insurer includes the need to consult the insurance supervisor of the parent insurer. *Information summarized from the assessment referencing the Insurance Business Law (IBL) and the Commission.* ### 2. Where the cross-border promotion of insurance contracts on a services basis is permitted, the ### 2. Where the cross-border promotion of insurance contracts on a services basis is permitted, the ### Cross-border promotion, licensing, and safeguards - Where cross-border promotion of insurance contracts on a services basis is permitted, the host insurance supervisor has one (or a combination) of: - a procedure whereby foreign insurers are required to notify the host supervisor of their intention to promote insurance contracts; - a special licensing procedure; or - specific safeguards to protect policyholders. - Notification or special licensing procedures include checks that the foreign insurer is subject to continuing effective prudential supervision in its home jurisdiction over its global activities. - The insurance law provides the host supervisor with powers to assess on a case-by-case basis whether to license, continue to license, or otherwise permit an insurance subsidiary or branch of a foreign institution to operate in its jurisdiction; the process should be transparent. - The insurance supervisor can refuse a license for a foreign establishment, or impose additional conditions on a license, where it has material concerns that the foreign parent insurer is not subject to continuing effective supervision in its home jurisdiction; the process should be transparent. - The insurance law empowers the insurance supervisor to prevent insurers established within its jurisdiction from promoting contracts through a branch or on a cross-border services basis in foreign jurisdictions where the insurer lacks required financial capacity or necessary expertise to manage the business prudently. ### Home supervision and reporting - Home supervisors require insurers with overseas establishments to maintain a sound and verifiable system of reporting from any foreign establishment to the head office. - Insurance supervisors exchange information, as necessary, on the operation in their jurisdictions of the insurance establishments of foreign insurers. - The IBL requires that all insurers and reinsurers carrying on business in Jersey are licensed by the Commission; this includes Jersey incorporated companies, branches of foreign insurers, and foreign insurers without a physical presence that market and sell through brokers and intermediaries situated in Jersey. - Under Article 4 of the IBL, a license may be granted by virtue of the insurer’s authorization under the law of an “acceptable” jurisdiction outside Jersey; the Commission obtains confirmation from the home supervisor that the insurer is authorized for the classes of business to be marketed in Jersey and that the insurer is in full compliance with regulatory requirements in the home jurisdiction. - The Commission will normally use regulatory returns sent to the home supervisor as part of its ongoing supervision but may require such an insurer to complete Jersey returns if circumstances demand. - Conditions the Commission may attach to licenses under Article 6 of the Law also apply to foreign insurers. - The powers and application procedures for accepting or rejecting license applications from foreign insurers are the same as those for Jersey companies, including fit and proper criteria and submission of financial and other planning information. - Article 4 (2) of the IBL states that no person shall carry on in or from within Jersey insurance (or reinsurance) business unless authorized by a license granted under Article 6 of the Law. - Information may be shared between supervisors, on a confidential regulator-to-regulator basis, under the provisions of Article 31 of the Law. ### On-site inspections, independent checks, and supervisory cooperation (Additional criteria) - Home supervisors have powers to order independent checks on data reported by an individual foreign establishment. - Insurance supervisors advise each other on a timely basis of any significant action proposed affecting the operations of a cross-border establishment. - Host supervisors accept on-site inspection of the branches of foreign insurers in their jurisdiction under conditions: - The home supervisor will inform the host supervisor of both commencement and conclusion of any examination of the host country branch. - The home supervisor and the host supervisor may communicate on the initiative of either party; the home supervisor would share necessary information to a reasonable extent, subject to statutory provisions. - Information obtained by the home supervisor in inspections and meetings with the host supervisor shall be treated as confidential and used solely for supervisory purposes according to applicable legislation. - The Commission has the power to request independent checks on information provided by a foreign insurer, usually done jointly with the home supervisor. - The Commission will accept requests from foreign home regulators for on-site visits to Jersey insurers where Jersey is the host supervisor. - The Commission considers communication between supervisors a key element of regulation and will request or provide information as necessary, within statutory provisions, to ensure proper group regulation. ### Coordination and cooperation (Principle 16) - Insurance supervisors increasingly liaise to ensure awareness of each other’s concerns for insurers operating in multiple jurisdictions. - In developing or implementing a regulatory framework, consideration should be given to whether the insurance supervisor: - is able to enter into agreements or understandings with other supervisors (in other jurisdictions or sectors) to share information or otherwise work together; - is permitted to share confidential information with an insurance supervisor in another jurisdiction, potentially limited to supervisors who have agreed and are legally able to treat the information as confidential; - should be informed of findings of investigations where investigative power rests with a body other than the insurance supervisor; - is permitted to set out the types of information and basis on which information obtained may be shared. - Essential criteria: - Ability to enter agreements or understandings with other supervisors (insurance, banking, securities) to share information or work together. - Permission to share confidential information with supervisors in other jurisdictions, possibly limited to those who legally can treat information as confidential. - Permission to set out the types of information obtained and the basis for sharing. - Arrangements allow for two-way flow of information without requiring strict reciprocity of format and detail. - Additional criteria include timely information about investigations by other bodies, host supervisors being informed by parent supervisors of material changes, and host supervisors informing parent supervisors of material problems; supervisors may obtain information on behalf of another supervisor or cooperate in investigations. - Under regulatory legislation, the Commission is able and willing to cooperate with overseas regulators without a requirement for a MOU, but recognizes the certainty MOUs add to information exchange. - The Commission can communicate information in its possession to a relevant supervisory authority at that authority’s request, whether or not the information arose from exercise of Commission powers. - The Commission may exercise powers at the request of, or to assist, an overseas supervisory authority, including: - power to impose, revoke or vary the conditions of a license; - power to refuse or revoke a registration; - powers of intervention; - powers relating to information and documents; - powers of investigation; and - powers of entry (through application to Jersey’s Bailiff). - The Commission can communicate information relating to customers of registered persons, without their consent, in cases such as insider dealing. - The Commission will always cooperate with other relevant supervisory authorities unless it believes assistance is requested other than for supervisory functions; assistance is given in investigations, compliance programs for the prevention of illicit activities, and by exchange of general information about matters of regulatory concern. - Domestic gateways exist for the Commission to provide and receive information to/from: the Viscount (matters such as bankruptcy and inquests); domestic law enforcement agencies (investigation of suspected offences or institution of criminal proceedings); the attorney general and any police officer where it suspects a ML offence under Articles 32 to 37 of the Proceeds of Crime Law 1999. - The Commission recognizes information exchange is two-way and will consult with an overseas regulator where problems exist with a regulated person licensed in both jurisdictions on a “home” and “host” basis. - Requests for assistance from overseas regulators can be and are met. ### Confidentiality (Principle 17) - All insurance supervisors should be subject to professional secrecy constraints in respect of information obtained in the course of their activities, including during on-site inspections. - The insurance supervisor is required to hold confidential any information received from other insurance supervisors, except where constrained by law or where the provider supervisor authorizes release. - Essential criteria: - An appropriate confidentiality requirement embodied in law (insurance law or other laws) that subjects insurance supervisors to professional secrecy constraints. - ‘Gateways’ allowing the insurance supervisor to pass confidential information to other supervisors or law enforcement bodies are clearly set out. - Freedom of information provisions do not override confidentiality where confidentiality is necessary for sound regulatory practice or effective communication with other regulators. - Insurance supervisors can hold confidential any information received from another supervisor with an expectation of confidentiality. - Under Article 28 of the IBL, any breach of confidentiality or disclosure of information by any person who receives this information, other than through a permitted gateway, is a criminal offence liable to imprisonment for a term not exceeding two years, or a fine, or both. - Articles 29-32 of the IBL define the permitted gateways. - The Commission keeps confidential information it receives to maintain sound regulatory practice, and will keep confidential information received from another supervisor except where the other regulator has been informed in advance that the information may be used in circumstances leading to publicity (for example in a criminal prosecution) and has provided the information in full knowledge and approval of that situation. ### Assessment, observance, and recommended actions - Observance summary: - Observed: 12 — ICP 2, 3, 6, 7, 8, 10, 11, 12, 14, 15, 16, 17 - Largely observed: 5 — ICP 1, 4, 5, 9, 13 - Recommended actions (Table 12): - (ICP 1) Organization of an insurance supervisor: Increase number of staff of the Insurance Division. Avoid impairing the independence of the supervisor. - (ICP 4) Corporate Governance: The Commission should complete its initiative to incorporate corporate governance requirements into Codes of Practice. - (ICP 5) Internal controls: Systematic confirmation by senior management and Board regarding their responsibility for internal controls. Introduce quickly Codes of Practice containing requirements for adequate risk management systems. - (ICP 8) Capital adequacy and solvency: The Commission should continue to review minimum capital standards, in light of recent European developments, to ensure the legal minimum remains appropriate and in line with international standards. - (ICP 9) Derivatives: It is recommended that present practices of the Commission in relation to derivatives be incorporated in the Codes of Practice. - (ICP 13) On-site inspection: Intensify on-site inspections (increasing the number of staff, see above). - (ICP 14) Sanctions: Complete the range of sanctions by granting the supervisor the power to impose monetary penalties (administrative fines). ### Authorities’ response and planned actions - The authorities welcome the Fund’s confirmation that Jersey has observed or broadly observed all of the IAIS Core Principles and endorse the Fund’s constructive recommendations to enhance implementation of international standards; many recommendations support actions planned or already underway at the time of the Fund’s assessment. - A consolidated action plan, prepared by the authorities, is appended to Volume I of the assessment. - Organization and independence (ICP 1): The authorities’ response to the Commission’s development function and the Committee’s power of direction is set out in general comments on Volume I (page 21). - Resourcing (ICPs 1 and 13): The authorities state the Commission moved quickly to address the resource deficit noted at the time of the Fund’s visit. An additional staff member has been approved in the Commission’s business plan for 2003 and will be recruited in 2003. Following recruitment, this additional staff member will conduct on-site inspections, increasing the frequency of such inspections. - Internal controls and Codes of Practice (ICPs 4, 5, and 9): The authorities note Codes of Practice addressing corporate governance, internal controls, and the use of derivatives are under consultation and will be finalized in 2004, along with Codes for CIF functionaries and deposit-takers. Draft Codes of Practice were out for public consultation at the time of the Fund’s assessment. - Management declaration on internal controls (ICP 5): (assessment text ends mid-reference to management declaration). *Source: IMF assessment chapter.* ### 118. The authorities accept that, currently, only trust company businesses are required ### cr03369 - 118. The authorities accept that, currently, only trust company businesses are required ### Declarations by regulated entities - The authorities accept that, currently, only trust company businesses are required to submit a declaration to the Commission that they have complied with relevant regulatory and AML legislation and Codes of Practice (Article 6 of the Financial Services (Trust Company Business (Accounts, Audits and Reports)) (Jersey) Order 2000). - The Commission intends to review whether directors (and senior management of branches) of all regulated businesses should be required to make such a declaration. - Any proposed changes would be subject to a period of consultation and legislative approval. ### Capital adequacy and solvency (ICP 8) - The authorities state that solvency requirements currently in place are in line with international standards. - The Commission will continue to review developments in international standards to ensure that minimum legal solvency requirements remain consistent with those standards. ### On-site inspection and outsourcing (ICP 13) - The Commission’s existing outsourcing policy requires supervisory access to any outsourced function (often achieved through an access clause in the outsourcing contract). - The Commission will not approve an arrangement that does not facilitate supervisory access. - The Commission will review in 2004 whether to extend its information-gathering and investigation powers to those carrying out outsourced functions for regulated institutions and to other third parties associated with a registered person for the purposes of its business. - Any proposed extensions of powers would be subject to a period of consultation and legislative approval. - The authorities recognize particular difficulties in enforcing access to information held outside Jersey. ### Regulatory sanctions (ICP 14) - The authorities’ response on civil monetary penalties and fining is set out in Volume I (page 43). ### IOSCO assessment — information, methodology, and scope - An assessment of observance of the IOSCO Objectives and Principles of Securities Regulation was conducted as part of the offshore financial sector assessment of Jersey. - The mission matched components of the regulatory system against IOSCO Principles, using IMF guidance notes, IOSCO reports and resolutions, OECD publications, selected Jersey legislation, orders, codes of conduct and guidance notes, Commission reports, IOSCO self-assessments prepared by the Commission, and operational documents from the Commission. - The mission paid close attention to the explanatory notes accompanying the IOSCO Objectives and Principles and the MFP Transparency Code. - The mission received extensive briefings from Commission staff and found no factors that impaired the assessment process; law, regulations and guidance notes were accessible. ### Institutional and market structure findings - The core regulatory provisions of securities law relate to: - the functions and powers of the Commission; - the issue of permits to those who perform designated functions on behalf of CIFs and the supervision of those functionaries; - the registration of those who undertake investment business (dealers, discretionary investment managers and investment advisers); and - the offer of securities and investments to members of the public and others. - The core investment product is the CIF. The value of CIFs in Jersey as at June 30, 2002 was BP 106.2 billion. - Financial assets under direct administration were estimated to be BP 31 billion. - There is no formal secondary market for securities in Jersey. - Main legislation: the CIFL; other relevant laws include the Financial Services (Jersey) Law, 1998, the Companies (Jersey) Law, 1991, and the Borrowing Control (Jersey) Law, 1947. - The Commission is a statutory single regulator for the financial sector and administers Company Law through its power to appoint the Registrar of Companies. - Jersey is a full member of the International Organization of Securities Commissions (IOSCO). - Jersey does not have statutory competition law; the Jersey Competition Regulatory Authority (JCRA) was established and a draft competition law was released for consultation and expected to be implemented in 2003. ### General preconditions and market views - The Commission’s stated purpose: to maintain Jersey’s position as an international finance centre with the highest regulatory standards, achieved by: - reducing risk to the public of financial loss due to dishonesty, incompetence and malpractice; - protecting and enhancing Jersey’s reputation and integrity; - safeguarding Jersey’s best economic interests; and - contributing to the fight against financial crime. - Market access is determined by the securities regulatory system and Commission decisions; no barriers to entry or exit were identified beyond those incidental to the regulatory system and separate government licensing. - Industry representatives consider the cost of compliance with securities regulation is higher in Jersey (and in Guernsey and the Isle of Man) than in competitor jurisdictions; many accept this as a trade-off for reputation, stability, regulatory environment and expertise, though some professionals advocate for less regulation. - Jersey’s ability to develop as an international finance centre depends on the quality of its securities regulatory system, its tax regime and professional expertise; authorities emphasize the importance of sound supervision and international cooperation. ### Detailed assessment — Principles Relating to the Regulator (selected) - Principle 1 (Responsibilities clear and objectively stated): - The Commission’s responsibilities are set out in the FSCL. - The Commission is responsible for supervision and development of financial services in or from within Jersey; providing reports, advice and information to the States and public bodies; and preparing and submitting legislative recommendations to the F&E Committee. - Comments/recommendations: - The Commission may wish to consider whether its commitment to the IOSCO Objectives should be recognized more explicitly. - The Commission should consider whether to recognize explicitly in its financial statements the separate accountability of the Registrar under Companies Law. - The mission considers the Commission should review the practice of regulating offers of interests in securitization and certain other securities under the Borrowing Control Law and consider whether more explicit powers are desirable. - Assessment: Implemented. - Principle 2 (Operational independence and accountability): - The Commission is established by statute; Commissioners are appointed by the States from persons nominated by the F&E Committee with intended balance among industry, users and public interest. - Commissioners act in a non-executive capacity except the director general; appointment procedures reviewed by the Jersey Appointments Commission. - The Commission may delegate functions; delegation is subject to reporting to the Board. - Remuneration for Commissioners is based on independent advice; disclosure rules for interests and withdrawal from deliberations exist. - The F&E Committee may dismiss a Commissioner for specified reasons (absent for more than six consecutive months without permission; bankrupt; incapacitated; otherwise unable or unfit). - Funding: statute allows fees, charges or government grants; in practice funded by fees and charges payable by the financial services industry. - Accountability: the Commission reports annually through the F&E Committee to the States, presenting plans, budget, objectives and performance indicators; aggrieved persons may appeal Commission registration decisions to the royal court of Jersey on unreasonableness grounds. - Two matters raised: - Article 11 of the FSCL allows the F&E Committee to give guidance or written general directions on policies to be followed by the Commission; the Committee has never done so, but the mission recommends review of whether such a power should be available and, if retained, that its exercise be public and subject to public accountability. - Article 18 requires the Commission to pay each year into the annual income of the States such amount as determined; the mission notes historical practice of levying Registrar of Companies fees that exceed operational needs and that the government is reviewing this matter because it may impact Commission independence. - Assessment: Broadly Implemented. - Recommendation: The Commission should confer with government on the continuing need for Article 11 provisions; the government should complete its review of Article 18. - Principle 3 (Powers, resources and capacity): - The Commission has explicit powers to: - register or refuse to register a person or issue a permit to carry on investment business; - revoke registration or permit; - attach and vary conditions; - issue codes of conduct to establish sound principles for conduct of business; - apply to the Court for appointment of a manager; - object to persons being principal persons or owners of registered persons (including banning); - issue directions requiring actions or omissions in relation to financial services businesses, including cessation of operations or removal/replacement of principal persons; - apply to the Court to make a financial services business subject to supervision, restraint or conditions and seek orders for asset transfer; - issue public statements concerning a person; - require provision of information and documents, conduct Commission investigations and, subject to a warrant by the Bailiff, enter and search premises; - share information with other supervisory authorities; - apply to the Court for an order prohibiting a person from being a director of a company; - request the attorney general’s office to bring prosecutions; and - publish information or give advice on the law including the rights of those provided with financial services and steps to enforce those rights. *Source: cr03369 - 118. The authorities accept that, currently, only trust company businesses are required* ### 2. These powers apply in respect of those who undertake investment business as defined. ### 2. These powers apply in respect of those who undertake investment business as defined. ### Powers, scope, and complementary laws - Powers apply in respect of those who undertake investment business as defined and to the functionaries of CIFs. - Similar powers to grant, refuse and revoke consent, and the ability to attach and vary conditions, are also available under the Borrowing (Control) (Jersey) Law and the Order made under it. - The Borrowing (Control) (Jersey) Law principally regulates: - the raising of money by the issue of securities (including shares) units, or limited partnership interests; - the circulation in Jersey of prospectuses for non-Jersey entities; and - the holding of registers in Jersey for non-Jersey entities. - The Borrowing (Control) (Jersey) Law complements the Companies Law and the CIFL and also applies to structures available to sophisticated and institutional investors, such as SPVs and private equity funds. - In relation to investment products, the Borrowing (Control) (Jersey) Law is principally used to control the issue of securities, units and interests by private collective investment schemes; the majority of these issue debt only to sophisticated investors, and all are restricted to fewer than 50 offers to investors. - The Attorney General has power to bring prosecutions for breach of the Borrowing (Control) (Jersey) Law. ### Commission structure, staffing, and resourcing - The Commission has the following divisions: authorizations, compliance, enforcement, policy and legal, insurance, financial business (to develop a new regulatory regime for trust and company service providers), and support services. - None of these divisions is exclusively responsible for securities and investments work; securities and investments work must be seen in the wider context of the Commission’s work. - The Commission has a current complement of staff of 68. - Some 15 percent of the Commission’s total resource is allocated to investment work. - The Commission supplements resources where appropriate with personnel based in the Channel Islands and U.K., for example the regulatory unit from an accountancy firm for some technical supervisory requirements applying to London Stock Exchange member stockbrokers. - Lawyers and accountants from both inside and outside Jersey are appointed as inspectors to conduct investigations on behalf of the Commission. - The arrangements for the funding of the Commission appear sound and reliable. - Observations on staffing: - Some professional staff seem stretched, some not yet experienced, and there are staff vacancies in the Division. - The forward program of work in the Business Plan 2002–2004 seems robust. - The level of resources available for securities and investment work may be suited to the jurisdiction. - Industry view: The mission met with a number of people in the financial services industry who generally well supported the efforts of the Commission, reinforcing its capacity to perform its functions and exercise its powers effectively as a securities regulator. ### Assessments and observations on powers (Principle 3) - Assessment: Implemented - Mission observations supporting the assessment: 1. Grounds for exercising the Commission’s powers are often expressed in very general terms in the statutes; courts may have difficulty applying them to particular situations, potentially limiting outcomes. 2. The Commission expects the States to consider in 2003 whether to confer on it the power to impose administrative fines; the mission considers this a significant development but still deems Principle 3 complied with in the absence of such powers. 3. The Commission depends on Codes of Practice; statutes provide for these codes and describe their legal effect. Breach of a code provision is not itself a breach of the law, but important administrative consequences can flow from a breach on the initiative of the Commission; codes are a significant supervisory tool. 4. The Commission expects the States to standardize its powers to apply to the Court for restitution on behalf of customers as part of a wider move to standardize law relating to supervision and regulation of the financial sector in Jersey; this is encouraged by the mission. ### Regulatory processes and Codes of Practice (Principle 4) - A Code of Practice has been issued and is in force for investment business (dealers, discretionary investment managers and investment advisers). - The Financial Services Law 1998 empowers the Commission to take action where it has reason to believe a person failed to follow the code, including: - revoking registration; - refusing to register an applicant; - issuing a public statement; or - issuing a written direction. - Equivalent Codes are not yet available for other areas of securities regulation (for example, operators of collective investment schemes), except for managers of recognized CIFs where conduct-of-business-type rules are in subordinate legislation. - Standards set in legislation for Recognized funds are used as a best practice benchmark for supervision of all CIF operators. - The Commission has a program of work to prepare Codes to formalize existing best practice and guidance. - The Commission’s application form for registration and personal questionnaires for principal persons are available on the website and address factors considered in suitability determinations. - Commission policy statements and guidance notes are available on a range of topics including promoters of public and private CIFs, issues of securities under the Borrowing Control Law, management and control of Jersey domiciled funds, eligible markets, outsourcing, and circulation in Jersey of offers originating outside Jersey. - The Commission aims to adopt international best practice following extensive industry consultation. - Appeal rights: Any person aggrieved by a decision of the Commission on designated matters relating to the administration of the Law may appeal to the Court on the grounds the decision was unreasonable having regard to all the circumstances. - The Commission has a stated policy of notifying the subject of an intended action that it is “minded to” take action and giving the subject time to offer information or explanations; subjects are generally offered an opportunity to attend meetings of Commissioners where a decision is to be taken. - Assessment: Partially implemented - Mission recommendation: The Commission should complete its program of preparing Codes of Practice; completion of codes for CIFs would lead to full compliance with Principle 4. ### Professional standards, confidentiality and conflicts of interest (Principle 5) - Confidentiality: - Any person who receives confidential information for the purposes of the law and discloses it other than for a permitted purpose is guilty of a criminal offence and liable to imprisonment for a term not exceeding two years, or a fine, or both. - Conflict of interest procedures for Commissioners: - A Commissioner with a direct or indirect personal interest must disclose the nature of the interest at a meeting in person or by written notice. - The disclosure must be recorded in the minutes. - The Commissioner must withdraw from deliberations and not vote on that matter. - A summary statement of all interests is circulated to all Commissioners and senior executives. - The Commission has produced a policy paper on management of conflicts of interest available on its website. - Staff requirements: - On commencement of employment, every member of staff signs a declaration regarding confidentiality and conflicts of interest. - Three main principles: regulatory action must be unaffected by conflicts; organizational structure kept under review to allow decisions notwithstanding conflicts; staff must not improperly use information received in the Commission’s employment. - The Commission Staff Handbook sets out policies covering confidentiality, conflicts of interest, gifts and hospitality, and expected standards of behavior; a copy of the Handbook is given to each staff member. - Executive staff are restricted from engaging directly or indirectly in any business or transaction. - Mission view: The Commission adheres to and enforces its policies on confidentiality and conflicts. - Assessment: Implemented ### Self-regulation (Principles 6 and 7) - The Commission considers there are no self-regulatory organizations (SROs); the mission agrees and finds no need for SROs. - Assessments: Principle 6 — Not applicable; Principle 7 — Not applicable ### Inspection, investigation, surveillance and enforcement powers (Principles 8 and 9) - Inspection, investigation and surveillance (Principle 8): - The Commission has power to require provision of information and documents reasonably required for its regulatory functions relating to: - the business of a registered or formerly registered person; - the integrity, competence, financial standing, or organization of that person or any principal person, and of any associate; or - compliance by the person with the law and any regulation, order, or Code of Practice. - Power extends to require attendance at the Commission to answer questions. - Power extends to unregistered persons suspected of conducting financial services business or making false or misleading statements. - Any officer or agent of the Commission may, on producing evidence of authority, enter at a reasonable time any premises occupied by a person on whom notice has been served. - The Commission may require commission of a report by an accountant or other approved professional. - The Commission routinely receives prudential information and financial statements and has enforcement powers where information is not received. - The Commission conducts on-site inspection visits to assess adherence to regulatory legislation and best practice; reporting accountants may be requested to address issues of interest. - Auditors or reporting accountants are required to communicate to the Commission circumstances giving reasonable cause to believe: - there are grounds for revoking a registered person’s registration; or - breaches of legal requirements, Codes of Practice or internal controls place investors at significant risk of material loss. - The Commission may appoint competent persons to investigate and report on matters including the nature, conduct, or state of a registered person’s business and compliance with legislation. - In prescribed circumstances the Police may enter and search premises for the purposes of the financial services law, acting on a warrant from the Bailiff. - Equivalent powers apply to those holding permits in respect of CIFs. - Mission view: The Commission has comprehensive inspection, investigation and surveillance powers. - Assessment: Implemented - Mission comment: The Commission regularly conducts on-site inspections and relies on statutory authority to obtain required information; it does not rely on the formal power of entry. The mission believes that the ability to undertake on-site inspections without resort to the formal power of entry should be clearly and unambiguously stated in the Law. - Enforcement powers (Principle 9): - The Court may, on application of the Commission and if satisfied that a person is likely to commit specified breaches, issue an injunction restraining that person where the person is likely to: - undertake unauthorized business; - breach any condition of registration; - provide false or misleading information or fail to provide information; - make misleading, false, or deceptive statements, or dishonestly conceal any material facts; - breach any direction issued by the Commission; or - breach any regulatory law. - The Court may order remedial steps where it is satisfied such steps could remedy the situation. - The Royal Court may make orders placing a registered person or permit holder’s business under supervision, restraint, or conditions where it is satisfied a person is not fit and proper, one of the matters in para 1 applies, or it is desirable for the protection of a person transacting investment business. - The Court may order restitution or steps to restore parties to prior positions where a breach of law occurred by entering into a transaction. - The Commission may apply to the Court for the appointment of a manager where, among other reasons: - inadequate management of the affairs of the business; - the person carrying on the business is not registered; - need to appoint a manager to collect, protect or preserve the assets or records of the business or property of customers; or - failure to comply with a notice of objection by the Commission to a change in principal person. - The Commission may, by notice in writing, give directions to: - require anything to be done or omitted to be done; - require that any principal person be removed or removed and replaced by another person acceptable to the Commission; and - require a registered person or formerly registered person to cease operations. *Assessment and observations are those of the mission and the Commission as set out in the report.* ### 7. The Commission may make public statements about a person. ### 7. The Commission may make public statements about a person. ### Powers, investigative tools, and cooperation with overseas authorities - The Commission may make public statements about a person. - Inspectors may be appointed under the Company Securities (Insider Dealing) (Jersey) Law 1988, with power to summon witnesses and obtain documents and information, for the purpose of investigating insider dealing in Jersey or elsewhere. - At the request of an overseas supervisory authority, the Commission may exercise the following powers for the purpose of assisting in the investigation of an offence committed in Jersey or elsewhere: - power to refuse or revoke a registration; - power to impose, revoke or vary conditions; - power to apply to the Court for an order making an investment business subject to supervision, restraint or conditions; - powers relating to information and documents; - power of investigation; - power of entry and search of premises (through the Bailiff); - power to communicate information which is in its possession, whether or not as a result of the exercise of any of the above powers, where it is satisfied that the authority to which the information is communicated will treat it with appropriate confidentiality. - No trading systems, including stock exchanges, operate in Jersey; accordingly, the Commission has no need for a power to suspend trading. - The Commission depends for the exercise of some powers on the attorney general’s Office and the Court; the relationship between the Commission and the AG’s Office is described as close and effective. - Assessment: Implemented ### Comments and recommended legislative/regulatory reviews - The Commission is scheduled to consider the benefits arising from consolidating the CIFL with the Financial Services Law. The mission considers that this is an opportunity to review the respective roles of the Commission, the attorney general’s Office and the Court in the enforcement of securities and investment laws. - The mission notes the need to account for the needs of the financial community (securities regulatory system, banking, insurance, discretionary trust work) and the level of law enforcement skills available in Jersey (AG’s Office, the Police or elsewhere). - The Commission and the government are looking at possible proposals to empower the Commission to levy administrative fines and the circumstances in which this may be appropriate; the mission recommends that consideration of this matter should continue as a priority. ### Compliance Division — structure, workload, and supervisory approach - The Commission’s Compliance Division undertakes supervisory work on each regulated group, including on site inspections, off-site prudential reporting (monthly, quarterly, or annual returns, audited accounts etc.), and complaint handling. - At the time of the mission’s visit the Compliance Division had a staff establishment of 27 people of which 19 were compliance officers; of these 5 were committed full-time to securities and investment work. - Division vacancies at that time were not in the CIF/investment business area. - The Division staff establishment increased from 27 to 35 people and was expected to increase again to 40 by the end of 2003. - In 1999/2000, the Commission set a target of visiting every licensed person within two years to secure an understanding of all supervised business. Based on that review the Division is developing a framework for a risk based approach to supervision, expecting: - visits on average less often than once every two years for lower-risk entities; and - more rigorous and more intensive inspections in risk situations. - The Divisional Director does not expect any reduction in resources available for the investment business area. - The Commission’s program of work for the financial year is contained in the Commission’s business plan 2002 – 2004. - Over the past two years the Compliance Division has reviewed all institutions’ internal management controls and procedures (corporate governance), staff quality and competence, risk management and AML systems. - Current supervisory scope (Division): - 71 banks; - 169 firms providing services in respect of 368 funds; - 162 firms registered to do investment business. - The Division is assuming responsibility for trust companies and will receive additional resources for this. ### Enforcement Division — role and capacity - The Enforcement Division’s aim is to identify and take enforcement action against regulatory breaches, reacting to information from Compliance Division, other regulators (domestic and overseas), the Police, industry, the public and internet sweeps. - The Commission assists regulators overseas in their investigations, particularly where these involve entities in Jersey. - Enforcement Division complement: 5 professionals. - Some 30 percent of Enforcement Division work relates to investments. - Important enforcement action proposals are referred to the Commissioners; referrals to the attorney general are done with the full authority of the Commission. - Assessment: Broadly implemented ### Mission recommendations on investor protection, disclosure, and advertising - The mission considers that greater emphasis could be placed on offer documents to non-expert investors where these are not currently subject to pre-approval, without increasing total resources committed to investment business. - The mission identifies mis-selling to non-expert investors as the most significant challenge to international confidence in funds management when retail investors are involved. - The Commission should consider whether present supervision procedures optimally contribute to timely, balanced, clear and accurate information in prospectuses and promotional literature of retail products. - The mission notes a discussion paper on regulation of advertising is outstanding and regards this as an important unresolved matter. ### Information sharing, MOUs, and cooperation principles - Principle 11: The regulator should have authority to share both public and nonpublic information with domestic and foreign counterparts. - The Commission may request assistance from relevant overseas regulators. - At the request of an overseas regulator the Commission may exercise powers including refusal/revocation of registration, imposing conditions, intervention (through the Court), obtaining information and documents, investigation, entry (through the Bailiff), and communicating information in its possession. - In deciding whether to exercise powers the Commission may (but does not have to) consider: - whether corresponding assistance would be given to the Commission in the overseas territory; - whether the case concerns breach of a law with no close parallel in Jersey or involves assertion of an unrecognized jurisdiction; - the seriousness of the case and its importance in Jersey and whether assistance could be obtained by other means; - whether it is otherwise appropriate in the public interest to give the assistance sought. - The Commission’s policy is to provide information and documents unless it believes the request is made other than for purposes of financial regulation or supervision; no request has been declined on this ground. - Assessment: Implemented - Principle 12: Regulators should establish information sharing mechanisms that set out when and how they will share both public and nonpublic information with their domestic and foreign counterparts. - The Commission can cooperate with overseas regulators without an MOU and does so, but recognizes the added certainty MOUs provide. - The Commission currently has MOUs in place with thirteen jurisdictions (including the U.K., Germany, France, and the United States) and discussions are ongoing with others including Italy and the Netherlands. - MOUs are based on a proforma document produced by the Forum of European Securities Commissions, establishing scope of assistance, procedures for requesting assistance, permissible uses of information exchanged, and confidentiality. - The Commission is liaising with supervisors to establish whether they have objections to publishing each MOU on the Commission’s web site. - Certain MOUs have been in place for a number of years; the Commission will review and update understandings where appropriate. - The Commission proposes to extend the number of MOUs in place with “home” authorities. - Assessment: Implemented - Principle 13: The regulatory system should allow assistance to be provided to foreign regulators making inquiries. - In 2001 the Commission conducted 70 investigations, of which 6 were at the request of overseas investigators and 9 were matters where the Commission notified other jurisdictions of issues relevant to them. - The Commission considers it has a strong commitment to effective cooperation on supervision, regulation and enforcement that is gaining international recognition. - Assessment: Implemented ### Principles for issuers, disclosure requirements, and company law provisions - Principle 14: There should be full, accurate and timely disclosure of financial results and other information material to investors’ decisions. - Under the Companies (Jersey) Law 1991 and Orders made under the Law no person shall circulate a prospectus in Jersey and no Jersey company shall circulate a prospectus outside Jersey unless: - it contains all material information and all statements required by law, which includes audited financial statements; - a copy has been delivered to the registrar signed by or on behalf of all of the directors of the company, a signed copy of any report included in or attached to it and such other particulars as the registrar may require; and - the registrar has given his consent to the circulation of the prospectus. - The registrar may consent to a prospectus that does not comply in every respect if satisfied that the deviation does not affect the substance and is not calculated to mislead. - These provisions are in addition to the Control of Borrowing (Jersey) Order 1958, which requires the Commission’s consent for circulation in Jersey of overseas prospectuses. - Liability for misleading or untrue statements or omissions in a prospectus: - For securities offered for subscription: compensation from the body corporate issuing the securities and from each person who was a director when the prospectus was circulated; - For securities offered otherwise than for subscription: compensation from the person making the offer and, where that person is a body corporate, from each person who was a director when the prospectus was circulated; - From each person stated in the prospectus as accepting responsibility for the prospectus, but only in respect of statements in or omitted from that part; - From each person who has authorized the contents, or any part, of the prospectus. - All companies are required by law to keep accounting records and to disclose financial and other information to shareholders on an annual basis. - A public company must present audited financial statements to the Registrar of Companies within seven months of its period end; these statements are placed on the public record. - Under the Companies (Jersey) Law 1991 meeting notice periods: - annual general meeting or meeting for passing a special resolution: 21 days’ notice in writing; - other meetings: 14 days’ notice in writing. - Directors’ duties under Companies Law: - act honestly and in good faith with a view to the best interests of the company; - exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. - Companies Law applies to CIFs that are companies; the CIF Law governs regulation of CIFs and empowers the government to make Orders prescribing matters under the Law. Rules have been made about prospectuses, auditors, record keeping and preparation/distribution of periodic reports. Orders are in place for Recognized and Unclassified CIFs. - Investment advisers have responsibility for full, timely and accurate disclosure; Codes of Practice for investment business require investment advisers to provide clients with adequate and fair information that is not misleading, though the mission notes this is not more explicitly addressed in the Code of Practice for Investment Business. - Except for Recognized funds, advertising of public offerings is not currently subject to regulation. The Commission has issued a discussion paper with a view to making possible proposals to government. - The Commission has a power of direction under Article 12 CIF Law and considers it may use this in respect of defective advertising. It is an offence under this law to make a misleading, false or deceptive statement or promise. - Jersey has no secondary market for securities and, accordingly, takes the view that it has no need for laws, codes or rules to cover listings, periodic reports, reports of material events, take-overs, change in control or change of interest holders associated with a publicly traded security. Where securities of Jersey companies are listed or traded elsewhere (U.K., Ireland, Luxembourg, Guernsey), trading and continuous obligations are expected to be subject to the jurisdiction of listing. - The mission noted that timeframes for periodic reporting in law and in terms and conditions of registration or permits do not reflect reasonable needs of stakeholders; specifically the requirement for the annual report to be prepared and distributed should be much shorter than the 7 months or 10 months presently prescribed in some laws or conditions of the Commission. - Assessment: Broadly Implemented - Comments: See Principle 10 ### Shareholder protection and ownership disclosure - Principle 15: Holders of securities in a company should be treated in a fair and equitable manner. - Jersey has no secondary market and therefore considers no need for legislation, codes, or rules to cover listings, continuous reporting, take-overs, or change in control or substantial shareholding interests in a listed company. - Jersey has mature rules of law about companies, investments and intermediaries providing for regulation and supervision of investor rights and orderly transaction of business. - Prospectus rules provide for full disclosure of information about the identity of the promoter and offeror and, in the case of CIFs, the functionaries of a CIF. - The Commission wishes to extend rules about ownership disclosure; current rules require details of changes in beneficial ownership of Jersey tax exempt companies to be filed with the Commission. - The States are expected in 2003 to consider legislative proposals requiring all changes in the legal or beneficial ownership of Jersey companies to be reported to the Commission. - Assessment: Implemented *Source: cr03369 — IMF/OFSIA mission report.* ### 1. Under the Companies (Jersey) Law 1991, public companies are required to publish audited ### cr03369 - 1. Under the Companies (Jersey) Law 1991, public companies are required to publish audited ### Accounting and audit requirements for Jersey public companies - Public companies are required to publish audited financial statements on an annual basis. - Financial statements must be filed with the Registrar of Companies within seven months of a company’s year-end. - The auditors’ report shall state whether in their opinion the financial statements have been properly prepared in accordance with the law and in particular whether a “true and fair” view is given. - Jersey companies will normally adopt GAAP in the United Kingdom and the audit will be conducted on this basis. - Under a Statement of Channel Islands Accounting Practice, it is recognized that the financial statements of companies incorporated other than in the Channel Islands should be drawn up to comply with the standards of the jurisdiction, e.g., United States GAAP, or International Accounting Standards. - The accounting standards adopted will be disclosed in the audit report to the financial statements. - Under the Companies Law, a copy of a company’s latest accounts accompanied by a report thereon by the company’s auditors shall be included in any prospectus. - A person is not qualified for appointment as auditor of a public company unless he is a member of a recognized professional body and is eligible for appointment under the rules of the body as an auditor. Recognized professional bodies listed include: - the Institute of Chartered Accountants in England and Wales; - the Institute of Chartered Accountants of Scotland; - the Association of Chartered Certified Accountants; or - the Institute of Chartered Accountants in Ireland. - Qualified auditors who are members of any one of the above bodies will be subject to the independence rules and audit guidelines established by it and subject to its disciplinary authority. - The Companies Law does not apply in respect of a CIF where the issuer is not a company; the mission notes it is not clear in the time available that financial reporting law applies effectively to other fund vehicles and that the Commission may wish to consider this question further. - As a matter of administrative policy the Commission reviews the financial statements of all CIFs; a checklist is used to perform this review. - The Commission has informed the mission that it has been following developments in other jurisdictions about the authority for accounting and audit standards and the regulation of the accounting profession, although it has not initiated a formal review of these matters. The mission considers this practice should continue. - Assessment: Implemented - Comment: The mission recommends that the Commission should continue to monitor international developments on the authority for financial reporting and audit standards applying to issuers of securities and investment products, whether companies, trusts, partnerships or other vehicles. ### Principles for Collective Investment Schemes (Principles 17–20) - Principle 17: The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme. - When considering an application for a permit to operate under the CIFL, the Commission is required to have regard to: - the protection of the public; - the reputation of Jersey in financial and commercial matters; - the best economic interests of Jersey; - and to this end must consider the function to be performed by the applicant, the reputation of the applicant and the CIF to which his function relates; and - taking into account any other functions there are or may be of the CIF. - The Commission evaluates promoters in terms of reputation, track record, relevant experience and financial resources; promoters will usually be of international stature. - The Commission will take into account to whom the offer of interests will be made from a scale of “very public” to “very private”. For the most public of funds, the promoter will normally be expected to be a member of a group of companies, the ultimate parent of which is publicly listed on a major stock exchange, with no one person controlling more than 15 percent of shares. - The Commission has established criteria for assessing operators of funds and will visit premises of applicants who do not already hold a permit for a similar function; it will also undertake independent enquiries. - Financial resource requirements for the principal operators of Recognized funds are determined by legislation which requires that the operator’s investment position risk requirement be taken into account in the calculation. - For other operators of Recognized funds and for all operators of Unclassified funds, the requirement is for financial solvency and a minimum issued and paid up share capital. - Typical permit conditions include prior approval by the Commission for changes to constitutive documents, functionaries, introduction of new sub-funds, issue of prospectus or similar document, changes to ownership of the functionary; submission of annual and any interim reports and accounts of the fund, the functionary and the ultimate parent; and notification of any change of the auditor or any directors of the functionary. - Operators are subject to ongoing supervision; the Commission has visited all registered persons within the past two years. - The Commission investigates suspected breaches of legislation, reviews permit conditions for operators and takes remedial action in the event of a default. - Operation of collective investment schemes may be carried out by delegates outside Jersey; Commission policy guidance generally: - expects to be able to continue to supervise any transferred function outside of Jersey, including having access to records; - will require management to retain control over outsourced activity; - must be satisfied that the jurisdiction in which the delegate operates has an equivalent standard of regulation and supervision in place to that in Jersey; and - will communicate regularly with the “host” supervisor. - The mission considers that the Commission sets standards for the eligibility and regulation of CIF operators. - Assessment: Implemented - Comment: The mission considers that the Commission should make more explicit reference in its policy and other statements to the importance of the offer and other promotional literature. - Principle 18: Regulation should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets. - Funds established in Jersey take the form of a company, a trust or a limited partnership. - Rules of law are contained in the CIF Law and Orders made under it, also in the Companies Law, Trust Law and Limited Partnership Law. - The relative duties of the operators and the relative rights and duties should be set out in constitutive documents and described in the prospectus. - There are rules of law about the segregation of client assets and these are enforced. They extend to apply to client money. - Assessment: Implemented - Principle 19: Regulation should require disclosure necessary to evaluate suitability of a collective investment scheme and the value of the investor’s interest. - Regulations require that a prospectus is prepared and updated as necessary for both Recognized and Unclassified funds. - The law determines who is responsible for preparing the prospectus and who is liable to compensate investors for false or misleading statements in a prospectus. - Regulations list matters to be addressed in the prospectus and provide for disclosure of any other matters investors and advisers would reasonably expect to be brought fairly to their attention. - Under Article 9 of the CIF Law it is an offence to make a statement or forecast knowing it to be misleading, false or deceptive. - Codes of Practice applying to those registered to do investment business cover the intermediaries’ obligation in respect of suitability of investment products. - Assessment: Implemented - Principle 20: Regulation should ensure proper and disclosed basis for asset valuation and pricing/redemption of units. - Regulations require regular determination of fund value; frequency and methods are determined by constitutive documents and disclosed in the prospectus. - Unclassified funds may operate single-pricing or dual-pricing; recognized funds are only permitted to operate dual-pricing; in either case the price of units must be based upon the net value of the assets. - Where assets are not listed or quoted on a recognized market, value is to be determined by a professional person approved by the depositary. - The depositary is normally required to be satisfied that manager’s measures for valuing the fund and determining prices of units conform with constitutive documents, applicable legislation and the prospectus. - Procedures for redemption or repurchase and circumstances for suspension must be described in the prospectus. - The manager is required to publish sale and repurchase prices of units, together with the amount of any preliminary charge. - Dealing in units may be suspended in exceptional circumstances; investors and the Commission must be notified when a suspension is introduced and when dealing is resumed. Applications made during suspension must be dealt with at prices calculated immediately after the suspension ends unless withdrawn before the suspension ends. - Assessment: Implemented ### Principles for Market Intermediaries (Principles 21–24) - Principle 21: Minimum entry standards for market intermediaries. - All intermediaries conducting investment business are required to be registered under the FSL. - Requirements before registration include: - minimum capital requirements; - professional indemnity insurance; - minimum qualification levels of employees; - segregation of clients assets; and - maintenance of adequate financial resources and adequate risk management systems. - Registered persons are expected to deal with the Commission in an open and cooperative manner and to advise the Commission promptly of matters affecting registration or interests of investors. - The Commission undertakes checks on all principal persons of the applicant, including major shareholders, directors and any person who may influence the business. - Assessment: Implemented - Principle 22: Initial and ongoing capital and prudential requirements reflecting risks. - Minimum capital levels are required under the law, together with adequate professional indemnity insurance. - Entities are required to calculate exposures to market intermediaries on a daily basis. Certain classes of registered entities are required to notify the Commission of events affecting their liquidity. - Registered entities must on a daily basis make a resource requirement calculation taking into account counterparty and exchange rate exposures; these calculations and any large exposures must be reported to the Commission if figures fall or rise above set levels. - All entities are subject to supervision in accordance with Commission policies. - All entities are required to submit audited annual financial statements to the Commission. - Sanctions are available for failure to meet prudential requirements (see principle 9). - Assessment: Implemented - Principle 23: Standards for internal organization and operational conduct. - All entities are required to follow a Code of Practice covering internal and operational matters, protection of clients’ interests and management of risk. - Day-to-day supervision and management of market intermediaries is the responsibility of named principal persons. - All intermediaries are subject to supervision by the Commission. - Assessment: Implemented - Principle 24: Procedure for dealing with failure of a market intermediary to minimize loss and contain systemic risk. - Where the Commission is satisfied there is sufficient evidence of insufficient resources to continue effective business, the Commission may apply to the Court for the appointment of a manager. - This, together with professional insurance requirements, is expected to minimize potential loss to investors. - No investor compensation scheme is in place (other than for investors in Recognized funds). - The Commission does not have a clear contingency plan for dealing with the failure by market intermediaries; this might include a list of agreed managers from which to select a suitable manager. - The mission does not at present consider that Principle 24 is fully implemented. - Assessment: Partially implemented ### Secondary market, trading systems and market integrity (Principles 25–30) - Principle 25: Establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight. - The Commission considers Principle 25 does not apply. The mission agrees. There are no stock exchanges or trading systems in Jersey. - Assessment: Not applicable - Principles 26–27, 29–30: Ongoing supervision, transparency of trading, management of large exposures, and clearing/settlement oversight. - Assessments: Not applicable - Principle 28: Regulation designed to detect and deter manipulation and other unfair trading practices. - There are a number of brokers registered in Jersey who are also members of the London Stock Exchange or the Channel Islands Stock Exchange in Guernsey; these brokers are supervised by the Commission and by the relevant Stock Exchanges. - Under an agreement with the London Stock Exchange, the Commission carries out enhanced supervision of Stock Exchange member firms in Jersey, supported by U.K. professional firms. - An offence of market manipulation is provided for in the FSL; the Commission has wide-ranging inspection and investigation powers including to obtain written and oral explanations and require production of documents. - These powers can be exercised to assist a relevant supervisory authority; the Commission can communicate information in its possession to that authority subject to safeguards and conditions in the law. - The mission considers that to the extent Principle 28 applies it is implemented. - Assessment: Implemented ### Summary assessments and recommended actions - Table 14 summary counts (Principles Grouped by Assessment Grade): - Implemented: 18 (Principles listed: 1,3,5,8,9,11,12,13,15,16,17,18,19,20,21,22,23,28) - Broadly Implemented: 3 (Principles listed: 2,10,14) - Partially Implemented: 2 (Principles listed: 4,24) - Not Implemented: 0 - Not applicable: 7 (Principles listed: 6,7,25,26,27,29,30) - Recommended actions (selected from the Recommended Plan of Actions): - Principle 1: The Commission may wish to consider, in any review of its statement of responsibilities, whether its commitment to the IOSCO Objectives should be recognized more explicitly. The Commission should consider whether to recognize the statutory accountability of the Registrar of Companies in its annual report or otherwise. The Commission should review the authority under the Borrowing Control (Jersey) Law 1947 by which it regulates the offer of interest in SPVs and certain other investment activity. - Principle 2: The Commission and government should review the authority under which the F&E Committee is empowered to give guidance and directions to the Commission. - The Commission and the government should complete the review of the procedure under which the Commission is required to raise money in excess of its operating needs by the use of its fee powers, for transfer to the government. - The mission recommends that the Commission complete its work to provide Codes of Practice for CIF functionaries. - Principle 9: The Commission and government should review the respective roles of the Commission, government and the Court in the enforcement of the law to ensure optimum outcomes. - Principle 10: The Commission should consider whether to place greater emphasis in the supervision process on ensuring that timely, balanced, clear and accurate information is communicated to investors and prospective investors; time frames for communicating information should be tightened up. The responsibility of the investment adviser in respect of promotional literature should be expressly recognized in the Code of Practice. The mission believes the ability to undertake on-site inspections without resort to a formal power of entry should be clearly and unambiguously stated in the Law. The Commission and the government should complete work on possible proposals to empower the Commission to levy administrative fines and the circumstances in which this may be appropriate. - Principle 16: The Commission should continue to monitor international developments on the authority for financial reporting and audit standards applying to issuers of securities and investment products, whether companies, trusts, partnerships or other vehicles. - Principle 24: The Commission should finalize and disseminate a contingency plan for dealing with the failure of a market intermediary. *The mission assessment and recommendations as contained in the IMF report.* ### 138. The authorities welcome the Fund’s confirmation that Jersey has implemented or ### The authorities welcome the Fund’s confirmation that Jersey has implemented or broadly implemented 21 of the 23 Principles ### Summary of assessment outcome and follow-up - The Fund assessed Jersey as having implemented or broadly implemented 21 of the 23 Principles against which it was assessed. - Two Principles were assessed by the Fund as partially implemented. - For one partially implemented Principle, finalization of Codes of Practice for fund functionaries will result in full compliance; public consultation on these Codes is already underway. - For the other partially implemented Principle, the Commission needs only to formalize its contingency arrangements for dealing with the failure of a market intermediary to comply with the Principle. - Core Principle 2 (CP2) is considered by the Fund to be implemented with respect to accountability. - A consolidated action plan, prepared by the authorities, is appended to Volume I of the assessment. ### Objectives, scope, and commitments (CP1) - Authorities agree there would be advantage in more explicitly committing to international standards beyond IOSCO objectives and principles, to include standards on banking, insurance and defenses against ML and the FT. - Planned actions: - In 2004, the Commission will consider reviewing its guiding principles to emphasize commitment to objectives set by the Basel Committee, IAIS, FATF and IOSCO. - The statutory responsibility of the Registrar of Companies will be recognized in the Commission’s 2003 annual report. - Article 29 of the Companies (Jersey) Law 1991 controls the public offering of securities by Jersey companies. - The Commission controls borrowing (including the issue of equity and debt) by Jersey and non-Jersey entities; the latter control already exceeds international standards and no additional action is proposed or required. ### Independence, accountability, and fees (CP2) - Independence: - The authorities’ response to the question of the Commission’s independence is set out in the general comments on Volume I. - Fee-raising powers: - The Commission is preparing proposals to revise the way Registry fees are set. - Proposed future fee structure (subject to consultation and legislative approval): company registration and annual return fees to consist of two components: Commission-determined administration fees and a government-determined fee which the Commission will collect as agent. - Action to implement such a change was well advanced at the time of the Fund’s assessment. ### Regulatory process and supervisory instruments (CP4, CP8) - Codes of Practice (CP4): - Public consultation on Codes of Practice for fund functionaries is already underway. - Intended finalization of these Codes in 2004. - On-site inspections (CP8): - The Commission has wide information-gathering powers enabling on-site supervisory visits. - The Commission will recommend amending legislation, subject to consultation and legislative approval, to explicitly refer to collection of information through regular supervisory visits. ### Enforcement powers and procedures (CP9) - Civil penalties and administrative fining powers: - The authorities’ response to the recommendation that the Commission be provided with civil monetary penalties and administrative fining powers is in Volume I. - Cooperation with prosecutorial authorities: - The Commission works closely with the Law Officers’ Department in enforcing regulatory legislation. - The Commission will finalize a memorandum of understanding (MOU) with the Attorney General to formalize existing working practices for enforcement of regulatory legislation and management of legislative breaches; development of this MOU was well advanced at the time of the Fund’s assessment. - The Commission’s Enforcement Division will complete a review of its policies and procedures to ensure law enforcement practices remain principled, practical and effective. ### Use of powers, compliance programs, and investor information (CP10) - Communication to investors: - The Commission emphasizes timely, balanced, clear and accurate information to investors and prospective investors. - The Companies (General Provisions) (Jersey) Order 2002 and the CIF (Unclassified Funds) (Prospectuses) (Jersey) Order 1995 control the circulation of prospectuses. - Regulatory reallocation and Codes: - In 2004 the Commission will consult on transferring the regulation of fund functionaries to the FSL, and is already consulting on Codes of Practice for fund functionaries. - Both measures aim to facilitate regulatory focus on promotional literature for retail investment funds. - Supervision priorities: - On-site supervision will focus on communication of information to investors; the Commission’s risk model identifies fund functionaries marketing to retail investors as a higher risk indicator. - In 2003 and 2004, a program of themed on- and off-site work will be carried out based on such information. - Filing deadlines and disclosure: - The Commission will review in 2004 the merits of shortening the filing deadline for financial statements and whether such a shorter deadline should apply to all public companies under the Companies (Jersey) Law 1991 or only to those offering securities to the public, and/or to CIFs through Codes of Practice; any changes proposed would be subject to consultation and legislative approval. - Amendments to Codes of Practice for investment business, more explicitly addressing requirements for disclosure of information to investors, will be issued for consultation. ### Accounting and auditing standards (CP16) - Current legal framework: - Article 104 of the Companies (Jersey) Law 1991 requires companies to prepare accounts in accordance with generally accepted accounting principles; it does not prescribe which principles are “generally accepted” and this is addressed through a Statement of Channel Islands Accounting Practice. - The same law sets qualifications for appointment as auditor. - Planned review in 2004: - The Commission will review which accounting and auditing standards are adopted by issuers and issuers’ auditors respectively, to determine whether they continue to be suitable. - The Commission will review methods of audit supervision adopted in other jurisdictions. - Any proposed changes would be subject to consultation and legislative approval. ### Failure of market intermediary and contingency arrangements (CP24) - Existing powers and procedures: - The Commission already has regulatory powers (appointment of a manager, power to direct, and power of intervention) and procedures (including responsibilities of a manager appointed by the Royal Court) to manage the failure of a regulated entity. - The Commission has used these powers and procedures in recent cases to facilitate the winding up of regulated entities. - Planned formalization: - The Commission will develop existing procedures in 2003 to manage the failure of a regulated institution by formalizing plans, training staff, and ensuring plans are appropriately tailored to the failure of an entity operating in any of the regulated sectors. ### Capacities, codes, and supervisory instruments (CP3, CP9 follow-up) - Application of regulatory legislation: - The authorities do not accept that Jersey’s courts will have difficulty applying regulatory legislation to particular situations. - While legislative grounds for exercising Commission powers may be expressed in general terms, Codes of Practice for trust company business and investment business establish principles for conduct in a “fit and proper” manner. - Codes of Practice rollout: - Codes of Practice have been drafted for deposit-taking, CIF functionaries and for insurance business. - Codes of Practice for fund functionaries and insurance business have already been issued for consultation. - Codes of Practice for deposit-taking business are to be issued for consultation in 2003. - It is intended that all Codes of Practice will be brought into force in 2004, when finalized. - Enforcement powers (CP9): - The authorities’ response to the question of the Commission’s fining powers is in Volume I. ### Detailed assessment against the OGBS Statement of Best Practice for trust and company service providers - Background and methodology: - In August 2002, a Working Group established by the OGBS produced a draft “Statement of Best Practice” (Statement) for trust and company service providers (CSP). - It was agreed with the Commission that the Statement will be used for the assessment of trust and company service providers in Jersey. - Because this is the first use of the Statement in an Offshore Financial Sector Assessment, a methodology was developed for assessment based on the Statement. - Scope of the Statement: - The Statement is drafted to be applicable to trust and company service providers whether or not based in a jurisdiction with a formal licensing and supervisory regime. - Unlike principles for banking, insurance and securities, the Statement does not require that trust and company service providers be licensed or subject to ongoing supervisory or enforcement procedures. - Assessment approach and limitations: - Even though Jersey registers and supervises trust and company service providers, the mission concluded that to ensure consistency with future assessments of other jurisdictions (some without formal licensing/regulation), it was not appropriate to assess regulator independence, accountability, resourcing, licensing, ongoing supervision or enforcement except to the extent necessary to assess compliance with the Best Practice Statement. - The mission made certain assumptions interpreting the Statement. - The Best Practice Statement is expressed as general principles rather than detailed criteria; the mission provided an indication of how Jersey compares with the Statement but did not attempt to provide a specific measure of compliance as it has for Basel, IAIS and IOSCO Principles. - Elements included in the OGBS Best Practice Statement: - Fit-and-proper criteria. - Conduct of business. - The holding and sharing of information. - Cessation of business. - Misleading statements. *Assessment content unit: cr03369 - 138. The authorities welcome the Fund’s confirmation that Jersey has implemented or broadly implemented 21 of the 23 Principles and related follow-up actions and planned reforms as summarized above.* ### 172. The assessment team has, of course, had the opportunity of examining the ### 172. The assessment team has, of course, had the opportunity of examining the ### Definition of Trust and Company Service Business - Trust company business is defined in Article 2(3) of the FSL and covers: - the formation of companies or partnerships; - acting as (or arranging for another to act as) the director of a company; - acting as (or arranging for another to act as) the partner of a partnership; - acting as (or arranging for another to act as) the secretary of a company; - providing a registered office, business or accommodation or correspondence address for a company or partnership; - acting as (or arranging for another to act as) the trustee of an express trust; - acting as nominee shareholder or unit holder for another person. - Exemptions: - Exempted persons divided into two categories: first category exempt from registration but subject to most regulatory and enforcement provisions of the FSL; second category exempted completely (includes persons already regulated by the Commission and liquidators and trustees in bankruptcy). - Persons recognized by the Commission as an experienced personal advisor are in the first exemption category (discussed further in Additional Issues). - Executors and administrators are exempted from registration under the FSL; mission was advised this is intended to cover persons, particularly lawyers, who have traditionally acted in administration of estates of deceased Jersey residents. The exemption is unrestricted and could enable a local service provider to act as executor in the estate of a nonresident. - The Commission does not consider the executor/administrator exemption to be a significant problem in practice. - Recommendations (mission): - Amend the FSL to restrict the executor/administrator exemption. - Broaden the definition of trust company business to specifically include acting as enforcer, protector and custodian (custodians may not always fall within the existing definition; protectors may fall within the definition only if they have the power to appoint a trustee). - Amend the FSL to include provision of trust management and administration services (such persons acting in a fiduciary capacity as trust administrators may not be regulated under the FSL in all circumstances, especially where the trustee is located outside Jersey and not subject to regulation). ### Fit-and-Proper Criteria (Principle 2) - Legal framework and practice: - Article 7 of the FSL enables the Commission to require an applicant for registration as a trust company business to provide such information as it may require in respect of persons who are principal persons in relation to the applicant. - A principal person is a person: - who is a director of the applicant; - who, individually or together with others, holds more than 10 percent of the shares in the applicant; - who, individually or together with others, holds or controls more than 10 percent of the voting power of the applicant; or - who exercises significant influence over the management of the company through his holding in the company. - The Commission requires all principal persons to complete a personal questionnaire; unless completed within the previous five years with no material changes, the personal questionnaire must be completed in long form. - On receipt of the personal questionnaire the Commission: - carries out a police check and checks names against professional body websites, the Commission’s internal databases, the DTI/UK Companies House website (which indicate disqualified Directors), a U.K. based shared regulatory database, and a closed user database run by the Viscount’s Chambers (lists Jersey equivalents of County Court judgments and bankruptcy orders); - for foreign principal persons, equivalent checks are carried out in other countries using commercial intelligence gatherers such as FT profile, 192.com and Equisearch; - takes up inter regulatory references. - Gap identified: - The OGBS Best Practice Statement’s notion of “individuals holding key positions” would appear to include senior management below director level; Article 7 does not specifically extend to senior managers unless they are also directors. - The Codes of Practice require a registered person to ensure senior managers and employees are fit and proper (section 3.1) and that certain percentages of employees in various categories have minimum levels of qualifications and experience specified in the First Schedule to the Codes. - Codes require continuing professional development for trust company business employees. - Recommendations (mission): - Require senior management below director level to complete a long form personal questionnaire. - Amend the FSL to empower the Commission explicitly to seek information concerning key (nondirector) employees, for example by extending the definition of “principal person.” - Bring such nondirector key employees within the scope of Article 11 so the Commission may object on fit and proper grounds to persons becoming or continuing as principal persons. - Enforcement: - Article 8(3) enables the Commission to consider fit and properness of “persons employed by or associated with” the applicant and to revoke a registration or impose sanctions (Article 20(2)(b)) if persons are detrimental in terms of customers’ interests or the reputation of Jersey. - Article 11 permits the Commission to object to a person becoming or continuing as a principal person. - Comment: - The FSL covers persons holding a significant interest and thus exceeds the OGBS Best Practice Statement in that respect. ### Conduct of Business (Principle 3) - Principle and application: - Principle 3 requires providers to exhibit evidence that their business will be or is being conducted in accordance with corporate governance, customer due diligence, conduct of client business, financial soundness, and systems and controls requirements. - Requiring applicants to supply information, documentation and explanations as part of the registration application is consistent with Principle 3 at the application stage. - Licensing and supervision timeline: - The Commission required applications for trust company business licenses to be received by 1 February 2001 and assessed applications during 2001 and 2002. - Pre-authorization compliance inspections were carried out for some 60 trust company businesses. - The Commission’s on-site program for trust company businesses commenced in April 2003. - Annual filing and audit requirements: - The Financial Services (Trust Company Business (Accounts, Audits and Reports)) (Jersey) Order 2000 (“the Accounts Order”) requires every trust company business to file annually a declaration that the registered person: - has complied with the requirements of the FSL, the Orders and the Codes of Practice relevant to the registered person and has maintained proper accounting records and adequate systems to enable the registered person to do so; and - has complied with the requirements of all legislation that relates to ML with which the registered person is required to comply. - The Accounts Order further provides a registered trust company business must furnish annually an auditor’s report in respect of the declaration and any report prepared by an internal or external auditor or by an accountant or consultant that addresses any breakdown or material weakness in the company’s internal control procedures and recommendations for improvement. - The auditor’s report provides negative assurance that during the audit no information was found which would lead to belief that the declaration was made falsely. - On-site monitoring: - For full consistency with the OGBS Best Practice Statement the Commission needs an effective on-site monitoring program; this program commenced in April 2003 and employs three route planners covering trust company business specific issues as well as AML and corporate governance issues. - Transitional firms: - Approximately 30 trust company businesses are operating under transitional registration provisions; most have not yet been registered because the Commission is not fully satisfied they meet registration criteria. - Common deficiencies relate to inadequate span of control; many firms are working actively towards merger under strict timetables imposed by the Commission. - The Commission has given transitional companies limited periods to comply rather than immediate refusal. - Recommendation (mission): - Consider imposing a reasonable final deadline on every outstanding transitional (depending on its circumstances) by which the transitional must meet licensing criteria; trust company businesses that do not comply should be refused registration to bring certainty and enable a proper assessment of consistency with the Best Practice Statement. - Comment: - The Commission’s insistence that existing businesses meet expected standards and avoidance of “grandfathering” substandard firms is credited, though continuing operation of non-compliant transitionals exposes the Commission to reputational risk if a failure occurs. ### Corporate Governance - Scope and standards: - The OGBS Best Practice Statement covers compliance with general standards of corporate governance, FATF Recommendations, relevant financial regulatory standards, relevant domestic statutory obligations and recognized standards in respect of directors and trustees responsibilities. - There are currently no generally accepted international corporate governance standards; OECD Principles apply principally to publicly traded companies. - Regulatory provisions: - Article 8(3)(a) of the FSL enables the Commission to refuse or revoke registration where it is not satisfied as to the structure and organization of the applicant or registered trust company business. - The Codes of Practice set out eight fundamental principles applicable to trust company business; those relating to corporate governance include: - a registered person must organize and control its affairs effectively for the proper performance of its business activities and be able to demonstrate the existence of adequate risk management systems; - a registered person must be transparent in its business arrangements. - Sections 3 and 4 of the Codes expand these functions. - The Commission has span of control requirements covered under systems and procedures. - The Commission’s enforcement powers are sufficient to enable intervention where registered trust company businesses are not applying high corporate governance standards. - Comment: - Given lack of internationally agreed general corporate governance standards, assessment of Jersey’s consistency with this aspect of the Principles is difficult; however, the FSL and the Codes of Conduct provide a sufficient basis for the Commission to ensure consistency once international standards have been agreed. ### Compliance with FATF Recommendations - AML coverage: - The class of persons required to comply with the Money Laundering (Jersey) Order 1999 is set out in the Second Schedule to the Proceeds of Crime (Jersey) Law 1999. The businesses of “providing trusteeship services,” “company formation” and “company administration” are all covered. - Those trust company businesses that fall within the definition in the Proceeds of Crime (Jersey) Law are covered by the Money Laundering (Jersey) Order; that Order, AML guidance notes and primary ML, drugs and terrorism legislation are covered in the AML/CFT Assessment and not considered further here. - Potential gaps: - Certain regulated activities under the FSL do not appear to be subject to the Money Laundering (Jersey) Order, for example: - acting as a partnership formation agent; - arranging for another person to act as a director (assuming that acting as a director falls within the definition of company administration in the Proceeds of Crime Law); - acting as or fulfilling the function of or arranging for another person to act as or fulfill the function of a partner of a partnership; - providing a registered office for a partnership; - providing an accommodation, correspondence or administrative address for a partnership (and possibly a company if it does not fall within the definition of company administration); - arranging for another person to act as trustee of an express trust; and - acting as (or arranging for another) to act as nominee shareholder or unit holder. *Assessment team (mission).* ### Section 3.1.6 of the Codes of Practice provides that all registered persons must comply with the ### Section 3.1.6 of the Codes of Practice provides that all registered persons must comply with the ### AML, regulatory scope, and recommendations - All registered persons must comply with the Proceeds of Crime (Jersey) Law, the Money Laundering (Jersey) Order and follow the standards set out in the AML guidance notes. - The AML provisions applicable to financial services businesses are brought within the regulatory regime, but the regulated activities described are not directly subject to the Proceeds of Crime (Jersey) Order and are therefore wholly outside the criminal sanctions for breaches of the Order. - The definition of financial services business in the Proceeds of Crime Law can be amended by Regulation; recommendation: - Amend the definition to precisely match the definition of trust company business in the FSL to bring all trust company businesses within the criminal regime. ### Compliance with relevant financial regulatory standards and domestic statutory obligations - Best Practice Statement: jurisdictions must require trust and company service providers to comply with any relevant financial regulatory standards. - Principal domestic legislation relevant to trust company businesses: - Companies (Jersey) Law 1991 - Limited Partnerships (Jersey) Law 1994 - Trusts (Jersey) Law 1984 - Sections 3.1.7 to 3.1.11 of the Codes of Practice require registered persons to: - comply with their statutory obligations in Jersey (for Jersey companies) and in the relevant jurisdiction (for companies incorporated outside Jersey); - ensure that they, or those providing company management services, are suitably competent and understand their duties under relevant laws; - have adequate procedures to ensure relevant documentation is subject to legal review where appropriate. - Sections 3.1.13 to 3.1.14 make equivalent provisions for trust service providers. - Filings required under the Accounts Order provide evidence of compliance with relevant domestic statutory obligations. ### Directors’ and trustees’ responsibilities - No generally recognized international standards exist for directors’ and trustees’ responsibilities; duties typically imposed partly by statute and partly by case law. - Companies (Jersey) Law 1991 (Article 74) sets out specific duties for directors; these duties apply equally to trust company businesses when they act as directors and are brought into the regulatory regime by sections 3.1.7 to 3.1.11 of the Codes of Practice. - Trusts (Jersey) Law 1984 imposes duties on trustees (Articles 17 to 19) and liabilities for breach (Articles 26 to 30); these duties apply to trust company businesses when they act as trustees. - Where duties are statutory, Accounts Order filings provide evidence of consistency with domestic obligations; duties imposed through case law may not fall within the phrase “relevant laws,” but this is not considered to undermine consistency with the Best Practice Statement. ### Customer due diligence - Customer due diligence is considered in the AML and CFT sections of the Report. ### Conduct of client business — Best Practice coverage and specific legal provisions - OGBS Best Practice Statement covers: - identification and segregation of clients’ assets; - effective handling of clients’ assets; - maintaining adequate accounting records of clients’ affairs; - maintaining adequate client documentation; - ensuring all transactions/decisions are appropriately authorized and handled by persons with appropriate knowledge, experience and status. - Article 18A of the FSL requires segregation and identification of trust property and any other assets not beneficially owned by the trust company business (defined as “trust company business assets”). - Financial Services (Trust Company Business (Assets – Customer Money)) (Jersey) Order 2000 (the “Customer Money Order” or CMO): - prohibits mixing customer money and other money and using customer money without authority; - requires trust company businesses to reconcile customer monies; - imposes requirements for keeping customer money in a pooled bank account. - Trust company business assets are not subject to audit requirements; however, the declaration filed under the Accounts Order and the auditor’s negative assurance are evidence of compliance with Article 18A and relevant provisions of the CMO. ### Record keeping for clients’ affairs - Section 3.7 of the Codes of Practice requires: - orderly and adequate accounting records are kept; - records are kept in Jersey; - records kept for at least 10 years. - Codes require trust company businesses to understand obligations under legislation relevant to entities for which services are provided (Jersey or elsewhere). - Companies (Jersey) Law 1991 and Trusts (Jersey) Law 1984 contain record-keeping requirements; Money Laundering (Jersey) Order 1999 requires records relating to customer identification and transactions. - Issue identified: ambiguity whether Codes apply to client accounting records; recommendation: - Amend the Codes to explicitly demonstrate full consistency with the OGBS Best Practice Statement concerning records of clients’ affairs, including client documentation. - Article 18A requires identification of trust business assets; Article 2 of the CMO requires adequate records of customer money but does not apply to nonmoney assets. - Recommendation reiterated: amend record keeping requirements in the Code to clearly state application to records of clients’ affairs, including client documentation. ### Authorization, conflicts, and handling of client affairs - OGBS Best Practice Statement covers proper exercise of discretion, conflict of interest handling, and expeditious handling of client business. - Codes of Practice provisions demonstrating consistency: - introduction of categories of employees with specific qualification requirements and role indicators to ensure competent staff; - requirements for apportionment of responsibility, supervision of employees and signatory requirements (paragraphs 3.1.3 and 3.1.4); - requirement in section 3 for high levels of competence of staff; - section 2 requirements that discretion be exercised for a proper purpose and on the basis of adequate information; - section 2 requirements to avoid conflicts or address them through disclosure/internal “Chinese walls”; - section 2 requirement to withdraw services in a timely manner where appropriate; - section 3 requirement to arrange affairs for proper performance and section 2 requirement to transact business expeditiously; - section 3.1.4 requirement for procedures governing sole, dual or multiple authorizations for handling trust company business assets. - Filings under the Accounts Order provide evidence of compliance. - Breach of the Codes of Practice is a ground for revocation of registration of a trust company business. ### Financial soundness — standards and requirements - OGBS Best Practice Statement covers: - maintaining adequate and orderly accounting records of business and clients’ affairs; - maintaining adequate financial resources including paid up capital and liquid capital; - compliance with relevant financial regulatory standards; - compliance with international accounting standards; - maintaining adequate professional indemnity cover. - FSL and Accounts Order impose requirements on registered persons consistent with the Best Practice Statement for the affairs of the trust company business. Key numeric and procedural requirements: - Article 8 of the Law: Commission must be satisfied initially and on an ongoing basis that the registered person is of adequate financial standing. - Section 5 of the Codes of Practice defines adequate financial resources as: - (a) a minimum of £25,000 paid up share capital (or evidenced net assets for non-incorporated entities); and - (b) a surplus of Adjusted Net Liquid Assets over Expenditure Requirements calculated in accordance with the Second Schedule to the Code. - Liquidity calculation requires demonstration of three months rolling expenses available as liquid capital. - Trust company businesses must undertake a liquidity calculation at least once in every three months. - Alternative to liquidity calculation: place a deposit of an equivalent amount under lien to the Commission or provide an irrevocable bank guarantee. - Different provisions apply for affiliation members. - Commission may raise capital requirements generally or for a particular trust company business by imposing a license condition. - No international standards/best practices exist regarding amount of capital and liquidity appropriate for trust and company service providers; mission unable to comment on reasonableness. - Principal mechanism to evidence compliance with financial regulatory standards: FSL requirement to submit audited accounts annually. - Section 6 of the Codes requires every trust company business to notify the Commission of any significant event rendering the registered person unable to comply with the Codes; failure to meet liquidity requirements would be such an event. ### Accounting standards and professional indemnity insurance - Article 8 (5) of the Accounts Order requires financial statements of a trust company business to be prepared in accordance with U.K. Accounting Standards issued by the U.K. Accounting Standards Board. - Section 5(4) of the Codes of Practice requires all trust company businesses to maintain minimum levels of professional indemnity insurance (PII); PII must include fidelity guarantee and director’s and officer’s insurance. - Minimum PII cover required is the greater of: - (a) three times relevant fees and Commissions; - (b) thirty times relevant fees and Commissions from the single largest customer of the registered trust company business; - (c) £5,000,000 for each and every claim; subject to a maximum of £10,000,000 for each and every claim. - No international PII standards exist for trust and company service providers; mission unable to comment on reasonableness. ### Systems and procedures — compliance functions, reporting, complaints, records, manuals, and control - OGBS Best Practice Statement covers: - effective compliance functions; - effective reporting requirements; - effective complaints handling system; - maintenance of adequate and orderly records; - maintenance of a policy and procedures manual; - ensuring an adequate span of control; - ensuring minimum levels of qualifications and relevant experience; - ensuring professional development requirements are met; - ensuring full understanding of duties arising under laws relevant to client entities. - Effective compliance functions: - Section 3.1.4 requires every trust company business to appoint a compliance officer; section 3.5 sets out compliance officer responsibilities. - Commission must be advised of any proposed change in the compliance officer and receive a completed personal questionnaire for the new compliance officer. - Compliance officer must report directly to the Jersey management Board unless the Commission permits otherwise. - Declaration under the Accounts Order, supported by negative audit assurance, provides evidence whether adequate compliance procedures exist. - Mission considers Codes consistent with OGBS Best Practice Statement in this regard. - Effective reporting requirements: - Best Practice Statement expects designation of an appropriately skilled and experienced AML reporting officer. - Proceeds of Crime (Jersey) Order requires every financial services business to appoint a MLRO. - The definition of financial services business in the Proceeds of Crime (Jersey) Law does not include all trust company businesses; Codes require every trust company business to comply with the Money Laundering (Jersey) Order, thus imposing a regulatory requirement to appoint a MLRO. - Recommendation: amend the definition of “financial services business” in the Second Schedule to the Proceeds of Crime (Jersey) Law to bring all trust company businesses within the criminal regime. - Complaints handling: - Section 3.6 requires trust company businesses to establish “effective complaints handling systems and procedures” and maintain an adequate record of complaints including a central register. - Trust company businesses must notify the Commission if a complaint is not satisfactorily resolved within 3 months. - Accounts Order declaration with negative audit assurance provides evidence of an effective complaints handling system; consistency with OGBS Best Practice Statement affirmed. - Maintenance of adequate and orderly records: - Covered by Section 3.7; discussed under “Conduct of Client Business” above. - Policy and procedures manual: - Section 3.1 requires effective systems and procedures but contains no specific requirement to maintain a policy and procedures manual. - Concern: the Accounts Order declaration and auditor’s negative assurance may not cover maintenance of a policy and procedures manual. - Recommendation: amend the Codes of Practice to require all trust company businesses to prepare and maintain a policy and procedures manual. - Ensuring an adequate span of control: - Addressed by other Code provisions on apportionment of responsibility, supervision, signatory requirements, and staff competence. *Source: the mission’s Report.* ### Section 3.2 of the Codes of Practice requires trust company businesses to satisfy the ### cr03369 - Section 3.2 of the Codes of Practice requires trust company businesses to satisfy the ### Span of Control - Section 3.2 of the Codes of Practice requires trust company businesses to satisfy the Commission that they have an adequate span of control appropriate to their business. - Trust company businesses that are entitled to control trust company business assets are required to be controlled by at least three appropriately skilled and experienced individuals. - The Commission has produced a Guidance Note on span of control. - Ensuring that applicants for registration as a trust company business have adequate spans of control has been a major focus of the registration process. - The reason for the nonregistration of many of the transitionals is their failure to satisfy the Commission that they have an adequate span of control. - The Codes of Practice are considered to adequately cover span of control. - The Accounts Order declaration, auditor’s negative assurance and on-site inspections will provide evidence that registered trust company businesses have the necessary spans of control in place. - Over 90 percent of the volume of this business sector has now been licensed. - An effective on-site monitoring program is required for full consistency with the OGBS Best Practice Statement; a program will be implemented shortly. ### Ensuring Qualifications, Experience and Professional Development - Ensuring Minimum Levels of Qualifications and Relevant Experience: This has already been covered above. - Ensuring that Professional Development Requirements are Met: This has already been covered above. - Ensuring a Full Understanding of the Duties Arising Under the Laws Relevant to the Affairs of Client Corporate Vehicles, Trusts and Other Legal Entities for which Trust Companies are Acting: This has already been covered above. ### Holding and Sharing of Information (Principle 4) - Principle description covers availability of information on ultimate beneficial owners/controllers and trustees, settlor, protector/beneficiaries; monitoring changes of client control/ownership; mechanisms for information access by relevant authorities; barriers to information flow; location of client information. - Companies (Jersey) Law does not permit bearer shares. - By virtue of the Control of Borrowing and taxation legislation, the Commission maintains a record of the beneficial owner of all companies (which is regularly updated for tax concession companies). This exceeds Best Practice Standards. - Cooperation with foreign supervisors (called relevant supervisory authorities) is provided for under section 33 of the FSL. - Article 33 of the FSL permits the Commission, to assist a foreign supervisor, to: - (a) exercise its powers under Article 29 of the FSL to require a registered person, a formerly registered person or a principal person in relation to a registered person (or an associate of a principal person) to provide the Commission with information, documents and explanations as provided for in the Article; - (b) appoint a competent person under Article 30 of the FSL to investigate a registered person; and - (c) apply to the Bailiff for a warrant to enter and search premises under Article 31 of the FSL. - Article 33 gives the Commission the power to communicate any information in its possession to a foreign supervisor. - The Commission may communicate information to a foreign supervisor whether or not the foreign supervisor has requested assistance; assistance under Articles 29, 30 and 31 requires a request by the foreign supervisor. - The Commission must be satisfied that the assistance is required by the foreign supervisor in the exercise of one or more of its supervisory functions. - The FSL provides guidance on factors to consider in deciding whether to assist a foreign supervisor, including whether assistance would be reciprocated in the foreign country, whether the case concerns a possible breach of law or other requirement that has no close parallel in Jersey or involves assertion of a jurisdiction not recognized in Jersey, and whether it is in the public interest to give assistance. - The Commission has very broad powers to assist a foreign supervisor by gathering information for it and communicating information to it. - The ability to exchange information for the purposes of criminal investigations is considered generally in the AML section. - Section 3.7 of the Codes of Practice imposes record keeping requirements on trust company businesses: records subject to the section must be kept in the Bailiwick of Jersey and must be retained for at least 10 years. - It is recommended that the Code be amended to clarify beyond doubt that this section applies to customer records and that the 10 year retention period is applicable to trust company businesses, notwithstanding that the period specified in the AML (Jersey) Order is five years. - The FSL provides that the Commission shall not communicate information to a foreign supervisor unless it is satisfied that the foreign supervisor will treat the information with “appropriate confidentiality”; the meaning of “appropriate” is unclear but is to be determined by the Commission. ### Audit and Compliance Reviews (Principle 5) - The Accounts Order covers keeping of accounting records, preparation of financial statements and general audit provisions. - Specific provisions of the Accounts Order: - (a) Article 4 requires every trust company business to appoint an auditor approved by the Commission and provides that a trust company business may not change its auditor without the consent of the Commission. - (b) Article 2 requires a trust company business to notify the Commission of its accounting period (which may not be changed without the Commission’s approval). - (c) Article 5 requires a trust company business to have its financial statements audited by its auditor and to provide its auditor with access to records and such information and explanations as the auditor needs. - (d) Article 7 provides that the audit must be conducted and the audit report prepared in accordance with the Auditing Standards issued by the Auditing Practices Board. - (e) Article 8(5) requires the financial statements of a trust company to be prepared in accordance with U.K. Accounting Standards issued by the U.K. Accounting Standards Board. - (f) Article 8 requires a trust company business to furnish the Commission with its audited financial statements within 4 months of the end of the accounting period (the Commission may extend this period by up to a further 4 months). - (g) Article 9 makes provision for consolidated financial statements. - (h) Article 11 specifies the circumstances that trigger the “whistle blowing” provisions contained in Article 16 of the FSL. - Article 16 of the FSL protects an auditor from breach of any duty where, in good faith, he reports any matter to the Commission pursuant to his whistle blowing obligations. - The Commission has issued guidance notes on “The Auditing of Persons Conducting Financial Services Business” and on the Commission’s interpretation and application of the Accounts Order. - Sections 113 to 113E of the Companies (Jersey) Law provide for the qualifications of auditors and apply in respect of auditors of public companies and auditors of private companies where articles require an audit or a resolution in general meeting provides for such a requirement. - There is no requirement for trust company businesses to have an internal audit function; the Code of Practice indicates the Commission will “take comfort” from those trust company businesses that have one. Where internal audit reports are prepared, copies must be made available to external auditors and (if required) to the Commission. - Compliance reviews: - Every trust company business must appoint a compliance officer. - Compliance officer responsibilities include ensuring robust arrangements for compliance with the Law, Orders and Codes of Practice, and ensuring appropriate monitoring of operational performances and prompt remedial action for deficiencies. - The Codes of Practice provide an adequate legal framework for internal compliance reviews; it is too early to conclude whether implementation is effective. - External compliance reviews will be undertaken by the Commission through on-site inspection visits. - The Commission’s on-site program for trust company businesses commenced in April 2003 following completion of most of the licensing process. ### Cessation of Business and Misleading Statements (Principle 6) - Cessation of Business: - Article 10A of the FSL enables the Commission to apply to the Court for the appointment of a manager of a trust company business, whether registered or not. - The Financial Services (Jersey) (Appointment of a Manager) Order 2000 specifies circumstances for appointment of a manager, generally relating to failings of management, and specifically covers the situation where a trust company business ceases business but has failed to close or transfer business in an orderly manner. - Article 20 (power to issue directions) could be used to achieve an orderly cessation of business. - The Commission can petition the Court for the winding up of a trust company if necessary. - Misleading Statements: - Article 27 of the FSL prohibits any person from making false or misleading, or reckless, statements, or engaging in similar practices, the purpose of which is to induce another person to buy or sell financial services. - Article 28 of the FSL facilitates an Order to prescribe standards of advertising; an Order has been drafted and is undergoing consultation with stakeholders and is expected to be in force in 2003. - The definition of “advertisement” in the Law includes letters and conversations as well as published advertisements. - Articles 29 and 30 of the Law make it an offence for any person to mislead the Commission in the course of their duties. - Section 6 of the Codes of Practice requires trust company businesses to demonstrate candor in their relationship with the Commission and places various disclosure requirements on them. - Article 8 of the FSL requires that a registered person, and its principals, maintain their integrity on an initial and ongoing basis. ### Action Plan (Selected recommendations) and Authorities’ response - Action Plan: Definition of Trust and Company Service Business (Principle 1) - The FSL should be amended to restrict the exclusion of executors and administrators from the definition of “trust company business” so that it is not possible for offshore trust business to be undertaken by Jersey trust service providers as executors. - The FSL should be amended to extend the definition of “trust company business” to specifically include enforcers, protectors and custodians and trust management and administration services. - Fit-and-proper criteria (Principle 2) - Key employees (below director level) of an applicant for registration should be required to complete a personal questionnaire; for fit and proper purposes, the Commission should treat key employees (below director level) of registered trust company businesses as directors. - Amend provisions to explicitly empower the Commission to seek information from applicants concerning their key (nondirector) employees, potentially by extending the definition of “principal person.” - The FSL should be amended to bring key employees within the scope of Article 11 so the Commission has formal powers to object to a person becoming a key employee, possibly by bringing key employees within the definition of “principal person.” - Conduct of Business (Principle 3) - The Commission should consider imposing a reasonable final deadline on every outstanding transitional trust company business before which the transitional will have to meet the licensing criteria. - The definition of financial services business in the Second Schedule of the Proceeds of Crime (Jersey) Law 1999 should be extended to include all trust company businesses, potentially by incorporating the FSL definition into the Law. - Record-keeping requirements in the Codes of Practice (section 3.7) should be amended to clearly state they apply to records of clients’ affairs, including client documentation. - The Code of Practice should be amended to impose a specific requirement on trust company businesses to maintain a policy and procedures manual. - Authorities’ response (overview) - The authorities welcome confirmation that Jersey’s regulatory and supervisory framework for trust company business is consistent with the OGBS Statement of Best Practice and, in some respects, exceeds those practices. - Approximately 230 trust company businesses were considered for registration; the process has been substantially completed. Remaining transitional applicants are subject to regulatory action or have committed to cease trust company business or resolve issues prior to licensing. - A consolidated action plan, prepared by the authorities, is appended to Volume I of the assessment. - The Commission will continue to review the scope of regulated activities, including the definition of trust company business, taking into account international standards and risks from nonregulated activities. - The Commission will review extending the definition of “principal” person to include ML reporting and compliance officers and other key post-holders; proposed changes would be subject to consultation and legislative approval. - Subject to consultation, Codes of Practice will be amended to refer explicitly to record-keeping requirements for customers’ and clients’ records and to require maintenance of a policy and procedures manual. - Subject to consultation and legislative approval, an amendment to the Second Schedule of the Proceeds of Crime (Jersey) Law 1999 will be brought forward to extend the scope of the Money Laundering (Jersey) Order 1999 so it covers all trust company business regulated under the FSL. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr03369.pdf_