## ASSESSMENT OF THE SUPERVISION AND REGULATION OF THE FINANCIAL SECTOR ## Source details **Canonical URL:** [ASSESSMENT OF THE SUPERVISION AND REGULATION OF THE FINANCIAL SECTOR](https://www.imf.org/-/media/files/publications/ofca/english/cr03371.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr03371.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr03371.pdf.json) --- ### Executive summary and mission - The International Monetary Fund (IMF) mission (MAE-led) visited Montserrat from October 21 to November 1, 2002 to assess offshore financial sector supervisory arrangements as a Module 2 offshore financial center assessment. - Mission leadership and team: Mr. Manuel Vasquez (MAE, mission leader), Ms. Margaret Cotter (LEG), Mr. Anthony Maxwell (Banking Advisor), Mr. Timothy Sullivan (Banking Advisor), Ms. Candice Huggins (AML/CFT Advisor); Mr. Pierre Lapaque (OAS-CICAD) assessed criminal law enforcement AML/CFT elements. - Report structure: - Volume I: general overview and summary of AML/CFT framework and recommendations. - Volume II: detailed assessments versus the Basel Core Principles (BCP) and the FATF AML/CFT Methodology (October 11, 2002 version). - Key high-level findings: - Montserrat has one of the smallest financial sectors among the six UK Overseas Territories; offshore banking is the dominant financial sector activity. - 11 offshore banks remain, down from 15 in 2000. - Two banks are licensed to operate in the domestic banking sector. - All offshore banks are owned and controlled by Latin American interests. - None of the offshore banks have a meaningful physical presence (mind and management) on the Island enabling comprehensive ongoing supervision by the Financial Services Commission (FSC). - MOUs signed with four regulators from Central and South America and an MOU with the Eastern Caribbean Central Bank (ECCB) in September 2002 to assist FSC supervision; MOUs were not fully implemented at mission time, particularly with respect to onsite inspections. - The FSC was established by law in 2001 and lacks sufficient staff and resources to conduct onsite examinations of offshore banks. - Montserrat is materially non-compliant or non-compliant with most Basel Core Principles, particularly those relating to prudential requirements and supervision; the legal framework for autonomy and supervisory powers is relatively sound regarding licensing and information sharing. - Primary money laundering legislation provides tools for criminalization, freezing and confiscation of proceeds of crime, and for international cooperation; anti-money laundering Regulations and an AML Practice Code exist but require upgrades and stronger implementation. - Only one offshore bank had filed Suspicious Transaction Reports (STRs) to date; the absence of STR filings generally requires investigation by the authorities. - Recommended broad actions: - Issue prudential regulations and guidelines to implement supervisory powers and prudential standards. - Grant the supervisor authority to take a range of remedial actions and clarify enforcement roles between the FSC and ECCB. - Augment acquisition/investment approval requirements and specify accounting and auditing standards. - Fully implement MOUs with overseas supervisors, remove restrictions on access to customer account information in MOUs, and require meaningful physical presence on-island for entities that cannot be effectively supervised offshore. - Strengthen AML/CFT framework implementation: upgrade Regulations and Practice Code, strengthen the Money Laundering Reporting Authority (MLRA), introduce counter-terrorism financing measures consistent with the FATF 8 Special Recommendations, and investigate absence of STRs. ### Financial system overview and economic context - Geography and demography: - Montserrat area: 102 square kilometers (39 square miles). - Population pre-eruption: about 12,000; two-thirds left the Island as a result of volcanic eruptions beginning in 1995. - Population at time of report: about 4,000. - Volcanic impact and reconstruction: - Severe volcanic activity commenced in 1995; Plymouth abandoned in 1997. - The UK government introduced a US$122.8 million three-year aid program to help reconstruct the Island. - About one-half of the Island expected to remain uninhabitable at least for another decade. - Government structure and responsibilities: - Montserrat is an internally-governing British Overseas Territory; the Governor (appointed by the Crown) retains responsibility for internal security, external affairs, defense, the public service and offshore finance. - Executive Council composition: Governor, Chief Minister, three other ministers, Attorney General, Finance Secretary. - Legislative Council: 11 seats (nine popularly elected for five-year terms); Attorney General and Finance Secretary serve as ex-officio members. - Macroeconomic and sectoral statistics (sources: ECCB): - Main economic activities: construction and government services together accounted for about 50 percent of GDP in 2000 (when GDP was EC$76 million). - Banking and insurance together accounted for less than 10 percent of GDP in 2000. - Unemployment rate in 1998: 6 percent. - Currency: Eastern Caribbean Dollar (EC$); exchange rate US$1.00 = EC$2.68 (fixed since 1976). - Membership: Eastern Caribbean Currency Union; Eastern Caribbean Central Bank headquartered in St. Kitts issues the currency. - Estimated Real GDP at factor cost (EC$ millions and Percent change): - 1996: 95.9 (21.5) - 1997: 76.7 (20.0) - 1998: 68.9 (8.6) - 1999: 60.3 (12.5) - 2000: 58.6 (2.8) - 2001: 56.9 (2.9) - 2002: 59.5 4.6 - Historical note: - Real GDP declined from EC$122 million in 1995 to about EC$60 million in 1999, with the decline peaking at -21.5 percent in 1996. - GDP contraction slowed markedly in 2000 and 2001 (each less than 3 percent contraction); 2002 recorded GDP growth of 4.6 percent. ### Financial institutions, markets, and supervisory arrangements - Banking sector structure and presence: - Offshore banks: 11 remaining (down from 15 in 2000). - Domestic banks: 2 licensed to operate in the domestic sector. - Offshore banks are owned and controlled by Latin American interests; during the mission only three offshore banks had opened small offices in Montserrat (two additional offshore banks reportedly opened offices after the mission). - None of the offshore banks had a meaningful physical presence (mind and management) on the Island to enable comprehensive ongoing supervision by the FSC. - Supervisory history and capacity: - Volcanic eruptions effectively suspended offshore sector supervision between 1996 and 1999; bank records became irretrievable and supervision resumed almost from scratch after 1999. - The FSC was established by law in 2001 and commenced putting supervisory arrangements in place for offshore banks. - FSC signed MOUs with four regulators from Central and South America to participate in supervision of offshore banks with affiliates in those regions; at mission time these MOUs were not fully implemented, particularly for onsite inspections. - FSC entered into an MOU with the ECCB in September 2002 under which the ECCB will take the lead supervisory role for specified functions while regulatory authority remains with the FSC and the Governor; prudential regulations still required under the Financial Services Commission Act, 2001 to implement the MOU effectively. - The MOUs with overseas regulators contain restrictions on access to customer account information in three cases; such restrictions will limit overseas regulators’ ability to supervise effectively. - The mission recommended removing restrictions on access to information in MOUs and ensuring that offshore banks that cannot be effectively supervised either establish substantive physical presence on the Island or cease operations. - Supervisory assessment versus Basel Core Principles: - Montserrat is materially non-compliant or non-compliant with most Basel Core Principles, particularly those related to prudential requirements and supervision. - Legal framework for autonomy and supervisory powers is relatively sound in areas such as licensing and information sharing. - Key recommended supervisory measures: - Develop and implement prudential regulations and guidelines setting forth prudential standards. - Grant the supervisor authority to take a range of remedial actions. - Work with the ECCB to ensure expeditious implementation of the MOU and clarify respective roles in enforcement actions. - Augment acquisition/investment approval requirements. - Specify accounting and auditing standards. - Fully implement MOUs with overseas supervisors to enable onsite inspections, including review of compliance with Montserrat’s anti-money laundering laws and Practice Code. - A fuller assessment of compliance with the Basel Core Principles was scheduled to be undertaken as part of an FSAP review of the ECCB during September–October 2003. ### Size and structure of the financial sector (additional details) - Montserrat has the smallest financial sector of the six UK Overseas Territories and, except for banking services, it has the least offshore activity of any of these territories. - Domestic banking sector deposits: - Total deposits at end-2001: around EC$130 million, of which about EC$22 million constituted claims by non-residents. - Foreign currency deposits in the domestic banking sector total about EC$3.5 million. - Offshore company business: less than 50 registered international business companies. - No licensed trust companies; no requirement to register trusts in Montserrat. - No licensed offshore insurance companies; seven foreign insurance companies carry on domestic business. - No identified securities and investment business activity, although there is an Exempt Mutual Funds Act. ### Offshore banking activity, ownership, and statistics - Offshore banks reported total deposits and assets as at June 30, 2002 of US$870.6 million and US$995.7 million, respectively. - All offshore banks are owned and controlled by interests in Latin America (Central America and South America). - None of these banks has a meaningful physical presence on the Island. - At the time of the mission: - Two banks were direct subsidiaries of foreign banks. - Remaining institutions were affiliated through holding company structures, as parallel banks, or were shell institutions. - Footnote detail: Two of these banks are not located/managed in the country of origin. Five of the 11 banks are parallel-owned institutions by holding companies while one is a standalone shell bank. ### Regulatory framework, oversight and market integrity arrangements - Under the constitution the Governor has overall responsibility for the offshore sector; the Governor-in-Council has the power to issue regulations under the Offshore Banking Ordinance. - The Eastern Caribbean Central Bank (ECCB) is responsible for supervising domestic banks and will participate in the supervision of offshore banks through an MOU with the FSC. - Responsibility for supervision of domestic insurance rests with the FSC. Company and trust services also fall under FSC supervision but activity is negligible. - The FSC currently has on its staff one full time supervisor and an administrative assistant. - The Commissioner of the FSC is also the Director of Financial Services in Anguilla; his term of office, which was expected to end in December 2002, continues while steps are underway to find a suitable replacement. - Key legislation: - Offshore Banking Act (OB Act): licensing regime for offshore banks; addresses capital and reserves; restriction on business; returns and accounts; examination and audit; receivership, liquidation, and reorganization; general and administrative matters. - Financial Services Commission Act, 2001 (FSC Act): establishes the FSC; sets forth functions and powers; establishes the position of Commissioner and the Commission’s directors; governance, funding, confidentiality, and power to make regulations; other general and administrative matters. ### Supervisory capacity, MOUs and implementation issues - FSC lacks adequate capacity to conduct comprehensive supervision of offshore banks, particularly routine onsite examinations. - An MOU was signed in September 2002 by the FSC and the ECCB to alleviate supervisory capacity constraints. - FSC has signed supervisory MOUs with four “home” regulators from Central and South America. - Several prudential visits have been made to overseas offices of offshore banks, but none has been subject to onsite inspections; steps to strengthen offsite supervision have only recently been initiated. - Breakdown of offshore banks by country of origin/location and MOU status (as reported): - No. of Banks 2 — Country Panamá — MOU with “Home Supervisor” Yes - No. of Banks 2 — Country Ecuador — MOU with “Home Supervisor” Yes - No. of Banks 3 — Country Costa Rica — MOU with “Home Supervisor” Yes - No. of Banks 3 — Country Guatemala — MOU with “Home Supervisor” Yes - No. of Banks 1 — Country Brazil — MOU with “Home Supervisor” No - Mission urged removal of restrictions on access to customer information contained in three of the MOUs with overseas regulators. ### AML/CFT assessment, findings, and action items - Scope and methodology: - Assessment used the October 11, 2002 version of the AML/CFT Methodology endorsed by the FATF. - Assessment included criminal justice measures and international cooperation elements; Mr. Pierre Lapaque (OAS-CICAD) conducted the criminal law enforcement assessment. - Legislative and regulatory framework: - Primary money laundering legislation provides tools for criminalization, freezing, and confiscation of proceeds of crime, and for international cooperation. - Anti-money laundering Regulations impose broad obligations on financial institutions for customer identification, record-keeping, monitoring and reporting of suspicious transactions. - An AML Practice Code (issued under the Proceeds of Crime Act) gives practical directions for compliance but is not mandatory — the Regulations provide that a court may take the Code into account in determining compliance. - Main AML/CFT findings and implementation gaps: - Significant gaps remain in implementation, particularly in the offshore banking sector, despite progress in developing legislative and regulatory frameworks and severe capacity constraints. - The Regulations and the Practice Code should be upgraded to align with international standards; enhancements in customer due diligence requirements are needed. - The legal role and capacity of the financial intelligence unit (Money Laundering Reporting Authority, MLRA) should be strengthened. - Counter-terrorism financing provisions require introduction and implementation, particularly measures related to the Terrorism Orders and the FATF 8 Special Recommendations. - MOUs that limit access to customer account information weaken AML/CFT efforts; removal of these restrictions and full implementation of MOUs with overseas supervisors and the ECCB are recommended. - Only one offshore bank had filed suspicious activity reports (STRs) to the authorities by the time of the mission; authorities should investigate the absence of STRs from other financial institutions — reporting to overseas competent authorities does not absolve Montserrat-based offshore banks of obligations under Montserrat legislation. - Recommended AML/CFT actions (high level): - Upgrade the anti-money laundering Regulations and streamline the Practice Code. - Strengthen affirmative legal obligations for financial institutions to file STRs. - Strengthen the legal role, capacity, and resourcing of the MLRA/financial intelligence unit. - Introduce and implement counter-terrorism financing measures consistent with the FATF 8 Special Recommendations and the Terrorism Orders. - Ensure MOUs permit access to customer account information necessary for supervision and AML/CFT oversight; implement MOUs to allow onsite inspections of offshore banks. ### On-site and off-site supervision (Basel CP 16 and related findings) - IMF assessment found Montserrat has not commenced a full onsite inspection program for offshore banks and that offsite supervision procedures need strengthening. - Absence of meaningful physical presence ("mind and management") by banks in Montserrat hinders periodic onsite inspections by the FSC and the ECCB. - At least two institutions appeared to meet the definition of "shell" banks; IMF recommended prompt action to either establish real mind and management in Montserrat or to close them down. - ECCB developed draft offsite and onsite supervision processes, but these have not been applied to offshore banks pending MOU implementation. - Through MOUs, the FSC plans to: - initiate a program of joint onsite examinations with four overseas supervisors from Central and South America; - share periodic quarterly bank returns with those overseas supervisors. - Several onsite inspections were carried out under MOUs with parent supervisors; a detailed onsite inspection program covering all banks was planned for 2004. - Restrictions on access to customer account information imposed by three of the MOUs should be removed. - FSC introduced enhanced quarterly reporting requirements for offshore banks, which reportedly improved dialogue with bank management. - ECCB review and reporting based on the quarterly returns was expected to commence in late 2003. - CP 20 (consolidated supervision) was determined by the assessment to be not applicable. ### Information requirements, supervisory scope and enforcement (Basel CPs 17–22, 23–25) - Information and accounting: - FSC needs more control over choice of accounting standards used by supervised entities and scope/standards applied in external and internal audits. - FSC should have the power to revoke the appointment of external auditors (CP 21). - FSC should establish principles and norms regarding consolidation of accounts and accounting techniques (CP 18). - Assessment recommended validation and examination of supervisory reporting, including returns related to capital adequacy (CP 19). - Formal powers and enforcement: - FSC has powers to revoke and suspend a license; impose conditions on licensees; require substitution of directors; appoint official controllers. - FSC currently lacks authority, backed by legal or administrative sanctions, to take a broader range of remedial actions to address problems such as failure to meet prudential requirements and violations of regulations. - Assessment recommended clarifying respective enforcement powers of the FSC and the ECCB under the MOU and granting the FSC a broader range of penalties for non-compliance (CP 22). - Cross-border cooperation: - Appropriate legal provisions exist for cooperating with foreign regulators in supervising local affiliates of foreign banks. - MOUs with four overseas supervisors had been signed pursuant to these cooperation provisions. - Assessment recommended continuing steps, in concert with the ECCB, to ensure MOUs work effectively in practice (CP 25). ### Key recommended actions (excerpted from the recommended action plan) - Responsibilities and Objectives – CP 1(1) - Review need for enabling legislation to allow the ECCB to participate fully in the supervision process, particularly regarding MOU implementation. - Legal Framework – CP 1(4) - Review need to amend the Offshore Banking (OB) Act and the FSC Act to more clearly set out powers to address compliance and safety-and-soundness concerns, including AML/CFT compliance. - Licensing criteria – CP 3 - Augment licensing criteria to cover corporate governance and other issues noted in the assessment. - Investment criteria – CP 5 - Define types and amounts of acquisitions and investments requiring supervisory approval beyond current OB Act provisions. - Prudential areas – CPs 6–14 - Implement appropriate prudential regulations or guidelines for offshore banks, taking into account ECCB regulations for domestic banks and addressing issues noted in the main findings. - Money Laundering – CP 15 - Fully implement MOUs with ECCB and overseas regulators, particularly regarding onsite examinations, and ascertain compliance with Montserrat’s AML/CFT requirements. - On-Site and Off-Site Supervision – CP 16 - Fully implement off-site surveillance and on-site examination processes established through the MOU; address shell bank issues. - Information and enforcement powers – CPs 17–22 - Intensify efforts to understand offshore banks through meetings, surveillance, and examinations; establish consolidation and accounting norms; validate supervisory information; grant supervisor authority to specify accounting standards and to impose a broader range of remedial actions and penalties. - Cross-Border Banking – CP 25 - Continue collaborating with ECCB to ensure cross-border MOUs function effectively in practice. ### Authorities’ response and implementation steps - Authorities’ three main action areas identified with responses: (a) Review and update the Offshore Banking Ordinance - Response: A review of proposed amendments was undertaken and a new draft Offshore Banking Act was drafted to cover most IMF recommendations and align domestic and offshore legislation with BCP regulatory requirements. (b) Issue Regulations and Guidance Notes - Response: In June 2003 the FSC requested CARTAC technical assistance on drafting Regulations and Guidelines; ECCB advised a deadline of end October 2003 for completion and internal review of first drafts. Montserrat set a target date of 31st December to have directions and guidelines ready for consultation and issuance, subject to ECCB and CARTAC meeting their targets. (c) Complete on-site inspections under MOUs - Response: Operational bases and mind and management of offshore banks were located in South and Central America, with operational languages Spanish and in one case Portuguese, complicating local supervision. - Five offshore banks were required to set up offices and maintain records in Montserrat for local inspection by the FSC. - The remaining six offshore banks, apart from one bank, were direct subsidiaries of a domestic bank regulated by the home supervisor. - Inspections of four Montserrat banks were carried out in 2003 under respective MOUs. - IMF recommended all remaining banks be subject to on-site examination as soon as possible; Montserrat intended to put a program in place by December 31, 2003, to be carried out over the subsequent 12 months, involving ECCB technical assistance. ### FATF AML/CFT assessment — main findings and recommendations - Scope and methodology: - FATF 40+8 assessment prepared by a team including IMF staff and independent experts; mission completed on November 1, 2002. - General findings: - Montserrat has a relatively comprehensive legal and institutional AML/CFT framework, particularly on terrorism financing measures, criminalization of offenses, confiscation, international cooperation, and law enforcement and prosecution powers. - Significant impediments to implementation were identified, largely due to resource constraints associated with volcanic eruptions and the absence of an effective supervisory regime for offshore banks. - Criminalization and conventions: - Montserrat depends on UK extensions for treaty ratification. - Vienna Convention provisions implemented in local law; UN International Convention for the Suppression of the Financing of Terrorism not extended to Montserrat; Palermo Convention had not been implemented and the UK was still to ratify and extend it to Montserrat. - Money laundering offense coverage and confiscation: - Money laundering criminalized and extends to proceeds of all serious offences except self-laundering by persons who had also committed domestic drug trafficking offences. - Authorities can freeze property related to ML but only after criminal proceedings have been initiated; for FT-related crimes, ex parte restraint orders can be obtained once a criminal investigation has commenced but before proceedings have been instituted. - Account monitoring orders are available only for terrorist-related offences; assessment recommended enhancing provisions to allow account monitoring and tracing for broader ML investigations. - FIU / Reporting Authority (RA): - Reporting Authority created by law in September 2002 but not yet operational at time of assessment. - Law did not impose a specific duty to receive and analyze suspicious activity reports; no specific provision required reporting institutions to provide additional information to the RA upon request. - In practice, RA forwarded suspicious activity reports to the police or customs and to the UK’s White Collar Crime Investigation Team (WCCT) based in Florida, USA. - Non-mandatory ML Practice Code issued; regulated entities failing to report suspicious transactions could face sanctions including suspension or revocation of licenses. - Authorities planned amendments to broaden RA’s duties, including power to request additional information and to require suspicious activity reports be disclosed to the RA rather than the police for ML and FT matters. - Law enforcement capacity: - Law enforcement powers to compel production of financial records by court order exist; stronger account monitoring and tracing provisions (similar to the UK Proceeds of Crime Act) would enhance investigative powers. - Only two police officers had been trained in basic ML investigation techniques; no specialized prosecutor training on ML had been provided and no training on FT had been provided to police or prosecution staff. - To date no prosecutions for ML or FT had occurred and no property had been seized or confiscated. - International cooperation and extradition: - Law allows Montserrat to provide, on a discretionary basis, a wide range of assistance to foreign authorities in relation to criminal investigations and proceedings. - Compulsory measures allowed under legislation and in particular under an MLAT with the USA. - Law provides for enforcement of foreign confiscation and restraining orders in relation to both ML and FT cases, though for ML cases there is a need for Orders designating jurisdictions whose orders are recognized by Montserrat. - Law does not allow extradition of individuals for ML and FT cases. - Customer due diligence, record keeping and STRs: - ML Regulations require procedures for customer identification but do not create an explicit requirement to identify customers. - Records of customer identification and transactions required to be maintained for five years under the ML Regulations. - ML Regulations and Practice Code do not specifically cover FT issues; neither makes provision for FT in some respects. - ML Regulations do not explicitly require filing of STRs; authorities plan to introduce an affirmative obligation with sanctions. - In practice, very few STRs filed with the RA, indicating possible weakness in compliance. - FATF-related recommended actions (selected): - Consider amending the Drugs Trafficking Offences Act to provide that disclosures to the Reporting Authority (FIU) are not treated as breaches of any restriction on disclosure of information (FATF 1-3). - In conjunction with the United Kingdom, introduce legislative mechanisms to allow for extradition for money laundering and terrorist financing (FATF 1-3; Special recommendations V). - Fully implement a program of supervision of offshore banks for AML/CFT, particularly through onsite inspections, in collaboration with the ECCB and overseas supervisors (FATF 26-29). - Remove the restriction on access to customer account information from MOUs with overseas regulators (FATF 26-29). - Extend ECCB guidelines on correspondent and shell banking relationships to offshore banks (FATF 26-29). - Make the Directive on wire transfers legally binding and issue industry guidelines to assist with implementation (Special recommendations VII). - Consider bringing money remittance firms under the supervision of the FSC or ECCB for CFT purposes (Special recommendations VI). - Introduce in the Practice Code appropriate guidance for offshore banks that deal with offshore shell companies (FATF 22-25). - Medium-term challenges: - Main challenge: implementation of an effective mechanism for verifying compliance with AML/CFT requirements by offshore banks. - MOUs with foreign regulators and the ECCB should help, but practical and legal limitations to full implementation should be resolved, including restriction on access to customer account information. - Need to upgrade FSC staff capacity; volcanic threat to the Island may impede recruitment. ### Operational and capacity priorities identified - FSC capacity and resource shortfalls: - FSC lacks sufficient staff and resources to conduct onsite examinations of offshore banks. - FSC’s MOU with the ECCB (September 2002) intended to alleviate capacity constraints, with ECCB taking a lead supervisory role for specified functions while regulatory authority remains with the FSC and the Governor; prudential regulations under the Financial Services Commission Act, 2001 are required to operationalize the MOU. - Data and supervision continuity concerns: - Volcanic eruptions between 1996 and 1999 resulted in irretrievable bank records and suspension of supervision; supervision effectively restarted after 1999. - Need to ensure overseas regulators participating in consolidated supervision have unrestricted access to information, including customer account information, to enable effective consolidated and onsite supervision. - Critical follow-up actions: - Issue prudential regulations, guidelines, and supervisory manuals. - Expedite staffing, training, and resource allocation for the FSC and MLRA. - Clarify legal and operational enforcement roles between FSC and ECCB, and implement MOUs with overseas supervisors including onsite inspection provisions. - Investigate the absence of STRs and ensure reporting obligations are met by Montserrat-based offshore banks. *International Monetary Fund, Review of Financial Sector Regulation and Supervision — Montserrat, October 2003.* ### 2003. The views expressed in these documents are those of the staff team and do not necessarily reflect ### ASSESSMENT OF THE SUPERVISION AND REGULATION OF THE FINANCIAL SECTOR ### Executive summary and mission - IMF mission (MAE-led) visited Montserrat from October 21 to November 1, 2002 to assess offshore financial sector supervisory arrangements as a Module 2 offshore financial center assessment. - Mission leadership and team: Mr. Manuel Vasquez (MAE, mission leader), Ms. Margaret Cotter (LEG), Mr. Anthony Maxwell (Banking Advisor), Mr. Timothy Sullivan (Banking Advisor), Ms. Candice Huggins (AML/CFT Advisor); Mr. Pierre Lapaque (OAS-CICAD) assessed criminal law enforcement AML/CFT elements. - The report: two volumes—Volume I presents a general overview and summary of AML/CFT framework and recommendations; Volume II contains detailed assessments versus the Basel Core Principles (BCP) and the FATF AML/CFT Methodology (October 11, 2002 version). - Key high-level findings: - Montserrat has one of the smallest financial sectors among the six UK Overseas Territories; offshore banking is the dominant financial sector activity. - 11 offshore banks remain, down from 15 in 2000. - Two banks are licensed to operate in the domestic banking sector. - All offshore banks are owned and controlled by Latin American interests. - None of the offshore banks have a meaningful physical presence (mind and management) on the Island enabling comprehensive ongoing supervision by the Financial Services Commission (FSC). - Memoranda of Understanding (MOUs) have been signed with four regulators from Central and South America and an MOU with the Eastern Caribbean Central Bank (ECCB) in September 2002 to assist FSC supervision; these MOUs were not fully implemented at mission time, particularly with respect to onsite inspections. - The FSC was established by law in 2001 and lacks sufficient staff and resources to conduct onsite examinations of offshore banks. - Montserrat is materially non-compliant or non-compliant with most Basel Core Principles, particularly those relating to prudential requirements and supervision, although the legal framework for autonomy and supervisory powers is relatively sound regarding licensing and information sharing. - The primary money laundering legislation provides tools for criminalization, freezing and confiscation of proceeds of crime, and for international cooperation; anti-money laundering Regulations and an AML Practice Code exist but require upgrades and stronger implementation. - Only one offshore bank has filed Suspicious Transaction Reports (STRs) to date; the absence of STR filings generally requires investigation by the authorities. - Recommended broad actions in the Executive Summary: - Issue prudential regulations and guidelines to implement supervisory powers and prudential standards. - Grant the supervisor authority to take a range of remedial actions and clarify enforcement roles between the FSC and ECCB. - Augment acquisition/investment approval requirements and specify accounting and auditing standards. - Fully implement MOUs with overseas supervisors, remove restrictions on access to customer account information in MOUs, and require meaningful physical presence on-island for entities that cannot be effectively supervised offshore. - Strengthen AML/CFT framework implementation: upgrade Regulations and Practice Code, strengthen the Money Laundering Reporting Authority (MLRA), introduce counter-terrorism financing measures consistent with the FATF 8 Special Recommendations, and investigate absence of STRs. ### Financial system overview and economic context - Geography and demography: - Montserrat area: 102 square kilometers (39 square miles). - Population pre-eruption: about 12,000; two-thirds left the Island as a result of volcanic eruptions beginning in 1995. - Population at time of report: about 4,000. - Volcanic impact and reconstruction: - Severe volcanic activity commenced in 1995; Plymouth abandoned in 1997. - The UK government introduced a US$122.8 million three-year aid program to help reconstruct the Island. - About one-half of the Island expected to remain uninhabitable at least for another decade. - Government structure and responsibilities: - Montserrat is an internally-governing British Overseas Territory; the Governor (appointed by the Crown) retains responsibility for internal security, external affairs, defense, the public service and offshore finance. - Executive Council composition: Governor, Chief Minister, three other ministers, Attorney General, Finance Secretary. - Legislative Council: 11 seats (nine popularly elected for five-year terms); Attorney General and Finance Secretary serve as ex-officio members. - Macroeconomic and sectoral statistics (sources: ECCB): - Main economic activities: construction and government services together accounted for about 50 percent of GDP in 2000 (when GDP was EC$76 million). - Banking and insurance together accounted for less than 10 percent of GDP in 2000. - Unemployment rate in 1998: 6 percent. - Currency: Eastern Caribbean Dollar (EC$); exchange rate US$1.00 = EC$2.68 (fixed since 1976). - Membership: Eastern Caribbean Currency Union; Eastern Caribbean Central Bank headquartered in St. Kitts issues the currency. - Estimated Gross Domestic Product, 1996–2002 (Real GDP at factor cost; EC$ millions and Percent change): - 1996: 95.9 (21.5) - 1997: 76.7 (20.0) - 1998: 68.9 (8.6) - 1999: 60.3 (12.5) - 2000: 58.6 (2.8) - 2001: 56.9 (2.9) - 2002: 59.5 4.6 - Historical notes: - Real GDP declined from EC$122 million in 1995 to about EC$60 million in 1999, with the decline peaking at -21.5 percent in 1996. - GDP contraction slowed markedly in 2000 and 2001 (each less than 3 percent contraction); 2002 recorded GDP growth of 4.6 percent, reversing the previous declining trend. ### Financial institutions, markets, and supervisory arrangements - Banking sector structure and presence: - Offshore banks: 11 remaining (down from 15 in 2000). - Domestic banks: 2 licensed to operate in the domestic sector. - Offshore banks are owned and controlled by Latin American interests; during the mission only three offshore banks had opened small offices in Montserrat (two additional offshore banks reportedly opened offices after the mission). - None of the offshore banks had a meaningful physical presence (mind and management) on the Island to enable comprehensive ongoing supervision by the FSC. - Supervisory history and capacity: - Volcanic eruptions effectively suspended offshore sector supervision between 1996 and 1999; bank records became irretrievable and supervision resumed almost from scratch after 1999. - The Financial Services Commission (FSC) was established by law in 2001 and commenced putting supervisory arrangements in place for offshore banks. - FSC signed MOUs with four regulators from Central and South America to participate in supervision of offshore banks with affiliates in those regions; at mission time these MOUs were not fully implemented, particularly for onsite inspections. - FSC entered into an MOU with the Eastern Caribbean Central Bank (ECCB) in September 2002 under which the ECCB will take the lead supervisory role for specified functions while regulatory authority remains with the FSC and the Governor; prudential regulations still required under the Financial Services Commission Act, 2001 to implement the MOU effectively. - The MOUs with overseas regulators contain restrictions on access to customer account information in three cases; such restrictions will limit overseas regulators’ ability to supervise effectively. - The mission recommended removing restrictions on access to information in MOUs and ensuring that offshore banks that cannot be effectively supervised either establish substantive physical presence on the Island or cease operations. - Supervisory assessment against Basel Core Principles: - Montserrat is materially non-compliant or non-compliant with most Basel Core Principles, particularly those related to prudential requirements and supervision. - The legal framework for autonomy and supervisory powers is relatively sound in areas such as licensing and information sharing. - Key recommended supervisory measures: - Develop and implement prudential regulations and guidelines setting forth prudential standards. - Grant the supervisor authority to take a range of remedial actions. - Work with the ECCB to ensure expeditious implementation of the MOU and clarify respective roles in enforcement actions. - Augment acquisition/investment approval requirements. - Specify accounting and auditing standards. - Fully implement MOUs with overseas supervisors to enable onsite inspections, including review of compliance with Montserrat’s anti-money laundering laws and Practice Code. - A fuller assessment of compliance with the Basel Core Principles was scheduled to be undertaken as part of an FSAP review of the ECCB during September–October 2003. ### AML/CFT assessment, findings, and action items - Scope and Methodology: - The AML/CFT assessment used the October 11, 2002 version of the AML/CFT Methodology endorsed by the Financial Action Task Force (FATF). - The assessment included criminal justice measures and international cooperation elements; Mr. Pierre Lapaque (OAS-CICAD) conducted the criminal law enforcement assessment. - Legislative and regulatory framework: - Primary money laundering legislation provides tools for criminalization, freezing, and confiscation of proceeds of crime, and for international cooperation. - Anti-money laundering Regulations impose broad obligations on financial institutions for customer identification, record-keeping, monitoring and reporting of suspicious transactions; an AML Practice Code (issued under the Proceeds of Crime Act) gives practical directions for compliance but is not mandatory—the Regulations provide that a court may take the Code into account in determining compliance. - Main AML/CFT findings and implementation gaps: - Significant gaps remain in implementation, particularly in the offshore banking sector, despite progress in developing legislative and regulatory frameworks and severe capacity constraints. - The Regulations and the Practice Code should be upgraded to align with international standards; enhancements in customer due diligence requirements are needed. - The legal role and capacity of the financial intelligence unit (Money Laundering Reporting Authority, MLRA) should be strengthened. - Counter-terrorism financing provisions require introduction and implementation, particularly measures related to the Terrorism Orders and the FATF 8 Special Recommendations. - MOUs that limit access to customer account information weaken AML/CFT efforts; removal of these restrictions and full implementation of MOUs with overseas supervisors and the ECCB are recommended. - Only one offshore bank had filed suspicious activity reports (STRs) to the authorities by the time of the mission; authorities should investigate the absence of STRs from other financial institutions—reporting to overseas competent authorities does not absolve Montserrat-based offshore banks of obligations under Montserrat legislation. - Recommended AML/CFT actions (high level): - Upgrade the anti-money laundering Regulations and streamline the Practice Code. - Strengthen affirmative legal obligations for financial institutions to file STRs. - Strengthen the legal role, capacity, and resourcing of the MLRA/financial intelligence unit. - Introduce and implement counter-terrorism financing measures consistent with the FATF 8 Special Recommendations and the Terrorism Orders. - Ensure MOUs permit access to customer account information necessary for supervision and AML/CFT oversight; implement MOUs to allow onsite inspections of offshore banks. ### Operational and capacity priorities identified - FSC capacity and resource shortfalls: - FSC lacks sufficient staff and resources to conduct onsite examinations of offshore banks. - The FSC’s MOU with the ECCB (September 2002) is intended to alleviate capacity constraints, with the ECCB taking a lead supervisory role for specified functions while regulatory authority remains with the FSC and the Governor; prudential regulations under the Financial Services Commission Act, 2001 are required to operationalize the MOU. - Data and supervision continuity concerns: - Volcanic eruptions between 1996 and 1999 resulted in irretrievable bank records and suspension of supervision; supervision effectively restarted after 1999. - The mission emphasized the need to ensure overseas regulators participating in consolidated supervision have unrestricted access to information, including customer account information, to enable effective consolidated and onsite supervision. - Critical follow-up actions: - Issue prudential regulations, guidelines, and supervisory manuals. - Expedite staffing, training, and resource allocation for the FSC and MLRA. - Clarify legal and operational enforcement roles between FSC and ECCB, and implement MOUs with overseas supervisors including onsite inspection provisions. - Investigate the absence of STRs and ensure reporting obligations are met by Montserrat-based offshore banks. *International Monetary Fund, Review of Financial Sector Regulation and Supervision — Montserrat, October 2003.* ### 9. Montserrat has the smallest financial sector of the six UK Overseas Territories and, ### 9. Montserrat has the smallest financial sector of the six UK Overseas Territories and, ### Size and structure of the financial sector - Montserrat has the smallest financial sector of the six UK Overseas Territories and, except for banking services, it has the least offshore activity of any of these territories. - There are 11 licensed offshore banks, down from 15 in 2000. - Two banks are licensed to operate in the domestic market. - Total deposits for the domestic banking sector stood at around EC$130 million at the end of 2001, of which about EC$22 million constituted claims by non-residents. - Foreign currency deposits in the domestic banking sector total about EC$3.5 million. - Offshore company business: less than 50 registered international business companies. - No licensed trust companies; no requirement to register trusts in Montserrat. - No licensed offshore insurance companies; seven foreign insurance companies carry on domestic business. - No identified securities and investment business activity, although there is an Exempt Mutual Funds Act. ### Offshore banking: activity, ownership, and statistics - Offshore banks reported total deposits and assets as at June 30, 2002 of US$870.6 million and US$995.7 million, respectively. - All of the offshore banks are owned and controlled by interests in Latin America (Central America and South America). - None of these banks has a meaningful physical presence on the Island. - At the time of the mission: two banks were direct subsidiaries of foreign banks; remaining institutions were affiliated through holding company structures, as parallel banks, or were shell institutions. - Footnote detail: Two of these banks are not located/managed in the country of origin. Five of the 11 banks are parallel-owned institutions by holding companies while one is a standalone shell bank. ### Regulatory framework, oversight and market integrity arrangements - Under the constitution the Governor has overall responsibility for the offshore sector; the Governor-in-Council has the power to issue regulations under the Offshore Banking Ordinance. - The Eastern Caribbean Central Bank (ECCB) is responsible for supervising domestic banks and will participate in the supervision of offshore banks through a recent MOU with the Financial Services Commission (FSC). - Responsibility for supervision of domestic insurance rests with the FSC. Company and trust services also fall under FSC supervision but activity is negligible. - The FSC currently has on its staff one full time supervisor and an administrative assistant. - The Commissioner of the FSC is also the Director of Financial Services in Anguilla; his term of office, which was expected to end in December 2002, continues while steps are underway to find a suitable replacement. - Key legislation: - Offshore Banking Act (OB Act): licensing regime for offshore banks; addresses capital and reserves; restriction on business; returns and accounts; examination and audit; receivership, liquidation, and reorganization; general and administrative matters. - Financial Services Commission Act, 2001 (FSC Act): establishes the FSC; sets forth functions and powers; establishes the position of Commissioner and the Commission’s directors; governance, funding, confidentiality, and power to make regulations; other general and administrative matters. ### Supervisory capacity, MOUs and implementation issues - The FSC is responsible for supervision but does not have adequate capacity to conduct comprehensive supervision of offshore banks, particularly routine onsite examinations. - An MOU was signed in September 2002 by the FSC and the ECCB to alleviate supervisory capacity constraints. - The FSC has recently signed supervisory MOUs with four “home” regulators from Central and South America. - Several prudential visits have been made to overseas offices of all offshore banks, but none has been subject to onsite inspections; steps to strengthen offsite supervision have only recently been initiated. - Table of offshore banks by country of origin/location and MOU status (as reported): - No. of Banks 2 — Country Panamá — MOU with “Home Supervisor” Yes - No. of Banks 2 — Country Ecuador — MOU with “Home Supervisor” Yes - No. of Banks 3 — Country Costa Rica — MOU with “Home Supervisor” Yes - No. of Banks 3 — Country Guatemala — MOU with “Home Supervisor” Yes - No. of Banks 1 — Country Brazil — MOU with “Home Supervisor” No - The mission urged the authorities to remove the restriction on access to customer information contained in three of the MOUs with overseas regulators to allow effective implementation. ### Anti-money laundering (AML/CFT) framework and implementation - Principal AML legislation includes: - Proceeds of Crime Act - Money Laundering Reporting Authority Act - Drug Trafficking Offences Act - Criminal Justice (International Cooperation) Ordinance - Exchange of Information Act - Regulations - Practice Code on the Prevention of Money Laundering - Anti-Terrorism (Financial and other Measures, Overseas Territories) Order - Progress achieved in the AML/CFT legislative and regulatory framework, but intensified efforts in implementation are required, particularly in the offshore banking sector. - Primary money laundering legislation provides tools for criminalization, freezing and confiscation of the proceeds of crime, and for international cooperation. - AML Regulations impose legal obligations on financial institutions with respect to customer identification, record-keeping, monitoring and reporting of suspicious transactions but require upgrading in a number of areas. - An AML Practice Code has been issued under the Proceeds of Crime Act to give practical directions to assist with compliance with the Regulations (the Code represents good practice but is not mandatory; however, a court may take the Code into account in determining whether a person has complied with the Regulations). - Recommendations: - Full implementation of the MOUs with the ECCB and overseas regulators, particularly regarding supervision of compliance with AML/CFT requirements. - Authorities should review the reasons for the absence of suspicious transaction reports (STRs) submitted by offshore banks and take appropriate action for failure to report. ### Previous reviews and external evaluations - March 1999 UK Government White Paper “Partnership for Progress and Prosperity: Britain and the Overseas Territories" recognized the need to preserve and enhance the Overseas Territories' reputation for honest administration and probity. - KPMG was appointed in December 1999 to assess Overseas Territories' performance against international standards and good practice; KPMG found Montserrat committed to developing its financial services sector and introducing anti-money laundering measures, but highlighted deficiencies related to lack of resources and manpower and recommended remedial action. - January 2000 Caribbean Financial Action Task Force (CFATF) evaluation found Montserrat was not fully compliant with the FATF and CFATF Recommendations, identified vulnerability to money laundering abuse, and recommended raising awareness of money laundering risk and strengthening the supervisory framework; authorities were commended for efforts despite difficult economic conditions. ### IMF assessment of compliance with the Basel Core Principles (CPs) - The assessment is based on Montserrat’s compliance with the Basel Core Principles for Effective Banking Supervision conducted as part of the IMF’s October 2002 Offshore Financial Center—Module 2 assessment, and updated in September 2003 during the ECCB Financial Sector Assessment Program (FSAP). - Scope: regulation and supervision of offshore banks licensed in Montserrat; domestic banking regulation and supervision (ECCB responsibility) reviewed separately as part of the 2003 FSAP. - Purposes of the assessment: - Benchmark the current state of preparations for supervision of Montserrat’s offshore banks, recognizing potential progress through full implementation of the September 2002 MOU with the ECCB. - Suggest further steps to strengthen regulation and supervision of offshore banks and provide input for an action plan to move towards full compliance with the Core Principles. - Methodology: assessment by independent bank supervision experts; examination of legal framework related to offshore banking; review of self-assessment questionnaire completed in 2002; meetings with the Commissioner and selected local agents and bank junior management; review of ECCB draft off-site surveillance and on-site examination procedures for offshore banking (no meetings with ECCB officials and no review of ECCB prudential policies or guidelines). - Main findings: - Montserrat is either materially non-compliant or non-compliant with many Basel Core Principles. - Urgent need to introduce prudential requirements relating to credit and market risks; internal controls; audit and accounting standards. - Offsite surveillance needs enhancement; comprehensive onsite examinations have not been conducted by the FSC. - Acute scarcity of supervisory resources, particularly for onsite inspections. - Problems related to shell and parallel banks and group structures that frustrate consolidated supervision. - Absence of onsite inspections has prevented review of compliance with AML laws and the Practice Code. - Actions taken and planned: - FSC entered into MOUs with the ECCB and with four overseas regulatory agencies to assist supervision; MOUs not fully implemented, particularly for onsite examinations where communication and coordination problems exist. - Three MOUs impose restrictions on access by overseas regulators to customer account information, restricting effective supervision for prudential and AML/CFT purposes. - FSC plans to develop and implement prudential regulations and/or guidelines with ECCB assistance; prudential guidelines on loan classification criteria and provisioning were issued in September 2002. - Representatives from the FSC are aware of weaknesses and are taking steps to enhance offsite supervision; implementation of a program of periodic onsite inspections has not commenced. - Specific assessment areas summarized: - Objectives, autonomy, powers and resources (CP 1): legal and regulatory framework relatively well-developed; need to clarify amendment to the FSC Act to bring the MOU with the ECCB into effect and to establish respective supervisory roles and objectives of the ECCB and the FSC; need to increase and broaden professional and managerial strength of the FSC and enhance supervisory powers. - Licensing and structure (CPs 2–5): provisions on licensing, ownership and permissible activities relatively sound; legal provisions only partly address criteria for judging investment proposals or banks’ capacity to take on major investments or acquisitions; OB Act requires prior FSC approval for investments in certain institutions. - Prudential regulations and requirements (CPs 6–15): lacks effective legal and regulatory provisions and supervisory procedures for key prudential requirements; absence of comprehensive and appropriate prudential regulations or guidelines is the overriding deficiency despite existing legal power for the supervisor to issue regulations; MOU commits FSC to adopt internationally accepted supervisory standards; FSC recognizing deficiencies and addressing them with ECCB assistance; prudential guidelines on loan classification criteria and provisioning issued in September 2002; FSC has not reviewed extent of offshore banks’ compliance with AML legislation and the Practice Code. - Methods of ongoing supervision (CP 16–20): offsite and onsite supervisory methods require enhancement; implementation of periodic onsite inspections has not commenced. *Source: IMF Offshore Financial Center assessment (October 2002; updated September 2003).* ### 37. Montserrat has not yet commenced a full onsite inspection program for offshore ### 37. Montserrat has not yet commenced a full onsite inspection program for offshore banks, and offsite supervision procedures needs to be strengthened ### On-site and off-site supervision (Basel CP 16 and related findings) - The IMF assessment found that Montserrat has not commenced a full onsite inspection program for offshore banks and that offsite supervision procedures need strengthening. - The absence of a meaningful physical presence ("mind and management") by the banks in Montserrat hinders periodic onsite inspections by the Financial Services Commission (FSC) and the Eastern Caribbean Central Bank (ECCB). - At least two institutions were identified as appearing to meet the definition of "shell" banks; the IMF recommended prompt action to either establish real mind and management in Montserrat or to close them down. - The ECCB developed draft offsite and onsite supervision processes, but these have not been applied to offshore banks pending implementation of Memoranda of Understanding (MOU). - Through MOUs, the FSC plans to: - initiate a program of joint onsite examinations with four overseas supervisors from Central and South America; - share periodic quarterly bank returns with those overseas supervisors. - Several onsite inspections were carried out under MOUs with parent supervisors; however, a detailed onsite inspection program covering all banks was planned to be carried out only in 2004. - Restrictions on access to customer account information imposed by three of the MOUs should be removed. - The FSC recently introduced enhanced quarterly reporting requirements for offshore banks, which reportedly improved dialogue with bank management. - ECCB review and reporting based on the quarterly returns was expected to commence in late 2003. - CP 20 (consolidated supervision) was determined by the assessment to be not applicable. ### Information requirements and supervisory scope (Basel CPs 17, 18, 19, 21) - The IMF assessment concluded the FSC needs more control over: - the choice of accounting standards used by supervised entities; - the scope of, and standards to be applied in, external and internal audits. - The FSC should have the power to revoke the appointment of external auditors (CP 21). - The FSC should establish principles and norms regarding consolidation of accounts and the accounting techniques to be used (CP 18). - The assessment recommended provision for validation and examination of supervisory reporting, including returns related to capital adequacy (CP 19). - The assessment recommended intensifying efforts to thoroughly understand offshore banks' activities through frequent meetings with bank management, off-site surveillance, and on-site examinations (CP 17). ### Formal powers of supervision and enforcement (Basel CP 22) - The assessment noted the FSC has powers to: - revoke and suspend a license; - impose conditions on licensees; - require substitution of directors; - appoint official controllers. - However, the FSC currently lacks authority, backed by legal or administrative sanctions against the bank and management, to take a range of remedial actions to address problems such as failure to meet prudential requirements and violations of regulations. - The assessment recommended clarifying the respective enforcement powers of the FSC and the ECCB under the MOU, and granting the FSC a broader range of penalties for non-compliance (CP 22). ### Cross-border banking and MOUs (Basel CPs 23–25) - CPs 23 and 24 were determined to be not applicable by the assessment. - The assessment found appropriate legal provisions exist for cooperating with foreign regulators in supervising local affiliates of foreign banks. - MOUs with four overseas supervisors had been signed pursuant to these cooperation provisions. - The assessment recommended continuing steps, in concert with the ECCB, to ensure MOUs work effectively in practice (CP 25). ### Key recommended actions (excerpted from Table 3—Recommended Action Plan) - Responsibilities and Objectives – CP 1(1) - Review need for enabling legislation to allow the ECCB to participate fully in the supervision process, particularly regarding MOU implementation. - Legal Framework – CP 1(4) - Review need to amend the Offshore Banking (OB) Act and the FSC Act to more clearly set out powers to address compliance and safety-and-soundness concerns, including AML/CFT compliance. - Licensing criteria – CP 3 - Augment licensing criteria to cover corporate governance and other issues noted in the assessment. - Investment criteria – CP 5 - Define types and amounts of acquisitions and investments requiring supervisory approval beyond current OB Act provisions. - Prudential areas – CPs 6–14 - Implement appropriate prudential regulations or guidelines for offshore banks, taking into account ECCB regulations for domestic banks and addressing issues noted in the main findings. - Money Laundering – CP 15 - Fully implement MOUs with ECCB and overseas regulators, particularly regarding onsite examinations, and ascertain compliance with Montserrat’s AML/CFT requirements. - On-Site and Off-Site Supervision – CP 16 - Fully implement off-site surveillance and on-site examination processes established through the MOU; address shell bank issues. - Information and enforcement powers – CPs 17–22 - Intensify efforts to understand offshore banks through meetings, surveillance, and examinations; establish consolidation and accounting norms; validate supervisory information; grant supervisor authority to specify accounting standards and to impose a broader range of remedial actions and penalties. - Cross-Border Banking – CP 25 - Continue collaborating with ECCB to ensure cross-border MOUs function effectively in practice. ### Authorities’ response and implementation steps - The Montserrat Government responded to the IMF assessment as part of a Module 2 Assessment (October 2002) and FSAP discussions in September and October 2003. - The IMF’s offshore BCP experts and the Commissioner of the FSC identified three main action areas: (a) Review and update the Offshore Banking Ordinance - Response: A review of proposed amendments to the Banking Act was undertaken and a new draft Offshore Banking Act was drafted to cover most IMF recommendations and align domestic and offshore legislation with BCP regulatory requirements. (b) Issue Regulations and Guidance Notes - Response: In June 2003 the FSC requested CARTAC technical assistance on drafting Regulations and Guidelines; ECCB advised a deadline of end October 2003 for completion and internal review of first drafts. Montserrat set a target date of 31st December to have directions and guidelines ready for consultation and issuance, subject to ECCB and CARTAC meeting their targets. (c) Complete on-site inspections under MOUs - Response: Operational bases and mind and management of offshore banks were located in South and Central America, with operational languages Spanish and in one case Portuguese, complicating local supervision (as noted by the IMF). - Five offshore banks were required to set up offices and maintain records in Montserrat for local inspection by the FSC. - The remaining six offshore banks, apart from one bank, were direct subsidiaries of a domestic bank regulated by the home supervisor. - Inspections of four Montserrat banks were carried out in 2003 under respective MOUs. - The IMF recommended all remaining banks be subject to on-site examination as soon as possible; Montserrat intended to put a program in place by December 31, 2003, to be carried out over the subsequent 12 months, involving ECCB technical assistance and discussion of Basel Committee issues during 2003. ### FATF AML/CFT assessment—main findings (context and institutional observations) - Scope and methodology - The FATF 40+8 assessment was prepared by a team including IMF staff and independent experts; the mission was completed on November 1, 2002. - General findings - The assessment found Montserrat has a relatively comprehensive legal and institutional AML/CFT framework, particularly on terrorism financing measures, criminalization of offenses, confiscation, international cooperation, and law enforcement and prosecution powers. - Significant impediments to implementation were identified, largely due to resource constraints associated with volcanic eruptions and the absence of an effective supervisory regime for offshore banks. - Criminalization and conventions - Montserrat, as a UK Overseas Territory, depends on UK extensions for treaty ratification. - Montserrat implemented the Vienna Convention provisions in local law; the UN International Convention for the Suppression of the Financing of Terrorism has not been extended to Montserrat, though relatively strong legislative measures were introduced to implement applicable provisions including UN Security Council Resolution 1373. - The Palermo Convention had not been implemented and the UK was still to ratify and extend it to Montserrat. - Money laundering offense coverage - Money laundering is criminalized and extends to proceeds of all serious offences except self-laundering by persons who had also committed domestic drug trafficking offences. - Significant dissuasive penalties exist; ML and FT offences apply to individuals and legal entities and generally to acts committed in Montserrat and in other jurisdictions. - Additional steps were recommended to allow extradition of offenders associated with terrorist financing and money laundering and to comply with FATF Special Recommendations on terrorism finance. Authorities planned to adopt provisions of the UK Proceeds of Crime Act to strengthen the regime. - Confiscation and restraint - Legal provisions for seizure and confiscation of funds derived from or used for financing terrorism are strong. - Authorities can freeze property related to ML but only after criminal proceedings have been initiated; for FT-related crimes, ex parte restraint orders can be obtained once a criminal investigation has commenced but before proceedings have been instituted. - Account monitoring orders are available only for terrorist-related offences; the assessment recommended enhancing provisions to allow account monitoring and tracing orders for broader ML investigations. - Some deficiencies could be remedied by adopting relevant provisions of the new UK Proceeds of Crime Act. - FIU/Reporting Authority (RA) - A financial intelligence unit, the Reporting Authority (RA), was created by law in September 2002 but was not yet operational at the time of the assessment. - The law did not impose a specific duty to receive and analyze suspicious activity reports; no specific provision required reporting institutions to provide additional information to the RA upon request. - For FT cases, suspicious activity reports were to be provided directly to the police or to the Governor. - The RA had access to financial, administrative and law enforcement databases and could disclose information to law enforcement in Montserrat and abroad subject to safeguards. - In practice, the RA forwarded suspicious activity reports to the police or customs and to the UK’s White Collar Crime Investigation Team (WCCT) based in Florida, USA. - A non-mandatory ML Practice Code had been issued to guide reporting entities; regulated entities failing to report suspicious transactions could face sanctions including suspension or revocation of licenses. - Authorities planned to draft amendments to broaden the legal scope of the RA’s duties, including power to request additional information from reporting parties, and to require suspicious activity reports be disclosed to the RA rather than the police for ML and FT matters. Introduction of a tipping-off offence for drugs-related ML was recommended. - Law enforcement considerations: about 20 reports of suspicious activity had been filed by an offshore bank with the FSC and were referred to WCCT due to international connections. - Law enforcement and prosecution capacity - Law enforcement had powers to compel production of financial records by court order; stronger provisions for account monitoring and tracing (similar to the UK Proceeds of Crime Act) would enhance investigative powers. - Law enforcement considerations: only two police officers had been trained in basic ML investigation techniques; no specialized prosecutor training on ML had been provided and no training on FT had been provided to police or prosecution staff. - In practice, police officers were not very familiar with legal frameworks and investigation tools for ML and FT; techniques such as controlled delivery and undercover operations are possible but had not been used. To date no prosecutions for ML or FT had occurred and no property had been seized or confiscated. *IMF assessment and related authorities’ responses as reported in the IMF’s assessment and FSAP discussions.* ### 55. The law allows Montserrat to provide, on a discretionary basis, a wide range of ### 55. The law allows Montserrat to provide, on a discretionary basis, a wide range of ### International cooperation and extradition - The law allows Montserrat to provide, on a discretionary basis, a wide range of assistance to foreign authorities in relation to criminal investigations and proceedings. - Compulsory measures are allowed under the legislation and in particular under an MLAT with the USA. - The law provides for enforcement of foreign confiscation and restraining orders in relation to both ML and FT cases, though for ML cases there is a need for the issue of Orders designating jurisdictions whose orders are recognized by Montserrat. - The Reporting Authority (RA) can share information freely with the Montserrat police and foreign law enforcement authorities. - The police can access Interpol and a regional information sharing network (OTCRIS) to communicate with counterparts in other jurisdictions. - The law does not allow extradition of individuals for ML and FT cases; a drawback to international cooperation. - The Governor is authorized to deport or exclude individuals deemed to be “undesirable.” ### Law enforcement considerations and RA activity - Requests for legal assistance from other countries are very infrequent: approximately one every five years under the MLAT with the USA. - There have been no requests involving ML or FT cases. - Given the low volume of requests, there is no immediate need to maintain statistics and assign staff solely for this purpose. ### Prudentially-regulated sectors and the Financial Services Commission (FSC) - Montserrat has established a Financial Services Commission (FSC) responsible for supervision of financial institutions other than domestic banks and primarily charged with supervision of compliance with AML/CFT requirements. - Significant staff and resource constraints limit the FSC’s ability to effectively supervise offshore banks despite efforts to involve the Eastern Caribbean Central Bank (ECCB) and overseas regulators. - The FSC Act should provide the FSC with appropriate administrative and disciplinary sanctioning authority, in line with those contained in the Anguillian draft FSC Act. - The FSC has supervisory responsibility for offshore banking, insurance, trust and company service providers, investments and asset management services. - The ability of the FSC to supervise for AML/CFT compliance is significantly constrained by the absence of a substantive physical presence by offshore banks in Montserrat. - Full implementation of supervisory MOUs with the ECCB and the four overseas regulators should partly address this limitation, but there is a need to lift restrictions on access to customer account information contained in some MOUs. - There is a need to upgrade staff capacity of the FSC; volcanic threat to the Island may impede recruitment. ### General AML/CFT framework, Regulations and Practice Code - Montserrat has passed anti-money laundering Regulations and a non-mandatory Practice Code issued by the Governor under the ML legislation to give practical guidance to financial institutions for complying with the ML Regulations. - The Practice Code is not mandatory, but the Regulations provide that a court may take it into account in determining whether a person has complied with the Regulations. - The Regulations and Practice Code apply to a wide range of financial institutions but do not specifically cover offshore banks, mutual funds and insurance business by reference to the applicable laws. - Confidentiality and secrecy laws do not inhibit implementation of AML/CFT legislation. - Neither the ML Regulations nor the Practice Code makes provision for FT issues. ### Customer due diligence, monitoring of transactions, and record keeping - The ML Regulations require financial institutions to have procedures for conducting customer identification but do not create an explicit requirement to identify their customers. - Procedures to maintain records of customer identification and transactions for five years are required under the ML Regulations. - Identified planned improvements to the ML Regulations include: - (i) creating an affirmative obligation to conduct customer identification/due diligence and record keeping; - (ii) provisions for internal audit; - (iii) an explicit requirement to retain records of customers and transactions, including for unusual and suspicious transactions. - Authorities plan to introduce in regulations provisions for complying with the FATF 8 Special recommendations particularly those relating to funds (wire) transfers. - Legislative initiatives are planned with respect to money remittance firms which will come under the supervision of the FSC and/or the ECCB. - Recommended actions (selected from the IMF list) include: - Impose an explicit requirement on financial institutions to identify clients and conduct other due diligence (FATF 10-13). - Enhance ML Regulations to prohibit transactions until identification is complete; provide sanctions for failure to identify customers; require verification of identity particularly for legal entities; consider requiring re-verification of existing clients, particularly relevant to offshore banks. - Fully implement MOUs with the ECCB and overseas regulators, especially with respect to examination of offshore banks for compliance with Montserrat AML/CFT customer identification and recordkeeping requirements. - Enhance ML Regulations to specifically require that records are kept for a period longer than five years on request from law enforcement authorities and that they be sufficient to reconstruct transactions and be available for inspection. ### Suspicious activity reporting (STRs) - The ML Regulations provide a framework for filing suspicious activity reports but do not explicitly require the filing of such reports. - The authorities plan to introduce an affirmative obligation in the law with appropriate sanctions for non-compliance. - The Practice Code requires that reports be made promptly but does not give a timeframe by which they are to be submitted to the authorities; it provides general guidelines for monitoring and identifying suspicious ML activity. - In practice, very few STRs have been filed with the RA, indicating a possible weakness in compliance. - No industry guidelines have been issued for FT. - Recommended actions (selected from the IMF list) include: - Introduce an explicit requirement in the ML Regulations to promptly report suspicious transactions and introduce a tipping-off prohibition for drug trafficking money laundering. - Consider integrating the mechanism for reporting of suspicious transactions relating to both ML and FT. - Implement a comprehensive onsite inspection program to ascertain the reason for the absence of reports from most offshore banks. - Introduce in the Practice Code guidelines for the recognition and reporting of suspicious transactions relating to FT. ### Medium-term challenges - Main challenge: implementation of an effective mechanism for verifying compliance with AML/CFT requirements by offshore banks. - MOUs with foreign regulators and the ECCB should help, but practical and legal limitations to full implementation should be resolved, including restriction on access to customer account information. - Need to upgrade FSC staff capacity; volcanic threat to the Island may impede recruitment. ### Summary assessment against the FATF 40+8 Recommendations - Overall assessment: Montserrat’s compliance with the FATF 40+8 Recommendations is relatively strong with respect to the legal framework. - Important improvements required in the area of extradition, the Regulations and the Practice Code. - Adoption of some provisions of the new UK Proceeds of Crime Act would strengthen the legal framework. - Implementation of the Recommendations, particularly those relating to the financial sector, is weak. - Absence of an effective supervisory framework for AML/CFT in the offshore banking sector is of particular concern. - Recommended action highlights (selected, preserving FATF references): - Consider amending the Drugs Trafficking Offences Act to provide that disclosures to the Reporting Authority (FIU) are not treated as breaches of any restriction on disclosure of information (FATF 1-3). - Consider broadening disclosure provisions in the Eastern Caribbean Central Bank Agreement Act to enable the ECCB to disclose information to financial institution supervisors (FATF 1-3). - In conjunction with the United Kingdom, introduce legislative mechanisms to allow for extradition for money laundering and terrorist financing (FATF 1-3; Special recommendations V). - Fully implement a program of supervision of offshore banks for AML/CFT, particularly through onsite inspections, in collaboration with the ECCB and overseas supervisors as appropriate (FATF 26-29). - Remove the restriction on access to customer account information from MOUs with overseas regulators (FATF 26-29). - Extend the ECCB guidelines on correspondent and shell banking relationships to offshore banks (FATF 26-29). - Introduce requirements for financial institutions to give enhanced scrutiny to transactions, particularly wire transfers, with counterparties from jurisdictions with inadequate AML/CFT regimes and provide appropriate guidance in the Practice Code (FATF 20-21). - Make the Directive on wire transfers legally binding and issue industry guidelines to assist with implementation (Special recommendations VII). - Consider bringing money remittance firms under the supervision of the FSC or ECCB for CFT purposes, as appropriate (Special recommendations VI). - Designate by Orders those jurisdictions whose confiscation orders are recognized by Anguilla (FATF 33-35) [note: recommendation text refers to Anguilla in the table]. - Introduce in the Practice Code appropriate guidance for offshore banks that deal with offshore shell companies (FATF 22-25). ### Other recommended actions and law enforcement capacity building - Enhance training for law enforcement officers, particularly on ML and FT trends and typologies. - The IMF recommends that the Money Laundering Reporting Authority should take on a more centralized structure and that Montserrat should develop more in-house investigative expertise; Montserrat is reviewing this requirement within its limited resources. ### Authorities’ response - Montserrat agreed to be assessed under the new AML/CFT Methodology document introduced shortly before the IMF assessment and accepted a number of IMF AML/CFT recommendations. - Montserrat noted that its existing Proceeds of Crime legislation and Anti-Money Laundering Regulations and Guidance Notes were largely drafted on similar UK legislation in place at the time. - Since then the UK has adopted a new Proceeds of Crime Act; proposed adoption by Montserrat of a number of new measures contained in that new Act should go a long way to meeting IMF legal and institutional recommendations. - The IMF recommends transferring a number of provisions from Guidance Notes into existing Regulations to give them more force of law; Montserrat has identified these provisions and the Regulations are being amended accordingly. - A number of other minor recommendations concerning Montserrat’s AML Regulations are also being included. - The FATF has issued revised 40 Recommendations since the IMF Report; these are to be reviewed in conjunction with Montserrat’s existing and proposed AML Legislation and Regulations. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr03371.pdf_