## cr04271 — IMF Module II offshore financial center assessment of the Netherlands Antilles

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### Assessment scope, mission, and contacts
- The assessment was a Module II offshore financial center assessment carried out during IMF MFD/LEG missions on January 14–18 and April 15–24, 2002, with an update by written procedure and telephone conferences in May and June 2003. The IMF’s Monetary and Exchange Affairs Department (MAE) was renamed Monetary and Financial Systems Department (MFD) as of May 1, 2003.
- The authorities agreed to use:
  - the full Basel Core Principles (BCP) Methodology for banking supervision, including essential and additional criteria; and
  - the MFD Anti-Money Laundering and counter-terrorist-finance (AML/CFT) methodology (February 2002 version).
- Principal mission contacts included senior officials and stakeholders such as Dr. E.D. Tromp (President, Bank of the Netherlands Antilles (BNA)), Mr. R.S.J. Martha (Minister of Justice), Ms. H. Chirino Roosberg (Head of the Reporting Center for Unusual Transactions (UTRC)), and representatives of banks, insurers, CSPs, and other public and private sector entities.

### Executive summary — headline findings and prioritized recommendations
- Banking supervision
  - Findings:
    - Banking supervision is compliant or largely compliant with the great majority of the Basel Core Principles.
    - The banking system is characterized as stable and adequately capitalized.
    - Legal and regulatory structure of banking supervision is very good.
    - Concerns: rising nonperforming loans, falling returns on assets, possible increases in rollovers and capitalization of interest, and weaknesses in banks’ reporting to support Regulation No. V.
    - In March 2003, the BNA issued a new policy rule on integrity testing of managers of banks.
  - Recommendations:
    - Conduct a specific exercise within banking supervision to analyze bank condition and prospects; assess asset quality by file review focused on borrower economic prospects; engage in risk-oriented discussions with banks; decide on appropriate provisioning levels.
    - Shift implementation from a compliance orientation to a proactive risk-based approach; strengthen off-site surveillance and on-site credit-risk–targeted examinations; require banks to assess and manage interest rate risk.
- Insurance and pensions
  - Findings:
    - Insurance supervision is observant or broadly observant with respect to the great majority of IAIS Core Principles; supervisory staff quality is high.
    - Captive and professional reinsurance supervision is lighter than onshore supervision.
    - Net premium income for life and nonlife subsectors (onshore and offshore) amounted to 19 percent of 2001 GDP; combined assets of these subsectors for 2001 amounted to 75 percent of GDP.
  - Recommendations:
    - Replace the lighter regulatory regime for captive and professional reinsurance with the more rigorous approach applied to onshore insurance companies, including licensing requirements and mandatory supervisory boards for captives/professional reinsurers.
    - Expand cooperation with foreign insurance supervisors through information exchange and MoUs.
    - Consider BNA joining the International Association of Pension Supervisors; review pension legislation to strengthen pensioner protection, transparency, and remove excessively lenient exemption clauses (e.g., ministerial exemption powers undermining rigor).
- AML/CFT framework
  - Findings:
    - The AML/CFT legal and institutional framework is generally comprehensive and well designed.
    - Gaps in coverage: nonlife insurance companies, lawyers, notaries, accountants, consultants, real estate agents, dealers in high-end goods (antiques, jewelry, auctioneers) are not fully covered.
    - UTRC established as independent governmental authority; reporting thresholds and protections exist.
  - Actions taken:
    - June 2003: BNA issued new AML/CFT guidelines for financial institutions and intermediaries.
    - March 2003: BNA introduced a new Integrity Test for managers of supervised financial institutions.
    - Fall 2002: obligation to report financing of terrorism activities to the UTRC was created.
    - Enhanced AML on-site inspections of insurance companies began in March 2003.
    - Draft legislation to include nonlife insurance companies, underwriters, brokers and agents under AML/CFT legislation submitted to parliament.
  - Recommendations:
    - Establish explicit statutory employment screening requirements and fit and proper criteria referring to criminal records.
    - Increase frequency of on-site AML/CFT inspections by BNA and other agencies; target sectors underreporting.
    - Grant legal authority to impose civil money penalties (administrative fines), directly or via court order, to BNA, Gaming Control Board, UTRC, FIU, and CSP Supervisory Board for law/AML violations.
    - Amend laws to permit information sharing between regulators and the UTRC and to empower the UTRC to obtain court orders or require inspections.
- Company Service Providers (CSPs)
  - Findings:
    - CSPs brought under supervision via the National Ordinance of August 3, 2001 on the Supervision of Fiduciary Business.
    - Approximately 75 companies registered and paid a license fee by mid-February 2002; another 150 expected by May 3, 2002 deadline.
    - CSP Supervisory Board has a secretariat of three full-time employees; board of five members appointed by minister of justice for five-year terms.
  - Mission concerns and recommendations:
    - Regulator should be the BNA rather than a newly created agency; delete Article 3(5) permitting dismissal of board members “at the request of ... an interested party ... for a substantial reason.”
    - Strengthen licensing by requiring regulator verification (not only applicant statements), expand fit and proper criteria (including no criminal convictions), require audited annual accounts, require “four-eyes” principle (at least two managers), and strengthen inspection, enforcement, reporting, external audit, and information-sharing powers.
    - Consider allocating CSP supervision to the BNA to consolidate cross-sector supervision.

### Background and macroeconomic context (selected statistics)
- Geography and governance: federation of five islands; central government established in Curaçao.
- Population: approximately 175,000.
- Currency and peg: Netherlands Antillean guilder (NA f.); NA f. 1.79 per $1 since December 23, 1971.
- GDP and income:
  - GDP for 2002: approximately US$2.7 billion.
  - Per capita income: US$15,600.
- Offshore sector contribution and assets:
  - Offshore tax revenue declined from about 20 percent of GDP in mid-1980s to less than 2 percent of GDP in 2002.
  - Tax revenues from offshore sector: some 2 percent of GDP in 2001.
  - Total contribution of offshore sector (including employment): estimated around 8 percent of GDP.
  - Offshore financial sector combined assets roughly estimated at US$36 billion, of which 96 percent is held by the banks.
  - At end-2001, 45 offshore banks active; end-2000 offshore banks balance sheet total US$35 billion.
- Macroeconomic performance and labor market:
  - Real GDP declined by some 12 percent since 1996.
  - Inflation: 0.8 percent in 1999; 5.0 percent in 2000; 0.4 percent in 2002.
  - Unemployment: 14.1 percent in 1999; 12.9 percent in 2000; 14 percent in 2001.
  - Growth: estimated ¾ percent growth over 2001–02; projected further growth of ½ percent for 2003.
  - Private investment increased 20 percent.
- Public finances and external sector:
  - General government deficit increased by 1¼ percent of GDP to 5½ percent of GDP (historical high).
  - Central bank provided net credit to government equaling 1.0 percent of GDP in 2001.
  - Current account deficit stood at an estimated 4¾ percent of GDP in 2002.
  - Foreign reserves increased to the central bank target of three months of imports.
- Monetary and public debt:
  - Growth of money was 11¾ percent over 2002.
  - Public debt stands at 75 percent of GDP.

### Banking system structure, balance sheets, and supervisory assessment
- Offshore banking and clientele:
  - Offshore banks focus on nonresident clients; not permitted to deal with residents.
  - Offshore banks primarily of Venezuelan and Netherlands origin; activities include private banking, asset management, loan booking offices, treasurer roles, and regional credit offices.
- Aggregate balance sheet of commercial banks operating in the international banking sector at year-end (In billions of Netherlands Antille Guilders; totals and composition)
  - Total assets:
    - 2000: 61.9 (100.0)
    - 2001: 68.1 (100.0)
    - 2002: 75.8 (100.0)
  - Assets composition highlights:
    - Cash and banks: 11.4 (18.4) in 2000; 15.1 (22.1) in 2001; 14.1 (18.6) in 2002
    - Loans: 33.8 (54.5) in 2000; 38.1 (56.0) in 2001; 42.2 (55.7) in 2002
    - Investments: 4.3 (6.9) in 2000; 4.5 (6.6) in 2001; 4.2 (5.5) in 2002
    - Other assets: 12.1 (19.8) in 2000; 8.2 (12.0) in 2001; 9.9 (13.1) in 2002
  - Liabilities composition highlights:
    - Total deposits: 20.2 (32.5) in 2000; 19.6 (28.8) in 2001; 20.3 (26.7) in 2002
    - Borrowings: 35.0 (56.5) in 2000; 40.7 (59.8) in 2001; 47.8 (63.1) in 2002
  - Capital and reserves / Total capital:
    - Capital and reserves: 5.3 (8.6) in 2000; 5.6 (8.2) in 2001; 4.4 (5.8) in 2002
    - Total capital: 5.7 (9.3) in 2000; 6.7 (9.8) in 2001; 6.6 (8.7) in 2002
  - Source: Bank of the Netherlands Antilles
- Aggregate balance sheet of domestic commercial banks (year-end; Millions of NA f.; percent of total)
  - Total assets:
    - 2000: 5,297.0 (100.0)
    - 2001: 5,973.6 (100.0)
    - 2002: 6,199.6 (100.0)
  - Key asset components:
    - Cash and banks: 1,268.3 (23.9) in 2000; 1,952.3 (32.7) in 2001; 1,767.1 (28.5) in 2002
    - Investments: 264.1 (5.0) in 2000; 261.9 (4.4) in 2001; 582.8 (9.4) in 2002
    - Loans: 3,449.4 (65.1) in 2000; 3,417.8 (57.2) in 2001; 3,500.9 (56.5) in 2002
    - Total deposits: 4,403.4 (83.1) in 2000; 5,060.1 (84.7) in 2001; 5,248.7 (84.7) in 2002
    - Total capital: 414.9 (7.9) in 2000; 488.4 (8.1) in 2001; 493.2 (0.0) in 2002
- Basel Core Principles (BCP) assessment — summary compliance counts:
  - Compliant: 20 principles
  - Largely compliant: 8 principles
  - Materially noncompliant: 2 principles
  - Noncompliant: 0
  - Not applicable: 0
- Key BCP weaknesses and recommendations:
  - CP 8 (loan evaluation and loan-loss provisioning) — materially noncompliant: require more frequent reviews of performing and nonperforming loan portfolios; improve reporting of specific provisioning for loan losses; increase on-site visits.
  - CP 16 (methods of on-going supervision) — materially noncompliant: off-site surveillance and on-site supervision require strengthening; prepare action plan to assess increased risk to earnings and capital.
  - Recommendation: empower BNA to impose fines or penalties on senior management and/or directors and to remove management without threatening license revocation.

### Offshore corporate, securities issuance, and CSP sector statistics
- Offshore corporate entities and CSPs:
  - Active offshore corporate entities: some 20,000 registered as corporations, private foundations, or partnerships.
  - 2001 registration activity: 534 new offshore companies registered; 205 removed from the register; 170 liquidated; 29 reactivated.
  - Registered companies fell from 20,550 at end-1997 to 19,777 at end-2001.
  - Approximately 190 company service providers; 70 CSPs specialized in financial services; about half of those 70 belong to an international group with head office in the Netherlands Antilles.
  - Approximately 600 offshore corporate entities serve as administrative vehicles for offshore investment institutions; between 60 percent and 70 percent administered by the two largest CSPs.
- Offshore debt securities and international issuance (selected figures; amounts outstanding, in billions of U.S. dollars)
  - All countries: 7,507.7 (2001 December); 9,196.8 (2002 December); 9,687.7 (2003 March); 10,266.2 (2003 June)
  - Offshore centers: 579.4 (2001 December); 656.9 (2002 December); 676.1 (2003 March); 691.9 (2003 June)
  - Cayman Islands: 380.6 (2001 December); 438.9 (2002 December); 449.8 (2003 March); 457.3 (2003 June)
  - Netherlands Antilles: 77.3 (2001 December); 85.7 (2002 December); 86.3 (2003 March); 89.2 (2003 June)
  - Note: If Cayman Islands excluded, Netherlands Antilles’ share of offshore issuance increases to 38 percent (BIS-based context in text).
- Offshore insurance
  - At end-2001 offshore insurance sector: 21 companies (5 reinsurance companies; 16 captive insurance companies — one life and 15 nonlife).
  - Net premium income (2000): offshore life insurance companies US$5.0 million; offshore nonlife insurance US$212.2 million.

### Insurance supervision — IAIS assessment, structure, and recommendations
- Organizational and staffing:
  - Insurance supervision exercised by the BNA under the State Ordinance on Insurance Supervision (1990) and decrees (1992).
  - Institutional Investors Supervision Department: 13 staff at end-2001 (including two actuaries, expatriate consultant, five on-site examiners, three off-site analysts); additional staff recruited including an actuary.
  - BNA operationally and financially independent from government; directors and staff prohibited from association with insurers except as policyholders.
- Recent supervisory developments:
  - AML/CFT guidelines adjusted to include all insurance companies; procedures manual for on-site inspections completed; on-site AML inspections commenced; ARAS system refined; insurance database finalized May 2003 to retain five years’ data.
  - As of end-June 2003, BNA conducted 18 visits and on-site inspections (4 full-scope inspections; remainder targeted AML/CFT and investment portfolio examinations).
- IAIS Core Principles observance summary (selected)
  - Principle 1: Observant — responsibilities clear; independence and staff quality high.
  - Principle 2 (Licensing): Broadly observant — rigorous licensing arrangements; new Integrity Unit and Integrity Test.
  - Principle 11 (Market conduct): Materially nonobservant — proposed National Ordinance on the Insurance Brokerage Business not enacted; market conduct guidelines not published.
  - Principle 13 (On-site inspection): Observant — structured on-site program since January 2003; follow standards of Society of Financial Examiners.
  - Principle 14 (Sanctions): Observant — Article 31 provides corrective actions; Article 55 authority to withdraw a license; recommendation to enable BNA to impose civil money penalties.
- Solvency and capital adequacy:
  - Life insurers: Decree 52/1992 minimum capital margin NA f. 400,000 (US$220,000) unless 4 percent of technical reserves yields a higher requirement.
  - P&C minimum floor NA f. 300,000 (US$165,000) unless Article 36 augmentation (15 percent additional reserve) yields higher requirement.
  - Central Legal Bureau issued statutory minimum capital requirements of NA f. 200,000 (US$110,000), pending ordinance revision.
  - Recommendations: develop BNA risk-reflective standards; review solvency requirement for professional reinsurers and captives; apply more risk-based capital requirements to captives.
- Confidentiality and information exchange:
  - Insurance legislation requires confidentiality and provides a gateway for sharing information with other supervisors; recommendation to broaden gateway and avoid mandatory reciprocity.

### Pensions — supervision, funding, and governance (selected facts)
- Number of pension funds: 25 active funds (23 corporate funds and 2 state funds).
- Year-end 1999 total assets: US$2.31 billion (1998: US$2.14 billion); state pension funds assets approx. US$1.2 billion at end-1999.
- Reporting and actuarial oversight:
  - Annual audited report required; scientific balance sheet required every five years (or more frequently if BNA requests) with actuary analysis of sufficiency.
  - BNA has veto over appointment of actuary or persons preparing annual report; Article 20 authorizes information requests and on-site inspections.
- Investment and funding rules:
  - Employers obliged to contribute at least annually; nonpayment must be notified to BNA within 30 days.
  - Foreign Exchange Regulations domestic investment minima by tiers:
    - Of the first tier of US$5.6 million (NA f. 10 million) of total provisions and liabilities, at least 40 percent must be invested locally.
    - Of the second tier of US$5.6 million, a minimum of 50 percent must be invested locally.
    - Of the remaining provisions and liabilities, a minimum of 60 percent must be invested locally.
  - Article 9 of SOCPF obliges pension funds to transfer investment risk to a licensed insurance company unless exempted by BNA-acceptable internal actuarial standards.

### AML/CFT framework — legal requirements, reporting thresholds, and institutional arrangements
- Client due diligence and reporting obligations:
  - Financial intermediaries required to verify identity, keep records of identity evidence and correspondence, retain transaction records to enable reconstruction by UTRC, and report unusual transactions to the UTRC.
  - Reporting thresholds:
    - All transactions over NA f. 250,000 (US$140,000) must be reported.
    - Other transactions over NA f. 20,000 (US$11,000) meeting additional criteria (exchange into large denominations, large foreign exchange, securities, or travelers’ cheque transactions) must be reported.
  - Financial intermediaries must identify and report complex or unusual transactions and patterns lacking apparent lawful purpose; examine background and purpose and report promptly to UTRC.
  - Reporting parties protected from criminal or civil suits for reporting suspicious transactions in good faith; reporting parties bound to secrecy regarding information submitted to the UTRC.
- Criminalization and confiscation:
  - Money laundering is a criminal offense; financing of terrorism not yet criminalized as a separate offense but punishable as accessory/participation in crimes per conventions referenced.
  - Confiscation: Criminal Code provides for seizure and forfeiture of proceeds of crime upon court order; no provision for confiscating property of equivalent value.
  - Treaty status: Vienna Convention ratified; Suppression of Terrorism Convention signed but not ratified; Palermo Convention signed but not yet ratified.
- Financial intelligence unit (UTRC)
  - UTRC legal authority: collect, register, process, analyze data; required to disseminate information/intelligence to domestic authorities when reasonable grounds to suspect money laundering or terrorism financing.
  - UTRC may exchange information with foreign FIUs subject to MoU without need for treaty.
  - UTRC may request assistance from BNA for regulated entities but no explicit law allowing information sharing between UTRC and BNA; recommendation to amend laws to permit such sharing and to empower UTRC to require inspections or obtain court orders for premises entry.
  - Budgetary procedures: UTRC budget approved annually but purchases require prior ministry approval and monthly projections; recommendation to replace with budgetary allocation and yearly audit.
- Supervision and on-site inspections:
  - BNA undertakes on-site AML inspections in banks every two years; mission recommends more frequent on-site inspections.
  - BNA has FIU-specialized staff and authority to instruct banks to comply with Guidelines on the Detection and Deterrence of Money Laundering.
- FATF 40+8 assessment (selected ratings and notes)
  - Recommendation 1 (Vienna Convention): C
  - Recommendation 16 (Legal protection for good faith reporting): LC — "Provision in Reporting Ordinance needs to be redrafted."
  - Recommendation 23 (Centralization of data on currency transactions): LC — "Minimum amount required for report is inadequate."
  - Recommendation 26 (AML programs in supervised banks): LC — "More frequency required for on-site inspections."
  - Recommendation 25 (Prevention of unlawful use of shell corporations): NC — "No actions have taken place to address this issue."
  - Recommendation 27 (Administrative regulation of other professions dealing with cash): NC — "No actions have taken place to address this issue."
  - FATF Special Recommendations: SR1–SR8 largely checked as ✔ with notes that specific laws (e.g., SR2 criminalizing terrorism finance as separate offense) and ratifications (Palermo) are outstanding.

### Free zones, trade, and CFATF recommendations
- Curaçao free trade zones processed goods valued at US$666 million in 2001.
- Free zones: Harbor Free Zone, Airport Economic Zone, Industrial Park “Brievengat”; 152 companies established; free zone firms pay 2 percent tax on profits.
- Vulnerabilities identified:
  - Porous separation between free zones and onshore activities; large number of contractual service companies; lack of KYC in admission process.
  - Recommendations: review and introduce CFATF-style legislative regimes for free trade zones (licensing, record keeping, reporting, supervisory authority, AML compliance programs, appointment of compliance officers); create specialized AML units in free zones; improve data collection and information sharing.
- CFATF guidelines implementation steps:
  - Netherlands Antilles National Committee on combating money laundering installed subcommittee recommending CFATF guideline implementation.
  - Drug Enforcement Agency presented in June 2003 to free zone and banking sector on money laundering through free zone companies.
  - Recommendation: authorities should review free zone regulations and introduce CFATF standards insofar as not already implemented.

### Attachment I — Comments on CSP legislation (principal technical issues)
- Scope and definitions:
  - Expand CSP definition beyond companies to any person or entity engaging in regulated activities by way of business; broaden “fiduciary services” definition to include registered office provision, accommodation address facilities, acting/arranging directors, company administration, safekeeping of shares, and other activities the regulator may specify.
- Fit and proper and licensing verification:
  - Regulator should verify applicant-provided information; require authority to request identity of indirect shareholders and ongoing disclosure.
  - Fit and proper criteria should include: no criminal convictions; not declared bankrupt or previously director/senior official of bankrupt company; possession of a university degree; and require “four-eyes” principle (minimum two managers).
- Reporting, external audit, and inspection powers:
  - Require annual audited accounts prepared in accordance with GAAP; require auditor confirmation and certificate of compliance; require external auditor to report irregularities to supervisory entity.
  - Inspection powers to include access to books and records of former CSPs regarding prior licensed-period transactions and to any person suspected of carrying on CSP business without a license.
- Enforcement and information sharing:
  - Provide regulator authority to issue directives; impose license conditions; appoint special auditors, advisors, temporary administrators; impose civil money penalties; remove/suspend/bar individuals; revoke and liquidate CSPs.
  - Establish rules for information sharing with domestic agencies (e.g., BNA), foreign regulators, FIUs, and prosecutors; require safeguards for purpose, secrecy, and reciprocity.

*The assessment and findings above are from the IMF Module II offshore financial center assessment of the Netherlands Antilles (mission January 14–18 and April 15–24, 2002; update May–June 2003).*

*Source: IMF Module II offshore financial center assessment of the Netherlands Antilles (mission January 14–18 and April 15–24, 2002; update May–June 2003).*

### Preface.................................................................................................................

### Preface

### Assessment scope and mission
- A Module II offshore financial center assessment of the Netherlands Antilles was carried out during a two-part IMF MFD/LEG mission on January 14–18 and April 15–24, 2002.
- An update was performed by written procedure and in a series of telephone conferences with the authorities in May and June 2003.
- The assessment reviewed both offshore and onshore regulation and supervision because supervision is identical across sectors except for captive insurance companies and professional reinsurers; supervision is exercised by the same agency.
- The authorities agreed to use:
  - the full Basel Core Principles (BCP) Methodology for banking supervision, including essential and additional criteria, and
  - the MFD Anti-Money Laundering and counter-terrorist-finance (AML/CFT) methodology developed by MFD in its February 2002 version.
- The IMF’s Monetary and Exchange Affairs Department (MAE) was renamed Monetary and Financial Systems Department (MFD) as of May 1, 2003.

### Mission contacts
- The mission met with senior officials and stakeholders, including:
  - Dr. E.D. Tromp, President of the Bank of the Netherlands Antilles (BNA);
  - Mr. R.S.J. Martha, Minister of Justice;
  - Mr. S. Betrian, Chairman of the Supervisory Board for Company Service Providers;
  - Ms. H. Chirino Roosberg, Head of the Reporting Center for Unusual Transactions (Financial Intelligence Unit);
  - Ms. Deborah Bolton, Consul General of the United States;
  - senior BNA banking supervision officials, insurance and pension fund officials;
  - Mr. E. Smeulders, Managing Director of the Curaçao Free Zone;
  - representatives of commercial banks, insurance companies, legal and notarial professions, and other private and public sector representatives in the financial, anti-money laundering, and law enforcement fields.

### Purpose and rationale
- The Netherlands Antilles undertook a full Module I and II Offshore Financial Center assessment—including a Fund-assisted self-assessment and an external Fund assessment—to evaluate compliance with international standards on banking and insurance supervision and AML/CFT.
- The initiative aimed to upgrade financial sector supervision and AML/CFT efforts for both offshore and onshore sectors, and to address perceptions following placement in the weakest category of the Financial Stability Forum list of offshore financial centers.

### Findings on institutional capacity
- The legal and institutional framework for financial sector supervision is described as comprehensive, effective, and to a great extent in line with international standards.
- Bank of the Netherlands Antilles (BNA) staff are characterized as highly capable, well-trained, and dedicated, able to attract appropriate personnel and material resources.

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### Executive Summary — Key findings and recommendations
- Banking supervision:
  - Banking supervision is compliant or largely compliant with the great majority of the Basel Core Principles.
  - The banking system is characterized as stable and adequately capitalized.
  - The legal and regulatory structure of banking supervision is very good.
  - Concerns: rising nonperforming loans, falling returns on assets, possible increases in rollovers and capitalization of interest, and weaknesses in banks’ reporting to support Regulation No. V.
  - Recommendation: conduct a specific exercise within the banking supervision department to analyze bank condition and prospects, assess asset quality by file review focused on borrower economic prospects, engage in risk-oriented discussions with banks, and decide on appropriate provisioning levels.
  - Note: In March 2003, the BNA issued a new policy rule on integrity testing of managers of banks.

- Insurance and pensions:
  - Insurance supervision is observant or broadly observant with the great majority of IAIS Core Principles; supervisory staff quality is high.
  - Recommendation: replace the lighter regulatory regime for captive and professional reinsurance with the more rigorous approach applied to onshore insurance companies, including licensing requirements.
  - Recommendation: expand cooperation with foreign insurance supervisors through information exchange and additional memoranda of understanding (MoUs).
  - Recommendation: BNA may consider joining the newly created International Association of Pension Supervisors; the mission supports review of pension legislation to strengthen pensioners’ position, transparency of funds’ financial condition, and to remove excessively lenient exemption clauses.

- AML/CFT framework:
  - The AML/CFT legal and institutional framework is generally comprehensive and well designed.
  - Gaps: nonlife insurance companies, lawyers, notaries, accountants, consultants, real estate agents, and dealers in high-end goods (antiques, jewelry, auctioneers) are not currently covered by the AML/FT framework.
  - Actions taken:
    - Per June 2003, the BNA issued new AML/CFT guidelines for financial institutions and intermediaries.
    - In March 2003, the BNA introduced a new Integrity Test for managers of supervised financial institutions.
    - In fall 2002, an obligation to report activities related to the financing of terrorism to the Unusual Transactions Reporting Center (UTRC) was created.
    - An enhanced program of AML on-site inspections of insurance companies began in March 2003.
    - Draft legislation to include nonlife insurance companies, underwriters, brokers and agents under AML/CFT legislation was submitted to parliament.
  - Recommendations:
    - Establish an explicit statutory requirement for financial institutions to screen applicants for employment to prevent use of institutions by money launderers or terrorists.
    - Increase frequency of on-site AML/CFT inspections by the BNA and other agencies, including the CSP Supervisory Board and the local Gaming Control Board.
    - Grant legal authority to impose, with a court order if necessary, civil money penalties (administrative fines) to the BNA, the Gaming Control Board, the UTRC, the FIU, and the CSP Supervisory Board for violations of law, including AML/CFT laws.

- Company Service Providers (CSPs):
  - CSPs have been brought under supervision of a regulatory entity.
  - Recommendation: consider allocating CSP supervision to the BNA, which already regulates banks, insurance companies, pension funds, investment institutions, and fund administrators; consolidating supervision aligns with international trends and practices in the Netherlands.

- Action planning:
  - The mission agreed with the authorities on elements of a comprehensive prioritized action plan to address remaining issues.

---

### Background and macroeconomic context
- Geography and governance:
  - The Netherlands Antilles is a federation of five islands, each with a separate government; the central government is established in Curaçao.
- Population and currency:
  - Population: approximately 175,000.
  - Domestic currency: Netherlands Antillean guilder (NA f.).
  - Exchange rate peg: NA f. 1.79 per $1 since December 23, 1971.
- Economy:
  - GDP for the year 2002: approximately US$2.7 billion.
  - Per capita income: US$15,600.
  - Main sectors: offshore financial services, oil refining, transportation and tourism.
  - Economic challenges:
    - Suffered from declines in offshore financial inflows and a series of hurricanes affecting St. Maarten in the late 1990s.
    - Offshore financial services tax revenue declined from about 20 percent of GDP in the mid-1980s to less than 2 percent of GDP in 2002, due to changes in tax legislation in other jurisdictions.
    - After September 11 and other shocks, cruise tourism showed an estimated 2 percent increase over 2002 and continued growth was expected in 2003.
    - Continued emigration of skilled labor to the Netherlands has occurred, though slowed by a weaker job market in the Netherlands.

*Source: IMF Module II offshore financial center assessment of the Netherlands Antilles (mission January 14–18 and April 15–24, 2002; update May–June 2003).*

### 4.      In 1997, the Netherlands Antilles entered a prolonged recession. Real GDP declined

### 4. In 1997, the Netherlands Antilles entered a prolonged recession. Real GDP declined

### Economic performance and labor market
- Real GDP declined by some 12 percent since 1996, primarily as a result of external shocks and inadequate policies.
- Inflation:
  - 0.8 percent in 1999
  - 5.0 percent in 2000 (mainly as a result of rising world oil prices and the impact of indirect taxes)
  - 0.4 percent in 2002
- Unemployment:
  - 14.1 percent in 1999
  - 12.9 percent in 2000 (mainly as a result of migration)
  - 14 percent in 2001
- Growth:
  - Estimated ¾ percent growth over 2001–02
  - Projected further growth of ½ percent for 2003
- Private sector indicators:
  - Private investment has increased 20 percent
  - Air travel capacity has increased
  - The offshore sector is showing signs of recovery

### Structural reforms and policy measures
- Important reforms over the past three years include:
  - Liberalization of air traffic
  - Abolishment of production monopolies and import quotas
  - More flexible work arrangements
  - Lifting of the individual dismissal permit requirement for most sectors
  - Measures to promote privatization, e-commerce, and international financial services
- Regulatory and supervisory changes:
  - In August 2001 company service providers were placed under supervision of the Supervisory Board for Fiduciary Business (under the responsibility of the minister of justice), obliging them to apply Know Your Customer (KYC) rules and report unusual transactions
  - Implementation of the commitment to the Organization for Economic Cooperation and Development (OECD) to eliminate harmful tax practices, leading to more customer due diligence

### Public finances and fiscal developments
- General government deficit increased by 1¼ percent of GDP, to a historical high of 5½ percent of GDP, driven by falling revenue collection and increased interest expenditure.
- The central bank provided net credit to the government equaling 1.0 percent of GDP in 2001, in part to help eliminate government payment arrears.

### External accounts and trade
- Current account deficit:
  - Stood at an estimated 4¾ percent of GDP in 2002, slightly below the average since 1995
  - Boosted by increased tourism inflows and growth in the Curaçao Free Zone
- Foreign reserves increased to the central bank target of three months of imports.
- Traditional merchandise exports have declined by some 12 percent over the last two years.
- Offshore sector recovery has been aided by the introduction of the new tax framework with the Netherlands.

### Monetary conditions and public debt
- Growth of money was 11¾ percent over 2002, mainly due to continuing foreign exchange inflows.
- Bank credit to the government increased significantly after the ceiling on this type of credit was lifted.
- Public debt stands at 75 percent of GDP.
- Up to 2001, insurance companies and pension funds were less willing to refinance government debt and to extend mortgage credit because of falling real estate values; decreased confidence in government paper led to increased bank deposits.
- In 2002, investment in government securities was boosted by its attractive yield compared to investments abroad.

### Banking system conditions and risks
- Banking system showed some improvement in 2002 after prior weakening:
  - Nonperforming loans have decreased somewhat
  - Level of provisions against nonperforming loans has increased
  - A more flexible on-site inspection schedule introduced
  - Special administration imposed on one undercapitalized bank
- Continued vigilance warranted due to:
  - Banks’ high exposure to the real estate market
  - Continued slow growth
  - Potential for enhanced competition as structural reforms are implemented
  - Potential spillover effects from the situation in Venezuela

### Financial sector environment and supervision
- The Bank of the Netherlands Antilles (BNA) is fully responsible for financial sector oversight and combines banking, insurance, pension fund, and mutual fund supervision; onshore and offshore financial institutions are under BNA supervision.
- Licensing: The BNA follows strict bank licensing policies and only accepts applications from reputable banks.
- Laws and regulations: For the most part compliant or broadly compliant with international standards on banking supervision, insurance supervision, AML/CFT, and investment institution supervision.
- Authorities are proactive in developing new techniques and policies and are undertaking strong efforts, together with other parts of the Kingdom of the Netherlands, to strengthen standards against terrorist finance.
- Legal, judicial, and professional infrastructure:
  - Strong general legal and judicial framework
  - Presence of well-trained legal, taxation, accounting, auditing, and company management professionals
  - Civil code and companies laws based on the European continental systems
  - Mortgages can be foreclosed without court intervention; effective bankruptcy rules are in place and can be implemented
- Historical disclosure regime:
  - Traditionally limited disclosure of financial information and ownership/beneficial ownership; offshore companies were almost completely “black boxes”
  - Increased international pressure and domestic recognition have shifted outlook toward greater disclosure—public and private sectors agree there is no option but to “regulate up.”

### International assessments and cooperation
- Financial Stability Forum (FSF): In an April 2000 perception-based survey, the Netherlands Antilles were classified as a jurisdiction “generally perceived as having legal infrastructures and supervisory practices and/or a level of resources devoted to supervision and cooperation that are largely of a lower quality.”
- Financial Action Task Force (FATF): In a 1999 mutual evaluation, the FATF evaluated the Netherlands Antilles favorably regarding their AML framework but noted further refinements and measures were necessary for NBFI and nonfinancial businesses, particularly the offshore sector.
- U.S. International Narcotics Control Strategy Report (INCSR) 2002: Positive about cooperation with U.S. investigation, law enforcement, and judicial authorities; noted St. Maarten poses significant problems and understaffing of the police and the UTRC needs to be addressed. The Netherlands Antilles confirmed commitment to fight drug trafficking and supported the U.S. Forward Operating Location at the international airport of Curaçao with a new 10-year lease ratified in October 2001.
- U.S. Internal Revenue Service (IRS): The IRS has granted the Netherlands Antilles, as well as some individual financial institutions, “Qualified Intermediary” (QI) status, recognizing KYC rules as sufficiently rigorous for QI eligibility.

### The Netherlands Antilles as an offshore financial center
- Main attractiveness factors:
  - an attractive tax regime and tax treaty system for offshore companies
  - freedom of capital movements
  - limited financial disclosure
  - limited disclosure of ownership/beneficial ownership of companies
  - good legal and judicial system
  - good quality financial and company services
  - political stability
  - convenient location and communications
- Tax developments:
  - Mid-2001: Netherlands Antilles and the Netherlands concluded the Belasting Regeling Koninkrijk (BRK)
  - Effective January 1, 2002: The Netherlands tax authorities will collect 8.3 percent dividend tax on payments going to the Netherlands Antilles (replacing the prior split of 5 percent collected by the Netherlands authorities and 3.3 percent by the Antillean authorities)
  - The New Fiscal Regime (NFR), approved in December 1999, was adjusted to be in line with the new BRK and eliminated the distinction between onshore and offshore activities (i.e., ring fencing)
- Economic contribution of the offshore sector (2001 / June 2001 / 2000 figures):
  - Tax revenues from the offshore sector amounted to some 2 percent of GDP in 2001.
  - Total contribution to the economy, including employment, is estimated at around 8 percent of GDP.
  - It employs more than 5 percent of the labor force.
  - Per June 2001, 14 percent of the international debt securities issued from offshore financial centers originated from the Netherlands Antilles.
  - Offshore financial sector combined assets roughly estimated at US$36 billion, of which 96 percent is held by the banks.
- Sector risks and outlook:
  - Future of the offshore sector more uncertain due to increased integration of global markets and increased scrutiny and calls for more disclosure.
  - Sector mainly provides tax planning services based on a network of tax treaties with industrialized countries; the BRK is expected to have consequences for use of the tax treaty network.

### Offshore banks (structure and balance sheet highlights)
- Number and scale:
  - At end-2001, 45 offshore banks were active in the Netherlands Antilles.
  - End-2000 balance sheet total of offshore banks was US$35 billion.
- Clientele and restrictions:
  - Banks primarily of Venezuelan and Netherlands origin.
  - Supervision of offshore banks is identical to onshore banks.
  - Offshore banks focus on nonbank offshore companies and are not permitted to have dealings with residents.
- Business diversity:
  - Some are subsidiaries or branches of large financial institutions in Europe, the United States, or South America.
  - Activities range from private banking and asset management to loan booking offices, treasurer roles for conglomerates, or regional credit offices.
  - All clients must be nonresidents.
- Risk profile:
  - Market risk, credit risk, interest rate risk, operational and political risks comparable to onshore business.
  - Reputational risk higher for private banking institutions due to nonresident clients and need for additional verification.

- Aggregate Balance Sheet of Commercial Banks Operating in the International Banking Sector at Year-End (In billions of Netherlands Antille Guilders)
  - Total assets:
    - 2000: 61.9 (100.0)
    - 2001: 68.1 (100.0)
    - 2002: 75.8 (100.0)
  - Assets composition highlights:
    - Cash and banks: 11.4 (18.4) in 2000; 15.1 (22.1) in 2001; 14.1 (18.6) in 2002
    - Loans: 33.8 (54.5) in 2000; 38.1 (56.0) in 2001; 42.2 (55.7) in 2002
    - Investments: 4.3 (6.9) in 2000; 4.5 (6.6) in 2001; 4.2 (5.5) in 2002
    - Other assets: 12.1 (19.8) in 2000; 8.2 (12.0) in 2001; 9.9 (13.1) in 2002
  - Liabilities composition highlights:
    - Total deposits: 20.2 (32.5) in 2000; 19.6 (28.8) in 2001; 20.3 (26.7) in 2002
    - Borrowings: 35.0 (56.5) in 2000; 40.7 (59.8) in 2001; 47.8 (63.1) in 2002
  - Capital and reserves / Total capital:
    - Capital and reserves: 5.3 (8.6) in 2000; 5.6 (8.2) in 2001; 4.4 (5.8) in 2002
    - Total capital: 5.7 (9.3) in 2000; 6.7 (9.8) in 2001; 6.6 (8.7) in 2002
  - Source: Bank of the Netherlands Antilles

### Offshore insurance
- At end-2001, the offshore insurance sector consisted of 21 companies:
  - 5 reinsurance companies
  - 16 captive insurance companies (one life and 15 nonlife)
- Parentage and origins:
  - Most have European parents; more than 50 percent have parent companies in the Netherlands.
- Net premium income (2000):
  - Offshore life insurance companies: US$5.0 million
  - Offshore nonlife insurance: US$212.2 million

*Source: IMF staff report on the Netherlands Antilles.*

### 31.      The types of risks being insured primarily by the offshore insurance sector are

### cr04271 - 31.      The types of risks being insured primarily by the offshore insurance sector are 

### Offshore insurance sector: types of risks and market structure
- Types of risks primarily insured: liability, motor, property, and some marine insurance.
- Many large nonlife risks are ceded to companies abroad because the local market is too small.
- The greater number of nonlife insurance companies may relate to the larger number of nonlife types of risk that are insured, leading to a larger number of specialized institutions.

### Offshore corporate entities: scale, uses, and trends
- Active offshore corporate entities: some 20,000 registered as corporations, Netherlands Antilles private foundations, or partnerships, with owners in the United States, the Netherlands, East Asia, Spain, Italy, and Latin America.
- 2001 registration activity:
  - 534 new offshore companies registered
  - 205 removed from the register
  - 170 liquidated
  - 29 reactivated
- Trend: number of registered companies fell from 20,550 at end-1997 to 19,777 at end-2001.
- Beneficial owners: foreign corporations and high net worth individuals.
- Typical activities: tax planning, captive banking and insurance, special purpose vehicles, asset management, holding companies for investment and intellectual property holdings, shipping, trading, financing, and investment institutions.
- Companies in the Netherlands Antilles are not subject to mandatory auditing requirements.

### Corporate services providers (CSPs) and offshore banking
- CSPs: majority of offshore corporate entities managed by some 190 company service providers.
  - 70 CSPs specialized in financial services
  - About half of those 70 belong to an international group with head office in the Netherlands Antilles
- Offshore banks: 45 operating in the Netherlands Antilles with total assets of some US$35 billion, or about 1,400 percent of 1997 GDP.
- Approximately 600 offshore corporate entities serve as administrative vehicles for offshore investment institutions; between 60 percent and 70 percent of these are administered by the two largest CSPs.
- Authorities intend to adopt legislation to place these investment institutions under supervision of the BNA.

### Offshore debt securities and international issuance
- Offshore issuance role:
  - Amount originating from the Netherlands Antilles: almost US$90 billion, or almost 13 percent of all international debt securities issued from offshore financial centers (BIS data).
  - If Cayman Islands (66 percent of the total) excluded, the Netherlands Antilles’ share increases to 38 percent.
- Table 2 (selected figures; amounts outstanding, in billions of U.S. dollars):
  - All countries: 7,507.7 (2001 December); 9,196.8 (2002 December); 9,687.7 (2003 March); 10,266.2 (2003 June)
  - Offshore centers: 579.4 (2001 December); 656.9 (2002 December); 676.1 (2003 March); 691.9 (2003 June)
  - Cayman Islands: 380.6 (2001 December); 438.9 (2002 December); 449.8 (2003 March); 457.3 (2003 June)
  - Netherlands Antilles: 77.3 (2001 December); 85.7 (2002 December); 86.3 (2003 March); 89.2 (2003 June)
  - Other jurisdictions listed in Table 2 include Aruba, Bahamas, Bermuda, Hong Kong, Lebanon, Mauritius, Panama, Singapore, West Indies U.K. (figures as shown in Table 2).

### Tax residency, profit tax rates, and treaty effects
- Offshore companies managed or controlled from the Netherlands Antilles are considered tax residents in the Antilles.
- Profit tax rates applicable to these companies:
  - 2.4 percent for companies channeling revenues from intellectual property
  - 15 percent for companies channeling dividends, royalties, or interest income
- Under tax treaties accessible to the Netherlands Antilles, payments by these companies to the beneficial owner, after taxation at these low rates in the Netherlands Antilles, are exempt from most or all taxation in the home country of the beneficial owner.

### Transparency, disclosure, and money laundering concerns
- Current disclosure framework and vulnerabilities:
  - Founders must be disclosed in founding documents, but subsequent ownership or beneficial ownership need not be registered publicly.
  - Bearer shares: no publicly available information on ultimate shareholder identity; such information is kept only by the CSP.
  - Annual financial statements must be prepared for shareholders, but there is neither an audit requirement nor a general publication requirement.
  - Articles of incorporation must include objectives, but these can be very broad and may not reveal company activity.
  - Disclosure requirement applies only to financial institutions or companies that (a) allow issuance of bearer shares to an aggregate amount of more than NA f. l 50,000, or (b) have issued bonds; those entities must deposit annual statements at the Companies Registry.
- Abandoned corporations:
  - A relatively high number of abandoned offshore corporations raises concern; exact figures not available.
  - Abandoned companies can be revived and sold by paying back registry fees.
  - Authorities intend to adopt legislation to give the Companies Registry authority to liquidate these corporations and clean up the registry; under current law there is no reliable legal framework for removal of defunct corporations.

### Recent and planned regulatory improvements
- CSP regulation:
  - State Ordinance on the Supervision of Fiduciary Companies enacted in August 2001; implementation starting up; existing CSPs requested to submit licensing applications.
  - CSPs will be obliged to apply KYC or customer due diligence rules under the State Ordinance.
  - CSP sector currently estimated at 200 active companies; bulk of business held by a few large companies, mostly owned by reputable banks.
- OECD commitments and ownership disclosure:
  - Netherlands Antilles will require companies to disclose more information on financial condition, ownership, and beneficial ownership when OECD commitments are implemented.
  - These developments aim to mitigate money laundering concerns.
- Companies Registry authority and CSP oversight:
  - Recent measures require CSPs to apply for licenses; supervisory arrangements established (see CSP Supervisory Board description below).

### Curaçao free trade zones: operations, vulnerabilities, and guidelines
- Free zones operated: Harbor Free Zone, Airport Economic Zone, Industrial Park “Brievengat”; all managed by “Curinde” corporation (85 percent owned by the Island Authority of Curaçao).
- 2001 activity: Curaçao free zones processed goods to a value of US$666 million.
- Table 3 (Curaçao Free Trade Zone, customs value, in millions of U.S. dollars):
  - Total export: 1997 = 227.5; 1998 = 160.6; 1999 = 338.6; 2000 = 291.5; 2001 = 310.3
  - Total import: 1997 = 173.9; 1998 = 104.8; 1999 = 302.7; 2000 = 285.8; 2001 = 355.6
  - Note: Data after 1998 understate volumes due to data losses.
- Free zone rules and operations:
  - 152 companies established in the three free zones.
  - Free zone firms may export a maximum of 25 percent of turnover to the Netherlands Antilles at normal import duties; remaining 75 percent must be reexported to third countries.
  - Free zone companies pay 2 percent tax on profits.
  - Operations regulated by the State Ordinance on the Establishment of Economic Zones in the Netherlands Antilles.
  - Admission/removal decisions made by Curinde NV; application process does not involve KYC screening.
  - All companies required to operate a bank account in the Netherlands Antilles and thus are subject to AML rules of the Netherlands Antilles.
- Movement and monitoring of goods:
  - Goods arrive through harbor or airport, sealed upon arrival pending customs clearance into the free zone.
  - Outer perimeter monitored by customs; goods exiting free zone monitored by customs at exit before entering economic space of the Netherlands Antilles.
  - Physical separation outsourced to “Securitas” (private security company).
- Vulnerabilities:
  - Large number of contractual service companies (12 different companies for services) creates scope for unauthorized entry/exit.
  - Porous separation between free zones and onshore activities raises concerns about evading import duties, trade in illicit substances, and money laundering.
- CFATF guidelines (key provisions):
  - Introduction of comprehensive legislative regimes for free trade zones, including licensing, record keeping, reporting, and supervisory authority terms of reference.
  - Enforcement of regulations and imposition of sanctions by supervisory authorities.
  - AML compliance programs including independent reviews, internal audits; appointment of compliance officers strongly recommended.
  - Free zone enterprises subject to KYC rules and reporting suspicious transactions.
  - Authorities to create specialized units in the free zone responsible for AML operations, training, and AML manuals.
  - Establish coordination between administrative and other authorities to combat money laundering.
  - Create data collection systems and measures enabling data sharing with other governments.
- Implementation steps:
  - Netherlands Antilles National Committee on combating of money laundering installed a subcommittee recommending implementation of CFATF guidelines.
  - Drug Enforcement Agency made presentations in June 2003 to the zone free and banking sector on money laundering through free zone companies.
  - Recommendation: authorities should review existing regulations for free zones and introduce CFATF standards insofar as not already implemented in Curaçao free zones.

### International investment institutions: scale and supervision
- Offshore investment institutions:
  - Estimated 600 offshore investment institutions administered in the Netherlands Antilles.
  - Approximately 40 investment institutions domiciled in the Netherlands Antilles.
  - Estimated 15 investment institutions, mostly U.S.- and Netherlands-based, offer collective investments in the Antillean domestic market.
  - Estimated US$10 billion under management.
- Supervision:
  - National Ordinance for the Supervision of Investment Institutions and Administrators became operational on January 1, 2003.
  - Institutions are in the process of applying for a license; reliable quantitative data not available to authorities.
  - Dutch Central Bank supervises 12 offshore investment institutions established in the Netherlands Antilles that offer services to Dutch residents.
- Key elements of investment supervision legislation:
  - Focus on conduct of business rules rather than prudential concerns.
  - Separation between manager and custodian required.
  - License or dispensation required to operate an investment institution.
  - Management and custodian must meet fit and proper criteria.
  - Custodian must be a legal entity, with own funds separated from assets of the investment institution.
  - Investment institutions will report periodically to the BNA and submit audited annual financial statements to BNA.
  - Institutions must meet BNA requirements regarding integrity, expertise, financial safeguards, conduct of business, and disclosure.
  - External auditor required to report to supervisor any circumstance that could endanger a clean opinion on annual statements.
  - Supervisor can conduct on-site inspections and has a range of sanctions.
  - Administrators of investment institutions will be subject to a licensing regime.
- BNA powers:
  - BNA will be able to issue subordinate regulations on fit and properness, conduct of business, financial strength, and disclosure.
  - Exemption policy guidelines developed by the bank and introduced to the sector in July 2003.

### Company Service Provider (CSP) supervisory framework
- CSP Ordinance (National Ordinance of August 3, 2001 on the Supervision of Fiduciary Business, 2001, No. 81):
  - Brought CSPs under regulation of a new Supervisory Board for Fiduciary Business (Article 2).
  - Since mid-February 2002, approximately 75 companies registered for CSP application and paid a license fee; by the May 3, 2002 deadline another 150 companies expected to do so.
  - CSP Supervisory Board expected to process license applications during remainder of 2002 and to start active supervision in January 2003.
  - Board currently has a secretariat of three full-time employees; additional positions may be authorized as needed.
- CSP Ordinance structure and funding:
  - Supervisory board of five members appointed by the minister of justice for a term of five years (Article 3).
  - Ordinance grants authority to issue ministerial orders to promulgate rules for the board after consultation with CSP interest groups and the board (Article 4(4)).
  - Funding consists of licensing fees (Article 7(4)), an annual supervision fee (Article 11(2)) from CSPs regulated by the board, and “funds obtained from voluntary contributions from the BNA, returns from investments, and deposit accounts” (Article 5(2)).
  - Prohibits carrying on fiduciary business without a license and provides that licenses will only be issued to corporate entities (Article 6).

*Source: Bank of the Netherlands Antilles; Companies Registry at the Chamber of Commerce (as cited in the text).*

### 59.      The ordinance sets forth requirements for license applications, including proof of

### cr04271 - 59.      The ordinance sets forth requirements for license applications, including proof of

### Company Service Provider (CSP) licensing and supervision requirements
- License applications must include:
  - proof of identity of the shareholders, directors, and those who will act as directors of offshore companies;
  - a declaration by each of these persons that there are no facts about such person that would cause reasonable doubt as to their integrity;
  - a declaration that such person has not been involved in any criminal offense (Article 7(1)).
- Each licensed CSP must submit to the supervisory board:
  - annual financial statements (Article 12(3));
  - an annual compliance certificate (Article 13).
- Supervisory powers and enforcement:
  - the board may inspect licensed CSPs and have access to all business documents (Article 12(4));
  - the supervisory board may revoke a CSP license (Article 16(1));
  - the supervisory board may remove members of management (Article 18(1)).

### Mission assessment of CSP regulatory framework — main concerns
- The mission’s view included:
  - the regulator should not be a newly created agency but rather the BNA;
  - the applications process relied too heavily on a statement by the applicant rather than an assessment by the regulator;
  - substantial gaps in addressing AML concerns such as KYC requirements and the obligation to make unusual transaction reports;
  - information sharing was not fully provided for;
  - enforcement measures were inadequate.

### Outstanding issues to be addressed for CSP regulation
- Major outstanding issues:
  - (1) autonomy and capacity of regulatory entity—which the mission previously recommended should be the central bank;
  - (2) scope of regulated activities;
  - (3) the licensing process—fit and proper criteria;
  - (4) scope of inspection powers;
  - (5) reporting and external auditing requirements;
  - (6) enforcement mechanisms and penalties;
  - (7) information sharing.

### Capacity and autonomy requirements for the CSP regulatory entity
- Criteria for an effective regulator:
  - authority;
  - maximum independence from political influences;
  - expertise in the financial area;
  - experience in regulation and supervision;
  - cross sector consistency in regulation and supervision.
- Resource considerations:
  - need to use staff, office facilities, and existing agencies efficiently due to scarcity of resources.
- The BNA’s suitability:
  - the BNA appears to meet these criteria to the greatest extent and seems a natural choice to assume the responsibilities laid down in the law.
- Specific recommended legal change:
  - delete Article 3(5) of the CSP Ordinance, which allows dismissal of a CSP supervisory board member “at the request of ... an interested party ... for a substantial reason,” because it diminishes the autonomy of the board.

### Banking supervision — overview and context
- BNA framework and practices:
  - the BNA has a strong framework, continuously reviews its system, has strong staff and generally good practices.
  - laws, regulations, inspection, authority, and remedial measures provide tools for effective supervisory oversight.
  - implementation should shift from a compliance orientation to a more proactive risk-based approach.
- Deteriorating domestic conditions increasing supervisory risk:
  - declining real estate values;
  - a long period of economic decline;
  - increased reluctance of the financial sector to refinance government debt.
- Supervisory focus recommendations:
  - be more proactive in oversight of credit risk management;
  - require banks to review loan portfolios and report to the BNA with higher periodicity and more attention to actual repayment capacity;
  - off-site surveillance should collect more detailed problem loan information;
  - develop a program of credit-risk–targeted on-site examinations;
  - include assessments of country risk and interest rate risk in ongoing supervision;
  - complete the market risk survey and decide the extent of market risk monitoring and management.

### Aggregate balance sheet of domestic commercial banks (year-end)
- Total assets:
  - 2000: 5,297.0 (Millions of NA f.), 100.0 percent
  - 2001: 5,973.6 (Millions of NA f.), 100.0 percent
  - 2002: 6,199.6 (Millions of NA f.), 100.0 percent
- Key asset components (Millions of NA f.; percent of total):
  - Cash and banks: 2000 — 1,268.3 (23.9); 2001 — 1,952.3 (32.7); 2002 — 1,767.1 (28.5)
  - Investments: 2000 — 264.1 (5.0); 2001 — 261.9 (4.4); 2002 — 582.8 (9.4)
  - Loans: 2000 — 3,449.4 (65.1); 2001 — 3,417.8 (57.2); 2002 — 3,500.9 (56.5)
  - Total deposits: 2000 — 4,403.4 (83.1); 2001 — 5,060.1 (84.7); 2002 — 5,248.7 (84.7)
  - Total capital: 2000 — 414.9 (7.9); 2001 — 488.4 (8.1); 2002 — 493.2 (0.0)

### Basel Core Principles (BCP) assessment — summary compliance
- Assessment grade counts:
  - Compliant: 20 principles
  - Largely compliant: 8 principles
  - Materially noncompliant: 2 principles
  - Noncompliant: 0
  - Not applicable: 0
- Specific findings by theme:
  - Objectives, autonomy, powers, and resources (CP 1): compliant, though no explicit legal protection for supervisory staff is mentioned; BNA will study including explicit legal protection in the Banking Supervision Ordinance.
  - Licensing and structure (CPs 2–5): compliant. The BNA received 11 applications since 1999; 9 were granted and 2 were withdrawn. Five of the nine licenses granted were to local banks for establishment of new international subsidiaries within the Netherlands Antilles. No applications have been denied in the past two years.
  - Prudential regulations and requirements (CPs 6–15): generally adequate. CPs 6, 7, 9, 10, and 15 — compliant; CPs 11–14 — largely compliant; CP 8 (loan evaluation and loan-loss provisioning) — materially noncompliant.
    - Recommendations: more frequent reviews of performing and nonperforming loan portfolios; improved reporting of specific provisioning for loan losses; more frequent on-site visits; require credit institutions to assess and manage interest rate risk and provide supervisory oversight of this risk.
  - Methods of on-going supervision (CP 16–20): CP 16 — materially noncompliant; CPs 17–19 — largely compliant; CP 20 — compliant.
    - Weaknesses: off-site surveillance and on-site supervision require strengthening; a need for an action plan to assess increased risk to earnings and capital.
  - Information requirements (CP 21): largely compliant. Banks must submit annual audited financial statements prepared in accordance with U.S. GAAP, Dutch GAAP, or International Accounting Standards. External auditors have a legal duty to report matters of material significance to the supervisor.
  - Formal powers of supervisors (CP 22): compliant. BNA can take corrective measures, restrict operations, and revoke licenses. Recommendation: BNA would benefit from the ability to impose fines or penalties on senior management and/or directors and to remove management without threatening license revocation.
  - Cross-border banking (CP 23–25): compliant. BNA has MoUs with Aruba, the Netherlands, and Venezuela and regular communication with those supervisors; mission recommended continuing to arrange appropriate MoUs with foreign supervisory authorities.

### Insurance and pension supervision — headline metrics
- 2001 insurance sector:
  - net premium income for the nonlife and life subsectors, offshore as well as onshore, amounted to 19 percent of 2001 GDP.
  - combined assets of these subsectors for 2001 amounted to 75 percent of GDP.
- Insurance sector structure and assets:
  - Insurance companies in the Netherlands Antilles at end-2001: counts provided for Life, Nonlife, and Reinsurance across onshore and offshore categories (tables provided).
  - Consolidated balance sheets (life and nonlife) are reported in millions of Netherlands Antilles Guilders for 1999–2001 with detailed line items for investments, current assets, technical provisions, capital, surplus, and totals.

*Source: IMF mission assessment and Bank of the Netherlands Antilles.*

### 79.      Insurance supervision is exercised by the BNA on the basis of State Ordinance on

### cr04271 - 79.      Insurance supervision is exercised by the BNA on the basis of State Ordinance on

### Regulatory framework and supervisory organization
- Insurance supervision is exercised by the BNA on the basis of State Ordinance on Insurance Supervision, enacted in 1990, supplemented by decrees (National Gazette 1992, Nos. 50, 52, 53, and 55).  
- Within the BNA, insurance and pension supervision is exercised by the Institutional Investors Supervision Department.  
- At end-2001, these departments numbered 13 staff under the leadership of the Deputy Director, including two actuaries, an expatriate consultant, five on-site examiners, and three off-site analysts. Additional staff is currently being recruited, including an additional actuary.  
- The BNA is operationally and financially independent from the government, although it is capitalized by the government, and is independent from the industry; directors and staff are prohibited from having any association with any insurer, except by taking out policies.

### Recent developments in supervision
- Adjustment and update of the AML/CFT guidelines to include all insurance companies.  
- Completion of a procedures manual for on-site inspections and off-site analysis.  
- Commencement of on-site AML inspections.  
- Preparation of a draft Procedures Manual for Market Conduct Examinations.  
- Further refinement of the on-line Annual Report Automated Statements System (ARAS) system.  
- Finalization of a database in May 2003 to retain five years’ data from the insurance companies; data are currently being entered, and staff is being trained in the use of the database.  
- As of August 1, 2003, a new staff member has started work. Per end-June 2003, the BNA has conducted 18 visits and on-site inspections, of which 4 full-scope inspections and the remainder targeted examinations focused on AML/CFT and investment portfolios.

### Staffing, capacity, and procedures
- Staff composition: two actuaries; other staff have at least a BA in business administration or accounting; most staff have between 10 years and 15 years experience in insurance supervision.  
- Staff regularly attend national and international training seminars; several staff are Certified Financial Examiners.  
- A comprehensive procedures manual for on-site inspections has been finalized and will be updated periodically. A tight schedule of on-site examinations, including AML/CFT, has been prepared.  
- Recommendations: reevaluate resources needed to implement the planned program of on-site examinations, new rules and regulations, and associated supervisory workload; complete new regulations as soon as possible.

### Assessment against IAIS Core Principles – summary of observance and issues
- Principle 1 (Organization of an insurance supervisor): Observant. Responsibilities are clear; independence and staff quality are high. Recommendation: reevaluate resources and complete new regulations.  
- Principle 2 (Licensing): Broadly observant.
  - Part 1: BNA designated licensing authority; rigorous licensing arrangements in place.  
  - Part 2: Legal/regulatory standards for assessment of key functionaries and business plans in place; new Integrity Unit created; new Integrity Test introduced.  
  - Part 3: Reliance on other supervisors is integral; need more MoUs; licensing of captives/professional reinsurers should wait for satisfactory cooperation arrangements; licensing of composites should be excluded.
- Principle 3 (Changes in control): Broadly observant. Prior approval process exists (procedures manual based on Article 17); requirements need to be brought into legislation.
- Principle 4 (Corporate governance): Broadly observant. Guidance Notes exist for board members but should be given binding status; captives/reinsurers currently not required to have supervisory boards—mission recommends mandatory supervisory boards for all captives and professional reinsurers to be discussed in captive legislation review.
- Principle 5 (Internal controls): Broadly observant. Internal controls are standard in off-site and on-site programs; Guidance Notes should be given more binding legal status (authority based on Article 31).
- Principle 6 (Assets): Broadly observant. Supervisory control of assets outlined in procedures and ARAS but not in regulations; procedures should be given binding status and necessary regulations issued.
- Principle 7 (Liabilities): Broadly observant. Financial statements and valuation follow GAAP and relevant international standards; technical provisions described in ARAS and examined annually; BNA intends to develop its own standards for valuation of liabilities to comply with international standards.
- Principle 8 (Capital adequacy and solvency): Broadly observant. BNA supervision goes some way toward risk-reflective capital adequacy but IAIS has not developed standards; BNA should develop its own standards.
  - Life insurers: Decree 52/1992 requires a minimum capital margin of NA f. 400,000 (US$220,000), unless technical reserves augmented by 4 percent of technical reserves as required by Article 36 is higher, in which case the higher amount must be maintained.  
  - P&C companies: floor is NA f. 300,000 (US$165,000), unless reserves augmented with a 15 percent additional reserve as required by Article 36 is higher, in which case the higher amount must be retained.  
  - Decree 52/1992 specifies permissible assets counting toward technical reserves.  
  - There are currently no statutory minimum capital requirements in the Insurance Ordinance; Central Legal Bureau issued statutory minimum capital requirements of NA f. 200,000 (US$110,000), pending revision of the ordinance.  
  - Recommendations: review solvency requirements to reflect risks, size, and complexity; review solvency requirement for professional reinsurers (seems low); apply more risk-based capital requirements to captives.
- Principle 9 (Derivatives and off-balance sheet items): Broadly observant. Survey indicated none of the insurers use such instruments; no regulation or guidance exists currently though regulation is in development based on IAIS guidance paper; guidance paper should be given binding status. BNA asset valuation guide includes guidelines on valuation of derivatives.
- Principle 10 (Reinsurance): Observant. Annual reinsurance questionnaire prior to hurricane season; reviews of catastrophe exposure and reinsurance coverage; BNA reviews reinsurance during desk and field examinations. Need more examiner training on reinsurance; BNA has only one reinsurance specialist. Rules on reinsurance should be given binding status.
- Principle 11 (Market conduct): Materially nonobservant. Proposed National Ordinance on the Insurance Brokerage Business not enacted; market conduct guidelines not published; proposed ordinance deals only with agents and brokers. Recommendations:
  - Consider supervising all persons providing insurance advice from within the Netherlands Antilles (including employees of insurers).  
  - Amend draft ordinance to include all persons providing insurance advice from within the Netherlands Antilles.  
  - Publish and give binding status to market conduct guidelines.  
  - Government is setting up an independent alternative dispute resolution body for complaints.
- Principle 12 (Financial reporting): Broadly observant. Late submission of audited statements is a current practice; action should be taken immediately to remedy, including imposing fines for late reporting based on the ordinance.
- Principle 13 (On-site inspection): Observant. Structured on-site inspection program implemented since January 2003; BNA follows standards of the Society of Financial Examiners; recommendations:
  - Extend on-site inspections to insurance brokers with attention to AML and market conduct.  
  - Follow through with more structured meetings with external auditors.  
  - Resume examination program for captives and professional reinsurers.
- Principle 14 (Sanctions): Observant. Article 31 provides corrective actions including issuance of legally binding instruction and appointment of an administrator; Article 55 provides authority to withdraw a license. Recommendations:
  - Consider legislating different, specific types of directives as well as maintaining an all-encompassing power.  
  - Enable the BNA to impose a range of civil money penalties (not criminal fines) against individuals and insurers/intermediaries.
- Principle 15 (Cross-border business operations): Broadly observant. All insurers operating in the Netherlands Antilles must be licensed; incidental cross-border business permitted on a direct provision of services basis. Minister of finance can prohibit or impose rules on specific inwards cross-border business. BNA requires brokers to submit annual details of all insurers with whom business has been placed. BNA consults frequently with Dutch and Aruban supervisors and with Trinidad and Tobago supervisors. Recommendations:
  - Change legislation so a licensed insurer must seek specific approval to operate cross-border.  
  - Prefer explicit legislative permission for foreign supervisors to conduct on-site inspections in the Netherlands Antilles; BNA arranges joint examinations with host supervisors.
- Principle 16 (Coordination and cooperation): Broadly observant. Recommendation: expedite remaining planned MoUs (taking account of IAIS Core Principle 16) and implement legislative changes so reciprocity is not mandatory when providing information to other authorities. Revised AML/CFT guidelines introduced in June 2003 to include all insurance companies (life, nonlife, captives, and professional reinsurance companies). AML controls should be extended to offshore intermediaries.
- Principle 17 (Confidentiality): (Text ends before substantive findings for Principle 17 in supplied content.)

### Key policy recommendations (condensed)
- Complete and give binding status to new regulations, Guidance Notes, market conduct guidelines, and rules on reinsurance, assets, and internal controls (authority based on Article 31).  
- Reevaluate and strengthen resources for the planned on-site examination program and for implementation of new rules.  
- Strengthen solvency and capital adequacy framework: develop BNA standards, review professional reinsurer and captive solvency requirements, and implement more risk-based capital requirements.  
- Expedite MoUs and legislative changes for information exchange, avoiding mandatory reciprocity.  
- Extend AML/CFT coverage and controls to offshore intermediaries and ensure AML/CFT inspections continue.  
- Amend licensing and supervisory provisions to require prior approval for changes in control and to require specific approval for cross-border operations.  
- Improve market conduct supervision by enacting the proposed National Ordinance on the Insurance Brokerage Business (expanded to all providers of insurance advice), publishing and binding market conduct guidelines, and establishing alternative dispute resolution mechanisms.  
- Strengthen enforcement tools: specify types of directives in legislation and enable imposition of civil money penalties.

*The mission assessed observance of the IAIS Core Principles and made the findings and recommendations summarized above.*

### 105.     The authorities are observant of this principle. The insurance legislation requires

### cr04271 - 105.     The authorities are observant of this principle. The insurance legislation requires

### Insurance confidentiality and AML/CFT
- Insurance legislation requires confidentiality and provides a gateway under which the bank can share information with other insurance supervisors.
- The gateway should be broader and not subject to full reciprocity in every case (as recommended in CP 2 and CP 16).
- The IAIS does not yet have a separate core principle on money laundering.
- Antillean AML legislation and regulation cover money laundering through insurance companies or brokers.
- Training is being provided to the insurance sector.

### Captives and Professional Reinsurers — legal framework and supervision
- Captive insurance companies and professional reinsurers are regulated under the 1992 State Decree on Licensing of Special Insurance; the definition of a captive insurer appears in Article 3 of the Special Decree.
- The decree creates a separate supervisory regime for captives and professional reinsurers, including insurers who from the Netherlands Antilles predominately insure or reinsure risks of group or cooperative members outside the Netherlands Antilles, and entities from within the Netherlands Antilles that exclusively write reinsurance business not within that definition.
- The term “captive” also includes insurers writing nonrelated risks situated outside the Netherlands Antilles as long as these risks are subordinate to the main related risks.
- Supervision over captives and reinsurers is overall lighter than for regular onshore insurers — an exception to the policy of regulating offshore and onshore financial institutions similarly.

Major differences in legal requirements for captives and professional reinsurers:
- Captives are allowed to have only one managing director; regular insurance companies must have at least two managing directors.
- Captives and professional reinsurers are not required to have a supervisory board; solvency requirements are based on net premiums income/net technical provisions rather than gross premium/gross provisions.
- Exemptions can be granted to allow life and nonlife business in one legal entity, provided separate administration, separate statements, and separate solvency margins are maintained for each type of business.
- Licensing applications must include a detailed business plan and a three-year forecast.
- Once licensed, the BNA can impose additional conditions under Article 31 of the ordinance.
- The licensing process allows little discretion to the supervisor; a license cannot be refused on grounds other than noncompliance with conditions in the decree.
- A solvency fund must be maintained as a safeguard for policyholders, above assets needed to cover technical provisions of the local branch; certain assets are ring-fenced and to be kept with a local bank.
- Minimum solvency margin for captives is calculated on net premium income (nonlife) or net fund (life), i.e., after deduction of reinsurance premiums paid.
- Where margins are not met, there is no automatic revocation of the license; the BNA can request the insurer to inform the bank of remedial measures, the insurer must enter a short-term reconstruction or financing scheme approved by the bank, and failure by the stipulated date leads to revocation and liquidation; upon revocation, the insurer remains subject to the bank’s supervision including control of disposal of assets; details of revocation are not published.
- Annual financial statements are not required to be published, though they must be filed with the BNA.
- Captives may underwrite risks of the general public in other jurisdictions if subordinate to main captive risks; risks such as casualty, guarantee and surety, and product and public liability may raise reliance concerns for third parties.

Cross-border and branch supervision:
- If bulk of business is outside the Antilles, home-led supervision may be inappropriate.
- Companies incorporated in the Antilles with foreign branches must file consolidated figures with the BNA for analysis; compliance with regulations is verified.
- Branch offices abroad are also subject to host supervisor oversight; where supervisory concerns arise the host supervisor is contacted.
- The BNA has conducted joint on-site examinations with foreign supervisors at branches of local companies abroad, with agreements on which supervisor would lead.

### Pension Funds — background and aggregate figures
- There are currently 25 pension funds active in the Netherlands Antilles: 23 corporate funds and 2 state funds.
- At year-end 1999, total assets of pension funds (corporate and state) amounted to US$2.31 billion (1998: US$2.14 billion).
- At end-1999, assets of the state pension funds amounted to approximately US$1.2 billion.
- Comprehensive 2000–02 figures for pension fund assets are not yet available.
- Starting 2003, the BNA annual report will contain financial data and information on the pension industry.

### Pension regulation, supervision, and governance
- The assessment is preliminary and based on limited information; an in-depth study into pensions and extent to which existing schemes meet population needs was not performed.
- Work is underway to review the 1985 law; authorities intend to update legislation to align with international developments and formally include noncorporate schemes.
- Pension schemes organized by professional associations (e.g., for lawyers and notaries) are in practice supervised similarly to corporate schemes; Article 1 Paragraph 2 treats these groups as corporations subject to the ordinance.
- Pension funds are obliged to invest approximately half their funds domestically, predominantly in government securities held to maturity due to limited domestic alternative investments.
- Nongovernment securities investments are managed through foreign securities markets subject to foreign jurisdiction laws and regulations.

Rights, reporting, and actuarial oversight:
- Beneficiaries have recourse to the regular court system based on contract provisions and Netherlands Antilles civil law.
- No formal criteria exist for assessment of financial viability of corporate or state pension schemes; the BNA requires annual reports and is designing a comprehensive annual reporting system.
- An extensive scientific balance sheet is required every five years, or more frequently if the BNA requests it; Article 13 requires the balance sheet to show, via actuary analysis, that assets are “sufficient” to cover obligations; Article 14 specifies investment policies must be “sound.”
- Legislation provides no rules on funding; actuaries employed by the scheme manager examine funding and actuarial reports are checked by the actuarial team of the BNA; an actuarial report is provided annually and a more extensive scientific balance sheet every five years (or more often as required).

Supervisory powers and independence:
- Article 20 gives the BNA authority to obtain information from the fund or the employer and to verify via on-site inspections; examinations involve the actuarial team.
- Independence of actuaries is encouraged; Article 5, Paragraph 1 of the SOCPF requires the chair of the fund to be an independent person.
- If a fund does not operate satisfactorily, the BNA can communicate concerns to the board and publish recommendations under Article 21; if warnings are not heeded, the BNA can request the court to appoint an administrator.
- Concern: Article 26 of the SOCPF grants broad exemption powers to the minister of labor and social affairs to waive key provisions (e.g., preparation of annual report, “sufficiency” of assets, “soundness” of investments, limits on investments in the sponsoring company) if the minister considers “the interests of the pensioners and other interested parties are sufficiently safeguarded.” This undermines the rigor of the law; mitigation exists because the BNA must give its opinion before the minister’s final decision, and the minister generally follows BNA advice.
- Fit and Proper Guidelines issued by the BNA apply to managers of supervised pension funds even though the law lacks explicit fit and proper criteria.
- Article 5 of the SOCPF: board must consist of at least as many employees or former employees as employer representatives; they jointly appoint an independent expert as chairperson; board decisions by simple majority; board members may retain outside professional expertise.
- Article 12: BNA has veto over appointment of an actuary or persons preparing the annual report.
- Article 20: BNA authority to obtain information from board members, any staff of the fund, and if necessary, the employer.

### Pension fund funding, investments, and remedial actions
- Employers are obliged to contribute at least annually; if contributions are quarterly, payment must occur within 10 days after termination of the quarter.
- Nonpayment must be notified to the BNA within 30 days.
- Article 6 requires pension fund Articles of Association to outline investment policy; Article 14 requires investments to be made on a “sound basis.”
- Article 15 permits receivables from the employer and investments in employer’s company stocks up to 5 percent of the fund’s assets, increased by an amount equal to the free reserve of the fund; the total of these claims and shares may not exceed one-tenth of the fund’s assets.
- Foreign Exchange Regulations set domestic investment minima by tiers:
  - Of the first tier of US$5.6 million (NA f. 10 million) of total provisions and liabilities, at least 40 percent must be invested locally.
  - Of the second tier of US$5.6 million, a minimum of 50 percent must be invested locally.
  - Of the remaining provisions and liabilities, a minimum of 60 percent must be invested locally.
- The BNA takes remedial action where necessary (examples summarized):
  - the BNA can call a meeting with the foundation board and request change within a specified timeframe;
  - if noncompliant, the BNA can give an instruction to the board;
  - if still noncompliant, the BNA can publish its instructions;
  - ultimately, the court can appoint a trustee at the bank’s request.
- Article 9 of the SOCPF obliges pension funds to transfer investment risk to an insurance company established and licensed in the Netherlands Antilles; Article 10 exempts funds that use internal actuarial and conduct of business guidelines acceptable to the BNA, subject to presenting a scientific balance sheet every five years or more frequently if required.

Winding-up and disclosure:
- Winding-up follows the articles of incorporation and general rules on liquidation under bankruptcy, companies, and foundations laws; to date, no pension fund liquidations have damaged pensioner claims.
- Some funds have been dissolved due to dissolution of sponsoring corporation or small size; some transformed into purchased plans or paid out as lump sums; no pensioner claims were lost; liquidation is subject to BNA oversight.
- Article 11: boards must present an audited report to the BNA annually, prepared by a qualified auditor, showing financial condition and compliance; disclosure to interested parties occurs in cases where employer makes contractual reservations to reduce or terminate contributions; publication is not required.
- Foundations operating many funds are obliged to issue financial statements under companies’ law, though these typically provide little specific detail on investment performance.

### Anti-money laundering and combating financing of terrorism — summary assessment
- The AML/CFT legal and institutional framework is assessed as comprehensive and well designed, with some areas to be strengthened.
- For the assessment, “financial intermediary” includes banks; life insurance companies (including agents, sub-agents, and brokers); money transmitters (MTs); company service providers (trust companies or fiduciaries regulated under the ordinance on the Supervision of Fiduciary Business — CSPs); and gambling casinos.
- MTs are licensed and supervised by the BNA under the Foreign Exchange Ordinance and the MT Admission Requirements.
- Foreign exchange houses (bureau de change) are not permitted under the laws of the Netherlands Antilles.

Client due diligence requirements (legal and institutional framework):
- Financial intermediaries are required to:
  - verify the identity of a person who conducts a transaction through their institution;
  - keep a record of the evidence of a person’s identity that was obtained and a record of all correspondence between the identified person and the financial intermediary;
  - keep such records of every transaction conducted through the financial intermediary as are reasonably necessary to enable the transaction to be readily reconstructed at any time by the UTRC;
  - report unusual transactions to the UTRC.
- Financial intermediaries must establish the identity of a customer before rendering any financial service based on an official identifying document, keep records of identity, and review identification when it appears data is no longer valid.
- Financial intermediaries are prohibited from rendering a financial service if the identity of the customer has not been established.
- For legal-entity clients, intermediaries must verify legal existence and structure, including legal form, trade name, address, domicile, location of head office, and identity of all authorized agents and representatives.

*Source: International Monetary Fund (IMF) report.*

### 134.     Financial intermediaries are required to identify complex or unusual transactions, and

### 134.     Financial intermediaries are required to identify complex or unusual transactions, and

### Reporting obligations and protections
- Financial intermediaries must identify complex or unusual transactions, and complex and unusual patterns of transactions that have no apparent or visible economic or lawful purpose, examine as far as possible the background and purpose of such transactions, and report promptly the information to the UTRC.
- Financial intermediaries are required to report:
  - all transactions over NA f. 250,000 (US$140,000); and
  - other transactions over NA f. 20,000 (US$11,000) that also meet other criteria (exchange into large denominations, large foreign exchange, securities, or travelers’ cheque transactions).
- Financial intermediaries and their officials are protected from criminal or civil suits for reporting suspicious transactions in good faith to the UTRC.
- Reporting parties are bound to secrecy in respect to information submitted to the UTRC.

### Fit and proper tests and licensing
- Legislation does not explicitly refer to lack of criminal record as a fit and proper criterion for shareholders, directors, senior officers, and employees of financial intermediaries.
- Under the revised March 2003 BNA Policy Rule Integrity Testing, which includes assessment of fit and proper criteria, any criminal records are considered by the BNA in its review.
- Transfers of control without BNA approval are prohibited.
- BNA approval is required for senior officials and shareholders of life insurance companies, and for changes in managing and supervisory directors.
- Members of the managing and supervisory board of directors, as well as shareholders of MTs, are subject to integrity and/or fit and proper tests.
- Banks, life insurance companies, and CSPs are subject to licensing procedures.
- MTs are currently licensed under the Foreign Exchange Ordinance but will be covered under a pending legislative proposal to be licensed as a MT.

### Criminalization of money laundering and terrorism finance
- Money laundering has been made a criminal offense.
- Criminalization of financing of terrorism is currently not covered explicitly, but is punishable as an accessory offense to or as participation in crimes set forth in the conventions referred to in the 1999 Suppression of the Financing of Terrorism Convention.
- Treaty status:
  - Netherlands Antilles through the Kingdom of the Netherlands is a party to and has ratified the Vienna Convention.
  - The Suppression of Terrorism Convention has been signed by the Kingdom of the Netherlands but not ratified.
  - The Palermo Convention against Transnational Crime was signed but not yet ratified.
- The offense of money laundering:
  - extends to a person who commits both the predicate offense and laundering as well as only laundering;
  - does not require conviction of a predicate offense to establish that assets were the proceeds of a predicate offense and to convict a person of laundering such proceeds;
  - includes predicate offenses that comprise all crimes;
  - extends to all assets that represent the proceeds of crime;
  - requires the element of knowing, including knowledge that can be inferred from objective factual circumstances;
  - can be applied to corporate entities, which can also be held accountable for money laundering.

### Confiscation of proceeds and related provisions
- The Criminal Code provides for the seizure and forfeiture of the proceeds of crime, under protection of third party rights.
- Confiscation is made upon application by the public prosecutor to the court for an order to take away an illegally obtained financial advantage or object.
- The Palermo Convention was signed December 12, 2000 by the Kingdom of the Netherlands and also on behalf of the Netherlands Antilles but has not yet been ratified.
- The Strasbourg Convention has been signed and ratified in 1999.
- Confiscation of assets of organizations found to be primarily criminal in nature is allowed.
- There is no provision for confiscating property of equivalent value.

### Financial intelligence unit (UTRC)
- The UTRC has been established as an independent governmental authority responsible for analyzing financial transaction reports to determine the presence of possible money laundering.
- Reporting parties are required to report any unusual transaction to the UTRC.
- The UTRC may require reporting parties to provide additional documentation if necessary.
- The UTRC may request assistance from the BNA with respect to regulated entities, but there is no explicit provision of law allowing information sharing between the UTRC and the BNA with respect thereto.
- With respect to other regulated entities or nonregulated entities, there is no explicit authority to request assistance.
- Legal authority: the UTRC may “collect, register, process, and analyze the data obtained by it, in order to determine whether these data may be important to prevent and detect money laundering...” (Reporting Ordinance, Article 3(a)).
- The UTRC has access to sources of financial and other relevant information on a real-time or expedited basis, including databases.
- The UTRC is required by law to disseminate information and intelligence, either on its own initiative or upon request, to domestic authorities for investigation or action when there are reasonable grounds to suspect money laundering or terrorism financing.

### International cooperation in AML/CFT matters
- The UTRC has the authority to exchange information with foreign FIUs either on its own initiative or upon request, subject to a MoU without the need for a treaty.
- Provisions for sharing information and intelligence relating to money laundering and terrorism, both formally and informally with other jurisdictions, are included in several multilateral and bilateral treaties.
- Mutual legal assistance is possible pursuant to a treaty and may be initiated in the Netherlands Antilles based on a determination that money laundering or a predicate crime occurred in the Netherlands Antilles, committed by a person under criminal investigation in the foreign state.
- There are procedures to provide effective legal assistance in the identification, freezing, seizure, or confiscation of proceeds of crime.
- Assistance may be provided if an individual is charged with money laundering or financing of terrorism only, as well as if charged with both the predicate and the money laundering offense or terrorism.
- Assistance may be provided even where there are different standards concerning the intentional elements of the crime to the extent possible under domestic law.
- Mutual assistance in criminal matters is effectuated primarily through bilateral treaties between the Kingdom of the Netherlands and foreign states, and through a number of multilateral treaties including the Strasbourg Convention.

### Banking sector: organizational, supervisory, and compliance arrangements
- The Netherlands Antilles is largely compliant as regards AML organizational and administrative arrangements.
- The BNA undertakes on-site inspections in banks every two years, where AML policies and procedures are adequate.
- The money-laundering element of the on-site review includes verification of documented policy statements on ethics and professional behavior and the communication of such policies to the staff.
- Any shortcoming or violation of the AML legislation is included in the examination report, and directives are set out to correct deficiencies in AML compliance.
- The BNA has established a FIU as a special and separate department to assist other supervision departments with additional expertise in reputational risk prevention and when conducting on-site examinations.
- The BNA has the authority to instruct a bank to take the necessary measures with regard to compliance with the Guidelines on the Detection and Deterrence of Money Laundering or signs that endanger liquidity for noncompliance with the Identification and/or Reporting Ordinances.

### Banking: customer identification, monitoring, and record-keeping
- Compliance with the Identification Ordinance and the AML guidelines is verified by the BNA during on-site inspections. This includes verification of:
  - prior due diligence on resident and nonresident individuals and legal entities before rendering any financial service (Articles 2, 3, and 8 of the Identification Ordinance);
  - the adequacy of procedures to determine the identity of the ultimate beneficial owner of an account or a transaction, including individuals or legal entities, trustees, foundations, and of corporate vehicles of all kinds (Article 5 (1), (2), (3), and (4) of Identification Ordinance; Section II.1.1 (A) of the AML guidelines);
  - the presence of appropriate records of identification documents and regular updating of the same their identity (Articles 3(3), 6 and 7 of the Identification Ordinance; Section II.1.1 of the AML guidelines).
- Wire transfers: examiners confirm whether banks require a “Source of Funds Declaration” when accepting funds from noncustomers and noncorrespondent banks and that banks keep a record of the information used to identify the originator, the amount involved, and the corresponding account number (Articles 6 (a), (b), and (c) (7) of the Identification Ordinance).
- Monitoring and reporting of suspicious activities:
  - Principle assessed as compliant.
  - BNA verifies that banks have formal policy statements, internal control procedures for reporting unusual transactions, adequate record keeping, and appointment of compliance officers.
  - Verification consists of examination of policies, procedures, significant samples of client files, and the existence of an adequate filing system for unusual transactions.
- Record keeping, compliance, and audit:
  - Principle assessed as compliant.
  - BNA confirms designation of senior officer(s) responsible for money laundering deterrence and detection.
  - Examiners verify that client transaction records are maintained and held available for inspection for at least five years, either from the termination of the agreement or the execution of the transaction.
  - On-site examinations include a review of internal control systems for customer due diligence and reporting of unusual transactions.
  - Deficiencies detected by internal audit or competent third parties must be reported to management or the compliance officer with suggested corrective action and deadline.
- Cooperation with supervisors and competent authorities:
  - The Netherlands Antilles comply with this principle.
  - The BNA is authorized to share any information obtained in the execution of its duties as supervisor of the banking system with foreign supervisory authorities engaged in the supervision of financial markets.
- Licensing and authorization:
  - Principle found to be compliant.
  - Law establishes information allowing the BNA to determine fit and properness of major shareholders, transparency of ownership structure, directors and senior management, and source of initial capital.
  - During licensing, the BNA may request necessary additional information and evaluates expertise and integrity of proposed directors and senior management via the 2003 BNA Policy Rule on Integrity Testing.
  - The BNA has authority to inquire into and order cessation of unauthorized banking business.

### Insurance sector: organizational arrangements and compliance
- Organizational and administrative arrangements:
  - Principle assessed as largely compliant.
  - The BNA’s “Guideline on the Detection and Deterrence of Money Laundering in Life Insurance Companies” outlines internal control systems focusing on customer identification, appointment of compliance officers, training, and reporting of unusual transactions.
  - To ensure compliance and test adequacy, the BNA prepared a procedures manual for its staff in January 2001.
  - Corporate Governance Guidance Notes for the Supervisory Board of Supervised Financial Institutions apply to all insurance companies, life and nonlife; examiners verify that the supervisory board of life insurance companies signs an annual “Statement of Compliance” certified by external auditors.
- Customer identification and due diligence:
  - Principle assessed as largely compliant.
  - Life insurance companies are bound by the Identification Ordinance for contracts meeting conditions established in the law; the Identification Ordinance does not currently bind nonlife insurers, life or nonlife reinsurers, insurance brokers, agents, and captive insurers.
  - New AML/CFT provisions and guidelines issued on June 16, 2003 also apply to nonlife insurers and provide guidance for customer due diligence policies and procedures.
  - A January 2001 BNA procedures manual provides guidance to examiners to ensure procedures to prevent, detect, and report unusual transactions.
- Monitoring and reporting of suspicious activities:
  - Principle assessed as noncompliant.
  - The procedures manual provides adequate guidance for verification of detection and internal reporting systems only with respect to life insurers.
  - Based on decrees of October 2002, CFT related transactions also must be reported.
- Record keeping, compliance, and audit:
  - Principle assessed as largely compliant.
  - The procedures manual is suitable to determine whether AML policy manuals contain measures for record keeping of questionable policyholders and transactions, audit-trail for questionable funds, and inquiry into source of funds for transactions.
- Cooperation with supervisors and competent authorities:
  - Principle assessed as compliant.
  - The BNA is authorized to exchange information with foreign insurance supervisors.
- Licensing and authorizations:
  - Principle assessed as compliant.
  - The BNA shall only grant a license to persons meeting the legal requirements for obtaining an insurance license (Article 11.1 of the Insurance Ordinance).
  - Grounds for revocation include ceasing to meet license requirements (Article 55.b) and serious deficiencies in complying with laws and regulations (Article 55.e of the Insurance Ordinance).

### FATF 40+8 Recommendations compliance (summary entries)
- Selected grades and remarks excerpted:
  - Recommendation 1 (Ratification and implementation of the Vienna Convention): C (checkmark).
  - Recommendation 16 (Legal protection for good faith reporting to competent authority): LC (checkmark) — remark: "Provision in Reporting Ordinance needs to be redrafted."
  - Recommendation 23 (Centralization of data on currency transactions): LC (checkmark) — remark: "Minimum amount required for report is inadequate."
  - Recommendation 26 (Adequate AML programs in supervised banks/financial institutions): LC (checkmark) — remark: "More frequency required for on-site inspections."
  - Recommendation 13 (Attention paid to AML risk from new technologies): LC (checkmark) — remark: "More attention needed on the part of authorities."
  - Recommendation 25 (Prevention of unlawful use of shell corporations): NC (checkmark under NCN/A) — remark: "No actions have taken place to address this issue."
  - Recommendation 27 (Administrative regulation of other professions dealing with cash): NC (checkmark under NCN/A) — remark: "No actions have taken place to address this issue."
  - Reporting form for detection and monitoring of cross-border transportation of cash has been implemented (Recommendation 22).
  - Note: Table 10 presents full grading across the FATF 40 Recommendations and Eight Special Recommendations.

*International Monetary Fund*

### 28. Guidelines for suspicious transactions

### 28. Guidelines for suspicious transactions

### Assessment of FATF Recommendations and Special Recommendations
- FATF Recommendations (40 + 8) were reviewed; ratings use C, LC, MNC, NC, N/A.
- Specific recommendations and implementation notes:
  - 28. Guidelines for suspicious transactions detection. ✔
  - 29. Preventing control of financial institutions by criminals. ✔ — Amendment of Insurance Ordinance needed.
  - 30. Recording of international flows of cash. ✔
  - 31. Information gathering and dissemination about AML. ✔
  - 32. International exchange of information relating to suspicious transactions and to persons or corporations involved. ✔
  - 33. Bilateral or multilateral agreement on information exchange when legal standards are different. ✔
  - 34. Bilateral and multilateral agreements and arrangements for mutual assistance. ✔
  - 35. Ratification and implementation of other international conventions on money laundering. ✔ — Palermo Convention has to be ratified.
  - 36. Cooperative investigations among countries’ authorities. ✔
  - 37. Definition of procedures for mutual assistance in criminal matters. ✔
  - 38. Authority to take expeditious actions in response to foreign countries’ requests. ✔
  - 39. Mechanisms to avoid conflicts of jurisdiction.
  - 40. Money laundering an extraditable offence. ✔

- FATF Eight Special Recommendations to Combat Terrorist Financing:
  - SR1. Take steps to ratify and implement relevant United Nations instruments. ✔
  - SR2. Criminalize the financing of terrorism and terrorist organizations. ✔ — Although adequately covered by existing provisions, a specific law criminalizing terrorist financing as a separate offense has to be introduced.
  - SR3. Freeze and confiscate terrorist assets. ✔
  - SR4. Report suspicious transactions linked to terrorism. ✔
  - SR5. Provide assistance to other countries’ terrorist financing investigations. ✔ — Full cooperation was given in checking accounts on the basis of the list of terrorists after 9/11.
  - SR6. Impose AML/CFT requirements on alternative remittance systems. ✔
  - SR7. Strengthen customer identification measures for wire transfers. ✔
  - SR8. Ensure that entities, in particular nonprofit organizations, cannot be misused to finance terrorism. ✔ — Amendments to legislation needed.

### Explanatory note on ratings
- Explanations: Recommendations in italics are reviewed for purposes of the legal framework, but not assessed as to implementation.
- The rating columns indicate the degree of compliance: C=compliant, LC=largely compliant, MNC=materially noncompliant, NC=noncompliant, and N/A = not applicable.

### Key remaining legal and implementation actions identified
- A specific law criminalizing terrorist financing as a separate offense has to be introduced.
- The Palermo Convention has to be ratified.
- Amendments to the Insurance Ordinance and other legislation are needed to prevent criminal control of financial institutions and to address nonprofit organization misuse.

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### D. Strengthening the AML/CFT Framework

### Client due diligence — gaps and recommendations
- Entities not covered under the AML/CFT framework:
  - Lawyers, notaries, accountants, consultants, real estate agents, and dealers in high-end goods, such as antiques, jewelry, and auctioneers are not covered under the AML/CFT framework.
  - Consideration should be given to adopting the approach taken by the amended EU AML Directive, which would make all such entities subject to the AML framework, including customer identification and unusual transaction reporting.
  - Requirements imposed by self-regulatory bodies for lawyers or notaries are not sufficient.
- Requirements for identifying complex or unusual transactions:
  - An explicit requirement should be added to the relevant laws or decrees that when determining whether a transaction or pattern of transactions is complex or unusual, financial intermediaries must give special attention to certain transactions and to examine the background and purpose of such transactions.
  - These include transactions with persons in jurisdictions (or, with respect to correspondent or pay-through accounts, with financial institutions) that do not have adequate systems in place to prevent or deter money laundering or terrorism financing.
- Wire transfer indicators:
  - Consideration should be given to revising the indicators in the ministerial decree with respect to the issuing of FATF Special Recommendation VII relating to wire transfers.
- Penalties and administrative fines:
  - Consideration should be given to the amendment of relevant laws to allow the BNA and other regulatory bodies, including the CSP Board, and the local Gaming Control Board, to impose, either directly or through a court order, administrative fines (or the equivalent of civil money penalties) on institutions.
  - Advantages of administrative fines listed:
    - (i) they may be imposed directly by the BNA, without the need to refer such matter to a public prosecutor;
    - (ii) administrative fines are subject to a lower standard of proof than criminal penalties and, therefore, are easier to impose;
    - (iii) in amounts that are sufficiently high, such penalties may discourage those who contemplate violating the law, or raise the costs of doing so to a sufficient level, so as to act as a significant deterrent;
    - (iv) broad-based administrative fines and civil penalties as an enforcement mechanism are becoming more common internationally as an integral part of financial regulatory and AML laws.
- Employment screening and fit and proper criteria:
  - An explicit statutory requirement that financial institutions screen applicants for employment to prevent the use of their institutions by money launders or terrorists is needed.
  - Statutory fit and proper criteria for directors, senior officers, and shareholders should also include explicit reference to this issue.

### Fit and proper test and financial transparency
- A law should be adopted to put in place a system for scrutinizing possible use of shell corporations, charitable or not-for-profit foundations, or other similar entities to ensure that they are not misused by criminals, including that they do not act as conduits for criminal proceeds or terrorist financing (including to escape any asset freezing measures) or to conceal or obscure the clandestine diversion of funds intended for legitimate purposes to terrorist organizations.

### Criminalization of money laundering and terrorism finance
- Legislation is required to make terrorism finance a separate offense.

### Financial intelligence units (UTRC) — powers and resourcing
- On-site inspections:
  - The BNA should conduct on-site AML inspections more frequently than once every two years; other regulators, including the CSP Supervisory Board and the Gaming Control Board do so as well; and target AML inspections to those institutions in each regulated sector that appear to be underreporting.
- Information sharing and authority:
  - Relevant laws should be amended to (i) permit information sharing between each of the regulators and the UTRC; and (ii) provide the UTRC with the authority to obtain a court order to allow the UTRC to gain entry to premises of reporting parties or to authorize the UTRC to require the BNA and other regulators to inspect a regulated entity on request by the UTRC.
- Civil penalties and compliance audits:
  - Consideration should be given to empowering the UTRC to (i) impose civil penalties or administrative fines, either directly or through a court order, on reporting parties for failure to make timely reports and for other violations of AML laws; and (ii) conduct compliance audits of reporting entities.
- Budgetary procedures:
  - Although the UTRC’s budget is approved annually by the council of ministers and the parliament, approval for each purchase of goods and services must be obtained in advance by the UTRC from the ministry of finance, along with a monthly projection of planned expenditures.
  - This approach is cumbersome and time-consuming and should be replaced by a budgetary allocation and yearly audit by the ministry or other appropriate agency of the government.
- Timing note:
  - The supervisory board has indicated that it does not expect to begin on-site inspections of CSPs before January 2003, at the earliest.

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### ATTACHMENT I — Comments on Company Service Provider Legislation

### Overall observation
- The Fund delivered extensive comments that led to substantial improvements in the law, but a number of significant issues remain. The Fund would be pleased to provide technical assistance on these issues if desired by the authorities.

### Scope of regulated activities
- The limited definition of CSPs, contained in the ordinance that only includes companies, should be expanded to include any person or entity that, by way of business, engages in the provision of regulated activities.
- The definition of “fiduciary services” (Article 1(g)) is too narrow and should contain a reference to all those activities subject to regulation, including, but not limited to:
  - (i) the provision of premises for use as a registered office for a company;
  - (ii) the provision of accommodation address facilities for a company;
  - (iii) acting as a director, alternate director, officer, or secretary of companies;
  - (iv) arranging for others to be directors, alternate directors, officers, or secretaries of companies;
  - (v) the provision of company administration services;
  - (vi) the safekeeping of shares and other securities;
  - (vii) such additional activities the supervisory authority may provide by issuance of a regulation.

### Fit and proper criteria
- The CSP ordinance requires that the regulator rely to a large extent on a statement by the applicant as to the background of shareholders, directors, and managers (Article 7(d)).
- The regulatory entity should be required to verify all the information provided by the applicant prior to the granting of a license.
- The law should include legal authority for the regulatory entity to request information on the identity of indirect shareholders or connections to groups of controlling shareholders, not only at the time of filing the application for a license, but also on an ongoing basis.
- Broad criteria in the law for ‘fit and proper’ qualifications should include:
  - having no criminal convictions;
  - not having been declared bankrupt or having been a director or senior official of a company that has been declared bankrupt;
  - possessing a university degree.
- These broad criteria would then be elaborated in more detail in regulations pursuant to Article 4(4) of the law.
- The “four-eyes” principle should be required for all CSPs, i.e., that at least two managers be working at the CSP at all times.

### Inspection powers
- Article 12(4) powers should also include the regulator’s authority to inspect and get access to books, records, accounts, and documents of former CSPs only in respect of such transactions, matters, or circumstances as occurred or existed when it was the holder of a CSP’s license.
- Such inspection powers should also be exercised in relation to any person or entity that, on reasonable grounds, is suspected by the supervisory entity of carrying on or to have previously carried on, business as a CSP without a license.

### Reporting and external audit requirements
- The financial statements requirement of Article 13 of the CSP ordinance is not sufficient.
- The ordinance should expressly require that CSPs prepare, in accordance with generally accepted accounting principles, annual accounts audited by an independent auditor.
- CSPs should also be required to furnish to the supervisory entity the annual audited accounts together with:
  - (i) a written confirmation of an independent auditor that the annual accounts have been prepared as required under the existing rules and regulations;
  - (ii) a certificate of compliance issued by an independent auditor that the CSP is in compliance with its obligations under the specific regulations set forth for CSPs.
- The ordinance should include special provisions requiring that the external auditor report to the supervisory entity any irregularities it may find in its examination.

### Enforcement mechanisms and penalties
- The ordinance should be revised to provide the regulator with authority to take actions based on broadly defined grounds—such as a threat to the integrity of the financial services industry, a threat to the financial soundness of the CSP, unfit ownership and/or management, and improper conduct of business—including one or more of the following:
  - issue a written directive requiring that action be taken by the CSP;
  - impose conditions to the license with regard to specified activities;
  - require the appointment of a special auditor at the expense of the CSP;
  - require the appointment of an advisor;
  - require the appointment of a temporary administrator or conservator to manage the affairs of the CSP under the direction of the supervisory entity;
  - impose a range of civil money penalties in amounts sufficiently high to discourage failure to comply with the law;
  - remove, suspend, and bar controlling shareholders, directors, managers, auditors, and employees not only from the affairs of a specified CSP, but also from future involvement in any CSP;
  - revoke the license of a CSP and liquidate it.

### Information sharing
- The ordinance should establish the rules for information sharing between the regulator and other agencies within the Netherlands Antilles (such as the BNA) as well as with regulators, financial intelligence units, and prosecutors in foreign jurisdictions.
- The supervisory entity should be authorized to furnish data and information received through its performance of duties.
- The supervisory entity should ascertain that:
  - the data or information will not be used for a purpose other than that for which it was furnished;
  - the secrecy of the furnished data or information has been adequately guaranteed;
  - the information is provided on the basis of reciprocity.

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_Source: https://www.imf.org/-/media/files/publications/ofca/english/cr04271.pdf_