## IMF assessment mission to The Bahamas (cr04318) ## Source details **Canonical URL:** [IMF assessment mission to The Bahamas (cr04318)](https://www.imf.org/-/media/files/publications/ofca/english/cr04318.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr04318.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr04318.pdf.json) --- ### Mission scope, timing, and methodology - Assessment covered regulatory and supervisory arrangements for the financial sector in The Bahamas, including arrangements for combating money laundering and the financing of terrorism. - Substantive assessment period: October 21–November 1, 2002; preliminary mission in January 2002; independent law enforcement expert mission in late April 2003 for AML issues outside Fund competence. - Scope included banking, securities, and trust and company services sectors; insurance sector excluded. - Methodology: “Module 2” approach using Basel Committee and IOSCO methodologies and the “Methodology for Assessing Compliance with Anti-Money Laundering and Combating the Financing of Terrorism Standards” (dated October 11, 2002) agreed between the IMF, World Bank and FATF. - Considered Offshore Group of Banking Supervisors “Trust and Company Service Providers: Statement of Best Practice” (September 6, 2002); Bahamian authorities opted not to include a review of trust and company service providers due to absence of internationally agreed standards. ### Progress and institutional developments - Very substantial progress toward an effective regulatory regime over the prior two years, reflected in: - body of legislation enacted in December 2000; - structural and operational arrangements established by supervisory agencies. - Major improvements attributed to strong leadership and dedicated staff at the Central Bank of The Bahamas (CBB) and the Securities Commission of The Bahamas (SCB). - Transition imposed considerable burden on regulators and private sector; majority of transition appears over but several issues remain. ### Key structural and governance observations - Regulatory structure is complex with an excessive number of agencies and pressure on limited technical and financial resources. - Cooperative arrangements exist, but statutory specificity authorizing cooperation is needed. - Government-appointed Commission (May 2002), chaired by the Governor of the CBB, to examine structure and recommend reforms. - Short-term concerns: - Dual reporting lines: some agencies report to the Ministry of Finance, others to the Ministry of Financial Services and Investments — this: - does not facilitate effective communication when unity is needed; and - gives rise to perceived conflict of interest combining regulatory and promotional responsibilities. - Recommendation preference: group all regulatory functions directly under the Ministry of Finance. - Securities Commission governance issues: - CBB has clearly defined independence of direction and operation. - Members of the SCB, including the Executive Director, may be removed forthwith without due cause; mission recommends dismissal only for just cause. - Operational risk noted due to imminent departure of an Executive Director with no successor nominated. - Information sharing: - Major improvements in ability to obtain information and assist overseas authorities. - Variation in application of legal provisions across agencies; standardization of requirements and procedures recommended. ### Banking sector risks and supervisory resources - Legacy of managed banks with no meaningful physical presence; some pose material reputation risks. - CBB issued directives giving these banks until June 2004 to establish a material presence or close; interim close oversight recommended. - Statute vests extensive powers in the Governor of the CBB personally, but statutory protection against civil and criminal liabilities is not extended to the Governor nor provided to SCB staff; mission recommends correcting these omissions. - Regulatory agencies face staff shortages with appropriate depth of skills; CBB relatively better placed. - Recommendation to establish a properly resourced policy unit within the Bank Supervision Department (BSD) and address priority issues. ### AML/CFT framework: status and short-term operational issues - Extensive provisions introduced since June 2000; fundamentals present but practical difficulties due to detailed and prescriptive requirements. - Ambiguities in exceptions to know-your-customer (KYC) rules may weaken framework. - Mission recommends encouraging a more risk-based approach within an overall framework demanding high standards of customer identification. - Cabinet was considering a draft Terrorism Bill; the Terrorism Bill was tabled in Parliament on June 25, 2003 and was still being debated when report finalized. - Short-term operational recommendations: - extend time permitted to financial institutions to identify customers on pre-2000 Bahamian dollar accounts; - revise provisions on beneficial owner identification and “eligible introducer” lists. ### Summary of key recommendations (selected) - General: - Consolidate reporting lines for regulatory authorities under the Ministry of Finance. - Complete comprehensive review of the regulatory framework to determine efficient local structure. - Introduce statutory protection against civil and criminal liability for all staff of, and official appointees to, regulatory authorities, while performing duties in good faith. - Banking: - Clarify extent to which branches and subsidiaries of foreign banks may pass information to head offices/parent banks for consolidated risk management and supervisory purposes. - Establish a properly resourced policy unit within the BSD. - Securities: - Narrow ministerial power to dismiss SCB members so that just cause is grounds for dismissal. - Complete draft mutual funds law and amendments to securities legislation and present to parliament as soon as possible. - Establish clear policy on confidentiality declarations required from overseas regulators to permit efficient information exchanges. - AML/CFT: - Ratify all relevant international conventions. - Enact legislation to criminalize and make other provisions in relation to financing of terrorism. - Rationalize money laundering legal framework to reduce highly prescriptive requirements and permit a risk-based approach. - Reduce number of exceptions to the principle of requiring financial institutions to identify their customers. - Extend time permitted to undertake customer identification on pre-2000 Bahamian dollar accounts; consider risk-based approach to resolving outstanding accounts. - Revise provisions relating to identification of beneficial owners/beneficiaries of corporate entities, trusts, partnerships, etc., to ensure no legal exceptions. - Review list of countries and institutions underpinning “eligible introducer” provisions. ### Financial system profile and key statistics - Geography and population: - archipelago of approximately 700 islands and cays, covering nearly 100,000 square miles of the Atlantic Ocean; - Bahamas stretch 750 miles southeasterly from approximately 50 miles east of Florida to within 50 miles of Haiti and Cuba; - population approximately 300,000, concentrated on New Providence (Nassau) and Grand Bahamas. - Economic dependence and sectoral shares: - Tourism and international financial services together account for approximately 55 percent of GDP. - Tourism represents an estimated 40 percent of GDP and employs over half the workforce. - In 2001, nearly 4.2 million visitors spent in excess of US$1.8 billion; more than 80 percent were from the United States and Canada. - Financial services sector accounts for an estimated 15 percent of GDP. - Macroeconomic and labor statistics: - Real GDP averaged 4.3 percent annual growth during 1996 through 2000 (international agencies’ estimate). - Fund estimates a contraction of 2 percent in 2001, with subdued growth in 2002 and early 2003. - Annual average inflation rate during 1992–2001: 2.06 percent per annum. - Workforce at end 2001: 164,675 persons; unemployment rate: 6.9 percent. - Financial institutions and markets: - At mid-October 2002, 310 licensed institutions: 123 held combined banking and trust licenses, 80 held only a banking license, 107 authorized solely to undertake trust business. - 198 institutions held public licenses to conduct a wide range of business; remainder restricted or inactive. - Domestic commercial banking sector: nine institutions with total deposit liabilities about US$22 billion, of which US$3.7 billion due to residents. - Total external assets of banking system at end-2001: US$258 billion. - Funds under management totaled approximately US$1 trillion (industry estimate). - At end-June 2002, 60 licensed fund administrators handling 706 mutual funds with total assets under management of US$97 billion; about 200 funds classified as “exempt.” - Company registrations: registered international business companies (IBCs) declined from approximately 117,000 at end-2000 to 47,100 in June 2002. - Market structure and constraints: - Bahamas ranked among world’s top five OFCs in relation to banking assets and assets under management. - Financial services sector employs some 14,000 persons. - Competitive advantages: English-speaking Commonwealth democracy, same time zone as New York, geographic proximity to U.S. eastern seaboard, relatively developed infrastructure, well-educated workforce. - Constraint: very high telecommunications costs limiting growth for dealing and back office functions. ### Regulatory framework, agencies, and coordination - Key laws (as amended): Central Bank of The Bahamas Act, 2000; Banks and Trust Companies Regulation Act, 2000; The Securities Industry Act, 1999; Mutual Funds Act, 1995; Financial and Corporate Service Providers Act, 2000; Proceeds of Crime Act, 2000; Financial Transactions Reporting Act, 2000; Financial Intelligence Unit Act, 2000. - Five agencies perform regulatory functions with interrelated responsibilities: CBB, SCB, Compliance Commission, Financial Intelligence Unit (FIU), Inspector of Financial and Corporate Service Providers (IFCS); Registrar of Insurance also noted. - All agencies supervise activities in both domestic and offshore sectors under a general legal and regulatory framework without differential regimes. - FIU established early 2001, member of Egmont Group, staff of 16 comprising police officers and analysts. - Group of Financial Services Regulators established 2001 with six-month revolving chairmanship; signed a memorandum of understanding on October 16, 2002 (five agencies excluding FIU) addressing information sharing, joint examinations, lead regulator identification, and routine coordination on license applications. - Project underway to create database identifying institutions with multi-agency interests; government-appointed Commission to consider moves toward a more unified regulatory system, possibly a single regulator. ### Resources, staffing, and agency capacities (selected figures) - CBB: - BSD staff total: 53 after rapid expansion. - Has responded to approximately 200 requests for information since December 2000. - SCB: - Total staff: 31. - IFSC: - Total staff: 4. - FIU: - Staff: 16. - Licensed institutions and physical presence: - Total bank and trust licensees: 310, of which 300 active. - Licensees with bank and trust or solely bank licenses: 203. - Licensees with physical presence in jurisdiction: 209; remainder were managed licensees including 36 stand-alone, or “shell,” banks. - Decision requiring substantially all banks to establish physical presence by June 2004 expected to result in surrender of up to 100 licensees. ### Basel Core Principles: selected findings and action plan highlights - Capital adequacy and risk frameworks: - Basel Capital Accord framework set in statute. - CBB applies dual minimum capitalization: either 8 percent of risk assets or 5 percent of total assets, whichever is higher. - Ongoing supervision: - On-site examinations introduced January 2001; on-site work expanded from AML compliance to risk management, corporate governance, and financial soundness. - CBB has not extended on-site program to overseas offices. - Supervisory information and auditors: - Banks required to submit annual report prepared by an approved external auditor accompanied by management certificate. - Appointment of all auditors subject to approval by Governor of the CBB. - CBB prefers IAS but permits other accounting standards subject to notification. - Formal powers and remedial measures: - Statute defines limited remedial actions supplemented by broad corrective power. - CBB has developed a ladder of intervention; publication of ladder and legal clarity on suspension recommended. - Recommended Action Plan (selected CP references and authorities’ responses preserved): - CP 1(2) Resources: Establish policy unit within BSD and additional legal adviser — Authorities: Agreed and in progress. - CP 1(5) Legal Protection: Grant Governor same protections as supervisory team — Authorities: Agreed; Banks and Trust Companies Act, 2000 under review. - CP 5 Investments: Finalize draft regulations — Authorities: Agreed; draft Regulations on Acquisitions and Investments under AG review; expected release in late 2003. - CP 10 Connected Lending: Finalize and publish draft regulations — Authorities: Agreed and substantially completed; Large Exposures regulations/guidelines expected by January 2004. - CP 13 Other Risks: Identify priorities and specialized skills — Authorities: Agreed; market risk flagged for external assistance. - CP 22 Remedial Measures: Publish ladder of intervention and review laws regarding suspension — Authorities: Agreed; ladder to be published as part of “The Regulatory Framework of Bank and Trust Supervision in The Bahamas.” ### Securities regulation (IOSCO) — selected findings and recommended actions - Market structure: - Domestic securities market extremely thin: 16 stocks traded on BISX; market capitalization less than US$2 billion; average about 10 trades per day; BISX has three members and faces severe financial difficulties. - Offshore sector dominated by mutual funds: 706 mutual funds with US$97 billion assets under management at end-June 2002. - Regulator and powers: - SCB supervises securities market and mutual fund industry; staff 31; quasi-governmental; reports to the minister of finance who has wide unspecified powers including dismissal of Commissioners. - Legal protection against civil liability not provided to SCB Commissioners or staff. - Cooperation and MOUs: - SCB had not signed any bilateral MOUs with foreign regulators as of assessment; conclusion of MOUs recommended. - SCB appears reluctant to permit onward disclosure by requesting authorities; IOSCO MOU under consideration. - Issuers, disclosure, and collective investment schemes: - No statutory mechanism governing takeover bids and treatment of shareholders; SIA empowers SCB to make rules but appropriate mechanisms not yet implemented. - Time period for public companies to release price-sensitive information under SIA: five days — mission recommends aligning with BISX “without delay.” - Mutual Funds Act licensing and exemption requirements complex; Investment Funds Bill prepared to simplify and extend SCB oversight; Investment Funds Bill passed both Houses and awaits appointed date to become law pending Regulations. - Market intermediaries and exchange: - SCB should create/test contingency plan for failure of an investment firm. - BISX reports monthly and inspected bi-annually; only one inspection to date; exchange needs additional funding and SCB should be satisfied it can manage orderly wind-down if necessary. - Recommended legislative amendments: - Narrow ministerial directions and dismissal powers; provide immunity to Commissioners and staff; introduce Mutual Fund Bill and amend SIA — authorities generally agreed and progressing. ### FATF assessment on AML/CFT — main findings and selected recommendations - Overall: - Important progress since June 2000; provisions contain fundamentals but are extremely detailed and prescriptive, posing practical difficulties. - Mission recommends a more risk-based approach within a high-standard customer identification framework. - Terrorism financing (FT) not criminalized at assessment time; Terrorism Bill tabled June 25, 2003. - Criminalization and penalties: - Money laundering criminalized as an indictable offense covering all proceeds of criminal conduct, consistent with Vienna and Palermo Conventions and FATF 40. - Penalties include unlimited fines and imprisonment of up to 20 years for "conviction on information." - Confiscation and freezing: - Provisional measures exist; POCA permits restraint orders ex-parte; confiscation after conviction permissible. - No provisions for identifying/tracing assets suspected of financing terrorism; laws do not provide for freezing funds/property of terrorists in accordance with UN resolutions. - FIU and reporting issues: - FIU established December 2000, member of Egmont Group; Director reports to Attorney General by annual report; Minister (Attorney General) may give the FIU directions in writing of a general nature as to policy. - Reporting gaps: persons other than financial institutions may report to police or FIU; no clear requirement police keep FIU apprised of STRs; auditors may report to any police member — potential delays. - Mutual legal assistance and extradition: - Mutual legal assistance available via application to Attorney General; CJA provides assistance without need for dual criminality or reciprocity for non‑treaty countries. - Extradition possible under Extradition Act, 1994; Act is dual criminality and minimum sentence Act; for Commonwealth countries minimum sentence requirement: two years; for other countries bilateral treaties required (e.g., U.S./Bahamas treaty article 2 sets one year). - FATF recommended actions (selected): - Revise confidentiality provisions to ensure domestic and international information sharing. - Amend POCA to reflect that the intentional element may be inferred from objective factual circumstances. - Amend POCA to allow forfeiture of property of corresponding value. - Reduce/eliminate exception from identification requirements applicable to transactions by/through other financial institutions or eligible introducers. - Prohibit establishment of anonymous or fictitious accounts; tighten POCA provisions on beneficial ownership of accounts, particularly trusts. - Require liquidated/dissolved companies to retain records for five years. - Create obligation to monitor, detect, and analyze unusual/complex transactions. - Enact regulations requiring banks to test compliance against home and host country KYC standards and follow group policies ensuring identity verification at least to Bahamian standards. - Provide regulatory authorities with resources for adequate on-site and off-site AML supervision. - Consider expanding staff at Attorney General’s Office and Tracing and Forfeiture/ML Investigation Section of Royal Bahamas Police Force. - Ratify and implement the 1999 International Convention for the Suppression of Financing of Terrorism and UN Security Council Resolution No.1373; criminalize financing of terrorism. - Amend wire transfer rules: Regulation 8 of the FTRR does not require originator name, address and account number to remain with the transfer — amend to meet FATF Special Recommendation VII. - Place measures for nonprofit organizations in law and implement supervision/monitoring. ### Authorities’ responses and legislative/administrative follow-up (selected) - Central Bank, Legislative Committee, and SCB actions and positions: - Legislative Committee constituted to review FTRA, FTRR and AML-KYC Guidelines; draft amendments submitted to government to adjust customer due diligence to a more risk-based approach. - CBB responses to mission concerns: - Section 15(2) BTCRA permits Inspector to give general approval for systematic transfer of certain classes of information between licensee and head office; shared client agreements frequently support intra-Group transfer. - Interprets confidentiality provisions as binding the licensee via directors/officers. - Considers legislative framework on beneficial owner identification adequate but will consider mission comments regarding Section 9 of FTRA. - Legislative Committee addressing wire transfer field requirements in draft Customer Due Diligence Regulations. - Proposals to implement risk-based customer acceptance system and to consider archiving records for dissolved/liquidated companies. - Will consider introducing fines for AML non-compliance and proceed with instituting fines where licensees do not comply. - SCB responses: - IOSCO MOU under consideration. - SCB will consider adopting BISX “without delay” disclosure timing in SIA amendments. - Investment Funds Bill passed both Houses and awaits appointed date pending Regulations. - SCB shares nonpublic information based on requesting authority undertakings and has responded to 16 of 19 overseas requests (January 2000–September 2003), with three matters pending. *International Monetary Fund assessment mission to The Bahamas (October 21–November 1, 2002; independent AML expert April 2003) — IMF staff report (cr04318).* ### Preface................................................................................................................. ### Preface ### Mission scope and methodology - The IMF conducted an assessment of the extent to which the regulatory and supervisory arrangements for the financial sector in The Bahamas complied with internationally accepted standards and measures of good practice, including arrangements for combating money laundering and the financing of terrorism. - The substantive assessment took place in the period October 21–November 1, 2002, following a preliminary mission in January 2002. - An independent law enforcement expert mission was undertaken in late April 2003 to review anti-money laundering issues outside the competence of the Fund mission. - The scope included the banking, securities, and trust and company services sectors, and extended to both the domestic and offshore markets. The insurance sector was excluded because it is a relatively small part of the Bahamian finance industry and its future development was under review by the authorities. - The assessment used the “Module 2” approach and employed: - long-standing methodologies of the Basel Committee and International Organization of Securities Commissions (IOSCO); - the “Methodology for Assessing Compliance with Anti-Money Laundering and Combating the Financing of Terrorism Standards” (dated October 11, 2002) agreed between the IMF, World Bank and the Financial Action Task Force (FATF). - The mission also considered the “Trust and Company Service Providers: Statement of Best Practice” (Offshore Group of Banking Supervisors, September 6, 2002); the Bahamian authorities opted not to include a review of trust and company service providers in the report due to the absence of internationally agreed standards. ### Mission activities and consultations - The mission reviewed relevant legislation, regulations and guidelines, and held discussions with: - government ministers and officials (Attorney General’s Chambers, Ministry of Finance, Ministry of Financial Services and Investment); - regulatory authorities (Central Bank, Securities Commission, Inspector of Financial and Corporate Services (IFCS), Compliance Commission); - the Financial Intelligence Unit (FIU); - a broad cross-section of private sector practitioners and professional associations. - Certain draft legislation, regulations, and policy guidelines were reviewed where appropriate. - The mission comprised Mr. Richard Chalmers (mission chief, MFD); Ms. Joy Smallwood (LEG); Messrs. Richard Britton, Christopher Cooke, Laurent Ettori, and Ms. Tanya Smith (consultants, MFD). The independent law enforcement expert for the AML/CFT assessment was Mr. Russell Ursula (CFATF Secretariat). ### Executive Summary ### Progress and institutional developments - Very substantial progress toward an effective regulatory regime in The Bahamas over the past two years, reflected in: - the body of legislation enacted in December 2000; - structural and operational arrangements put in place by supervisory agencies. - Major improvements by the Central Bank of The Bahamas (CBB) and the Securities Commission attributed to strong leadership and dedicated staff. - The transformation imposed a considerable burden on the regulatory agencies and on private sector institutions; while the majority of the transition appears over, several issues remain to be resolved. ### Key structural and governance observations - The overall regulatory structure is complex, involves an excessive number of agencies, and places considerable pressure on limited technical and financial resources. - Agencies have developed cooperative arrangements, but statutory specificity authorizing cooperation is needed. The government-appointed Commission (May 2002), chaired by the Governor of the CBB, was to examine the current structure and make recommendations for reform. - Short-term concerns: - Dual reporting lines: some regulatory agencies report to the Ministry of Finance and others to the Ministry of Financial Services and Investments, which: - do not facilitate effective communication when unity is needed; and - give rise to a perceived conflict of interest in combining regulatory and promotional responsibilities (in the Ministry of Financial Services and Investments). - Recommendation preference: group all regulatory functions directly under the Ministry of Finance (distinct from any rationalization of the regulatory infrastructure). - Securities Commission governance: - CBB has clearly defined independence of direction and operation. - Members of the Securities Commission, including the Executive Director, may be removed forthwith without due cause; mission recommends circumscribing this power so that just cause is the grounds for dismissal. - The then-current Executive Director was due to leave in less than one month with no successor nominated, posing operational risk. - Information sharing: - Major improvements in regulators’ ability to obtain information and assist overseas authorities. - Application of legal provisions varies across agencies; standardization of requirements and procedures recommended. ### Banking sector risks and supervisory resources - Legacy of managed banks that maintain no meaningful physical presence in The Bahamas; some pose material risks to jurisdictional reputation. - CBB issued directives giving these banks until June 2004 to establish a material presence in the islands or to close; in the interim, CBB should maintain close oversight to bring supervision toward standards applied to the rest of the banking sector. - Legislation vests extensive powers in the Governor of the CBB personally, but does not grant the Governor the same statutory protection against civil and criminal liabilities provided to the CBB’s supervisory staff; analogous protection is not provided to Securities Commission staff. The mission recommends correcting these omissions to reduce risk of obstructive legal action. - Regulatory agencies face staff shortages with appropriate depth of skills; CBB is relatively better placed. Agencies should create environments to attract and retain scarce skills that the private sector values highly. - Recommendation to establish a properly resourced policy unit within the Bank Supervision Department (BSD) and address priority issues. ### AML/CFT framework - Extensive provisions introduced since June 2000; contain important fundamentals but present practical difficulties due to detailed and prescriptive requirements. - Ambiguities in exceptions to know-your-customer (KYC) rules may weaken the framework. - Mission recommends encouraging a more risk-based approach within an overall framework demanding high standards of customer identification. - Cabinet was considering a draft Terrorism Bill (intended to be presented to Parliament shortly); the Terrorism Bill was tabled in Parliament on June 25, 2003 and was still being debated when the report was finalized. - Short-term operational recommendations included extending time permitted to financial institutions to identify customers on pre-2000 Bahamian dollar accounts and revising provisions on beneficial owner identification and “eligible introducer” lists. ### Summary of Key Recommendations - General - Consolidate the reporting lines for the regulatory authorities under the Ministry of Finance. - Complete the comprehensive review of the overall regulatory framework to determine the most efficient structure for the local environment. - Introduce statutory protection against civil and criminal liability for all staff of, and official appointees to, the regulatory authorities, while performing their duties in good faith. - Banking - Clarify the extent to which branches and subsidiaries of foreign banks may pass information to their head office and parent bank for consolidated risk management and supervisory purposes. - Establish a properly resourced policy unit within the Bank Supervision Department (BSD) and address the issues on which action is required. - Securities - Narrow the powers of the minister to dismiss members of the Securities Commission so that just cause is the grounds for dismissal. - Complete the work on the draft mutual funds law and on the amendments to the securities legislation and present to parliament as soon as possible. - Establish a clear policy with respect to the confidentiality declaration required from overseas regulators in order to permit efficient exchanges of information in line with the practice adopted by the CBB. - AML/CFT - Ratify all the relevant international conventions. - Enact legislation to criminalize and make other provisions in relation to the financing of terrorism. - Rationalize the legal framework with respect to money laundering to reduce highly prescriptive requirements and permit financial institutions to develop a risk-based approach. - Reduce the number of exceptions to the high level principle of requiring financial institutions to identify their customers. - Extend the time permitted to financial institutions to undertake customer identification on pre-2000 Bahamian dollar accounts, and consider introducing a risk-based approach to resolving outstanding accounts. - Revise provisions relating to the obligation to identify beneficial owners/beneficiaries of corporate entities, trusts, partnerships, etc., to ensure no legal exceptions. - Review the list of countries and institutions underpinning the “eligible introducer” provisions to ensure they do not weaken customer identification requirements. ### Financial System Overview — Background - Geography and population - The Commonwealth of The Bahamas is an archipelago of approximately 700 islands and cays, covering nearly 100,000 square miles of the Atlantic Ocean. - From its westernmost island (approximately 50 miles east of Florida), The Bahamas stretch 750 miles in a southeasterly direction to within 50 miles of Haiti and Cuba. - Population is approximately 300,000, most concentrated on New Providence (capital Nassau) and Grand Bahamas. - Political context - The Bahamas became independent on July 10, 1973, and has a political system based on the British Westminster model with a Governor General, a Prime Minister and a bicameral Parliament. - Political stability since independence. - In the general election held in May 2002, the Progressive Liberal Party was elected to a five-year term, winning 29 of 40 seats; the Free National Movement governed between 1992 and 2002. *International Monetary Fund assessment mission to The Bahamas (October 21–November 1, 2002).* ### 3. The Bahamian economy is highly dependent upon tourism and international financial ### The Bahamian economy is highly dependent upon tourism and international financial services ### Tourism and international financial services: contributions and characteristics - Tourism and international financial services together account for approximately 55 percent of GDP. - Tourism represents an estimated 40 percent of GDP and employs, directly and indirectly, over half of the workforce. - In 2001, The Bahamas attracted nearly 4.2 million visitors, who spent in excess of US$1.8 billion. - More than 80 percent of these visitors were from the United States and Canada. - The financial services sector accounts for an estimated 15 percent of GDP, with additional hidden contribution from high-value tourism associated with business visitors (e.g., accompanying spouses and post-business stayovers). - The Bahamas has been an attractive domicile for offshore financial services over the past fifty years. ### Recent policy responses and sector adjustments - In response to international concerns about money laundering and regulatory weaknesses, at the end of 2000 the government enacted far reaching measures to strengthen regulatory and supervisory regimes and to allow easier cooperation with foreign regulators. - These measures required significant adjustment by sector participants and are expected by the authorities to enhance the long-term attractiveness of The Bahamas as an international financial services center. - The government intensified efforts to improve tourism competitiveness by promoting new investment in hotels and other facilities, encouraging wage constraint, and expanding marketing efforts. - The offshore legislative suite has been progressively expanded, with particular focus on development of the securities and mutual funds industry; the government is looking to introduce new legislation to make the jurisdiction more competitive in offshore insurance and niche products (e.g., special purpose vehicles, protected cell companies, e-commerce). ### Macroeconomic performance and labor market - Real GDP averaged 4.3 percent annual growth during 1996 through 2000 (international agencies’ estimate). - The Fund estimates a contraction of 2 percent in 2001, with subdued growth in 2002 and early 2003. - The recent weak performance reflects U.S. recessionary conditions and the impact of September 11, 2001. - During 1992–2001, The Bahamas experienced an annual average inflation rate of 2.06 percent per annum. - The workforce at end 2001 comprised 164,675 persons and the unemployment rate was 6.9 percent. - The broad economic strategy articulated by the government emphasizes maintaining fiscal prudence, encouraging foreign direct investment, and increasing access to development benefits for lower and middle income families. Key elements include: - Encouraging development in agriculture, fisheries, and manufacturing through closer integration with tourism and other sectors. - Increasing competitiveness of the tourism industry. - Broadening the scope of the international services sector. - Pursuing privatization of government-owned corporations where feasible. - Increasing and enhancing the efficiency and effectiveness of services generally. ### Offshore financial center profile and market structure - The Bahamas is regarded as one of the preeminent OFCs in development, size, and market share; ranked among the world’s top five OFCs in relation to banking assets and assets under management. - The financial services sector broadly defined employs some 14,000 persons. - Activity is linked primarily to Latin American, North American, and (to a lesser extent) European markets; the business cycle is particularly defined by U.S. economic developments. - Competitive advantages include: stable English-speaking Commonwealth democracy, same time zone as New York, geographic proximity to the U.S. eastern seaboard, relatively developed infrastructure, and a substantial, well-educated workforce. - Constraints include very high telecommunications costs, which have limited growth potential for dealing and back office functions. ### Financial institutions and markets — banks and trust companies - At mid-October 2002, there were 310 licensed institutions: 123 held combined banking and trust licenses, 80 held only a banking license, and 107 were authorized solely to undertake trust business. - In total, 198 institutions held public licenses to conduct a wide range of business; the remainder were restricted in scope or inactive. - The domestic commercial banking sector comprises nine institutions with total deposit liabilities of about US$22 billion, of which only US$3.7 billion are due to residents of The Bahamas. - Total external assets of the banking system at end-2001 were US$258 billion. - Funds under management totaled approximately US$1 trillion (industry estimate). - The offshore sector’s traditional focus: wholesale euro-currency business, private banking, and asset management; Swiss, North American, and British-based banks have a strong presence. - Approximately two-thirds of offshore banks maintain a substantive physical presence in the islands. - Requirement: all banks and trust companies to establish a physical presence in the islands by June 2004 (resident senior personnel and comprehensive books and records maintained in jurisdiction). - The authorities expect licensed banks and trust companies to decline to about 250 institutions by June 2004 from just over 400 at end-2000. ### Securities, mutual funds, and company service providers - The local securities market is extremely thin: 16 stocks traded on the Bahamas International Securities Exchange (BISX), market capitalization of less than US$2 billion, and an average of about 10 trades per day; BISX has three members and is facing severe financial difficulties. - At end-June 2002, there were 60 licensed fund administrators handling 706 mutual funds with total assets under management of US$97 billion. - About 200 of these funds are classified as “exempt” (either overseas funds established in approved jurisdictions or local funds targeted at 15 or fewer investors). - Approximately one-half of the total value of funds under management is administered by a single dominant firm. - Company service providers: the number of registered international business companies (IBCs) declined from approximately 117,000 at end-2000 to 47,100 in June 2002 following legislative amendments (abolition of bearer shares; obligation on formation agents to maintain certain books and records in the jurisdiction). ### Regulatory framework, oversight, and anti-money laundering arrangements - Key legislation (as amended) and associated regulations include: - Central Bank of The Bahamas Act, 2000; - Banks and Trust Companies Regulation Act, 2000; - The Securities Industry Act, 1999; - Mutual Funds Act, 1995; - Financial and Corporate Service Providers Act, 2000; - Proceeds of Crime Act, 2000; - Financial Transactions Reporting Act, 2000; - Financial Intelligence Unit Act, 2000. - The Financial and Corporate Service Providers Act (December 2000) requires licensing of persons (other than licensed banks or trust companies) offering company registration and management services; a three-month window was granted for existing firms to apply for licenses. The IFCS Providers had issued 165 licenses at the time of the mission’s visit. - Five agencies perform regulatory functions with some interrelated and sometimes overlapping responsibilities: Central Bank of The Bahamas (CBB), Securities Commission of The Bahamas (SCB), Compliance Commission, Financial Intelligence Unit (FIU), Registrar of Insurance, and Inspector of Financial Services (IFCS). - Summary of supervisory responsibilities: - CBB licenses and supervises banks and trust companies. - SCB oversees securities and mutual funds. - IFCS supervises company managers and related service providers. - Registrar of Insurance supervises insurers. - Compliance Commission ensures compliance with AML obligations for businesses not subject to prudential supervision. - All agencies supervise activities in both domestic and offshore sectors under a general legal and regulatory framework without differential regimes between the two sectors. - The FIU was established in early 2001 to receive, analyze, and pass for investigation suspicious transaction reports (STRs); it is a member of the Egmont Group and has a staff of 16 comprising police officers and analysts. ### Strengths and vulnerabilities in the regulatory and supervisory arrangements - Structural vulnerabilities: - Market structure creates risk of regulatory overlap (e.g., banks and trust companies registered as broker-dealers and engaged in incorporation and management of offshore companies). - The Compliance Commission’s remit covers activities that include normal business of prudentially supervised financial institutions. - Some company service providers and trust companies perform similar activities but are supervised under different regimes. - Organizational and governance issues: - While CBB, SCB, and Compliance Commission report to the Minister of Finance, IFCS and Registrar of Insurance report to the Minister of Financial Services and Investments, whose portfolio emphasizes business development and external marketing rather than regulation. - Pressure on the pool of skilled resources to staff multiple regulatory agencies was identified. - Reform actions and institutional responses: - A Fund mission in January 2002 recommended a review of the regulatory structure. - A consultant retained by the Fund visited Nassau and a commission was appointed by the minister of finance in May 2002 to develop a strategy for rationalization of regulatory agencies; the commission comprises the head of the FIU and the heads of other regulatory agencies, is chaired by the governor of the CBB, and received the consultant’s report in June 2002. - Regulators executed an MOU recognizing a primary regulator responsible for AML supervision of its licensees; for financial and corporate service providers and the insurance sector, the Compliance Commission supervises AML compliance on behalf of the Registrar of Insurance and the Inspector of Financial and Corporate Service Providers. - Legal challenges: - Eleven new or revised laws introduced in December 2000 restructured the regulatory environment and removed factors that had long supported the OFC (e.g., high confidentiality, relative lack of intrusive regulation, liberal licensing). - These changes resulted in removal from the FATF NCCT list in June 2001, but spawned legal challenges from the private sector alleging unconstitutionality and adverse interests to the Bahamian people. - One challenge relating to FIU powers to freeze funds by administrative order was successfully appealed by the government; another omnibus action challenging the legislative package was awaiting a substantive hearing before the courts (hearing date set for February 2004). *Source: IMF staff report (cr04318).* ### 27. In the meantime, the Group of Financial Services Regulators, ### Regulatory structure and supervisory coordination in The Bahamas ### Group of Financial Services Regulators and inter-agency cooperation - The Group of Financial Services Regulators was established in 2001 with a six-month revolving chairmanship and terms of reference to ensure greater harmonization of the existing system of regulation. - The group focused on implementing recommendations calling for a unitary approach to a number of regulatory matters within the existing structure and has: - rationalized the overall approach to supervision and reduced the risk of an excessive regulatory burden on the industry; - agreed a program of joint examinations between the CBB and the SCB for institutions of common interest; - agreed that the CBB will assume responsibility with the IFCS for overseeing corporate service activities of banks and trust companies when undertaken through separately licensed subsidiaries; - established a framework between the IFCS and the Compliance Commission to share inspection responsibilities given overlapping constituencies and similar resource limitations. - On October 16, 2002, five agencies (excluding the FIU) signed a memorandum of understanding (MOU) addressing: - sharing of information; - joint examination procedures; - identification of a principal or “lead” regulator; and - routine coordination in processing license applications. - A project is underway to create a database identifying all institutions with multi-agency interests. - A government-appointed Commission is to consider formal moves toward a more unified regulatory system, possibly leading to a single regulator. ### Resources, staffing, and agency capacities - Resource availability varies considerably across agencies; all agencies compete with the private sector for scarce specialist skills. - Central Bank of The Bahamas (CBB): - BSD has a total of 53 staff after rapid expansion in the last two years. - Able to recruit inexperienced junior staff but faces retention problems after training. - Recognizes possible need to adjust salary structure to retain experienced staff. - Benefits from an independent source of funding through central banking functions. - Has compulsory powers to require persons to provide relevant information, with onward disclosure conditions; noncompliance is an offense. - Has responded to approximately 200 requests for information since December 2000. - Securities Commission of The Bahamas (SCB): - Total staff of 31, most well-trained and relatively experienced. - Not entirely self-financed; dependent for a significant proportion of its budget on direct government funding. - Plans to expand scope of license fees to provide sufficient direct income without jeopardizing competitiveness. - Resource constraints have delayed progress on entering formal arrangements with several overseas counterparts. - International Financial Services Commission (IFSC) and Compliance Commission: - Both are relatively new (emerged from December 2000 legislation) and appear poorly resourced in numbers. - The IFSC has a total of 4 staff and is tasked, within the office of the Registrar General, with many routine functions of the company registry. - Both intend to rely extensively on external accountants for on-site examination work while retaining ultimate responsibility for analysis and responses. - Financial Intelligence Unit (FIU): - Established in early 2001 to receive, analyze, and pass STRs under the Financial Transactions Reporting Act (FTRA). - Member of the Egmont Group. - Staff of 16 comprising experienced police officers and analysts. ### Recommendations on regulatory framework and reporting lines - The mission offered two specific recommendations regarding the overall regulatory structure: - First: strongly support undertaking the proposed review of the regulatory framework at the earliest opportunity because the current structure: - gives rise to the risk of duplication of process; - places unnecessary strain on limited authority resources; - exhibits disparity in regulatory approach to different institutions conducting similar business; - would benefit from material changes being implemented before agencies expand and consolidate operations. - Implementation may take some years due to need for legislation and integration/harmonization of systems, procedures, and staff. - Second: recommend consolidation of reporting lines for all regulatory agencies under the ministry of finance to avoid conflicts of interest between promotional and regulatory functions, in line with common international practice. ### Cross-border cooperation, information sharing, and legal gateways - Information sharing with overseas regulatory authorities is addressed by several Acts: the Central Bank of The Bahamas Act, the SIA, the Financial and Corporate Service Providers Act, the FTRA, and the Mutual Funds Act; the conditions are the same across all five Acts. - Permitted disclosure: Bahamian regulators may pass to an overseas regulatory authority any “information necessary to enable that authority to exercise regulatory functions including the conduct of civil or administrative investigations and proceedings to enforce laws, regulations, and rules administered by that authority.” - Definition and scope: - “Overseas regulatory authority” is not defined identically across Acts but is broadly deemed an agency that fulfils the same functions as the respective Bahamian authority. - The CBB has discretion to extend corresponding functions to “any additional regulatory function in relation to companies or financial services as the bank may specify by order.” - Preconditions for disclosure: - Regulators must take into account various factors and must be satisfied, among other things, that: - the requesting authority provides an undertaking on confidentiality sufficient to show the requester is subject to “adequate legal restrictions on further disclosure,” or - the requesting authority undertakes not to disclose the information without prior consent of the donor; - the information will not be used in criminal proceedings against the person providing the information. - Observed differences in application: - The SCB appears to hold requests to a standard that is difficult to achieve, limiting the amount of nonpublic information shared with other supervisors. - The CBB focuses on reasonable assurances of protection and notes information has been provided on the understanding it will be kept confidential and not disclosed further without prior approval of the CBB. - Bilateral MOUs: - Neither the CBB nor the SCB is required to have a bilateral MOU before sharing information, facilitating efficient exchanges. - The CBB is negotiating with six overseas authorities; SCB progress has been delayed by resource constraints. - Legal impediments at institution level: - Section 15 of the BTCRA states no person “shall, without the express or implied consent of the customer concerned, disclose to any person any such information relating to the identity, assets, liabilities, transactions, or accounts of a customer.” - Exceptions primarily allow the CBB to perform ancillary duties; information may be passed only for collating or synthesis purposes beyond customer consent. - Gateways have developed within industry practices to permit sharing with head offices for specific requests; some institutions use general confidentiality waivers at account opening, though views differ on their sufficiency. - Judicial cooperation: - The Bahamas has treaties with Canada and the United States on Mutual Assistance in Criminal Matters and an agreement with the United Kingdom “Concerning the Investigation of Drug Trafficking and Confiscation of the Proceeds of Drug Trafficking.” - Domestic legislation provides gateways through the “Criminal Justice (International Cooperation) Act 2000” and the “Evidence (Proceedings in Other Jurisdictions) Act 2000.” ### Summary assessment under Basel Core Principles (selected findings) - Assessment basis: CBB self-assessment, review of laws/regulations/prudential guidelines, discussions with CBB governor and staff, industry groups, and review of examination templates and manuals. - Banking sector structure and scale: - Total bank and trust licensees: 310, of which 300 were active. - Licensees with bank and trust, or solely bank licenses: 203; remainder were trust or nominee trust licenses. - Licensees with physical presence in the jurisdiction: 209; the remainder were managed licensees, including 36 stand-alone, or “shell,” banks. - Decision in 2001 requiring substantially all banks to establish physical presence by June 2004 is expected to result in surrender of up to 100 licensees. - Industry estimate of assets under management: above $1 trillion. - Total external banking assets approximated $258 billion at year-end 2001. - Supervisory developments: - On-site examinations introduced in January 2001 to supplement off-site processes. - On-site work expanded from AML compliance to include risk management, corporate governance, and financial soundness. - CBB produced a range of prudential regulations and guidelines, though many prudential regulations and requirements remain in early development stages. - Preconditions and legal environment: - Bahamas is a stable democracy with enforceable property rights, effective bankruptcy law, and appropriate measures to resolve problem banks. - Protection of Depositors Act (September 1999) established a deposit insurance fund with maximum coverage of B$50,000 to each Bahamian dollar deposit held by member institutions. - Main findings on compliance with Core Principles: - There is compliance with many Core Principles; legal and regulatory framework provides the CBB authority to license and supervise banks, applying equally to on-shore and off-shore licensees. - Issues remain regarding process applied to stand-alone managed licensees and booking branches. - Compliance is less robust in areas related to prudential regulations and requirements, many of which are early in development. - Specific Core Principle observations: - Objectives, autonomy, powers, and resources (CP 1): - Law sets supervisor responsibilities and grants operational independence; Inspector (and designees) protected against civil and criminal liabilities, but the governor is not afforded the same protection (though indemnified against legal costs). - Supervisory function funded from CBB internal resources generated from central banking functions. - Human resources in key areas (for example, policy development and legal advice) are fewer than workload demands; recruitment and retention of skilled employees, particularly senior officials, is problematic. - Licensing and structure (CPs 2–5): - Banking business is a regulated activity; only licensed institutions may use the word “bank.” - Application requirements address fitness and propriety, financial resources, business plan, and track record; foreign bank applicants require a statement of “no objection” from home supervisor. - Law does not define “significant ownership or control”; instead prohibits share issuance, transfer, or disposal without CBB approval, with unspecified exemption provisions. - No current regulations requiring prior CBB approval for major investments or acquisitions (except establishment of foreign subsidiaries); regulations have been drafted to address investments and acquisitions. - Licensing letters advise “There should be no establishment of a branch, subsidiary or representative office of the bank, or its participation in any other financial institutions without the prior approval of The Central Bank.” - CBB prudential norms reinforce the licensing statement. *International Monetary Fund assessment and mission findings.* ### 52. Prudential regulations and requirements (CPs 6–15): The formalization of ### cr04318 - 52. Prudential regulations and requirements (CPs 6–15): The formalization of ### Prudential regulations and requirements: status and priorities - The formalization of prudential regulations and requirements are in various stages of completion. - The CBB has focused on transforming the limited-scope statement of prudential norms into more robust standards requiring greater depth of risk management. - KYC and AML have received the greatest attention over the past two years, resulting in a relatively comprehensive program of compliance testing. - Prudential regulations and policies are still being considered and drafted in several areas; additional, dedicated resources are required to complete this work within a reasonable timeframe. ### Capital adequacy and risk frameworks - The application of the Basel Capital Accord framework is set in statute. - The CBB currently applies a dual minimum level of capitalization: either 8 percent of risk assets or 5 percent of total assets, whichever is higher. - Draft large exposures regulation addresses connected lending; lending to “related parties” is subject to various requirements, including arm’s length dealing. - The CBB has not yet formalized positions on credit, market, country, and transfer risks, though credit and country risks are assessed through on-site and off-site examinations. - Technical assistance may be required to develop appropriate regulations and guidelines on market risk due to lack of in-house expertise. ### Methods of ongoing supervision (CP 16–20) - The CBB has developed a combination of on-site and off-site supervisory procedures yielding a reasonable understanding of banks’ positions. - Off-site program based on quarterly prudential returns has existed for many years; on-site examination program has been in place since 2001. - Cross-training instituted: off-site analysts participate in examinations to improve understanding. - On-site program originally focused solely on AML; it has been gradually expanded to cover a variety of prudential banking risks. - Several risks remain to be addressed in a structured form. - Existence of time-limited “managed” licensees without a physical presence poses a serious obstacle to a comprehensive on-site program and regular contact with bank management. - The CBB requires unaffiliated managed banks to be phased out by June 2004; booking branches based in Basel Committee member countries may remain if they meet certain criteria. - The CBB has not extended its on-site program to any overseas offices. ### Supervisory information, auditors, and reporting (CP 21) - Supervisory information is primarily validated through on-site examinations; the CBB may require reviews by independent accountants and has used this option in practice. - No established policy currently on incorporating random or comprehensive reviews within auditors’ work. - No formal consolidated reporting system for domestic financial services groups exists yet; such a system is being developed within a new off-site system. - The CBB is party to a domestic inter-agency MOU providing for a lead regulator for groups spanning more than one agency. - Banks are required by statute to submit an annual report prepared by an approved external auditor accompanied by a management certificate verifying accounts are true and correct. - Appointment of all auditors is subject to approval (which may be withdrawn) by the Governor of the CBB. - There is no single national accounting standard required; the CBB prefers IAS but permits other standards subject to notification to the CBB and recognition as having broad international acceptance. - The CBB has legal authority to request additional information from auditors and to require procedures in line with CBB instructions. ### Formal powers of supervisors and remedial measures (CP 22) - Statute defines a limited number of specific remedial actions (including power to impose conditions on a license at any stage) supplemented by a very broad power to take corrective measures if a licensee is not complying with rules, regulations, accounting procedures, or prudential norms. - The CBB has developed a ladder of intervention listing types of actions to respond to licensee problems; the ladder is not a public document. - Suspension of a license is a remediation measure available to the CBB and is seen as an important tool to act immediately and take control without pre-notification procedures for revocation. - Law does not define “suspension” nor discuss its effect on the institution; the CBB interprets suspension to mean all activities must cease from the date of the order (taking loan payments and deposits, paying employees and other bills, etc.). - All suspensions to date have subsequently resulted in revocation; clarity in law is needed on suspension procedures and effects if suspension is to remain a key enforcement instrument. ### Cross-border banking and supervisory cooperation (CP 23–25) - Legal framework draws no distinction between foreign and domestic institutions for supervisory and regulatory process. - Vast majority of Bahamian licensees are subsidiaries or branches of foreign banks; the CBB has focused on its role as host supervisor. - Material concerns remain about effective supervision over managed banks with no physical presence in The Bahamas, including booking branches of established international banks and higher-risk independent banks with no affiliation to another regulated institution. - While all licensees are subject to the same off-site program, on-site regime for institutions without physical presence is far more circumscribed. - Since December 2000, the CBB has had a range of powers to cooperate with and assist overseas regulatory authorities; exchanges of information are not dependent upon an MOU. - The CBB is negotiating MOUs with several overseas regulators for which The Bahamas is a significant host jurisdiction. - The CBB has shared information spontaneously with home country authorities when significant concerns existed about a Bahamian licensee. - There is provision for on-site examination of branches and subsidiaries in The Bahamas by overseas regulatory authorities or their agents; some such examinations have taken place. - Direct access to certain customer records is prohibited; the CBB has arrangements to obtain (and sanitize, if necessary) relevant information on behalf of overseas authorities. ### Recommended Action Plan: selected highlights (as presented) - CP 1(2) Resources: Establish a policy unit within the BSD with dedicated resources, and create an additional position of legal adviser to the BSD. - Authorities’ response: Agreed and in progress. BSD restructuring in process; restructured department will include integrated on- and off-site function and a fully resourced policy unit under direct supervision of the Inspector. Additional legal resources already engaged. - CP 1(5) Legal Protection: Grant the Governor of the CBB the same protections afforded the members of the banking supervisory team. - Authorities’ response: Agreed. The Banks and Trust Companies Act, 2000 is being reviewed and necessary amendments will be recommended. - CP 5 Investments: Finalize the existing draft regulations. - Authorities’ response: Agreed and in progress. Draft Regulations on Acquisitions and Investments have been finalized and are under review by the Attorney General’s Office; expected release in late 2003. - CP 10 Connected Lending: Finalize and publish the draft regulations. - Authorities’ response: Agreed and substantially completed. Large Exposures regulations and guidelines drafted with reference to definition of “related parties.” Guidelines and Regulations expected to be finalized by January 2004. - CP 13 Other Risks: Continue to review the status of existing, in-process and prospective regulations, identify priorities, and assess where additional specialized skills are needed. - Authorities’ response: Agreed and in progress. Policy Unit has made considerable progress; additional resources identified. Market risk identified for additional training and external assistance. - CP 22 Remedial Measures: Publish the “ladder of intervention” and review laws and internal policies regarding suspension of a license. - Authorities’ response: Agreed. CBB will publish the ladder of intervention as part of “The Regulatory Framework of Bank and Trust Supervision in The Bahamas.” ### Authorities’ response and technical assistance needs - The CBB began preparing for its IMF Module 2 assessment in late 2001; the process was resource consuming but provided benefits in assessing compliance and identifying strengths and weaknesses. - The CBB agrees generally with IMF assessors’ recommendations and has commenced actions to move towards full compliance with all Core Principles. - Technical assistance needs identified: additional training and focused seminars in specialized areas such as market risk and onsite examination. - For market risk, there is a need to engage external expertise for a three to six months period to augment in-house resources and facilitate transfer of skills. - The CBB expects to develop a framework for monitoring market risk, consistent with the Basel Capital Accord (1996 amendment) by late 2004. - The IMF may assist by encouraging supervisory agencies in countries which monitor market risk and test market risk models to provide cross-training opportunities for Central Bank staff. ### Securities regulation (IOSCO) — assessment summary - Assessment carried out on the SCB and relevant legislation: Securities Industry Act 1999 (SIA) (as amended) and Mutual Funds Act 1995 (as amended) and associated regulations; review took note of an SCB self-assessment report. - Meetings held with SCB senior staff, Attorney General and staff, governor and senior staff of the central bank, practitioners, and acting CEO and Chief Legal and Compliance Officer of the Stock Exchange. - Regulatory framework and market structure: - SCB supervises securities market and mutual fund industry. - No formally recognized self-regulatory organizations; SCB registered BISX as a stock exchange and delegated certain powers. - Domestic securities market is extremely thin: 16 stocks traded on BISX, with market capitalization of less than US$2 billion, and a current average of about 10 trades per day; the exchange has only three members. - Offshore sector dominates market interest, led by mutual funds: at end-June 2002, 60 licensed fund administrators handling 706 mutual funds with total assets under management of US$97 billion. - General preconditions: The Bahamas is a stable democracy with sound economic policies, enforceable property rights, effective bankruptcy law, highly professional legal and accountancy professions, and an effective judicial system. - Principle-by-principle observations: - Regulator (principles 1–5): SCB is quasi-governmental with a staff of 31; reports to the minister of finance who has wide and unspecified powers to direct the SCB and dismiss Commissioners. Legal protection against civil liability is not provided to Commissioners or staff for acts in good faith. SCB is partly self-funded but also dependent on government support. Of 80 broker dealers and securities investment advisors registered with the SCB, 48 are also licensed in respect of their bank and trust business by the CBB; an MOU provides for CBB to act as principal regulator for those 48 entities. - Self-regulatory organizations (principles 6–7): Legislation does not formally recognize SROs; SCB may approve and register a stock exchange and delegate powers. SCB has registered BISX and delegated oversight of trading, member supervision, and monitoring of listed companies, while retaining extensive powers to vary or withdraw delegated powers. - Enforcement (principles 8–10): SCB has comprehensive investigation and enforcement powers (except power to wind up unlicensed mutual funds). Current legislation does not explicitly authorize routine inspections of investment firms, though SCB conducts such inspections in practice; draft legislation intends to close loopholes to provide explicit inspection powers for all registrants. - Cooperation (principles 11–13): SCB can share public and nonpublic information with domestic counterparts without apparent problems. Sharing information with foreign counterparties requires an undertaking on confidentiality or an undertaking not to disclose without SCB consent; SCB appears reluctant to permit onward disclosure by requesting authorities (e.g., to judicial authorities or parliamentary committees), which may obstruct transfers of nonpublic information because no overseas agency can provide blanket assurance. *Source: IMF assessment of The Bahamas (Central Bank of The Bahamas and Securities Commission of The Bahamas).* ### 71. The SCB has not signed any bilateral MOUs with foreign regulatory counterparts, ### cr04318 - 71. The SCB has not signed any bilateral MOUs with foreign regulatory counterparts, ### Cooperation with foreign regulators (Principles 11–13) - The SCB has not signed any bilateral MOUs with foreign regulatory counterparts, although it has received requests to do so from Canada, Japan, the United Kingdom and the United States. - The conclusion of such MOUs may assist in clarifying the procedures for effective information exchanges. - Authorities' responses and planned actions: - The SCB confirms that its consent will be given for the further release of nonpublic information onto judicial authorities or other bodies such as parliamentary committees of the requesting authority, requesting only to be notified when the information has been further passed on. - The IOSCO MOU is presently being considered for adoption. - Recommended action in Table 2: "Commence bilateral negotiations with one or more key jurisdictions with a view to signing bilateral MOUs." ### Issuers and disclosure (Principles 14–16) - Findings: - No mechanism in law or enforceable codes of practice governs the practice and aftermath of takeover bids and other changes in corporate control, and the treatment of shareholders in this process. - The SCB has power under the SIA to make rules for tender offers, mergers, and other issues of corporate control and acquisition involving any public company, but has yet to implement appropriate mechanisms. - The time period in which public companies are legally obliged under the SIA to release price-sensitive information is five days, which is described as excessive relative to the Stock Exchange rules requirement of "without delay." - Recommended actions: - Replicate in legislation the BISX requirement that public companies disclose material change information to the public "without delay." - Make rules to ensure that in takeovers and similar situations all shareholders are treated fairly and equitably. - Authorities' response: - Including the BISX requirement in legislation will be addressed in amendments to the SIA. - The SCB intends to request IMF technical assistance to make rules for takeovers and similar situations. ### Collective investment schemes (Principles 17–20) - Findings: - Current licensing and exemption requirements in the Mutual Funds Act are complex and confusing. - Proposed new legislation (preparation well advanced) should simplify and clarify requirements and ensure SCB oversight powers are logical and complete. - Exempt fund provisions currently allow voluntary filing of documentation with the SCB; the proposal will replace this with a mandatory obligation. - Most funds currently exempt "will also require a license." - Practical problems identified: - Rules and regulations do not adequately address issues concerning stock lending by a fund, which can increase fund income but exposes funds to significant risk if not controlled. - Mutual Fund Regulations 1995 permit a unit trust to forgo an independent custodian if "not less than 80 percent of the equity capital of the fund is listed on a recognized stock exchange," or if the mutual fund administrator meets certain capital requirements that are likely, in most cases, to be very low relative to the assets administered. - Authorities' response: - The SCB notes that all funds will fall under SCB purview and will either have to be licensed or registered. - The stock lending issue is being researched by the SCB with a rule to be developed "as soon as is practicable." - The Investment Funds Bill removes the 'exception' allowing non-independent custodians. ### Market intermediaries (Principles 21–24) - Findings: - SCB should create and test a contingency plan to deal with the failure of an investment firm. - Most necessary elements (information flows, domestic inter-regulator cooperation arrangements, statutory powers) appear to be in place, but it is not clear whether procedural or legislative gaps exist. - Licensing and supervisory procedures adopted by the SCB appear to work well and no obvious gaps are noted, although routine inspections are carried out without specific supporting powers. - Legislation needs updating to reflect current business practices by removing overlap in the registration process between certain categories of firms. - The SCB informally requires broker-dealers and securities investment advisers to comply with BISX conduct of business rules when those go beyond SCB rules (for example, 'best execution'). - Only three broker-dealers out of 54 are members of the exchange. ### Secondary market and the BISX exchange (Principles 25–30) - Findings: - BISX is the only stock exchange in The Bahamas; there are no other mechanisms for matching buyers and sellers that would fit a generally accepted definition of a trading system. - The power of the SCB to regulate trading systems is "not beyond doubt." - The SIA empowers the Commission to supervise and regulate the operations and duties of a securities exchange and to "review, approve, reverse or vary any rules, regulations, interpretations, decisions, actions or orders of the exchange." - BISX files a monthly report with the SCB including income statement, cash flows, tangible net worth, trading statistics, etc. - The SCB carries out on-site inspections of BISX on a bi-annual basis; the exchange opened in 2000 and only one inspection has been carried out to date. - The volume of trading on BISX has been very low since launch and the exchange appears to need additional funding from existing/new shareholders or the government. - Risks and recommended actions: - The SCB should be satisfied it can manage an orderly wind-down of the exchange if necessary. - In practice, investor risk is small given low levels of trading and settlement occurring on a T+3 basis; main risk likely lies in the security of the system for recording ownership of dematerialized shares. - The SIA contains provisions to deter market manipulation and unfair trading, with criminal sanctions including fines and imprisonment for creation of false markets, market rigging transactions, employment of deceptive devices, misuse of confidential information and insider dealing; the SIA provides a mechanism for victims of insider actions to seek compensation. - IOSCO Principle 29 calls for regulation to ensure proper management of large exposures, default risk, and market disruption. The SCB has not reviewed interaction of securities law and general insolvency law to establish whether customer trades or positions are adequately protected in the event of an intermediary's default. ### Enforcement, recommended actions and authorities' responses (Table 2 highlights) - Recommended actions for the regulator (P 1–5): - Narrow the Minister’s power to give directions to the SCB. - Restrict the Minister’s power to dismiss Commissioners to proper cause (e.g., bankruptcy or fraud). - Provide Commissioners and staff with immunity against liability. - Introduce the draft Mutual Fund Bill into Parliament to secure improvements in SCB powers including the power to raise additional fees. - Authorities' responses: - Narrowing the Minister’s power to give directions has been addressed in the Investment Funds Bill and will be addressed through amendments to the SIA. - Restricting the Minister’s power to dismiss Commissioners and providing immunity will be addressed in amendments to the SIA. - The Investment Funds Bill has been tabled and passed by both Houses of Parliament and awaits an appointed date to become law; the appointed date is being reserved until the Regulations are completed for contemporaneous enforcement. - Enforcement resourcing: - Apply resources necessary to accelerate drafting of further amendments to the SIA to correct deficiencies as identified by the SCB; the SCB "notes the Missions comments." ### FATF Recommendations for AML/CFT — main findings and institutional arrangements - Report scope and methodology: - Report prepared by a team composed of International Monetary Fund staff, outside experts under IMF supervision, and a further expert not under IMF supervision; assessment based on information available when missions were completed in October 2002 (main mission) and April 2003 (independent law enforcement expert). - The report summarizes observance of the FATF 40 Recommendations and 8 Special Recommendations and provides recommendations to strengthen observance. - Main findings: - The Bahamas has made important progress on measures to combat money laundering; extensive provisions introduced since June 2000 contain important fundamentals but pose practical difficulties due to extremely detailed and prescriptive provisions. - The mission recommends encouraging the industry to develop a more risk-based approach within a framework demanding high standards of customer identification on a very broad basis. - On financing of terrorism (FT), Cabinet was considering a relevant draft bill "which it was hoped would be presented to Parliament very shortly." The Terrorism Bill was tabled in Parliament on June 25, 2003. - Criminalization and legal provisions: - Money laundering is criminalized as an indictable offense, extends to all proceeds of criminal conduct, and is consistent with definitions in the Vienna Convention, Palermo Convention, and the FATF 40 recommendations. - Both individuals and corporate entities are subject to criminal laws for money laundering, including unlimited fines and imprisonment of up to 20 years for "conviction on information." - FT is not criminalized at the time of the assessment. - Recommendations: The Bahamas should ratify the International Convention for the Suppression of Financing of Terrorism (1999) and the UN Convention Against Transnational Organized Crime (Palermo Convention), and should fully implement UN Resolutions on prevention and suppression of financing of terrorist acts, particularly UN Security Council Resolution No.1373. - Confiscation and freezing: - Provisional measures exist to seize, freeze, or restrain dealings with cash related to proceeds of crime; POCA permits courts to issue restraint orders ex-parte. - Confiscation of assets of equivalent value is permissible after conviction. - No provisions are in place for identifying and tracing assets suspected of being used to finance terrorism; laws do not provide for freezing funds or property of terrorists in accordance with UN resolutions; instrumentalities (except drug-trafficking under section 33 of the DDA) are not covered. - Financial Intelligence Unit (FIU): - A FIU was established in December 2000 and is a member of the Egmont Group; it has responsibility for receiving STRs. - Under Section 5 of the Financial Intelligence Unit Act, the Minister (the Attorney General) may give the FIU directions in writing of a general nature as to policy to be followed in the public interest. - The Director of the FIU handles day-to-day matters and reports formally to the Attorney General by an annual report. - Reporting gaps: Persons other than financial institutions may report suspicions to either the police or the FIU; there is no clear requirement for the police to keep the FIU apprised of STRs they receive, and auditors may report to any member of the police, which may delay information arriving at the FIU and could compromise timely analysis. - Law enforcement powers and international cooperation: - Police may execute search and seizure warrants from a magistrate; Section 6(4) of the MLAA authorizes Royal Bahamas Police to execute a warrant to assist in a request for legal assistance from abroad. - Sections 19(2)(c), 22(d)(i) and 22(d)(iii) of the FTRA allow disclosure of information to the Attorney General’s office for administration of the Mutual Legal Assistance Treaty process. *Report by the International Monetary Fund assessment team.* ### 96. There are laws and procedures for mutual legal assistance in money laundering ### 96. There are laws and procedures for mutual legal assistance in money laundering ### Mutual legal assistance and extradition - There are laws and procedures for mutual legal assistance in money laundering regarding: - the production of records by financial institutions and other persons, - the search of persons and premises, - seizure and obtaining of evidence for use in investigations and criminal proceedings. - Mutual legal assistance can be provided in money laundering matters by making an application to the Attorney General. - A dual criminality test applies for international cooperation under a bilateral treaty. - Under the CJA, used for non‑treaty countries, the Attorney General has broad powers to grant assistance without the need for dual criminality or reciprocity. - International cooperation is supported through bilateral and multilateral treaties. - Extradition: - Extradition is possible from The Bahamas under the Extradition Act, 1994. - The Extradition Act, 1994 is a dual criminality and minimum sentence Act (not a list offense Act). - A person can be extradited where the alleged crime carries a minimum sentence of two years for Commonwealth countries. - For other countries, bilateral treaties are required; in those treaties a person can be extradited where the alleged offense is one year (see article 2 of U.S./Bahamas treaty on extradition). - Treaties have been signed with the countries listed in schedule 1 of the Extradition Act. - The Bahamas will extradite their own nationals; there is nothing explicit in the Extradition Act, other legislation or the Constitution that forbids this, and The Bahamas has extradited their own nationals on numerous occasions (authorities’ practice). ### Institutional responsibilities and sectoral coverage - Licensing and supervision: - The Central Bank of The Bahamas (CBB) licenses and supervises banks and trust companies. - The Securities Commission of The Bahamas (SCB) oversees the securities and mutual funds industry. - Company managers and related service providers are the responsibility of the Inspector of Financial and Corporate Service Providers (IFCS). - The Compliance Commission is tasked primarily to ensure compliance with AML obligations for businesses not otherwise subject to prudential supervision. - Supervision applies to both domestic and offshore sectors under a general legal and regulatory framework that does not apply differential regimes between the two sectors. ### Prudentially regulated sectors — supervision, resourcing, and legacy issues - Supervision and Enforcement: - The CBB has made substantial progress in developing a robust regulatory framework quickly, but legacy managed banks with no meaningful physical presence in The Bahamas remain. - Some managed banks pose material risks to the reputation of the jurisdiction. - These managed banks were given (through a CBB directive) until June 2004 to establish a presence in the islands or to close. - The CBB should enhance oversight of these entities to align supervision with standards applied to the rest of the banking sector. - Resourcing: - There is a shortage of staff with the appropriate depth of skills across regulatory agencies, though the CBB appears better placed than others. - Agencies should establish an environment to attract and retain scarce skills, recognizing that skills in short supply are those for which private sector financial institutions pay well. ### Preventative measures and legal framework for AML/CFT - Legal instruments and obligations: - All AML/CFT provisions are contained in the POCA, the FTRA, the FTRR, FIUA, FIUR, or FIU guidelines. - Breach of the law is treated as a criminal offence rather than an administrative matter. - Mandatory regulations require regulated entities to have procedures on customer identification, record keeping, reporting of suspicious transactions, and appropriate training regarding suspicious transactions, which comply with international standards. - Tipping off is penalized and persons furnishing information to competent authorities are protected from claims for breach of confidentiality. - Certain exceptions in customer identification (e.g., for non vested beneficiaries in a trust) should be more narrowly tailored to avoid putting the AML/CFT framework at risk. ### Non‑prudentially regulated sectors that are macro relevant - IFCS regime and AML supervision: - The corporate service providers regulated by the IFCS present structural issues. - AML supervision for the sector is uniformly based on the FTRA. - While IFCS has licensing and enforcement authority over corporate service providers, an agreement has been reached for the Compliance Commission to monitor compliance with AML obligations in this sector. ### Recommended Action Plan to Improve Compliance with the FATF Recommendations (selected actions and references preserved) - General framework of the Recommendations (FATF 1–3): - Revise confidentiality provisions to ensure authorities can share information at both the domestic and international level. - Scope of the criminal offense of money laundering (FATF 4–6): - Amend POCA to specifically reflect that the intentional element of these offences may be inferred from objective factual circumstances. - Provisional measures and confiscation (FATF 7): - Amend POCA to specifically allow for the forfeiture of property of corresponding value. - Customer identification and record‑keeping rules (FATF 10–13): - Reduce or eliminate the exception from identification requirements applicable to transactions made by or through other financial institutions or through eligible introducers. - Prohibit the establishment of anonymous or fictitious accounts by tightening POCA provisions regarding beneficial ownership of accounts, particularly trusts. - Require liquidated companies or dissolved partnerships to retain records for five years so that compliance with FATF 12 is achieved. - Increased diligence of financial institutions (FATF 14–19): - Create an obligation to monitor, detect and analyze unusual and complex transactions; financial institutions should implement these requirements. - Measures to cope with countries with insufficient AML measures (FATF 20–21): - Enact regulations requiring banks to have a routine for testing compliance against both home and host country KYC standards. - Enact regulations recommending that a group policy be followed so overseas branches and subsidiaries ensure identity verification and record keeping at least to Bahamian standards or to higher host country standards where appropriate (currently this requirement exists only in guidance). - Enact provisions to require financial institutions to pay special attention to transactions with countries with deficient AML/CFT provisions. - Implementation & role of regulatory and other administrative authorities (FATF 26–29): - Provide all regulatory authorities with resources necessary to develop adequate on‑site and off‑site supervision of compliance at financial institutions. - Adopt a consistent approach across regulators regarding powers of information sharing with overseas regulators to create effective international cooperation. - Administrative Cooperation – Exchange of general information (FATF 30–31): - Regulatory authorities should agree on a common, practical interpretation of confidentiality and the exchange of information; a strict interpretation of current law could lead to very limited exchange. - Other forms of cooperation – Basis & means of cooperation in confiscation, mutual assistance, and extradition (FATF 33–35): - Consider expanding staff at the Attorney General’s Office and the Tracing and Forfeiture/ML Investigation Section of RBPF to continue responding promptly and fully to requests for assistance received from other countries. - Special recommendations on terrorist financing (selected points): - Ratification and implementation of UN Instruments: Ratify and fully implement the 1999 United Nations International Convention for the Suppression of the Financing of Terrorism and implement UN Security Council Resolution No.1373. - Criminalizing the financing of terrorism and associated money laundering: The Bahamas should criminalize the financing of terrorism and terrorist organizations. - Freezing and confiscating terrorist assets: Amendments required to criminalize the financing of terrorism as soon as possible. - Reporting suspicious transactions related to terrorism: Amendments to relevant legislation required. - International Cooperation: Under treaties with countries including the USA and Canada, dual criminality is required before assistance can be rendered; The Bahamas has not yet criminalized the financing of terrorism. - Wire transfers (Special Recommendation VII): Regulation 8 of the FTRR does not require financial institutions to include the name, address and account number of the originator in the wire transfer that should remain with the transfer or related message through the payment chain; it only requires maintenance of records of such information and should be amended to meet FATF Special Recommendation VII. - Nonprofit organizations: No legal provisions, no supervision or monitoring of nonprofit organizations; measures should be placed in law and implemented. *Source: IMF assessment of The Bahamas (AML/CFT framework and supervisory regime).* ### 103. The Central Bank was generally pleased with the assessment of the IMF Mission of ### cr04318 - 103. The Central Bank was generally pleased with the assessment of the IMF Mission of ### General framework - The Central Bank was generally pleased with the IMF Mission’s assessment of the AML/CFT framework in the banking and trust sectors. - A Legislative Committee comprising the Financial Services Regulators, private sector participants and industry associations has been constituted to review the FTRA, FTRR and the AML-KYC Guidelines and to recommend amendments to the Government. - Specific responses to mission concerns: - C-43 (Transfer of nominative information between branches and head office) - Section 15(2) of the BTCRA permits the Inspector to give general approval for the systematic transfer of certain classes of information between a licensee, its head office, a branch or a subsidiary. - In practice, permission has been given where licensees requested passage of nominative information (e.g., for consolidated monitoring of large exposures). - “Shared client agreements” signed by the client frequently support intra-Group transfer of client information; the Central Bank is increasingly observing this during onsite examination. - Confidentiality provisions - The Mission expressed concern that confidentiality provisions of section 15 of the BTCRA bind only directors, officers and employees, not the licensee. - The Central Bank’s view: reference in section 15(1)(a) to directors and employees by necessary inference binds the licensee because the licensee is operated by those persons (directors, officers, employees and agents). - Risk-based approach - The Mission was concerned about the detailed and prescriptive approach of the FTRR. - The Legislative Committee has submitted draft amendments to the Government to adjust customer due diligence to a more risk-based approach in accordance with the revised FATF 40 Recommendations. - Consistency in information sharing arrangements - The Attorney General’s Office together with financial service regulators is reviewing interpretation and application of information sharing provisions of applicable statutes to address consistency issues. ### Customer identification: prohibitions, beneficial owners, and related issues - C-45 (Prohibition of numbered or anonymous accounts) - The Mission noted “there is no explicit prohibition of numbered or anonymous accounts in the law.” - The Central Bank advises Regulation 3(2) of the FTRR addresses C-45: all facility holders are verified using a consistently high KYC standard. - Onsite examiners verify client declarations of beneficial ownership; where client is not the beneficial owner, the beneficial owner’s identity must be verified. - The Central Bank’s position: FATF 10 compliance may be achieved by either a positive or negative obligation; the FTRA imposes a positive obligation to establish and/or verify customer and beneficial owner identities. - C-46 (Identification of beneficial owners) - The Mission stated gaps exist in legislation regarding beneficial owners. - The Central Bank states legislative framework requiring compliance with FATF Recommendation 11 is in place: - Financial institutions must obtain information about the true identity of a person on whose behalf an account is opened or for whom a transaction is conducted whenever there are reasonable grounds to believe a customer is acting on behalf of another or when there are doubts the customer is acting on own behalf. - Onsite examinations cover the Process of Control over AML activities and use representative sampling to confirm required documentation is in place. - Examiners assess policies, procedures, personnel quality, and perform substantive and compliance testing; large dollar items and nostro account reconciliations are sample tested. - The Central Bank will consider the Mission’s comments regarding Section 9 of the FTRA. - C-48 (Wire transfers) - The Mission was concerned the FTRR does not specifically require institutions to include name, address and account numbers of the originator. - The Legislative Committee is considering this matter and has addressed the legal requirement in draft Customer Due Diligence Regulations submitted to the Government. - Practically, per paragraphs 100 and 101 of the KYC-AML Guidelines, financial institutions routinely populate wire transfer fields for beneficiary, account and originator. - Onsite examination tests control processes using a template entitled Review of Internal Controls for Wire Transfers and Other Payments; wire activity is included in account and transaction monitoring processes. - Gradated customer acceptance policies - The Mission flagged absence of specific guidance to banks to develop gradated customer acceptance policies with extensive due diligence for higher risk customers. - The Legislative Committee recommended implementation of a risk-based customer acceptance system and submitted draft amendments to the FTRA and FTRR to facilitate this. - The Central Bank has issued Guidance Notes on Accounting and Other Records and Internal Control Systems and Corporate Governance Guidelines; in practice many financial institutions have documented risk-based client acceptance policies and authorization levels examined via the Acceptance of New Business and Maintenance of Existing Client Relationships template. - Trusts - The Mission expressed concern about exemptions under the FTRA from identifying beneficiaries in certain circumstances. - The Central Bank’s position: - Section 10 exemption applies only to beneficiaries who do not have any vested interest in a trust. - When a beneficiary’s interest becomes vested, financial institutions must verify the beneficiary’s identity pursuant to FTRR 3(2). - The Central Bank does not agree the FTRA is ambiguous; provisions regarding trusts are adequate and the FTRA covers legal or corporate entities via the Interpretation and General Clauses Act. - Corporate entities - Written confirmation requirement in the FTRR aims to rule out accounts operated on behalf of undisclosed principals. - The requirement to obtain information on the true owner complies with FATF 10: verify legal existence and structure of customers (e.g., IBC), and verify authority of persons acting on behalf of customers. - The Central Bank notes there is no requirement in FATF 40 or the Basle CDD paper to verify beneficial owners of IBCs; Bahamian legislation meets FATF and Basel standards. - Politically exposed persons (PEPs) - Banks are required by the Central Bank’s Corporate Governance Guidelines to develop policies and procedures to manage reputation and other risks, including policies for acceptance of customers such as PEPs. - Identification of beneficial owners (reiteration) - The FTRA requires verification of facility holders and persons on whose behalf they act under Sections 6 and FTRR Reg. 3(2) and for occasional transactions under Sections 7, 8, 9, and 10. - FATF 11 requires verification where a financial institution has doubts whether the account holder is acting on own behalf; FTRA meets this under section 6(4). ### Ongoing monitoring of accounts and transactions (C-49, C-50) - The Mission recommended development of regulations or guidelines to encourage banks to apply enhanced due diligence to certain transaction classes. - The Legislative Committee proposed amendments to the FTRR to address ongoing risk-based account activity monitoring, with heightened scrutiny expected for: - PEPs; - business relations (including financial institutions) domiciled in higher risk jurisdictions; - relationships refused by other financial institutions; - facility holders with complex or unusually large transactions. - Onsite examinations indicate the majority of financial institutions already apply appropriate methodologies for heightened scrutiny of higher risk relationships. ### Recordkeeping (C-53) - The Mission recommended requiring archiving of customer records for dissolved or liquidated companies. - This matter is under consideration. ### Internal controls, compliance and audit (C-61) - The Mission observed need for routine compliance testing for financial institutions against home and host country KYC standards. - The Central Bank will consider incorporating current FIU Guideline requirements into specific Regulations requiring licensees to test compliance of foreign branches and subsidiaries against the higher of the home or host country AML/CFT standards. - The Central Bank emphasizes the FIU Guidelines already apply to all Bahamian licensees and their foreign branches and subsidiaries and recommend implementing the higher of Bahamian or host country STR/AML standards. ### Integrity standards (C-63) - The Mission noted lack of measures, apart from FIU Guidelines, to prevent unlawful use of vulnerable entities (e.g., charitable or nonprofit organizations). - The Central Bank advises that under the FTRR all facility holders, including charitable and nonprofit organizations, are verified using a common KYC standard. ### Enforcement powers and sanctions - The Mission observed no specific provisions empowering the Central Bank to require closure of a foreign establishment where host supervisory obstacles prevent onsite inspections. - The Central Bank advises Section 14(1)(g) of the BTCRA empowers the Governor to require a licensee to take any action the Governor considers necessary, which may include closure of an establishment in a foreign jurisdiction. - The recommendation to authorize imposition of fines on banks non-compliant with AML legal framework is under consideration. - The Central Bank intends to proceed with instituting fines where licensees do not comply with AML framework requirements. ### Securities Commission (SCB) response and related regulatory points - General framework and information exchange - The SCB sees no difference between SCB and CBB approaches on exchange of information to overseas regulators. - The IOSCO MOU is presently being considered for adoption. - Implementation & administrative cooperation - Specific provisions regarding inspections included in the Investment Funds Act; amendments to the SIA will address registrants and licensees under the SIA. - BISX conduct of business rules are approved by the SCB; SCB has no objection to developing these as guidelines or rules. - Amending the SIA and SIR to extend applicability from only Broker Dealers to all registered firms will be addressed through SIA amendments. - Exchange of information practice and statistics - The Commission shares information based on an undertaking from requesting authorities and will consider alternative bases for sharing where satisfied requesting authority has similar laws. - For January 2000 – September 2003 the SCB received 19 requests from overseas authorities for assistance with respect to nonpublic information; the SCB responded to 16 requests and three matters were pending. ### Cooperation between supervisors and other competent authorities - The Authority maintains domestic regulators apply enabling provisions for information sharing consistently for like regulators (e.g., Central Bank to overseas Central Bank). - Issues have arisen when the Central Bank accommodated requests from non-bank overseas regulators about further disclosure of released information; the Central Bank is urgently working on resolving this. ### Exceptions to customer verification obligations and related legal implementation - The FTRA imposes an obligation on all financial institutions to verify clients (“facility holders”) before establishing accounts/facilities per FTRR standards. - This verification obligation extends to beneficial owners where the facility holder is not the sole beneficial owner. - The FTRA requires identity verification for persons seeking to engage in a large cash transaction (occasional transaction) and for any person on whose behalf the transactor may be acting; reliance on verification by an eligible introducer is permitted in some cases. - Section 10 exemption in FTRA applies where a trustee conducts a large cash transaction in relation to a trust and beneficiaries are contingent and the contingency has not materialized; where a financial institution holds an account for a trust it must maintain information on beneficiaries. - If a trustee approaches an institution without an established facility to conduct a large cash transaction, the institution must be satisfied: - (a) the person is acting as trustee; - (b) the cash is not for personal benefit; - (c) the existence of the trust; and - (d) the identity of beneficiaries to the extent known. - Section 9 imposes a primary obligation on persons who use their own accounts to conduct transactions on behalf of others to provide verification details for any person on whose behalf the account is used; exceptions exist where the account holder is a designated eligible introducer under the FTRA. - Section 8 addresses situations where someone approaches another financial institution to conduct a large cash transaction on behalf of another person. - The Authority does not agree significant exceptions exist to the principle to verify, but will consider amendments to the FTRA: - (1) introduce a more risk-based approach to customer verification; - (2) specifically require verification where suspicion is aroused irrespective of the amount involved. ### Reconciliation of STR reporting to the Police and FIU - The recommendation to introduce a mechanism to ensure all STRs are received by the FIU on a timely basis is being considered. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr04318.pdf_