## ASSESSMENT OF THE SUPERVISION AND REGULATION OF THE FINANCIAL SECTOR — Review of Financial Sector Regulation and Supervision, Seychelles, OCTOBER2004

## Source details

**Canonical URL:** [ASSESSMENT OF THE SUPERVISION AND REGULATION OF THE FINANCIAL SECTOR — Review of Financial Sector Regulation and Supervision, Seychelles, OCTOBER2004](https://www.imf.org/-/media/files/publications/ofca/english/cr04381.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/ofca/english/cr04381.pdf.md)
- [Structured JSON version](/-/media/files/publications/ofca/english/cr04381.pdf.json)

---

### Scope and purpose; mission
- Assessment focus: observance of international supervisory standards in the banking sector and arrangements for anti-money laundering and combating the financing of terrorism (AML/CFT).
- Assessment context: stand-alone OFC (Module 2) assessment; nonbank financial institutions surveyed but not assessed relative to international standards.
- AML/CFT benchmark: draft Fund and Bank Methodology for Assessing Legal, Institutional and Supervisory/Regulatory Aspects of AML/CFT (April 2002).
- Mission dates: June 18–July 2, 2002.
- Mission composition: IMF MAE and LEG staff and external experts (mission chief Ms. Patricia Brenner; Ms. Maike Luedersen; Mr. John Aspden; Mr. Stanley Silverberg; Ms. Hannah Faux).

### Engagements and information gathering
- Meetings held with: Governor and General Manager of the Central Bank of Seychelles (CBS); Attorney General; Minister of Industry and International Business; General Manager of the Seychelles International Business Authority (SIBA); Ministry of Foreign Affairs; Insurance and credit union supervisor at the Ministry of Finance; Development Bank of Seychelles (DBS); Seychelles Housing Development Corporation (SHDC); Registrar of Companies; Assistant Commissioner of Police; and relevant staff of these authorities.
- Consultations with: foreign and domestic banks; insurance companies; Seychelles Credit Union (SCU); bank auditors; registered agents for IBCs and trusts; a foreign exchange bureau.

### Financial sector structure and macro context (selected)
- Population: 81,000 inhabitants.
- GDP (2001): US$570 million.
- Financial system composition:
  - Domestic: six commercial banks; Development Bank of Seychelles (DBS); Seychelles Housing Development Corporation (SHDC); Seychelles Credit Union (SCU); two insurance companies.
  - Nondomestic (offshore): more than 9,000 international business companies (IBCs); 25 licensed international trade zone companies (SITZ); 49 trusts; two dormant offshore insurance companies; one temporarily licensed offshore investment bank (not yet operational).
- Macroeconomic and policy environment:
  - Fixed exchange rate, foreign exchange restrictions and allocation system, price controls, large government capital projects.
  - Large external current account and fiscal deficits financed by accumulation of external and domestic government debt, together equivalent to more than 200 percent of GDP at end-2001.
  - Real GDP declined by more than 15 percent during 1999-2001.

### Key statistics (financial system assets, December 31, 2001)
- Total assets and credit to the private sector (in millions of SR and percent of total):
  - Commercial banks: Total Assets 4,910.2 (80.9 percent of total); Credit to the Private Sector 677.6 (47.6 percent of total).
  - Seychelles Housing Development Corp.: Total Assets 730.0 (12.0 percent); Credit to the Private Sector 470.3 (33.1 percent).
  - Development Bank of Seychelles: Total Assets 267.1 (4.4 percent); Credit to the Private Sector 205.4 (14.4 percent).
  - Insurance companies (H. Savy Insurance and SACOS): Total Assets 120.0 (2.0 percent); Credit to the Private Sector 37.0 (2.6 percent).
  - Seychelles Credit Union: Total Assets 42.3 (0.7 percent); Credit to the Private Sector 32.3 (2.3 percent).
  - Total: Total Assets 6,069.6 (100.0 percent); Credit to the Private Sector 1,422.6 (100.0 percent).

### Banking sector governance, regulation, and supervision — findings
- Legal framework: principal laws include the Central Bank of Seychelles Act (1982, amended 1986, 1999, 2001) and the Financial Institutions Act (1984, amended 1995), plus related regulations.
- Institutional links and autonomy concerns:
  - Close links between CBS and the Ministry of Finance; the Governor of CBS also Principal Secretary for Finance; Principal Secretary for Finance is a voting member of the Central Bank Board.
  - Provisions in the Financial Institutions Act allow the Minister of Finance decisions on banking regulations and appeals of CBS enforcement orders; presidential decision-making provisions further compromise CBS autonomy.
  - CBS Act does not clearly specify objectives or priorities.
- Supervisory arrangements and capacity:
  - Bank supervision and foreign exchange bureaus supervised by Bank Supervision Division (BSD) of CBS (three supervisory and two administrative staff at time of mission).
  - BSD staff also monitor exchange control compliance and act as the Financial Intelligence Unit (FIU); salaries may be 50 percent or more below private sector; recent staff losses to private sector.
  - Supervision of credit union and insurance companies less formal and carried out within the Ministry of Finance; DBS has no designated external supervisor.
- Operational shortcomings and immediate recommendations:
  - Outdated legislation and lack of resources limit compliance with Basel Core Principles (BCPs).
  - No deposit insurance scheme.
  - CBS must give 30 days notice before revoking a bank license; mission recommends removal of the 30 days notice requirement and stiffer penalties/corrective actions.
  - No hands-on supervision of banks’ liquidity positions and no formal arrangements to ensure bank liquidity in a crisis.
  - Recommended immediate capacity enhancements:
    - Separate exchange control implementation from supervision; create a dedicated exchange control unit.
    - Initially hire at least two additional supervisory staff to increase capacity for on- and off-site supervision.
    - Create a career path and improve remuneration to retain supervisory staff.

### AML/CFT findings and recommended legal reforms
- Legal and institutional baseline:
  - Anti-Money Laundering Act (AML Act) adopted in 1996; Guidance Notes on AML Procedures issued by CBS in March 1998 (legally non-binding).
  - AML Act requires suspicious transaction reports; CBS empowered to determine identification and record keeping procedures for financial institutions.
  - Money laundering criminalized and sanctioned by imprisonment for up to 15 years and/or imposition of a money penalty.
  - No criminal provisions in place addressing terrorism or terrorist financing at time of assessment; authorities considering drafting relevant legislation (later enactment noted in CBS comments).
  - CBS carries out FIU functions; BSD comprised five staff members including two support staff at assessment time.
- Compliance assessment and priority reforms (selected):
  - Guidance Notes generally appropriate but need updating to reflect recent best AML/CFT practices; core provisions on customer identification and record keeping should be placed in the AML Act rather than only in Guidance Notes.
  - Strengthen customer identification requirements regarding non-resident individuals, non-resident companies, and IBCs.
  - Emphasize in law that suspicious transaction reports must be submitted promptly (without undue delay); provide explicit confidentiality waiver and legal protection to reporting entities and their staff when reporting in good faith.
  - Extend internal controls to include terrorist financing issues and require appointment of a compliance officer in law.
  - Adopt legislation criminalizing terrorism, terrorist organizations and terrorist financing as soon as possible, and by December 31, 2002 at the latest.
  - Ratify the International Convention for the Suppression of the Financing of Terrorism and the Palermo Convention as soon as possible, and by December 31, 2002 at the latest.
  - Amend forfeiture provisions to provide for substitute assets and forfeiture of assets of equivalent value; permit temporary seizure of assets; clarify forfeiture of income or gains received on proceeds of crime.
  - Amend Central Bank Act to clearly set out that CBS may exercise the function of an FIU; amend AML Act to provide for effective freezing mechanism and grant CBS staff explicit personal legal protection when carrying out official duties.
  - Allocate one additional staff experienced in AML/CFT issues by December 31, 2002.
  - Improve flow of information between government entities and create a forum to combine CBS financial expertise with police investigative knowledge.
  - Require banks to submit AML/CFT internal guidelines to CBS for review; issue special guidance regarding private banking and higher risk customers such as politically exposed persons.

### Offshore financial activity — findings and regulatory observations
- Offshore strategy: government strategy to promote offshore financial services, but offshore activity remains limited.
- Historical international concerns: FSF and FATF published unfavorable perceptions in 2000; Economic Development Act (EDA) of 1995 (never implemented) repealed August 2, 2000 leading to FATF retracting an earlier warning.
- Licensing and regulatory treatment:
  - Current licensing framework for offshore banks in some areas more lenient than for domestic banks (e.g., initial minimum capital); several offshore bank applications rejected for not meeting CBS policy requiring international stature and established track record.
  - Temporary license granted to an offshore investment bank; operations pending enabling legislation and business plan approval.
- SIBA role and capacity:
  - SIBA (established 1994) licenses Registered Agents and Trustees and registers IBCs, trusts, and SITZ companies; also charged with promotion of Seychelles as an offshore center—mission views regulator/promoter dual role as potential conflict of interest and recommends separation in the medium term.
  - Offshore fee revenue: IBC and SITZ fees generated less than US$700,000 in 2001; government provided an additional US$400,000 to finance SIBA activities.
  - Proposed Financial Services Authority (FSA) consolidation of supervisory functions would be resource intensive; mission expresses reservations given limited prudential expertise and budgetary constraints.
- Offshore-related AML concerns and recommendations:
  - SIBA collects little information about IBCs other than names; registered agents strike off companies failing to pay fees.
  - Mission calls for greater SIBA scrutiny regarding ultimate beneficial owners of IBCs, enhanced AML scrutiny of IBCs, and improved record keeping and beneficial owner identification by registered agents.

### Nonbank financial institutions — performance and supervisory issues
- Insurance companies:
  - Insurance Act of 1994 provides for regulation by Ministry of Finance and Communications; supervision lapsed in past two years though companies submit audited financials annually.
  - Pre-tax underwriting profits in the range of 15 to 18 percent of premium income through June 30, 2001.
  - Heavy reliance on reinsurance abroad requiring foreign exchange; mission recommends priority access to foreign exchange to pay reinsurance premiums.
- Development Bank of Seychelles (DBS):
  - Ownership: 55.5 percent government; remainder international institutions and a commercial bank.
  - Recorded return on equity around 6 percent in 2001 despite relatively high NPLs; operates tax free and borrows in foreign currency but onlends in domestic currency; in arrears on international debt servicing due to limited foreign exchange access.
  - Mission recommends considering subjecting DBS to profits tax, adding private sector representation on the Board, more flexibility in loan pricing, and eventual privatization.
- Seychelles Credit Union (SCU):
  - Member-owned cooperative with assets about SR 40 million.
  - Loan collection problems, suspect provisioning and accounting practices; about 12 percent of loan portfolio not serviced regularly; dividend to members about 1.5 percent based on 2001 performance.
  - Mission recommends CBS undertake an on-site examination of SCU within the next six months and thereafter every other year.
- Seychelles Housing Development Corporation (SHDC):
  - Accounts for one-third of credit to the private sector via subsidized housing lending.
  - Liabilities heavily subsidized by government; system complex and may misdirect subsidies.
  - Mission recommends greater transparency on SHDC goals and costs and better targeting of housing subsidies; government encouraging commercial banks to take over some SHDC housing loans.

### Assessment under Basel Core Principles (BCPs) and action plan (selected)
- Overall compliance: assessed as modest to materially non-compliant overall; relatively better compliance where legal protection for supervisors, inter-supervisor cooperation, and offsite supervision/contact with bank management are concerned; most other core areas show shortcomings due to outdated legislation and lack of resources.
- Key legal and governance reforms recommended:
  - Modernize and redraft the Central Bank of Seychelles Act and the Financial Institutions Act; provide CBS with operating autonomy and clear supervisory responsibilities.
  - Remove distinctions between domestic and nondomestic (offshore) banks; apply uniform high standards.
  - Amend provisions to remove Minister/President decision-making that undermines CBS independence; remove 30 days notice for license revocation.
  - Amend sections to allow information sharing with supervisory authorities without pre-existing agreement requirements and provide legal protections (indemnity) for CBS in applying AML Act.
- Operational and supervisory reforms (selected):
  - Increase BSD supervisory staffing and resources; create a career path, separate budgets, and redefine responsibilities.
  - Expand depth and frequency of prudential on-site and off-site supervision; increase use of external audits.
  - Tighten licensing criteria and ownership requirements for banks; strengthen AML/CFT procedures and guidance.
  - Address liquidity contingency planning and prepare supervisory responses to possible changes in exchange control or SR convertibility.
- Specific deadlines and action points recommended:
  - Draft a new Financial Institutions Act and a new Central Bank Act by December 31, 2002.
  - Seek parliamentary approval of a new Financial Institutions Act and a new Central Bank Act by June 30, 2003.
  - Unify the regulatory and supervisory regimes for domestic and nondomestic (offshore) banking by June 30, 2003.
  - Remedy identified shortcomings in AML/CFT legislation and guidance as recommended.
  - Create a career path and expand resources for supervisory staff within CBS by June 30, 2003.
  - Prepare a contingency plan addressing supervisory measures for changes in exchange control arrangements by December 31, 2002.
  - SIBA-specific deadlines:
    - Introduce a regulatory regime for registered agents for companies and trusts by December 31, 2002.
    - Prepare revisions to IBC law to meet best practice on disclosure and corporate governance standards by December 31, 2002.
  - CBS recommendation: undertake on-site examination of SCU within the next six months and thereafter every other year.

### Authorities’ response, implementation progress, and technical assistance needs
- Authorities’ intent and actions:
  - Governor of CBS and BSD staff acknowledged many weaknesses identified, including outdated legislation and differences in treatment of onshore and offshore banking.
  - Minister of Finance announced intention to modernize banking and central bank legislation in the 2002 budget speech.
  - Authorities requested model financial sector legislation and technical assistance to draft new Financial Institutions Act and Central Bank Act; Governor aimed to explore publishing draft bills for parliamentary consideration by end-2002.
  - Authorities intended to increase BSD staffing to enable onsite inspections of banks at least every other year and to increase use of external audits in supervision.
- Drafting and supervisory changes reported (selected):
  - Draft legislation and revisions reflect removal of Minister’s approval from specified FIA sections (licensing, fees, appeals, regulations) and deletion of 30-day license revocation notice.
  - Draft section 5(c) and section 32(1) address character, professional experience, integrity, competency and financial soundness in the “fit and proper” test.
  - Draft section 28(10) expands auditors’ responsibilities.
  - CBS reported management and structural changes: foreign exchange management transferred from Supervision Division to Banking Control Unit overseen by Banking Controller; Supervision Division staffing increased to four officers (1 senior and 3 juniors).
  - On-site examination activity since 2003: five of the six banks examined; five of six banks had liquidity policy and contingency plans evaluated; five of six banks had other risks and business contingency plans reviewed; CBS beginning to request submission of all banks’ lending, arrears and provisioning policies.
  - Draft law to apply Basel capital ratio to all banks, including non-domestic (draft section 20 (4) and (5)); draft Section 26A provides powers for CBS to issue prudential regulations, including potential gearing ratio.
  - Draft section 24 addresses reduction of large exposures to an acceptable level (e.g., 25 percent of capital); draft section 25 defines connected lending.
- Technical assistance needs identified:
  - MAE and LEG technical assistance recommended to draft an entirely new Financial Institutions Act and an entirely new Central Bank Act.
  - Model laws to be transmitted by Fund LEG and MAE by September 2002 (recommended).
  - MAE multi-topic mission proposed to support move to indirect instruments of monetary control; assistance to address emergency liquidity support and lender-of-last-resort facilities; options for a limited deposit insurance scheme.
  - AML/CFT technical assistance recommended to draft and amend legislation (priority: criminalize terrorism and terrorist financing; align with Palermo Convention and International Convention for the Suppression of the Financing of Terrorism).
- Timetable and staffing recommendations for AML/CFT:
  - Adopt terrorism-related criminal provisions and ratify conventions by December 31, 2002 (recommended).
  - Allocate one additional staff experienced in AML/CFT issues by December 31, 2002.
  - CBS reported training and legislative progress in subsequent years (Prevention of Terrorism Act enacted June 2004; Palermo Convention ratified March 30, 2004; International Convention for the Suppression of the Financing of Terrorism ratified April 22, 2004; proposed AML regulations and draft amendments under preparation with regulatory timetable into end-2004).

*International Monetary Fund — Assessment completed August 2002; authorities agreed publication April 2004; report dated OCTOBER2004.*

### 2004. The views expressed in these documents are those of the staff team and do not necessarily

### ASSESSMENT OF THE SUPERVISION AND REGULATION OF THE FINANCIAL SECTOR — Review of Financial Sector Regulation and Supervision, Seychelles, OCTOBER2004

### Scope and Purpose
- The assessment focused on observance of international supervisory standards in the banking sector and arrangements for anti-money laundering and combating the financing of terrorism (AML/CFT).
- The assessment was conducted in the context of a stand-alone OFC (Module 2) assessment.
- Nonbank financial institutions (insurance companies, certain parastatal financial institutions, company and company service providers, and trust and trust service providers) were surveyed; these activities are relatively small and were not assessed relative to international standards.
- The AML/CFT arrangements were reviewed on the basis of the draft Fund and Bank Methodology for Assessing Legal, Institutional and Supervisory/Regulatory Aspects of Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT Methodology) of April 2002.

### Mission and Team
- Mission dates: June 18–July 2, 2002.
- Team composition:
  - Ms. Patricia Brenner, Mission Chief, Monetary and Exchange Affairs Department (MAE), IMF
  - Ms. Maike Luedersen, Legal Department (LEG), IMF
  - Mr. John Aspden, Chief Executive, Financial Supervision Commission, Isle of Man
  - Mr. Stanley Silverberg, banking expert, formerly United States Federal Deposit Insurance Corporation
  - Ms. Hannah Faux, Administrative Assistant, MAE, IMF

### Engagements and Information Gathering
- The mission met with:
  - Governor of the Central Bank of Seychelles
  - General Manager of the Central Bank of Seychelles
  - Attorney General
  - Minister of Industry and International Business
  - General Manager of the Seychelles International Business Authority
  - Ministry of Foreign Affairs
  - Insurance and credit union supervisor at the Ministry of Finance
  - Development Bank of Seychelles
  - Seychelles Housing Development Corporation
  - Registrar of Companies
  - Assistant Commissioner of Police
  - Relevant staffs of the above authorities
- The mission also held discussions with:
  - Foreign and domestic banks
  - Insurance companies
  - Seychelles Credit Union
  - Bank auditors
  - Registered agents for international business companies and trusts
  - A foreign exchange bureau

### Findings, Deliverables, and Recommendations (report structure)
- The report contains:
  - Executive Summary
  - I. Overview of the Financial Sector
  - II. Offshore Financial Activity
  - III. Summary of Activity and Supervision of Nonbank Financial Institutions
  - IV. Summary of Assessment under the Basel Core Principles for Effective Banking Supervision, including:
    - A. Banking Supervision in Seychelles
    - Recommendations and action plan
    - Authorities’ response to the assessment
  - V. Summary of Assessment of the Legal and Institutional Framework for AML/CFT and Implementation in the Banking Sector, including:
    - A. Measures to Prevent Money Laundering and Terrorist Financing
    - Recommendations and action plan
    - Authorities’ response to the assessment
  - VI. Technical Assistance Needs, including:
    - A. Banking Sector Needs
    - B. Technical Assistance Needs in AML/CFT
  - Tables and Appendices:
    - Table 1: Assets of the Financial System
    - Table 2: Recommended Actions to Improve Compliance with the Basel Core Principles
    - Table 3: Recommended Actions to Strengthen AML/CFT Measures
    - Appendix I: List of Laws and Regulations Pertaining to the Financial Sector, Financial Sector Regulation, and Anti-Money Laundering Framework
    - Appendix II: Authorities’ Response to Action Plans
    - Appendix Tables 4 and 5: BCP Action Plan and Authorities’ Response; AML/CFT Action Plan and Authorities’ Response

### Timing, Publication, and Follow-up
- The mission completed the report in August 2002.
- The Seychelles authorities agreed to publish the report in April 2004.
- Appendix II reflects, as of August 2004, the actions the authorities have taken, or plan to take, in response to the recommendations of the report.

### Institutional and Publication Notes
- The contents constitute technical advice and recommendations given by IMF staff to the authorities of a member country in response to their request for technical assistance; disclosure rules for the report and summaries require written authorization of the recipient country’s authorities and the IMF’s Monetary and Financial Systems Department for disclosure to parties outside the IMF other than technical assistance providers and donors.
- The policy of publication of staff reports and other documents by the IMF allows for the deletion of market-sensitive information.
- Copies available from International Monetary Fund — Publication Services, 700 19th Street, N.W., Washington, D.C. 20431; Telephone: (202) 623 7430; Telefax: (202) 623 7201; E-mail: publications@imf.org; Internet: http://www.imf.org. Price: $15.00 a copy.

*International Monetary Fund — Assessment completed August 2002; authorities agreed publication April 2004; report dated OCTOBER2004.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Mission and scope
- The assessment was conducted by an MAE mission at the request of the Central Bank of Seychelles during June 18-July 2, 2002, as part of the IMF’s Offshore Financial Centers (OFC) initiative.
- The assessment covered:
  - Compliance with supervisory and regulatory principles relative to the Basel Core Principles for Effective Banking Supervision (BCPs) in the banking sector.
  - Arrangements for anti-money laundering and combating terrorist financing (AML/CFT) in the banking sector, using the IMF and World Bank Draft AML/CFT Methodology.
  - Regulation and supervision of nonbank financial institutions and offshore financial service providers.

### Financial sector structure and macro context
- Population: 81,000 inhabitants.
- GDP (2001): US$570 million.
- The financial system comprises:
  - Domestic: six commercial banks, a specialized development bank (Development Bank of Seychelles—DBS), a housing finance company (Seychelles Housing Development Corporation—SHDC), a credit union (Seychelles Credit Union—SCU), and two insurance companies.
  - Nondomestic (offshore): more than 9,000 international business companies (IBCs), 25 licensed international trade zone companies (SITZ), 49 trusts, two (dormant) offshore insurance companies, and a temporarily licensed offshore investment bank (not yet operational).
- Macroeconomic and policy environment:
  - Fixed exchange rate, foreign exchange restrictions and allocation system, price controls, and large government capital projects.
  - Large external current account and fiscal deficits financed by accumulation of external and domestic government debt, together equivalent to more than 200 percent of GDP at end-2001.
  - Real GDP declined by more than 15 percent during 1999-2001.
- Banking system features:
  - Bulk of banking assets held in government obligations; only 17 percent of assets in loans to the private sector at end-2001.
  - Local assets ratio requirement relaxed from 70 percent to 50 percent in October 2001, but banks continued to hold well over 70 percent of assets in government securities.
  - Excess liquidity in banking system, limited demand for credit, acute shortage of foreign exchange.
  - Banks reportedly enjoy an adequate level of profitability related to the margin between administered deposit and lending rates.

### Key statistics (financial system assets, December 31, 2001)
- Total assets and credit to the private sector (in millions of SR and percent of total):
  - Commercial banks: Total Assets 4,910.2 (80.9 percent of total); Credit to the Private Sector 677.6 (47.6 percent of total).
  - Seychelles Housing Development Corp.: Total Assets 730.0 (12.0 percent); Credit to the Private Sector 470.3 (33.1 percent).
  - Development Bank of Seychelles: Total Assets 267.1 (4.4 percent); Credit to the Private Sector 205.4 (14.4 percent).
  - Insurance companies (H. Savy Insurance and SACOS): Total Assets 120.0 (2.0 percent); Credit to the Private Sector 37.0 (2.6 percent).
  - Seychelles Credit Union: Total Assets 42.3 (0.7 percent); Credit to the Private Sector 32.3 (2.3 percent).
  - Total: Total Assets 6,069.6 (100.0 percent); Credit to the Private Sector 1,422.6 (100.0 percent).

### Banking sector governance, regulation, and supervision findings
- Regulatory framework: principal laws include the Central Bank of Seychelles Act (1982, amended 1986, 1999, 2001) and the Financial Institutions Act (1984, amended 1995), plus related regulations.
- Institutional links and autonomy:
  - Close links between the Central Bank and the Ministry of Finance; fiscal dominance in credit allocation.
  - The Governor of the Central Bank is also the Principal Secretary for Finance; the Principal Secretary for Finance is a voting member of the Central Bank Board.
  - Provisions in the Financial Institutions Act allow Minister of Finance decisions on banking regulations and appeals of Central Bank enforcement orders.
  - Central Bank Act does not clearly specify objectives or priorities, and presidential decision-making provisions further compromise Central Bank autonomy.
- Supervision arrangements:
  - Bank supervision and foreign exchange bureaus supervised by the Bank Supervision Division (BSD) of the Central Bank (three supervisory and two administrative staff).
  - Supervision of credit union and insurance companies is less formal and carried out within the Ministry of Finance; DBS has no designated external supervisor.
  - BSD staff also monitor exchange control compliance and act as the Financial Intelligence Unit (FIU); salaries may be 50 percent or more below private sector, with recent staff losses to private sector.
- Operational shortcomings:
  - Outdated legislation and lack of resources limit compliance with BCPs.
  - No deposit insurance scheme.
  - CBS must give 30 days notice before revoking a bank license; mission recommends removal of the 30 days notice requirement and stiffer penalties/corrective actions.
  - No hands-on supervision of banks’ liquidity positions and no formal arrangements to ensure bank liquidity in a crisis.
- Recommended immediate supervisory capacity enhancements:
  - Separate implementation of exchange control from supervision; create a dedicated exchange control unit.
  - Initially hire at least two additional supervisory staff to increase capacity for on- and off-site supervision.
  - Create a career path and improve remuneration to retain supervisory staff.

### AML/CFT findings and recommendations
- Anti-money laundering legislation effective since 1996; Guidance Notes on Anti-Money Laundering Procedures issued by the Central Bank in March 1998.
- Assessment: moderate compliance with international AML standards.
  - Guidance Notes are generally appropriate but need updating to reflect recent best AML/CFT practices.
  - Most banks apply know-your-customer identification procedures for Seychellois customers; banks provide internal guidance to employees.
  - Mission recommends core provisions on customer identification and record keeping be placed in the AML Act rather than only in Guidance Notes.
  - No specific criminal provisions defining terrorism or terrorist financing; such legislation needs to be drafted.
- Offshore-related AML concerns:
  - SIBA collects little information about IBCs other than names; registered agents strike off companies failing to pay fees.
  - Mission calls for greater scrutiny by SIBA regarding ultimate beneficial owners of IBCs, enhanced AML scrutiny of IBCs, and improved record keeping and beneficial owner identification by registered agents.

### Offshore financial activity findings
- Government strategy to promote offshore financial services, but offshore activity remains limited.
- Past international concerns: Financial Stability Forum (FSF) and Financial Action Task Force on Money Laundering (FATF) published unfavorable perceptions in 2000; Economic Development Act (EDA) of 1995 (never implemented) was repealed on August 2, 2000, leading to FATF retracting an earlier warning.
- Offshore licensing and regulatory treatment:
  - Current licensing framework for offshore banks in some areas more lenient than for domestic banks (e.g., initial minimum capital).
  - Several offshore bank applications rejected for not meeting CBS policy requiring international stature and established track record.
  - A temporary license was granted to an offshore investment bank; operations pending enabling legislation and business plan approval.
- SIBA role and capacity:
  - SIBA (established 1994) licenses Registered Agents and Trustees and registers IBCs, trusts, and SITZ companies; also charged with promotion of Seychelles as an offshore center—mission views regulator/promoter dual role as potential conflict of interest and recommends separation in the medium term.
  - Offshore activity revenue: IBC and SITZ fees generated less than US$700,000 in 2001; government provided an additional US$400,000 to finance SIBA activities.
  - Proposed plan to consolidate supervisory functions into a new Financial Services Authority (FSA) would be resource intensive; mission expresses reservations given limited prudential expertise and budgetary constraints.

### Nonbank financial institutions: performance and supervision
- Insurance companies:
  - Insurance Act of 1994 calls for regulation by Ministry of Finance and Communications; supervision lapsed in past two years though companies submit audited financials annually.
  - Pre-tax underwriting profits in the range of 15 to 18 percent of premium income through June 30, 2001.
  - Heavy reliance on reinsurance abroad requiring foreign exchange; mission recommends priority access to foreign exchange to pay reinsurance premiums.
- Development Bank of Seychelles (DBS):
  - Ownership: 55.5 percent government; remainder international institutions and a commercial bank.
  - Recorded return on equity around 6 percent in 2001 despite relatively high NPLs; operates tax free and borrows in foreign currency but onlends in domestic currency; in arrears on international debt servicing due to limited foreign exchange access.
  - Mission recommends considering subjecting DBS to profits tax, adding private sector representation on the Board, more flexibility in loan pricing, and eventual privatization.
- Seychelles Credit Union (SCU):
  - Member-owned cooperative with assets about SR 40 million.
  - Loan collection problems, suspect provisioning and accounting practices; about 12 percent of loan portfolio not serviced regularly; dividend to members about 1.5 percent based on 2001 performance.
  - Mission recommends CBS undertake an on-site examination of SCU within the next six months and thereafter every other year.
- Seychelles Housing Development Corporation (SHDC):
  - Accounts for one-third of credit to the private sector via subsidized housing lending.
  - Liabilities heavily subsidized by government; system complex and may misdirect subsidies.
  - Mission recommends greater transparency on SHDC goals and costs and better targeting of housing subsidies; government encouraging commercial banks to take over some SHDC housing loans.

### Basel Core Principles (BCP) assessment — overall and specific recommendations
- Overall compliance: assessed as modest to materially non-compliant overall, with relatively better compliance where legal protection for supervisors, inter-supervisor cooperation, and offsite supervision/contact with bank management are concerned; most other core areas show shortcomings due to outdated legislation and lack of resources.
- Key governance/legal actions recommended:
  - Modernize and redraft the Central Bank of Seychelles Act and the Financial Institutions Act; provide CBS with operating autonomy and clear supervisory responsibilities.
  - Remove distinctions between domestic and nondomestic (offshore) banks; apply uniform high standards.
  - Amend provisions to remove Minister/President decision-making that undermines CBS independence; remove 30 days notice for license revocation.
  - Amend sections to allow information sharing with supervisory authorities without pre-existing agreement requirements and provide legal protections (indemnity) for CBS in applying AML Act.
- Operational and supervisory recommendations (selected):
  - Increase BSD supervisory staffing and resources; create a career path, separate budgets, and redefine responsibilities.
  - Expand the depth and frequency of prudential on-site and off-site supervision; increase use of external audits.
  - Tighten licensing criteria and ownership requirements for banks; strengthen AML/CFT procedures and guidance.
  - Address liquidity contingency planning and prepare supervisory responses to possible changes in exchange control or SR convertibility.
- Specific deadlines and action points recommended:
  - Draft a new Financial Institutions Act and a new Central Bank Act by December 31, 2002.
  - Seek parliamentary approval of a new Financial Institutions Act and a new Central Bank Act by June 30, 2003.
  - Unify the regulatory and supervisory regimes for domestic and nondomestic (offshore) banking by June 30, 2003.
  - Remedy identified shortcomings in AML/CFT legislation and guidance as recommended.
  - Create a career path and expand resources for supervisory staff within CBS by June 30, 2003.
  - Prepare a contingency plan addressing supervisory measures for changes in exchange control arrangements by December 31, 2002.
  - SIBA-specific recommendations:
    - Introduce a regulatory regime for registered agents for companies and trusts by December 31, 2002.
    - Prepare revisions to IBC law to meet best practice on disclosure and corporate governance standards by December 31, 2002.
  - CBS recommendation: undertake on-site examination of SCU within the next six months and thereafter every other year.

### Authorities’ response and implementation intent
- The Governor of the Central Bank and BSD staff acknowledged many weaknesses identified by the mission, including outdated legislation and differences in treatment of onshore and offshore banking.
- The Minister of Finance announced intention to modernize banking and central bank legislation in the 2002 budget speech.
- Authorities requested model financial sector legislation and technical assistance to draft new Financial Institutions Act and Central Bank Act; Governor aimed to explore publishing draft bills for parliamentary consideration by end-2002.
- Authorities intend to increase BSD staffing to enable onsite inspections of banks at least every other year and to increase use of external audits in supervision.

*The assessment and recommendations are those of the IMF MAE mission to Seychelles (June 18-July 2, 2002).*

### 2.  Permissible activities The definitions of “bank” and “banking business” in

### 2.  Permissible activities The definitions of “bank” and “banking business” in

### Licensing, ownership, and governance
- Section 3 of the 1996 Regulations must require CBS to form a view on the fitness and propriety of the shareholders, as well as of directors and management.
- CBS should introduce its own suite of personal questionnaires designed to elicit all relevant information about a director or manager to focus the assessment process.
- CBS must admit only banks which meet its stated criteria of quality.
- The FIA to be amended so that CBS’ prior approval must be obtained for any material (typically greater than or equal to 10 percent) shareholder or prospective material shareholder of a bank.
- Fit and proper tests are applied to managers, directors and significant shareholders in the licensing process, but subsequent changes do not require CBS approval; recommended that the FIA and the AML Act be amended to provide for CBS approval of any subsequent changes in management, directors and significant shareholders.
- The Company Registrar should intensify background checks for managers, directors and shareholders in domestic companies.
- For IBCs, SIBA should increase its level of oversight and carry out plans to strengthen the licensing of registered agents and trustees.

### Investment, capital adequacy, and credit risk
- CBS must require banks first to discuss with it any planned direct investment which falls within the statutory limit, and issue guidance on inappropriate types.
- The Basel capital ratio should apply to all banks, including non-domestic.
- The Basel ratio might be supplemented by a gearing ratio in view of the special nature of banks’ balance sheets.
- Loan classification and provisioning requirements to be set to ensure adequacy of provisions therefore no overstatement of capital.
- Loan classification and provisioning requirements to be set by CBS.
- CBS to request submission of all banks’ lending, arrears and provisioning policies.
- Amend the FIA to reduce the size of permitted large exposures to an acceptable level (e.g., 25 percent of capital).
- Connected lending should be defined and reported to CBS, and a limit included in the FIA.
- CBS to ensure that it is in a position to receive details of banks’ country risk, and policy and exposure relating thereto.

### Risk management, internal controls, and audit
- CBS to improve the reporting on and supervision of liquidity and establish a clear policy for banks to follow.
- CBS to consider banks’ other risks, and to review their business contingency plans.
- Section 30 of the FIA to be made explicit that CBS must be satisfied on the adequacy of all internal controls.
- CBS to require banks to submit copies of internal audit reports and external auditors’ management letters.
- External auditors to perform compliance checks and verify that prudential returns have been correctly completed. The FIA to be amended to reflect this increased role of auditors.
- System to be introduced for auditors to check accuracy of prudential returns.
- The FIA to be amended so that limits and requirements can be applied on a consolidated as well as individual basis.

### Supervision intensity and modalities
- Additional resources needed substantially to intensify depth and scope of on and offsite supervision.
- Program of frequent supervision to be drawn up and risk-prioritized.
- Bank management contact to be enhanced through more onsite visits and offsite prudential discussions.
- Offsite supervision depth and scope to be increased, especially as banks’ activities broaden and new activities are undertaken.
- CBS to request banks’ policies and intensify frequency of onsite visits for compliance verification.

### Remedial measures and enforcement
- The FIA to be amended so that CBS can revoke a license without notice if required in depositors’ interests.
- CBS to implement a strict regime for non-compliance with the regulations. Fines to be reviewed and imposed.
- The AML Act should be amended to increase the maximum penalties for noncompliance with specific reporting and other obligations imposed under the AML Act.
- The authorities should consider granting explicit authority to the CBS to impose administrative fines directly under the constitutional framework.

### AML/CFT legal and institutional framework — findings
- The Seychelles adopted the Anti-Money Laundering Act (AML Act) in 1996.
- In 1998, the CBS issued Guidance Notes on anti-money laundering procedures; the Guidance Notes are legally non-binding.
- The Guidance Notes are specific regarding identification requirements for resident customers opening individual accounts and largely for corporate accounts by domestic companies, but insufficient for non-resident individuals, non-resident companies, and IBCs due to heavy reliance on third party identification.
- The AML Act requires suspicious transaction reports to be filed and empowers CBS to determine identification and record keeping procedures for financial institutions.
- Violations under the AML Act are sanctioned, but the penalties are relatively low.
- Money laundering is criminalized and sanctioned by imprisonment for up to 15 years and/or imposition of a money penalty.
- There are no criminal provisions in place addressing terrorism, terrorist organizations or the financing of terrorism; authorities are considering drafting relevant legislation.
- The CBS carries out the functions of a financial intelligence unit in the Seychelles; within the CBS, the Bank Supervision Division comprises five staff members, including two support staff.
- Suspicious transaction reports must be submitted to the CBS; the CBS reviews incoming reports for possible money laundering and, though not yet required under the law, also screens for indications of terrorist financing.
- The CBS is not authorized to order a temporary freezing of transactions; such order could be issued by a court.
- The CBS forwards information on suspected money laundering to the Commissioner of Police for further investigation and action.
- The Republic of Seychelles acceded to the Vienna Convention and has signed, but not yet ratified, the Palermo Convention and the International Convention for the Suppression of the Financing of Terrorism; ratification of both conventions is expected by the end of 2002.
- As provided for in the Constitution, it is possible to extradite a resident Seychelles’ national.
- The Attorney-General is responsible for mutual legal assistance matters related to the investigation or prosecution of money laundering.
- There are currently six commercial banks and one foreign exchange bureau operating in the Seychelles.
- The CBS includes a review of customer identification procedures in its onsite inspections and treats compliance with anti-money laundering measures as an integral part of prudent banking supervision.
- In general, banks apply adequate customer identification requirements regarding individual accounts by residents; procedures applied to other account types need improvement.

### AML/CFT recommendations and action plan (selected)
- Amend the AML Act to set core provisions on customer identification and record keeping procedures in law rather than in non-binding Guidance Notes.
- Strengthen customer identification requirements regarding non-resident individuals, non-resident companies, and IBCs.
- Emphasize in law that suspicious transaction reports must be submitted promptly (without undue delay) and provide explicit confidentiality waiver and legal protection to reporting entities and their staff when reporting in good faith.
- Extend internal controls to include terrorist financing issues and require the appointment of a compliance officer in law.
- Consider granting explicit authority to the CBS to impose administrative fines directly.
- Adopt legislation criminalizing terrorism, terrorist organizations and terrorist financing as soon as possible, and by December 31, 2002 at the latest.
- Ratify the International Convention for the Suppression of the Financing of Terrorism and the Palermo Convention as soon as possible, and by December 31, 2002 at the latest.
- Amend forfeiture provisions to explicitly provide for the forfeiture of substitute assets obtained with partly criminal funds, and for the forfeiture of assets of equivalent value; clarify forfeiture of any income or gains received on proceeds of crime; amend the AML Act to permit temporary seizure of assets.
- Amend the Central Bank Act to clearly set out that the CBS may exercise the function of a financial intelligence unit in the Seychelles.
- Amend the AML Act to provide for an effective mechanism to freeze suspicious transactions and grant CBS staff explicit personal legal protection when carrying out their official duties.
- Allocate one additional staff experienced in AML/CFT issues to AML/CFT issues by December 31, 2002.
- Improve flow of information between government entities and create a forum to combine CBS financial expertise with police investigative knowledge.
- Require banks to submit their AML/CFT internal guidelines to CBS for review and for CBS to regularly provide updated guidance on identifying suspicious transactions.
- Issue special guidance regarding private banking activities and higher risk customers, such as politically exposed persons, and guidance to banks on consolidating customer accounts for monitoring and suspicious transaction reporting purposes.
- Strengthen CBS reviews concerning fit and proper requirements for managers, directors and significant shareholders.

### Tabled recommended actions (high-level)
- Customer due diligence: Move core provisions into the AML Act; strengthen non-resident and IBC requirements.
- Record keeping: Move core provisions into the AML Act.
- Suspicious transactions reporting: Require prompt submission; provide confidentiality waiver and legal protection for reporters.
- AML/CFT internal controls: Include terrorist financing; require compliance officer.
- Sanctions: Increase maximum penalties; consider CBS authority to impose administrative fines.
- Integrity standards: Require CBS approval for subsequent changes in management, directors and significant shareholders; enhance fit and proper standards and oversight for IBCs.
- Criminalization: Enact terrorism-related criminal provisions by December 31, 2002.
- Confiscation: Provide for forfeiture of substitute assets and assets of equivalent value; allow temporary seizure.
- Process for financial intelligence: Amend Central Bank Act and AML Act to clarify FIU role, freezing powers, and CBS staff protections; allocate one additional AML/CFT-experienced staff by December 31, 2002.
- International cooperation: Specify powers of the CBS to receive and disseminate information in law.

*Source: Summary of the assessment of the legal and institutional framework for AML/CFT and implementation in the banking sector (Seychelles).*

### Part 2: Suggested actions for the banking sector

### Part 2: Suggested actions for the banking sector

### Organizational and administrative arrangements
- Central Bank of Seychelles (CBS) should carry out onsite inspections focusing on AML/CFT issues.
- Banks should be required to submit their AML/CFT internal guidelines to CBS for review.
- CBS should intensify training sessions and emphasize recent best practices regarding AML/CFT issues and regularly provide updated guidance on identifying suspicious transactions.
- CBS should ensure that all banks appoint a compliance officer.

### Customer identification and due diligence
- Banks should increase their focus on identifying the ultimate beneficial owners of funds.
- Rigorous customer identification procedures for IBCs need to be put in place.
- CBS should issue special guidance regarding private banking activities and higher risk customers, such as politically exposed persons.

### Monitoring and reporting suspicious transactions
- CBS should issue guidance to banks alerting them to the need to consolidate customer accounts for monitoring and suspicious transaction reporting purposes.
- The AML Act needs amendment to provide for prompt submission of suspicious transaction reports and an effective mechanism to freeze suspicious transactions.

### Record keeping, compliance and audit
- CBS should ensure that all banks appoint a compliance officer.
- The penalty scheme in the AML Act for specific reporting and other obligations requires an overhaul.
- An explicit provision on personal liability protection for actions carried out in good faith in the course of official action is necessary for CBS staff in the financial intelligence unit function.

### Cooperation between supervisors/regulators and competent authorities
- The procedures for cooperation and exchange of information with central banks and foreign regulatory authorities should be enhanced and formalized.
- Sections 38 and 38A (drafted provisions) should be amended to provide for the sharing of information relating to all banks on the same terms, to include provision of information to supervisory authorities, and to exclude a requirement for an agreement to be in place before information can be exchanged.
- Draft sections 38A and 38B have been revised to reflect these changes in the draft law.

### Licensing and authorizations
- The reviews of CBS concerning fit and proper requirements for managers, directors and significant shareholders should be strengthened.
- The FIA to be amended so that CBS’s approval must be obtained for any material (typically greater than or equal to 10 percent) shareholder or prospective material shareholder of a bank (covered under draft section 35).
- Section 3 of the 1996 Regulations must require CBS to form a view on the fitness and propriety of the shareholders, as well as of directors and management; draft sections 5(1)c and 32(1) apply but need extension to include owners.
- CBS should introduce its own suite of personal questionnaires designed to elicit all relevant information about a director or manager to focus the assessment process (under review).
- The definitions of “bank” and “banking business” in the FIA to be significantly broadened (expanded in draft section 3A).

### Authorities’ response to the assessment
- Seychelles is committed to bringing its regulatory and supervisory regime into compliance with international banking and anti-money laundering and combating terrorist financing standards.
- The recommendations of the IMF OFC Module 2 assessment team will be studied carefully and either incorporated into proposed legislative changes to be presented to the National Assembly for approval or into regulations for implementation, whichever is appropriate.
- Authorities note Seychelles is a small country with limited resources and expertise and are requesting technical assistance to help implement recommendations regarding banking regulation and supervision and AML/CFT.
- The Government of the Seychelles provided the IMF Monetary and Financial Systems Department (MFD) with letters and tables outlining steps taken to address recommendations; authorities are incorporating comments on draft banking and central bank legislation and will seek necessary approvals to have the bills enacted.
- CBS’ comment: Redrafted by IMF. Anticipate that proposed legislation will be in place by end 2004 (referring to CBS Act and FIA updates).

### Technical assistance needs — Banking sector (MAE and LEG support)
- The mission recommends technical assistance to assist authorities in drafting an entirely new Financial Institutions Act and an entirely new Central Bank Act due to need for substantial modernization.
- The Fund’s Legal and Monetary and Exchange Affairs Departments were suggested to transmit model laws for financial institutions and the central bank, respectively, by September 2002.
- The Fund will consider providing technical assistance as a team consisting of LEG and MAE staff and possibly an expert consultant from outside the Fund.
- The new Central Bank Act would need to:
  - More clearly specify the objectives of the Central Bank and the priority to be given to those objectives;
  - Include the prevention of financial crime as one of those objectives;
  - Establish the autonomy of the Central Bank in pursuing those objectives;
  - Provide for CBS guidance on determining loan quality and provisioning.
- The new Financial Institutions Act should:
  - Strengthen the autonomy of the Central Bank by removing numerous references to authority for the Ministry of Finance to take decisions on banking regulations, and to rule on appeals of Central Bank enforcement orders relative to sound banking practices;
  - Establish identical supervisory and regulatory arrangements for domestic and offshore banking;
  - Strengthen licensing criteria for bank managers and shareholders;
  - Establish much tighter loan concentration limits;
  - Increase the role of auditors in assuring that banks meet prudential requirements;
  - Provide for the CBS to give instructions to banks on rules for loan classification and provisioning.
- A multi-topic MAE technical mission is proposed to support a move to indirect instruments of monetary control, which would need to be accompanied by:
  - A relaxation of administered interest rates to allow for positive real rates;
  - A further decline in the local asset rate;
  - Overhaul of the rediscount and standing facilities;
  - Expansion of liquidity management operations through securitization of a substantial amount of CBS advances to the government.
- The MAE mission could also help the Central Bank address measures to provide emergency liquidity support and lender-of-last-resort facilities to banks in case of external shocks and to consider options for a limited deposit insurance scheme.

### Technical assistance needs — AML/CFT
- The mission recommends technical assistance to assist the authorities in drafting and amending legislation in the area of AML/CFT.
- Drafting new legislation criminalizing terrorism, terrorist organizations and terrorist financing should take priority (in line with anticipated ratification of the International Convention for the Suppression of the Financing of Terrorism and the United Nations Convention Against Transnational Organized Crime).
- The AML Act needs amendment in a number of areas, including:
  - Establishing customer identification and record keeping requirements in the law;
  - Providing for prompt submission of suspicious transaction reports;
  - Establishing an effective mechanism to freeze suspicious transactions;
  - Introducing explicit provision on personal liability protection for actions carried out in good faith by CBS staff in the financial intelligence unit function;
  - Overhauling the penalty scheme for reporting and other obligations.
- Fit and proper requirements applying to managers, directors and shareholders of financial institutions under the FIA need to be strengthened; this could be discussed in the context of technical assistance for a new banking law.

### Implementation and supervisory progress (selected supervisory findings and actions)
- Draft legislation and revisions reflect removal of Minister’s approval from specified FIA sections: 3(3) granting of licenses; 9(2) setting of annual licence fees; 40(2) appeals; 56(1) regulations; and section 58 removes the vested authority of the President to declare a person as a financial institution.
- Draft section 5(c) and section 32(1) address character, professional experience, integrity, competency and financial soundness as elements of the “fit and proper” test.
- Draft section 28(10) expands the responsibility for auditors.
- CBS reports managerial and structural changes: management and control of foreign exchange issues have been removed from the Supervision Division, transferred to a Banking Control Unit overseen by the Banking Controller; Supervision Division staffing increased to four officers (1 senior and 3 juniors).
- License revocation notice period of 30 days has been deleted from section 12(5) of the existing FIA.
- CBS reports that on-site examinations since 2003 have begun to request submission of all banks’ lending, arrears and provisioning policies.
- Of the six banks, five have been examined since 2003; five of the six banks have had liquidity policy and contingency plans evaluated; five of the six banks have had other risks and business contingency plans reviewed.
- The Basel capital ratio is to apply to all banks, including non-domestic (covered in draft section 20 (4) and (5)); draft Section 26A provides powers for CBS to issue regulations on prudential matters, including potential introduction of a gearing ratio.
- Amend the FIA to reduce permitted large exposures to an acceptable level (e.g., 25 percent of capital); draft section 24 covers this but is being considered carefully as it may adversely affect some banks.
- Connected lending should be defined and reported to CBS and a limit included in the FIA; draft law defines connected lending and expands on it in section 25.
- CBS has revised the maturity profile return and issued clear instructions to banks on liquidity reporting and supervision.

*International Monetary Fund — OFC Module 2 Assessment (Part 2: Suggested actions for the banking sector).*

### Section 30 of the FIA to be made explicit that CBS must be satisfied on the

### Section 30 of the FIA to be made explicit that CBS must be satisfied on the 

### Internal controls, audits, and supervisory verification
- CBS’ Comment: The adequacy of all internal controls for the banks is being reviewed. This has already been done for five of the six banks, with the sixth bank due for an examination in the second half of 2004.
- CBS to require banks to submit copies of internal audit reports.
  - CBS’ Comment: May request for such reports under draft section 30 (e).
- CBS to require external auditors’ management letters.
  - CBS’ Comment: May request for such letters under draft section 28 (10)(a).
- External auditors to perform compliance checks and verify that prudential returns have been correctly completed.
  - CBS’ Comment: The draft FIA is to be further amended to shift the onus onto the banks so that the draft will read something to the effect that “each bank is required to obtain an outside qualified opinion...” in these issues. However during on-site visits the examiners do carry out compliance checks and verify that the returns have been correctly completed.
- Recommended Action (Principle 19): System to be introduced for auditors to check accuracy of prudential returns.
  - CBS’ Comment: This is currently being done during on-site examinations which have begun since 2003 but the draft Section 28(10) (b) can also apply for auditors to check the accuracy of the returns.

### Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT)
- Principle 15 summary: Banking supervisors must determine that banks have adequate policies, practices and procedures, including strict “know your customer” rules, to prevent misuse by criminal elements.
- Recommended Action: The Guidance Notes are not as explicit or detailed as required by today’s standards. AML Act and Guidance Notes need to be brought up-to-date as soon as possible, to include terrorism and a substantial increase in specified fines.
  - CBS’ Comment: A new law called the Prevention for Terrorism Act was passed in June 2004.
- Guidance Notes must be explicit that evidence of a lack of adequate policies and procedures in AML core areas will be treated as grounds for severe regulatory/enforcement action.
  - CBS’ Comment: Will be reviewed in line with AML amendments.
- CBS to elevate its concern to ensure that proper procedures are followed at all times. Banks to send copies of their AML procedures and policies for review. Much more frequent (e.g., at least annual) onsite visits should be conducted on each bank to verify compliance.
  - CBS’ Comment: Of the six banks, five have been examined so far and the reports produced cover the area of AML procedures and policies. The sixth bank is due to be examined in the second half of 2004.
- CBS and police to arrange briefing and training sessions for the industry.
  - CBS’ Comment: Since the start of 2004, CBS has begun providing training for staff of the banks including the Seychelles Credit Union. The PowerPoint presentation is broad covering both AML and CTF issues.
- CBS to suggest that the industry should comment on the FATF’s draft review of its recommendations.

### Legal and institutional AML/CFT action plan and status
- Seychelles commitment: Strengthen legal framework and supervisory regime in line with international standards on AML/CFT; prepared and published a bill on Prevention of Terrorism for discussion and approval by Parliament.
- Prevention of Terrorism Bill: criminalizes the financing of terrorism with extra-territorial application as envisioned by the 1999 International Convention for the Suppression of the Financing of Terrorism and provides for mechanism and authority to gather information to deter terrorist activities.
- AML Act amendments planned:
  - First step: AML Act will be amended to allow the Minister of Finance to issue regulations in the areas brought out in the AML/CFT assessment recommendations. The new regulations are expected to be in place by end 2004.
- On-site inspections and training:
  - In the last two years CBS carried out on-site inspections of banks focusing on AML/CFT issues. Of the six banks, five inspections were carried out and the sixth bank is due for an on-site inspection in early September 2004, including a detailed examination of AML/CFT issues.
  - Training sessions for bank staff (including the Seychelles Credit Union) have been carried out since February 2004.

### Specific recommended legal and regulatory amendments (Table 5 highlights)
- Customer due diligence
  - Recommendation: Core provisions on customer identification procedures should be set out in the AML Act rather than in the Guidance Notes; strengthen requirements regarding non-resident individuals, non-resident companies, and IBCs.
  - CBS’ Comments: Proposal is to amend the existing AML Act and allow the Minister for Finance to make regulations and possibly use sections 6 and 10 of the draft legislation in the regulations.
- Record keeping
  - Recommendation: Core provisions on record keeping procedures set out in the AML Act rather than in the Guidance Notes.
  - CBS’ Comments: Proposed regulations will set out what has been suggested in section 8 of the draft AML/CFT legislation.
- Suspicious transactions reporting
  - Recommendation: Amend AML Act to emphasize prompt submission of suspicious transaction reports, provide for explicit confidentiality waiver and legal protection for reporting entities and staff.
  - CBS’ Comments: Proposed regulations would cover in detail reporting of suspicious transactions and possibly use what has been proposed in section 12 of the draft AML/CFT legislation.
- AML/CFT internal controls
  - Recommendation: Extend internal controls to include terrorist financing issues; amend AML Act to require appointment of a compliance officer.
  - CBS’ Comments: Proposed regulations would consider covering section 18 of the draft AML/CFT legislation.
- Sanctions
  - Recommendation: Amend AML Act to increase maximum penalties for non-compliance; consider granting explicit authority to the CBS to impose administrative fines directly.
  - CBS’ Comment: To be discussed with AG’s office.
- Criminalization and conventions
  - Recommendation: Adopt legislation criminalizing terrorism, terrorist organizations and terrorist financing as soon as possible and by December 31, 2002 at the latest.
  - CBS’ Comment: Prevention of Terrorism Act 2004 enacted in June 2004.
  - Recommendation: Ratify the International Convention for the Suppression of the Financing of Terrorism and the Palermo Convention as soon as possible and by December 31, 2002 at the latest.
  - CBS’ Comment: Palermo Convention ratified on March 30, 2004 while the former was ratified on April 22, 2004.
- Confiscation and forfeiture
  - Recommendation: Amend forfeiture provisions to provide for substitute assets and forfeiture of any income or gains received on proceeds of crime; amend AML Act to permit temporary seizure of assets.
  - CBS’ Comment: Proposed regulations would consider covering what has been proposed under section 38(13) of the draft AML/CFT legislation.
- Financial intelligence and CBS functions
  - Recommendation: Amend the Central Bank of Seychelles Act to clearly set out that the CBS may exercise the function of a financial intelligence unit; amend AML Act to provide an effective mechanism to freeze suspicious transactions; protect CBS staff with explicit personal legal protection.
  - CBS’ Comment: To be included in the amendment to the AML Act / Existing AML Act to be amended to cover this.
  - Staffing: One additional staff experienced in AML/CFT issues should be allocated by December 31, 2002.
  - CBS’ Comment: One experienced officer handles AML/CFT issues but is assisted by three other officers, including the head of Bank Supervision.
- Information flow and international cooperation
  - Recommendation: Improve flow of information between government entities and establish a forum combining CBS financial expertise with police investigative knowledge; specify powers of CBS to receive and disseminate information by law.
  - CBS’ Comment: Being taken up with the AG’s office.

### On-site and off-site supervision, resources, and supervisory relationships
- Principle 16 (On-Site and Off-Site Supervision)
  - Finding: Additional resources needed substantially to intensify depth and scope of on- and off-site supervision.
  - CBS’ Comment: Staff complement increased by two so that there are now four Bank Supervision Officers--one senior and three juniors where the latter are being given appropriate training.
  - CBS’ Comment on program: Program has been drawn up so that at least once every two years a bank is examined although if a bank has serious problems then the examination will be done at least once every year or more frequently depending on the severity of the problems.
- Principle 17 (Bank Management Contact)
  - Recommended Action: To be enhanced through more onsite visits and offsite prudential discussions.
  - CBS’ Comment: Each officer has been assigned two financial institutions under their responsibility to ensure that a relationship is built and maintained between the bank and the central bank.
- Principle 18 (Off-site Supervision)
  - Recommended Action: Depth and scope to be increased, especially as banks’ activities broaden and new activities are undertaken.
  - CBS’ Comment: With the increase in staff within the division, analysis of prudential reports and statistical returns is now being carried out with quarterly reports being produced and discussed with the divisional head and other officers of the division.
- Principle 20 (Consolidated Supervision)
  - Recommended Action: The FIA to be amended so that limits and requirements can be applied on a consolidated as well as individual basis.
  - CBS’ Comment: A provision to be included in the draft FIA.
- Principle 21 (Accounting Standards)
  - Recommended Action: Closer relationship with auditors to be developed as described for Principle 14.
  - CBS’ Comment: Covered under draft section 28.

### Formal powers, remedial measures, and fit-and-proper requirements
- Principle 22 (Remedial Measures)
  - Recommended Action: The FIA to be amended so that CBS can revoke a license without notice if required in depositors’ interests.
  - CBS’ Comment: Reflected under draft Section 12.
  - Recommended Action: CBS to implement a strict regime for non-compliance with the regulations. Fines to be reviewed and imposed.
  - CBS’ Comment: Draft Part VI A--Offences and Penalties under review.
- Integrity standards and licensing
  - Recommendation: FIA and AML Act should be amended to require CBS approval of any subsequent changes in management, directors and significant shareholders.
  - CBS’ Comment: The draft FIA contains such an amendment.
  - Recommendation: Strengthen fit-and-proper reviews for managers, directors and significant shareholders.
  - CBS’ Comment: Amendments have been made to the draft FI legislation to cater for this.

### Suggested actions for the banking sector (operational measures)
- Organizational and administrative arrangements
  - Recommendation: CBS should carry out onsite inspections focusing on AML/CFT issues; Banks should be required to submit AML/CFT internal guidelines to CBS for review.
  - CBS’ Comment: Since 2003, five of the six commercial banks have undergone on-site examinations and their AML/CFT internal guidelines have been evaluated by CBS. The last bank is due to be examined in early September 2004.
  - Recommendation: CBS should intensify training sessions and regularly provide updated guidance on identifying suspicious transactions.
  - CBS’ Comment: Training began in February 2004; the presentation carried out can be viewed on CBS’ website: www.cbs.sc.
- Customer identification and due diligence
  - Recommendation: Banks should increase focus on identifying ultimate beneficial owners of funds; rigorous customer identification procedures for IBCs; issue special guidance regarding private banking and higher risk customers such as politically exposed persons.
  - CBS’ Comment: Beneficial ownership is rigorously covered in on-site examinations; these issues will be covered when the guidance notes are updated.
- Monitoring, reporting, record keeping, compliance and audit
  - Recommendation: CBS should issue guidance to banks to consolidate customer accounts for monitoring and suspicious transaction reporting purposes.
  - CBS’ Comment: This issue will be covered when the guidance notes are updated.
  - Recommendation: CBS should ensure all banks appoint a compliance officer.
  - CBS’ comment: This has already been done during the on-site examinations recently carried out. CBS intends to have a presentation on the responsibilities of the MLRO or compliance officer sometime during the latter part of 2004.
- Cooperation and information exchange
  - Recommendation: Procedures for cooperation and exchange of information with central banks and foreign regulatory authorities should be enhanced and formalized.
  - CBS’ Comment: Amendments have been made to the draft FI legislation to allow for this.

---


_Source: https://www.imf.org/-/media/files/publications/ofca/english/cr04381.pdf_