## Offshore Financial Center Assessment Report for the Cook Islands — Preface and Key Findings

## Source details

**Canonical URL:** [Offshore Financial Center Assessment Report for the Cook Islands — Preface and Key Findings](https://www.imf.org/-/media/files/publications/ofca/english/cr04413.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/ofca/english/cr04413.pdf.md)
- [Structured JSON version](/-/media/files/publications/ofca/english/cr04413.pdf.json)

---

### Scope, mission, and participants
- Assessment basis:
  - Banking supervision assessed against the Basel Committee’s Core Principles for Effective Banking Supervision.
  - AML/CFT regime assessed against the October 2002 AML/CFT Methodology (FATF 40+8).
- Mission dates: February 16–27, 2004.
- Mission members included:
  - Mr. Ian Carrington (Mission Chief)
  - Mr. Peter Csonka (Senior Counsel, LEG)
  - Ms. Desiree Cherebin and Mr. Joel Shapiro (Consultants, Banking Supervision)
  - Mr. Steven Gilbert (Consultant, AML/CFT)
  - Claudia Mariel (Mission Assistant)
  - Independent AML/CFT expert: Detective Senior Inspector Simon Leung Chin-keung (Hong Kong Police Force)
  - Observer: Ms. Judy Lau (Pacific Financial Technical Assistance Centre, PFTAC)
- Key interlocutors included: Prime Minister The Honorable Dr. Robert Woonton; NCCT Working Group; Financial Supervisory Commission (FSC); Financial Intelligence Unit (FIU); Solicitor General’s Office; Ministry of Justice; Ministry of Foreign Affairs; Police; Customs Department; New Zealand High Commissioner; financial institutions; auditors; trustees; Law Society.

### Key factual background and statistics
- Geography and governance:
  - Cook Islands consists of 15 islands; total land area approximately 90 square miles.
  - Located 1,600 miles north-east of New Zealand and 2,800 miles south of Hawaii.
  - Self-governing parliamentary democracy with a prime minister, a cabinet, a 24-member legislature, and a 15-member House of Ariki.
  - Status: self-governing state in free association with New Zealand; New Zealand responsible for defense and external affairs.
- Economic composition and performance:
  - 2002 sector shares of GDP: services 83.3 percent; agriculture 13.1 percent; industrial 3.6 percent.
  - GDP contractions during 1995–1998: 3.2 percent, 0.3 percent, 2.3 percent, and 0.8 percent, respectively.
  - Since 1998, GDP increased on average by 6 percent per annum.
  - GDP per capita (2002): NZ$10,537.
  - Provisional population normally resident (September 2003): 13,800.
- Offshore sector scale and role:
  - Offshore financial center established in 1981; offshore entities exempt from all forms of tax and subject to strict confidentiality provisions.
  - Approximately 800 international companies and approximately 2,100 international trusts.
  - Registration and license fees represent about 4 percent of government revenues.
  - Industry estimate: total contribution of the offshore sector at something over 8 percent of GDP.
  - Direct employment in offshore sector: about 80 persons.
  - Specialization: asset protection trusts with much client base from the United States.
- Banking and financial institutions:
  - Three domestic banking operations: branches of ANZ and Westpac (Australia) and Bank of the Cook Islands (BCI).
  - BCI formed in 2001 by merger of the Cook Islands Development Bank and the Post Office Savings Bank.
  - Banking Act 2003 license categories: Domestic; International; Restricted International.
  - Trustee companies required to incorporate international companies and act as operational conduit for offshore institutions without physical presence.
  - Offshore insurance: 20 institutions operating in the offshore sector (believed to be captives).

### Financial Supervisory Commission (FSC) — structure and immediate program
- Legal mandate:
  - FSC Act (May 2003) grants responsibility for regulation and supervision of licensed financial institutions and administration of listed Acts (Banking Act 2003; Trustee Companies Act 1981–82; Offshore Insurance Act 1981–82; Insurance Companies’ Deposits Act 1970–71; International Companies Act 1981–82; International Companies Amendment Act 2003; International Trusts Act 1984; International Partnerships Act 1984).
- Governance and staffing:
  - FSC Board: Chairman and four members.
  - Executive staff: Commissioner, Deputy Commissioner, senior supervisor, two supervisors, registrar, and deputy registrar.
  - Deputy Commissioner resignation effective February 16, 2004; senior supervisor position filled March 2004.
- Two-year FSC work program: October 2003–September 2005.
  - Early priorities: prepare industry profiles; develop licensing and supervisory regime; draft supporting regulations.
  - Later priorities: establish off-site monitoring procedures for banks; develop off-site and on-site monitoring of nonbank financial institutions; develop manuals of systems and procedures.

### Banking system size and licensing timetable
- Domestic system total assets: approximately $NZ 180 million.
  - Of which roughly $NZ 150 million represents loans to commercial enterprises and consumers.
- Deadline for submission of license applications under the Banking Act 2003: March 1, 2004.
- Anticipated maximum number of banks in foreseeable future: 11 (based on licensing applications).
- Sixteen international banks had been licensed under the Offshore Banking Act 1981 (repealed by Banking Act 2003).
- Trustee companies administering trusts at mission time: six trustee companies; they administered 2,100 international trusts.

### Strengths, major challenges, and institutional needs
- Strengths:
  - New Banking Act and FSC Act provide a sound legal basis for financial sector regulation, authorization, and effective supervision.
  - Suite of AML legislation enacted in May 2003 (including Proceeds of Crime Act 2003, FTRA, MACMA, EA).
- Major challenges and capacity gaps:
  - Staffing: recruitment, training, and retention of qualified supervisory and compliance personnel; heavy reliance on expatriates.
  - Development needed: regulations, guidance notes, supervisory tools, prudential returns, examination procedures, and consolidated supervision frameworks.
  - Historical under-resourcing limited effective regulatory activity; FSC must build supervisory capacity beyond licensing.
  - FIU staffing: authorized strength 3; only Head of FIU and Intelligence Officer appointed; Compliance and Administration Officer vacant.
  - FIU Head contract expiry: June 2004; Intelligence Officer scheduled to leave April 2004.

### AML/CFT legal and operational findings
- Legal framework developments:
  - ML criminalized via Sections 280A and 280B of the Crimes Act 1969 (amended June 2003); principal ML offense conforms to Vienna and Palermo Conventions in actus reus and scienter.
  - Proceeds of Crime Act 2003 (POCA) establishes forfeiture and pecuniary penalty orders as discretionary criminal penalties requiring conviction of a serious offense.
  - Financial Transactions Reporting Act (FTRA) requires reporting of suspicious transactions and cash/electronic transactions above $NZ 10,000.
  - FIU legislatively established and operational; Egmont Group membership expected June 2004.
- Gaps and weaknesses:
  - Financing of Terrorism (FT) is not criminalized and is not a predicate offense for ML.
  - No legislation provides for freezing of terrorist funds; authorities cannot freeze funds as required by UN Security Council Resolutions on FT.
  - CFT legislation was under drafting based on a regional model law; draft Terrorism Suppression Bill planned.
  - No adequate framework for assessing compliance with AML legislation; compliance supervision weak.
  - No prosecutions or restraints/seizures under the new ML/POCA framework to date.
  - Since enactment of new legislation in June 2003, FIU received only a small number of STRs and notably no STRs since enactment.
  - Absence of comprehensive on-site verification: only one on-site bank examination using an FSC questionnaire; FIU requested internal policies/procedures from institutions; none submitted.
- International cooperation and treaties:
  - Cook Islands had not ratified the Convention for the Suppression of the Financing of Terrorism and had not signed the Vienna or Palermo Conventions at time of assessment (authorities later took ratification/accession steps).
  - Domestic law allows mutual legal assistance (MACMA and POCA) and extradition, subject to dual criminality.
  - UNSCRs implementation possible in principle (UNSCRA) but necessary regulations not yet issued.

### Risks identified concerning trustee companies, international companies, and confidentiality
- Registrar of Companies lacks verified information on beneficial owners of international companies (ICs) and on the real activities of these companies.
- Due diligence responsibility lies principally with six trustee companies; FSC has legal authority to undertake compliance checks but lacked capacity and was not conducting such checks at time of mission.
- Statutory provisions impeding enforcement:
  - International Trusts Act amendments (1995–96) and specific sections (e.g., Section 23(2), Section 26) can shield existence or beneficial ownership of trusts and allow Ministerial exemptions that may limit supervisory reach.
  - These provisions may impede FSC licensing renewals, FIU intelligence gathering, and enforcement of AML/CFT measures.

### Assessment of observance of the Basel Core Principles — main impediments and immediate needs
- Overall finding:
  - Legislative suite (FSCA and Banking Act 2003 and Prudential Statements) provides a strong legal framework requiring higher standards (tangible physical presence, transparent financial statements, consolidated supervision).
- Main impediments to implementation:
  - Resource constraints and inexperienced examiners.
  - Absence of comprehensive prudential statements and prudential returns beyond capital adequacy.
  - Slow development of supervisory tools (examination manuals, report templates, evaluation tools).
- Immediate needs prior to issuance of new licenses (by June 1, 2004):
  - Extensive training program for examiners, including risk assessment techniques.
  - Issuance of essential prudential statements and prudential returns.
  - Development of supervisory systems, analytical procedures, on-site inspection procedures.
  - Procedures for information exchange with other supervisors and with the FIU.

### Priority recommended actions (selected extracts and exact prescriptions)
- Resources and staffing:
  - "The Commission should explore creative ways under which senior staff can be attracted from the Cook Islands Diaspora, especially in New Zealand, as well as locally."
  - Develop program to educate and compensate staff, identify leadership, and create career paths.
- Independence:
  - "The Commissioner should not be in a position where routine operational issues are presented to the Board prior to or concurrently with action taken. The Board should be involved intimately with policy matters, but not in the day-to-day operations of the Commission."
- Licensing:
  - Publish a comprehensive list of licensed financial institutions in a manner readily accessible to the public; post warning notices and, where practicable, take legal action against unlicensed institutions.
  - Verify physical presence requirements and treat verification as compliance exercise and survey; publish prudential statement on physical presence per Basel paper on “Shell Banks and Booking Offices” (January 2003).
- On-site and off-site supervision:
  - "The FSC should establish a comprehensive training program for all supervision staff."
  - Issue prudential returns in critical areas of banking activity and risk management; develop supervisory tools (examination manual, report template, evaluation tools for credit, market, liquidity risk).
  - Prioritize development of off-site supervisory capabilities; limit near-term on-site examinations to targeted training exercises.
- Prudential and reporting standards:
  - Define off-balance sheet items to ensure consistency in capital adequacy reporting.
  - Issue a prudential return requiring written credit and investment policies and reporting on large exposures and connected lending.
  - Amend Prudential Statement 3-2004 to include classification and provisioning for off-balance sheet items.
  - Require audited financial statements prepared in accordance with internationally accepted accounting standards and ensure approved auditors are members of recognized accounting bodies.
- Remedial powers and enforcement:
  - Amend law to empower the Commission to remove directors and officers for abuse or incompetence and to impose fines for minor offenses.
  - Issue a prudential statement setting out a ladder of compliance explaining sanctions and remedial actions.
- AML/CFT specific (international treaties and criminalization):
  - "The Convention for the Suppression of the Financing of Terrorism should be ratified."
  - "The Vienna and Palermo Conventions should be signed."
  - "FT should be criminalized as a matter of priority."
  - Make confiscation mandatory for any serious offense where proceeds are detected; adopt freezing of terrorist funds as a priority and legislate to give effect to UN Security Council Resolutions on FT.
- AML/CFT compliance monitoring and FIU capacity:
  - "The FSC should train its staff and develop appropriate methodologies to undertake its monitoring responsibilities under the FTRA."
  - "The FIU should be adequately resourced to undertake its compliance function under the FTRA."
  - Issue revised guidance notes consistent with new AML legislation; issue guidance on suspicious activity handling, introduced business, risk-based enhanced scrutiny for jurisdictions lacking adequate AML/CFT regimes, vetting of employees in sensitive positions, and vulnerabilities of charities/nonprofit organizations.
- Trustee companies / International companies:
  - "The FSC needs to develop an effective mechanism to undertake meaningful supervisory surveillance of trustee companies and the Registrar of Companies should ensure that the beneficial owners of ICs are identified, verified, and this information is kept updated."

### Authorities’ response — selected positions and planned actions
- Staffing and resources:
  - Commission will continue to pursue qualified staff from the Cook Islands Diaspora; filling vacancies on a contract basis with expatriates deemed necessary; leadership identification after performance evaluation period of 6 months to a year.
  - Career paths to be developed after capability assessment.
- Independence:
  - Authorities view consultation between Commissioner and Board as flexible and effective; routine referrals to Board do not imply lack of independence.
- Publication of licenses:
  - Publication of licensed banks will begin immediately after re-licensing completes; publication for non-bank LFIs will follow development of appropriate licensing and supervision frameworks.
  - Commission will post warning notices and take legal action against unlicensed institutions where practicable.
- Supervision development and technical assistance:
  - Original 2-year work program incorporates most recommended actions; timing constrained by resources.
  - Training for 2004 has been delivered and will continue via IMF technical assistance, seminars/workshops, and PFTAC attachment programs.
  - PFTAC to assist in development of prudential returns by June 2004; IMF-TA for off-site supervision being arranged by August 2004 including establishment of a computer-based system for financial data and indicators.
  - Supervisory tools for on-site and off-site functions expected to be completed by end of 2004; a “learn as you work” approach supplemented by classroom training and attachments will be used.
- Legislative amendments and treaty actions:
  - Commission proposes to follow Recommended Action Plan generally but takes exception on some characterizations of Board-Commission interactions and resource constraints.
  - Commission will propose amendments to Banking Act 2003 (receivership/liquidation provisions; harmonization with FSCA 2003).
  - Authorities reported sending instrument of ratification for the Financing of Terrorism Convention the week of the 8th March 2004 and an instrument of accession for the Palermo Convention; accession to the Vienna Convention planned when enabling legislation enacted.  

*Offshore Financial Center Assessment Report for the Cook Islands, Preface and Executive Summary (mission February 16–27, 2004).*

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

### Preface

### Scope and purpose
- The Offshore Financial Center Assessment Report for the Cook Islands assesses supervision in the banking sector on the basis of the Basel Committee’s Core Principles for Effective Banking Supervision and the regime for the anti-money laundering and combating the financing of terrorism (AML/CFT) based on the October 2002 AML/CFT Methodology.
- Assessments were undertaken of the regulation and supervision of the banking sector, and of the arrangements in place for AML/CFT.

### Mission and participants
- The assessments were carried out during a mission from February 16–27, 2004.
- Mission members included:
  - Mr. Ian Carrington (Mission Chief)
  - Mr. Peter Csonka (Senior Counsel, LEG)
  - Ms. Desiree Cherebin and Mr. Joel Shapiro (Consultants, Banking Supervision)
  - Mr. Steven Gilbert (Consultant, AML/CFT)
  - Claudia Mariel (Mission Assistant)
  - An independent AML/CFT expert, Detective Senior Inspector Simon Leung Chin-keung of the Hong Kong Police Force, evaluated the law enforcement sections of the methodology.
  - Ms. Judy Lau of the Pacific Financial Technical Assistance Centre (PFTAC) joined the mission as an observer.
- The mission met with the Prime Minister, The Honorable Dr. Robert Woonton; the NCCT Working Group; the Financial Services Commission (FSC); the Financial Intelligence Unit (FIU); the Solicitor General’s Office; the Ministry of Justice; the Ministry of Foreign Affairs; the Police; the Customs Department; the New Zealand High Commissioner; representatives of various financial institutions; auditors; trustees; and the Law Society.

### Acknowledgements
- The mission expressed gratitude to the Cook Islands authorities and institutional staff for their cooperation, openness, and feedback, which strengthened the report.

### Report structure
- Volume I describes the financial system and regulatory and supervisory arrangements and provides Reports on Standards and Codes (ROSCs) based on detailed assessments in Volume II.
- Volume II provides detailed assessments carried out on the basis of the Basel Core Principles for Effective Banking Supervision and the AML/CFT methodology for assessing compliance with the FATF’s 40+8 Recommendations.

### Key factual background and statistics
- Geography and governance:
  - The Cook Islands (CI) consists of a group of 15 islands with a total land area of approximately 90 square miles.
  - Located 1,600 miles north-east of New Zealand and 2,800 miles south of Hawaii.
  - CI is a self-governing parliamentary democracy with a prime minister, a cabinet, a 24-member legislature, and a 15-member House of Ariki.
  - CI has the status of a self-governing state in free association with New Zealand; New Zealand bears responsibility for defense and external affairs.
- Economic composition and performance:
  - In 2002, the services, agriculture, and industrial sectors accounted for 83.3 percent, 13.1 percent and 3.6 percent of GDP, respectively.
  - During 1995–1998, GDP contracted by 3.2 percent, 0.3 percent, 2.3 percent, and 0.8 percent, respectively.
  - Since 1998, GDP has increased on average by 6 percent per annum.
  - GDP per capita for 2002 was estimated to be NZ$10,537.
  - Provisional estimates for September 2003 place the population normally resident in the Cook Islands at 13,800.
- Offshore sector scale and role:
  - Offshore financial center established in 1981, with offshore entities exempt from all forms of tax and subject to strict confidentiality provisions.
  - Approximately 800 international companies and approximately 2,100 international trusts.
  - Registration and license fees represent about 4 percent of government revenues.
  - Industry estimates put the total contribution of the offshore sector at something over 8 percent of GDP.
  - About 80 persons are directly employed in the offshore sector.
  - The Cook Islands specialize in asset protection trusts, with much of the client base originating from the United States.
- Banking and financial institutions:
  - There are three domestic banking operations in the CI, including branches of ANZ and Westpac from Australia and the Bank of the Cook Islands (BCI).
  - The BCI was formed in 2001 by the merger of the Cook Islands Development Bank and the Post Office Savings Bank.
  - The Banking Act 2003 provides for three categories of licenses:
    - Domestic: Authorizes licensees to carry on domestic banking business in and from within the Cook Islands.
    - International: Authorizes licensees to carry on international banking business in or from within the Cook Islands.
    - Restricted International: Authorizes licensees to carry on international banking business of a type and nature specified in the license and approved by the FSC.
  - Trustee companies are required to incorporate international companies and to act as the operational conduit for offshore institutions without a physical presence; they act as introducers of business.
  - Insurance: 20 institutions operate in the offshore sector and are believed to operate essentially as captives.
- Financial Supervisory Commission (FSC):
  - The FSC Act (May 2003) gives the FSC responsibility for regulation and supervision of licensed financial institutions and administration of:
    - The Banking Act 2003
    - The Trustee Companies Act 1981–82
    - The Offshore Insurance Act 1981–82
    - The Insurance Companies’ Deposits Act 1970–71
    - The International Companies Act 1981–82
    - The International Companies Amendment Act 2003
    - The International Trusts Act 1984
    - The International Partnerships Act 1984
  - Governance and staffing:
    - FSC Board of Directors comprised of a Chairman and four members.
    - Executive staff comprised of a Commissioner, a Deputy Commissioner, a senior supervisor, two supervisors, a registrar, and a deputy registrar.
    - The previous Deputy Commissioner resigned with effect from February 16, 2004; the senior supervisor’s position was filled in March 2004.
  - The FSC replaced an under-resourced Office of the Commissioner of Offshore Financial Services that had devoted much of its time to processing license applications and responding to international initiatives.
  - FSC two-year work program: October 2003–September 2005.
    - Early program priorities: prepare industry profiles, develop an effective licensing and supervisory regime, and draft regulations to support supervisory activity.
    - Later program priorities: establish off-site monitoring procedures for banks; develop off-site and on-site monitoring of nonbank financial institutions; develop manuals of such systems and procedures.
- Anti-money laundering and combating the financing of terrorism (AML/CFT):
  - AML legislation chronology and materials:
    - Money Laundering Prevention Act 2000 enacted.
    - Guidance on the Prevention of Money Laundering issued.
    - Money Laundering Prevention Regulations passed in early 2002.
    - Guidance Notes updated with a Draft Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cook Islands.
  - In response to FATF’s NCCT initiative, the Cook Islands took measures to strengthen financial sector regulation:
    - New legislation for regulation of banking activity.
    - Establishment of the Financial Supervisory Commission.
    - A suite of anti-money laundering legislation enacted in May 2003, with work ongoing on legislation for combating the financing of terrorism.

### Strengths, challenges, and institutional needs
- Strengths:
  - The new Banking Act and FSC Act provide a good basis for sound financial sector regulation and a framework for authorization and effective supervision of licensed entities.
- Major challenges and capacity gaps:
  - Staffing: training and retention of appropriately qualified personnel.
  - Development of regulations, guidance notes, and supervisory tools.
  - Historical under-resourcing of the prior supervisory office limited effective regulatory activity; FSC must build supervisory capacity beyond licensing.

### Key recommendations (BCP and AML/CFT excerpts)
- Resources:
  - "The Commission should explore creative ways under which senior staff can be attracted from the Cook Islands Diaspora, especially in New Zealand, as well as locally."
- Independence:
  - "The Commissioner should not be in a position where routine operational issues are presented to the Board prior to or concurrently with action taken. The Board should be involved intimately with policy matters, but not in the day-to-day operations of the Commission."
- Licensing:
  - "A comprehensive list of licensed financial institutions should be published in a manner that is readily accessible to the public, indicating that any other institutions purporting to be licensed with the Commission are operating in contravention of existing law."
  - "In the event the Commission becomes aware that an institution is conducting a banking business without a license, it should post warning notices, and where practicable, take legal action against the institution."
- On-site and off-site supervision:
  - "The FSC should establish a comprehensive training program for all supervision staff."
  - "The Commission must issue prudential returns in a number of critical areas of banking activity and risk management to ensure that all licensed financial institutions adopt international best practice and are advised as to the nature of policy and practice that the Commission expects."
  - "Supervisory tools, such as an examination manual and examination report template, also must be developed, together with evaluation tools for such areas as credit, market, and liquidity risk."
- AML/CFT — International treaties and legal framework:
  - "The Convention for the Suppression of the Financing of Terrorism should be ratified."
  - "The Vienna and Palermo Conventions should be signed."
  - "FT should be criminalized as a matter of priority."
- AML/CFT — Compliance monitoring and industry guidance:
  - "The FSC should train its staff and develop appropriate methodologies to undertake its monitoring responsibilities under the FTRA."
  - "The FIU should be adequately resourced to undertake its compliance function under the FTRA."
  - "Revised guidance notes that are consistent with the new AML legislation should be issued to industry."
- Trustee companies / International companies:
  - "The FSC needs to develop an effective mechanism to undertake meaningful supervisory surveillance of trustee companies and the Registrar of Companies should ensure that the beneficial owners of ICs are identified, verified, and this information is kept updated."

*Offshore Financial Center Assessment Report for the Cook Islands, Preface and Executive Summary (mission February 16–27, 2004).*

### 19.      Following work undertaken by an IMF TA mission in 2002 and other donors and

### Strengths and Vulnerabilities in the Financial Regulatory and Supervisory Arrangements; Assessment of Observance of the Basel Core Principles for Effective Banking Supervision

### Banking: institutional setup, licensing, and supervision
- The Financial Supervisory Commission (FSC) is a new regulatory body that had not started its program of supervision of licensed financial institutions; the first major task is the license application process under the Banking Act.
- Deadline for submission of license applications: March 1, 2004.
- The FSC has recruited a Commissioner with supervisory experience; other supervisory staff have no previous supervisory experience and require extensive training.
- The FSC needs to develop basic supervisory infrastructure including:
  - development of regulations and guidance notes;
  - on-site and off-site surveillance tools;
  - prudential returns and systems for reviewing/assessing returns;
  - examination procedures to enable annual on-site inspections as required by the FSCA.
- Potential operational independence concern: the Commissioner currently consults the Board on many day-to-day decisions, risking erosion of executive operational independence.
- Licensing considerations:
  - The FSC must define a clear licensing philosophy, including approach to international companies applying for licenses.
  - Risk that some international companies that currently hold banking licenses may continue to operate after June 1, 2004 without an appropriate license.
  - The FSC should consider publicizing the list of institutions licensed to conduct banking business and issuing warnings about unlicensed entities.
- Domestic banking system structure and size:
  - Domestic banks comprise branches of ANZ and Westpac and the indigenous Bank of the Cook Islands (BCI).
  - Total assets in the domestic system estimated at approximately $NZ 180 million, of which roughly $NZ 150 million represents loans to commercial enterprises and consumers.
  - BCI resulted from the 2001 merger of the Cook Islands Development Bank and the Post Office Savings Bank; BCI will no longer engage in development lending and will transfer development lending and problem loans to affiliated companies not subject to FSC supervision.
- Offshore financial center (OFC) structure:
  - OFC established in 1981.
  - Sixteen international banks licensed under the Offshore Banking Act 1981 (repealed by the Banking Act 2003).
  - Approximately 800 international companies (ICs) registered at the time of the mission.
  - Six trust companies administer 2,100 international trusts.
  - Approximately 20 offshore insurance companies.
  - Anticipated maximum of 11 banks in the foreseeable future based on licensing applications.

### Anti‑Money Laundering and Combating the Financing of Terrorism (AML/CFT)
- The Cook Islands developed a comprehensive suite of AML legislation (Proceeds of Crime Act 2003 and related laws listed).
- CFT legislation has not yet been adopted; authorities are drafting CFT legislation based on a regional model law.
- Regulations developed after the AML legislation were approved by cabinet during the mission.
- No adequate framework for assessing compliance with AML legislation is currently in place.
- Both the FSC and the FIU need to review current resource levels against compliance responsibilities under the FTRA.
- International conventions and criminalization:
  - The Cook Islands have not ratified the Convention for the Suppression of the Financing of Terrorism and have not signed the Vienna or Palermo conventions.
  - The financing of terrorism is currently not criminalized in the Cook Islands.

### Key concerns and resource constraints
- Human resources constraints affect multiple agencies: FSC, FIU, the SG’s chambers, and the police.
- Current dependence on foreign personnel is critical; medium-term strategy should emphasize training local staff to take over functions currently undertaken by expatriates.
- Consideration should be given to ways to attract appropriately qualified persons to work for key government agencies.
- Trustee companies and international companies:
  - No effective mechanism to check due diligence performed on approximately 800 international companies registered at the time of the mission.
  - Due diligence responsibility lies with six trustee companies; FSC has legal authority to undertake compliance checks but does not currently do so and will not develop this capacity under its current initiative.
  - Registrar of Companies lacks information on beneficial owners of ICs and on the real activities of these companies.
  - Lack of adequate supervision of trustee companies poses limited direct risk to the Cook Islands (most ICs do not conduct business within the Cook Islands and domestic financial institutions are obliged to undertake due diligence). The real threat is to the international financial community where proper due diligence may not have been undertaken.
- Role of the private sector:
  - Government consultation with the private sector is desirable but should be limited; past modification of model legislation and recent FTRA regulations raise concerns about excessive private-sector influence that reduces conformity with international standards.

### Assessment of observance of the Basel Core Principles (general and main findings)
- The Basel Core Principles assessment was conducted as part of the IMF Module 2 Offshore Financial Center (OFC) assessment program.
- Assessors: Desiree Cherebin and Joel Shapiro (Consultants, MFD).
- The suite of legislation enacted in May 2003, including the Financial Services Commission Act (FSCA) and the new Banking Act, provides a strong legal framework requiring institutions licensed in the Cook Islands to operate under higher standards (including tangible physical presence, transparent financial statements, and consolidated supervision).
- Main impediments to implementation:
  - resource constraints, mainly inexperienced examiners;
  - absence of a comprehensive set of prudential statements;
  - slow pace of development of supervisory tools.
- The Commission faces severe challenges to implement an effective supervisory framework by June 1, 2004 when new licenses are issued.
- Immediate needs identified:
  - extensive training program for newly recruited examiners, including risk assessment techniques;
  - issuance of prudential statements and prudential returns (beyond capital adequacy);
  - development of supervisory systems, analytical procedures, and on-site inspection procedures;
  - development of procedures to exchange information with other supervisory authorities and with the FIU.

### Principle-by-principle highlights and recommended actions
- Objectives, autonomy, powers, and resources (CP1)
  - The Banking Act 2003 and FSCA set out functions, supervisory responsibilities, enforcement powers, authority to grant/revoke licenses, and legal protection for supervisors acting in good faith.
  - Additional provisions for resolving problem banks (receivership and liquidation procedures) would strengthen the legal framework.
  - Staffing: Commissioner and Senior Supervisor were recruited from outside the jurisdiction on contractual basis; Deputy Commissioner post vacant. Urgent need for staff education, appropriate compensation, and retention strategies.
  - The Board should clearly define the Commissioner’s responsibilities and avoid involvement in routine operational matters.
  - The Commission should develop procedures for exchange of information with other supervisors and with the FIU.
- Licensing and structure (CPs 2–5)
  - Licensing requirements in legislation and a Prudential Statement on Licensing (February 2004) set out detailed licensing criteria, including “fit and proper” tests, risk management, accounting/control systems, and minimum capital requirements.
  - All existing licensees grandfathered under the new act must reapply by March 1, 2004.
  - The Commission has arranged technical assistance from PFTAC for evaluation of new license applications, including compliance with physical presence requirements.
  - A key test is implementation of licensing criteria and management of previously licensed entities that are not re-licensed and other unauthorized entities purporting to hold Cook Islands banking licenses.
- Prudential regulations and requirements (CPs 6–15)
  - A detailed prudential statement on minimum capital requirements based on Basel I has been issued; requires risk-weighting of on- and off-balance-sheet assets.
  - Prudential statements on asset classification and loan loss provisioning have been issued.
  - Commission recognizes need for additional prudential statements covering all areas of risk management.
  - Apart from a capital adequacy return, prudential returns remain to be prepared and systems for monitoring all risks (including connected lending and related-party transactions) are not yet in place.
  - Immediate attention needed to develop on-site inspection procedures and to train examiners in risk assessment techniques.
  - Commission needs to work closely with the FIU to ensure licensee compliance with AML requirements.
- Methods of ongoing supervision (CPs 16–20)
  - Legal framework permits on-site and off-site inspections, but supervisory tools, prudential statements, examiners, and returns must be developed for an effective program.
  - Commissioner proposes establishing regular contact programs with management of financial institutions.
- Information requirements (CP21)
  - Legislation requires institutions to maintain records that accurately reflect financial position and appoint an approved auditor.
  - These provisions should be complemented by requirements that audited financial statements are prepared in accordance with internationally accepted accounting standards and that approved auditors are members of recognized accounting bodies.

*Assessment conducted as part of the IMF Module 2 Offshore Financial Center assessment program; assessors Desiree Cherebin and Joel Shapiro (Consultants, MFD).*

### 57.      Procedures for the independent verification of the accuracy of the financial records of

### 57.      Procedures for the independent verification of the accuracy of the financial records of 

### Formal powers of supervisors (CP 22)
- The Banking Act 2003 provides the Commission with a wide range of enforcement powers including the suspension or revocation of a license and the issuing of directives.
- Identified gaps and recommended legal changes:
  - Enable the Commission to remove directors for abuse of power and incompetence.
  - Empower the Commission to impose fines for minor offenses.

### Cross-border banking (CPs 23-25)
- The Commission has legal authority to effectively supervise branches of foreign banks, including sharing information with home supervisors.
- Immediate needs:
  - Develop working relationships with foreign regulators.
  - Consider implementation of an approach to consolidated supervision.

### Recommended Action Plan — summary of key recommendations (selected items)
- 1(1) Clear responsibilities and objectives
  - Finding: Provisions of law relating to problem bank resolution are not addressed fully; no specific provisions for receivership or liquidation proceedings.
  - Recommended Action: Amend the Banking Act 2003 to add provisions specifically addressing receivership and liquidation, together with powers granted to the Commission in the event of a liquidity crisis.

- 1(2) Resources
  - Finding: Current hiring practices raise succession and sustainability concerns.
  - Recommended Action:
    - Develop a program to educate and compensate staff to encourage retention, identify staff for leadership roles, and develop career paths.
    - Explore attracting senior staff from the Cook Islands Diaspora, especially in New Zealand, and consider recruiting from within the banking system.
    - Note: Filling vacancies on a contract basis with expatriates places management continuity and capacity at risk.

- 1(2) Independence
  - Finding: The Board and Commissioner are establishing a working relationship; concerns about routine operational issues being presented to the Board.
  - Recommended Action: The Board should be involved intimately with policy matters, but not in day-to-day operations.

- 1(6) Arrangements for information sharing
  - Finding: Confidentiality and Disclosure provisions of the Banking Act 2003 and the FSCA are inconsistent and sometimes duplicative; two statutes criminalize similar behavior with different penalties.
  - Recommended Action: Harmonize Sections 23(1) of the FSCA and 46(2)(g) of the Banking Act 2003, and Sections 20(3) of the FSCA and 47 of the Banking Act.
  - Additional Finding: No processes established for information exchange with the FIU and foreign supervisory authorities.
  - Recommended Action: Accelerate process with the FIU to ensure it is in place when licenses are issued.

- 3. Licensing criteria
  - Finding: Banking Act 2003 sets criteria for physical presence for international banks; Commission plans to verify compliance.
  - Recommended Action:
    - Treat verification as both a compliance exercise and a survey and analyze results to publish a prudential statement on the Commission’s interpretation of “best practice” relating to physical presence.
    - Identify and contain unregulated institutions operating banking business; publish a comprehensive, publicly accessible list of licensed financial institutions after re-licensing; post warning notices and take legal action against unlicensed institutions where practicable.

- 4. Ownership
  - Finding: No standardized medium for reporting change in control or significant ownership changes.
  - Recommended Action: Develop a standardized form to ensure communication of essential information.

- 6. Capital adequacy
  - Finding: Prudential return for reporting and assessment of capital is satisfactory but off-balance sheet line items may be inconsistently interpreted.
  - Recommended Action: Define off-balance sheet items to assure greater consistency in reporting.

- 7. Credit policies
  - Recommended Action: Issue a prudential return requiring licensed financial institutions to establish written credit and investment policies governing risk management, credit administration, monitoring and reporting exposures, and compliance with large exposure and connected lending restrictions.

- 8. Loan evaluation and loan loss provisioning
  - Finding: Prudential Statement 3-2004 provides guidance on asset classification and provisioning.
  - Recommended Action: Amend Prudential Statement 3-2004 to include classification and provisioning requirements for off-balance sheet items.

- 10. Connected lending
  - Finding: Banking Act 2003 definition of “connected or related parties” is incomplete and excludes business interests of directors or shareholders and their families; law does not permit Commission judgment about existence of connections.
  - Recommended Action: Amend the Banking Act 2003 to include a comprehensive definition and enable Commission discretion; require prudential returns to provide information on large exposures and connected lending.

- 16. On-site and off-site supervision
  - Finding: Legal framework exists for on-site and off-site supervision but foundational elements are lacking.
  - Recommended Action:
    - Implement a comprehensive training program for supervision staff, including senior and junior supervisors.
    - Issue prudential returns in critical areas of banking activity and risk management.
    - Develop supervisory tools: examination manual, examination report template, evaluation tools for credit, market, and liquidity risk.
    - Prioritize development of off-site supervisory capabilities (prudential returns, training in financial analysis, technology platform) and delay implementation of a robust on-site program until these are addressed.
    - Limit near-term on-site examinations to targeted areas serving as training exercises; coordinate work of external auditors with targeted examinations where risks or noncompliance are identified.

- 18. Off-site supervision
  - Finding: Commission can apply certain sanctions for noncompliance with information requests, but noncompliance is not a punishable offense and fines are not prescribed.
  - Recommended Action:
    - Amend law to strengthen sanctions and facilitate collection of accurate information in a timely manner.
    - Develop an automated system to facilitate analysis of international banking licensees; seek technical assistance to develop such processes.

- 19. Validating supervisory information
  - Finding: Responsibility for registering approved auditors transferred to the Commission; many auditors may have benefitted from prior “rubber stamp” approvals.
  - Recommended Action: Implement a re-registration process to update listing and enable proper due diligence; strengthen auditor ratification where weaknesses identified.

- 20. Consolidated supervision
  - Finding: Commission has virtually no knowledge of overall structure of international financial institutions and has not considered supervising material parts of groups or evaluating consolidated risks.
  - Recommended Action:
    - Define desired financial group structures for the Cook Islands and communicate through a prudential statement.
    - Prudential statement should define comprehensive consolidated supervision and implications for licensees’ organization, operations, and reporting requirements.
    - Obtain financial and other supervisory information on Bank of the Cook Islands Holding Corporation and its nonbank subsidiaries on both stand-alone and consolidated basis.

- 21. Accounting standard
  - Recommended Action: Issue a prudential statement describing criteria for approving auditors and require that financial statements of licensees be prepared in accordance with internationally accepted accounting standards.

- 22. Remedial measures
  - Finding: Commission lacks power to require removal of directors and officers for abuses or incompetence and lacks authority to impose fines.
  - Recommended Action:
    - Amend existing laws to empower the Commission to remove directors and officers and to impose fines where warranted.
    - Issue a prudential statement setting out a ladder of compliance explaining the actions the Commission may employ.

### Authorities’ response and planned actions
- Resources and staffing (paragraphs 60–61)
  - The Commission has tried to attract and retain qualified staff with limited success.
  - Identification of staff who can assume leadership roles will occur after a reasonable performance evaluation period of 6 months to a year.
  - Filling vacancies with expatriates on contract was deemed necessary; career paths will be developed after assessing capabilities.
  - The Commission will continue pursuing qualified staff from the Cook Islands Diaspora.

- Independence (paragraph 61)
  - Authorities consider consultation between the Commissioner and the Board as flexible and effective; routine referrals to the Board do not imply lack of independence.
  - Board consultation provides benefits: suggestions on procurement and hiring, feedback on staff, and keeping members abreast for unified positions.

- Licensing publication (paragraph 62)
  - At the initial stage, publication of the list of licensed financial institutions may cause confusion; publication for banks will begin immediately after re-licensing completes.
  - For non-bank LFIs (Offshore Insurance Companies and Trustee Companies), publication will follow development and implementation of appropriate licensing and supervision framework.
  - The Commission will post warning notices and take legal action against unlicensed institutions where practicable.

- Supervision development and training (paragraph 63)
  - The Commission’s original 2-year work program incorporates most recommended actions; timing constrained by resources.
  - Training provided and planned for 2004 has been delivered and will continue via IMF technical assistance, seminars/workshops, and PFTAC attachment programs.
  - A comprehensive training program will be prepared when industry structure and staff calibre are clearer.

- General position (paragraphs 64–65 and Table 2 summary)
  - The Commission proposes to follow the Recommended Action Plan generally but takes exception on certain points regarding Resources and Independence due to resource constraints and disagreement on characterization of Board-Commission interactions.
  - The Commission will propose amendments to the Banking Act 2003 (e.g., receivership/liquidation provisions; harmonization with FSCA 2003 as noted).
  - The Commission requests IMF assistance for creative staffing solutions and technical assistance or model disclosure documents to accelerate implementation when licenses are issued.
  - A revised 2-year work program for banking supervision, including accomplishments and remaining tasks, has been prepared.

*Source: Authorities’ Response to BCP Assessment and Recommended Action Plan (Banking Act 2003; Prudential Statements; Commission work program).*

### 3. Licensing criteria Will issue a prudential statement on best practice

### 3. Licensing criteria Will issue a prudential statement on best practice

### Licensing criteria and physical presence
- The Commission will issue a prudential statement on best practice relating to physical presence.
- Basic benchmark for best practice will follow the Basel paper on “Shell Banks and Booking Offices” issued January 2003.
- Results of a compliance exercise and survey will provide inputs in developing the prudential statement on physical presence.
- Any “Model” definitions the IMF can provide will enable the Commission to expedite action.

### License surrender, use of the term “bank”, and publication of licensed banks
- Action initiated on surrender of license for existing banks that have ceased or will have to cease doing banking business when its license expires on 1 June 2004; letters sent in this regard.
- These banks were reminded of Section 52 of the Banking Act 2003 on the restriction in the use of the term “bank”.
- List of banks that have been licensed under Section 7 of the Banking Act 2003 will be published in the Gazette as required by law.

### Ownership
- A standard form for ownership will be developed.

### Capital adequacy
- The Commission will issue clarification to Prudential Statement No. 2 on capital adequacy on definition of off balance items and other areas once first report due end of April are received and reviewed.
- Any “Model” definitions the IMF can provide will enable the Commission to expedite action.

### Credit policies
- The Commission will issue appropriate prudential statements and prioritize critical areas as determined during the evaluation process and subsequent on-site examination.
- More common risk management issues like credit and investment policies will be prioritized.

### Loan evaluation and loan loss provisioning
- Prudential Statements will be amended to include classification and provisioning requirements for off-balance sheet items.

### Connected lending
- The Commission will propose pertinent amendments to the Act for a more comprehensive definition of “connected or related parties.”
- Prudential returns will be adjusted to provide information on large exposures and connected lending relationships.

### On-site and off-site supervision (Reference Principle 16)
- Comprehensive training of staff already started with briefing sessions, on-the-job training, attendance in a PFTAC sponsored seminar, and participation in other training programs, including attachment programs to be arranged with PFTAC assistance and other sources.
- Further training details are in the main body of the response relating to Key Recommendations and the revised 2-years Work Program.
- PFTAC will assist in development of prudential returns by June 2004 to be paced starting the following month.
- IMF-TA being arranged by August 2004 for offsite supervision, including establishment of a computer-based system for financial data and indicators.
- Supervisory tools on procedures, both for on-site and off-site functions, are expected to be completed by end of 2004.
- In the interim, on-site procedures of other supervision authorities in the region with similar set-up will be used as a guide.
- A robust on-site examination requires necessary supervisory tools and staff skills fully developed; a “learn as you work” approach is expected to be supported by classroom training and attachments.
- An IMF-TA expert is expected to complement training and guidance provided by the Commissioner or other parties such as external auditors and contracted experts.

### Off-site supervision (Reference Principle 18)
- Will review and propose amendments to strengthen the sanctions available to the Commission.
- Developing an offsite supervision monitoring system and supervisor skills is an area where technical assistance has been requested even prior to the Assessment.

### Validating supervisory information (Reference Principle 19)
- As part of the license renewal process, the Commission will check that existing or proposed auditor(s) meet the criteria specified in section 41.
- In due course, a prudential statement will be issued.

### Consolidated supervision (Reference Principle 20)
- Consolidated supervision is not adequately covered by existing laws and amendments in this regard will be proposed.
- The Commission acknowledges the need for consolidated supervision where it is the home country supervisor or where licensed bank’s management and ownership are identical with a holding company or related companies.
- Details of overall group structure of banks have been included in licensing requirements.
- The 3 supervisors, under guidance of the IMF expert and the Commissioner, are reviewing documents relating to group structures and will request additional information or meetings with applicants as necessary.
- For the Bank of Cook Islands Holding Corporation and its non-bank subsidiaries’ relationship with the Bank of Cook Islands, Ltd., information requirements in recommended action may be included as a condition should a license be granted.

### Accounting standard (Reference Principle 21)
- Accounting standard requirements will be included in the Prudential Statement to be issued, with reference to Principle 19 on external auditors.

### Remedial measures (Reference Principle 22)
- Will propose amendments to strengthen enforcement action on the removal of directors and officers for cause and authority to impose fines; action will take into account Principle 18.
- The Commission will consider issuing a prudential statement once more familiar with types and scale of gravity for various acts of “non-compliance” to match with a ladder of compliance.
- Any “Model” provided by the IMF will expedite preparation and issuance of the proposed prudential statement.

---

### Report on Observance of Standards and Codes — FATF Recommendations for AML/CFT

### Introduction and methodology
- The Report assesses observance of the FATF 40 Recommendations for Anti-Money Laundering (1996) and 8 Special Recommendations for Combating the Financing of Terrorism (collectively “FATF 40+8”).
- The assessment team included IMF staff, an expert under IMF supervision, and an independent expert provided by the Asia Pacific Group on Money Laundering; portions attributable to the Independent AML/CFT Expert are shown in italics in the Report.
- The assessment is based on information available at the time it was completed on February 26, 2004.

### Main finding (overall)
- The current AML legal, institutional, and supervisory framework provides a sound basis for prevention, detection, and prosecution of ML offenses, but implementation remains weak and FT is not addressed.
- The Cook Islands authorities substantially improved the legal framework in 2003 with passage of an AML suite of legislation: Proceeds of Crime Act 2003 (POCA), mutual legal assistance (MACMA), extradition (EA), and financial transactions reporting (FTRA).
- The FIU was legislatively established and operational.
- Implementation in several areas, particularly compliance supervision, remains weak and often appears driven by external pressure.
- Significant shortcomings include lack of criminalization of FT and delay in ratification of relevant international treaties.
- The FATF listed the Cook Islands as a noncooperative country in June 2000 and, as of the assessment, had not removed the Cook Islands from that list.

### Criminalization of ML and FT
- ML criminalized through Sections 280A and 280B of the Crimes Act 1969 (CA), as amended in June 2003.
- The principal ML offense (280A) conforms to Vienna and Palermo Conventions: actus reus covers conversion to possession; scienter is knowledge or reasonable suspicion.
- ML offense applies to physical and corporate persons and extends to predicate offenses defined by threshold: any offense punishable under Cook Islands law by imprisonment of not less than 12 months or a fine of more than $NZ 5,000 qualifies.
- FT is not criminalized and is not a predicate offense for ML.
- To date, no charges have been laid for ML offenses; the Report identifies lack of prosecutorial capacity and no focus on proceeds as contributing factors.
- Mission recommendations included: criminalizing laundering of one’s own proceeds in Section 280A; including “willful blindness” among knowledge standards; adding penalties for legal entities or professionals engaged in ML or FT (such as withdrawal of license or bar from professional activity); enabling combination of penalties under Section 280A.

### Confiscation and terrorist funds freezing
- POCA 2003 establishes forfeiture orders and pecuniary penalty orders as discretionary criminal penalties requiring conviction of a serious offense; forfeiture can apply where accused has absconded or died.
- Law enforcement powers include production orders, monitoring orders, search warrants, seizure and restraining orders.
- To date, no property has been restrained, seized, or forfeited under current legislation.
- No legislation provides for freezing of terrorist funds; authorities currently cannot freeze such funds as required by UN Security Council Resolutions relating to FT.
- Mission recommended that forfeiture be made mandatory for any serious offense where proceeds are detected and that freezing of terrorist funds be adopted as a matter of priority.
- Legal provisions and protections for bona fide third parties are adequate.
- POCA is administered by Crown Law Office, but there is no designated agency overseeing the forfeiture program or keeping relevant statistics.
- Formal AML/CFT training is not available domestically; ad hoc regional donor-funded training has been provided. The Solicitor-General, Commissioner of Police, and head of the FIU have attended various workshops and seminars.
  
### Financial Intelligence Unit (FIU)
- An independent administrative-type FIU collects, analyzes, and disseminates financial intelligence and is a key gateway for information exchange with foreign counterpart FIUs.
- Under Sections 10 and 11 of the FTRA, a broad range of “financial institutions” must submit reports to the FIU on suspicious transactions and cash and/or electronic transactions above $NZ 10,000.
- The FIU can require reporting parties to supplement reports and has broad powers to obtain relevant information to combat ML, but it does not have FT-related functions at present.
- The FIU can exchange information with counterpart FIUs without violating secrecy provisions.
- Egmont Group membership is expected to be granted in June 2004.
- The FIU keeps statistics on Suspicious Transaction Reports, Cash Transaction Reports, Electronic Funds Transfer Reports, Border Currency Reports, and intelligence from domestic or overseas agencies.
- There are no statistics on cases referred to other law enforcement agencies and their results, nor on requests made by or referred to foreign agencies.
- The FIU has so far received only a small number of STRs; notably, there have been no STRs since enactment of new legislation in June 2003.
- FIU authorized staffing strength is 3, with only the Head of FIU and the Intelligence Officer appointed; the Compliance and Administration Officer position is vacant.
- The Head of the FIU has extensive FIU and law enforcement experience from New Zealand; her contract will expire in June 2004.
- The Intelligence Officer is due to leave the FIU and return to CIP in April 2004.

### Law enforcement and prosecution
- Crown Law Office and Cook Islands Police have primary responsibility for investigating and prosecuting ML offenses; customs and tax authorities could also investigate related matters.
- To date, there has been no investigation or prosecution of ML.
- Police are insufficiently equipped for financial investigations and are not using the full range of powers and investigative tools for combating money laundering and tracing proceeds of crime.
- Under POCA, authorities have powers to compel production of bank account records via production orders, monitoring orders, and search warrants.

### International cooperation
- Domestic law covers mutual legal assistance (MACMA and POCA) and extradition (EA), but the Cook Islands is not a party to the Palermo and Vienna Conventions, nor to the International Convention for the Suppression of the Financing of Terrorism (though it has signed the latter).
- Under MACMA and POCA, the Cook Islands can provide a range of assistance without formal treaties, subject to dual criminality.
- Domestic law (the UNSCRA) in principle allows giving effect to UN Security Council Resolutions on FT, including SCR 1373, subject to issuing necessary regulations; none issued so far.
- Absence of criminalization of FT prevents extradition of persons sought for FT; authorities plan to correct this with the proposed draft Terrorism Suppression Bill.
- Cook Islands Police have been effective in following up informal requests for assistance through police networks; records are maintained in the Intelligence Office of the Cook Islands Police.
- Crown Law Office handles mutual legal assistance requests and has received one request to date; no foreign requests have been received for registering foreign forfeiture orders in the Court of Cook Islands.

### Preventive measures for financial institutions
- Establishment of the FSC and FIU is an important first step to improve prudential regulation and AML/CFT oversight.
- FTRA, FSCA, and the Banking Act of 2003 establish a sound basis for a competent regulatory authority and legal framework governing banking institutions.
- Legislative steps in 2003 are viewed as initial measures toward FATF compliance; further progress is needed for full conformity with FATF 40+8 Recommendations.
- Draft Guidance Notes on the Prevention of Money Laundering and Terrorist Financing in the Cook Islands (March 2003) were prepared but are not yet effective and are subject to further review; these were not considered in the assessment.

*Source: Report on Observance of Standards and Codes — FATF 40+8 assessment and the Commission’s responses as contained in the referenced IMF assessment documents.*

### 83.      However, there is strong concern with the more recent efforts to establish a firm

### 83. However, there is strong concern with the more recent efforts to establish a firm regulatory regime to enable sound implementation of the legislative principles.

### Regulatory conflicts and dilution of AML/CFT requirements
- The FTRA contains provisions on customer identification, verification, and required responses by financial institutions.
- The FTRR on Customer Identification (CID) contains provisions that dilute the customer identification requirements in the FTRA.
- Exceptions provided in the Offering Company Regulations conflict with the requirements established by governing laws.
- The relaxing of key components of the AML/CFT framework through regulatory alterations sends a confusing message regarding the intent of the authorities.
- The laws take precedence over regulations, but the inconsistency undermines clarity and implementation.

### Implementation progress and supervisory capacity
- Due largely to the newness of the legislation, operational steps to implement comprehensive compliance and enforcement activities remain limited.
- Other than domestic banking, the rest of the financial sector is either under a lax regulatory regime or under no effective government supervision.
- For certain licensed financial institutions (including trustee companies and insurers), licensing requirements do not specifically refer to a fit-and-proper test.
- The laws that establish and govern these institutions require updating similar to the banking legislation.

### Enforcement actions and on-site verification
- The authorities have played a minimal role in enforcing AML requirements in the financial sector.
- Offshore banking, insurance, and trust company sectors are not currently subject to effective supervision by the FSC.
- Other covered entities, such as money remitters and moneychangers, fall outside any prudential regulatory regime; responsibility for checking compliance falls to the FIU.
- Since enactment of the FTRA, compliance by banks has been verified only by one on-site examination through completion of an FSC-developed questionnaire.
- The FIU requested copies of internal policies and procedures from institutions for maintaining compliance with the FTRA; none have yet been submitted.
- No other on-site verifications have been carried out by either the FIU or the FSC.
- The FIU has the power to prescribe measures to financial institutions to ensure compliance with suspicious transaction reporting obligations.
- Further Regulations and Guidance Notes need issuance on key issues including:
  - instructions relative to suspicious activities;
  - protocol for “introduced business”;
  - regulatory requirements and treatment of business from jurisdictions without adequate AML/CFT regimes;
  - vetting processes for employees in sensitive positions;
  - vulnerability of charities/nonprofit organizations;
  - measures to deal with CFT.

### Core supervisory arrangements and risks
- The FSC cannot presently verify AML compliance by banks, trust companies, and insurers; the FIU is not capable of executing compliance audit responsibilities for other institutions.
- The FSC has devoted much of its modest supervisory resources to developing a licensing regime consistent with prudential responsibilities under the FSC Act.
- The FSC lacks capacity to adequately supervise trustee companies; no effective mechanism exists to ensure due diligence by trustee companies on nonbank international companies.
- Countries with AML/CFT regimes below international standards could find their financial institutions establishing relationships with Cook Islands international companies lacking proper due diligence.

### Legal provisions that impede enforcement
- Certain Cook Islands legal provisions may create difficulties for enforcing FTRA-based AML/CFT measures regarding international companies and trusts, by allowing shielding of beneficial owner identity or even the existence of trusts.
- Since the International Trust Amendment Act 1995-96, a potential litigant against an international trust is statute barred from even finding out whether the trust exists in the Cook Islands.
- Section 23(2) of the International Trusts Act requires proceedings against international trusts (other than criminal proceedings) to be held in camera and judgments to exclude names of interested parties; this may cause problems for FSC licensing renewals and FIU intelligence gathering.
- Section 26 of the International Trusts Act, Section 224 of the ICA, and similar provisions in the International Partnerships Act and the Offshore Insurance Act authorize the Minister of Finance and Economic Management to exempt international trusts, companies, partnerships, or offshore insurance license holders from complying with provisions of their Acts, including identification of holders of bearer shares.

### Specific sectoral observations
- The Banking Act provides the FSC with the ability to regulate domestic and offshore banks; however, due to lack of corollary legislation, insurers and trust companies operate under weak oversight and have not been subject to meaningful scrutiny.
- The FIU and financial regulators need a coordinated strategy for on-site verification of AML requirements across sectors.
- The FIU compliance officer position must be filled.
- There are no appropriate supervisory procedures applied to offshore banking and insurance sectors; no effective regime exists to supervise trust companies.
- Money transmission services (Western Union) are not licensed nor regulated in the Cook Islands but are subject to FTRA obligations and have made some CTRs.

### Summary assessment against the FATF Recommendations
- The Cook Islands has achieved substantial progress in bringing its AML/CFT legislative and regulatory framework in line with relevant international standards in a relatively short period.
- Significant challenges remain in overall implementation, affecting compliance with the FATF 40+8 Recommendations.
- The Cook Islands complies only with FATF Recommendations that focus primarily on legislative action apart from CFT, but does not comply with effective implementation on those matters.

### Priority actions recommended
- Criminalization of FT and extension of preventive measures.
- Ratification of international conventions.
- Enhanced compliance supervision.
- Coordination of AML/CFT policy.
- Consistency of regulations with the FTRA.
- Development of updated Guidance Notes for the financial sector.
- Development and facilitation of compliance examination functions within the FSC and FIU.
- Further dialogue with the private sector on AML/CFT goals and needs.

### Table 3 — Selected recommended actions (high-level extracts)
- Ratify the Vienna Convention and ensure domestic legislation for its implementation.
- Make criminal forfeiture mandatory for any serious offense where proceeds are detected.
- Resolve conflict between the FTRR and the FTRA by eliminating any provision in the Regulations that diminishes identification requirements set forth by the FTRA; review and correct similar conflicts between FTRA and company/trust law (ICA and ITA) (see paragraph 88).
- The FSC should determine whether banks have adequate record-keeping systems and procedures.
- The FIU and FSC should engage with financial institutions to clarify suspicious activity concepts and tipping-off issues.
- The FIU and/or FSC should issue guidance notes addressing enhanced scrutiny for countries lacking adequate AML/CFT regimes.
- Introduce statutory fit-and-proper tests for directors, managers, and significant shareholders at licensing/change in ownership of all regulated financial institutions and make them ongoing requirements.
- FSC should develop a strategic plan addressing AML/CFT issues, including risk assessment of regulated institutions and supervisory guidance/procedures; this could be conducted in cooperation with the FIU.
- Assess FSC Supervisory Division resources once licensing rationalization is complete.
- Fill the FIU’s Compliance Officer position.
- Expand statutory basis and extent of FSC cooperation with other domestic authorities in the FSC Act.
- Ratify the Vienna Convention and ensure domestic legislation is in place for implementation (repeated under cooperation and confiscation).
- For FATF special recommendations on terrorist financing:
  - Ratify the ICSFT and ensure domestic legislation for implementation.
  - Implement the UN SCRs on FT.
  - Criminalize FT as a priority and include it among “serious offenses” so it is a predicate offense for ML.
  - Adopt legislation for freezing terrorist funds and effective implementation of UN SCRs on FT.
  - Ensure the CIG circulates UN and other terrorist watch-lists to financial institutions and keeps them abreast of new developments.

### Authorities’ response (selected points)
- The Cook Islands sent its instrument of ratification the week of the 8th March 2004 for the Financing of Terrorism Convention and the instrument of accession for the Palermo Convention; dates of ratification/accession to be advised when received from the UN Treaty Section.
- The Cook Islands will accede to the Vienna Convention when the enabling legislation has been enacted.
- The PM challenged the IMF statement that the Cook Islands is not a party to the Vienna Convention; the Cook Islands is included by territorial application clause in New Zealand treaty action when New Zealand ratified the Vienna Convention in 1987. The Cook Islands is bound by the Vienna Convention but is not a state party in its own right; discussions between NZ and the Cook Islands are ongoing to consider the best approach for accession/succession.
- Agreement with IMF draft report in principle, including:
  - suite of legislation passed in 2003 is generally good (subject to minor amendments);
  - regulations need review as parts may be ultra vires the Acts they are made under;
  - anti-terrorism legislation must be a priority;
  - it is too soon to determine adequacy of enforcement.
- The Society’s view includes specific suggested amendments:
  - amend section 23 of the International Trusts Act 1984 so restrictions on in camera proceedings and excluded names do not apply to the Commission (FSC) and possibly FIU intelligence needs;
  - abolish or truncate Ministerial exemption powers in section 26 of the International Trusts Act 1984, section 224 of the ICA, section 77 of the International Partnerships Act 1984, and section 23A of the Offshore Insurance Act 1981-82 so exemptions are only for limited minor administrative cases;
  - restore requirement that trustee companies display a list of trusts they provide a registered office for (with possibility of public inspection during normal working hours rather than display);
  - review domestic and offshore insurance legislation to complete the legislative package;
  - insert a ‘paramount’ provision in the Financial Transactions Reporting Act 2003 similar to section 20(15) of the Financial Supervisory Act 2003 to avoid ambiguity when later legislation overrules earlier inconsistent legislation.

### Analysis of Effectiveness and preventive measures (selected comments)
- Agreement with narrowing the definition of Financial Institution to cover “reporting” institutions (assumed to be Licensed Financial Institutions) to reduce current confusion.
- IMF concern over acceptance of transactions with regulated financial institutions (RFIs) is explained by the view that transactions with RFIs in FATF-approved countries rely on KYC held at the RFI level and reporting obligations at that level; this was intended to avoid duplication where world-wide ID of participants is already addressed by the RFI’s compliance.

---


_Source: https://www.imf.org/-/media/files/publications/ofca/english/cr04413.pdf_