## Detailed Assessment of Compliance of the Basel Core Principles ## Source details **Canonical URL:** [Detailed Assessment of Compliance of the Basel Core Principles](https://www.imf.org/-/media/files/publications/ofca/english/cr04414.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr04414.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr04414.pdf.json) --- ### Overview and purpose - Assessment conducted as part of the IMF Module 2 Offshore Financial Center (OFC) assessment program. - Assessors: Desiree Cherebin and Joel Shapiro, banking supervision consultants. - Methodology: followed the core principle assessment methodology approved by the Basel Committee; reviewed FSC self-assessment and met with the Prime Minister, FSC Board representatives, FSC Commissioner, Financial Intelligence Unit (FIU), senior officers of three domestic banks and one offshore bank, two audit firms, Trust Companies Association, and management of two trust companies. - Key laws and regulations reviewed: Banking Act 2003 (BA), Financial Supervisory Commission Act 2003 (FSCA), Financial Transactions Reporting Act 2003 (FTRA) and February 2004 regulations and prudential statements. - Note: With the exception of one on-site examination report of the local domestic bank, no prudential information exists on any licensed financial institution because the FSC has yet to implement supervisory policies and procedures. ### Institutional and market structure - Offshore sector contribution and composition: - Registration and license fees represent about 4 percent of government revenues. - Industry estimates put the total contribution of the offshore sector in the range of 8 percent of GDP. - Offshore sector composition: sixteen international banks; some 800 international companies; six trust companies administering 2,100 international trusts; approximately 20 offshore insurance companies. - Domestic banking system: - Composed of branches of ANZ and Westpac and the indigenous Bank of the Cook Islands (BCI). - Estimated total assets in the domestic system aggregate approximately $NZ 180 million, of which roughly $NZ 150 million represents loans to commercial enterprises and consumers. - Historical context: - In June 2000 the Cook Islands were placed on the FATF list of non-cooperative countries and territories. - Government action: In May 2003 enacted legislation to establish a sole regulator (FSC) and strengthen supervision; FSC established in June 2003; first Commissioner appointed in September 2003. ### Financial Supervisory Commission (FSC): legal mandate, structure, and capacity - Legal mandate and functions: - FSCA Section 3(1) establishes the FSC; Section 15(2) requires FSC to “keep under review, the operation ...and the effectiveness of supervision of licensed financial institutions” and to “continually monitor the extent to which Cook Islands legislation and the supervision of licensed financial institutions comply with internationally accepted standards.” - Section 16 empowers FSC to license financial institutions and monitor compliance with the Banking Act 2003. - Banking Act 2003 Section 14(1) principal supervisory functions: supervise, regulate, and inspect licensed financial institutions; promote financial stability and soundness; review banking business and implement internationally accepted standards of prudential supervision; recommend amendments to legislation. - Section 14(2) sets minimum prudential standards including consideration of capital adequacy, credit risk management, liquidity, and operational risk. - FSC required to issue a Statement of Intent and an annual report annually under Sections 27 and 28 of the FSCA; Statement rendered to the Minister of Finance (MOF). - Organizational structure and appointments: - Board composition: Section 4 envisions five members; at assessment time three local business persons, one local attorney, and one former Deputy Governor of the Reserve Bank of New Zealand. Directors appointed for two years (some initial appointments of three years under Section 5(2)). MOF appoints one Board member as Chairman. - Board appoints the Commissioner; Commissioner exercises routine supervisory powers by delegation but Board considers licensing and enforcement actions. - Funding and budgeting: - FSC funded from licensing and registration fees. - Budget for fiscal year ending June 30, 2004 indicates fees will generate positive earnings; estimated 50 percent of revenue will be contributed to the Government’s general fund for the year ending June 30, 2004. - Concern: FSC must ensure freedom to use financial resources generated from licenses and fees to execute duties; contribution to General Fund may restrict FSC activities. - Staff and capacity: - Staff resources devoted to supervision set at five: Commissioner, a Deputy Commissioner, a Senior Supervisor, and two junior supervisors. - Only the Commissioner has experience and background in bank supervision; senior supervisor has some insurance background; Deputy Commissioner position vacant. - Vacancies being filled with expatriates on contract; Commissioner is an expatriate appointed for a two-year period that commenced in September 2003. - Remuneration: comparable for entry-level positions locally; increased incentives necessary to attract expatriates for senior posts. - Assessment commentary stresses need for succession planning, local capacity building, training, supervisory tools, prudential returns, procedural manuals, and an IT platform. ### Legal framework and unresolved legal preconditions - New legal framework (May/June 2003) empowers the FSC to license, supervise and enforce. - Two specific gaps highlighted: - Legal framework for resolving problem banks not fully addressed—need procedures for receivership and liquidation beyond general provisions in the Companies Act. - Public safety net unresolved—questions on government approach to rescuing depositors at BCI in event of a financial crisis. - Pre-2003 situation: Monetary Board had ceased to function effectively; Offshore Financial Services Commission primarily collected fees; no active on-site/off-site supervision; no meaningful legal requirements on transparency, accounting standards, corporate governance, or safe and sound banking practices. ### Principle 1 — Objectives, autonomy, powers, and resources (selected findings) - Principle summary: Effective supervision requires clear responsibilities and objectives, operational independence and adequate resources, and a suitable legal framework for authorization, ongoing supervision, enforcement powers, and information sharing/confidentiality protections. - Assessment highlights: - Principle 1(1) Clear responsibilities and objectives: Largely compliant. - Principle 1(2) Operational independence and adequate resources: Materially noncompliant. - Principle 1(3) Suitable legal framework for authorization and ongoing supervision: legal provisions centralize FSC authority; assessment derived from Cook Islands detailed assessment. ### Licensing, permissible activities, and physical presence (Principles 2–4) - Prohibition and penalties: - No entity may carry on a banking business in or from the Cook Islands unless licensed by the FSC (Banking Act 2003, Section 3). - Penalties for contravention of Section 3: Individual: fine not exceeding $NZ 50,000 or imprisonment for a term not exceeding 3 years, or both. Body corporate: fine not exceeding $NZ 250,000. - Section 52 prohibits use of the word “bank” without FSC approval; penalties: Individual fine not exceeding $NZ 50,000 or imprisonment not exceeding 2 years or both; body corporate fine not exceeding $NZ 250,000. - Definition and permissible activities: - “Banking business” defined in Section 2 of the Banking Act 2003; Act allows other activities by regulation as customary banking practice. - Restriction on use of the word “bank” enforced by FSC; FSC may authorize use for entities other than licensed institutions as a practical matter. - Gaps: FSC had not issued directives or prudential regulations prescribing additional permissible activities (e.g., foreign exchange services). - Physical presence (Section 23) and licensing procedures: - Section 23 requires each licensee, except restricted licensees, to maintain a physical presence in the Cook Islands with both “mind and management” operating the institution from the Cook Islands. - Physical presence requirements include conducting banking business from designated premises; maintaining operating records; having at least one employee knowledgeable on day-to-day operations. - FSC Prudential Statement No. 1-2004 standardizes applications and minimum information requirements. - Timing/transitional licensing: entities operating under earlier Acts were granted provisional licenses; all licenses temporary and each institution must submit license applications to FSC by March 1, 2004, allowing 90 days to process before the June 1, 2004 deadline. - Of 16 institutions licensed under the Banking Act 2003 from the offshore community, only eight indicated intention to seek a new license. - Licensing criteria include: ownership structure, reputation, financial capacity, fit and proper directors/managers, satisfactory risk management and internal controls, and minimum capital base of $NZ 2 million fully paid. - Assessment: Principle 3 — criteria and authority consistent with licensing standards; physical presence enforcement and verification recommended. ### Prudential standards: Capital, credit, provisioning, and large exposures (Principles 5–9) - Capital adequacy: - Section 24 requires capital commensurate with nature and scale; minimum paid up capital not less than $NZ 2 million. - Prudential Statement No. 2-2004 sets minimum capital ratios effective March 1, 2004: 5 percent for Tier I capital to total risk-weighted assets, and 10 percent for total capital and reserves to total risk-weighted assets. - Institutions must report capital and reserve structure and capital ratios quarterly; first required reporting date expected as of June 30, 2004. - Assessment: Compliant. - Credit policies and loan loss provisioning: - No Prudential Standard yet issued on credit and investment administration; urgent implementation needed. - Prudential Statement 3-2004 on “Asset Classification, Provisioning and Non Accrual of Interest” issued February 2004; board must ensure quarterly review of loans in excess of 10 percent of capital, the twenty largest borrowers, nonaccrual loans and a sample of remainder. - Assessment: Credit policies — Materially noncompliant. Loan evaluation/provisioning — Largely compliant with need to expand to off-balance sheet items. - Large exposure limits: - Section 36 restricts solo and group advances, including off-balance sheet items, to 25 percent of capital; defines “group” by 51 percent voting share control or practical control; advances by foreign banks and those to Government are exempt. - No current requirement for licensees to report large exposures to FSC. - Assessment: Largely compliant; supervisory monitoring and reporting recommended. ### Connected lending, country, market and other risks (Principles 10–13) - Connected lending: - Section 36(6) extends lending restrictions to relatives but lacks a comprehensive definition of “connected or related parties” and lacks FSC discretion to determine connections. - Assessment: Materially noncompliant. - Recommended legal amendment: include comprehensive definition and grant FSC discretionary powers; issue prudential statements and prudential returns to measure connected party transactions. - Country risk and market risk: - FSC currently unaware of level/nature of country and transfer risk in international banks; licensing process does not explicitly request this information. - No procedures or prudential returns developed to capture market risk exposures. - Assessment: Country risk — Noncompliant. Market risk — Noncompliant. - Recommendation: capture exposures via prudential returns; examiner training and procedures necessary. - Other risks (liquidity, interest rate, operational): - No procedures developed despite legal authority. - Assessment: Noncompliant. - Recommendations: comprehensive prudential statement on risk management including liquidity MIS, stress testing, contingency planning, internal audit, business resumption plans, and examination procedures. ### Internal control, audit, accounting, and corporate governance (Principles 14–21) - External auditors and corporate governance: - Section 41 requires licensed financial institutions to retain an external auditor to render an annual report on audited financial statements. - No specific provisions in Banking Act 2003 or prudential statement setting out duties and responsibilities of the board; Prudential Statement 3-2004 articulates some board responsibilities for asset classification and provisioning. - Assessment: Materially noncompliant for corporate governance/internal controls. - Recommendations: issue prudential statement on corporate governance; develop on-site review procedures and examiner training. - Auditor disclosure and approval: - Section 43 requires auditors to disclose to the FSC information indicating insolvency, fraud, serious irregularities, losses substantially reducing capital, or failure to comply with FSC directives. - Section 41(2) requires auditors to be experienced and approved by FSC; registration processes currently lack due diligence and background checks. - No requirement for financial statements to be prepared in accordance with acceptable accounting standards or to be published. - Assessment: Materially noncompliant for audit/accounting and prudential reporting. - Recommended actions: document auditor approval criteria, require internationally accepted accounting standards, require publication of audited financial statements, establish supervisory procedures to ensure audit compliance, consider re-registration of auditors. - Validation of supervisory information: - FSC lacks functioning on-site processes and limited capacity to validate supervisory information. - Section 44 authorizes FSC to appoint a licensee’s external auditor to conduct an audit and report on asset quality, adequacy of loan loss provisions, and accounting/control systems. - Assessment: Noncompliant. Concerns about auditor competence and registration process. ### Consolidated supervision and host/foreign bank oversight (Principles 20–25) - Consolidated supervision: - FSC has virtually no knowledge of overall structure of international financial institutions and has not determined approach to supervise material parts of groups or evaluate consolidated risks. - No legal provisions require FSC satisfaction that ownership and organizational structures do not obstruct effective consolidated supervision. - Assessment: Noncompliant. - Recommendations: define desired group structures via prudential statement; require consolidated information for Bank of the Cook Islands Holding Corporation and affiliates. - Host country and foreign bank supervision: - Section 29 requires FSC approval prior to conducting banking business through overseas office/branch/subsidiary and requires overseas operations be subject to adequate supervision with FSC access to information. - Assessment: Host country supervision — Noncompliant. Supervision over foreign bank establishments — Largely compliant. - Recommendation: develop foreign bank supervision program and relationships with host supervisors (e.g., APRA). ### On-site and off-site supervision, management contact, prudential reporting (Principles 16–19) - On-site/off-site capacity: - FSC empowered to inspect premises and records (Sections 14 and 15) but has no infrastructure or prudential returns; staff lack experience and training. - FSC conducted first on-site examination February 4–12, 2004, of Bank of the Cook Islands with PFTAC assistance. - Assessment: Noncompliant. - Priorities: staff training, develop prudential returns, IT automation, examination manual and report templates. - Bank management contact: - No program of routine contact; described as “open door policy.” - Assessment: Noncompliant. - Commissioner plans annual meetings with each institution post-licensing and more frequent operational meetings based on supervision results. - Off-site supervision and returns: - Prudential Statement 2-2004 requires quarterly capital adequacy filing; no broader periodic prudential return required at present. - Assessment: Materially noncompliant. - Recommendation: develop wider prudential returns, consider legal sanction for noncompliance, automate returns and create peer group analyses; PFTAC offered assistance. ### Enforcement powers, remedial measures, and sanctions (Principles 21–22) - Enforcement tools available: - Section 17(2) lists enforcement actions: revoke/suspend license, appoint examiner, appoint qualified auditor, appoint court appointed manager. - Section 19 permits issuance of directives requiring cessation of unsafe practices or corrective action. - Prudential Statements list corrective measures including prohibition on new activities, suspension of lending, prohibition on dividends and discretionary compensation. - Gaps: statutes do not provide a full ladder of enforcement actions and do not empower FSC to impose fines or remove directors for incompetence. - Assessment: Largely compliant. - Recommendations: strengthen powers to remove directors who abuse power, grant power to impose fines for minor offenses, and issue a prudential ladder of compliance. ### Summary compliance and prioritized supervisory recommendations - Selected high-priority recommendations: - Amend Banking Act 2003 to add provisions for receivership or liquidation proceedings and grant powers to FSC in event of liquidity crisis. - Develop staff retention, succession, and recruitment programs including outreach to Cook Islands Diaspora and careful use of expatriate contracts. - Clarify Board/Commissioner roles to preserve Commissioner independence on routine operational matters. - Harmonize confidentiality and disclosure provisions between Banking Act 2003 and FSCA. - Accelerate establishment of processes for information exchange with FIU and foreign supervisors once overseas operations are known. - Verify physical presence of international banks awarded a license and publish FSC interpretation of “best practice” related to physical presence. --- ### Detailed Assessment Report on Anti‑Money Laundering and Combating the Financing of Terrorism (AML/CFT) ### Assessment methodology, team and field work - Team composition: IMF staff, an IMF-supervised expert, and an expert from Asia Pacific Group roster. - Materials examined included: Banking Act 2003; International Companies Act 1981–82; Trustee Companies Act 1981–82; FSCA; FTRA; POCA; MACMA and Amendment Act 2003; Extradition Act 2003; Criminal Procedure Amendment Act 2003; UNSCRA 2003; Crimes Act 1969; Criminal Procedure Act 1980–81; and FTRA regulations including Financial Transactions Reporting Regulations 2004. - Field work: team visited Rarotonga from February 16 to February 27, 2004; met with Working Group on NCCT issues, Ministry of Justice, Crown Law Office, FSC, FIU, Police, Customs, private sector representatives, domestic banks, trust companies, external auditors, and a money transmission service provider. ### General ML/FT risk assessment and institutional roles - Agencies directly involved: FIU, Cook Islands Police (CIP), Crown Law Office (CLO); Customs, Immigration and Revenue Management have roles. - Crime environment: general crime rate low; no evidence of major organized crime, drug trafficking or serious fraud generating large proceeds domestically. - Risk profile: - Domestic money laundering risk small. - Potentially significant risk of abuse in offshore banking sector and trustee companies. - Enforcement statistics: - No successful investigation and prosecution of money laundering in the Cook Islands to date. - Insignificant number of STRs insufficient to indicate trends. ### Legislative framework and international obligations - FATF status: Cook Islands remain on FATF list of Non‑Cooperative Countries and Territories since June 2000. - Legislative reforms: Money Laundering Prevention Act 2000; comprehensive new AML-suite effective June 2003 including POCA, MACMA, EA, FTRA, and amended Crimes Act 1969 (Sections 280A and 280B). - FT: not criminalized at time of assessment; draft Terrorism Suppression Bill under preparation. - International conventions: Cook Islands not party to Vienna or Palermo Conventions; signed UN ICSFT December 24, 2001 but not ratified; UNSCRA enacted April 9, 2003 but implementing regulations not issued. ### Criminalization, penalties and standards - Money laundering offense: - Section 280A Crimes Act 1969 criminalizes ML with predicate offenses defined as “serious offenses” under Section 280: offenses punishable by imprisonment not less than 12 months or fine over $NZ 5,000. - Result: over 200 offenses qualify as “serious” and thus as predicates. - Penalties: physical persons imprisonment up to five years or fine up to $NZ 50,000; legal persons fines up to $NZ 250,000; POCA forfeiture and pecuniary penalty orders applicable. - Conviction on a predicate offense not necessary for ML conviction under Section 280A. - Tipping-off: - Section 280B criminalizes disclosure likely to prejudice an ML investigation; defenses and penalties align with principal offense. - Assessment and gaps: - FT not criminalized — major compliance shortcoming. - Suggested legal enhancements include explicit laundering of one’s own proceeds, inclusion of “willful blindness” in scienter, additional penalties for legal entities/professionals, and combinable penalties. ### Proceeds of Crime Act (POCA), confiscation and provisional measures - POCA provides for forfeiture orders and pecuniary penalty orders; tainted property defined broadly. - Forfeiture rules: - Solicitor-General may apply for forfeiture within 6 years of conviction (Section 11). - Forfeiture is discretionary and requires conviction; remedies for absent or deceased accused exist. - Provisional measures: - Search warrants for tainted property (Sections 35–36); seizure permitted with conditions and needs restraining order to retain. - Production orders (Section 79) and monitoring orders (Sections 87–92) available; monitoring orders maximum six months. - Rights of third parties: - Section 20 allows third parties to apply to Court to declare interest where they acted in good faith for sufficient consideration. - Asset Forfeiture Fund: - Section 100 establishes a Confiscated Assets Fund; receipts include amounts paid to Crown instead of forfeiture and pecuniary penalty payments. - Assessment: - POCA provisions broadly conform to international standards but untested in practice; discretionary nature may impede implementation. - Recommendations: consider mandatory criminal forfeiture, simplify regime, consider civil non‑conviction forfeiture options, and set up forfeiture fund. ### FIU — functions, reporting, staffing, and effectiveness - FIU functions (Section 27 FTRA): receive STRs, CTRs and EFTRs over $NZ 10,000; analyze and refer to Police; compile statistics; issue guidance and training; undertake compliance audits for non‑licensed entities. - Reporting obligations: - CTRs and EFTRs: mandatory within 3 working days for single cash or electronic transfer over $NZ 10,000 (Section 10). - STRs: report as soon as practicable but no later than in two working days (Section 11). - Sanctions for failure to report: up to $NZ 10,000 for individuals/$NZ 50,000 for corporations (CTRs); up to $NZ 20,000 or two years imprisonment for individuals/$NZ 100,000 for corporations for STRs. - FIU statistics (supplied): - STRs August 2000–June 2003: 22 - CTRs July 2003–January 2004: 529 - EFTRs July 2003–January 2004: 2050 - Border Currency Reports since August 2000: 0 - Intelligence since October 2001: 15 - Of STRs: 18 by banks, 3 by trustee companies, 1 by a CIG agency. - Staffing and resources: - FIU budget increased from $NZ 100,000 in 2002–03 to $NZ 256,000 in 2003–04. - Authorized professional staff of three: Head (contract expires June 2004), Intelligence Officer (due to leave April 2004), Compliance Officer (vacant). - FIU has secure stand-alone computer system but database lacks reporting capacity and classification/result fields. - Assessment: - Legal framework comprehensive; operational capacity limited and reliant on key personnel; low STR numbers suggest awareness or compliance gaps. - Recommendations: amend definition of “financial institutions” to “reporting institutions”; amend Section 11(5) so additional information is supplied to requesting law enforcement agency; fill staffing gaps; enhance FIU database; establish formal unit-to-unit channels with domestic and foreign agencies. ### Preventive measures for financial institutions (FTRA and CID Regulation) - Customer identification and due diligence: - FTRA Section 4 requires establishment and verification of identity and ultimate beneficial ownership; CID Regulation Part 4 requires photographic ID plus second form (bank references, employment references, utility bills, or election register). - Exemptions in CID Regulation Part 6 conflict with FTRA: exceptions for regulated foreign institutions and transactions under $NZ 10,000 create legal inconsistencies. - No explicit prohibition of numbered accounts. - Assessment: FATF 10 and FATF 11 — Materially noncompliant due to regulatory conflicts and inadequate supervision of trustee companies. - Recommendations: resolve conflict between FTRR and FTRA; develop FSC compliance program; ensure beneficial owners of international companies are identified and verified; defer introduced business regime until supervisory capacity exists. - Ongoing monitoring, wire transfers and record keeping: - Section 8 requires enhanced scrutiny of complex/unusual/large transactions and wire transfers without complete originator information (Section 8(1)(c)). - Record keeping (Section 6): retain transaction records and identification for minimum period of 6 years; records must be in Cook Islands or reproducible within three working days. - Assessment: legal framework generally adequate; implementation and guidance lacking; FATF 12 — Largely compliant but more compliance checking needed. - Recommendations: issue guidance on enhanced scrutiny for noncompliant countries; upgrade IT and automated reporting; clarify record-keeping wording in Section 6. - Suspicious transaction reporting and tipping off: - STRs required under Section 11; penalties for failure; Section 16 provides protection for good faith reporters; Section 14 prohibits tipping off. - Low STR submissions indicate under-reporting or lack of understanding; system does not cover FT. - Assessment: FATF 15 — Largely Compliant; SR IV — Noncompliant (does not address FT). - Recommendations: extend STR system to FT, issue updated Guidance Notes, continue training. ### Internal controls, compliance, audit and fit-and-proper standards - Compliance obligations: - FTRA requires appointment of Money Laundering Reporting Officer; FSCA requires Compliance Officer for licensed institutions; Qualification of Compliance Officers Regulations 2004 require at least three years experience in finance, law, accounting or insurance. - No explicit requirement to apply AML/CFT requirements to branches and majority-owned subsidiaries abroad. - Assessment: FATF 19 & 20 — Largely Compliant with need for implementation/testing. - Fit-and-proper standards and integrity: - Banking Act 2003 includes fit-and-proper and disqualification provisions (Section 2(4), Sections 27(2) and 27(4)). - Nonbank regulated institutions lack comparable fit-and-proper tests. - Assessment: FATF Recommendation 29 — Noncompliant. - Recommendations: extend fit-and-proper tests to nonbank financial institutions; issue guidance on background checks for sensitive positions. ### Law enforcement, prosecution, special investigative techniques, and mutual legal assistance - Investigative tools: - POCA provides production orders, monitoring orders, and search warrants; CPA amended May 2003 creates basis for interception warrants (Section 96A) with restrictive conditions. - Interception not operational due to lack of technology; other techniques (undercover, controlled deliveries) not legislatively clear and unused. - Law enforcement capacity: - CIP strength 110 police officers; CIB strength 12 detectives; Crown Law Office two qualified lawyers with two junior prosecutor posts vacant. - Training gaps and staff departures affect capacity; two experienced fraud investigators left CIB but remain in AML roles (FSC and FIU). - Mutual legal assistance and extradition: - MACMA and POCA enable broad mutual legal assistance subject to dual criminality; Section 38 MACMA enables registration/enforcement of foreign forfeiture orders subject to conviction and finality. - Extradition: FT not criminalized so extradition for FT not currently possible. - Assessment: mutual assistance and extradition frameworks comprehensive but untested; recommended ratification of Vienna/Palermo/ICSFT; implement UN SCRs; criminalize FT; clarify MACMA/POCA overlap and permit assistance absent treaty where appropriate. - Recommendations for law enforcement/prosecution: immediate training for investigators and prosecutors in POCA and financial investigations; designate Crown Law Office as central repository of ML/FT statistics; develop inter‑agency cooperation channels (CLAG/NCC). ### Border controls, cash movement and CTRs - Cross-border reporting: - Section 10 FTRA requires CTRs for cash or electronic transfers over $NZ 10,000. - Around 500 CTRs were submitted to FIU at time of assessment; no Border Currency Reports yet. - Customs process: Arrival Declaration includes baggage declaration; no mechanism for departing passengers; enforcement at seaport unclear. - Recommendation: improve declaration mechanism for departures and coordination between Customs, Marine Police and FIU. ### FATF compliance ratings (selected) - Criminalization and treaties: Recommendation 1 — Noncompliant. - Institutional and coordination: Recommendation 2 — Largely compliant. - STRs, CTRs and reporting: Recommendation 10 — Materially Noncompliant; Recommendation 11 — Materially Noncompliant. - FIU: FATF 14 — Largely Compliant; FATF 26 — Materially noncompliant (capacity gaps). - Special Recommendations: SR I — Noncompliant; SR II — Noncompliant; SR III — Noncompliant; SR IV — Noncompliant; SR V — Noncompliant. ### Recommended Action Plan (selected, prioritized) - Criminal justice and international cooperation: - Ratify Vienna and Palermo Conventions and the ICSFT. - Criminalize FT and implement UN SCRs (including freezing terrorist funds). - Consider mandatory criminal forfeiture and potential civil forfeiture regimes. - FIU and supervision: - Amend FTRA definitions to “reporting institutions”; amend Section 11(5) for direct provision of additional information to investigating agencies. - Fill FIU staffing gaps, enhance database and IT, and formalize unit-to-unit communication channels. - Develop and implement prudential returns, supervisory tools, and examiner training with PFTAC assistance. - Regulatory and supervisory measures: - Harmonize FTRA and implementing regulations (eliminate exemptions that diminish identification requirements). - Develop compliance programs for trustee companies and ensure beneficial ownership information is collected and kept updated. - Issue and promulgate updated Guidance Notes covering enhanced due diligence, wire transfers, introduced business, and tip‑off clarifications. - Strengthen auditor registration, require internationally accepted accounting standards and publication of audited financial statements. - Capacity building: - Immediate training for ML investigators, prosecutors, FIU and FSC examiners. - Develop strategic plans, succession, recruitment and retention programs for FSC and FIU staff. - Consider re-registration of auditors and enhanced vetting for auditors and compliance officers. - Operational coordination: - Designate a lead agency for AML/CFT coordination and re-cast the Working Group as a policy-making body. - Establish the forfeiture fund (Section 100 POCA) and assign CLO as central body to keep ML/FT statistics. *Source: IMF assessment unit "Detailed Assessment of Compliance of the Basel Core Principles" and associated AML/CFT mission report (cr04414).* ### 1. Detailed Assessment of Compliance of the Basel Core Principles....................................8 ### 1. Detailed Assessment of Compliance of the Basel Core Principles ### Overview and purpose - Assessment conducted as part of the IMF Module 2 Offshore Financial Center (OFC) assessment program. - Assessors: Desiree Cherebin and Joel Shapiro, banking supervision consultants. - Methodology: followed the core principle assessment methodology approved by the Basel Committee; reviewed FSC self-assessment and met with the Prime Minister, FSC Board representatives, FSC Commissioner, Financial Intelligence Unit (FIU), senior officers of three domestic banks and one offshore bank, two audit firms, Trust Companies Association, and management of two trust companies. - Key laws and regulations reviewed: Banking Act 2003 (BA), Financial Supervisory Commission Act 2003 (FSCA), Financial Transactions Reporting Act 2003 (FTRA) and February 2004 regulations and prudential statements. - Note: With the exception of one on-site examination report of the local domestic bank, no prudential information exists on any licensed financial institution because the FSC has yet to implement supervisory policies and procedures. ### Institutional and market structure - Offshore sector contribution: - Registration and license fees represent about 4 percent of government revenues. - Industry estimates put the total contribution of the offshore sector in the range of 8 percent of GDP. - Offshore sector composition: sixteen international banks; some 800 international companies; six trust companies administering 2,100 international trusts; approximately 20 offshore insurance companies. - Domestic banking system: - Composed of branches of ANZ and Westpac and the indigenous Bank of the Cook Islands (BCI). - Estimated total assets in the domestic system aggregate approximately $NZ 180 million, of which roughly $NZ 150 million represents loans to commercial enterprises and consumers. - Historical context: - In June 2000 the Cook Islands were placed on the FATF list of non-cooperative countries and territories due to absence of effective supervision of the offshore sector, lack of AML infrastructure, and excessive secrecy. - Government action: In May 2003 enacted legislation to establish a sole regulator (FSC) and strengthen supervision; FSC established in June 2003; first Commissioner appointed in September 2003. ### Financial Supervisory Commission (FSC): legal mandate, structure, and capacity - Legal mandate and functions: - FSCA Sections cited: FSC established under Section 3(1); Section 15(2) requires FSC to “keep under review, the operation ...and the effectiveness of supervision of licensed financial institutions” and to “continually monitor the extent to which Cook Islands legislation and the supervision of licensed financial institutions comply with internationally accepted standards.” - Section 16 empowers FSC to license financial institutions and monitor compliance with the Banking Act 2003. - Banking Act 2003 Section 14(1) principal supervisory functions: supervise, regulate, and inspect licensed financial institutions; promote financial stability and soundness; review banking business and implement internationally accepted standards of prudential supervision; recommend amendments to legislation. - Section 14(2) sets minimum prudential standards including consideration of capital adequacy, credit risk management, liquidity, and operational risk. - FSC required to issue a Statement of Intent and an annual report annually under Sections 27 and 28 of the FSCA; Statement rendered to the Minister of Finance (MOF). - Organizational structure and appointments: - Board composition: Section 4 of the FSCA envisions five members; at assessment time three local business persons, one local attorney, and one former Deputy Governor of the Reserve Bank of New Zealand. Directors appointed for two years (some initial appointments of three years under Section 5(2)). MOF appoints one Board member as Chairman. Ineligibilities include Members of Parliament, certain shareholders/employees of licensed institutions, and Crown servants. - Board appoints the Commissioner; Commissioner exercises routine supervisory powers by delegation but Board considers licensing and enforcement actions. - Funding and budgeting: - FSC funded from licensing and registration fees. - Budget for fiscal year ending June 30, 2004 indicates fees will generate positive earnings; estimated 50 percent of revenue will be contributed to the Government’s general fund for the year ending June 30, 2004. - Concern: FSC must ensure freedom to use financial resources generated from licenses and fees to execute duties; contribution to General Fund may restrict FSC activities. - Staff and capacity: - Staff resources devoted to supervision set at five: Commissioner, a Deputy Commissioner, a Senior Supervisor, and two junior supervisors. - Only the Commissioner has experience and background in bank supervision; senior supervisor has some insurance background; Deputy Commissioner position vacant. - Vacancies being filled with expatriates on contract; Commissioner is an expatriate appointed for a two-year period that commenced in September 2003. - Remuneration: comparable for entry-level positions locally; increased incentives necessary to attract expatriates for senior posts. - Assessment commentary stresses need for succession planning, local capacity building, training, supervisory tools, prudential returns, procedural manuals, and an IT platform. ### Legal framework and unresolved legal preconditions - New legal framework (May/June 2003) addresses previous deficiencies by empowering the FSC to license, supervise and enforce. - Two specific gaps highlighted: - Legal framework for resolving problem banks not fully addressed—need procedures for receivership and liquidation beyond general provisions in the Companies Act. - Public safety net unresolved—questions on government approach to rescuing depositors at BCI in event of a financial crisis. - Pre-2003 situation: Monetary Board had ceased to function effectively; Offshore Financial Services Commission primarily collected fees; no active on-site/off-site supervision; no meaningful legal requirements on transparency, accounting standards, corporate governance, or safe and sound banking practices. ### Detailed assessment: Basel Core Principles — Principle 1 (Objectives, autonomy, powers, and resources) - Principle summary: Effective supervision requires clear responsibilities and objectives, operational independence and adequate resources, and a suitable legal framework for authorization, ongoing supervision, enforcement powers, and information sharing/confidentiality protections. - Principle 1(1): Clear responsibilities and objectives - Description: FSC charged under FSCA and Banking Act 2003 with full responsibility for supervision of licensed financial institutions. FSCA Sections 15 and 16 require review of supervision effectiveness and empower licensing and monitoring. - Banking Act 2003 Section 14(1) supervisory functions listed (see above). - Annual reporting: Statement of Intent and annual report required under Sections 27 and 28 of FSCA. - Assessment: Largely compliant. - Comments: Laws do not fully address provisions relating to orderly resolution of a problem bank. Section 17 of the Banking Act 2003 empowers enforcement actions including suspension/revocation of license, appointment of an examiner, or appointment of a court appointed manager; insolvency declaration requires auditor certification or exam results—processes may be impractical in major liquidity events. Licensed institutions are companies under the Companies Act which includes general receivership/liquidation provisions. - Principle 1(2): Operational independence and adequate resources - Description: FSCA and Banking Act 2003 grant FSC supervisory and licensing powers. Section 19 of FSCA makes FSC accountable to MOF, which appoints FSC Board; Board directs Commissioner. MOF may give general policy directions in writing “which are not inconsistent with the duties, functions, or powers of the FSC.” - Board composition and appointment provisions described above. - Board responsibility: appoint Commissioner; Commissioner may delegate routine supervisory powers but Board considers licensing and enforcement. - Funding: licensing and registration fees expected to generate positive earnings; estimated 50 percent of revenue contributed to Government for fiscal year ending June 30, 2004. - Staffing: five staff; most lack bank supervision experience; reliance on expatriates. - Assessment: Materially noncompliant. - Comments: - Prime Minister has moved FSC portfolio under his direct responsibility (action taken outside of FSCA which names MOF), raising need to amend FSCA to reflect change; however Section 19 limits ministerial direction to written general policy directions consistent with FSCA duties. - Dependency on expatriates for senior staff compromises succession and sustainability; urgent need for staff education, compensation, retention programs, and identification of future leaders among local staff. - FSC must have freedom to use fee revenues for its operations—anticipated Government contribution risks restricting necessary early investments in training, supervisory tools, and IT. - Board involvement in routine operational matters can undermine Commissioner’s independence; Commissioner should not present routine operational issues to Board prior to or concurrently with taking action. - Principle 1(3): Suitable legal framework for authorization and ongoing supervision - Description: FSCA centralizes FSC authority for granting and withdrawing banking licenses and monitoring compliance with Banking Act 2003 (Sections 15, 16). Banking Act 2003 Section 14 establishes FSC supervision and enforcement powers and enables publication of prudential statements and obtaining information, reports or other documents from banks. *Assessment derived from the Cook Islands detailed assessment of observance of the Basel Core Principles for Effective Banking Supervision, as presented in the IMF OFC Module 2 assessment.* *Source: IMF assessment unit "Detailed Assessment of Compliance of the Basel Core Principles" (cr04414).* ### Section 3 of the Banking Act 2003 specifies that no entity can carry on a banking business in ### Section 3 of the Banking Act 2003 specifies that no entity can carry on a banking business in ### Prohibition on carrying on banking business (Section 3) - No entity may carry on a banking business in or from the Cook Islands unless licensed by the FSC (Banking Act 2003, Section 3). - Penalties for contravention of Section 3: - Individual: fine not exceeding $NZ 50,000 or imprisonment for a term not exceeding 3 years, or both. - Other cases (body corporate): fine not exceeding $NZ 250,000. - Section 52 prohibits use of the word “bank” or derivatives without prior FSC approval. - Penalties for contravention of Section 52: - Individual: fine not exceeding $NZ 50,000 or imprisonment for a term not exceeding 2 years or both. - Body corporate: fine not exceeding $NZ 250,000. ### Supervisory framework and powers (Principle 1(4)) - Legal and institutional framework: - FSCA Part 2 articulates the FSC’s duties, functions and powers. - Section 15 enables the FSC to review, enact or amend legislation related to supervision of licensed financial institutions. - Section 16 empowers the FSC to license these institutions. - Section 18 provides the FSC with power to conduct on-site examinations and collect required information to ensure legal compliance. - Banking Act 2003 Part 3 sets out FSC’s supervision and enforcement authority. - Section 14 of the Banking Act 2003 requires the FSC to implement internationally accepted prudential standards and “collect and analyze such information as may be required in prudential matters relating to licensees.” - Section 15 of the Banking Act 2003 permits the FSC to conduct compliance inspections. - Section 17 provides additional powers to investigate where more serious concerns arise. - Enforcement tools available to the FSC: - Issuance of a specific directive against a licensed financial institution. - Revocation of the license. - The Banking Act 2003 creates formal offenses and penalties for breaches and noncompliance. - The statutes do not provide a full ladder of enforcement actions, nor do they empower the FSC to impose fines or civil money penalties (beyond statutory criminal fines and imprisonment). - Minimum supervisory criteria listed in the Banking Act 2003 for FSC consideration: - capital adequacy, - asset concentration and risk exposure, - liquidity, - asset quality, - internal controls, - risk management and accounting systems. - Assessment: Compliant. ### Legal protection for supervisors (Principle 1(5)) - Section 14 of the FSCA provides legal protection against damages for: - FSC Board members, the Commissioner and staff, or other persons acting under FSC authority, for acts or omissions in discharge or purported discharge of FSC duties. - Financial protection: - Board has means through fees generated from licensing and registration activities to protect staff against costs of defending actions while discharging duties. - FSC’s Board approved utilization of agency funds in defense of staff or FSCA actions at the Board meeting held February 12, 2004. - Assessment: Compliant. ### Information sharing and confidentiality (Principle 1(6)) - Confidentiality protections and exceptions: - Section 23(1) of the FSCA protects confidentiality of affairs of licensed financial institutions; disclosure is a punishable offense. - Section 23(2) lists exceptions, including disclosures lawfully required or permitted by Cook Islands law or for criminal proceedings. - Financial Transactions Reporting Act 2003 provisions permit exchange of information between the FSC and the FIU. - Cross-border information sharing: - FSCA (Section 23) permits disclosure of information on licensed financial institutions to overseas regulatory authorities for civil or administrative investigations and enforcement. - Banking Act 2003 Section 46(2) permits disclosure by the FSC to a foreign supervisory authority. - Banking Act 2003 Section 16 permits a foreign supervisory authority to participate in a compliance inspection undertaken by the FSC. - Inconsistencies and concerns: - Confidentiality and Disclosure provisions in the Banking Act 2003 are inconsistent and sometimes duplicative with those in the FSCA (e.g., Sections 23(1) of the FSCA and 46(2)(g) of the Banking Act 2003; Sections 20(3) of the FSCA and 47 of the Banking Act 2003). - Banking Act 2003 confidentiality (Section 47(2)) may prohibit disclosure of “protected information” to the FSC except in connection with investigation or prosecution of a criminal case, potentially restricting supervisory information flows. - Both statutes criminalize disclosure by FSC directors and staff, but with different penalties; parallel offenses are a potential problem. - Recommendation: harmonize confidentiality and disclosure provisions, deal with protection of information and cooperation with foreign authorities only in the FSCA, and limit Banking Act confidentiality provisions to licensees and their agents so as not to block the FSC’s supervisory information needs. - Operational note: - No formal processes established to date governing exchange of supervisory information with FIU or foreign authorities. - FSC has opened discussions with the FIU and the Australian Prudential Regulatory Authority (APRA) to formulate processes. - Assessment: Largely compliant. ### Permissible activities and use of “bank” (Principle 2) - Definition of “banking business” (Section 2 of the Banking Act 2003): - “the business of receiving funds through the acceptance of money deposits... or any similar operation through the sale or placement of bonds, certificates, notes or other securities, and the use of such funds...for loans or investment for the account and the risk of the person (licensed financial institution) doing such business.” - The Act allows other activities to be prescribed by regulation as customary banking practice. - Restriction on use of the word “bank”: - Section 52: no entity other than a licensed financial institution carrying on business in the Cook Islands may use any name, description or title connoting the term bank or derivative without prior FSC approval. - FSC may authorize use of the name bank for entities other than licensed institutions as a practical matter. - Gaps and operational issues: - FSC has not issued directives or prudential regulations prescribing additional permissible activities (e.g., foreign exchange services). - Bank of the Cook Islands Holding Corporation must have FSC approval to continue to use the word “bank” in its name subsequent to June 4, 2004 (date on which the Corporation’s banking license expires). - Assessment: Largely compliant. ### Licensing framework and criteria (Principle 3) - Licensing authority and power: - Section 16(1)(a) of the FSCA empowers the FSC to license financial institutions, monitor compliance with laws and any license conditions. - Section 3 of the Banking Act 2003 states entities may conduct banking business in or from the Cook Islands only if licensed under the Act. - FSC may examine books and records of entities believed to be conducting banking business without a license; conducting an unlicensed banking business is a punishable offense. - Classes of banking licenses: - domestic banking license (conduct domestic banking business), - international banking license (carry on an international banking business in or from the Cook Islands), - restricted international banking license (authorizes international banking business as specified in the license). - Transitional and application timing: - Entities operating under the Banking Act 1969 were granted a domestic banking license when the 2003 Act was enacted; Bank of the Cook Islands was deemed to have a domestic banking license. - Institutions operating under the Offshore Banking Act 1981–82 were granted an international banking license. - Foreign banks with branches in the Cook Islands were permitted to hold a domestic banking license. - No institutions hold a restricted international banking license at present. - All licenses currently held by institutions under the Banking Act 2003 are temporary. - Each institution must submit license applications to the FSC by March 1, 2004, allowing 90 days to process before the June 1, 2004 deadline. - Licensing criteria (applicants must fulfill): - ownership structure, reputation, financial capacity, and financial history of the applicant are satisfactory; - each director, manager, and associate of the applicant is a fit and proper person; - the risk management, accounting, and internal control systems are satisfactory; - the capital structure of the applicant is adequate and a minimum capital base of $NZ 2 million has been fully paid. - Additional criteria for foreign banks: - the foreign bank is subject to comprehensive supervision and regulation on a consolidated basis by the home country supervisor; - the home country supervisor has provided written confirmation that it has no objection to the foreign bank carrying on business in the Cook Islands, and that it is willing to cooperate in supervision. - FSC authority on license revocation and rejections: - FSC may revoke or suspend a license for breach of terms or if furnished with false, inaccurate or misleading information. - Applications may be rejected if criteria are not fulfilled or information is inadequate. - Assessment: (Principle 3) — the document provides criteria and authority consistent with licensing standards. *Source: Banking Act 2003, Financial Services Commission Act (FSCA), and accompanying assessments and comments.* ### Section 23 of the Banking Act 2003 requires each licensee, with the exception of those with a ### Section 23 of the Banking Act 2003 requires each licensee, with the exception of those with a restricted license, to maintain a physical presence in the Cook Islands ### Physical presence and bank licensing - Section 23 requires each licensee, except restricted licensees, to maintain a physical presence in the Cook Islands defined as having both “mind and management” operating the institution from the Cook Islands. - Physical presence requirements include: - conducting a banking business from designated premises; - maintaining operating records, including financial statements relating to its banking business; - having at least one employee who is knowledgeable on a day-to-day basis of the institution’s banking business. - FSC Prudential Statement No. 1-2004, “Bank Licensing Requirements, Policies and Procedures,” standardizes written applications and minimum information requirements; licensing considerations include: - fitness and propriety of owners and prospective managers; - realistic and viable business plans with adequate capitalization for the bank’s size and risk profile; - physical presence in the Cook Islands; and - adequacy of systems and controls to ensure prudent conduct and compliance with the Financial Transactions Reporting Act 2003. - Applications must include very extensive information: full ownership and related-party details; detailed business plans; financial projections for at least three years; internal organization and control systems; financial information for significant shareholders (10 percent interest or more); and background information on significant shareholders, directors, and officers. - For major shareholders, the FSC requires evidence that persons have adequate funds to meet initial subscription and collectively sufficient assets or access to capital to meet projected near-term additional capital; the FSC may seek evidence of the source of capital. - The Commissioner recruited PFTAC technical assistance (a former U.S. bank examiner) for two months to assist FSC staff in evaluating applications and verifying/validating data/processes; limited on-site examination/visitation may occur where applicants currently have a physical presence. - Timing and transitional licensing: - All entities licensed under earlier Acts were granted domestic or international licenses but must apply for new licenses by March 1, 2004. - Applications will be evaluated and new licenses awarded by June 1, 2004. - Of 16 institutions licensed under the Banking Act 2003 from the offshore community, only eight indicated intention to seek a new license. - Recommended supervisory follow-up: - Verify physical presence requirements for successful international banking licensees; - Review and possibly revise interpretation of “physical presence” and issue a prudential statement reflecting “best practices”; - Establish an ongoing program of regular examination and review to monitor implementation of business and strategic plans and licensing commitments; - Commence communication processes with host country supervisors for international banks; - Ensure institutions that do not intend to apply surrender licenses and wind down banking business; - Publish a comprehensive list of all institutions licensed to conduct a banking business and publish notices when institutions operate without a license, and, where practicable, act in accordance with law. - Assessment: Largely compliant. - Comment: FSC licensing processes will not be fully tested until applications are filed beginning March 2004. ### Principle 4 — Ownership - Section 2(2) defines significant ownership interest as legal or equitable interest enabling control of 10 percent or more of voting stock, entitlement to 10 percent or more of dividends, or 10 percent or more in distribution of surplus assets. - Section 35 empowers the FSC to approve sale, transfer or disposition of a significant interest prior to the transaction; Prudential Statement 1-2004 requires reporting of significant changes in ownership prior to occurrence and FSC written approval with specific terms and conditions. - Assessment: Largely compliant. - Comment: No standardized medium exists to report changes in significant ownership; FSC may consider developing a standardized form capturing number of shares, value, mode/source/terms of financing, collateral use, and financing institution name. New significant owners remain subject to all licensing criteria. ### Principle 5 — Investment criteria - Section 39 restricts equity acquisitions in nonfinancial enterprises to combined value not exceeding 25 percent of licensee’s eligible capital without FSC written approval to exceed the limit. - Section 34 requires FSC written approval prior to acquiring the business of another licensee or financial institution in the Cook Islands. - Exceptions to the capital exposure benchmark include shares taken for debts previously contracted, acquisition/disposal of shares in a financial institution, and foreign banks. - Assessment: Largely compliant. - Comment: FSC has not issued criteria via Prudential Statement to assess individual investment proposals beyond the capital restriction; law does not distinguish between cases requiring prior approval and cases where after-the-fact notification suffices. ### Principle 6 — Capital adequacy - Section 24 requires licensed financial institutions to maintain capital commensurate with nature and scale of operations, with minimum paid up capital of not less than $NZ 2 million. - Section 25 directs FSC to consider: - scale and nature of financial liabilities, including deposits; - nature of assets and perceived risk; - nature of banking business conducted. - Prudential Statement No. 2-2004 (pursuant to Sections 24 and 25) applies to domestic and international bank licensees (not foreign banks) and: - defines Tier I and Tier II capital, and total capital and reserves; - sets minimum capital ratios effective March 1, 2004: 5 percent for Tier I capital to total risk-weighted assets, and 10 percent for total capital and reserves to total risk-weighted assets; - risk-weighting schedule parallels Basel I and incorporates balance sheet and off-balance sheet items; - FSC may increase minimum capital for any licensed institution at its discretion; - licensed institutions must report capital and reserve structure, calculation of total risk-weighted assets, and capital ratios quarterly; first required reporting date expected as of June 30, 2004; - institutions report on a consolidated basis; minimum capital requirements apply stand-alone and consolidated. - Sections 17 and 24 authorize FSC action if minimum capital falls below required ratio, including requiring a restoration plan; Prudential Statement permits supervisory measures such as discontinuation of dividend payments and management fees, prohibitions on new activities or expansion. - Assessment: Compliant. - Comments: - No specific market risk calculation was developed on introduction of capital requirements due to belief licensed institutions undertake little own-account trading; this may need amendment after FSC analysis and on-site examinations of international banks. - Definitions for certain off-balance sheet line items in quarterly reports are warranted to avoid varying interpretations. ### Principle 7 — Credit policies - Section 14(2)(e) requires FSC to evaluate quality of a licensee’s assets; Sections 15 and 18 allow FSC to request information. - No Prudential Standard yet issued on credit and investment administration to address credit risk management or investment program. - FSC has not developed systems/procedures to assess adequacy of applicants’ risk management policies and procedures; urgent implementation needed given offshore banks intending to apply. - No reporting system exists to measure risk undertaken by licensed financial institutions; required prior to June 1, 2004 license issuance deadline. - FSC examiners lack expertise to assess adequacy of licensees’ policies for monitoring/controlling credit risk. - Since July 2003 establishment, FSC conducted one on-site exam of one domestic bank with PFTAC assistance to review credit risk management systems; PFTAC Bank Supervision Adviser prepared summary notes to assist examiners. - Assessment: Materially noncompliant. - Recommendations: - Issue a Prudential Standard requiring banks to establish and document credit and investment policies with appropriate credit administration, on-going monitoring/reporting, controls, and systems for legal compliance (including large exposures and group/related party transactions). - Implement an on-going inspection program for on-site review of credit and other operations. - Prepare an examination manual with detailed procedures for reviewing loans and other assets and assessing risk management. - Prioritize intensive training for bank supervisors in collaboration with PFTAC, including courses, attachments and on-the-job training. ### Principle 8 — Loan evaluation and loan loss provisioning - Section 14(2)(e) requires FSC to evaluate adequacy of loss provisions; Prudential Statement 3-2004 on “Asset Classification, Provisioning and Non Accrual of Interest” issued February 2004. - Prudential Statement 3-2004 requirements: - board must ensure quarterly review of all loans in excess of 10 percent of capital, the twenty largest borrowers, nonaccrual loans and a sample of remainder to facilitate categorization and provisioning; - Paragraph 11 sets classification categories and criteria; Paragraphs 12 and 13 set provisioning and record-keeping requirements; - only loans/assets secured by cash, government guarantees and securities, and FSC approved liquid and readily marketable assets are exempt from classification/provisioning; - FSC recognizes need to amend Statement to include off-balance sheet assets. - Under Section 44 FSC may require auditor’s report on adequacy of provisions. - The sole PFTAC-assisted on-site inspection did not include comprehensive assessment of loan classification/provisioning; FSC expects asset evaluation/provisioning to be significant objective of proposed on-site program. - Assessment: Largely compliant. - Comments: - Prudential Statement 3-2004 should be expanded to include off-balance sheet items. - Newly recruited examiners require training and a procedures manual; PFTAC Bank Supervisor Adviser will assist with classroom training and attachments. ### Principle 9 — Large exposure limits - Section 36 restricts solo and group advances, including off-balance sheet items, to 25 percent of capital and defines “group” by 51 percent voting share control or practical control; advances by foreign banks and those to Government are exempt. - Section 36(6) allows FSC approval for booking exposures in excess of 25 percent if licensee agrees to reduce exposure within specified period. - Prudential Statement 3-2004 Paragraph 5 requires board to ensure on-going loan portfolio reviews for compliance with legal provisions. - No current requirement for licensees to report large exposures to FSC. - Assessment: Largely compliant. - Comments: - Exception process should be transparent and closely monitored. - Ensure institutions have systems to monitor and control exposures; develop examination procedures and include required information in prudential returns. - PFTAC will assist with preparation of prudential returns; recommended return should require reporting of all loans in excess of 10 percent of capital and include sectoral and geographic exposures. ### Principle 10 — Connected lending - Section 36(6) extends lending restrictions to a director or shareholder’s spouse, father, mother, son or daughter and requires advances to such persons be on substantially the same terms as to members of the public. - No comprehensive definition of “connected or related parties” to include business interests; FSC lacks discretion to judge existence of connections between bank and other parties. - No requirement for board approval of connected-party transactions above specified amounts, nor for FSC to set limits or receive/review information on such lending. - Assessment: Materially noncompliant. - Recommendations: - Amend Banking Act 2003 to include comprehensive definition of “connected or related parties” and give FSC discretionary powers to determine such relationships and set limits. - Prudential statement on credit risk management should require documented policies/procedures for connected lending, board approval, and on-going monitoring. - Issue a prudential return to measure connected party transactions and establish examination procedures (linked to Core Principle 9). ### Principle 11 — Country risk - Sections 8(1)(d) and 14(2)(f) require FSC to be satisfied applicants’ risk management systems are satisfactory prior to issuing a license and on an ongoing basis. - FSC currently unaware of level/nature of country and transfer risk in international banks; licensing process does not explicitly request this information. - Assessment: Noncompliant. - Comments: - Country risk and other risk areas must be captured through prudential returns. - Establish examination procedures and examiner training for country risk analysis commensurate with reported exposures. ### Principle 12 — Market risks - Section 14(2)(f) empowers FSC to ensure licensed institutions have satisfactory risk management systems. - Assessment: Noncompliant. - Comments: - Market risk exposures must be captured through prudential returns. - Develop examination procedures and provide examiner training commensurate with licensees’ market risk exposures. - See Core Principle 7 description for broader context. ### Principle 13 — Other risks (liquidity, interest rate, operational) - Sections 14(2)(d), 14(2)(f) and 14(2h) authorize FSC to ensure satisfactory risk management systems in liquidity and other risk areas. - No procedures developed by FSC for these risk areas despite legal provisions for licensing and on-going monitoring. - Assessment: Noncompliant. - Recommendations for a comprehensive prudential statement on risk management to include: - Liquidity: good MIS, central liquidity control, analysis of net funding under alternative scenarios, diversification of funding sources, stress testing and contingency planning; separately address domestic and foreign currencies. - Interest rate risk: good MIS and stress testing. - Operational risk: internal audit and internal control systems, fraud countermeasures, business resumption plans, procedures for major system modifications, and preparation for significant business-environment changes. - Develop examination procedures. ### Principle 14 — Internal control and audit - Section 14(2)(f) enables the FSC to ensure licensed institutions have satisfactory internal control systems. - No further detailed Prudential Statement or procedures described in the content provided. *Source: IMF Country Report cr04414* ### Section 41 of the Banking Act 2003 requires licensed financial institutions to retain an external ### Section 41 of the Banking Act 2003 requires licensed financial institutions to retain an external auditor, who must render a report on the audited financial statements of these institutions annually. ### External auditors, corporate governance, and board responsibilities - Section 41 of the Banking Act 2003 requires licensed financial institutions to retain an external auditor who must render a report on the audited financial statements annually. - External auditors must report on the adequacy of internal control systems under Section 44 at the request of the FSC. - There are no specific provisions in the Banking Act 2003 nor any prudential statement setting out the duties and responsibilities of the board of directors with respect to corporate governance. - Prudential Statement 3-2004 articulates some Board responsibilities in the area of asset classification, provisioning, and nonaccrual of interest. - Section 8(1)(b) of the Banking Act 2003 requires the FSC to ensure that directors have significant experience in banking. - Section 28 gives the FSC the power to direct a licensee to remove a director, but it does not cover incompetence and disregard of duties. - The FSC will collect some information on internal control systems during the licensing process, but no prudential standard has been issued relating to internal controls or duties and responsibilities of directors, including the establishment and composition of an audit committee. - Section 15(1) empowers the FSC to examine the records of a licensee, including reports of the internal auditor. - An on-site examination program, which includes the review of the internal audit function, has not yet been established. - Assessment: Materially noncompliant. - Comments (as stated): The FSC recognizes the deficiencies in internal controls and a prudential statement on corporate governance is to be drafted. The FSC should ensure that this prudential statement addresses internal control requirements including: - delegating authority and responsibility; - separation of functions and accounting for assets and liabilities; - reconciliation of these processes; - appropriate independent internal or external audit and compliance functions. - Comments (continued): On-site review and inspection procedures for assessing the effectiveness of board oversight and the internal audit function need to be developed and documented by the FSC and its examiners trained in the required examination procedures. ### Principle 15 — Money laundering: legal framework and supervisory practice - The Financial Transactions Reporting Act 2003 (Parts 2 and 3) requires financial institutions to: - identify and verify customer identity; - maintain transaction records; - monitor transactions; and - report large and suspicious transactions. - Section 12 sets out obligations of the FSC and auditors regarding reporting suspicious transactions to the FIU. - Section 16 provides protection for persons reporting in good faith. - Section 28 allows the FIU to disclose information to foreign agencies under specified conditions. - Section 17 of the FSCA makes it a licensing condition that a financial institution appoint a compliance officer responsible for establishing and maintaining office and accounting procedures including customer identification and recordkeeping as may be prescribed by regulation. - The Cook Islands Government issued: - Financial Supervisory Commission (Qualification of Compliance Officers) Regulations 2004, - Financial Transactions Reporting (Customer Identification) Regulations 2004, and - Financial Transactions Reporting (Forms) Regulations 2004 in February 2004, which include forms to be used by financial institutions to report prescribed information to the FIU. - The FSC is developing a close working relationship with the FIU; the FIU has enforcement powers under Section 31 of the Financial Transactions Reporting Act 2003. - FSC examiners have been attending FIU training sessions and similar training is planned for the future. - No on-site examinations of licensed financial institutions have been carried out by the FSC to determine compliance with the Financial Transactions Reporting Act 2003 and the enabling regulations. - Assessment: Materially noncompliant. - Comments (as stated): The FSC and FIU need to develop on-site examination procedures to determine whether financial institutions have policies, practices, and procedures to prevent use by criminal elements, including: - existence of procedural manuals; - adequate staff training in customer identification and transaction record-keeping; - compliance with reporting obligations. - Comments (continued): Training of FSC examiners needs to be expanded to include methodologies for reviewing AML procedural manuals, transaction and reporting records, and preparation of reports to the FIU. - Comments (continued): The FSC needs to agree with the FIU on procedures for reporting its findings following on-site inspections. ### Principle 16 — On-site and off-site supervision: powers, capacity, and progress - Sections 14 and 15 of the Banking Act 2003 empower the FSC to: - review banking business and implement internationally accepted prudential supervision standards; - inspect the premises and business, within or outside the Cook Islands, including systems and controls of a licensee; - inspect the assets and examine the records of a licensee. - The FSC’s resources at present were devoted almost entirely to preparation for the review of licensing applications to be submitted by March 1, 2004; virtually all FSC resources would be employed in analysis of these applications until approximately June1, 2004. - The FSC has no infrastructure to conduct an on-site and off-site supervision program; staff lack experience and training in both processes. - There are no prudential returns to support an off-site analytical process; systems to detect trends or issues have not been developed. - Examination tools such as an examination report and manual have not been developed; tools to assess credit risk, liquidity risk and other banking risks are lacking. - For the first two years or more, the FSC proposes on-site examinations will be principally compliance rather than risk-based due to training needs. - The FSC conducted its first on-site examination from February 4–12, 2004, focusing on the Bank of the Cook Islands’ management systems and internal control environment with concentration on credit risk management systems. The examination was led by a banking supervision advisor from PFTAC who provided on-the-job training to the FSC's two bank supervisors. - Assessment: Noncompliant. - Comments (as stated): Developing a robust on-site and off-site supervision function will be a massive undertaking. Priorities should include: - training of staff (formalized training program, potential secondments to other supervisors, accreditation ladder); - development of prudential returns and creation of an off-site function to analyze them; - development of examination tools early to enable effective on-site work. ### Principle 17 — Bank management contact - The FSC does not have a program of routine contact with management of supervised institutions and has had irregular contact described as “an open door policy.” - The absence of prudential returns and an on-site/off-site program limited FSC knowledge of international banks’ activities and risk profiles pending receipt of license applications beginning of March. - The FSC intends to consider management quality closely during the licensing process but will have met with very few international banks. - Assessment: Noncompliant. - Comments (as stated): The Commissioner plans to institute a more formal program after completion of the licensing process at mid-year, intending to meet with management of each institution at least annually to discuss strategic issues and performance; operational meetings to occur more frequently based on on-site and off-site supervision results. ### Principle 18 — Off-site supervision: information collection and returns - Section 18(2)(b) and Section 14(d) of the Banking Act 2003 empower the FSC to require and collect information in support of supervision and on prudential matters. - The FSC has instituted Prudential Statement 2-2004, requiring quarterly filing of a report on capital adequacy. - No wider scope periodic prudential return on either a stand-alone or consolidated basis is required at present. - The FSC recognizes the necessity of instituting a broader reporting program and intends to prioritize it after licensing application assessments; an off-site supervision function will be created to analyze returns. - The FSC can enforce compliance by issuing directives against institutions that restrict business activities or compel compliance with information requirements. - Assessment: Materially noncompliant. - Comments (as stated): The law could be stronger by making noncompliance a punishable offense with a prescribed fine, as is the case for certain other areas of noncompliance with the Banking Act 2003. - Comments (continued): The FSC may consider adequate technology capabilities to automate returns to facilitate analysis, enable creation of peer groups for international banks, compare performance, identify trends, and quantify differences. - PFTAC has offered to assist the FSC in developing a set of prudential returns to be communicated to licensed financial institutions in time for a first-time filing date as of June 30, 2004; the FSC is receptive to technical assistance from PFTAC. ### Principle 19 — Validation of supervisory information - The FSC does not have a functioning on-site supervision process and has limited capacity to validate supervisory information. - Supervision staff require training and development of supervisory and examination tools as described under Principle 16. - Only one on-site examination has occurred to date (Bank of the Cook Islands) with technical assistance from PFTAC. - Section 44 of the Banking Act 2003 authorizes the FSC to appoint a licensee’s external auditor to conduct an audit and report through the licensed financial institution on matters the FSC determines, including: - asset quality; - adequacy of loan loss provisions; - accounting and control systems. - Under Section 44 the Commissioner could require external auditors to check prudential returns when developed. - Section 43 requires auditors to report to the FSC information obtained during audits indicating: - insolvency; - a criminal offense or fraud; - serious irregularities in risk management; - losses that seriously reduce capital; - failure to comply with an FSC directive or guideline. - The Banking Act 2003 has no explicit provision requiring external auditors to meet with the FSC on audit results. - Assessment: Noncompliant. - Comments (as stated): Concerns exist about auditors’ competence and reputation. Approximately 200 auditors and audit firms from all over the world have been registered to act as external auditors in the Cook Islands; registration under the International Companies Act 1981–82 was often done through trust companies and appears to have lacked background checks or evidence of certification. The FSC now has responsibility for registering approved auditors and is positioned to review and enhance the registration process, possibly requiring a re-registration to perform appropriate due diligence. - Comments (continued): Section 43 should be amended to require external auditors to report information on a breach of the FSCA or the Banking Act 2003 by the institution. ### Principle 20 — Consolidated supervision - The FSC has virtually no knowledge of the overall structure of international financial institutions whose licensing applications it will evaluate and has not determined how to supervise material parts of these groups or evaluate consolidated risks. - Section 5 of the Bank of the Cook Islands Act 2003 granted a transitional banking license to the Bank of the Cook Islands Holding Corporation that expires on June 4, 2004. - In June 2004, subject to FSC approval of a license to conduct banking business by the Bank of Cook Islands, Ltd., the holding company will no longer be subject to FSC supervision; the FSC’s supervision authority will extend only to the bank subsidiary. - The bank is a subsidiary of the Holding Corporation, which is affiliated with nonbank entities: Development Finance Limited and CIDB Former Loans Ltd. - No legal provisions require the FSC to be satisfied that ownership and organizational structures of licensed financial institutions do not obstruct effective consolidated supervision. - Assessment: Noncompliant. - Comments (as stated): Given impending licensing applications from international banks, the FSC should consider and communicate its vision for desirable institution types in the Cook Islands and consider issuing a Prudential Statement defining comprehensive consolidated supervision and implications for licensees’ organizational structure, operations, and information reporting. - Comments (continued): Supervision of the Bank of the Cook Islands presents a special challenge after June 4, 2004, when the holding company’s transitional license expires, making supervision stand-alone; at a minimum, arrangements must allow the FSC to review the holding company’s consolidated operations to ensure the bank’s safety and soundness, including information on connected lending, large exposures on a consolidated basis, financial condition of the holding company (stand-alone and consolidated), financial condition of nonbank affiliates, and nature/volume/type of transactions and fund flows between the bank and affiliates/holding company. ### Principle 21 — Accounting standards and reporting - Section 26 of the Banking Act 2003 requires a licensee to keep and maintain accounting records necessary to disclose with reasonable accuracy the licensee’s financial position. - Section 42 requires licensees to have annual auditor’s reports prepared and submitted to the FSC within four months of the close of their financial year and sets out information to be included in the auditor’s report, such as whether the balance sheet of the licensee and its subsidiaries gives a true and fair view of the state of affairs. *Source: IMF content unit "cr04414 - Section 41 of the Banking Act 2003 requires licensed financial institutions to retain an external auditor, who must render a report on the audited financial statements of these institutions annually."* ### Section 43 of the Banking Act 2003 requires an auditor to disclose to the FSC information ### Section 43 of the Banking Act 2003 requires an auditor to disclose to the FSC information ### Auditor disclosure and reporting requirements - Section 43 requires an auditor to disclose to the FSC information relating to the affairs of the licensee obtained during the audit if, in its opinion: - the licensee is likely to become insolvent or be unable to meet its obligations or is in serious financial difficulties; - a criminal offence involving fraud or dishonesty may have been committed; - serious irregularities have occurred including irregularities that may place at risk the interest of depositors; - losses incurred that substantially reduce the capital of the licensee; and - the licensee has failed to comply with a directive or guideline issued by the FSC. - Section 43 also: - facilitates discussion of the audit between the auditor and the FSC; - requires the auditor to provide such additional information as the FSC may require. - Under Section 44 of the Banking Act, the FSC may require a licensee’s auditor to provide a report on: - asset quality; - adequacy of loss provisions; and - the accounting and control systems and such other matters as the FSC may determine. ### Auditor approval, appointment, and registration - Section 41(2) requires a licensee’s auditor to be experienced in auditing business and to be approved by the FSC. - Auditors for banks incorporated under the International Business Companies Act (international banks) must be registered by the FSC and: - be suitably qualified; and - declare the country law under which they are registered as a company auditor. - Current FSC registration processes: - do not include ensuring that information submitted by trust companies complies with the requirements of the International Companies Act; - do not carry out due diligence checks on applicants to confirm their qualifications or affiliation to an accounting body prior to registration. - The FSC can appoint an auditor under: - Section 41(3) if the licensee fails to appoint an approved auditor; and - Section 17(2) as part of its enforcement powers. - The FSC does not have power to revoke the appointment of a licensee’s auditor. ### Accounting standards, publication, and prudential reporting - There is no requirement in the Banking Act 2003 for financial statements to be prepared in accordance with acceptable accounting standards. - There is no requirement for licensees to publish their audited financial statements. - There are no specific requirements in the Banking Act 2003 for licensees to submit periodic prudential reports to the FSC. - The FSC proposes to issue a prudential guideline under Section 14(3) of the Banking Act 2003 to require submission of prudential returns for various operations of licensees (it has already done so for capital adequacy and asset classification). - Operational procedures of the FSC are still in the formative stage and procedures for ensuring compliance with accounting and audit requirements are still to be implemented. ### Assessment of compliance and recommended corrective actions (audit/accounting) - Assessment: Materially noncompliant. - Comments and recommended actions: - The FSC needs to document the criteria for approving auditors under Section 41 of the Banking Act 2003, which should include affiliation with an approved professional body. - The FSC should require that the financial statements of all licensees are prepared in accordance with internationally accepted accounting standards. - A prudential statement pertaining to these issues should be issued by the FSC. - Licensees should be required to publish their audited financial statements and display copies for public perusal in their offices and in any other media as may be required by the FSC. - The FSC needs to establish supervisory procedures for ensuring compliance with audit requirements and train its examiners to review and assess audit reports. ### Enforcement powers and remedial measures (Principle 22) - Section 17(1) allows the FSC to take enforcement action if it considers an institution: - has contravened the act or regulations; - carries on banking business in a manner detrimental to the interests of the public, depositors and other creditors; or - fails to comply with a directive given by the FSC or fails to cooperate with the FSC on a compliance inspection. - Section 17(2) lists enforcement actions the FSC may take: - revoke or suspend a license; - appoint an examiner to carry out an investigation; - appoint a qualified person to audit the licensee on the conduct of banking business; and - appoint a court appointed manager. - Section 19 permits the FSC to issue directives requiring a licensee to cease unsafe practices or contraventions and to take corrective action. - Prudential Statement 2-2004 (Paragraph 11) and Prudential Statement 3-2004 (Paragraph 16) list enforcement and corrective measures including: - prohibition from engaging in new activities or from expanding existing activities; - suspension of lending, investment and credit extension activities; - prohibition from acquiring, through purchase or lease, additional fixed assets; - prohibition from accepting further deposits or other liabilities for borrowed money; - prohibition from declaring or paying dividends or bonuses, salary incentives, severance packages or other discretionary compensation to directors, managers, and officers. - Gaps and limits: - The enforcement powers do not include removal of directors and officers for abuses of power or incompetence. - The FSC does not have authority to impose fines. - Assessment: Largely compliant. - Comments and recommended actions: - Strengthen Section 19(2)(b) to allow the FSC to remove directors who abuse power or whose actions threaten depositors and other creditors. - Grant the FSC power to impose fines for minor offences such as late or inaccurate submission of prudential returns. - Issue a prudential statement setting out a ladder of compliance so licensed financial institutions are aware of actions that can be applied against them. ### Globally consolidated, host country, and foreign bank supervision (Principles 23–25) - Section 29 requires a bank incorporated and licensed in the Cook Islands to obtain written FSC approval prior to conducting banking business through an overseas office, branch or subsidiary, and requires overseas operations to be subject to adequate banking supervision with FSC access to required information or documents. - The FSC has no specific power to require a licensee to close an overseas operation, though closure may be invoked under enforcement powers. - The FSC is not currently undertaking consolidated supervision and is not aware of overseas activities for any locally incorporated banks. - Assessment for globally consolidated supervision (Principle 23): Noncompliant. - Recommended actions for consolidated supervision: - Require all existing licensees to re-apply for a new license by March 1, 2004 to identify entities with overseas operations. - Develop returns to obtain prudential information on global operations and establish systems and procedures for supervising licensees on a consolidated basis. - Open communications with host country supervisors and train examiners in consolidated supervision. - Host country supervision (Principle 24): - The FSC can share information with supervisory authorities under Section 46(3) of the Banking Act 2003 and Section 23 of the FSCA, subject to legal restrictions on further disclosure and requirement that information be required for regulatory or law enforcement purposes; penalties for unauthorized disclosure are included. - Assessment: Noncompliant. - Recommended actions: - Develop a foreign bank supervision program that encourages host country supervisors to examine overseas operations of Cook Islands–licensed financial institutions and create a communication process for sharing supervisory information. - Tailor the program to the organizational structure and extent of applicants’ financial operations outside the Cook Islands. - Supervision over foreign banks' establishments (Principle 25): - Section 8 and Prudential Statement 1-2004 apply licensing requirements to both domestic and foreign banks. - Section 9 sets additional criteria for licensing foreign banks, including: - reputation of the foreign bank is satisfactory; - relevant home country law and licensing and supervisory requirements are acceptable; - the foreign bank should be subject to comprehensive consolidated supervision; - the foreign bank has written approval from its home country supervisor for the establishment of the branch together with a statement confirming supervision in accordance with the Basel Core Principles and willingness to cooperate with the FSC; and - the foreign branch will provide a written acknowledgement that it may discuss its conduct and status with the home country supervisor and provide required information. - Exemptions for foreign banks: - Sections 29 and 36 do not apply to foreign banks; - Foreign banks are exempt from Section 42 relating to appointment of an approved auditor once the FSC is provided with audited financial statements made by a duly qualified auditor in accordance with the laws of the country in which the foreign bank is incorporated. - Section 16 allows FSC to permit foreign supervisors to participate in a compliance inspection of the foreign bank’s Cook Islands operations if conditions on necessity, legal restrictions, and non-disclosure without FSC permission are met. - The FSC has written to APRA to establish contact and recognizes the need for further dialogue on Cook Islands branches’ operations. - Assessment: Largely compliant. - Comments and recommended actions: - Develop working relationships with APRA to assist in reviewing branch operations and in training as the FSC develops on-site and off-site supervisory procedures. - Ensure foreign banks are fully compliant with the Financial Transactions Reporting Act 2003. ### Summary compliance and prioritized recommendations - Summary assessments (excerpt from Table 2): - Principle 22: Remedial Measures — Largely compliant. - Principle 23: Globally Consolidated Supervision — Noncompliant. - Principle 24: Host Country Supervision — Noncompliant. - Principle 25: Supervision Over Foreign Banks’ Establishments — Largely compliant. - Audit/accounting and prudential reporting areas were assessed as Materially noncompliant. - Selected recommended actions (from the Recommended Action Plan): - Amend the Banking Act 2003 to add provisions specifically addressing receivership or liquidation proceedings and grant powers to the FSC in the event of a liquidity crisis. - Develop staff retention, succession, and recruitment programs, including outreach to the Cook Islands Diaspora and cautious use of expatriate contracts. - Clarify the Board/Commissioner roles so routine operational issues are not presented to the Board prior to or concurrently with action taken. - Harmonize Confidentiality and Disclosure provisions between the Banking Act 2003 and the FSCA (noting 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 differ). - Accelerate establishment of processes governing information exchange with the FIU and prepare processes for foreign supervisory authorities once overseas operations are known. - For licensing criteria: verify physical presence of international banks awarded a license and publish a prudential statement on the FSC’s interpretation of “best practice” related to physical presence. *Source: Assessment of the Banking Act 2003 and FSC supervisory arrangements under the Banking Act 2003.* ### 3. Licensing criteria The FSC will be challenged to ensure that unregulated ### 3. Licensing criteria The FSC will be challenged to ensure that unregulated ### Licensing and containment of unregulated institutions - The Financial Supervisory Commission (FSC) must identify and “contain” unregulated institutions that may be operating a banking business. - International institutions that operated under the previous legislative regime and have indicated they will not apply for a new license to conduct a banking business must wind down their banking business and surrender their license. - 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 FSC are operating in contravention of existing banking law. - If the FSC 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. ### Ownership change reporting - The FSC is aware of the information required to assess a change in control or significant change in the ownership structure of a bank. - There is no standardized medium through which such changes can be reported. - Recommended action: - Develop a standardized form to ensure communication of essential information for reporting ownership or control changes. ### Capital adequacy reporting - The FSC’s prudential return for the reporting and assessment of capital is satisfactory. - Potential issues: - Confusion or differences in interpretation of certain off-balance sheet line items on the report. - Recommended action: - Provide definitions for off-balance sheet items to assure greater consistency in reporting. ### Credit policies and loan loss provisioning - Legal framework exists for the FSC to supervise credit risk management. - Recommended actions: - Issue a prudential return requiring licensed financial institutions to establish written credit and investment policies governing: - risk management approach; - credit administration practices; - monitoring and reporting of exposures; - measurement and control of exposures; - compliance with restrictions on large exposures and connected lending relationships. - Amend Prudential Statement 3-2004 to include classification and provisioning requirements for off-balance sheet items. ### Connected lending - The Banking Act 2003 needs amendment to: - include a comprehensive definition of “connected or related parties,” and - enable the FSC to use discretion in determining such relationships. - Current deficiencies: - Present definition excludes business interests of directors or shareholders and their families. - Law does not permit the FSC to use judgment about the existence of connections between the institution and other parties. - Recommended action: - Prudential returns should provide information on large exposures and connected lending relationships. ### On-site and off-site supervision: capacity building and sequencing - Legal framework exists to enable the FSC to launch on-site and off-site supervision functions, but a foundation must be set. - Foundation elements required: - A comprehensive training program for supervision staff, including the senior supervisor and the two junior supervisors. - Issuance of prudential returns in critical areas of banking activity and risk management to ensure adoption of international best practice. - Development of supervisory tools: an examination manual, examination report template, and evaluation tools for credit, market, and liquidity risk. - Core Principles 7, 11, 12, 13, and 14 emphasize: - Need for staff training, issuance of prudential statements, and development of supervisory inspection procedures to build competent on-site function. - Off-site function development needs: - Development of prudential returns, training in analysis of financial institutions, and a technology platform to facilitate analysis of data. - Recommended implementation sequencing: - Concentrate resources on critical areas in the near term. - Delay implementation of a robust on-site examination program until critical necessities are addressed. - Near-term on-site examinations should be limited to targeted areas and serve as training exercises. - Work of external auditors, once certification is ratified, should complement targeted examinations where the FSC has identified risk, noncompliance, or critical interest. ### Off-site supervision: sanctions and automated analysis - The FSC is authorized to apply certain sanctions against a licensed financial institution for noncompliance in providing information required in a prudential return. - Legal gap: - Noncompliance is not a punishable offense at present, and fines are not prescribed. - Recommended action: - Amend existing law to strengthen sanctions available to the FSC to facilitate collection of accurate information in a timely manner. - Recommended system development: - Develop an automated system to facilitate analysis of international banking licensees to: - compare performance more easily; - identify trends and quantify differences in the banking business of this group; - support policy development and supervisory strategies. - Seek technical assistance in developing such processes. ### Validating supervisory information and auditor registration - Responsibility for registering approved auditors has been transferred to the FSC. - Concern: - Many auditors appear to have benefited from a “rubber stamp” approval under past practice. - Recommended actions: - Conduct a re-registration process to update the current listing and enable the FSC to perform appropriate due diligence. - Strengthen the ratification process where weaknesses have been identified. ### Consolidated supervision and group structures - The FSC has virtually no knowledge of the overall structure of international financial institutions, nor has it considered how to supervise material parts of these groups or evaluate risks to the consolidated group. - Recommended actions: - The FSC should define the types of financial group structures desired for the Cook Islands and communicate this vision through a prudential statement, meetings with management, and other media. - The prudential statement should define comprehensive supervision on a consolidated basis, and implications for licensees in terms of organizational structure, operations, and information reporting obligations to the FSC. - Specific supervisory need: - The FSC must have financial and other supervisory information on Bank of the Cook Islands Holding Corporation and any of its affiliates, both on a stand-alone and consolidated basis. - Without such information, FSC supervision of Bank of the Cook Islands, Ltd. will not be comprehensive or consolidated. ### Accounting standards and remedial measures - Recommended action on auditors and accounting: - 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. - Enforcement gaps: - The FSC lacks power to require removal of directors and officers for abuses or incompetence. - The FSC does not have authority to impose fines. - Recommended legal changes: - Amend existing laws to empower the FSC 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 FSC may employ. --- ### II. DETAILED ASSESSMENT REPORT ON ANTI-MONEY LAUNDERING AND COMBATING THE FINANCING OF TERRORISM ### Assessment methodology and team - A detailed assessment of the AML/CFT regime of the Cook Islands was prepared by a team including: - staff of the International Monetary Fund (IMF), - an expert under the supervision of the IMF, and - another expert not under IMF supervision selected from a roster of experts provided by the Asia Pacific Group on Money Laundering. - Roles and coverage: - IMF staff and the expert under staff supervision reviewed AML/CFT laws and regulations, and supervisory and regulatory systems for prudentially regulated financial institutions and macroeconomically relevant nonprudentially regulated activities (specifically trust and company service providers). - The expert not under IMF supervision reviewed regulatory systems for other nonprudentially regulated sectors (money exchange and transmission services) and criminal law enforcement capacity and implementation. - Materials examined included statutes and regulations such as: - Banking Act 2003 (BA); - International Companies Act 1981–82 (ICA); - Trustee Companies Act 1981–82 (TCA); - Financial Supervisory Commission Act 2003 (FSCA); - Financial Transactions Reporting Act 2003 (FTRA); - Proceeds of Crime Act 2003 (POCA); - Mutual Assistance in Criminal Matters Act 2003 (MACMA) and Amendment Act 2003 (MACMAA); - Extradition Act 2003 (EA); - Criminal Procedure Amendment Act 2003 (CPAA); - United Nations (Security Council Resolutions) Act 2003 (UNSCRA); - Crimes Act 1969 (CA); - Criminal Procedure Act 1980–81 (CPA); and - regulations under the FTRA including the Financial Transactions Reporting Regulations 2004 (FTRR), Extradition Regulations 2004 (ER), Proceeds of Crime (Border Currency Report Form) Regulations 2004 (PCR), International Companies (Evidence of Identity) Regulations 2004 (ICR), Qualifications for Compliance Officers pursuant to the FSC Act 2003, etc. - Nonbinding materials such as Prudential Statements of the FSC were considered; draft Guidance Notes on the Prevention of Money Laundering and Terrorist Financing in the Cook Islands (March 2003) were not considered as they were not yet effective. - Assessment team members named: - Mr. Peter Csonka (Senior Counsel, LEG); - Mr. Steven Gilbert (Consultant, MFD); - Mr. Simon Leung (Senior Inspector of Police, Hong Kong China) — Independent AML/CFT Expert (IAE) who assessed criminal law enforcement elements and arrangements for money exchange and transmission services. - Field work: - The team visited Rarotonga from February 16 to February 27, 2004. - Meetings held with Cook Islands Working Group on NCCT issues, Ministry of Justice, Crown Law Office (Solicitor-General), FSC, FIU, Police, Customs, private sector representatives including Law Society, Trust Company Association, domestic banks, trust companies, external auditors, and a company providing money transmission services. - The AML/CFT team expressed gratitude to the FSC and the FIU for organization and cooperation. ### General situation of money laundering and terrorism financing risks - Authorities directly involved in ML/FT intelligence, investigation, and prosecution: - Financial Intelligence Unit (FIU); - Cook Island Police (CIP); - Crown Law Office (CLO). - Other agencies with investigative/prosecution roles in their fields: - Customs, Immigration, and Revenue Management departments. - Future role: - These agencies shall play the same role in combating the financing of terrorism when the proposed Suppression of Terrorist Financing Act is passed. - Crime environment: - General crime rate remains low: burglary, petty theft and low-level fraud with an insignificant amount of property involved. - No evidence suggesting major organized crime, drug trafficking or serious fraud that would generate large revenue and create domestic demand for money laundering services. - Risk assessment: - Domestic money laundering risk is small. - Potentially significant risk of abuse in the Cook Islands offshore banking sector and trustee companies. - Enforcement statistics: - There is yet no successful investigation and prosecution of money laundering in the Cook Islands; therefore no statistical data on estimated volume of proceeds of crime. - The insignificant number of suspicious transactions reports made to the FIU is insufficient to indicate any particular money laundering trend or typology. ### Overview of AML/CFT legislative and institutional measures - FATF listing: - The Cook Islands remains on the FATF’s list of Non-Cooperative Countries and Territories (NCCT) since June 2000. - FATF concerns (as of listing): - Cook Islands Government held no relevant information on approximately 1,200 international companies it had registered. - Country licensed seven offshore banks that took deposits from the public, yet were not required to identify customers, nor keep records. - Excessive secrecy provisions guarded against disclosure of bank records and information about international companies. - International Companies Act 1981 (ICA) permitted issuance of bearer shares and marketing of shelf companies. - ICA prohibited public access to registers of corporate directors or managers or disclosure of beneficial owners. - Corporate directors not required to be residents; companies had to maintain a registered office and company secretary and file annual reports, but were not required to have accounts audited. - Legislative reforms enacted: - Money Laundering Prevention Act 2000 (MLPA) enacted August 2000. - An entirely new AML-suite took effect in June 2003 superseding previous legislation and regulations; included new acts on: - proceeds of crime, - mutual legal assistance, - extradition, - financial transactions reporting. - Crimes Act 1969 amended to introduce new ML offense through Sections 280A and 280B. - New ML offense extends to all predicate offenses that are “serious offenses” and applies to physical and corporate persons. - “Serious crimes” 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, whether committed in the country or overseas. - At present FT is not criminalized and is not a predicate offense for ML. - A new Banking Act was enacted in 2003. - Proceeds of Crime Act 2003 (POCA) remedies: - Tainted property and benefits from crime recoverable through forfeiture orders and pecuniary penalty orders. - Both are discretionary criminal penalties and require conviction of a serious offense. - Forfeiture can apply where the accused has absconded or died. - Law enforcement can use production orders, monitoring orders, and search warrants for tracing assets. - Seizure and restraining orders can secure assets. - Financial Transactions Reporting Act 2003 (FTRA) powers and structure: - Redefined obligations on customer identification, record-keeping, internal controls, and reporting of suspicious or other types of transactions. - Reorganized supervisory structure: - Allocated compliance checking for licensed entities to the Financial Supervisory Commission (FSC). - Established an independent administrative-type FIU responsible for supervision of non-licensed entities and collection, analysis, and dissemination of financial intelligence. - Under Sections 10 and 11 of the FTRA: - A broad range of financial institutions required to submit ML-related reports to the FIU on suspicious transactions and cash or electronic transactions above $NZ 10,000. - FIU authority: - Can require reporting parties to supplement reports. - Has broad powers to obtain relevant information to combat ML. - Does not have FT-related functions at present. - Charged with exchange of information with counterpart FIUs and training. - Egmont Group membership expected to be granted in June 2004. - International conventions and treaties: - The Cook Islands is not a party to the Vienna Convention and has not signed or ratified the Palermo Convention. - The Cook Islands signed the UN International Convention for the Suppression of the Financing of Terrorism on December 24, 2001, but has not ratified it. - The Cook Islands enacted the UNSCRA to give effect to UN Security Council Resolutions on FT, including Resolution 1373, but has not yet issued any implementing regulations under the Act. *Source: International Monetary Fund assessment (cr04414).* ### 29. The Mutual Assistance in Criminal Matters Act 2003 (MACMA) and the POCA ### 29. The Mutual Assistance in Criminal Matters Act 2003 (MACMA) and the POCA ### Overview - The Cook Islands enacted the Mutual Assistance in Criminal Matters Act 2003 (MACMA) and the Proceeds of Crime Act (POCA) to enable a broad range of mutual legal assistance subject to dual criminality. - The Extradition Act 2003 (EA) provides for extradition, but the absence of criminalization of FT prevents extradition for FT. The authorities plan to address this with a proposed draft Terrorism Suppression Bill. ### International participation and conventions - The Cook Islands is a member of the Asia/Pacific Group on Money Laundering and was subject to mutual evaluations in October 2001 (jointly with the Offshore Group of Banking Supervisors). - The assessment used the October 11, 2002 version of the FATF 40+8 Methodology. - The Cook Islands: - has not ratified the UN International Convention for the Suppression of the Financing of Terrorism (signed December 24, 2001; ratification planned after adoption of a draft Terrorism Suppression Bill); - has neither signed nor ratified the UN Convention against Transnational Organized Crime (Palermo Convention) nor the United Nations Convention on Illicit Drugs and Psychotropic Substances (Vienna Convention), though government approval for participation was reported and instruments of ratification or accession were to be prepared; - has not implemented UN Security Council Resolutions (SCRs) 1267, 1269, 1333, 1373, and 1390, but passed the United Nations (Security Council Resolutions) Act 2003 on April 9, 2003 enabling Orders in Executive Council and regulations to give effect to SCRs; no regulations had been issued under that Act pending planned CFT legislation. ### Criminalization of Money Laundering (ML) - ML is criminalized in Section 280A of the Crimes Act 1969. The principal ML offense makes it a crime to: - acquire, possess or use property knowing or having reason to believe that it is derived directly or indirectly from a serious offense; - convert or transfer such property directly or indirectly from a [serious offense] with the aim of concealing or disguising the illicit origin of that property, or aiding any person involved in the commission of the offense to evade the legal consequences thereof; - conceal or disguise the true nature, origin, location, disposition, movement or ownership of the property derived directly or indirectly from a [serious offense]; - render assistance to another person for any of the above. - Predicate offenses are defined as “serious offenses” under Section 280: - an act or omission constituting an offense punishable by imprisonment for not less than 12 months or a fine of more than $NZ 5,000; or - an act or omission constituting an offense against the law of another country that, had it occurred in the Cook Islands, would be punishable by imprisonment for not less than 12 months or a fine of more than $NZ 5,000. - As a result of this threshold, over 200 offenses qualify as “serious” and thus as predicate offenses for ML. Examples in the Crimes Act 1969 include: - Dealing in persons (Section 109); - Bribery and corruption (Sections 110–117); - Participating in organized crime group (Section 109A); - Smuggling migrants (Section 109 C); - Trafficking in people (Section 109 D); - Prostitution (Section 163); - Kidnapping (Section 231); - Theft (Sections 242–248); - Criminal breach of trust (Section 252); - Robbery (Section 256); - Extortion by certain threats (Section 260); - False pretences (Sections 268–269); - Fraud and false accounting (Sections 273–276); - Conspiracy to commit offense (Section 333); - Market manipulation, false trading and market rigging (Sections 339–340). - Other statutes establish serious offenses (e.g., Secret Commissions Act 1994–95; Income Tax Act 1997; Narcotics Act 1965). Criminal offenses committed overseas may qualify as predicate offenses subject to the threshold and dual criminality. - Penalties for ML: - Physical persons: imprisonment of up to five years or a fine of up to $NZ 50,000; restitution applicable under the Crimes Act 1969; forfeiture and pecuniary penalty orders under the POCA applicable. - Legal persons: fines of up to $NZ 250,000 (i.e., five times the amount for physical persons); forfeiture and pecuniary penalty orders under the POCA applicable. - Neither the POCA nor the Crimes Act 1969 provides for revocation of professional licenses, barring professional activity, or winding up of companies as criminal penalties for ML. - Conviction on a predicate offense is not necessary for an ML conviction: Section 280A provides that “any person may be convicted of a money laundering offense under this section notwithstanding the absence of a conviction in respect of a crime which generated the proceeds alleged to have been laundered.” - Ancillary ML offense (Section 280B): disclosure of information likely to prejudice any investigation of an offense or possible offense of ML (tipping off) is an offense; defenses and penalties align with the principal ML offense and penalties can be combined. - Violations of obligations under the Financial Transactions Reporting Act 2003 constitute criminal offenses punishable by a fine up to $NZ 10,000 or imprisonment. ### Criminalization of Financing of Terrorism (FT) - The Cook Islands has not yet criminalized FT, nor ratified the ICSFT. A draft Terrorism Suppression Bill is under preparation based on the “Counter Terrorism and Transnational Organized Crime Model Provision 2003.” ### Scienter (knowledge standard) - The ML offense applies to those who engage in ML “knowingly” or on a “reasonable suspicion” basis. Willful blindness is not sufficient to meet the knowledge standard. Knowledge, intent or purpose may be inferred from objective factual circumstances. - Legal entities have criminal liability; the Interpretation Act 1924 defines “person” to include natural and corporate persons. Section 280A(5) specifically sets a penalty for a “person which is a body corporate.” ### Adequacy of Legal Means and Resources - The Cook Islands’ AML-related laws were inspired by international model provisions and laws of other countries. The legal means to prevent systemic ML largely exist; law enforcement will have powers to combat FT when FT legislation is enacted. - Practical resource and familiarity gaps: - FSC and FIU actively established the ML reporting system and liaise with financial institutions. - Crown Law Office (CLO), Cook Islands Police (CIP), Immigration, and Customs are not fully familiar with new AML legislation and investigative powers under it. - Both supervisory authorities and law enforcement agencies are understaffed. - High Court judges are New Zealand judges who sit on rotation, each staying on the Islands for two weeks. The Solicitor-General indicated phone conferences and faxing of signed orders from New Zealand could be arranged for urgent POCA orders. - Justices of the Peace (JPs) and juries are laymen and may have difficulties understanding ML laws; training for JPs, laymen, and New Zealand judges with regard to Cook Islands legislation was recommended. ### Analysis of Effectiveness - Ratification: The Cook Islands has not ratified any international treaty on ML or FT, though enabling legislation for Palermo Convention requirements has largely been put in place. - Implementation of UN SCRs: Not implemented; no regulations issued under the United Nations (Security Council Resolutions) Act 2003. - FT not criminalized; this is a major compliance shortcoming. - Practical use: - No ML charges had been laid to date; earlier Money Laundering Prevention Act 2000 was repealed and also saw no prosecutions. - Lack of prosecutions attributed to lack of focus on proceeds in investigations and lack of familiarity with the ML offense, not to weaknesses in the ML definition itself. - Scope of “serious offense” does not currently extend to FT and related terrorism offenses. - Areas identified for strengthening the ML legal regime include: - criminalize expressly the laundering of one’s own proceeds in Section 280A; - include “willful blindness” among the knowledge standards; - include additional penalties for legal entities or professionals engaged in ML or FT, such as withdrawal of license or bar from exercising a professional activity; - enable the penalties foreseen for the ML offense under Section 280A to be combined. ### Recommendations and Comments (mission) - Ratify the relevant international treaties on ML and FT, such as the Vienna and Palermo Conventions and the ICSFT. - 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. - Consider a review of the ML offense to include the suggested elements above. - Provide immediate training for ML investigators and prosecutors in the new AML legislation and develop skills and techniques of financial investigation. - Provide training to JPs and laymen in the new AML legislation and make such training also available to New Zealand judges with regard to Cook Islands legislation. - Set up the forfeiture fund provided for by Section 100 of the POCA and use additional resources for training investigators and prosecutors to motivate pursuit of proceeds of crime. ### Implications for compliance with FATF Recommendations 1, 4, 5, SR I, SR II - FATF 1 – Noncompliant, as the Vienna Convention is not yet ratified. - FATF 4 – Compliant. - FATF 5 – Compliant. - SR I – Noncompliant as the UN ICSFT is not yet ratified and the UN SCRs are not implemented. - SR II – Noncompliant, as FT is not criminalized. ### Confiscation of proceeds of crime or property used to finance terrorism (POCA) - Confiscation regime governed mainly by Sections 11–34 of the POCA; some crime-specific provisions (e.g., Section 18 of the Narcotics Act 1965). - Two primary types of recovery: - Forfeiture orders (criminal forfeiture) and - Pecuniary penalty orders. - Forfeiture orders: - “Tainted property” defined by Section 3 of the POCA to include: - property used in or in connection with the commission of a serious offense whether situated in the Cook Islands or elsewhere (actual instrumentalities); - property intended to be used in or in connection with the commission of a serious offense whether situated in the Cook Islands or elsewhere (intended instrumentalities); - proceeds of a serious offense, including property converted, transformed, or intermingled with such proceeds, and income, capital or other gains derived from such property, whether situated on the Cook Islands or elsewhere. - “Property” includes money and all other property, real or personal, whether situated in the Cook Islands or elsewhere, including an enforceable right of action and other intangible or incorporeal property. - Forfeiture is a discretionary criminal penalty and requires conviction of a serious offense. - Under Section 11 of the POCA, the Solicitor-General may apply for a forfeiture order within a period of 6 years following the day of conviction. - Section 12: Solicitor-General must issue notice of the application; the Court determines whether the property is “tainted,” drawing inferences from possession, control, use for commission of the offense, etc. - Section 17: if property is found tainted, the Court orders forfeiture to the Crown and must determine value and may give directions to effect the order. - If tainted property cannot be found or is located outside the Cook Islands, the Court may order the person to pay to the Crown an amount equal to the value of the property; such amount is a civil debt enforceable as if an order in civil proceedings. - Section 16: forfeiture excludes native freehold land; in such cases the Court may only forfeit movable property. - Pecuniary penalty orders: - Aim to recover the “benefits” derived from a serious offense on conviction; application by the Solicitor-General against the defendant who benefited. - “Benefit” defined in Section 4 of the POCA as any payment or reward received or any pecuniary advantage derived from the commission of the offense. - Section 27 sets rules for determining benefit and value; if a person obtains tainted property, benefit is the value of the property obtained; advantage is taken to be a sum equal to the value of the advantage so derived. - If satisfied that the defendant benefited, the Court orders payment equal to the value of the benefit. - Conditions of application and enforcement similar to forfeiture orders; Sections 28–30 specify methods for calculating realizable amounts. *Source: IMF mission report.* ### Section 21 of the POCA allows an application to be made to the Court for a forfeiture order against tainted ### Section 21 of the POCA allows an application to be made to the Court for a forfeiture order against tainted ### Forfeiture where accused has absconded or died - Section 21 of the POCA permits an application to the Court for a forfeiture order against tainted property where the accused has absconded. - Section 15 (2): a person is taken to have absconded in connection with an offense if reasonable attempts to arrest the person under a warrant have been unsuccessful during a period of 6 months starting on the day that the warrant was issued. - The defendant’s absconding does not remove the obligation of the Solicitor-General to give reasonable written notice of the application for forfeiture to any person who appears to have an interest in the property. - The POCA also allows forfeiture of tainted property where the defendant has died after the issue of the warrant. ### Property of criminal organizations - No specific provision mandates confiscation of property belonging to organizations found to be primarily criminal in nature. - Participation in an organized criminal group is an offense under Section 109A of the CA; penalty: a term of imprisonment not exceeding five years, qualifying it as a “serious offense.” - Under Section 11 of the POCA, forfeiture is applicable to any person convicted of participation in an organized criminal group, but the main forfeiture provision is discretionary; application to organized crime participants is therefore discretionary. - Section 32 (pecuniary penalty orders) allows the Court to “lift the corporate veil” to assess benefits derived by a person from a serious offense, to order inspection of company books, and to declare company property available to satisfy a pecuniary penalty order. ### Provisional measures — Search and seizure - POCA provides for search warrants in two situations: - Search for tainted property (Sections 35–36) - Search for property-tracking documents (Section 85) - Sections 35–36: police may apply to the Court or Registrar of the High Court for a warrant to search land or premises for “tainted property.” - Police can seize tainted property if they have reasonable grounds to believe it is tainted or can afford evidence about a serious offense, or to prevent concealment or destruction. - Police must specify the offense for which the property is tainted within 48 hours after seizure, failing which the property must be returned to the person from whom it was seized. - To retain seized property, a restraining order must be made against that property. - Section 48: the Solicitor-General can apply for a restraining order against property held by a defendant or by a person other than a defendant; this order may be made ex parte. - Section 85(2): defines property-tracking document broadly as any document relevant to identifying, locating, or quantifying property subject to the effective control of a person convicted or suspected of having committed a serious offense, where there are grounds for believing that he/she derived a benefit from that offense. - CPA Sections 96 and 97: any constable may search premises and seize objects, evidence or instrumentalities of any offense punishable by imprisonment; retained until disposed of by Court order. If no proceedings within three months after seizure, any person claiming entitlement may apply for release. ### Restraining orders - Section 50 conditions for a restraining order include: - the defendant has been convicted, has been charged or will be charged with a serious offense within 48 hours; - if not yet convicted, reasonable grounds for believing the defendant committed the offense (Section 48 (3) suggests the suspected offense must have been committed within the 6 years preceding the Solicitor-General’s application or since the application was made); - reasonable grounds for believing the defendant’s property is tainted or he/she derived a benefit directly or indirectly from the offense; - if property belongs to another person, reasonable grounds for believing the property is tainted or is subject to the effective control of the defendant. - Notice and duration: - Solicitor-General must give reasonable notice of an application for a restraining order, unless reasons exist not to do so; in that case the Court may issue a restraining order valid for a maximum period of 14 days. - Otherwise, the restraining order is valid for six months and can be renewed as necessary to enable a forfeiture or pecuniary penalty order to be made. - Court may appoint an Administrator to take custody of restrained property and direct satisfaction of a pecuniary penalty order by payment to the Crown from restrained property. After appeal periods expire, the Administrator can sell the property. ### Powers to identify and trace: production and monitoring orders - Tracing powers available to law enforcement include production orders (Sections 78–86), monitoring orders (Sections 87–92), and search (and seizure) under POCA, CPA and Narcotics Act 1965. - Production orders (Section 79): - Police can apply to a judge for a production order in respect of any person who may possess or control a property-tracking document; application may be made ex parte. - Compels production at specified time and place of specific property-tracking documents or documents of that kind. - For computer files, the order may compel access to the computer, passwords and software necessary to access it. - Once produced, police may inspect, take extracts, print, copy or keep the document. - Section 82 (2): the fact that the information would incriminate the producer or breach a nondisclosure obligation is not accepted as an excuse, though the document cannot be used as evidence against the producer in criminal proceedings except for failure to comply. - Monitoring orders (Sections 87–88): - Solicitor-General can apply for a monitoring order requiring a financial institution to provide information about transactions through an account held by a particular person for a maximum period of six months. ### Disclosure of government-held information and FIU powers - Sections 93 and 94: a Government department or statutory body can be directed by the Solicitor-General to give or disclose any document or information relevant to establishing whether a serious offense has been or is being committed or to making orders under Parts 2 and 3 of the POCA. - FIU powers under the FTRA: - FIU may request information from any law enforcement agency and supervisory authority for FTRA purposes; may send information to appropriate law enforcement agencies; may enter into agreements with foreign institutions or agencies for exchange of information. - Upon receiving a suspicious transaction report, FIU can request further information from the reporting financial institution and provide the information to law enforcement agencies. ### Rights of bona fide third parties and voiding contracts - Section 12: Solicitor-General must give reasonable written notice to any person believed to have an interest in property subject to a forfeiture application; Court may direct publication of notice. - Section 20: third parties claiming an interest may apply to Court to declare nature, extent and value of their interest if Court is satisfied: - applicant was not involved in committing the offense; - applicant acquired the interest at the time or after the offense was committed, for sufficient consideration and without knowing the property was tainted. - If forfeiture order already made, claim may be made within six months starting on the day when the order is made; if order made, property returned or an amount equal to the value paid if disposed of. - Sections 49 and 62: Court must require Solicitor-General to give reasonable written notice to any person who may have an interest before issuing a restraining order; if no notice requested by Solicitor-General, order has effect for 14 days only; after 14 days any extension requires reasonable written notice to interested persons. - Section 18: Court may set aside conveyance or transfer of property that occurred after seizure or service of notice of application under Section 12, unless transfer was for valuable consideration to a person acting in good faith and without notice. - Illegal Contracts Act 1987 referenced as additional basis to void contracts that are illegal at law or in equity. ### Asset Forfeiture Fund and asset sharing - Section 100 establishes the Confiscated Assets Fund. - Section 100 (2): the following to be paid into the Fund: money paid to the Crown instead of a forfeiture order; money paid under a pecuniary penalty order; money paid by a foreign jurisdiction in respect of confiscated assets. - Financial Secretary with Minister of Finance approval may authorize payments out of the Fund for law enforcement-related purposes; to satisfy Crown obligations to foreign jurisdictions; to meet remuneration and expenses of the Administrator; and to cover administration costs. - Asset sharing: - Section 36 (2) of MACMA: where the Attorney-General requests a foreign country to arrange enforcement of a forfeiture or pecuniary penalty order, the Attorney-General may enter an arrangement with the foreign country to share the amount forfeited or paid. - Section 40 (3) of MACMA: where a foreign forfeiture or pecuniary penalty order is registered in the Court, the Attorney-General may enter an arrangement with the foreign country to share the amount forfeited or paid. ### Statistics, training, and terrorist financing (FT) measures - No designated agency oversees the forfeiture program or keeps relevant statistics. - There is no successful or ongoing ML/FT investigation; relevant statistics do not exist. - Formal AML/CFT training on freezing, seizure and confiscation is not available; some ad hoc donor-funded regional training exists. - Head of the FIU has attended various workshops organized by AML regional body. - Intelligence officer of the FIU has been attached to the FIU of New Zealand Police for training on three occasions. - Staff of the SC and CIP have attended various AML/CFT workshops. - FT is not yet an offense in the Cook Islands; relevant statistics do not exist. Once CFT legislation is available, statistics should be prepared by the designated agency. - No legislation specifically provides for freezing funds or other property of terrorists or persons associated with terrorists; only the UNSCRA framework legislation was enacted but implementing regulations have not been issued. - Authorities currently cannot freeze without delay funds or other property of terrorists as required by relevant UN SCRs. - UN terrorist watch-lists are not circulated to financial institutions by the authorities, and there is no process for updating them. ### Analysis of effectiveness - The POCA provisions on criminal forfeiture, pecuniary penalty orders and provisional measures are comprehensive and broadly conform to international standards. - As no property has been restrained, seized or forfeited under the current legislation, the regime has not been tested in practice, making assessment of actual effectiveness difficult. - The discretionary nature of the confiscation regime may partly explain lack of implementation. - Distinction between forfeiture orders and pecuniary penalty orders is unclear given the broad definition of tainted property; there is potential for overlap. - Consideration suggested to extend notion of tainted property to “benefits.” - As practice develops, authorities should assess whether the regime enables effective confiscation; options include making criminal forfeiture mandatory and introducing civil (nonconviction based) forfeiture with reversal of burden of proof and civil standard of proof. - Tracing powers (production orders, monitoring orders, search warrants) appear sufficient in law, but have not been tested in practice. - Law enforcement unfamiliarity with POCA powers leads to preference for general search warrants. - Recommendation that Crown Law Office be best placed to collect ML and FT-related statistics as practice develops. - Limited availability of AML/CFT training; no investigator in CIP has received such training. ### Recommendations and comments (bulleted) - Make criminal forfeiture mandatory for any serious offense where proceeds are detected. - Consider simplifying the confiscation regime; for example, extend scope of forfeiture orders to benefits and consider dispensing with pecuniary penalty orders unless they serve a distinct purpose. - Consider introducing a civil (nonconviction based and noncriminal) forfeiture regime. - Adopt as a matter of priority legislation that provides for freezing of terrorist funds and enables effective implementation of UN SCRs on FT. - Ensure, if necessary by issuing regulations, that the CIG regularly circulate UN and other terrorist watch-lists to financial institutions and keep them abreast of new developments. - Consider amending the POCA to enable forfeiture of property of organizations found to be primarily criminal in nature. - Make AML/CFT training mandatory for all law enforcement personnel, in particular prosecutors and police officers involved in ML and FT investigations and prosecutions; training should specifically cover POCA implementation and use of its specific powers. - Ensure the Crown Law Office represents the Cook Islands authorities in all restraining and forfeiture order applications and hearings; designate it as the central body to keep relevant statistics. - Use trained officers as AML/CFT trainers to conduct regular training for public and private sectors to involve them in the AML/CFT process. - CIP should include the AML/CFT regime in its basic training program for new recruits to raise awareness and introduce new legal concepts. ### Implications for compliance with FATF Recommendations 7, 38, SR III - FATF 7 – Largely compliant as the necessary legislation exists, but it is untested in practice; in addition, criminal forfeiture is not mandatory. - FATF 38 – Compliant. - SR III – Noncompliant, as the Cook Islands does not have measures in place to freeze without delay funds or other assets of terrorists, those who finance terrorism and terrorist organizations in accordance with the relevant UN SRC resolutions. Italic attribution line: *The mission.* ### Section 27 of the FTRA regulates the FIU’s position and functions. The latter are formulated either as positive ### Section 27 of the FTRA regulates the FIU’s position and functions ### FIU position and core functions - The FIU’s functions are formulated as positive obligations or as authorizations and include: - Receiving suspicious transaction reports (STRs); cash transaction reports (CTRs) over threshold $NZ 10,000; electronic funds transfer reports (EFTRs), both inward and outward over threshold $NZ 10,000; border currency reports (BCRs) over threshold $NZ 10,000 and intelligence reports; - Collecting information relevant to serious offenses or ML from public sources; - Analyzing and assessing all reports and information; - Referring the case to the Police for investigation if the FIU has reasonable grounds to believe that a serious offense or ML was, is being or may be committed and disseminating financial intelligence and information to other domestic authorities (e.g., Customs) for investigation or action if there are reasonable grounds to suspect ML; - Compiling statistics; - Issuing guidelines to financial institutions; - Providing training to financial institutions on customer identification, record keeping and reporting obligations and identification of suspicious transactions; - Providing feedback to financial institutions; - Undertaking compliance audits for entities not regulated by a supervisory entity. ### Obligation to report to the FIU (Sections 10 and 11) - Section 10: mandatory reporting to the FIU within 3 working days of: - any single cash transaction in excess of $NZ 10,000 unless the recipient and the sender is a financial institution, as defined by Section 2 of the FTRA 2003; - any single electronic funds transfer in excess of $NZ 10,000, whether inward or outward of the Cook Islands. - Sanctions for failure to report under Section 10: - individuals: fine of up to $NZ 10,000; - corporate bodies: fine of up to $NZ 50,000. - Structuring a transaction to avoid reporting (smurfing) is an offense punishable by the same fines. - Section 11: reporting suspicious transactions as soon as practicable but no later than in two working days. Reporting institutions must report any information that may: - be relevant to an investigation or prosecution of a person for serious offense or a ML offense; - assist in the enforcement of the POCA; - be related to the commission of a serious offense or a ML offense. - Sanctions for failure to report suspicious transactions under Section 11: - individuals: fines of up to $NZ 20,000 to two years of imprisonment; - corporate bodies: fines up to $NZ 100,000. ### Guidelines and training - Under Section 27, the FIU has authority to issue guidelines to financial institutions to assist compliance with the FTRA. - In practice, the FIU and the FSC plan jointly to issue guidance “as and when required.” - Historical and practical materials provided: - Guidance notes issued pursuant to the Money Laundering Prevention Act 2000 (since repealed) and an updated version reflecting the new AML/CFT legislation was under preparation at the time of the mission’s visit; - The FIU circulated the Egmont Group 100 cases document, provided a training video and customer pamphlets to assist in-house training. ### Reporting procedures (Section 11(3)) - Suspicious transaction reports must: - be made in writing; - contain any details as required; - contain a statement on the grounds on which the financial institution holds the suspicion; - be signed or otherwise authenticated by the financial institution. - Standardized forms: - printed in October 2003 and included in the FTR Regulations issued on February 18, 2004; - FIU provided training to Money Laundering Reporting Officers in February 2004 on how to fill prescribed forms. - Processing of reports is described in the FIU’s Internal Standard Operating Procedures Manual. ### Obtaining further information and powers to compel cooperation - Section 27(h): FIU empowered to ask for further information relating to any suspicious transaction report received from a financial institution. - Section 27(i): FIU authorized to instruct any financial institution to take any steps appropriate in relation to any information or report (STRs or other reports) to enforce compliance with the Act. - Section 30: FIU authorized to examine records or look into the business and affairs of any financial institution for the purpose of ensuring compliance with reporting obligations. - Financial institutions must give all reasonable assistance and furnish any information reasonably required. - Penalties for failure to cooperate: - individuals: fine up to $NZ 20,000 or imprisonment of up to two years; - corporations: fines up to $NZ 100,000. - Section 11(5): a financial institution that has made a “report” to the FIU must provide, at the request of a law enforcement agency, any further information it has on the transaction or the parties to assist an investigation. The reporting institution may forward the additional information either to the FIU or directly to the requesting law enforcement agency. ### Authority to disseminate information for investigation (Section 27 subsections) - The FIU is an administrative unit that receives, analyzes and disseminates financial intelligence; it has no investigative mandate. - Section 27(c): when the FIU has reasonable grounds to believe a serious offense or a money laundering offense has been, is being, or may be committed, the FIU must refer the matter to the Police for investigation. - Section 27(f) and (q): - FIU may send any report, any information derived from that report or any other information it receives to appropriate law enforcement authorities if it has reasonable grounds to suspect the transaction is suspicious; - FIU may transmit information from, or derived from, a compliance audit or supervisory review or suspicious transaction report to appropriate domestic or foreign law enforcement authority if it has reasonable grounds to believe the information is suspicious or relevant to an investigation for noncompliance with the FTRA, a serious offense or a money laundering offense. ### Information sharing with other FIUs (Sections 28–29) - Section 29(1): FIU may disclose information to an institution or agency of a foreign state or an international organization established by governments of foreign states with powers and duties similar to the FIU, on the terms and conditions set out in an agreement or arrangement regarding exchange of information. - Section 28: FIU may enter into arrangements with “like” bodies in line with Egmont Group principles and, with Cabinet approval, enter negotiations (orally or in writing) relating to agreements or arrangements for information exchange. - Section 29(2): no agreement or arrangement is necessary for disclosure of information to a foreign FIU for purposes of an investigation, prosecution or proceedings relating to a serious offense or a money laundering offense. - Section 27(q): FIU may transmit information from, or derived from, compliance audits or supervisory reviews to appropriate domestic or foreign law enforcement authority if FIU has reasonable grounds to believe the information is suspicious or relevant to an investigation. ### Data protection and confidentiality - (No detailed provisions provided in the supplied content beyond the heading "Data protection and confidentiality".) *Source: Financial Transactions Reporting Act (FTRA) 2003 provisions governing the Cook Islands Financial Intelligence Unit (Section 10, Section 11, Section 27, Section 28, Section 29, Section 30) and related operational practices described in the assessment.* ### Section 28 (3) of the FTRA clarifies that the information exchanged with other FIUs must be information that the ### Section 28 (3) of the FTRA clarifies that the information exchanged with other FIUs must be information that the ### Legal provisions on information exchange - Section 28 (3) of the FTRA: information exchanged with other FIUs must be information that the FIU, institution or agency has reasonable grounds to believe would be relevant to investigating or prosecuting a serious offense or a money laundering offense or an offense that is substantially similar to either offense. - Where the FIU supplies information on the basis of an agreement or arrangement, those agreements or arrangements must: - restrict the use of information to purposes relevant to investigating or prosecuting a serious offense, a money laundering offense or an offense that is substantially similar to either offense; and - stipulate that the information must be treated in a confidential manner and must not be further disclosed without the express consent of the FIU. ### Statistics (reports received) - The FIU keeps statistics on Suspicious Transaction Report, Cash Transaction Report, Electronic Funds Transfer Report, Border Currency Report, and intelligence provided by either domestic or overseas agency. - The following data were supplied to the IAE on the number of reports received: - Suspicious Transaction Reports August 2000–June 2003: 22 - Cash Transaction Report July 2003–January 2004: 529 - Electronic Funds Transfer Report July 2003–January 2004: 2050 - Border Currency Report Since August 2000: 0 - Intelligence Since October 2001: 15 - Reporting entities entered onto the FIU database and linked through a unique report number. - Of the STRs received: - 18 were submitted by banks - 3 by trustee companies - 1 by a CIG agency - No STR had been referred to the CIP at the time of reporting; consequently, no statistics exist on reports resulting in investigations, prosecutions or convictions, or STRs materially assisting such ventures. - The database records entities involved and amount of transaction but: - has no reporting capacity - keeps no record of classification or result of enquiry - is unable to generate management or statistical information - Since the number of STRs is insignificant, there is no time limit for STRs to remain on the database. ### Staff, appointments, and contracts - The FIU operation is financed by the Minister of Finance with additional sponsoring by the New Zealand Government. - Budget increased from $NZ 100,000 in 2002–03 to $NZ 256,000 in 2003–04 to cover the salary of the Head of the FIU and other operational costs. - Authorized professional staff of three, including: - Head - Intelligence Officer - Compliance Officer (position currently vacant) - The head of the FIU: - appointed by the Minister of Finance - responsible for overall operational performance, financial management, staffing and direction - previously a member of the New Zealand Police FIU and FIU Technical Adviser to the Cook Islands through the NZAID program for 18 months - contract expires in June 2004 - The Intelligence Officer: - primarily responsible for receiving, evaluating, analyzing, and disseminating intelligence products related to reports and information received by the FIU - responsible for conducting local inquiries for relevant overseas agencies and organizations, educating financial institutions on money laundering typologies and trends, and facilitating training - is a fraud investigator loaned from the CIP - has been attached to the NZ Police FIU on three occasions for “on the job” training - due to leave the FIU and return to CIP in April 2004 - The Compliance Officer role: - primarily responsible for assessing and enforcing compliance with FTRA requirements - liaising with Nonregulated Financial Institutions, conducting on site examinations, maintaining liaison with the FSC, maintaining a compliance register, and providing office and management support ### Technical resources and practices - The FIU has a stand-alone secure computer system with exclusive, direct access that cannot be accessed from outside the unit. - All transaction reports required by the FTRA and received by the FIU are entered into the database regardless of electronic or paper form. - The FIU conducts a preliminary analysis of STRs and uses personal contacts of the head and the Intelligence Officer to obtain information from Customs, Immigration, and CIP. - Criminal conviction information can be obtained on a real time basis. - If reasonable grounds exist to suspect a transaction is suspicious, the FIU will send the information directly to the CIP. - If preliminary analysis does not produce reasonable grounds, the FIU conducts further analysis and, if no grounds exist, keeps the case active until further information is obtained. - The FIU’s premises adequacy is doubtful; office equipment exists but would benefit from upgrading. ### Analysis of Effectiveness - The Cook Islands FIU is a new institution that began effective operation in October 2002, prior to the FTRA coming into force. - Legal framework (FTRA, FTRR, Standard Operating Procedures Manual) is comprehensive and reflects international standards and best practice. - Identified legal and policy issues for reconsideration: - The definition of “financial institutions” in Section 2 of the FTRA is considered overly broad; suggested clarification to cover “reporting” or “obligated” institutions. - Section 11 (5) allows a choice for “financial institutions” to supply additional information either to the FIU or to the requesting law enforcement agency; mission suggests amending Section 11 (5) to require additional information be supplied directly to the law enforcement agency conducting the investigation. - Material resources appear adequate for present workload, but may be insufficient if all statutory FIU functions are combined with a default policy role. - Operational independence is respected and there is no undue outside influence. - Concerns: - Potential departure of both the head of the FIU and the Intelligence Officer in mid-2004 risks staffing continuity. - Unfilled Compliance Officer post jeopardizes operation. - Intelligence development capacity relies heavily on personal contacts of the head and Intelligence Officer; their departure would dramatically reduce intelligence gathering capacity. - Low number of STRs relative to number of banks and financial institutions suggests lack of awareness or noncompliance with reporting requirements across the financial sector, Customs, and Marine police of the CIP. - Recording of results of investigations, prosecutions, or convictions in the FIU database depends on feedback from investigating and prosecution agencies; practice not yet established due to no referrals made. ### Recommendations and comments - Amend definition of “financial institutions” to “reporting institutions” in Section 2 of the FTRA 2003. - Amend Section 11 (5) so that the additional information is supplied to the requesting law enforcement agency directly only. - In light of the pending expiration of the contracts of the Head of the FIU and the Intelligence Officer, immediate arrangements should be made to ensure these positions continue to be filled by persons of appropriate qualifications and experience. - Fill the post of FIU Compliance Officer as soon as practicable. - Establish formal channels of communication, on unit-to-unit basis, for obtaining and sharing information with domestic and overseas agencies. - Maintain close liaison with the CIP and pass to the CIP any substantiated intelligence of potential serious crime, ML and FT as required by the FTRA. - Enhance the FIU database with reporting capacity and include results and feedback to and from the agency. ### Implications for compliance with FATF recommendations - FATF 14 – Largely Compliant, as legal framework exists but compliance monitoring yet to be implemented. - FATF 28 – Largely compliant, as guidelines exist but are not updated. - FATF 32 – Compliant. ### Law enforcement and prosecution authorities, powers and duties (criteria 25–33) - Designated investigative authority: Cook Islands Police (CIP) working in conjunction with the Crown Law Office. - Investigative techniques: - Legislation does not specifically provide for, nor prohibit, undercover operations, controlled deliveries, etc.; authorities advised these techniques are theoretically available but lack legislative basis and have not been used in practice. - An amendment to the CPA adopted in May 2003 created a clear legal basis for interception of private communications. - Pursuant to Section 96A of the amended CPA: - The Police may apply to a Judge of the High Court for a warrant for any member of the Police to intercept a private communication by means of a listening device where there are reasonable grounds for believing that any member of an organized criminal group is planning, participating in, or committing, or has planned, participated in, or committed, criminal offenses of which at least one is an offense of the kind referred to in Section 109A (2) of the CA. - A Judge may grant an interception warrant if satisfied it would be in the best interests of the administration of justice and the following additional conditions are all met: - reasonable grounds for believing that: - (i) there is an organized criminal group; and - (ii) any member of that organized criminal group is planning, participating in, or committing, or has planned, participated in, or committed, criminal offenses of which at least one is an offense of a kind referred to in Section 109A(2) of the Crimes Act 1969 as part of the continuing course of criminal conduct planned, organized, or undertaken by members of that group; - reasonable grounds for believing that evidence relevant to the investigation of the case will be obtained through the use of a listening device to intercept private communications; - whichever is applicable: - (i) other investigative procedures and techniques have been tried but have failed to facilitate the successful conclusion of the police investigation of the case, or are likely to be too dangerous to adopt in the particular case; or - (ii) other investigative procedures and techniques are unlikely to facilitate the successful [investigation]. *Cook Islands FIU assessment and related legal framework and statistics as provided by the IMF mission.* ### conclusion of the police investigation of the case, or are likely to be too dangerous to adopt in ### cr04414 - conclusion of the police investigation of the case, or are likely to be too dangerous to adopt in ### Use of investigative techniques - The Commissioner of Police (CIP) can authorize foreign law enforcement agents to execute constabulary duty within Cook Islands jurisdiction. - The CIP can use the full panoply of coercive measures and special investigatory powers in all serious crime and ML investigations (and probably the same for FT when the relevant act is passed), but in practice these methods have never been used. - Interception of private communications is the only “special” investigative technique currently set forth in legislation; it has not been applied in practice due to lack of required technology and would require leasing technology from New Zealand if needed. - Conditions for granting an interception order are described as very restrictive; consideration should be given to expanding the list of offenses (for example, to include terrorism-related offenses). ### Ability to compel financial records - Under the POCA, law enforcement authorities have powers to compel production of bank account records and related documents via: - production orders (Section 79), - monitoring orders (Sections 87–88), - search warrants (Section 85). - Section 85 empowers police officers to apply for a warrant to search premises for a “property-tracking” document related to a serious offense. - Section 79 allows ex parte applications for production orders compelling persons to produce specific property-tracking documents. - Monitoring orders may require a financial institution to provide information about transactions conducted during a particular period through a specified account and may be made for a maximum period of six months. - Secrecy obligations are overridden by these powers even though a general provision such as Sections 35–36 of the FTRA does not exist under the POCA. ### Cooperation and information sharing - The primary body promoting interagency cooperation in the ML arena is the Combined Law Agency Group (CLAG) under the Commissioner of Police, with representatives from Customs, Immigration, and the FIU. - On the request of the head of FIU, the current Anti-corruption Committee is planned to be expanded and changed to the National [AML] Coordinating Committee (NCC), to consist of the Financial Secretary, the Solicitor-General, and the heads of government departments involved in the AML system. - The arrangement permitting foreign law enforcement agents to execute constabulary duty in the Cook Islands is described as effective and demonstrating good cooperation among agencies. ### Law enforcement and prosecution agencies: structure, funding, and staffing - CIP staffing and structure: - CIP strength: 110 police officers under the Commissioner of Police. - The Deputy Commissioner of Police is an officer qualified in law. - Criminal Investigation Bureau (CIB) strength: 12 detectives, divided into four sections responsible for serious crime, drug, fraud, and fingerprint examination. - Because of the small size of the CIB, all officers are mobilized for major crime investigations. - Equipment and support: - The CIB is equipped with staff, computers, printers, vehicles, Internet facilities, and has access to specialist forensic services from New Zealand Police, Australian Federal Police, and the Federal Bureau of Investigation. - Existing resources appear adequate for current operational needs, but the Commissioner of Police is seeking additional budget, some of which would go to the CIB if approved. - Crown Law Office (CLO) staffing: - The Crown Law Office presently has two qualified lawyers: the Solicitor-General (SG) and a senior prosecutor. - Two junior prosecutor posts are vacant; recruitment is hindered by high private-sector salaries. - Customs staffing: - Customs has 5 full time officers and 20 part time officers. - Full time officers check incoming passengers and goods at both airport and port; the 20 part time officers operate at the airport for arriving passengers. - Customs officers know the threshold for bringing cash in and out of the country. ### Statistics on ML and FT investigations, prosecutions, and convictions - There is no designated official or agency responsible for keeping ML/FT statistics; one reason is that statistical information is nil. - The CIP has established an intelligence database to input all information that comes to the CIP, which may assist in tracing results of ML-related investigations if such a case arises. ### Typologies and trends on current ML and FT methods and techniques - There are no disclosed ML or FT cases to police; it is therefore impossible to identify any typology or trend on ML and FT methods in the Cook Islands. - The STRs made to the FIU were not sufficient to draw any conclusions on typologies or trends. ### Training in ML and FT - The Cook Islands have participated in several AML/CFT seminars and workshops; additional training is provided ad hoc, often sponsored by donor agencies. - Three detectives of the fraud squad have received ad hoc AML/CFT training. - A March 2003 UN/Commonwealth Secretariat/Pacific Islands Forum Secretariat technical assistance program provided in-country mentoring to CIP and Crown Law Office staff on financial investigations, proceeds of crime, and financing of terrorism; two fraud section officers worked as counterparts and acquired necessary skills. - One officer attended a five-day course by the Pacific Islands Forum Secretariat on Money Laundering, Proceeds of Crime and financial investigations. - Two most experienced fraud investigators are not currently in the CIB: one joined the FSC and the other is on loan to the FIU. - The SG has attended various AML/CFT workshops and appears qualified for prosecuting ML and FT; the Senior Prosecutor has not yet received AML/CFT training. ### FT, prosecution and forfeiture problems - To date, there have been no investigations, prosecutions, convictions, or seizures of proceeds of crime in relation to ML. - Native freehold land policy, which bars forfeiture of title over such land (Section 16 of the POCA), may present a potential problem for forfeiture and should be further considered. ### Analysis of Effectiveness - The legal framework for special investigative techniques is not fully in line with international standards; interception of private communications is an exception but is impractical without technology. - Powers to compel production of records (production orders, monitoring orders, search warrants) provide a sufficient basis for financial investigations without major impediments. - Law enforcement authorities are not yet sufficiently familiar with new powers introduced by the POCA; training on the new legislation and use of powers in financial investigations is indispensable. - The CLO and CIP are designated officials responsible for prosecuting and investigating ML; the SG has reasonable training but further training for other prosecutors is needed. - Departure of the two most experienced fraud investigators has seriously affected CIB capacity in investigating financial fraud and money laundering, although both officers remain in the AML field (FSC and FIU) and overall national capacity is not jeopardized. - It is a practice that CIP will prosecute most criminal cases, and the Deputy Commissioner of Police often forms his own legal opinion for criminal investigations; only cases involving members of the police force are passed to the CLO. Annually about 15 cases, on average, are passed to the CLO for legal advice and prosecution. This practice is not appropriate for ML cases given their complexity. - The CLO is identified as best placed to collect ML and FT-related statistical data (investigations, prosecutions and related judicial orders) as practice develops. - In the absence of meaningful ML statistics and actual ML case investigations, typologies and trends cannot be identified. ### Recommendations and comments - Consider expanding the list of criminal offenses for which interception of private communications under Section 96A of the amended CPA would be available. - With the departure of two experienced fraud investigators: - Immediate training should be provided for the only remaining fraud investigator in the CIB. - If resources permit, training should also be provided for other detectives in the CIB. - Similar AML/CFT training should be provided for prosecutors of the Crown Law Office. - The Crown Law Office should be designated as responsible for collecting and keeping ML-related statistics. - The FIU, CIP, and Crown Law Office should select among the STRs and try to develop a possible ML case to test capacity and provide practical experience for officers involved. ### Mutual legal assistance (MACMA) and extradition - Mutual legal assistance can be provided by the Cook Islands based on domestic law or international treaties; the Cook Islands is not a party to any multilateral treaty in the area of mutual assistance in criminal matters and has concluded only one bilateral agreement (on transfer of convicted offenders) in this area. - MACMA scope: - Applies to any “criminal matter,” defined as an offense against Cook Islands law punishable by imprisonment for a term of not less than 12 months or a fine of more than $NZ 5,000, or an offense against a foreign law which, had it occurred in the Cook Islands, would have been punishable by the same penalties (dual criminality generally required). - The MACMA provides for assistance including: taking of evidence and production of documents (Part 3); search and seizure (Part 4); arrangements for persons to give evidence or assist investigations (Part 5); custody of persons in transit (Part 6); and assistance regarding proceeds of crime (Part 7). - Requests from foreign jurisdictions must be made in writing to the Attorney-General; if formal requirements of Section 7 MACMA are satisfied, the Attorney-General may authorize assistance. - Section 11 MACMA authorizes the Attorney-General to take evidence and transmit it to a foreign country; Section 11 (2) allows requests for production of documents or articles located in the Cook Islands. - Section 15 (2) provides that compulsion can only be applied by the Judge if the person compelled would be compellable in the requesting jurisdiction. - Search and seizure under MACMA are available only for proceedings or investigations involving a serious offense; Section 18 authorizes the Attorney-General to direct an officer to apply to a Judge for a search warrant where reasonable grounds exist that relevant material is located in the Cook Islands. - Once seized under warrant, property is deposited into custody and control of the Commissioner of Police and may be handled or delivered according to directions from the Attorney-General. *Source: IMF.* ### Section 38 of the MACMA provides that upon a foreign country's request, the Attorney-General may make ### Section 38 of the MACMA provides that upon a foreign country's request, the Attorney-General may make ### Mutual legal assistance under the MACMA - Section 38 enables the Attorney-General, upon a foreign country's request, to make arrangements for enforcement of: - a foreign forfeiture order; or - a foreign pecuniary penalty order. - Conditions for enforcement of a foreign forfeiture order: - the foreign forfeiture order must be made for a serious offense; and - the order must be against property believed to be located in the Cook Islands. - Attorney-General satisfactions required before registration: - a person has been convicted of the underlying offense; and - the conviction and the forfeiture order are not subject to further appeal in the foreign country. - Exclusions: - enforcement of nonconviction based forfeiture or confiscation orders by the Cook Islands is excluded. - Upon satisfaction of requirements, the Attorney-General may apply for registration of the foreign order by the Court; once registered such foreign orders are enforced or treated as if made by the Court under the POCA. ### Assistance to locate, freeze, and obtain property-tracking documents - Section 44 of the MACMA: - Attorney-General may, when requested to obtain the issue of a search warrant for property, direct an authorized officer to apply to the Court under the POCA for a search warrant for “tainted property” if: - a proceeding or investigation for a serious offense has commenced in a foreign country; and - the Attorney-General believes on reasonable grounds that tainted property of the offense is located in the Cook Islands. - Section 46 of the MACMA: - Attorney-General may direct an authorized officer to apply to the Court under the POCA for: - a production order to obtain possession of the property-tracking document; or - a search warrant for the property-tracking document under Section 86 of the POCA. - Under Section 86 of the POCA: - Sections 78 to 85 apply to the order or search warrant, i.e., it is subject to the same enforcement provisions as if it related to domestic proceedings or investigations. - Foreign restraining orders registered under the MACMA: - Sections 72 to 77 of the POCA apply to such orders. - Attorney-General may apply for a restraining order under conditions similar to the search warrant where he/she believes on reasonable grounds that property that may be made or is about to be made the subject of a foreign restraining order is located in the Cook Islands. - Reciprocity: - Each of the above forms of assistance may also be requested by the Cook Islands from a foreign jurisdiction under similar conditions. ### Assistance under the POCA (search, seizure, restraining, production orders) - Overlap and potential parallel procedures: - Definitions of “criminal matter” in MACMA and “serious offense” under the POCA overlap, making it unclear whether execution of such requests is under MACMA or POCA and whether procedures could run parallel. - Procedure under POCA (Sections 43–47): - Attorney-General authorizes, at request of a foreign jurisdiction, a police officer to seek a search warrant from a Judge to locate/identify tainted property. - If search identifies tainted property and reasonable grounds exist to believe seizure is necessary (e.g., to prevent concealment, loss, or destruction), the search warrant authorizes seizure. - Once property is seized, a forfeiture order must be issued within 30 days, failing which the property must be returned to the person from whose possession it was seized. - If the requesting foreign jurisdiction does not request forfeiture, it must at least obtain a restraining order against the property and have it registered (recognized) by a Cook Islands Court before the end of the 30-day period. - Sections 72–77 address the procedure for registration/recognition of restraining orders. - Section 86 enables foreign jurisdictions to seek production orders and search warrants in relation to a serious offense committed abroad. ### Treaties, UN Resolutions, and international obligations - UNSCRA: - UNSCRA allows the CIG to give effect to important Security Council Resolutions, including SCR 1373, by making regulations, though none were so far issued to effectively implement the UN requirements in the area of FT. - Bilateral treaties: - The list of applicable bilateral mutual legal assistance treaties only includes a bilateral agreement concluded in 1995 with Western Samoa for the transfer of convicted persons. - Extradition arrangements: - The EA extended application of extradition treaties and arrangements that were applicable pre-sovereignty. - Cook Islands has extradition arrangements with over 130 countries and territories, including all Commonwealth and Pacific Islands Forum member States. ### Use, implementation, and tracking of requests - Types of requests: - informal exchange of information; and - formal legal assistance. - Records and handling: - CIP maintains records of each request received and responses in the Intelligence Office. - CLO is responsible for handling mutual legal assistance requests; CLO has received one request to date. - Staffing and prioritization: - CLO gives higher priority to domestic matters; current staffing problems have affected timely and effective follow-up to formal requests. - Police-to-police model: - CIP has been effective in following up requests via established police networks. ### Extradition and terrorist financing (FT) - Extradition offense definition under EA: - any offense punishable in both the requesting country and the Cook Islands by imprisonment for not less than 12 months or a fine of more than $NZ 5,000, which include ML and predicate offenses. - Extradition of nationals: - Cook Islands may extradite its own nationals subject to the dual criminality requirement. - Number of extradition partners: - enables extradition to or receiving fugitives from over 130 “extradition countries” listed in Annex to the Act through simplified procedures (to varying degrees). - FT-related limitation: - FT is not yet criminalized; therefore Cook Islands is currently not in a position to extradite any person sought for FT. This is a major issue for compliance with FATF Special Recommendation V. ### Law enforcement exchange of information and cooperative investigations - Existing arrangements: - primarily with Interpol (via New Zealand Police) and with the South Pacific Islands Criminal Intelligence Network (“SPICIN”). - arrangements evolved without legislative mandate; limitations on use may be imposed by providing agency. - Response practices: - Cook Islands law enforcement authorities advised they always respond to requests for information from external/international agencies; where requester identity is unknown, steps ensure the requester is reputable. - MACMA 2003: - did not prevent continuation of existing exchange of information but regulated exchange usable for evidentiary purposes. - Records of each request and response are maintained in the Intelligence Office of the CIP. - Cooperative investigations: - not specifically authorized nor prohibited by statute. - Cook Islands police continue to cooperate under Commissioner of Police authority; practice is effective and timely and enhanced by AML legislation permitting wider cooperation. ### Co‑ordinating seizure and forfeiture actions, sharing - Section 36(2) of MACMA: - where the Attorney-General requests a foreign country to make arrangements for enforcement of a forfeiture order or pecuniary penalty order, the Attorney-General may enter an arrangement with the foreign country to share the amount forfeited or paid. - Section 40(3) of MACMA: - where a foreign forfeiture order or pecuniary penalty order is registered in the Court, the Attorney-General may enter an arrangement with a foreign country to share with that country the amount forfeited or paid. - Status: - No request has yet been made to a foreign country nor has any foreign forfeiture order been registered in the Court of the Cook Islands. ### No terrorist safe-harbor and resource considerations - FT status: - FT is not criminalized under the existing legislation. - Volume of requests and resourcing: - number of both outgoing and incoming requests remains low. - CLO and CIP manage to meet current demand. - CIP effectively deals with police-to-police requests via established networks. - Communication between CLO and CIP remains minimal; this may affect cooperation in handling formal legal assistance requests. - Future needs: - with newly introduced POCA and the coming CFT act, the number of formal requests may rise significantly in a short span of time; additional resources may be needed. - current exchange between CLO and CIP relies on informal personal contacts; recommendation to establish more formal communication channels at senior levels. ### Analysis of effectiveness and drafting issues - General: - legal provisions regulating mutual legal assistance and extradition are comprehensive and in line with international standards, but largely untested in practice, making meaningful assessment difficult. - authorities should review practical operation and correct deficiencies as practice develops. - Drafting issues in MACMA noted: - Section 5 and Section 4: - provision or obtaining assistance under MACMA is not limited to certain jurisdictions nor limited as to type of assistance; cooperation may be extended to all countries without prior designation. - MACMA does not specifically require a treaty, agreement or other arrangement to provide/obtain assistance; mission considers adding an explicit provision in Section 4 to clarify arrangements are not necessary, subject to assurance of reciprocity if necessary. - Parallel regimes: - MACMA and POCA seem to create parallel regimes for search, seizure, restraining and production orders; mission suggests both statutes should explicitly provide that execution of a request under one statute is exclusive and bars procedures under the other. - Extradition shortcoming: - absence of criminalization of FT prevents extradition for FT; CIG has identified this and plans to correct with proposed Terrorism Suppression Bill. ### Recommendations and policy comments - Ratify and implement international treaties: - Ratify the relevant international treaties in the area of ML and FT, such as the Vienna and Palermo Conventions and the ICSFT and ensure domestic legislation is in place for their implementation, in particular with regard to the criminalization of FT. - MACMA drafting clarifications: - Consider including a provision in MACMA to expressly permit mutual legal assistance in the absence of a treaty, agreement or other arrangement, on a discretionary basis, if necessary with an assurance of reciprocity. - Monitor practical effectiveness of MACMA and POCA in permitting recognition of foreign forfeiture and confiscation orders and consider expanding recognition to nonconviction based (civil) forfeiture orders. - For clarity, amend MACMA/POCA to ensure execution under one statute bars concurrent procedures under the other. - Operational recommendations: - Police should be aware of international cooperation requirements of AML legislation (POCA, MACMA, EA). - Improve coordination between CIP and CLO; establish formal communication channels at senior levels. - Anticipate resource needs for rising formal requests after POCA and CFT act; plan for additional financial, human or technical resources. - Regulatory and supervisory recommendations (AML/CFT oversight): - Amend statutes referred to at Section 36 of the FTRA to reflect the superior interest of AML enforcement over secrecy provisions. - Designate a lead agency to coordinate and ensure implementation of the overall AML regime. - Ensure any policy decision in AML involves inter-agency consultation and decision-making processes. - Re-cast the Working Group as a policy-making body to lead FIU and FSC in development of the AML/CFT regime. - Develop basic compliance examination procedures (pilot exercise with FIU and FSC staff) and roll out to assess compliance. - Finalize and issue detailed AML/CFT Guidance Notes for all reporting institutions. ### Implications for FATF Recommendations (as assessed) - FATF 3 – Largely compliant, as domestic legislation is in place but the Cook Islands has not yet ratified any international treaty related to ML or FT - FATF 32 – Compliant - FATF 33 – Compliant - FATF 34 – Materially noncompliant, as the Cook Islands has not yet ratified any international treaty related to ML or FT - FATF 37 – Compliant - FATF 38 – Compliant - FATF 40 – Compliant - SR I – Noncompliant, as the Cook Islands has not yet ratified the ICSFT nor implemented the relevant UN SCRs - SR V – Noncompliant, as the Cook Islands at present is not in a position to afford mutual legal assistance in connection with criminal investigations relating to FT, the latter not being a criminal offense ### Preventive measures for financial institutions — I. General Framework - FTRA role: - FTRA is the main instrument establishing legal and institutional obligations of financial intermediaries with respect to AML/CFT; intended to regulate application of due diligence measures. - Sections 35 and 36 of the FTRA: - address confidentiality/secrecy of financial transactions and provide authority that supersedes other related legislation. - compel financial institutions to comply with reporting and other requirements of the FTRA and provide basis for providing transaction information to the FIU for AML purposes. - Section 36 indicates FTRA prevails over conflicts with: - (a) International Companies Act 1981-82; - (b) International Partnership Act 1984; - (c) International Trusts Act 1984; - (d) Banking Act 2003; and - (e) Off-Shore Insurance Act 1981-82. - FTRA mandates: - due diligence, ongoing monitoring of customers and transactions, suspicious activity reporting, development and maintenance of internal procedures for compliance, audit and record keeping. - establishes supervision and authority of the FIU, including cooperation with supervisors, and provides for administrative and penal sanctions for noncompliance. - FIU responsibilities (Section 27): - lead development of regulatory and procedural mechanisms for covered institutions regarding AML measures. - receive reports made under Sections 5, 8, 10, 11, and 12 of the FTRA, and information from law enforcement agencies and any other information about suspicions of a serious offense or money laundering offense. - Sections 27(b)-27(f): collect information from available sources, forward/request information from law enforcement or supervisory agency, analyze and assess reports and information, and refer matters to Police if reasonable grounds exist to believe a serious offense or money laundering offense has been, is, or may be committed. - Sections 27(h)-27(i): request further information regarding suspicious transaction reports and instruct institutions to take steps to enforce compliance. - Sections 27(j)-27(o): compile statistics, disseminate information/intelligence domestically and internationally, issue guidelines, conduct training on customer identification/record keeping/reporting of suspicious transactions, and generate information on trends and developments. - Section 27(p): FIU must conduct compliance audits for all covered financial institutions, except those regulated by the FSC; for licensed financial institutions the FSC is designated under the FTRA to have responsibility and authority for effective implementation of fully compliant AML regimes. - FSC Act (Section 16(g)): - FSC functions include consulting with licensed financial institutions to encourage development of high professional standards, initiating/promoting codes of conduct, and developing/maintaining continuing education systems on financial crimes and money laundering issues. - FIU-FSC coordination: - established gateways for communication exist but are not yet formalized. - Implementation challenges: - principal challenge for FSC and FIU is developing programs and tools to assess compliance of reporting institutions and to assess adequacy and effectiveness of systems employed by reporting institutions. ### Analysis of Effectiveness (General Framework) - FTRA, implementing regulations, the FSC and Banking Acts provide a reasonable basis for starting an AML/CFT regime. - Operation of FSC and FIU is at a nascent stage. - No lead agency designated by the CIG to drive implementation; coordination mechanism exists through NCCT Working Group but policy decisions do not systematically involve it. - Absence of clear consultation procedures and decision-making responsibilities may jeopardize integrity of AML regime. - Secrecy provisions in banking, trust and company legislation were overridden by Section 36 of the FTRA, though consequential amendments have not been made in the statutes concerned. ### Recommendations and implications for FATF Recommendation 2 - Amend statutes referred to at Section 36 of the FTRA to reflect superior interest of AML enforcement over secrecy provisions. - Designate a lead agency to coordinate and ensure implementation of the overall AML regime. - Ensure policy decisions involve inter-agency consultation and decision-making processes. - Re-cast Working Group as a policy-making body to lead FIU and FSC. - Develop basic compliance examination procedures as a pilot exercise and roll out to sample institutions. - Finalize and issue detailed AML/CFT Guidance Notes for all reporting institutions. - FATF 2 – Largely compliant – legal and regulatory structures largely in place, but implementation capacity not capable of effective oversight, compliance monitoring, and enforcement. ### Preventive measures — II. Customer identification (summary) - Anonymous accounts: - not legally permissible in the Cook Islands. - Section 7 of the FTRA: - imposes affirmative obligations to establish identity and beneficial ownership of all contracting parties, including directors or controlling persons of legal entities. - requires financial institutions maintain accounts in the true name of the account holder and prohibits opening, operating or maintaining an account in a fictitious or false name. *Source: IMF assessment of the Cook Islands AML/CFT legal and institutional framework.* ### Part 4 of the CID Regulation requires that financial institutions must verify the customer identification information ### Part 4 of the CID Regulation requires that financial institutions must verify the customer identification information ### Verification requirements and required documentation - Part 4 of the CID Regulation requires verification through: - a valid photographic government-issued identification such as a passport or driver’s license, and - a second form of identification, which can be nonphotographic and include bank references, employment references, utility bills, or copy of an election register. - The FTRA Section 4.3(c) requires financial intermediaries to identify customers when entering into business relationships and to repeat identification if there are doubts about the identity of the contracting person or the beneficial owner during the course of the business relationship. - Section 4(1) of the FTRA requires all financial institutions to establish and verify the identity of the contracting party through official documentation as soon as practicable and before any person becomes a customer. - Section 4(4) of the FTRA requires establishment of the ultimate beneficial owner or the person for whom the transaction is being conducted. - The FTRA Section 4.2(a)(iii) requires financial institutions to verify the provisions regulating the power to bind the entity and to verify that any person purporting to act on behalf of the customer is authorized to do so, and identify those persons. ### Customer information required by the CID Regulation (Part 3) - For individuals: - the full name, date and place of birth, nationality, address, and occupation. - For associations (defined to include any association of persons, any company, corporation, firm, partnership, joint venture, mutual fund, statutory body, association, organization, state or agency of a state but not a trust): - the name of the association, place and date of incorporation, address of registered office and principal place of business; - the full name, occupation, date and place of birth, and permanent residential address of each significant interest holder and officer. - For trusts: - the name of the trust, address of any registered office, service address; - an explanation of the nature of the trust and description of purpose and beneficiaries; - full name, occupation, date and place of birth, and permanent address of each settlor or trustee. ### Specified exceptions and conflicts between instruments - Exemptions to Part 4 verification requirements (do NOT apply where): - the customer remits funds by bank check or letter of credit issued by a regulated financial institution, or from an account in the name of the customer held with a regulated financial institution; - the customer is a central or local government or agency; - the customer is an association listed on an approved exchange; - the customer is an existing customer who has already provided official identification; - the customer is an existing customer and the transaction involves less than $NZ 10,000. - Part 6 of the CID Regulation indicates Section 4(1) of the FTRA does NOT apply where: - a customer is a regulated financial institution acting in its own right or on behalf of another institution; or - any transaction where the recipient and the sender are regulated financial institutions. - The CID Regulation’s definition of a regulated financial institution includes: - a financial institution in the Cook Islands, or a person resident, based, carrying on business, or incorporated in or formed under the laws of an approved jurisdiction carrying on business in relation to which a foreign regulatory authority exercises regulatory functions and includes a wholly owned subsidiary thereof. - Part 6 does not identify specific high-risk jurisdictions whose AML/CFT frameworks are not capable of ensuring compliance of its regulated institutions with the FATF recommendations. - The CID Regulation conflicts with the requirements of the FTRA regarding customer identification by providing an exception that does not exist in the law. ### Implementation, supervision, and current practices - The minimum requirements for customer due diligence are set forth in the FTRA and the newly promulgated implementing regulations; compliance is mandatory and violations are subject to sanctions, both administrative and criminal. - Implementation will be enforced by compliance audits of banks, insurance, securities, trustees, and other financial institutions covered by the legislation. - For licensed financial institutions (banks, trusts, insurance companies), audits appear to be conducted primarily by the FSC. - At the time of the assessment, the FSC had conducted one inspection of a bank as part of a broader examination, and utilized a questionnaire borrowed from another jurisdiction. - Compliance audit of other nonlicensed covered entities will be done directly by the FIU, which is not yet capable of performing audits directly; it may be an option to have these functions performed by third party contractors such as auditors or other consultants. - There is no explicit prohibition of numbered accounts, nor any exemption from customer identification requirements for numbered accounts. - Institutions visited appeared to adhere to FTRA identification requirements, though full adherence is not always practicable (for example, customers known by an alias not supported by official identification; institutions sometimes rely on verification by staff who know the customer). - Draft Guidance Notes circulated in March 2003 by the Commissioner for Offshore Financial Services provided more detailed guidance than notes promulgated in 2001, but were never officially promulgated. - Some institutions utilize group-defined procedures from home offices subject to more stringent regulatory regimes and indicated global consolidated supervision and audit and AML/CFT training by home office/group leadership. ### Gaps, vulnerabilities, and legal impediments - There is currently no effective mechanism for authorities to check on the due diligence performed on the approximately 800 international companies (ICs) registered at the time of the mission. - Responsibility to undertake due diligence for these entities lies with six trustee companies. - The FSC does not undertake compliance checks of trustee companies and will not develop this capacity under its current initiative to strengthen supervisory infrastructure. - The Registrar of Companies does not have information on the beneficial owners of the ICs it registers, nor on the real activities of these companies. - Certain legal provisions in trust and corporate law may undermine FTRA due diligence objectives: - 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 Off-shore Insurance Act 1981-82 allow the Minister of Finance and Economic Management to exempt international trusts, international companies, international partnerships or holders of an offshore insurance license from compliance with provisions of their respective Acts — this exemption could defeat FTRA objectives (example: Minister may exempt any international company from identifying holders of bearer shares). - Excessive confidentiality provisions for trusts may prevent potential litigants from even finding out a trust exists in the Cook Islands. - The mission recommends restoring the pre-1995 requirement that trustee companies display a list of the trusts they provide a registered office for, or alternatively ensure such a list is available for public inspection during normal working hours. ### Analysis of effectiveness - Implementing Regulations supplement statutory AML provisions, but exemptions granted by the FTRR directly contradict the FTRA’s customer identification requirements; this conflict of law may defeat primary legislation’s purpose. - Definitions of “licensed” or “regulated” financial institutions across regulations overlap and contradict each other and statutory provisions, creating potential confusion about institutional obligations. - If exemptions in regulations are intended to create a regime for introduced business, such a regime should be explicitly provided in accordance with international best standards. - The weakness in due diligence arrangements for ICs does not pose a direct domestic risk because most ICs do not conduct business within the Cook Islands and CI financial institutions are obliged to undertake due diligence on all customers, including ICs; however, the real threat is to the international financial community where inadequate due diligence on ICs could facilitate relationships with institutions in countries whose AML/CFT regimes do not meet international standards. - The FSC is working to develop capacity to undertake both on-site and off-site supervision; on the basis of anticipated applications for banking licenses, there will be a maximum of 11 banks in the foreseeable future. - Several aspects of trust law need careful review to ensure consistency with the FTRA’s due diligence requirements. ### Recommendations and policy actions - The FSC should develop a compliance program that encompasses all regulated financial institutions as soon as possible. - Resolve the conflict between the FTRR and the FTRA by eliminating any provision in the Regulations that diminishes the scope of identification requirements set forth by the FTRA. - Issue guidance directing reporting institutions to take special care when conducting transactions with institutions residing in countries with weak AML/CFT compliance regimes. - Avoid use of an overly broad notion of “approved jurisdictions” that does not guarantee introducers maintain international best practice. - Adapt the draft 2003 Guidance Notes to reflect recently enacted laws and regulations, and formally promulgate them. - The FSC needs to develop an effective mechanism to undertake meaningful supervisory surveillance of trustee companies. - The Registrar of Companies should ensure that beneficial owners of ICs are identified, verified and this information is kept updated. - Establish protocols to ensure best international practices for “introduced business” are followed throughout the business relationship. - Amend the CID Regulation to require that any financial institution accepting business from a third party must: - a) satisfy itself that the third party is regulated and supervised for, and has measures in place to comply with the provision of Section 4 of the FTRA; - b) immediately obtain the necessary information required under Section 4 of the FTRA; and - c) take adequate steps to satisfy themselves that copies of identification data and other relevant documentation required under Part 2 of CID will be made available from the third party upon request without delay. - Defer adoption of an introduced business regime until supervisory capacity is developed by the FSC or is available through other means. - Carefully review certain aspects of trust law to ensure consistency with the FTRA’s due diligence requirements. ### Implications for compliance with FATF Recommendations - FATF 10 – Materially Noncompliant: - Although the law’s requirements would be consistent with FATF 10, the newly promulgated regulations directly contradict the rigid customer identification requirement; this conflict should be eliminated throughout the regulatory framework. - The weakness in respect of compliance checks of trustee companies must be rectified. - FATF 11 – Materially Noncompliant: - The newly promulgated regulations directly contradict the rigid customer identification requirement; this conflict should be eliminated throughout the regulatory framework. - SR VII – NA ### Ongoing monitoring of accounts and transactions (FTRA provisions and effectiveness) - Section 8 of the FTRA requires financial institutions to pay special attention to all complex, unusual, large and patterns of transactions, and transactions that do not contain complete originator information; transactions involving persons or businesses in jurisdictions without adequate AML/CFT systems receive enhanced scrutiny. - Section 8(2)a requires examination of the background, purpose and nature of the transaction and a written record of findings. - Section 8(2)b requires institutions to report these findings to the FIU or law enforcement agency and to assist in any investigation related to a serious offense or money laundering offense. - Section 6(2) of the FTRA requires banks to be able to reconstruct transactions for the FIU or other law enforcement agencies. - Automated reporting systems to identify multiple related transactions were not in place at two of the three domestic banks visited; given small sector size, manual identification of suspicious structuring may be effective if transaction volumes are fairly low. - Section 4(3)c of the FTRA requires ongoing scrutiny of transactions throughout the customer relationship to ensure consistency with the institution’s knowledge of the customer, the customer’s business and risk profile, and, where necessary, the source of funds. - Discussions with banking institutions indicated lack of clarity about the purpose and usefulness of the NCCT List in AML/CFT programs. *Source: IMF assessment text on FTRA and CID Regulation, including mission findings and recommendations.* ### Section 8(1)(c) of the FTRA specifically requires institutions to give enhanced scrutiny to wire transfers that do not ### Section 8(1)(c) of the FTRA specifically requires institutions to give enhanced scrutiny to wire transfers that do not ### Enhanced scrutiny for wire transfers and originator information - Section 8(1)(c) of the FTRA requires institutions to give enhanced scrutiny to wire transfers that do not contain complete originator information. - Concern noted about enhanced scrutiny and reporting of unusual or complex transactions from countries with inadequate AML/CFT systems. - At least one instance observed where personnel could use additional training in recognizing unusual patterns of client activity. ### Guidance Notes, FIU training, and typologies - Guidance Notes issued by the MLPA in 2001. Section 54 and Appendix C provide brief guidance on what is considered a “Suspicious Transaction.” - The FIU provided training in February 2004 to reporting institutions on completion of relevant forms and supplied case study materials in ML typologies. - The FIU provided information on jurisdictions that had weak systems for the detection and prevention of money laundering. - The FIU circulated via electronic mail detection guidance in the form of 2001 and 2002 FIU typologies and 100 sanitized cases prepared by the Egmont Group. ### Analysis of effectiveness (wire transfers and related guidance) - Legal framework for ongoing monitoring of accounts and transactions is generally adequate. - FIU has conducted fairly comprehensive training on FTRA requirements, reporting forms, and the role of the FIU. - The overall framework would be strengthened by new, more relevant and complete Guidance Notes broadening guidance on business relationships and transactions with persons from countries with inadequate AML/CFT systems. - Concerns remain regarding enhanced scrutiny of wire transfers and reporting of unusual or complex transactions from these countries. ### Recommendations and comments (wire transfers) - The FIU and/or the FSC should issue the draft guidance notes that address enhanced scrutiny for countries with inadequate AML/CFT systems. - Further training in patterns and practices of suspicious activities would be beneficial. - The FSC and FIU should develop permanent systems to warn reporting institutions of countries which do not have adequate AML/CFT systems and to provide other relevant information such as lists published by the Counter Terrorism Committee of the UN Security Council. The system should include a mechanism to update previous notices as new information becomes available. ### Implications for compliance with FATF Recommendations (wire transfers) - FATF 14 – Largely Compliant—Legal framework is developed but yet to be implemented. - FATF 21 – Largely Compliant. While there is a requirement for enhanced scrutiny related to transactions with persons in jurisdictions that do not have adequate systems in place to prevent or deter AML/CFT, the FSC is not yet able to assess compliance. - FATF 28 – Largely compliant. Further guidance on identification of suspicious transactions and industry-specific typologies are necessary. - SR VIII — listed among implications. --- ### IV — Record keeping (coverage and statutory requirements) - Customer record keeping is addressed in Section 6 of the FTRA. - Required records (Section 6(1)): - (a) records of all transactions and correspondence relating to the transactions; - (b) records of a person’s identification and verification obtained in accordance with Section 4; - (c) records of all reports made to the FIU; - (d) records of all enquiries made to or by the financial institution by the FIU. - Records must enable a transaction to be readily reconstructed (Section 6(2)). - Records must contain particulars sufficient to identify name, address and occupation (or business/principal activity) of each person conducting the transaction and, if applicable, on whose behalf the transaction is conducted (Section 6(3)). - Additional particulars required in documents used to identify and verify persons include: - nature and date of the transaction; - type and amount of any currency involved; - type and identifying number of any account involved; - negotiable instrument details where applicable (drawer, institution, payee, amount, date, number, endorsements); - name and address of the financial institution and of the officer/employee/agent who prepared the record (Section 6(4)). - Retention periods and location: - Records in subsection (1)(a) must be kept for a minimum period of 6 years from the date of any transaction or correspondence and in the Cook Islands or reproducible within three working days in usable form in the Cook Islands (Section 6(5)(a),(b)). - Records in subsections (1)(b), (c) and (d) must be kept for a minimum period of 6 years from the date the account is closed or the business relationship ceases, whichever is later, and in the Cook Islands or reproducible within 3 working days in usable form in the Cook Islands (Section 6(6)(a),(b)). - Offences and penalties for contravention of subsections (1) to (4): - individual: fine of up to $NZ 5,000; - body corporate: fine of up to $NZ 20,000 (Section 6(7)(a),(b)). - Electronic and machine-readable records allowed if a paper copy can be readily produced; electronic retention requires an electronic signature of the person who keeps the record (Section 6(8)(a),(b)). ### Observed practices and analysis (record keeping) - FTRA provides sufficient guidance for banking institutions; no industry-specific guidance or requirements issued by the FSC or FIU for the insurance sector. - Regulated institutions reported actual record-keeping practices comply with minimum statutory requirements; institutions’ own retention requirements varied from 7 to 20 years for different types of information. - Guidance in the FTRA is extensive but lacks clarity in some areas (e.g., cross-references between subsections). - As of the report, apart from one bank examination, there has not been checking of compliance systems; overall effectiveness of implementation not documented. - Banks contacted appear to operate in compliance with record keeping requirements of the FTRA. ### Recommendations and comments (record keeping) - Amend wording of section 6(2) of the FTRA to: “Records required under section (1) (a) are those records that are reasonably necessary to enable the transaction to be readily reconstructed at any time by the FIU or by a law enforcement agency.” - Replace current section 6(4) wording so it is not a separate subsection but follows immediately after section 6(3)(b): “As well as the documents used by the financial institution to identify and verify the identity of each such person.” - The FSC should undertake an initial process to determine whether banks have adequate record-keeping systems and procedures to provide assurance that compliance will be maintained. ### Implications for compliance with FATF Recommendation 12 - FATF 12 – Largely compliant – The FSC and FIU need to conduct more extensive compliance checking to ensure there is at least a suitable minimum level of compliance among covered institutions. --- ### V — Suspicious transactions reporting (STRs) - Section 11 of the FTRA requires financial institutions to report within two days if they have reasonable grounds to suspect a transaction (completed or attempted) may be relevant to an investigation or prosecution for a serious offense or money laundering offense, may assist enforcement of the Proceeds of Crime Act, or is related to a serious offense or money laundering offense. - Current reporting system does not apply to FT. - Section 11(2) provides penalties, including fines and/or imprisonment, for failure to comply. - In urgent matters, original reports may be made orally, with written report required within three days (Section 11(4)). - Section 18(2) requires appointment of a Money Laundering Reporting Officer with responsibilities including establishing procedures and systems, staff awareness, training in recognition of suspicious transactions, and establishing an audit function. - Since enactment of the FTRA, there have been no STRs filed, suggesting lack of understanding among industry as to what constitutes suspicious activity. - FIU provided training in February 2004 on reporting requirements and circulated detection guidance (2001 and 2002 typologies and 100 sanitized cases). - Section 11(5) requires a reporting financial institution to provide further information to FIU or law enforcement on request; failure punishable by fines and/or imprisonment (Section 11(6)). - Section 12 places similar reporting requirements on supervisory authorities and auditors. - Section 16 provides protection from civil, criminal, or disciplinary proceedings for good faith reports, except in cases of “tipping off.” - Section 14 prohibits “tipping off”; contravention punishable by fines and/or imprisonment. - FIU empowered under Section 27(i) and Section 31 to instruct institutions and enforce compliance, including judicial injunctions and fines. ### Analysis of effectiveness (STRs) - Systems generally adequate for ML, but do not cover FT. - No STRs forwarded to the FIU since June 2003 enactment of the standard forms, suggesting lack of understanding of suspicion or other bottlenecks. - Current tipping-off provisions seem adequate; any amendment to exempt disclosure of STRs between financial institutions would be contrary to the FTRA’s purpose. - Discussions revealed uncertainty among financial institutions about what constitutes tipping off a customer. - No industry-specific guidance issued for the insurance sector. ### Recommendations and comments (STRs) - The suspicious transaction reporting system should be extended to FT. - The FIU and FSC should open further dialog with financial institutions to determine understanding of suspicious activity concepts and identify gaps or bottlenecks; initiatives should focus on clarifying what constitutes tipping off. - The draft 2003 Guidance Notes should be updated against the new legislation and issued as soon as possible. - The FIU should continue training efforts to reinforce recognition of suspicious transactions. ### Implications for compliance with FATF Recommendations (STRs) - FATF 15 – Largely Compliant. Further guidance on identification of suspicious transactions and industry-specific typologies would enhance the reporting process. - FATF 16 – Compliant. - FATF 17 – Largely Compliant. There has been a lack of demonstrated understanding among banks and other institutions with respect to the tipping off offense. - FATF 18 – Largely Compliant. The relationship between institutions and the FIU needs to be further developed to ensure the system of ongoing training and guidance is effective. - FATF 28 – Largely Compliant, as the Guidance Notes were not updated at the time of the mission. - SR IV – Noncompliant as the reporting system does not address FT. --- ### VI — Internal controls, compliance and audit - Section 18 of the FTRA states a Compliance Officer appointed under Section 17 of the Financial Supervisory Commission Act 2003 is responsible for compliance with Sections 4, 6, and 7 of the FTRA (customer identification, record keeping and retention). - Financial institutions must appoint a Money Laundering Reporting Officer at management level to ensure compliance with reporting requirements prescribed by Sections 10 and 11 by establishing procedures, training, awareness, and audit systems. - Training practices vary among institutions; some conduct regular staff meetings discussing AML/CFT requirements, others conduct formal targeted training. One institution reported regular semi-annual training with post-training assessments. - Section 17 of the Financial Supervisory Commission Act 2003 requires all licensed financial institutions to appoint a Compliance Officer at management level to establish and maintain policies, procedures, and accounting mechanisms to meet obligations in customer identification, record keeping and retention. - Qualification of Compliance Officers Regulation 2004 requires Compliance Officers to have at least three years work experience in finance, law, accounting, or insurance either within or outside the Cook Islands. - Banking Act 2003 Section 8(b) and 8(c) require directors, managers, and associates to be “fit and proper person” with sufficient experience in banking. - No other laws or regulations regarding employee screening procedures. - Sections 17 and 18 imply foreign branches and subsidiaries are included in AML requirements; banks operating domestically do not currently have foreign branches and subsidiaries. - No provisions address differences where minimum AML/CFT requirements differ between home and host jurisdictions. Two foreign bank branches reportedly comply with home jurisdiction (Australia). ### Analysis of effectiveness (internal controls) - General framework for internal controls, compliance, and audit is in place in the FTRA and the FSCA; regulation on Compliance Officer Qualifications provides a brief experience requirement. - Neither the FTRA nor the FSC Act explicitly require institutions to apply AML/CFT requirements to branches and majority owned subsidiaries located abroad. - No implementation or compliance testing has been conducted to demonstrate adherence. ### Recommendations and comments (internal controls) - FIU/FSC should provide more descriptive guidance on audit system components for AML/CFT compliance systems and more detailed guidance on skills requirements for Compliance Officers. - Legal/regulatory guidance should promote sound practices when vetting employees for higher-risk positions. - Provide more descriptive guidance on the role of Compliance Officers and Money Laundering Reporting Officers, and acceptable combinations/divisions of duties. - As part of a risk assessment, the FSC should determine and document training practices of institutions to help identify lower risk entities and allocate resources to higher risk institutions. - The FSC should indicate that financial institutions are expected to apply AML/CFT requirements to branches and majority owned subsidiaries located abroad; reinforce through Guidance Notes and surveillance activities. ### Implications for compliance with FATF Recommendations (internal controls) - FATF 19 – Largely Compliant—While there is a legal requirement, there has been no implementation or compliance testing. - FATF 20 – Largely Compliant—There is no explicit requirement or guidance stipulating that legal and regulatory obligations should be applied to foreign branches and subsidiaries. _Attributed to the IMF assessment contained in the cited report._ ### 62. Section 15 of the FSC Act 2003 confirms the duty of the FSC to keep under review Cook Islands legislation ### cr04414 - 62. Section 15 of the FSC Act 2003 confirms the duty of the FSC to keep under review Cook Islands legislation ### Statutory duties and functions of the FSC - Section 15 of the Financial Supervisory Commission (FSC) Act 2003 confirms the duty of the FSC to keep under review Cook Islands legislation relating to licensed financial institutions and to continually monitor the extent to which Cook Islands legislation and supervision complies with “internationally accepted standards.” - Section 16(g) partly defines the FSC function to consult with, develop and maintain regular contact with licensed financial institutions to: - encourage development of high professional standards within licensed financial institutions; - initiate, promote and maintain codes of conduct; - develop and maintain for persons engaged by licensed financial institutions a system of continuing education in respect of issues relating to financial crimes and money laundering. - The general requirement applies to all regulated financial institutions; however, except for banking institutions there are no well-established standards of conduct, integrity, and preclusion of those with prior criminal history from sensitive positions. ### Fit-and-proper, integrity, and licensing requirements (banking and nonbank) - Banking Act 2003 — Section 8(1)a: - addresses qualifications and integrity of directors, managers, and associates with the concept of “fit and proper person” and sufficient banking experience to be involved in operations/management of a bank. - does not specifically preclude those with criminal records from holding significant investments or positions with banks. - Prudential Regulation No. 1-2004 on bank licensing: - indicates due diligence will be conducted to ensure key persons, managers, directors, and significant shareholders are “fit and proper.” - Banking Act 2003 — Section 2(4) defines a disqualified person in part as: - (a) one who has been convicted of an offense under the Act - (b) one that is or has been a director or is or has been directly or indirectly concerned in the management of a licensee or a bank or other financial institution within or outside the Cook Islands which had its license revoked or was wound up by a court - (c) one that has been convicted by a court in any jurisdiction of an offense involving dishonesty - Banking Act 2003 — Sections 27(2) and 27(4): - prohibit appointment or continuation as an officer of a banking business by a “disqualified person.” - contraventions can be punishable by fines for the institution, and fines and/or prison for natural persons. - Trustee Companies Act 1981–1982 — Section 5B and Offshore Insurance Act 1981–1982 — Section 5: - provide the FSC authority to request information, presumably including criminal history, of applicants and related persons. - Gaps: - No other guidance related to integrity or competence of nonbank financial institutions (trust companies, insurers, other FTRA-defined institutions) comparable to banking “fit-and-proper” provisions. - No specific guidance for vetting lower-level employees in key AML/CFT risk positions or procedures for vetting employees across banking and other institutions. ### Offshore activity, charities, non-profits, and registration regimes - Offshore activity dominated by International Companies and International Trusts: - These vehicles are incorporated and managed by Trustee companies captured under the FTRA and therefore required to undertake full customer due diligence on these vehicles and their principals. - International companies themselves are not subject to direct reporting requirements under the FTRA unless licensed as a bank, an offshore insurance company, or otherwise captured under section 2 of the Act. - Charities and non-profits: - Generally register under the Incorporated Societies Act 1994, giving basic tax benefits and legal entity status. - A register of these entities is maintained by the registrar of the court. - Revenue Management Department maintains a list of charities; charities must be “gazetted” by Revenue Management to be eligible for tax benefits. - Revenue Management does not maintain a list of non-profit organizations. - The Cook Islands Non-Government Organization maintains a list of non-profit organizations. - Gaps: - Apart from FTRA reporting and registration/administrative arrangements, there appear to be no laws, regulations or regulatory arrangements that specifically address integrity issues related to charities, non-profit organizations and shell companies in the context of ML and FT. ### Analysis of effectiveness (prudential, AML/CFT oversight) - The establishment of the FSC is an important first step to improve prudential regulation and AML/CFT oversight in the Cook Islands; however, few operational steps have been taken to implement comprehensive compliance and enforcement activities, reflecting the newness of the institution. - Outside domestic banking, much of the financial sector is either under a lax regulatory regime or under no government supervision. - For certain licensed nonbank institutions (trust companies, insurers), licensing requirements do not specifically refer to a fit-and-proper test. - Integrity Standards under the Banking Act 2003 are generally sound and rigorous, but other acts governing regulated institutions have not been similarly updated. - Many financial institutions defined by the FTRA are not regulated by the FSC and are not required to obtain a license. ### Recommendations and policy measures (from the analysis) - Update and rationalize laws governing nonbank regulated financial institutions to provide standards similar to those applied to banks with respect to prudential matters. - FIU/FSC should issue guidelines addressing the need for performance of background checks for persons in sensitive positions relative to potential money laundering activities. - Strengthen the regulatory framework to better address regulation of charities, non-profits and shell companies. - Introduce statutory fit-and-proper tests for directors, managers, and significant shareholders at the time of licensing/change in ownership of all regulated financial institutions; make fit-and-proper an ongoing requirement. ### FATF implication: Recommendation 29 - 29 – Non-Compliant. Legal and regulatory measures do not set “fit and proper” standards regarding control and participation of financial institutions other than banks. ### Enforcement powers and supervisory capacity - FSC Act 2003 — Section 18(2)f: - FSC may direct a licensed financial institution that failed to comply with any obligation under the Act or any license to implement any action plan to ensure compliance. - Section 18(3): failure to comply is an offense punishable by fines and/or imprisonment. - Banking Act 2003 — Section 17: - FSC may take enforcement against a licensee (bank) for contraventions, detrimental conduct, likely insolvency, failure to comply with a Directive, breach of license terms, furnishing false/misleading information, conviction of dishonesty, or if a person with interest is not “fit and proper” or refuses cooperation with examinations. - Enforcement actions per Section 17(2) can include license revocation or suspension (Section 11), appointment of an examiner (Section 18), or appointment of a manager (Section 21). - Banking Act 2003 — Section 19: - FSC may issue a Directive to compel Cease and Desist or corrective actions including replacing/strengthening management. - FSC Act 2003 — Section 17 / Section 18: - Financial institutions must appoint a Compliance Officer responsible for customer identification, recordkeeping and retention and other prescribed matters. - FSC may enter premises of regulated financial institutions to review compliance and may require supply of information or explanation under Section 18(2)(b). - FSC may carry out compliance inspections of a bank under Section 15 of the Banking Act 2003. - Sanctions for failure to comply with reporting obligations under Sections 10 and 11 of the FTRA are imposed by Courts. - Analysis of effectiveness: - Legal framework provides ample enforcement authority, but without a meaningful compliance checking system (at least in traditional financial sector) enforcement powers remain largely virtual. ### Supervisory resources, FIU capacity, and cooperation (domestic and international) - FSC supervisory staffing and capacity: - Supervisory staff of the FSC includes: - one Commissioner, - one Senior Examiner, - two Examiners. - Only the Commissioner has supervisory experience and has been with the organization since September 2003. - The other three supervision staff members are new to regulation and in training. - Very little capability exists for the FSC to fully carry out prudential supervision and AML/CFT compliance, although examiners performed some due diligence in an on-site examination of the domestic commercial bank. - Examination policies and procedures with respect to AML/CFT have not been drafted; plans exist to obtain outside resources but details not finalized. - FIU staffing and capacity: - FIU staff presently includes: - one Head of the Unit, - one Intelligence Officer, - one Compliance Officer position unfilled. - FIU has focused on developing legal/regulatory framework and setting up operations; given the large number of covered institutions (believed to be more than one thousand), it will be some time before the FIU can check compliance significantly. - Domestic cooperation: - FSC Act 2003 — Section 22(2): FSC may disclose information to other competent domestic authorities for investigations and prosecutions within an appropriate confidentiality regime. - Concern: no specific provision directed at domestic authorities regarding cooperation beyond simple disclosure, including lending of expertise to investigations. - Banking Act 2003 — Section 47: prevents disclosure of protected information except when authorized by a Court, performing duties under the Banking Act or any other Act, suspicious transaction reporting under the FTRA, required under a warrant, with express/implied consent, or if available to the public from another source. - International cooperation: - FSC Act 2003 — Section 23(1): FSC may disclose to an overseas regulatory authority information including civil or administrative investigations and proceedings to enforce laws, regulations, and rules administered by that authority, but may decline unless satisfied about recipient protections and undertakings. - Section 20(3): FSC may require licensed institutions or personnel to supply information necessary for FSC functions; FSC may obtain compulsory powers. - Where assistance to an overseas authority is justified under Section 23, the FSC may direct persons to: - (a) provide specified information relevant to the inquiry; - (b) produce specified documents relevant to the inquiry; - (c) give assistance in connection with the inquiry as specified in writing. - Analysis of effectiveness: - Framework for cooperation with supervisory authorities is generally adequate, but FSC and FIU lack adequate trained resources to cover AML/CFT and other risks. - Some concern exists about legislative authorization for higher levels of cooperation by the FSC with other domestic authorities in investigations. ### Recommendations and capacity-building actions (supervision and cooperation) - Assess the level of resources in the FSC’s Supervisory Division once licensing rationalization is completed to ensure adequate human and other resources for supervisory and compliance roles. - Fill the FIU’s Compliance Officer position to ensure coverage of all risk areas related to licensed institutions. - Expand the basis and extent of cooperation of the FSC with other domestic authorities in the FSC Act. - Develop a strategic plan for FSC addressing AML/CFT issues, including: - performing a risk assessment of regulated institutions to prioritize examination resources; - developing supervisory guidance and procedures; - cooperation with the FIU to enable sharing of information, techniques, and resources. ### FATF implication: Recommendation 26 - FATF 26 – Materially noncompliant. While a FIU has been established and is operating, its capabilities are not consistent with its responsibilities. Presently there is one unfilled position, making the FIU incapable of carrying out even basic compliance functions, and the FIU’s critical information sharing role is largely untested. ### Controls and monitoring of cash and cross-border movements (FATF Recommendation 22) - PCA — Section 96: - Any person who leaves or arrives in the Cook Islands with more than $NZ 10,000 in cash or negotiable bearer instruments shall report the fact to Customs. - Practical arrangements: - All arriving passengers must complete an Arrival Declaration; the Arrival Card includes a Baggage Declaration listing items to be declared, with cash over $NZ 10,000 as an item. - There is no declaration mechanism for departing passengers. - Customs procedure: - Customs will enquire with the passenger making the declaration. - If the Customs officer is satisfied the money is not related to any serious offense, Customs completes a Border Currency Report and passes it to the Financial Intelligence Unit (FIU). - Baggage of arriving passengers is randomly checked by Customs. - To date, Customs have not found any large cash transportation at airport and seaport checkpoints nor received any declaration over the threshold; Customs made no Border Currency Report to the FIU so far. - Marine Police: - Marine Police are responsible for patrolling the border but, similar to Customs, have not made any Border Currency Report to the FIU so far. - Effectiveness concerns: - Unclear to what extent declaration obligation is effectively enforced, particularly at the seaport. *Source: IMF assessment of Cook Islands financial sector legislation and supervisory framework (sections on FSC Act 2003, Banking Act 2003, FTRA, PCA, related analyses and recommendations).* ### Section 10 of the FTRA requires that financial institutions report to the FIU any transaction of an amount in ### cr04414 - Section 10 of the FTRA requires that financial institutions report to the FIU any transaction of an amount in ### Cash transaction reporting (Section 10 of the FTRA) - Section 10 requires that financial institutions report to the FIU any transaction of an amount in cash exceeding $NZ 10,000, or any other amount that may be prescribed, in the course of a single transaction, unless the recipient and the sender is a financial institution. - Cash transaction reports ("CTRs") are made available to the FIU on standardized forms and then processed by FIU staff. - Around 500 CTRs were submitted to the FIU at the time of the assessment visit. - There is no requirement to notify Customs or other authority of overseas jurisdictions from which the shipment originated or is destined to, if undeclared cash is detected at the border. ### Ratings of compliance with FATF Recommendations (selected findings) - The mission reported ratings for multiple FATF Recommendations, including: - Recommendation 1 – Noncompliant. - Recommendation 2 – Largely compliant. - Recommendation 3 – Largely compliant. - Recommendation 4 – Compliant. - Recommendation 5 – Compliant. - Recommendation 7 – Largely compliant. - Recommendation 8 – See answers to 10 to 29. - Recommendation 10 – Materially Noncompliant (criteria 45, 46, 46.1). - Recommendation 11 – Materially Noncompliant (criteria 46.1, 47). - Recommendation 12 – Largely compliant (criteria 52, 53, 54). - Recommendation 14 – Largely compliant (criteria 17.2, 49). - Recommendation 15 – Largely compliant (criterion 55). - Recommendation 16 – Compliant (criterion 56). - Recommendation 17 – Largely compliant (criterion 57). - Recommendation 18 – Largely compliant (criterion 57). - Recommendation 19 – Largely compliant (criteria 58, 58.1, 59, 60). - Recommendation 20 – Largely Compliant (criterion 61). - Recommendation 21 – Largely Compliant (criteria 50, 50.1). - Recommendation 26 – Materially noncompliant (criterion 66). - Recommendation 28 – Largely compliant (criteria 17.2, 50.1, 55.2). - Recommendation 29 – Noncompliant (criterion 62). - Recommendation 32 – Compliant (criteria 22, 22.1, 34). - Recommendation 33 – Compliant (criteria 34.2, 35.1). - Recommendation 34 – Materially noncompliant (criteria 34, 34.1, 36, 37). - Recommendation 37 – Compliant (criteria 27, 34, 34.1, 35.2). - Recommendation 38 – Compliant (criteria 11, 15, 16, 34, 34.1, 35.2, 39). - Recommendation 40 – Compliant (criteria 34, 40). - Selected Special Recommendations: - SR I – Noncompliant (criteria 1, 34). - SR II – Noncompliant (criteria 2.3, 3, 3.1). - SR III – Noncompliant (criteria 7, 7.3, 8, 13). - SR IV – Noncompliant (criterion 55). - SR V – Noncompliant (criteria 34, 34.1, 37, 40, 41). - SR VI – N/A (criteria listed). - SR VII – N/A (criteria 48, 51). ### Effectiveness: Criminalization of ML and FT (Assessment I) - The Cook Islands has not ratified any international treaty on ML or FT, despite enacting much required implementing legislation for the Palermo Convention. - The Vienna Convention requirements regarding the ML-offense and confiscation are largely met by the POCA; the Narcotics Act 1965 would benefit from consequential revision. - The mission regards lack of ratification of international treaties as a significant shortcoming because it prevents participation in treaty-based international cooperation. - The Cook Islands has not implemented the UN SCRs on FT, in particular SCR 1373, since it has not issued necessary regulations under the United Nations (Security Council Resolutions) Act 2003. - FT has not been criminalized; the mission considers this a major issue for compliance with international standards. - No ML charge was laid by prosecution authorities to date; the ML offense was first criminalized in the Money Laundering Prevention Act 2000 and later repealed and replaced, but no prosecutions were brought under either statute. - The mission attributes disappointing prosecution results to lack of focus on proceeds in criminal investigations and lack of familiarity with the ML offense, not to the definition of ML. - Identified legal amendments suggested by the mission: - criminalize expressly the laundering of one’s own proceeds in Section 280A; - include “willful blindness” among the knowledge standards; - include additional penalties for legal entities or professionals engaged in ML or FT, such as withdrawal of license or bar from exercising a professional activity; - enable that the penalties foreseen for the ML offense under Section 280A may be combined. - The mission expects FT will be incorporated into the AML system but notes FT is not yet listed as a serious offense. ### Effectiveness: Confiscation and asset recovery (Assessment II) - POCA provides comprehensive legal provisions for criminal forfeiture and pecuniary penalty orders and provisional measures, broadly conforming to international standards. - No property has been restrained, seized or forfeited under current legislation; the confiscation regime has not been tested in practice. - The discretionary nature of the current confiscation regime may help explain lack of implementation. - The mission suggests considering whether forfeiture orders and pecuniary penalty orders should be maintained separately, and whether the notion of tainted property should be extended to “benefits.” - The mission suggests considering introduction of civil forfeiture (forfeiture not based on criminal conviction, with reversal or partial reversal of burden of proof and civil standard of proof) as practice develops. - Powers for tracing assets (production orders, monitoring orders, search warrants) are available and override secrecy obligations, though Sections 35–36 of the FTRA 2003 do not have direct analogues in the POCA. - Law enforcement authorities have preferred general search warrants over the new POCA powers; the POCA tracing provisions remain untested. - No ML investigations or prosecutions occurred, so no ML-related statistics are maintained; mission suggests the Crown Law Office would be best placed to collect ML and FT-related statistical data as practice develops. ### Effectiveness: FIU operations, analysis, and dissemination (Assessment III) - The Cook Islands FIU began effective operation in October 2002, prior to the FTRA coming into force. - The legal framework for the FIU (FTRA, FTRR, Standard Operating Procedures Manual) is comprehensive and reflects international standards. - Issues identified for reconsideration: - The definition of “financial institutions” in Section 2 of the FTRA is considered overly broad; mission suggests clarifying that the definition covers “reporting” or “obligated” institutions. - Section 11 (5) allows financial institutions a choice to supply additional information either to the FIU or the requesting law enforcement agency; the mission recommends amending Section 11 (5) to require that additional information be supplied directly to the law enforcement agency conducting the investigation. - FIU statistics show number of reports received but the FIU keeps no statistics on the number of reports resulting in investigations, prosecutions or convictions; no STR was so far forwarded to the CIP. - Material resources are adequate but would benefit from IT and office equipment upgrades; current budget suffices for present structure and workload but may be insufficient if FIU undertakes full statutory and default policy roles. - Staffing concerns: - Potential departure of the head of the FIU and the Intelligence Officer in mid-2004 raises staffing risks. - The unfilled Compliance Officer post jeopardizes FIU operations. - Current intelligence-gathering relies heavily on personal contacts of key staff; loss of either could dramatically reduce capacity. - The mission recommends planning to reinforce and properly train FIU staff as operational demand grows. - Low number of STRs relative to number of banks and financial institutions indicates low awareness or noncompliance with reporting obligations in the financial sector and among Customs and Marine Police. - Recording outcomes of investigations/prosecutions in the FIU database depends on feedback from investigating and prosecution agencies; practice is not yet established because FIU has not referred any case for investigation. ### Effectiveness: Law enforcement, prosecution, and investigative powers (Assessment IV) - The legal framework for special investigative techniques is not fully in line with international standards; interception of private communications is the only special technique set forth and has not been applied due to lack of technology. - Conditions for interception orders appear restrictive; mission suggests considering extending the list of offenses to include terrorism-related offenses as practice develops. - Powers to compel production of records (production orders, monitoring orders, search warrants) are sufficient and override secrecy obligations. - Law enforcement authorities are not yet sufficiently familiar with POCA’s new powers; training is indispensable to develop practice. - Designated officials for prosecuting and investigating ML are the Crown Law Office (CLO) and the Cook Islands Police (CIP); the Solicitor-General has received reasonable ML training, but further training for other prosecutors is needed. - Departure of two experienced fraud investigators from CIB has reduced investigative capacity; both remain in the AML field, mitigating overall impact. - CIP typically prosecutes most criminal cases; about 15 cases per year are passed to the CLO for legal advice and prosecution—mission notes this practice may not be appropriate for complex ML cases. - The CLO and CIP acknowledge power to compel financial records but have yet to attempt to execute it. - Some investigative techniques (e.g., undercover agent operation) are of limited utility given small population; CIP lacks resources/technical support for telecommunications interception but has backup from New Zealand police and FBI. - The arrangement allowing foreign law enforcement agents to execute constabulary duty is effective; CIP and FIU initiatives in creating CLAG and NCC are strategic. ### Effectiveness: International cooperation (Assessment V) - Legal provisions regulating mutual legal assistance and extradition are comprehensive and in line with international standards but largely untested in practice. - As practice develops, authorities should review which portions of mutual assistance legislation work well and correct deficiencies. - The mission noted drafting issues in the MACMA that may need reconsideration: - Assistance under the MACMA is not limited to certain jurisdictions (Section 5) nor limited as to type of assistance (Section 4), implying cooperation may be extended to all countries without prior designation. - The MACMA does not specifically require that a treaty, agreement or other arrangement exist for provision or obtaining of assistance; mission suggests explicit clarity could be helpful. *Source: The mission's assessment.* ### Section 4 of the MACMA to the effect that such ### Section 4 of the MACMA to the effect that such ### International cooperation, mutual assistance, and mutual legal assistance statutes - The MACMA and the POCA seem to create parallel regimes for the provision of assistance to a foreign jurisdiction with regard to search, seizure, restraining and production orders necessary for locating, identifying tainted property related to, or the investigation of, a foreign serious offense. - The mission believes that for the sake of clarity, both statutes should provide explicitly that the execution of a request pursuant to one or the other statute is exclusive and bars ipso facto procedures under the other. - Consider including a provision in MACMA to expressly permit mutual legal assistance in the absence of treaty, agreement or other arrangement, on a discretionary basis, if necessary with an assurance of reciprocity. - Monitor the practical effectiveness of the MACMA and the POCA statutes in permitting recognition of foreign forfeiture and confiscation orders and consider expanding recognition to nonconviction based (civil) forfeiture orders. - The Police should be aware of the international cooperation requirements of the AML legislation, for example, pursuant to the POCA, the MACMA and the new EA. ### Extradition and criminalization of terrorist financing (FT) - As regards extradition, the absence of criminalization of FT prevents the Cook Islands from extraditing persons sought for FT. This is a major shortcoming. - The Cook Islands Government (CIG) has already identified this shortcoming and is planning to correct it with the proposed draft Terrorism Suppression Bill (see under Criteria 1–6). - Recommended actions include: Ratify the relevant international treaties on ML and FT, such as Vienna and Palermo Conventions and the ICSFT; Implement the UN SCRs on FT; Criminalize FT as a matter of priority and include it among “serious offenses” so that it is a predicate offense for ML; Adopt as matter of priority legislation that provides for the freezing of terrorist funds and enables the effective implementation of UN SCRs on FT. ### Domestic capacity, communication, and resource concerns - The Cook Islands has few formal requirements to enable it to cooperate internationally, making it easy for other jurisdictions to cooperate with the Cook Islands. - The CIP has established a good network with foreign law enforcement agencies, particularly within the Pacific region; requests for information are usually dealt with in an expedient manner. - There was only one formal request made so far to the CLO; present financial and human resources are sufficient for dealing with that request. - In view of the newly introduced the POCA and the coming CFT act, the number of formal requests may rise significantly in a short span of time. Additional resources may be needed. - Communication between the CLO and CIP is not effective because information exchange is through informal, personal contacts only. The mission suggests establishing a more formal communication channel at senior levels. - The FIU database should be further enhanced with reporting capacity and include the results and feedback to and from the agency. ### Legal and institutional framework for all financial institutions — overview and lead agency - The FTRA and implementing regulations, the FSC and Banking Acts provide a reasonable basis for the start of an AML/CFT regime in the Cook Islands; however, the process has only really begun and the operation of the FSC and FIU are at a very nascent stage. - Ensuring effective implementation of the FATF 40 + 8 Recommendations is a shared responsibility between the FIU and the FSC, but no lead agency has been designated by the CIG to drive the implementation process. - A coordination mechanism exists through the NCCT Working Group, in which both the FIU and the FSC participate, but policy decisions do not systematically involve the Working Group, nor are all important legislative amendments discussed there. - The absence of clear consultation procedures and decision-making responsibilities may jeopardize the integrity of the AML regime. - Secrecy provisions in banking, trust and company legislation were overridden by Section 36 of the FTRA, though consequential amendments have not been made in the statutes concerned. ### I — General framework for financial institutions - For the sake of clarity, the statutes referred to at ... (text continues under Recommended Action Plan). - The establishment of the FSC is an important first step, but few operational steps have been taken to implement comprehensive compliance and enforcement activities. - Other than domestic banking, the rest of the financial sector is either under a lax regulatory regime or under no government supervision. - Some licensed institutions (trust companies, insurers) do not have licensing requirements that specifically refer to a fit-and-proper test. - Other financial institutions as defined by the FTRA are not regulated by the FSC and are not required to obtain a license. ### II — Customer identification and due diligence - Implementing Regulations under the FTRA supplement statutory AML provisions, but exemptions granted by the FTRR contradict the FTRA’s relevant provisions. - Definitions in various regulations on “licensed” or “regulated” financial institutions overlap and contradict each other and statutory provisions, potentially causing confusion about compliance obligations. - If the intention of exemptions is to create a regime for introduced business, this should be done by explicitly providing for such a regime in accordance with international best standards. - Some banks and trust companies already have rigorous customer identification procedures, often using group-defined procedures encompassing global consolidated supervision and audit. - Weaknesses in due diligence arrangements for ICs do not pose a direct risk to the Cook Islands since most ICs do not conduct business within the Cook Islands and CI financial institutions are obliged to undertake due diligence on all customers, including ICs. - Anticipated applications for banking licenses indicate a maximum of 11 banks in the foreseeable future; the FSC is working to develop capacity for both on-site and off-site supervision of these institutions. - A significant number of companies in the non-banking sector will remain unsupervised; because ICs conduct business internationally, the primary threat is to the international financial community where proper due diligence may not be undertaken. - Several aspects of trust law may hamper implementation of FTRA’s due diligence requirements and need careful review for consistency with the FTRA. ### III — Ongoing monitoring of accounts and transactions - The legal framework for ongoing monitoring of accounts and transactions is generally adequate. - The FIU has conducted fairly comprehensive training on the requirements of the FTRA, reporting forms, and the role of the FIU. - The overall framework would be strengthened if new, more relevant and complete Guidance Notes broadened focus regarding business relationships and transactions with persons from countries with inadequate AML/CFT systems. - Concerns exist regarding enhanced scrutiny of wire transfers and reporting of unusual or complex transactions from such countries. ### IV — Record keeping - Guidance for record keeping in the FTRA is extensive but lacks clarity in some areas; for example, section cross-references in section 6 should be clarified. - Actual practices in institutions appear at least as stringent as FTRA requirements, and in some cases surpass the minima. - No compliance system checks have yet been performed, so overall effectiveness of implementation has not been documented. - Banks met by the mission appear to operate in compliance with record keeping requirements of the FTRA. ### V — Suspicious transactions reporting (STR) - Systems in place are generally adequate for ML, but they do not cover FT. - To date there have been no STRs forwarded to the FIU since the June 2003 enactment of the standard forms. This suggests either a lack of understanding of suspicion or other issues causing withholding of potential reports. - Current tipping-off provisions of the FTRA seem adequate and provide necessary protections. - Any amendment seeking to exempt disclosure of information between financial institutions about an STR being made to the FIU would be contrary to the purpose of the FTRA. ### VI — Internal controls, compliance and audit - The general framework for internal controls, compliance, and audit are in place in the FTRA and the FSCA. - A regulation on Compliance Officer Qualifications provides a brief experience requirement. - Neither the FTRA nor the FSC Act explicitly require institutions to apply AML/CFT requirements to branches and majority owned subsidiaries located abroad. ### VII — Integrity standards - Integrity Standards under the Banking Act 2003 are generally sound and rigorous. - Other acts governing regulated institutions have not been similarly updated to reflect modern concerns and practices relative to these standards. - The FSC has limited operational implementation so far; development and implementation of comprehensive compliance and enforcement activities will take time. ### VIII — Enforcement powers and sanctions - The legal framework provides ample enforcement authority for the FSC to take enforcement action against institutions lacking adequate compliance systems. - Until a meaningful compliance checking system is implemented, at least in the traditional financial sector, these enforcement powers will remain virtual. ### IX — Cooperation between supervisors and other competent authorities - Framework for cooperation with supervisory authorities is generally adequate. - The FSC does not appear to have an adequate level of trained resources to cover AML/CFT as well as all other areas of risk. - The FIU is not presently equipped to carry out its mandated compliance audits of nonregulated financial institutions as defined under the FTRA. - Some concern exists relative to legislative authorization of higher levels of cooperation by the FSC with other domestic authorities in the conduct of investigations. - The FIU should maintain close liaison with the CIP and pass to the CIP any substantiated intelligence of potential serious crime, ML and FT as required by the FTRA. ### Recommended Action Plan to Improve the Legal and Institutional Framework and Strengthen Implementation (Table 9) — Criminal Justice Measures and International Cooperation I — Criminalization of ML and FT - Ratify the relevant international treaties on ML and FT, such as Vienna and Palermo Conventions and the ICSFT. - Implement the UN SCRs on FT. - Criminalize FT as a matter of priority and include it among “serious offenses” so that it is a predicate offense for ML. - Consider a review of the ML offense to include the above elements. - Provide immediate training for ML investigators and prosecutors in the new AML legislation and develop skills and techniques of financial investigation. - Provide training to the JPs and laymen in the new AML legislation and make such training also available to New Zealand judges with regard to Cook Islands legislation. - Set up the forfeiture fund provided for by Section 100 of the POCA and use the additional resources for providing training to investigators and prosecutors to motivate law enforcement to pursue proceeds of crime. II — Confiscation of proceeds of crime or property used to finance terrorism - Make criminal forfeiture mandatory for any serious offense where proceeds are detected. - Consider simplifying the confiscation regime; consider extending the scope of forfeiture orders to benefits as well and reconsider the continued need for pecuniary penalty orders. - Consider introducing a civil (nonconviction based and noncriminal) forfeiture regime. - Adopt as matter of priority legislation for freezing terrorist funds and enabling effective implementation of UN SCRs on FT. - Ensure, if necessary by issuing regulation, that the CIG regularly circulate UN and other terrorist watch-lists to financial institutions and keeps them abreast of new developments. - Consider amending the POCA to enable forfeiture of property of organizations found to be primarily criminal in nature. - Make AML/CFT training mandatory for all law enforcement personnel, in particular prosecutors and police officers involved in investigation and prosecution of ML and FT offenses; training should specifically cover implementation of the POCA and use of its specific powers. - Ensure the Crown Law Office is responsible for representing the Cook Islands authorities in all restraining and forfeiture order applications and hearings and designate it as the central body to keep relevant statistics. - Designate trained officers as AML/CFT trainers to conduct regular AML/CFT training to both public and private sectors to involve them in the AML/CFT process. - The CIP should include the AML/CFT regime into its basic training program for new recruits. III — The FIU and financial intelligence processes - Amend definition of “financial institutions” to “reporting institutions” in Section 2 of the FTRA 2003. - Amend Section 11 (5) so that additional information is supplied to the requesting law enforcement agency directly only. - In light of pending expiration of the contracts of the Head of the FIU and the Intelligence Officer, immediate arrangements should be made to ensure these positions continue to be filled by persons of appropriate qualifications and experience. - The post of FIU Compliance Officer should be filled as soon as practicable. - The FIU should establish formal unit-to-unit channels of communication for obtaining and sharing information with domestic and overseas agencies. - The FIU should maintain close liaison with the CIP and pass to the CIP any substantiated intelligence of potential serious crime, ML and FT as required by the FTRA. - The FIU database should be further enhanced with reporting capacity and include the results and feedback to and from the agency. IV — Law enforcement and prosecution authorities, powers and duties - Consider expanding the list of criminal offenses for which interception of private communications under Section 96A would be available. - With the departure of two experienced fraud investigators, immediate training should be provided for the only remaining fraud investigator in the CIB; if resources permit, training should also be given to other detectives in the CIB. - Provide similar training for prosecutors of the Crown Law Office. - The Crown Law Office should be designated as responsible for collecting and keeping ML-related statistics. - The FIU, CIP, and Crown Law Office should select among STRs and try to develop a possible ML case to test capacity and provide experience for officers involved. V — International cooperation - Ratify the relevant international treaties in the area of ML and FT, such as the Vienna and Palermo Conventions and the ICSFT and ensure domestic legislation is in place for their implementation, in particular regarding criminalization of FT. - Consider including a provision in MACMA to expressly permit mutual legal assistance in the absence of treaty, agreement or other arrangement, on a discretionary basis, if necessary with an assurance of reciprocity. - Monitor the practical effectiveness of the MACMA and the POCA statutes in permitting recognition of foreign forfeiture and confiscation orders and consider expanding recognition to nonconviction based (civil) forfeiture orders. - The Police should be aware of the international cooperation requirements of the AML legislation, for example, pursuant to the POCA, the MACMA and the new EA. - Coordination between the CIP and CLO needs improvement. *Source: IMF mission findings and recommended action plan as presented in the referenced section.* ### Section 36 of the FTRA should be amended ### Section 36 of the FTRA should be amended ### Governance and policy coordination - Section 36 of the FTRA should be amended accordingly to reflect the superior interest of AML enforcement over secrecy provisions. - A lead agency should be designated to coordinate and ensure the implementation of the overall AML regime. - Any policy decision in the area of AML should involve the inter-agency consultation and decision-making process. - The policy process would be strengthened by the re-casting of the Working Group as a policy-making body to lead both the FIU and FSC in terms of approach to development of the AML/CFT regime. - Basic compliance examination procedures should be developed as a pilot exercise, perhaps with a combination of FIU and FSC staff, and rolled out with a sample set institutions to gauge compliance with all of the relevant requirements of the FTRA and determine the need for future action and/or guidance. - The authorities should finalize and issue detailed AML/CFT guidance Notes for all reporting institutions. ### II—Customer identification - The FSC should develop a compliance program that encompasses all regulated financial institutions as soon as possible, as at present the state of the development of compliance regimes, internal controls, and other aspects/elements of an AML/CFT program at other than one domestic bank is unknown. - Part 6 exempts CID requirements for transactions from any foreign regulated institution, which diminishes the value of maintaining an AML/CFT framework. This conflict between the FTRR and the statutory provisions of the FTRA should be resolved as a matter of priority by eliminating any provision in the Regulations that diminishes the scope of the identification requirements set forth by the FTRA. - Guidance should be issued that directs reporting institutions to take special care when conducting transactions with institutions residing in countries with weak AML/CFT compliance regimes. - The notion of “approved jurisdictions” seems overly broad and does not guarantee that introducers maintain international best practice, and should therefore be avoided. - The draft 2003 Guidance notes should be adapted to reflect recently enacted laws and regulations, and then formally promulgated. - 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. - It is critical that protocols be established to ensure that best international practices for “introduced business” are followed throughout the business relationship. - The CID regulation should be amended to require that any financial institution that accepts business from a third party must: - a) satisfy itself that the third party is regulated and supervised for, and has measures in place to comply with the provision of Section 4 of the FTRA; - b) should immediately obtain the necessary information required under Section 4 of the FTRA; and - c) should take adequate steps to satisfy themselves that copies of identification data and other relevant documentation required under Part 2 of CID will be made available from the third party upon request without delay. - Implementing a framework for introduced business as outlined above will require a level of supervisory sophistication that is beyond the current capacity of the FSC. The adoption of a regime should therefore be deferred until such time that the requisite supervisory capacity is developed by the FSC or is available through other means. - Certain aspects of trust law need to be carefully reviewed to ensure that they are consistent with the FTRA’s due diligence requirements. ### III—Ongoing monitoring of accounts and transactions - The FIU and/or the FSC should issue the draft guidance notes that address enhanced scrutiny for noncompliant countries. - Further training in patterns and practices of suspicious activities would be beneficial. - The FSC and the FIU should also develop permanent systems to warn reporting institutions of countries which do not have adequate AML/CFT systems and to provide other relevant information such as lists published by the Counter Terrorism Committee of the UN Security Council. The system should include a mechanism to update previous notices as new information becomes available. ### IV—Record keeping - The wording of section 6(2) of the FTRA should be amended to read as follows: - “Records required under section (1) (a) are those records that are reasonably necessary to enable the transaction to be readily reconstructed at any time by the FIU or by a law enforcement agency.” - The following wording should replace the current section 6(4) of the FTRA, should not be a separate subsection and should follow immediately after section 6 (3) (b): - “As well as the documents used by the financial institution to identify and verify the identity of each such person.” - The FSC should undertake an initial process to determine whether banks have adequate record-keeping systems and procedures to provide assurance that compliance will be maintained. ### V—Suspicious transactions reporting - The suspicious transaction reporting system should be extended to FT. - The FIU and FSC should open up further dialog with financial institutions to determine the level of understanding of suspicious activity concepts to identify potential gaps or bottlenecks in the process. Initiatives toward this end should also focus on clarifying what constitutes the tipping off of a customer. - The draft 2003 Guidance Notes should be updated against the new legislation and issued as soon as possible. - The FIU should continue its training efforts to reinforce the actions that have already taken place, particularly by providing training in the recognition of suspicious transactions. ### VI—Internal controls, compliance and audit - The FIU/FSC should consider providing more descriptive guidance on audit system components for AML/CFT compliance systems, as well as more detailed guidance on the skills requirements for Compliance Officers appointed by financial institutions. - There should be legal/regulatory guidance provided to promote sound practices when vetting employees who may assume higher-risk positions within institutions. - It would likely be useful to provide more descriptive guidance on the role of Compliance Officers and Money Laundering Reporting Officers, and what are acceptable combinations and divisions of duties in practice. - As part of a risk assessment exercise, the FSC should seek to determine and document the training practices of institutions to help identify those that pose lower risk. This would further aid in allocating resources to higher risk institutions. - The FSC should indicate that financial institutions are expected to apply AML/CFT requirements to branches and majority owned subsidiaries located abroad. This should be reinforced through the Guidance Notes and the FSC ‘s surveillance activities. ### VII—Integrity standards - It would be useful for the laws governing nonbank regulated financial institutions to be updated and rationalized to provide a similar standard as those applied to banks with respect to prudential matters. - The FIU/FSC should issue guidelines that address the need for the performance of background checks for persons in sensitive positions relative to potential money laundering activities. - The current regulatory framework should be strengthened to better address the regulation of charities and non-profits and shell companies. - The government should introduce statutory fit-and-proper tests for directors, managers, and significant shareholders at the time of licensing/change in ownership of all regulated financial institutions similar to those contained in the banking law. In addition, the fit-and-proper test should be made an ongoing requirement. ### VIII—Enforcement powers and sanctions - The FSC should seek to implement a compliance program for regulated institutions. - The authorizing legislation for nonbank financial institutions should be revised to reflect a similar approach and level of enforcement authority as provided in the banking law for banking institutions. ### IX—Cooperation between supervisors and other competent authorities - The level of resources in the FSC’s Supervisory Division should be assessed once the rationalization of licensing has been completed to ensure it has adequate human and other resources to carry out its supervisory and compliance role. - The FIU’s Compliance Officer Position should be filled to ensure that all areas of risk related to the operation of licensed institutions are adequately covered. - The basis and extent of compliance of the FSC with other domestic authorities should be expanded in the FSC Act. - As part of the FSC’s overall development it would be helpful to set forth a strategic plan specifically addressing AML/CFT issues to be included among the other supervisory initiatives it must undertake. This would include performing a risk assessment of regulated institutions to aid in the allocation/prioritization of examination resources, as well as key steps needed to develop appropriate supervisory guidance and procedures. This exercise could be conducted in cooperation with the FIU to enable the sharing of information, techniques, and resources. ### Sector-specific guidance summaries - Banking Sector: See recommendations in detailed assessment for II—Customer identification; III—Ongoing monitoring of accounts and transactions; IV—Record keeping; VI—Internal controls, compliance and audit; VIII—Enforcement powers and sanctions; IX—Cooperation between supervisors and other competent authorities. - Insurance Sector: Develop regime for the supervision of insurance entities for II—Customer identification; III—Ongoing monitoring of accounts and transactions; IV—Record keeping; V—Suspicious transaction reporting; VI—Internal controls, compliance and audit. - Securities Sector: See recommendations in detailed assessment for II—Customer identification; IV—Record keeping; VI—Internal controls, compliance and audit; VII—Integrity standards; VIII—Enforcement powers and sanctions; IX—Cooperation between supervisors and other competent authorities. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr04414.pdf_