## cr0492 ## Source details **Canonical URL:** [cr0492](https://www.imf.org/-/media/files/publications/ofca/english/cr0492.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr0492.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr0492.pdf.json) --- ### Mission, scope, and methodology - An IMF team conducted a Module 2 Offshore Financial Center (OFC) assessment of the British Virgin Islands (BVI) during the period November 11–22, 2002. - The mission assessed the BVI’s regulatory and supervisory arrangements with respect to internationally accepted standards and evolving good practices. - Separate assessments completed: - The Basel Core Principles for Effective Banking Supervision (BCP); - The Insurance Core Principles of the International Association of Insurance Supervisors (IAIS Insurance Core Principles); - The Objectives and Principles of Securities Regulation of the International Organization of Securities Commissions (IOSCO Principles) (primarily with respect to the regulated mutual fund sector); - The Methodology for Assessing Compliance with Anti-Money Laundering and Combating the Financing of Terrorism Standards (AML/CFT Methodology) (methodology endorsed by the FATF in October 2002 and by the Fund’s Executive Board in November 2002); - Good practices for company and trust service providers in the context of the September 6, 2002, draft statement of Best Practice of the Offshore Group of Banking Supervisors (OGBS Good Practices). ### Assessment team and stakeholders - Assessment team members included Mr. Richard Gordon (Mission Chief, MFD), Ms. Pramita Moni Sengupta (Deputy Mission Chief, Legal Department), banking, insurance, securities, company and trust services, AML/CFT, and STA advisors. - Mr. Atle Roaldsøy, Norwegian Ministry of Justice, participated as an independent AML/CFT expert (IAE). - Discussions were held with: the Governor of the BVI; the Honorable Chief Minister and Minister of Finance; senior management and regulators of the BVI Financial Services Commission (FSC); the Attorney General; the Financial Secretary; the Commissioner of Royal Virgin Islands Police; and a broad range of financial services industry representatives. ### Overall summary findings — sectoral supervisory framework - The BVI has most of the essential elements for a suitable framework for financial supervision. - Primary legislation provides the FSC with adequate independence and authority to license and supervise covered financial services (banking, insurance, securities, trust and company service providers). - Implementation has largely been good and FSC staff are described as dedicated and experienced professionals. - Authorities are keen to address identified weaknesses and in many cases have already taken steps to do so. - Suggested legislative enhancements: - Amendments to the Financial Services Commission Act (FSCA) to further ensure independence and professionalism, including selection and term of the managing director and method of selecting board members. ### FSC staffing, governance, and supervisory capacity - FSC staffing and deployment: - The FSC is staffed with approximately 75 professional employees. - Of those assigned directly to licensing and supervision: five assigned to banking and fiduciary services; three to the insurance sector; five to investment business. - Key capacity and governance findings: - Current staffing levels likely inadequate once full on-site inspections begin in 2003. - Some staff below management/director levels lack in-depth regulatory and supervisory experience. - Executive Council not required to disclose grounds for removal of board members; Managing Director (MD) does not have fixed-term appointment. - Conflicts policy for FSC board members could be more detailed and specific. - FSC funding mechanism: quasi-independent source based primarily on a percentage of receipts of registration and license fees; FSC estimates it requires at least 10 percent of such fees though minimum threshold of 7.5 percent applies if not negotiated. - Planned and implemented staffing and governance actions: - Recruitment in process; use of international headhunters; Legal Department vacancy filled; search for head of Policy Planning underway. - Prepare plan and procedures for audit and compliance program; begin on-site inspections; complete manuals; train staff. - Consideration of FSCA amendments: require Executive Council to disclose grounds for removal; prescribe fixed-term appointment for MD; amend board Code of Conduct to provide more detailed conflicts policy. ### Supervision practice and on-site inspection program - Current weaknesses: - No regular and comprehensive on-site examination and compliance program in operation (except for CSPs). - Off-site inspections detailed and well-executed for initial licensing and renewal, but ad hoc in follow-up. - Limited transaction testing and file verification as part of AML/CFT and prudential supervision. - Remediation and timelines: - KPMG assisted in designing a computer-based audit and on-site inspection program; manuals completed. - Training for KPMG’s computer-based on-site inspection program completed; implementation scheduled Q1 2004 (on-site inspections to begin 1st quarter 2004). - Job description questionnaire for inspection coordinator completed; vacancy to be filled using international headhunters. - Computer-based inspection to be implemented Q1 2004. - Recommended supervisory enhancements: - Increase human resources and training; consider specialized consultants and/or requiring external auditors to perform and certify certain compliance testing. - Verify regulatory reporting with bank records as part of on-site supervision. - Specify human resource needs in a detailed 3- to 5-year recruitment and succession program. ### Banking sector — structure, prudential gaps, and reforms - Market structure and statistics: - There are 10 banks with total assets of US$2.71 billion in the BVI; composition: 6 general license banks, 4 restricted license banks, and 1 state-owned bank (GOB). - The Government-Owned Bank (GOB), the Development Bank of the Virgin Islands, has total assets amounting to US$56 million. - Key prudential weaknesses: - No detailed formal prudential regulation in law/regulation for capital, credit concentration, credit reserve requirements, connected lending, liquidity requirements, country risk limitations, market risk, interest rate risk. - GOB not subject to prudential supervision at time of findings. - FSC administratively required most banks to comply with an 8 percent risk-based capital requirement; one branch had a 14 percent capital assignment; a proposed amendment to the BTCA provides for a 12 percent risk-weighted capital requirement. - FSC required audited financial statements of subsidiaries but not of branches (branches required to file audited financial statements commencing end of financial year 2003). - Planned actions and timing: - Draft legislation pending to subject GOB to FSC supervision (to be implemented by end-2003 or early 2004). - Branches required to have an assignment of capital by Q2 2004. - The FSC drafted Large Exposure, Liquidity Policy and a Code of Banking Practice to be adopted by Q1 2004. - Prudential guidelines being drafted with implementation due by end-2004; items marked "completed": large exposures, liquidity management, prudential returns. ### Compliance with Basel Core Principles — key observations - Strengths: - FSCA established FSC objectives, autonomy, powers, resources, and broad rule-making powers. - FSC follows a risk-based approach concentrating on asset-liability management, financial performance, capital adequacy, and credit risk management. - Deficiencies: - Lack of detailed prudential regulation (CP 5–15) and limited on-site supervisory testing (CP 16–20). - Information requirements (CP 21) limited: regulatory reports are highly summarized and lack detail (e.g., levels of delinquency); no published detailed bank condition information. - FSC has adequate legal powers for remedial action but supervisory shortcomings have delayed timely remedial responses (CP 22). - Recommended actions (selected): - Place the Development Bank under full FSC authority (end-2003 or early 2004). - Implement prudential standards consistent with international standards. - Implement Corporate Governance Standards and formal internal audit requirements. - Implement on-site supervisory program and changes to off-site supervisory reporting and analysis. - Verify regulatory reporting with bank records; coordinate with consolidated supervisors and use external auditors for regulatory testing. ### Insurance sector — market, captives, and supervisory gaps - Market statistics: - There are 293 insurance companies licensed in the BVI. - There are a total of 263 captive insurers; 241 captives are organized to insure U.S.-based risks. - Domestic insurance premiums approximately US$40 million; captive industry wrote over US$400 million. - Captive premia for 2002 are estimated to exceed US$400 million. - The captive sector is growing at a rate of about 10 percent per year. - Supervisory findings: - Sector benefits from FSC supervision and parent-company supervision for subsidiaries; overall well-supervised for entities with strong parents. - Deficiencies in Internal Controls, Corporate Governance, and On-Site Inspections under IAIS Core Principles. - Lack of guidelines for corporate governance and internal controls for insurance managers; E&O, fidelity and surety and professional liability insurance not compulsory for all providers (planned to be introduced). - Planned and implemented responses: - Draft amendments to the Insurance Act, 1994 and Insurance Regulations, 1995 prepared; expected to take effect in the first half of 2004. - On-site inspection program for Insurance Managers designed; field testing and staff training planned with program introduction in Q1 2004. - Proposed requirement that Insurance Manager, Agent, Broker or Insurance Intermediary have in force Professional Indemnity insurance. ### Securities sector and mutual funds — structure, legal framework, and enhancements - Market structure and statistics: - At end-September 2002, a total of 2,606 mutual funds had been registered or recognized in the BVI (up from 2,346 at end-2001). - Growth rate of funds over 14 percent per year. - About 8 percent of funds are public mutual funds; remainder are professional or private funds. - FSC estimates total assets of all public, private, and professional funds under management as exceeding US$55 billion. - Around 490 licenses for mutual fund administrators and managers had been granted (number does not reflect cancellations); growth in licenses nearly 20 percent per year. - Legal and regulatory framework: - Mutual funds regulated under the Mutual Funds Act, 1996 (as amended); FSC created under FSCA, 2001. - FS(IC)A 2000 supplements framework for information sharing. - Key supervisory gaps: - Mutual fund conflicts of interest not comprehensively addressed. - No requirement for mutual funds, managers and administrators to file annual audited financial statements with the FSC (filing to be required in proposed public fund regulations). - No specific requirement for books and records or segregation of assets for all functionaries (custodians and others may be beyond FSC jurisdiction). - No guidelines for prospectuses of public mutual funds; no rules on public mutual fund asset valuations and related disclosure. - No prohibition preventing public mutual funds from ceasing redemption without FSC permission (guidance planned). - Planned reforms and timing: - Draft Code of Practice expected end of Q1 2004; proposed Public Funds Regulations expected end of Q2 2004. - Mutual Funds Amendment Act and proposed filing requirements expected end of Q4 2003 (Amendment) and end of Q2 2004 (regulations). - Reporting requirements and fit-and-proper tests to be introduced; Mutual Funds (Amendment) Act drafted with enactment timeframe within first quarter of 2004 for fit-and-proper tests. ### IBCs, bearer shares, and Companies & Trust Service Providers (CSPs) - Scale and fiscal dependence: - FSC and private sector estimate approximately 350,000 active IBCs registered in the BVI, an estimated 45 percent share of the world IBC market. - Fees for registration and licensing of IBCs accounted for approximately 55 percent of total government revenues of US$187,476,000 in the prior year. - Other revenue shares: personal and corporate income tax at 17 percent; import duties at 10 percent of total revenues. - IBC and CSP regulatory regime: - IBCs must be registered by registered agents who are subject to regulation and supervision by the FSC. - Registered agents must maintain a registered agent and principal office in the BVI; they may be licensed under the Companies Management Act, 1990 (CMA) or the Banks and Trust Companies Act, 1990 (BTCA). - Licenses valid until December 31 of the year issued and renewable in January of the next year. - License counts: 20 Company Management Services (CMA); 96 Restricted Trust Business (BTCA); 92 General Trust Business (BTCA). Total registered agents bringing the total to 89 (including 20 CMA licenses). - CSP supervision and inspections: - All CSPs are subject to regulation and supervision by the FSC; oversight largely meets OGBS Good Practices. - FSC has conducted on-site inspections covering over 70 percent of total business using detailed questionnaires and random file checks for AMLCP compliance. - Gaps: need to complete inspections of all CSPs; inspections could be more detailed and structured; need a regular compliance and on-site inspection program. - Recommendation: require professional indemnity insurance for CSP licensing (policy guideline drafted). - Bearer shares and immobilization: - IBCs may issue registered or bearer shares; amending legislation to the IBCA drafted to implement immobilization of bearer shares (deposit with authorized or recognized custodians) with two-year phase-in for existing companies. - An amendment to the BTCA will be needed to define and establish authorized custodians. ### AML/CFT legal framework, institutions, and supervisory implementation - Legal framework and institutional arrangements: - Primary instruments: Proceeds of Criminal Conduct Act (PCCA) (1997); Anti-Terrorism Orders (Statutory Instruments Nos. 3366 in 2001 and 1822 in 2002). - The PCCA established the Reporting Authority (RA) as the Financial Intelligence Unit (FIU); RA membership includes FSC Managing Director, head of Police FINU, and a Senior Crown Counsel from the AGC. - The Anti-Money Laundering Code of Practice (AMLCP) and guidance notes cover KYC, record keeping, ongoing monitoring, suspicious transaction reporting (STR), internal procedures, controls, and audit; AMLCP incorporates guidance notes as mandatory. - Key AML/CFT findings and vulnerabilities: - BVI considered vulnerable to ML and FT due to its role as a major financial center and dominant place of IBC registration, and as a potential transshipment corridor for cocaine trafficking. - Confiscation provisions exist but forfeiture provisions for instrumentalities of ML are not clearly defined outside narcotics and a short list of crimes. - STR regime under the PCCA is voluntary/defensive, contributing to relatively low STR numbers for the size of the sector. - Money remitters not yet subject to licensing or prudential supervision (serious concern); proposed Money Services Act expected enactment within second quarter of 2004. - The Development Bank of the BVI not subject to AML/CFT requirements in the AMLCP despite accepting deposits (ongoing concern). - Supervisory implementation and gaps: - FSC is the supervisory authority for AMLCP adherence; powers include on-site inspection and approval of compliance officers. - On-site supervision not fully implemented: visits and questionnaires exist but limited transaction testing and file verification. - Minimal implementation in non-prudential sectors: trust and company service providers, money remitters, lawyers, and accountants require accelerated supervisory action. - RA has no systematic contact with reporting institutions; RA lacks statutory authority originally to order administrative blocking/freezing when an STR is filed (later legislative changes addressed some short freezing authority). - Recommended AML/CFT measures: - Implement on-site inspections immediately with specific file review and transaction testing for AML/CFT verification. - Consider enacting mandatory suspicious transaction reporting and require the RA to keep detailed STR statistics (STRs received, analyzed, disseminated, resulting in investigation/prosecution/conviction). - Empower RA/FIA or FSC to obtain follow-up information after an STR is filed; provide statutory authority for short-term freezing and asset identification. - Regulate independent money remitters (licensing, supervision, fit-and-proper tests). - Fill vacancies and strengthen staffing in FSC Legal and Enforcement Division and Police FINU; consider forming a Financial Investigative Authority (FIA) with clear delineation of intelligence versus investigative functions. ### Law enforcement, mutual legal assistance, and investigative capacity - Police FINU: - Responsible for investigating all financial crimes, including money-laundering offences. - Investigative powers generally adequate, but staff are scarce and domestic cases are few; capacity constrained for in-depth domestic and international investigations. - Mutual legal assistance (MLA) workload: - High volume of MLA work due to BVI’s role in IBC formation; execution of foreign requests occupies major part of Police FINU capacity. - BVI has assisted foreign authorities in freezing substantial values over the last decade. - Proposed Financial Investigative Authority (FIA): - Proposal envisages a separate agency staffed by secondments from Police FINU, customs, tax, civil service, and AGC with independent funding and a steering committee. - FIA Act and related legislative developments: - Financial Investigation Agency Act 2004 provides RA power to identify and freeze assets for five days under section 4(2)(c). - Section 4 (2) (b) allows the agency to direct any person to refrain from completing a transaction for a period of "seventy- two hours". - Section 4 (2) (d) allows the Agency to require production of any information it considers relevant. - FIA Act does not establish statutory procedures for distinguishing analysis and transmittal as investigative evidence but section 5 provides for issuing directions as to policy. - Recommended law-enforcement improvements: - Develop targeted statistics on freezing, seizing, and confiscating proceeds of crime. - Clarify mandates and division of tasks between RA and Police FINU; ensure procedures to preserve confidentiality and to distinguish intelligence analysis from admissible investigative evidence. ### Fiscal, economic, and structural overview - Geography and demographics: - The BVI is a British Overseas Territory of 153 square kilometers comprising over 40 islands, islets and cays, with a population of around 21,000. - About two-thirds of the population lives on Tortola (53 square kilometers) and another 15 percent on Virgin Gorda (21 square kilometers). - Approximately 40 percent of the labor force comes from outside the territory. - Income and dependence: - Annual per capita income about $37,000; median income about $11,000. - The BVI is highly dependent on both tourism and the offshore financial sector (both approximately 40 to 45 percent of GDP). - Budgetary dependence on offshore fees and fiscal outlook: - Fees for registration and licensing of IBCs accounted for approximately 55 percent of total government revenues of US$187,476,000 in the prior year. - Two new capital projects (an 80-bed hospital and a new sewage treatment plant) estimated to cost around US$160 million, to be financed primarily through additional borrowing. - Public debt stands at around US$46 million or less than 25 percent of annual government revenues; government guaranteed debt roughly equal in amount. - Recurring revenues historically ran a surplus of a few percentage points over recurring expenditure; expected flattening/reduction of IBC-related revenues and increased debt service from capital projects point to a tight budgetary situation. - Chief minister announced intent to move to a zero rate of income tax by 2005 (policy announced). ### Key implementation timelines and status (selected) - On-site inspections and inspection program: - On-site inspections to begin 1st quarter 2004; computer-based inspection to be implemented Q1 2004. - Prudential and sectoral regulatory measures: - Draft Code of Practice and Mutual Funds Amendment Act and Public Funds Regulations expected between end of Q4 2003 and end of Q2 2004 (various elements). - Branch audited financial statements required commencing end of financial year 2003; branches to be required to have capital assignments by Q2 2004. - Draft amendments to the Insurance Act expected to take effect in the first half of 2004. - Proposed Money Services Act expected to be enacted within second quarter of 2004. - Mutual Funds (Amendment) Act drafted with fit-and-proper tests timeframe within first quarter of 2004. - Financial Investigation Agency Act 2004 provisions: - Short freezing authority for RA ("five days"); seventy-two hour transactional refrain power; authority to require production of information. ### Selected recommended priorities (condensed) - Implement a comprehensive on-site inspection and compliance program across banking, insurance, securities and CSP sectors immediately, with transaction testing and file review for AML/CFT verification. - Strengthen FSC human resources: recruit, train, and implement a 3- to 5-year succession and deployment plan; fill Legal and Enforcement Division vacancies. - Enact or amend legislation to: - Subject the Development Bank to FSC prudential supervision; - Provide clear prudential regulations (capital, large exposures, liquidity, provisioning, connected lending, related-party transactions); - Institute fit-and-proper tests for mutual funds, managers, and money remitters; - Implement immobilization of bearer shares and clarify custodial regimes. - Enhance AML/CFT measures: - Move from voluntary STR regime to mandatory/reporting enhancements and detailed STR statistics; - Regulate and license money remitters via Money Services Act; - Clarify RA/FIA powers for short-term freezing and production of information. - Improve transparency and governance: - Amend FSCA to require disclosure of grounds for board removal and prescribe fixed terms for the MD; require reasons for non-routine decisions; strengthen conflicts of interest rules. *Source: International Monetary Fund — Offshore Financial Center assessment of the British Virgin Islands (Module 2, November 11–22, 2002) and IMF 2003 country report (cr0492).* ### Preface................................................................................................................. ### Preface ### Mission and methodology - An IMF team conducted a Module 2 Offshore Financial Center (OFC) assessment of the British Virgin Islands (BVI) during the period November 11–22, 2002. - The mission assessed the BVI’s regulatory and supervisory arrangements with respect to internationally accepted standards and evolving good practices. - The mission completed separate assessments of the BVI’s observance of five standards and evolving good practices: 1. The Basel Core Principles for Effective Banking Supervision (BCP); 2. The Insurance Core Principles of the International Association of Insurance Supervisors (IAIS Insurance Core Principles); 3. The Objectives and Principles of Securities Regulation of the International Organization of Securities Commissions (IOSCO Principles) (primarily with respect to the regulated mutual fund sector); 4. The Methodology for Assessing Compliance with Anti-Money Laundering and Combating the Financing of Terrorism Standards (AML/CFT Methodology); 5. Good practices for company and trust service providers in the context of the September 6, 2002, draft statement of Best Practice of the Offshore Group of Banking Supervisors (OGBS Good Practices). - The AML/CFT Methodology referenced is the methodology endorsed by the FATF in October 2002 and by the Fund’s Executive Board in November 2002. ### Assessment team and participants - The assessment team consisted of: - Mr. Richard Gordon (Mission Chief, Monetary and Financial Systems Department); - Ms. Pramita Moni Sengupta (Deputy Mission Chief, Legal Department); - Mr. Joseph O’Neill (Banking Advisor); - Mr. Tomas Power (Insurance Advisor); - Ms. Tanis MacLaren (Securities Advisor); - Mr. Hermann Krull (Company and Trust Services Advisor); - Ms. Marie-Christine Dupuis (AML/CFT Financial Sector Advisor); - Mr. Simon Quin (STA). - Mr. Atle Roaldsøy, Norwegian Ministry of Justice, participated as an independent AML/CFT expert (IAE). - The mission held discussions with the Governor of the BVI, the Honorable Chief Minister and Minister of Finance, senior management and regulators of the BVI Financial Services Commission (FSC), the Attorney General of the BVI, the Financial Secretary of the BVI, the Commissioner of Royal Virgin Islands Police, and a broad range of representatives of the financial services industry. - The FSC organized logistical arrangements for the mission. ### Sectoral supervisory issues — summary findings - The BVI has most of the essential elements for a suitable framework for financial supervision. - Primary legislation provides the FSC with adequate independence and authority to license and supervise covered financial services, which include banking, insurance, securities (mutual funds, their management, and investors), and trust and company service providers, whether onshore or offshore, and implementation has largely been good. - The FSC’s professional staff, led by senior management and directors, are described as dedicated and experienced professionals with a clearly articulated goal of maintaining and, where possible, improving the framework and implementation of financial services supervision in the BVI. - Authorities (FSC and BVI Government) have indicated they are keenly interested in addressing identified weaknesses and in many cases have already taken steps to that end. - Some changes to the Financial Services Commission Act (FSCA) would further ensure continued independence and professionalism, including with respect to selection of and term of the managing director, and the method of selecting board members. ### Supervision practice and capacity - A weakness exists with respect to onsite supervision of banking, insurance, and securities sectors: - There is often detailed and well-executed off-site inspection in the course of granting initial licenses and license renewal, and on an ad hoc basis. - There is currently no regular and comprehensive examination and compliance program in operation, and no on-site inspections of regulated entities/providers other than trust and company service providers. - Authorities, with KPMG’s assistance, are implementing a comprehensive examination methodology and plan to start on site inspections in 2003. - To implement the proposed plan for on-site inspections, there is a need to increase human resources; authorities are undertaking recruitment with the help of, inter alia, international headhunting firms. - Consultation with industry has increased, particularly with respect to education, but needs to be regularized and deepened, especially regarding feedback from regulated persons. ### Banking sector findings - Virtually all banks are subsidiaries or branches of high-quality banking institutions subject to effective consolidated supervision by the home country supervisor. - Key weaknesses: - Prudential standards such as guidance and parameters for assuming and managing risk have not been issued, although the FSC has requested that banks confirm that their policies and procedures are in compliance with relevant Bank for International Settlements (BIS) papers. - The Government-Owned Bank (GOB) (The Development Bank of the Virgin Islands) operates in the local retail and commercial market, appears to have multiple weaknesses including high levels of nonperforming loans and outdated financial statements, and is not currently under any outside prudential supervision (planned to be introduced in 2003). - In the past the FSC has in effect required an 8 percent risk-weighted capital requirement for subsidiaries (imposed as a matter of administrative discretion rather than by law or regulation) and the FSC imposed a 14 percent capital assignment for one of the three branches. - A proposed amendment to the Banks and Trust Companies Act (BTCA) provides for a 12 percent risk-weighted capital requirement. ### Insurance sector findings - All insurance companies insuring domestic risk are subsidiaries or branches of high-quality institutions subject to effective consolidated supervision; most captives have single U.S.-based parents whose structure and operations have been vetted by the U.S. Internal Revenue Service. - The sector benefits from FSC supervision and the above parent-company supervision, resulting in a well-supervised sector overall. - Weaknesses: - Lack of guidelines for corporate governance and internal controls, particularly important for supervision of managers of captives; such guidelines are planned to be introduced in early 2003. - There is no compulsory errors and omissions, fidelity and surety and broad-form professional liability insurance for all providers, although this is also planned. ### Securities sector findings - The FSC has generally done a good job of supervision in the securities sector. - Weaknesses and recommended enhancements: - The FSC needs to set out the prospectus disclosure requirements applicable for public funds; disclosure obligations of mutual funds need to be enhanced. - Business conduct rules and requirements for books and records, internal controls and risk management systems for mutual fund managers and administrators should be strengthened. - All managers, administrators and other mutual fund functionaries, such as custodians, should be required to segregate client assets effectively. - Most of these issues are addressed in a draft code of practice expected to come into force in early 2004; remaining issues are expected to be addressed in proposed regulations for mutual funds. ### International business companies (IBCs) and bearer shares - The regime for registering and maintaining IBCs in the territory meets or exceeds most best practices, largely because IBCs must be registered (incorporated) by registered agents who themselves are subject to regulation and supervision. - A draft amendment to the International Business Companies Act, 1984 (IBCA) is planned to require that the registered agents keep information on IBC directors in the territory. - Amending legislation to the IBCA is being finalized to implement the immobilization of bearer shares; this requirement appears to address concerns of the Financial Action Task Force (FATF) and Organization for Economic Cooperation and Development (OECD), among others. ### Companies and trust service providers (CSP) sector findings - All CSPs are subject to regulation and supervision by the FSC. - Oversight largely meets industry best practices as provided in the OGBS Statement of Best Practices. - Key needs: - Completion of inspections of all CSPs and drafting of a regular compliance and on-site inspection program, given the very large IBC client base and the need to assess compliance with the OGBS statement of best practice (including that action can be taken where there is evidence of noncompliance). - Inspections could be more detailed and structured. - Greater contact and consultation by the FSC and the BVI Association of Registered Agents would be helpful. ### Framework for anti-money laundering and combating the financing of terrorism (AML/CFT) - The legal framework for AML/CFT measures in the BVI is generally compliant with international standards. - Sufficient legal means and measures are in place for criminalization of money laundering (ML) and financing of terrorism (FT), to facilitate international cooperation in ML and FT matters, and to provide for confiscation and forfeiture of assets associated with ML and FT. - The Attorney General’s Chambers (AGC) appear to be well versed to handle complex matters, but few prosecutions have taken place in the BVI; any increase in the number of prosecutions would impose a heavy burden on the AGC’s Commercial Crimes Unit. - Required measures for FT, including criminalization and freezing/confiscation of FT assets, have been fully integrated into the legal framework. - The BVI has taken a pragmatic approach to establishing the supervisory framework for AML/CFT measures and applying due diligence requirements to all regulated persons. - Money remitters are not yet subject to licensing or prudential supervision, although this is contemplated under a proposed law which authorities expect to be enacted in the first half of (text truncated in source). *IMF assessment of the British Virgin Islands (Module 2 OFC assessment, November 11–22, 2002).* ### 2003. The FSC is carefully building its staff to cover the range of its mandates, by enhancing ### cr0492 - 2003. The FSC is carefully building its staff to cover the range of its mandates, by enhancing ### FSC staffing, AML/CFT implementation, and supervisory capacity - Findings: - The FSC is enhancing staff for AML/CFT compliance, including filling vacancies in the Legal and Enforcement Division; such staff will have a significant role in implementing the legal and supervisory framework under the AMLCP and the guidance notes. - While the legal and supervisory frameworks are adequately structured, the implementation of the full range of AML/CFT supervisory measures has not yet been fully achieved. - Verification of AML/CFT must be an essential part of examination procedures and manuals; specific file review and transaction testing are needed as supervisory measures are implemented. - Supervisors have kept abreast of financial sector concerns and have provided extensive training and guidance to financial intermediaries to aid in establishing adequate internal compliance measures. - Action / Follow-up noted: - Vacancies in directorships of Legal Department and Policy Planning Department, and anticipated vacancies in at least one other department, were to be filled. - Recruitment in process; Legal Department vacancy filled; search for head of Policy Planning in effect using international headhunters. - Need for additional trained regulatory staff; recruitment in process and training plan drafted. - Consideration of using specialized consultants and/or requiring external auditors to perform and certify certain compliance testing. - Training for KPMG’s computer based on-site inspection program recently completed for implementation 1st quarter 2004. - On-site inspections to begin 1st quarter 2004. - Computer based procedures manual completed by KPMG. - Job description questionnaire for inspection coordinator completed with vacancy to be filled shortly using international headhunters. - Computer based inspection to be implemented Q1 2004. ### Cross-border information exchange and cooperation - Finding: - Cross-border information exchange and cooperation has been excellent in all areas. ### Issues of general applicability (governance, procedures, audit) - Findings: - Executive Council not required to disclose grounds for removal of board members. - Conflicts policy for FSC board members could be more detailed and specific. - Managing Director (MD) does not have fixed-term appointment. - FSC board not required to disclose grounds for removal. - Detailed reasons for all non-routine decisions not always provided unless requested. - No regular and comprehensive audit and compliance program. - No on-site inspections; no manual for inspections. - Action Plans: - Amend FSCA to require Executive Council to disclose grounds for removal. - Amend board Code of Conduct to provide more detailed conflicts policy. - Amend FSCA to provide for fixed-term appointment and disclosure of grounds for dismissal. - Amend guidelines to require reasons for all non-routine decisions be provided. - Prepare plan and procedures for audit and compliance program; begin on-site inspections; complete manuals; train staff. - Follow-up / TA Needs: - FSC Board to consider amendments to FSCA and Code of Conduct. - Recruitment and training of additional regulatory staff; consideration of consultants. - Technical assistance in conducting inspections and in related capacity-building programs. ### Banking sector: prudential supervision and regulatory gaps - Findings: - Government of the BVI (GOB) not subject to the prudential supervision of the FSC. - No risk based capital requirement in law or regulations for subsidiaries; no capital allocation for branches. - No specific prudential regulations on credit concentration, credit reserve requirements, connected lending, liquidity requirements, and country risk limitations. - FSC requires audited financial statements of subsidiaries, but not of branches (at time of findings). - Action Plans: - Amend legislation to subject GOB to supervision by FSC. (Draft legislation pending.) - Consider issuing regulation establishing adequate capital requirements consistent with international standards. - Draft legislation that includes requiring a 12 percent risk based capital pending. - Consider prudential regulations based on internationally recommended standards tailored to local circumstances; discuss with banks; promulgate appropriate standards. - Amend guidelines to require audited financial statements of branches. - Follow-up / Outcomes: - Draft legislation pending to subject GOB to FSC supervision. - Branches will be required to have an assignment of capital by Q2 2004. - The FSC has drafted Large Exposure, Liquidity Policy and a Code of Banking Practice to be adopted by Q1 2004. - Branches are now required to submit audited financial statements. ### Insurance sector: governance, controls, and required coverages - Findings: - Lack of guidelines on the operations of insurance managers and other intermediaries on corporate governance and internal control procedures. - Errors and Omissions, Fidelity and Surety and Professional Liability insurance not required for all insurance managers, compliance officers and insurance agents and brokers based on a sliding scale of level of exposure to various hazards. - Action Plans: - Assess suitability of applicable IAIS Guidance notes; discuss with intermediaries and other stakeholders; promulgate appropriate standards. - Determine appropriate types of insurance necessary; discuss with industry; assess appropriate levels of exposure; issue guidance requiring coverage. - Follow-up: - In process, to be completed in 2003. ### Securities sector: mutual funds regulation and disclosure - Findings: - Mutual fund conflicts of interest not dealt with comprehensively. - No requirement of mutual funds, managers and administrators to file annual audited financial statements with the FSC, or for managers and administrators to file other regulatory reports. - No specific requirements regarding books and records, or that assets be segregated (except custodians and others over whom FSC has no jurisdiction). - No guidelines for issuing prospectuses of public mutual funds. - Requirement for public mutual funds to make immediate disclosure of any material changes needed expansion. - No rules on public mutual fund asset valuations and related disclosure provisions. - No prohibition on public mutual funds from ceasing to redeem its securities without the permission of the FSC. - Action Plans and Timing: - Issue formal requirement for disclosure of all relationships between managers, administrators, other functionaries and service providers; to be included in proposed public mutual funds regulations (end of Q2 2004) and draft Code of Practice (end of Q1 2004). - Issue guidelines in draft Code of Practice and Mutual Funds Amendment Act requiring filing annual audited financial statements, including regular inspections; to be included in draft Code of Practice (end of Q1 2004) and Mutual Funds Amendment Act (end of Q4 2003). - Issue detailed guidelines on books and records and asset segregation for all functionaries who hold BVI registered public mutual fund assets; to be included in proposed public mutual funds regulations (end of Q2 2004) and draft Code of Practice (end of Q1 2004). - Issue guidelines in the proposed Public Funds Regulations and Mutual Funds Amendment Act regarding prospectuses for public mutual funds; to be included in proposed public mutual funds regulations (end of Q2 2004) and Mutual Funds Amendment Act (end of Q4 2003). - Issue guidelines in the draft Code of Practice on asset valuations and related disclosure provisions; to be included in draft Code of Practice (end of Q1 2004). - Issue guidelines in proposed public mutual funds regulations requiring public mutual funds to notify the FSC before ceasing to redeem its securities; to be included in proposed public mutual funds regulations (end of Q2 2004). ### IBC, Trust and Company Service Provider (CSP) sectors: supervision, inspections, and industry engagement - Findings: - Need to ensure continuing and enhanced compliance with current draft of OGBS Statement of Best Practice. - More detailed and structured on-site inspection of CSPs needed to be able to take action where there may be evidence of noncompliance. - Increased input from industry needed in respect of supervisory processes. - Action Plans: - Monitor and measure Bank & Fiduciary Services Division policies and implementation against OGBS Draft Methodology Document. - After finalization and acceptance of OGBS Draft Methodology Document, follow-up audit to be undertaken by MFD of the Division’s findings. - Introduce a staff secondment program with the local CSP industry and auditing firms. - FSC to liaise with the local CSP industry and auditing firms. - Increase contact and consultation with the BVI Association of Registered Agents; FSC to establish a closer working relationship with the Association of Registered Agents by Q1 2004. - Follow-up / Implementation: - Computer based inspection to be implemented Q1 2004. ### Financial system and offshore overview — background, structure, and fiscal dependence - Setting and demographics: - The BVI is a British Overseas Territory of 153 square kilometers in size and comprising over 40 islands, islets and cays, with a population of around 21,000. - About two-thirds of the population lives on the island of Tortola (53 square kilometers) and another 15 percent on the island of Virgin Gorda (21 square kilometers). - The BVI’s annual per capita income is about $37,000 and the median income about $11,000. - Currently, approximately 40 percent of the labor force comes from outside the territory. - Economic structure and constraints: - The BVI is highly dependent on both tourism and the offshore financial sector (both approximately 40 to 45 percent of GDP). - Physical and policy constraints limit expansion of office and hotel space and the airport cannot accommodate wide-body planes. - Government policies preserve environmental quality and restrict size and number of new construction projects. - Government and governance: - The governor is appointed by the U.K. Foreign and Commonwealth Office (FCO) and retains direct responsibility for external affairs, terms and conditions of public service, and administration of justice. - The executive council consists of the chief minister and four other ministers (all elected members of the legislative council) and the attorney general (ex officio); the governor normally chairs sessions of the council. - The legislative council consists of 13 members elected for a term not exceeding four years. - Judicial branch includes a high court with two resident judges and a single magistrate; the appeal court and high court are associated with the Organization of Eastern Caribbean States (OECS). - The civil service and several statutory bodies, including the Tourist board and the FSC, operate with professional reputations; the administration of justice, AGC, police, and courts are identified as key elements in minimizing reputational risk. - Offshore financial services: - Very limited offshore banking sector; policy allows only highly reputable institutions subject to effective consolidated supervision to engage in onshore or offshore banking. - Offshore insurance sector restricted to captive insurers and their managers. - Offshore securities sector limited to mutual funds, their managers, and administrators. - The largest offshore activity is registration of IBCs under the IBCA (enacted in 1984); IBCs are prohibited from carrying on business with BVI residents or owning real property in the BVI, though BVI residents may hold shares or other securities in the IBC. - The BVI was identified by the European Union (EU) as not conforming with its Code of Conduct on Business Taxation because of the ring-fencing nature of the IBC tax regime; the chief minister stated the government would combine the IBCA and the Companies Act, 1885 into a single law by end-2003, and move to a zero rate of income tax by 2005. - IBC sector scale and trends: - FSC and private sector estimate approximately 350,000 active IBCs registered in the BVI, which is assumed to dominate the world IBC market with an estimated 45 percent share. - In recent years, the number of IBCs being registered has begun to level off or even decline, while the number of companies being struck from the register has increased. - Causes include increased regulatory and AML/CFT standards and the transfer of significant personal wealth already into IBCs. - Registered agents must be incorporated by and, at all times, maintain a registered agent; registered agents are subjected to prudential licensing and supervision requirements and to AML/CFT duties. - Budgetary dependence on offshore fees: - Last year, fees for the registration and licensing of IBCs accounted for approximately 55 percent of total government revenues of US$187,476,000. - Other key sources of revenue include personal and corporate income tax at 17 percent, and import duties at 10 percent of total revenues. - Revenues from registration and licensing of IBCs are expected to remain relatively flat. - The chief minister announced intent to move to a zero rate of income tax by 2005. - Import duties are relatively inelastic due to small retail sector, duty-free imports from U.S. Virgin Islands and Puerto Rico, and politically popular exemptions for certain nonprofit entities. *From the IMF 2003 country report on the British Virgin Islands.* ### 12. Government expenditures, however, are expected to continue to rise. The BVI’s ### Government expenditures and financial sector overview — British Virgin Islands ### Fiscal outlook and government expenditures - Recurring revenues have traditionally run a surplus of a few percentage points over recurring expenditure, with capital projects funded from this surplus and from sources like the Caribbean Development Bank and the European Investment Bank. - Public debt stands at around US$46 million or less than 25 percent of annual government revenues. - Government guaranteed debt of state-owned enterprises and others is at a more or less equal amount. - Two newly approved capital projects — an 80-bed hospital and a new sewage treatment plant — are estimated to cost around US$160 million, to be financed primarily through additional borrowing. - The costs of these projects are expected to create additional pressure on the budget. - Even if the government does not eliminate the income tax, the expected flattening and even reduction of registration and license fees from IBCs, plus increased debt service costs from the new capital projects, is expected to result in a tight budgetary situation for the foreseeable future. ### Banking sector - The banking sector is composed of 11 banks: - 6 general license banks (authorized to engage in banking business within and outside the BVI) - 4 restricted license banks (may only engage in banking business outside the BVI, with certain exceptions) - 1 state-owned bank (GOB) - All banks of any significance (other than GOB bank) are subsidiaries or branches of foreign banking groups. - The Government-Owned Bank (GOB): - Created with a special mandate to promote development of the BVI. - Authorized to accept local deposits. - Engages primarily in lending to consumer, mortgage, small business, tourism, and government sectors. ### Insurance sector - Local insurance market annual premium is about US$40 million. - 30 firms are licensed to write direct insurance on personal and commercial risk; these firms are primarily well-established firms regulated in their home jurisdictions. - There are 13 licensed insurance agents, 11 licensed insurance brokers, and 7 loss adjusters. - The market appears to be stable. - Captive insurers: - Number 263, approximately 95 percent of which are single-parent captives. - All but 22 are organized to insure U.S.-based risks and have been certified by the United States Internal Revenue Service under applicable U.S. tax laws. - This represents about 9 to 10 percent of the world market for captive insurers. - None is allowed to underwrite third-party insurance on a direct basis. - Single-parent captive premia typically under US$500,000 (due to exemption requirements of the U.S. Risk Retention Act); a small percentage have premia exceeding US$1 million. - Captive premia for 2002 are estimated to exceed US$400 million. - The sector is growing at a rate of about 10 percent per year. - There are 12 licensed insurance managers required to have physical presence in the territory; most captive business is managed by subsidiaries of large multinationals. ### Securities and mutual funds - There is no stock exchange and no facility for the issue of securities other than mutual funds; no retail market for securities exists in the jurisdiction. - Mutual funds: - Total of 2,606 mutual funds had been registered or recognized in the BVI. - Growth rate of funds is over 14 percent per year. - About 8 percent of funds are public mutual funds (may be sold by prospectus to any investor); the rest are professional funds or private funds (offers to the public prohibited; investor count must be fewer than 50). - The Financial Services Commission (FSC) does not collect data on the size of funds but estimates total assets of all public, private, and professional funds under management as exceeding US$55 billion. - Around 490 licenses for mutual fund administrators and managers have been granted (number does not reflect cancellations); growth in granting of licenses is nearly 20 percent per year. - Very few licensed managers or administrators are physically located in the territory. - Mutual funds are not required to have managers or administrators licensed by the FSC. - Current legislation does not give the FSC authority to regulate other market participants (e.g., portfolio dealers or underwriters); the draft Investment Business Act would provide such authority. ### International Business Companies (IBCs) and trust and company service providers (CSPs) - Estimated around 350,000 IBCs in the BVI, representing around 45 percent of the total world market. - Most IBCs are used as holding companies for shares, trust property, and other assets; a smaller but significant number are used for private investment activity. - IBC client base tends to come from the Far East, Europe, and Latin America. - All IBCs must be registered in the BVI by a registered agent and must have an office maintained in the British Virgin Islands and a registered agent at all times; the registered agent is the key to registration and to information beyond registration documents. - Registered agents may be licensed under: - Companies Management Act, 1990 (CMA), or - Banks and Trust Companies Act, 1990 (BTCA). - Registered agent services include registration, provision of registered office services, provision of directors or officers, and provision of nominee shareholders. - Registered agents must establish a physical presence in the BVI when licensed. - Trust licensing: - A BTCA license to conduct trust business entitles automatic company management licensing. - General Trust License (GTL) permits full trust business and company management; Restricted Trust License may not conduct company management and may act for up to a maximum of 25 trusts (proposed to increase to 50), with any additions requiring new application and reassessment. - License statistics and registration: - Licenses valid until December 31 of the year issued and renewable in January of the next year. - 20 licenses for Company Management Services under the CMA. - 96 licenses for Restricted Trust Business under the BTCA. - 92 licenses for General Trust Business under the BTCA. - Forty-nine of the 92 General Trust Business license holders, and 20 subsidiaries of General Trust Business license holders, have been registered as registered agents, bringing the total number of registered agents (including 20 CMA licenses) to 89. - No CSP is a provider of banking, accounting, or legal services, though some have connected-entity relationships with law firms, banks, and accounting or other financial service firms. - All CSPs are required to maintain a principal office in the BVI. ### Regulatory framework, oversight, and market integrity (FSC) - The Financial Services Commission Act (FSCA), effective January 2002, establishes the Financial Services Commission (FSC) as an independent statutory body. - FSC responsibilities and authority: - Grant and revoke licenses of all covered financial services, including banking, insurance, securities, and trust and company service provider sectors (onshore and offshore); supervise operations of such persons. - Register domestic companies, IBCs, and limited partnerships; oversee compliance with the Companies Act (CA) and the International Business Companies Act (IBCA). - Monitor, detect, and assist in prosecution of financial crime; maintain contact with foreign regulators; public education; advise the executive council on legislative changes. - Provision for an independent appeals board for appeals of any FSC action except refusal to grant a license. - The FSCA was enacted following recommendations of the KPMG Review of Financial Regulation in the Caribbean Overseas Territories and Bermuda to transform the financial services department (FSD) into an independent regulatory body and to transfer licensing and supervisory powers to that body; promotional duties were moved to a financial services marketing unit within the BVI Government. - FSC powers (as supplemented by sector laws and regulations) include powers to: - issue regulations (with executive council approval) for conduct of regulated persons and their officers and agents; - prescribe manuals of compliance procedures and codes of practice; - require regulated persons to appoint compliance officers and define their responsibilities; - require persons engaged in financial services business (or connected persons) to furnish any relevant non-privileged information, including applying for and executing search warrants; - conduct compliance inspections; - appoint investigating examiners and advisers, issue cease-and-desist directives, revoke or suspend authorizations, apply to court for orders to protect businesses or property of regulated persons; - compound offenses under the act; - provide information to high-ranking officers in approved international organizations or law enforcement authorities, and to foreign regulatory authorities in jurisdictions approved by the board that discharge corresponding duties. - Books of account and budgetary issues: - The FSC is required to keep audited books of account and a report on its activities to be tabled before the executive and legislative councils; such books and reports had not yet been prepared as the FSC had only recently begun operation. - FSCA provides basic obligations on conflicts of interest and confidentiality; additional rules and procedures adopted by the board supplement these, though rules on conflicts of interest could be made more specific. - FSC funding: quasi-independent source based primarily on a percentage of receipts of registration and license fees; the actual amount it may keep (not less than 7.5 percent or the previous year’s allocation, and normally not more than 15 percent) is based on a negotiated agreement between the executive council and the FSC. - The FSC currently estimates it requires at least 10 percent of such fees given current resource demands, especially regulatory staffing; if not achieved by negotiation, the minimum threshold of 7.5 percent would be instituted. - The general budgetary squeeze anticipated over the next few years, and the prominence of registration and licensing fees as main government revenue, may place additional pressures on this funding process, potentially resulting in resource constraints for the FSC. - Governance and Board of Commissioners: - The Board is non-executive; activities limited to creating and appointing senior management (except the managing director (MD)), establishing general policy, and monitoring/overseeing policy implementation and management by the MD. - The MD is responsible for operations, creates and appoints FSC staff (subject to board approval), and coordinates/executes requests for assistance from foreign regulatory bodies. - Board appointment: appointed by the Executive Council for a period not exceeding three years; the council determines terms with a goal of having one-third of board members’ terms end each year; consideration being given to extending terms. - The FSCA allows removal of a board member for cause but does not require disclosure of grounds for removal; consideration should be given to requiring such disclosure. - The Council appoints the MD on recommendation of the Board under terms and conditions as it sees fit; consideration that prescribing a term of service (perhaps five years) and requiring public disclosure of reasons for dismissal of the MD would be preferable. - Current practice saw most Board members selected from names put forward by the MD; consideration could be given to establishing a formal external advisory committee to advise the executive council on board and MD appointments. - The Board has adopted Procedures and Protocol Guidelines, a Code of Conduct, Guidelines for Operating Procedures for the Licensing and Supervisory Committee, and a Table of Authorized Levels of Decision-Making; areas reserved for the Board are clearly laid out. - The Board currently meets once a month and reviews monthly memoranda prepared by the MD on FSC work; some private sector complaints about lack of transparency in Board decision-making. - Licensing and Supervisory Committee: - Main functions vested in a licensing and supervisory committee including MD, Deputy MD, and directors of regulatory and supervisory divisions (banking and fiduciary services, insurance, investment business, legal and enforcement). - Committee reviews and acts on all applications for licenses and supervises regulated persons to ensure fit-and-proper continuing compliance. - Board guidelines specify peer review of committee decisions and require documentation be prepared and circulated a week prior to meetings. - Guidelines do not require written reasons for all decisions (only when requested); amendment to require written reasons for all denials could improve review efficiency once appellate review is operational. - Staffing and supervision: - The FSC performs day-to-day functions through various regulatory directorates. - A few significant senior management vacancies exist, including director of legal and enforcement (Deputy MD temporarily filling the role); expected filling soon with a former Attorney General. - Plans exist but are unimplemented for appellate review of decisions, a policy and research department, and an insolvency services department; the director of at least one department is expected to retire soon. - FSC is seeking to fill vacancies using international headhunting firms. *International Monetary Fund (IMF) staff report excerpt.* ### 44. The FSC is staffed with approximately 75 professional employees, the vast majority ### Staffing, Supervision, and Basel Core Principles Assessment (BVI Financial Services Commission) ### FSC staffing and capacity - The FSC is staffed with approximately 75 professional employees, the vast majority of whom are involved with the relatively routine task of registration of IBCs in the Registry of Corporate Affairs. - Of those assigned directly to the licensing and supervision of financial institutions: - five are assigned to banking and fiduciary services; - three to the insurance sector; - five to investment business. - Administrative functions are undertaken through the financial controller, operations manager, and human resources manager. - Capacity concerns and planned actions: - Current staffing levels are likely to be inadequate once full on-site inspections begin in 2003. - Some staff below management and director levels lack in-depth knowledge of regulated persons and extensive regulatory and supervisory experience. - The FSC largely took over duties and staff of the FSD and has been in existence only since the beginning of 2002; it is still gearing up for full operation. - The FSC is actively recruiting and training new staff, including through the use of headhunters; the local community college has begun a program in financial services. - Recommendation: specify human resource needs in a detailed 3- to 5-year recruitment and succession program to implement a long-term enhancement and deployment of skills-strategy. ### Supervisory practices, on-site inspections, and enforcement - Current practices: - Detailed and well-executed off-site inspection of relevant documents commonly occurs in initial licensing and license renewal, including background checks where necessary. - The FSC has not yet fully implemented a comprehensive audit and compliance system that exercises all supervisory powers, including on-site inspections outside of the CSP sector. - Enforcement activities are undertaken in part on an ad hoc basis. - Remediation underway: - The FSC engaged KPMG to assist in designing an audit program. - Manuals have already been prepared, and the audit program and on-site inspections are expected to begin in 2003. - Off-site reporting and validation: - The FSC receives quarterly balance sheet and income statement information with additional memorandum information and a maturity analysis of assets and liabilities, but regulatory reports are highly summarized and lack sufficient detail (for example, levels of delinquency). - The FSC requires banks to file audited financial statements and accepts audits in accordance with the standards of a bank’s country of origin; the FSC does not require branches to file audited financial statements. - As part of on-site supervision implementation, verification of regulatory reporting with bank records is recommended. ### Information collection, industry consultation, and prudential returns - Weaknesses: - Collection of information relating to the financial industry and of regulated persons is inadequate for planning, supervision improvement, and anticipating future needs. - Efforts and plans: - Increasing and dedicated effort to engage in consultations with industry, including outreach and industry education on new regulatory and supervisory requirements. - The consultative process is becoming more regularized, with ongoing consultation on the design of a new prudential return expected to be introduced at the end of 2003. ### Market structure and main banking-sector facts - There are 10 banks with total assets of US$2.71 billion in the BVI; they operate under the BTCA and are subject to FSC supervision. - Six have a general license and can do business within and outside the BVI. - Four have a restricted license and can only do business outside the BVI, with certain exceptions. - All these banks are primarily subsidiaries or branches of foreign banking groups. - The Government-Owned Bank (GOB), the Development Bank of the Virgin Islands, operates pursuant to the Development Bank of the Virgin Islands Ordinance (1974) and has total assets amounting to US$56 million; the GOB engages in retail and commercial banking. - The banking system is composed almost entirely of subsidiaries and branches of international banking institutions, which appear subject to adequate consolidated supervision. ### Compliance with the Basel Core Principles — key findings - General preconditions and structure: - The FSC implemented its limited on-site supervisory visits program during 2001 and is developing prudential regulations and more in-depth on-site examination procedures expected to be implemented during 2003. - The BVI generally complies with BCPs relating to Objectives, Powers, and Resources and Licensing, but lacks specific prudential regulations and requirements; supervision is limited to high-level questionnaires and discussions with management, leaving overall supervision weak. - The GOB is currently not subject to prudential oversight; authorities are proposing legislative amendments to place the GOB under FSC supervision. - Prudential regulation and requirements (CP 5–15): - The BVI generally lacks detailed formal prudential regulation regarding capital, credit policies, reserves, large exposures, connected lending, market risk, liquidity, interest rate risk, and country risk. - The FSC administratively requires the general license banks, and most restricted license banks, to comply with an 8 percent risk-based capital requirement. - On-site prudential visits use detailed questionnaires covering credit, foreign exchange, liquidity risks, corporate governance, and internal audit; questionnaires do not cover certain issues, including country risk and connected lending. - The lack of clear regulatory requirements and detailed testing results in a relatively weak prudential regulatory framework, mitigated by the foreign-bank composition of the system. - The FSC has adopted adequate AML policies but no detailed on-site testing has yet been performed to ascertain operational effectiveness. - Methods of ongoing supervision (CP 16–20): - Effective supervision requires a combination of on-site and off-site procedures; current on-site visits (begun in 2001) are limited to meetings with top management and use the “Bank Prudential Visit Questionnaire.” - The level of detailed questioning, analysis, and follow-up provides only a broad-level perspective; lack of detailed analysis and testing limits independent verification of management representations and off-site reports. - Information requirements (CP 21): - FSC requires audited financial statements from banks but not from branches; neither the FSC nor the banking industry publishes detailed bank financial condition information. - Remedial measures and exit (CP 22): - FSC has adequate legal powers to take corrective action, but shortcomings in supervision and prudential standards have delayed timely remedial actions in practice. - Cross-border banking and cooperation (CP 23–25): - No banks incorporated in the BVI have foreign subsidiaries or foreign branches. - The FSC actively maintains communication with home country supervisors; prudential requirements for foreign branches are generally implemented by the consolidated supervisor. ### Strengths, planned reforms, and recommended actions - Strengths and recent improvements: - The Financial Services Commission Act of 2001 established FSC objectives, autonomy, powers, resources, and broad rule-making powers. - The enactment of the FSC Act greatly improved independence of licensing, regulatory and supervisory procedures and provided adequate resources for supervision. - The FSC follows a risk-based approach, concentrating supervisory work on asset-liability management, financial performance, capital adequacy, and credit risk management. - Planned reforms and supervisory enhancements: - Guidance notes expected to address capital requirements, large exposures, connected lending, related-party transactions, and other prudential issues. - A more comprehensive on-site supervision module is expected during the second half of 2003. - The FSC is modifying its off-site reporting package to include detailed information on: (i) exposures to central governments; (ii) income and expense statements; (iii) securities subdivided by different categories (debt vs. equity and trading vs. investment/held to maturity); (iv) past-due loans and other assets; (v) repricing maturities; (vi) off-balance sheet items; (vii) derivatives; and (viii) risk-based capital calculation. - The FSC may consider implementing broad prudential requirements that require boards and management to establish detailed policies and procedures on corporate governance and risk management, subject to FSC approval. - The FSC should consider greater coordination with consolidated supervisors and the use of external auditors or other professionals to assist in detailed regulatory testing. - Table 2 recommended actions (summary): - Place the Development Bank under full FSC authority (to be implemented by end-2003 or early 2004). - Implement prudential standards consistent with international standards. - Implement Corporate Governance Standards and formal requirements for internal audit. - Implement on-site supervisory program and changes to off-site supervisory reporting and analysis. - Verify regulatory reporting with bank records as part of on-site supervision. - Design methodology and add resources for effective off-site supervision and continuously coordinate with home supervisors. - Increase interaction with home country supervisors to improve understanding of consolidated entity risks. ### Authorities’ response and supervisory tools - The FSC has signed off on the Fiduciary/Company Management On-site Monitoring Program; the Banking On-site Monitoring Program is expected to be signed off shortly. - The Bank Prudential Visit Questionnaire has provided useful insights; a new questionnaire will allow the FSC to assess banks’ asset quality. - Draft guidelines on concentration and liquidity risks, credit policies, and large exposure consistent with the BCP are with the banking industry for consultation. - No specific loan classification or provisioning rules have been issued; the FSC expects banks to have internal policies consistent with international best practice. - The FSC expects to test the quality of banks’ systems, controls, and internal audits on an ongoing basis once on-site inspections commence. *Source: IMF assessment of the British Virgin Islands’ compliance with the Basel Core Principles (IMF Module 2 for Offshore Financial Centers).* ### 84. Country risk is not significant for BVI banks as most loans are to domestic companies ### 84. Country risk is not significant for BVI banks as most loans are to domestic companies ### Banking sector country risk and supervision - Country risk for BVI banks is not significant because most loans are to domestic companies or individuals. - Where country risk exposures exist, they are to OECD and G10 countries. - Connected lending is monitored through prudential returns via the sections titled "Related Party Deposits" and "Related Party Loans and Advances". - All banks' licenses have been approved and granted on the explicit understanding that the banks would be regulated according to the BIS standards. ### Reporting and disclosure requirements - The FSC now requires all branches to file audited financial statements commencing end of financial year 2003. - A proposed amendment to the BTCA will require all banks to publish financial statements in the local press. ### Prudential guidelines (development and implementation timeline) - Prudential guidelines are being drafted and are due to be implemented by end-2004 for the following areas (items marked "completed" noted as such): - bank licensing; - large exposures (completed); - liquidity management (completed); - credit concentration limits; - risk weighted capital adequacy ratio; - credit classification for provisioning purposes and income recognition; - general principles for maintenance of accounting and other records and internal control systems; - internet banking; - corporate governance; - related party transactions; - relationship between financial institutions and external auditors; - public disclosure of information; - interest rate risk; - country risk; - market risk; - code of practice for banks; - prudential returns (completed). ### Securities sector — scope and legal framework - The assessment covers the BVI securities sector and aims to determine levels of observance of the IOSCO principles and suggest areas for development; it was undertaken as part of the IMF Module 2 for Offshore Financial Centers. - Regulation of securities was introduced with the Mutual Funds Act, 1996, as amended (the MF Act), implemented in January 1998, providing for registration of public mutual funds and recognition of private and professional funds and governing licensing of mutual fund managers and administrators. - The Financial Services Commission (FSC) was created under the Financial Services Commission Act, 2001 (the FSCA), giving the FSC authority to administer, enforce, grant and revoke licenses and certificates, incorporate companies under both the Companies Act and the International Business Companies Act, 1984, conduct examinations, impose levies and collect fees. - The Financial Services (International Cooperation) Act, 2000 (FS(IC)A) supplements the framework by setting out requirements for information sharing with foreign regulators and law enforcement agencies. - The legal system in the BVI operates under common law principles. ### Market structure and statistics (mutual funds and service providers) - At the end of September 2002, a total of 2,606 mutual funds had been registered or recognized in the BVI, up from 2,346 at the end of 2001, an increase of more than 11 percent in nine months. - About 8 percent of these are public mutual funds that may be sold by prospectus to any investor; the remainder are professional funds or private funds (private funds: offers to the public are prohibited and the number of investors must be fewer than 50). - As at the end of September 2002, 490 licenses had been granted to mutual fund administrators and managers (this number does not reflect the total number of active licenses). - One fund administration and 75 fund management licenses were granted during the first nine months of 2002. - Mutual funds are not required to have managers or administrators licensed by the FSC; very few of the licensed managers or administrators are physically located in the territory. - There is no stock exchange in the BVI, no facility for the issue of securities other than mutual funds, and no retail market for securities of any kind in the jurisdiction. - There are no self-regulatory organizations in the territory; the BVI Association of Mutual Fund Practitioners was formed in late 2001. ### General preconditions for effective securities regulation - Preconditions appear to be present: no significant barriers to entry and exit; competition encouraged; foreign participation welcomed. - Bankruptcy legislation is outdated; a modern Insolvency Act has been drafted and is to be introduced to the legislature shortly. - The regulator has legally enforceable powers of decision and action; legal and accounting resources available to market participants do not pose constraints; taxation framework is supportive. ### Main findings — summary of IOSCO Principles assessment (Principles 1–30) - The Regulator (Principles 1–5) - Responsibilities of FSC are clear and objective; it is operationally independent and publicly accountable to the government and to the administrative courts. - FSC staff meet high expectations of professionalism; processes are clear and consistently applied. - All laws that FSC administers are publicly available within the BVI; FSC might consider additional transparency regarding consultation processes to be more open and inclusive. - Scope of authority (Principle 2–5) - The FSC does not have authority over the full range of securities activities covered by the IOSCO Principles; gaps exist but are in areas with no evident activity in the BVI at present. - Self-Regulation (Principles 6–7) - There are no self-regulatory organizations; given current industry structure this is not inappropriate. - Enforcement (Principles 8–10) - FSC has comprehensive inspection, investigation, surveillance and enforcement powers, but some limitations (e.g., need for a suspicion before appointing an examiner) could be eliminated. - Monetary penalties may not be an effective deterrent and should be reexamined. - FSC has not implemented an effective system to exercise these powers: no comprehensive system of on-site or off-site inspections; enforcement is ad hoc. - A new computer based audit and inspection program is being developed for implementation in 2003, along with regular reporting requirements for fund managers and administrators. - Significant additional resources are needed to implement effective oversight; FSC's investigation and enforcement abilities are limited by lack of staff. - Cooperation in Regulation (Principles 11–13) - FSC has broad authority to share information with domestic and foreign counterparts; no significant practical impediments to providing assistance to foreign regulators. - Legislative provisions dealing with information sharing should be conformed to avoid artificial constraints (e.g., revise FSCA definitions to ensure they do not limit FSC's ability to share information where foreign regulators are exercising jurisdiction over activities the FSC cannot). - Issuer Regulation (Principles 14–16) - No primary market issues other than mutual funds; lack of FSC statutory authority in this area is not a weakness given market realities. - Accounting and auditing standards applied are high and internationally acceptable, though processes for approving an auditor and recognizing a jurisdiction would benefit from including an assessment of the applicable accounting and auditing standards. - Mutual Fund Regulation (Principles 17–20) - Entry standards for fund managers and administrators are generally satisfactory. - Rules governing conflicts of interest between fund managers, related companies and funds need more comprehensive treatment. - Business conduct rules and requirements for books and records, internal controls and risk management for mutual fund managers and administrators should be strengthened. - There should be an express requirement that mutual fund assets must be segregated from assets of the fund manager, custodian or other service providers. - Initial disclosure (prospectus) requirements for public mutual funds should be set out in a regulation and continuous disclosure obligations need improvement, particularly timely public disclosure of material changes. - These matters are to be addressed in the draft Code of Practice. - FSC should establish a supervision program for fund managers and administrators combining periodic receipt and review of financial information and on-site visits. - Market Intermediary Regulation (Principles 21–24) - Market intermediaries are not currently subject to regulation; absence of retail securities intermediation activities makes this gap not serious. - The Commission has recommended government introduce legislation to govern persons carrying on investment business; the draft Investment Business Act should address these issues. - Secondary Markets Regulation (Principles 25–30) - FSC has no authority over exchanges, trading systems or clearing and settlement systems; no organized market exists in the BVI and none is expected in the foreseeable future. ### Recommended action plan (selected actions, FSC responses, and timing) - Principle 2 - Recommended: Consider amending legislation to require the FSC to give reasons for all non-routine decisions and develop a more detailed conflicts policy for board members. - Response: Under consideration. - Principle 3 - Recommended: Increase staff resources for ongoing supervision and enforcement. - Response: To be implemented. - Principle 4 - Recommended: Make licensing and approval processes and requirements publicly available; enhance transparency of consultation process. - Response: Forms, specific requirements and checklists are made available (though not on the website). Intention to include more information on the website. Consultation process is being enhanced; more rigorous consultation with the Mutual Funds Advisory Committee is already taking place. Consideration is being given to including application forms and the public register on the FSC website. - Principle 9 - Recommended: Ensure fines under the FSCA and related statutes are set at a level to be an effective deterrent. - Response: Under consideration. - Principle 10 - Recommended: Increase staff resources for inspections and enforcement; expedite completion and implementation of the new audit and compliance program. - Response: Appropriate actions to be undertaken. The audit and compliance program is finalized but cannot be implemented until the Code of Practice is issued. Expected to be implemented end of Q1 2004. - Principle 11 - Recommended: Broaden legislative language relating to information sharing to eliminate need for foreign regulator to be exercising powers corresponding to those granted the FSC. - Response: Under consideration. - Principle 16 - Recommended: FSC should assess the quality of accounting principles and auditing standards in a jurisdiction before approving an auditor or recognizing a jurisdiction under the MF Act; standards should be equivalent to IAS. - Response: Agree, expected end of Q1 2004. - Principle 17 - Recommended: Deal with mutual fund conflicts of interest more comprehensively; require disclosure of relationships among managers, administrators, functionaries and service providers; require annual audited financial statements and other regulatory reports; institute regular inspections. - Response: Will be a formal requirement under prospectus requirements in proposed public fund regulations; other conflicts addressed in draft Code of Practice. Reporting requirements included in draft Code of Practice. Public mutual funds are required to prepare annual accounts though not to file them; filing will be required in proposed public fund regulations. Expected end of Q1 2004 (Code of Practice) and end of Q2 2004 (Proposed Public Funds Regulations). - Principle 18 - Recommended: Impose specific books and records and asset segregation requirements on all functionaries holding BVI registered public mutual fund assets. - Response: Agree; predominantly covered for managers and administrators in the draft Code of Practice. FSC has no remit over custodians or other functionaries. Expected end of Q1 2004. - Principle 19 - Recommended: Issue prospectus regulations for public mutual funds; require immediate disclosure of material changes to investors; extend statutory liability for misrepresentations in a prospectus to all parties involved in preparing or authorizing the prospectus. - Response: Agree for prospectus regulations and disclosure; to be included in proposed public fund regulations, expected end of Q2 2004. Disagree on extending statutory liability to all parties involved in preparing the prospectus (directors ultimately responsible). - Principle 20 - Recommended: Enact binding rules on mutual fund asset valuations and related disclosure; prohibit public mutual funds from ceasing redemptions without notification to the FSC. - Response: Agree for public mutual funds; to be included in proposed public fund regulations, expected end of Q2 2004. Partially agree on redemption cessation notification—would be prudent to require notification; expected end of Q2 2004. ### Insurance sector assessment (IAIS Insurance Core Principles) - Assessment based on: (1) self-assessment against IAIS Core Principles; (2) relevant laws and regulations; (3) analysis of FSC practices and procedures; and (4) discussions with FSC supervisory staff. - Legal framework for insurance is based on the Financial Services (International Cooperation) Act, 2000 (FSC Act), the Insurance Act of 1994 and the Insurance Regulations of 1995. - Supervision is performed by the Office of the Director: Insurance Business within the FSC. - Supervisory staff cooperated extensively in the assessment and prepared a self-assessment against IAIS Core Principles. *Source: IMF Offshore Financial Center assessment of the British Virgin Islands (Module 2) — assessment of banking prudential framework, IOSCO Objectives and Principles of Securities Regulation, and IAIS Insurance Core Principles.* ### 107. The latest available data indicate that there are 293 insurance companies licensed in ### Insurance and Captive Insurance in the British Virgin Islands ### Market structure and activity - There are 293 insurance companies licensed in the BVI. - There are a total of 263 captive insurers and 241 of the captives are organized to insure U.S.-based risks. - The domestic insurance activity generated approximately US$40 million in premium, while the captive industry wrote over US$400 million. - Approximately 95 percent of the captive business is written by single-parent captives. - There are 13 insurance agents, 11 insurance brokers, 12 insurance managers, and 7 loss adjusters. - There has been a steady growth of captives world-wide in the recent past of approximately 10 percent annually; the growth rate of the BVI captives closely tracks this global growth. ### Rationale for captive industry and competitive position - Business demand for risk-financing or risk management mechanisms alternative to traditional commercial insurance markets created demand for jurisdictions authorizing captive insurers under “user friendly” standards. - Organizers of captives gain advantages to their business or tax status under their own jurisdiction’s laws; the BVI gains licensing revenue and creates jobs. - Fixed costs applicable to a BVI-based captive offer significant savings compared to other jurisdictions seeking captives. - Major market players offering management services to captives are beginning to establish a presence in the territory, signaling a likely increase in the number of captives. ### Supervision preconditions and effective supervision of captives - Effective insurance supervision requires an agency charged clearly with regulation, having sufficient independence, professional staff and resources, a statutory mandate delegating necessary powers, appropriate standards for licensing and ongoing monitoring, prudential standards governing operations and financial condition, and cooperation with other organizations. - Prudential rules for captive insurers often differ materially from those for insurers marketing to the general public but still require monitoring of solvency, investments, asset and liability matching, and sufficiency of reserves. - Regulators must adopt standards that maintain confidence insurers can meet contractual obligations irrespective of ownership; this is particularly important for liability insurance where third-party beneficiaries exist. ### Findings on the regulatory framework and gaps - The BVI has enacted The Financial Services (International Cooperation) Act, 2000 (FSC Act), a modern and comprehensive statute. - The sector-specific law and regulations (The Insurance Act of 1994 and the Insurance Regulations of 1995) have not been amended to add additional standards; a re-draft of the law and regulations is in progress to harmonize them with the broad powers under the Financial Services Act. - The current state of the insurance law and regulations does not provide precise protections for policyholders in establishing a formal dispute resolution mechanism; an informal system of investigating complaints exists and is expected to be addressed when the inspection process begins. - The BVI does not meet all of the IAIS Core Principles, having deficiencies in Internal Controls, Corporate Governance, and On-Site Inspections. - The staff of the FSC charged with supervising insurance is quite small; except for the two most senior persons, staff has limited training in insurance regulation and supervision. Recruiting and retention of qualified staff has been a problem. - The director is a seasoned insurance professional who has demonstrated strong capacity-building results with limited resources; senior staff are training more junior members, particularly in on-site inspections, and the knowledge that on-site inspections will occur is expected to prompt compliance in corporate governance and internal control procedures. ### Main mission findings (summarized) - The Insurance Act of 1994 and the Insurance Regulations of 1995 have not been amended to add additional standards; a re-draft is in progress to harmonize with the Financial Services Act. - Despite dominance of captives, there remains substantial insurance business for risks resident, located, or to be performed within the BVI; the law lacks a formal dispute resolution mechanism but an informal complaint investigation system exists and will be addressed with inspections. - The BVI does not meet all IAIS Core Principles—specifically Internal Controls, Corporate Governance, and On-Site Inspections. - The FSC should require comprehensive errors and omissions (E&O), fidelity and surety, and professional liability insurance for all intermediaries. ### Recommended action plan and authorities’ response (selected items) - Need for implementation of the on-site inspection process and continued training of staff. - Follow-up: Manuals completed; train staff on use; field-test; possible technical assistance in conducting initial inspections and in other capacity-building programs. - Response: Ad hoc on-site inspections of insurance managers took place in the second half of 2003, focusing on specific individual and groups of companies. An on-site inspection program for Insurance Managers has been designed. Training is being provided to Insurance Division staff. The program will be introduced in the first quarter 2004. - Need for rules governing operations of managers and other intermediaries to strengthen corporate governance and internal control procedures. - Follow-up: Assess suitability of various IAIS Guidance notes; discuss with intermediaries and stakeholders; promulgate appropriate standards. Draft guidance notes consistent with IAIS standards to be issued. - Follow-up: Require compulsory Errors and Omissions, Fidelity and Surety and Professional Liability insurance for insurance managers, compliance officers and insurance agents and brokers based on a sliding scale of exposure. - Response: A current proposed amendment to the Insurance Act, 1994 includes the requirement that the Insurance Manager, Agent, Broker or Insurance Intermediary have in force Professional Indemnity insurance, for such amount as may be prescribed in the Regulations. - Revise the Insurance Act and Regulations to harmonize with the increased authority of the FSC. - Follow-up: Prepare appropriate draft language and explanations; submit to legal counsel; table law. - Response: Draft amendments to the Insurance Act, 1994 and Insurance Regulations, 1995 have been prepared. They are currently being further amended to ensure harmonization with the Insolvency Amendment Act, 2003. It is expected that the amendments will take effect in the first half of 2004. ### AML/CFT findings related to the financial sector - The assessment covers the FATF 40 Recommendations for AML and 8 Special Recommendations on Combating the Financing of Terrorism; the assessment team completed its work in November 2002. - The BVI is vulnerable to money laundering (ML) and financing of terrorism (FT) as a major financial center and dominant place of registration for international business companies, and as a possible transshipment corridor for cocaine trafficking. - An adequate legal framework has been established to criminalize ML and FT, facilitate international cooperation, and provide for confiscation and forfeiture; the Proceeds of Criminal Conduct Act (PCCA) is the primary instrument for criminal provisions and confiscation. - Financing of Terrorism is addressed by Two Statutory Instruments No. 3366 in 2001, The Terrorism (United Nations Measures) (Overseas Territories) Order, and No. 1822 in 2002, the Anti-Terrorism (Financial and Other Measure) Overseas Territories). - The BVI ML criminal provisions are generally consistent with the Vienna and Palermo Conventions; FT is criminalized consistent with the International Convention for the Suppression of the Financing of Terrorism. - Confiscation of proceeds from criminal conduct and provisional freezing measures are adequate, but forfeiture provisions applying to property laundered and instrumentalities of ML are not clearly defined in the law outside the context of narcotics and a relatively short list of relevant crimes. - The PCCA established the Reporting Authority (RA) as the FIU responsible for receipt and processing of Suspicious Transaction Reports (STRs); the RA is a statutory body whose members include the managing director of the Financial Services Commission, the head of the Police Financial Investigations Unit (Police FINU), and a Senior Crown Counsel from the AGC. - The RA’s mandate and the division of tasks and powers between the RA and the Police FINU are not formalized, making the scope somewhat unclear and potentially problematic as STR volumes increase. - Suspicious transaction reporting is a voluntary/defensive requirement under the PCCA, which may contribute to relatively low numbers of STRs filed for the size of the financial sector. - The RA has no systematic contact with reporting institutions; while STRs have been sufficient for obviously suspicious transactions, gaps may exist where reporting parties refuse transactions instead of filing STRs. - The law does not provide for the RA or other competent authority to order administrative blocking or freezing of transactions when an STR is filed. - The absence of detailed, adequately broken-down statistics hampers strategic analysis, feedback to reporting institutions, and identification of areas for improvement; authorities have been satisfied with voluntary reporting but noted the potential need for mandatory reporting based on objective criteria. *Source: IMF Report on the British Virgin Islands (cr0492).* ### 130. As a general matter, the Police FINU has responsibility for investigating all financial ### cr0492 - 130. As a general matter, the Police FINU has responsibility for investigating all financial ### Law-enforcement responsibilities and capacity - The Police FINU has responsibility for investigating all financial crimes, including money-laundering offences. - Reports on the financing of terrorism are to be reported to the governor, who provides the information to the AGC for action. - The AGC are vested with prosecutorial responsibility and for providing mutual legal assistance from formal international requests and mutual legal assistance treaties (MLAT)s. - The assessment notes scarce resources and a very limited number of domestic cases, with the number of staff clearly putting limitations on undertaking in-depth investigations of domestic and international cases. - Investigative powers available are described as "generally adequate." - Recommendation: Targeted statistics related to law-enforcement activities, including freezing, seizing, and confiscating of the proceeds of crime, should be developed. ### Mutual legal assistance (MLA) workload and impact - Because of the BVI’s dominant role in the formation of international business companies, the Police FINU spends considerable time executing mutual legal assistance. - BVI has assisted foreign authorities in the freezing of substantial values over the last decade. - The substantial number of requests for assistance strongly indicates that present staffing of the FINU is not sufficient to take on a more active approach to ML/FT cases. - Work connected to requests for assistance occupies a major part of the capacity of the Police FIU. - There is some strain on the limited number of staff to thoroughly follow up all mutual legal assistance requests in desired detail. - The assessment emphasizes BVI’s significant role in global efforts to fight money laundering and the financing of terrorism due to frequent multi-jurisdictional money-laundering operations. ### Financial Investigative Authority (FIA) proposal - Authorities proposed the formation of the Financial Investigative Authority (FIA) as a separate agency staffed from members seconded from the Police FINU, customs, tax, civil service, and the AGC. - FIA design features and needs identified: - Need for ad hoc powers to bring in expertise (e.g., forensic accounting) for deeper investigations. - Proposal envisages independent funding and internal control, with a steering committee from parent agencies and the governor’s office. - FIA expected to have powers of the police and customs, and other powers as may be necessary; these powers should be expressly delineated in enabling legislation. - The FIA will be a hybrid of financial intelligence analysis and investigative functions; clear procedures must distinguish intelligence analysis from transformation into admissible investigative evidence. - Internal procedures should reduce potential conflicts of interest among various bodies. - Autonomy and integrity of the new unit are important; relationship between the RA and the FIA must be clearly regulated to limit access to agency-specific information. ### International cooperation and legal framework for MLA - International cooperation and provision of mutual legal assistance appear to function effectively. - BVI laws allow for broad exchanges of information for investigations, prosecutions, and regulatory matters, although dual criminality is required for provision of evidence and records. - The PCCA specifically provides for enforcement of external confiscation orders for money laundering. - Amendments to mutual legal assistance laws are contemplated to widen the scope of assistance and to authorize police to interrogate witnesses directly under an MLA request. - Statistics compiled are limited to the number of requests in different categories and do not capture the effort required for execution. - The Head and staff of the Police FIU, and the AGC, are described as competent with considerable experience. ### AML/CFT legal framework and supervisory architecture - The general framework for AML compliance is contained in the Anti-Money Laundering Code of Practice (AMLCP) and the guidance notes covering: - customer due diligence measures (KYC), - record keeping, - ongoing monitoring of relationships and transactions, - suspicious transaction reporting, - minimum requirements for internal procedures, controls, and audit. - The AMLCP specifically incorporates the guidance notes as a requirement for which sanctions apply, making the guidance notes mandatory. - The AMLCP and guidance notes apply across a broad number of financial intermediaries, including banks and trust companies, insurance businesses, mutual funds and mutual fund managers, company managers (registered agents or trust companies), money remitters, and activities where money belonging to a client is held or managed by an attorney or accountant. - Ongoing concern: The Development Bank of the British Virgin Islands is not subject to the AML/CFT requirements in the AMLCP and guidance notes, despite accepting deposits. ### Supervisory implementation and gaps (FSC role) - The FSC is the supervisory authority responsible for ensuring adherence to the AMLCP and the guidance notes. - FSC powers and status: - Direct prudential supervisory authority, including fit-and-proper assessments for management of banks and trust companies, insurance, mutual funds and mutual fund managers, and administrators. - On-site inspection powers and broad powers for approval of compliance officers. - In the process of completing necessary inspection manuals and procedures to exercise its full supervisory functions. - Current supervisory gaps and weaknesses: - On-site supervision has not been fully implemented; there are visits and compliance questionnaires but limited transaction testing and file verification. - Minimal implementation of AML/CFT measures in nonprudential sectors: trust and company service providers, money remitters, lawyers, and accountants. - Money remitters are not licensed and supervised; this is described as a serious concern. - Progress in implementation in the trust and company service provider sector, and for attorneys and accountants, requires accelerated action by the FSC. - Outreach findings: - FSC outreach shows high-level awareness and desire to achieve compliance; industries responsive to adopting internal controls and KYC requirements. - Continued concern regarding reliance on eligible introducers to conduct KYC on behalf of BVI financial intermediaries; verification needed to ascertain adequacy of supervisory controls over eligible introducers. ### Recommended supervisory and enforcement actions (selected highlights from Table 5 and text) - Provisional measures and confiscation: - The PCCA or other legislation should provide for a specific forfeiture provision that allows for forfeiture of all property laundered and instrumentalities associated with an ML offence. - Authorities should consider statutory authority for administrative bodies, such as the FSC or the RA, to identify or freeze assets suspected of being ML or FT assets for a short period of time. - Regulation and licensing: - Regulation of independent money remitters should be completed, including licensing and supervision procedures. - Fit-and-proper tests should be applied to mutual funds and mutual fund managers, and to money remitters, when sectoral acts are amended/enacted. - On-site inspections and KYC: - The FSC should enhance on-site inspections, particularly in mutual fund, insurance, and banking, to include file sampling for KYC and beneficial owner information; inspection procedures and manuals should be completed. - Specific transaction testing should be implemented as part of on-site inspections and required for internal audits by reporting persons. - Supervisory controls should pay particular attention to adherence to KYC by company service providers. - Suspicious transaction reporting and follow-up: - Consideration should be given to enacting a mandatory suspicious transaction reporting system. - The RA should keep statistics on STRs received, STRs analyzed and disseminated, STRs resulting in investigation, and prosecution or convictions. - Specific authority of the RA or FINU to obtain additional information after an STR is filed should be considered; alternatively empower the FSC to obtain additional information in support of STRs. - The authority of the RA or the Police FIU to obtain additional information from financial institutions in follow-up to STRs should be specified by law or regulation. - Implementation & staffing: - Implementation of on-site inspections is required immediately. - Vacancies for positions with the FSC’s Division for Legal and Enforcement should be filled as soon as reasonably practicable; staffing needs to be more robust and staff properly trained. ### Authorities’ response and legislative developments reported - The assessment indicates many recommended actions are intended to be fulfilled upon enactment/amendment of key legislation. - Provisional measures and confiscation: - The Proceeds of Criminal Conduct Act (PCCA) (1997) provides generally for confiscation orders in relation to property that is income or profit derived from the proceeds of crime; no provision contemplated for specific forfeiture of instrumentalities associated with a money laundering offence within the intended amendment to the PCCA. - Short freezing authority: - The Financial Investigation Agency Act 2004 provides for the Reporting Authority to identify and freeze assets for a short period of time ("five days") under section 4(2)(c), including on request from a foreign investigation agency or law enforcement authority. - Regulation of money services: - The proposed Money Services Act, providing for regulation, supervision and licensing along with relevant fit-and-proper tests, should be enacted within the second quarter of 2004. - Suspicious transaction reporting: - No specific statutory system of mandatory reporting currently; the PCCA provides for a voluntary system. - The FIA Act (recently enacted) specifically provides (Section 20) that the FSC shall issue guidelines governing suspicious transaction reporting procedures. - Transaction refraining power: - Section 4 (2) (b) of the FIA Act allows the agency to direct any person to refrain from completing a transaction for a period of "seventy- two hours" subsequent to the receipt of a disclosure. - Information production and follow-up: - FIA Act Section 4 (2) (d) allows the Agency to require production of any information it considers relevant to performance of its functions, which would include obtaining additional information from financial institutions as follow-up to STRs. - The FIA Act does not establish procedures for distinguishing analysis and transmittal as investigative evidence in statute, but guidelines exist in practice and section 5 provides for issuing directions as to policy. - Fit-and-proper tests: - The Mutual Funds (Amendment) Act has been drafted with a timeframe for enactment within the first quarter of 2004 to provide for fit-and-proper tests. ### Oversight of Companies and Trust Service Providers (CSP) and IBCs - The regime for registering and maintaining IBCs meets and in many ways exceeds best practices because IBCs must be registered by registered agents who are regulated and supervised by the FSC, including fit-and-proper standards and due diligence responsibilities under the AMLCP and guidance notes. - Beneficial ownership and registers: - There are no stated restrictions on who can beneficially own an IBC; an IBC may be beneficially owned by beneficiaries of a trust. - Registered agents are subject to customer due diligence policies, including beneficial owner identification under the AMLCP and guidance notes. - Bearer shares and proposed immobilization: - IBCs may issue registered or bearer shares; the registrar cannot give precise figures on how many do so. - Amending legislation to the IBCA has been drafted to implement immobilization of bearer shares, requiring bearer shares to be deposited with authorized custodians or with recognized custodians. - An amendment to the BTCA will be needed to define and establish authorized custodians. Recognized custodians are persons not licensed under the BTCA and not resident in the BVI, but based in countries not subject to FATF sanctions, and will be subject to prudential and AML regulation. - Industry largely accepted the proposal with a two-year phase-in period for existing companies. - The assessment notes it is not clear exactly how immobilization will improve beneficial ownership identification, since shares could still be held in trust by trustees in other jurisdictions. - Company registers and disclosure: - Under the IBCA, a company must maintain a register of shareholders and may maintain a register of directors; these registers must be kept at the registered office. - Directors may be individuals or companies; nominee directors are not prohibited; disclosure of true identity of directors to the registrar is optional, though registered agents must retain such information. - If information about directors and officers is disclosed to the registrar, it is publicly available. - Registered agents retain customer due diligence responsibilities under the AMLCP and guidance notes. *Source: IMF Offshore Financial Centre assessment (cr0492).* ### 155. All CSPs are subject to regulation and supervision by the FSC. Such oversight largely ### Supervision and Regulation of Company and Trust Service Providers (CSPs) ### Scope of oversight and standards - All CSPs are subject to regulation and supervision by the Financial Services Commission (FSC). - Oversight largely meets industry best practices as provided in the OGBS Statement of Best Practices. - An ongoing project monitors and measures the division’s policies against the OGBS methodology paper; the project is currently underway in the division. ### Licensing, appointment of officers, and AML responsibilities - Under the FSC Act, all CSPs are required to appoint a compliance officer; the FSC has issued guidance notes for compliance officers. - The AMLCP requires all CSPs to appoint a money-laundering reporting officer to receive and take appropriate action on internal suspicious transaction reports. - Depending on the size of the CSP, the same person may undertake both compliance officer and money-laundering reporting officer functions. ### Registration, on-site inspection program, and supervisory capacity - Since the passage of the BTCA and CMA, the BVI Financial Services Department (FSD) began exercising registration and surveillance functions over CSPs. - Licenses must be renewed every year. - The FSC has been conducting on-site inspections of CSPs for the past three years using detailed questionnaires covering: - Fit and proper requirements. - Soundness of financial position. - General overview of business to judge quality and level of service and nature of clients. - Random file checks to cover requirements under the AMLCP and guidance notes. - CSPs covering over 70 percent of total business have been subject to such on-site inspections; these inspections appear to be relatively well conducted. - Identified supervisory gaps and needs: - Complete inspections of all CSPs given the very large IBC client base. - Draft and implement a regular compliance and on-site inspection program. - Inspections could be more detailed and structured. - Additional consultation and continued training for Banking and Fiduciary Services Division staff is a high priority; staff attendance at international fora recommended. - Staffing and capacity developments: - All staff members have attended available annual international seminars on company and trust services providers. - The FSC is hosting a training seminar for the Caribbean Group of Banking Regulators in 2003. - The Divisional budget for 2003 provides for the creation of two further regulators’ posts, which will increase staffing capacity. - The Division runs a summer internship program providing exposure and employment opportunities to BVI students. - Industry representatives expressed a high regard for the integrity and dedication of the Division in executing statutory duties. ### Industry self-regulation and professional indemnity insurance - The BVI Association of Registered Agents (ARA) includes all but one registered agent (who is expected to join shortly) and has issued a Code of Conduct providing guidance on minimum standards for: - Relationships with clients. - Relationships with BVI authorities. - Client acceptance procedures. - Transfer of clients between registered agents. - The ARA maintains a peer review and disciplinary system to ensure compliance. - Recommendations to enhance regulator–industry interaction: - Greater contact and consultation between the FSC and the ARA would be helpful. - Consider engagement with the CSP industry (perhaps through the ARA) and auditing firms to introduce a staff secondment program both to and from the private sector, subject to mechanisms addressing conflicts of interest and confidentiality. - Cross-pollination of skills and perspective expected to deepen understanding and cooperation between regulator and industry. - Professional indemnity insurance: - Although many CSPs have professional indemnity insurance, it is not required. - Recommendation: Such insurance should be required for licensing. ### Cross-border cooperation and information sharing - Legal framework and disclosure restrictions: - Section 29 of the FSC Act sets out restrictions on the disclosure of information disclosed to the FSC and its organs and the circumstances in which these restrictions do not apply. - Section 29(2)(e) allows disclosure for the purpose of enabling or assisting a foreign regulatory authority in a country or jurisdiction approved by the FSC board in discharging duties or exercising powers corresponding to those under the FSC Act or any financial services legislation. - The receiving authority is required not to transmit disclosed information to any other person except with the prior consent of the FSC board. - Section 29(1) provides that information and disclosures made to the FSC or its organs and representatives in discharging functions under applicable legislation are privileged and must not be disclosed except as provided in section 29(2). - Distinction in practice and use of the FS(IC) Act: - The FSC distinguishes between routine informal inquiries and formal inquiries for legal or regulatory assistance. - Formal inquiries are handled under the Financial Services (International Cooperation) Act, 2000 (“the FS(IC) Act”), which: - Sets criteria for the FSC when deciding whether to exercise compulsory powers to obtain information or documents not in its possession. - Allows the FSC to require foreign regulators to give written undertakings (e.g., to provide corresponding assistance and to contribute toward costs of compulsory powers). - Prescribes the procedure for obtaining information by compulsion and provides safeguards in the process. - Operational experience: - The Banking and Fiduciary Services Division has received and responded to 43 routine informal inquiries over the last two years from various foreign agencies. - Most inquiries concerned IBCs rather than the CSPs themselves. - The extent to which the BVI director of banking and fiduciary services can hold confidential information received from another regulating authority depends on the law in that jurisdiction and conditions attached by the foreign authority sharing the information. ### Authorities’ response and remedial actions - Results from monitoring FSC policies against the OGBS Good Practices: - The FSC is compliant in all respects except for two areas: - The FSC does not require all CSPs to have professional indemnity insurance. - External auditors do not have the statutory authority and protections necessary to report to the competent authority. - Remedial measures drafted by the FSC: - A policy guideline requiring all CSPs to have professional indemnity insurance has been drafted. - A draft amendment to the BTCA will place statutory responsibilities and provide protection to external auditors when reporting to the FSC. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr0492.pdf_