## 1. Banking System

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### A. Scope and Methodology
- Assessment of the British Virgin Islands’ (BVI) compliance with the Basel Core Principles (BCPs) conducted under the IMF Module 2 for Offshore Financial Centers.
- Based on an initial self-assessment by the authorities, supplemented by team–authority discussions.
- Assessment prepared by Mr. Joseph O’Neill.
- Grading system: compliant; largely compliant; materially noncompliant; noncompliant; and not applicable.
- Legal basis: Bank and Trust Company Act (BTCA) of 1990; working sessions with the Financial Services Commission (FSC), other governmental authorities, bankers association, and commercial banks.

### B. Market Structure and Key Statistics (As of June 30, 2002)
- Total number of banks: 11
- Total assets: $2,763 million
- Total capital: $171 million
- Breakdown by license type and institution (As of June 30, 2002, in millions of U.S. Dollars):
  - General license:
    - Subsidiary of foreign banks: Number of Institutions 3; Total Assets $765; Total Capital $123
    - Branches of foreign banks: Number of Institutions 3; Total Assets $834; Total Capital (not specified)
  - Restricted license:
    - Subsidiary of foreign banks1/: Number of Institutions 3; Total Assets $1,069; Total Capital $7
    - Subsidiary of a foreign company2/: Number of Institutions 1; Total Assets $39; Total Capital $38
  - Development Bank of the Virgin Islands: Number of Institutions 1; Total Assets $56; Total Capital $3
- Footnotes:
  - 1/ Excludes Disa Bank (BVI) Limited (a subsidiary of a Panamanian bank), which has been in receivership since 2001.
  - 2/ This corporation is engaged solely in intercompany treasury operations.
- Composition and operational features:
  - All banks except DBVI operate under the BTCA and are supervised by the FSC.
  - BTCA restricted Class I Banking License limits deposit taking to persons outside the BVI and prohibits investing in assets representing a claim on any BVI resident (with exceptions).
  - General license banks are primarily subsidiaries or branches of regional/international institutions (examples: Banco Popular de Puerto Rico, Barclays, HSBC, Scotia Bank).
  - General-license total loans outstanding as of June 30, 2002: approximately $500 million (approximately 30 percent of their total assets).
  - Approximately 60 percent of total assets (or $1 billion) placed in deposits and short-term instruments with other banks, home office, parent bank or affiliates.
  - Close to 50 percent of deposits in general license banks are from foreign individuals and corporations.
  - Total capital for general license banks: $123 million (deemed adequate).
  - Restricted bank activity concentrated in Bank of East Asia (BVI) Limited with total assets $977 million; it redeposits all funds with its parent bank.
  - DBVI operates under Development Bank of the Virgin Islands Ordinance (July 1974), accepts deposits from the public, currently exempt from prudential oversight, provides periodic regulatory information to the FSC on a voluntary basis; amendment expected to place DBVI under FSC jurisdiction.

### C. Preconditions for Effective Banking Supervision
- Preconditions in Core Principles methodology:
  - (i) sound and sustainable macroeconomic policies;
  - (ii) a well-developed public infrastructure;
  - (iii) effective market discipline;
  - (iv) procedures for efficient resolution of problems in banks;
  - (v) mechanisms for providing an appropriate level of systemic protection.
- Findings:
  - BVI generally has in place the preconditions for effective banking supervision.
  - Lacks mechanisms for systemic protection, but composition of onshore banking (branches/subsidiaries of strong regional and international banks) mitigates this shortcoming.
  - Transparency may be improved substantially; deficiency not deemed to have significant adverse effect because parent organizations are mostly publicly traded.
  - Expectation that international standards and best practices are applied by participants.

### D. Detailed Assessment — Selected Principles, Findings, and Ratings
- Principle 1 — Objectives, Autonomy, Powers, and Resources
  - Principle 1(1) Clear responsibilities and objectives: Assessment: Compliant.
  - Principle 1(2) Operational independence and adequate resources: Assessment: Largely Compliant.
    - Concern: Managing director lacks a fixed statutory term; recommendation that the ultimate supervisor have a fixed statutory term to minimize undue pressure.
    - FSCA funding: FSC will retain between 7.5 percent and 15 percent of collections as agreed with executive council; if no agreement, receives same amount as previous year.
  - Principle 1(3) Legal framework for authorization and ongoing supervision: Assessment: Largely Compliant — steps to become fully compliant are underway (DBVI placement under FSC).
  - Principle 1(4) Powers to address compliance and safety and soundness: Assessment: Compliant.
  - Principle 1(5) Legal protection for supervisors: Assessment: Compliant (Section 50 FSCA grants immunity for acts done in good faith).
  - Principle 1(6) Information sharing and confidentiality: Assessment: Compliant (Section 29 FSCA; Financial Services (International Cooperation) Act gateways).
- Principle 2 — Permissible Activities and Use of Term “Bank”
  - Section 2 and Section 16 of the BTCA: “bank” defined and use of terms limited; Section 16(c) prohibits solicitation or receiving deposits from the public without a license.
  - Assessment: Compliant.
- Principle 3 — Licensing criteria
  - Licensing requirements in Part II BTCA and Bank and Trust Companies Regulations, 1991; Guidelines for Banking Licensing approved November 26, 1993.
  - Minimum capital (Section 12 BTCA): US$2 million for general license; US$1 million for restricted license. FSC may require additional capital.
  - Assessment: Compliant.
- Principle 4 — Ownership change controls
  - Section 14 BTCA prohibits transfer of shares without prior written FSC approval; transfers above 25 percent require Committee approval.
  - Assessment: Compliant.
- Principle 5 — Investment criteria
  - Laws/regulations do not cover limitations on acquisitions/investments or placing risks with affiliates.
  - Assessment: Noncompliant.
- Principle 6 — Capital adequacy
  - Administrative practice: FSC requires an 8 percent leveraged capital requirement for general-license banks and most restricted-license banks (not applied to branches).
  - DBVI not legally subject to prudential capital requirement despite accepting deposits.
  - Assessment: Materially noncompliant—steps to become fully compliant are underway.
  - Comments: FSC intends to recommend amendment to BTCA for a 10 to 12 percent minimum capital requirement.
- Principle 7 — Credit policies
  - Prudential visits limited to meetings and discussions; no legal requirements for specific internal controls.
  - Assessment: Materially noncompliant—steps to become fully compliant are underway.
  - FSC to issue regulation requiring banks to submit approved policies and procedures; on-site examinations to be implemented second half of 2003.
- Principle 8 — Loan evaluation and loan-loss provisioning
  - No legal/regulatory requirements for evaluating asset quality or reserves for specific assets.
  - Assessment: Materially noncompliant—steps to become fully compliant are underway.
- Principle 9 — Large exposure limits
  - Form BS requires detail of 10 largest nonbank exposures; no statutory prudential limits.
  - FSC administrative limit: 25 percent of bank’s capital as lending limit.
  - Assessment: Materially noncompliant—steps to become fully compliant are underway.
- Principle 10 — Connected lending
  - No legal limits on exposures to related parties; some banks have affiliate exposures exceeding total capital.
  - Assessment: Noncompliant—steps to become fully compliant are underway.
- Principle 11 — Country risk
  - Legal and supervisory framework does not contemplate country and transfer risk.
  - Assessment: Noncompliant—steps to become fully compliant are underway.
- Principle 12 — Market risks
  - No specific legal/regulatory requirements; no capital charge for market risk.
  - Assessment: Materially noncompliant—steps to become fully compliant are underway.

### E. Supervision Processes (Principles 13–25) — Key Findings and Ratings (2003)
- Principle 13 Risk Management: No specific regulatory requirements for interest rate, liquidity, FX, or operational risk. Assessment: Materially noncompliant—steps underway.
- Principle 14 Internal control and audit: Compliance officer concept in advanced stages; corporate governance guidelines to be issued. Assessment: Materially noncompliant—steps underway.
- Principle 15 Money laundering (AML/CFT): AMLCP and Guidance Notes in place; STR filing voluntary (consideration of mandatory reporting underway). Assessment: Largely Compliant.
- Principle 16 On-site and off-site supervision: Form BS is highly summarized; on-site prudential visits began in 2001 but lack depth; FSC to implement on-site supervision module second half of 2003. Assessment: Materially noncompliant—steps underway.
- Principle 17 Bank management contact: Regular contact through prudential visits; FSC meets Banking Association quarterly. Assessment: Compliant.
- Principle 18 Off-site supervision: Current reporting lacks sufficient detail; FSC modifying reporting package. Assessment: Materially noncompliant—steps underway.
- Principle 19 Validation of supervisory information: No formal program to validate supervisory information. Assessment: Materially noncompliant—steps underway.
- Principles 20 & 23 Consolidated supervision: Not applicable (no BVI-incorporated banks with foreign subsidiaries/branches).
- Principle 21 Accounting standards: Section 17 BTCA requires audited financial statements three months after year-end; branches not required to file audited statements. Assessment: Materially noncompliant—steps underway.
- Principle 22 Remedial measures: Section 20(2) BTCA grants remedial powers; in practice remedial actions not timely due to supervision shortfalls. Assessment: Largely Compliant—steps underway.
- Principle 24 Coordination with other supervisors: Sporadic meetings; MOUs in discussion with Federal Reserve, FSA, Puerto Rico, Cayman, Barbados. Assessment: Largely Compliant—steps underway.
- Principle 25 Equal treatment of foreign bank establishments: Compliant (banking industry entirely foreign except DBVI).

### Cross-cutting prioritized remediation (paragraph 15)
- Four major issues:
  - Priority recruiting of additional qualified staff; current staffing inadequate for in-depth supervision. FSC has financial resources and flexibility to compensate personnel; consider consultants.
  - Implement on-site supervision modules (with KPMG assistance) for banks, trusts, insurance; complete staffing to execute them.
  - Head of FSC lacks legislative certainty; recommend fixed term appointment and greater transparency on separation.
  - Increase transparency of financial information on market participants.

### Selected recommended actions (from Table 4)
- Legal framework (CP 1.3):
  - Recommended action: Place the Development Bank under full authority of the FSC.
  - Authorities’ response: To be implemented by end-2003 or early 2004.
- Prudential standards (CP 5–13):
  - Recommended action: Implement prudential standards consistent with international standards to protect safety and soundness of system and interests of depositors and creditors.
  - Authorities’ response: See comments (multiple implementation steps under way).
- On-site and off-site supervision (CP 16,18):
  - Recommended action: Implement on-site supervisory program and changes to off-site reporting and analysis.
  - Authorities’ response: To be implemented.
- Information validation (CP 19):
  - Recommended action: Include verification of regulatory reporting with bank records as part of on-site supervision.
  - Authorities’ response: To be implemented.
- Cooperation with other supervisors (CP 24):
  - Recommended action: Increase interaction with home country supervisors; consider limited scope joint examinations.
  - Authorities’ response: To be implemented.

---

### AML/CFT: Methodology, Institutional Framework, FIU (Reporting Authority), and Key Findings

### Assessment context and methodology
- IMF-led OFC assessment of the BVI conducted November 11–23, 2002.
- AML/CFT assessment used the Methodology for Assessing Compliance with AML/CFT Standards (FATF 40+8), October 2002 version.
- Team included IMF staff, independent AML/CFT expert (IAE), Norwegian Ministry of Justice expert for criminal enforcement, and others.

### Vulnerabilities and risk environment
- Two primary vulnerabilities:
  - BVI is in an important transshipment corridor for cocaine trafficking; CFATF found drug trafficking a major problem in 1998.
  - BVI is a major offshore financial center with dominant share of IBCs globally; potential misuse, particularly at layering and integration stages.
- IBCs can provide a “nearly ‘impenetrable layer of protection around the ownership of assets’” when formed without commercial justification.

### Primary AML/CFT legal and supervisory framework
- Key instruments:
  - Proceeds of Criminal Conduct Act, 1997 (PCCA);
  - Anti-Money Laundering Code of Practice, 1999 (AMLCP), amended 2000 and 2001;
  - Reporting Authority (Constitution and Procedure) Order, 1998;
  - Anti-Money Laundering Guidance Notes for the BVI Financial Services Sector (Guidance Notes);
  - Drug Trafficking Offenses Act 1992, as amended 2000;
  - Financial Services Commission Act (FSCA); Banks and Trust Companies Act (BTCA); Company Management Act (CMA); Mutual Funds Act (MFA); Insurance Act (IA).
- AMLCP incorporates Guidance Notes and makes Guidance Notes subject to sanction for noncompliance.
- Money remitters estimated by FSC to be three known entities; not licensed or prudentially supervised at time of assessment; proposed licensing and regulatory act expected first half of 2003.
- Single supervisor for prudential and AML measures: FSC.
- DBVI not yet subject to AML/CFT due diligence, record keeping, or internal controls under AMLCP (but subject to STR laws).

### Reporting Authority (RA) / FIU structure and operations
- RA established under PCCA; independent of FSC; three members appointed by governor:
  - Head: managing director of the FSC;
  - Member: head of Police FINU (investigative arm);
  - Member: Senior Crown Counsel from AGC.
- Deputy managing director of FSC is Secretary for the RA.
- RA member of Egmont Group since 1999.
- STR reception statistics (general totals provided):
  - 1998: 18 STRs received
  - 1999: 27 STRs received
  - 2000: 26 STRs received
  - 2001: 62 STRs received
  - 2002, to date: 45 STRs received
  - Since 1998 the RA has received about 180 reports.
  - Authorities estimate about ¼ of STRs are relevant to cases handled by foreign jurisdictions.
- STR filing: voluntary under PCCA; AMLCP Paragraphs impose internal reporting procedures and empower Reporting Officer; Guidance Notes use “should” (not mandatory).
- RA practices:
  - STRs distributed to all RA members; Police FINU conducts preliminary analysis.
  - RA can disseminate STRs to domestic law enforcement (Section 28(7) PCCA) and may disclose to FSC for regulatory purposes.
  - RA lacks formal statistics on STR dispositions; material not subject to qualitative analysis for statistical/strategic intelligence.
- Recommendations for RA/FIA:
  - Establish Financial Investigative Agency (FIA) as separate statutory agency with police powers; proposed constitution by second quarter 2003.
  - Improve RA/FIU independence, clarify tasks/powers, compile STR statistics, enhance analytical capacity, consider enacting mandatory STR law, provide authority to require additional information and to freeze transactions for short periods.

### Criminalization, confiscation, investigative powers
- ML criminalized under PCCA Sections 28–30; tipping off criminalized under Section 31.
- Predicate offenses extend to all serious offenses (indictable offenses).
- Criminal penalties (examples):
  - PCCA ML penalties: summary conviction imprisonment not exceeding six months or fine not exceeding US$3,000; conviction on indictment imprisonment not exceeding 14 years and a fine not exceeding US$20,000.
  - DTOA Section 23B: summary conviction imprisonment not more than six months or fine up to US$10,000; conviction on indictment up to 14 years or a fine up to US$50,000.
  - FT under Statutory Instrument No. 1822: conviction on indictment penalty imprisonment not exceeding five years, to a fine; summary conviction imprisonment up to six months and a fine up to statutory maximum.
- Confiscation regime:
  - PCCA provides confiscation of a sum representing benefit derived from ML; DTOA contains specific provisions for narcotics-related confiscation.
  - PCCA provisional measures for freezing/seizing property: Sections 16, 17 & 18 (ex parte applications).
  - Section 4(3) PCCA allows voiding of gifts made by defendants convicted of ML.
  - Findings: Confiscation and provisional measures assessed as adequate in principle, but provisions for forfeiture of laundered property and instrumentalities outside narcotics are limited in law and practice.
  - Recommendations: Provide explicit forfeiture provisions for all property laundered and instrumentalities; strengthen administrative authority to identify/trace/freeze assets; compile formal statistics on freezing, seizure, confiscation.

### Law enforcement and mutual legal assistance
- CJIC (Criminal Justice (International Cooperation) Act, 1993), FSIC (Financial Services (International Cooperation) Act, 2000), and Mutual Legal Assistance (United States of America) Act, 1990 provide legal bases for international cooperation.
- Mutual legal assistance generally effective; requests have tripled in seven years; BVI has MLAT with United States.
- Recommendations: broaden CJIC where needed, consider additional bilateral agreements, develop statistics on MLA, freezing, seizing, confiscation.

### Customer due diligence, records, and supervision
- AMLCP Section 4(1) requires identification procedures for new and continuing business relationships.
- Guidance Notes Paragraph 66 acceptable identification documents for individuals: valid passport, national identity card, armed forces identity card, or drivers license bearing a photograph.
- Company verification documents (Guidance Notes Paragraph 72): certificate of incorporation; name and address of beneficial owners; memoranda and articles; resolutions; powers of attorney.
- Recordkeeping:
  - AMLCP Paragraphs 7 and 9: retain identity and transaction records for at least five years.
  - Guidance Notes Paragraph 97: RA may request extended retention if investigation initiated.
- Introduced business: eligible introducers may conduct CDD; concerns that regulated person may not have direct responsibility or access to due diligence performed by introducer.
- Findings: Legal framework largely adequate on paper for identification and recordkeeping; implementation gaps exist—supervision incomplete, beneficial ownership verification weak, eligible introducer oversight insufficient, STR filing voluntary undermines detection.
- Recommendations: Complete on-site inspections and sampling of CDD; require introduced-business due diligence be transmitted to regulated entity and accessible locally; enact licensing/supervision for money remitters; consider mandatory STR regime and authority to require additional information; require enhanced scrutiny for wire transfers lacking originator information in line with FATF guidance.

### STR regime, legal protections, and operational recommendations
- STRs voluntary; Section 28(2)(a) PCCA protects reporters from liability.
- Section 31 PCCA prohibits tipping off; applies broadly including authorities.
- Recommendations:
  - Make STR reporting mandatory;
  - Strengthen legal protections for reporting and for disclosures when responding to RA requests;
  - Provide specific authority for RA or Police FINU to block/freeze transactions/accounts for a limited period after SAR receipt (and statutory immunity for blocking actions).

---

### FIU, Police FINU, and Proposed Financial Investigative Agency (FIA)
- Police FINU: investigative arm responsible for investigating financial crimes; experienced staff and training programs in place.
- FIA proposal:
  - Executive council decision to establish FIA; bill being drafted; 2003 budget provisioned.
  - Proposed addition of eleven staff to FIA, in addition to three Police FINU staff.
  - FIA to be staffed by secondments from Police FINU, Customs, Tax, Civil Service, and AGC; subordinated to RA; independently funded; steering committee oversight.
  - FIA powers: expected to include police and customs powers; enabling legislation should delineate powers and access to task force information.
- Operational recommendations:
  - Review resourcing and staffing adequacy post-constitution;
  - Provide ad hoc access to external expertise (e.g., forensic accounting);
  - Clearly delineate procedures distinguishing intelligence analysis from evidentiary investigations;
  - Ensure safeguards to protect autonomy, confidentiality, and limit conflicts of interest.

---

### Part II — Financial Services Commission (FSC): Mandate, Powers, Independence, and Implementation Challenges

### Organization, powers, and funding
- FSC established by FSCA (in force January 1, 2002).
- Board: six members appointed by Executive Council for terms not to exceed three years; Managing Director an ex‑officio member.
- FSCA funding: FSC to retain between 7.5 percent and 15 percent of its collections as agreed with Executive Council; if no agreement, receives same amount as previous year.
- FSCA Part V powers include requiring information (s. 30, 32), appointing examiners (s. 36), enforcement actions (s. 37–40), issuing codes (s. 41), and prosecution/compounding (s. 53–56).
- FSCA confidentiality gateways: Section 29 and Financial Services (International Cooperation) Act (FSIC) enable sharing with foreign regulators subject to Board consent and undertakings.

### Governance, accountability, and transparency observations
- Board appointments “at pleasure”; Managing Director lacks fixed statutory term—recommend fixed term and clearer removal transparency.
- Appeals: limited in some areas (no appeal from Licensing and Supervisory Committee refusals); appeal period 14 days with no extension.
- Recommendation: require FSC/LSC to give reasons for all significant nonroutine decisions; strengthen conflicts policy for Board members.

### Resourcing, staffing, and implementation gaps
- Critical need for additional human resources to implement on-site/off-site supervision, enforcement, and AML/CFT functions.
- Legal and enforcement vacancies in FSC Legal and Enforcement Division noted; recommended immediate filling and training.
- FSC engaged consultants and KPMG to develop on-site modules and a computer-assisted compliance and inspection program; implementation contingent on staff hiring and Code of Practice finalization.

### Information sharing and international cooperation
- FSCA s.29(2)(e) permits assistance to foreign regulatory authorities in jurisdictions approved by the Board; FSIC prescribes procedural safeguards and conditions.
- Practice: FSC distinguishes informal routine inquiries from formal requests handled under FSIC; formal requests usually require signed undertakings and may invoke compulsory powers.
- Timelines (operational practice):
  - Initial response to requests within 1 week.
  - Non-formal requests completed within 1–2 weeks.
  - Formal requests completed on average within 2–3 months.
  - From January 2002 through November 2002: processed 9 of 13 formal requests and completed 30 informal requests.

---

### Insurance, Securities (Mutual Funds), and Trust & Company Service Providers — Key Findings

### Insurance sector (selected findings)
- Market structure:
  - Total insurance companies licensed: 293
  - Captive insurers: 263 (241 organized for US-based risks)
  - Insurance agents: 13; insurance brokers: 11; insurance managers: 12; loss adjusters: 7
  - Domestic insurance premiums: approximately US$40 million
  - Captive industry premium: over US$400 million
- Supervisory framework and powers:
  - Insurance Act, 1994 and Insurance Regulations, 1995 supplement FSCA.
  - Insurance Director experienced; FSC has statutory powers to require information, compliance inspections, appoint examiners, revoke/suspend authorizations, apply for protective orders, and issue directives.
- Observations:
  - On-site inspection manuals and staff training being prepared; on-site inspections considered essential.
  - Capital minima (Section 14): $100,000 general insurers; $200,000 life insurers; $300,000 for both general and long-term.
  - Recommendations: promulgate dynamic risk-sensitive performance indicators; require corporate governance standards for insurance managers; consider monetary penalties for intermediate remedial action.

### Securities / Mutual Funds (IOSCO-related findings)
- Market structure and data:
  - End of September 2002: 2,606 mutual funds registered/recognized (up from 2,346 end-2001).
  - Approximately 8 percent are public mutual funds.
  - Licenses for mutual fund administrators and managers as of end-September 2002: 490.
- Regulatory needs and action plan:
  - Need additional human resources to oversee fund managers, administrators, and mutual funds; strengthen enforcement.
  - Draft Code of Practice under MF Act s.25A to be implemented (extensive requirements covering conduct, capital, reporting, segregation, conflicts).
  - Recommendations: set prospectus disclosure rules for public funds; require segregation of mutual fund assets; require audited financial statements and routine reporting for managers/administrators; implement on-site/off-site supervision and continuous disclosure regime.

### Trust and Company Service Providers (CSPs)
- IBCs and registered agents:
  - As of June 30, 2002: 501,353 incorporated IBCs; active IBCs estimated between 300,000 and 400,000.
  - Registered agents: 89 (as of October 31, 2002), of which 88 belong to the BVI Association of Registered Agents.
  - Licenses issued by Banking & Fiduciary Services Division: 20 Company Management; 96 Restricted Trust Business; 92 General Trust Business.
- Licensing, supervision, and requirements:
  - Registered agents must maintain a principal office in the BVI.
  - General trust licensees: minimum fully paid-up capital US$250,000; must file annual audited statements within three months of fiscal year-end.
  - Company service providers under CM Act must maintain minimum paid-up capital US$25,000.
  - Restricted trust licensees may manage up to 25 trusts listed in original application.
- On-site inspection and best practice:
  - On-site inspections take place regularly using OGBS Statement of Best Practice questionnaire; specific transaction testing not yet fully implemented.
  - Immobilization of bearer shares: amendment finalized (authorities’ response indicates implementation).

---

### Cross-cutting Recommendations and Implementation Timelines (Selected)
- Complete placement of DBVI under FSC authority (target end-2003/early-2004).
- Implement prudential standards consistent with international standards (plans and drafts in consultation; various items to be implemented by end-2004).
- Implement on-site supervisory programs for banks, trust and company service providers, insurance, mutual funds; FSC to finalize and sign Bank On-site Monitoring Program and Fiduciary/Company Management On-site Monitoring Program.
- Modify and enhance off-site reporting packages to include detailed exposures, income/expense statements, securities breakdowns, past due loans, repricing maturities, off-balance sheet items, derivatives, and risk-based capital calculations.
- Enact Money Services Act to regulate money remitters (target second quarter 2004 per authorities’ response).
- Establish FIA with statutory powers to freeze assets for short periods and to require production of information (legislative provisions in FIA Act and FIA operational steps noted).
- Finalize and implement Code of Practice under MF Act s.25A (draft extensive Code; expected implementation early 2004 per source).
- Recruit and train additional qualified staff across FSC divisions, especially Legal & Enforcement, Banking & Fiduciary Services, Insurance, and Investment Business Divisions.

*Source: IMF assessment (cr0493).*

### 1.     Banking     System ..............................................................................................

### 1. Banking System

### A. Scope and Methodology
- The report provides an assessment of the British Virgin Islands’ (BVI) compliance with the Basel Core Principles (BCPs).
- The assessment was undertaken as part of the IMF Module 2 for Offshore Financial Centers.
- The conclusions are based on an initial self-assessment of the authorities, supplemented by additional discussions between the team and the authorities.
- The assessment was prepared by Mr. Joseph O’Neill.
- The assessment uses a five-part qualitative grading system: compliant; largely compliant; materially noncompliant; noncompliant; and not applicable.
- The assessment was carried out on the basis of the Bank and Trust Company Act (BTCA) of 1990, with working sessions involving the Financial Services Commission (FSC), other governmental authorities, the bankers association, and commercial banks.

### B. Market Structure and Key Statistics (As of June 30, 2002)
- Total number of banks: 11
- Total assets: $2,763 million
- Total capital: $171 million
- Breakdown by license type and institution (As of June 30, 2002, in millions of U.S. Dollars):
  - General license:
    - Subsidiary of foreign banks: Number of Institutions 3; Total Assets $765; Total Capital $123
    - Branches of foreign banks: Number of Institutions 3; Total Assets $834; Total Capital (not specified)
  - Restricted license:
    - Subsidiary of foreign banks1/: Number of Institutions 3; Total Assets $1,069; Total Capital $7
    - Subsidiary of a foreign company2/: Number of Institutions 1; Total Assets $39; Total Capital $38
  - Development Bank of the Virgin Islands: Number of Institutions 1; Total Assets $56; Total Capital $3
- Footnotes from table:
  - 1/ Excludes Disa Bank (BVI) Limited (a subsidiary of a Panamanian bank), which has been in receivership since 2001.
  - 2/ This corporation is engaged solely in intercompany treasury operations.
- Composition and features:
  - All banks, except for the Development Bank of the Virgin Islands (DBVI), operate under the BTCA and are subject to supervision by the Financial Services Commission (FSC).
  - BTCA provides a restricted Class I Banking License that limits deposit taking to persons outside the BVI and prohibits investing in assets that represent a claim on any BVI resident, with certain exceptions.
  - General license banks are primarily subsidiaries or branches of reputable regional and international institutions (examples named: Banco Popular de Puerto Rico, Barclays, HSBC, Scotia Bank).
  - General license banks are locally engaged primarily in traditional deposit taking and lending (residential mortgage, personal, small business and local government).
  - Close to 50 percent of the deposits in the general license banks are from foreign individuals and corporations.
  - Total loans outstanding in the general license banks as of June 30, 2002 amount to approximately $500 million, or approximately 30 percent of their total assets.
  - Approximately 60 percent of total assets (or $1 billion) is placed in deposits and short-term instruments with other banks, the home office, parent bank or affiliates, representing a high level of liquidity and, in various cases, significant credit concentration risk.
  - Total capital for general license banks amounts to $123 million, which is deemed adequate.
  - The restricted bank activity is concentrated in the Bank of East Asia (BVI) Limited with total assets amounting to $977 million; this bank redeposits all its funds with its parent bank.
  - The DBVI operates under the Development Bank of the Virgin Islands Ordinance of July 1974, accepts deposits from the public, is currently exempt from prudential oversight, provides periodic regulatory information to the FSC on a voluntary basis, and it is expected that the DBVI Ordinance will be amended to place the DBVI under the FSC’s regulatory jurisdiction.

### C. Preconditions for Effective Banking Supervision
- Preconditions identified in the Core Principles methodology:
  - (i) sound and sustainable macroeconomic policies;
  - (ii) a well-developed public infrastructure;
  - (iii) effective market discipline;
  - (iv) procedures for efficient resolution of problems in banks;
  - (v) mechanisms for providing an appropriate level of systemic protection.
- Findings:
  - The BVI generally has in place the preconditions for effective banking supervision.
  - The BVI lacks mechanisms for systemic protection; however, the composition of the onshore banking system (branches or subsidiaries of strong regional and international banks, which operate under systemic safeguards themselves) mitigates this shortcoming.
  - Transparency in the system may be improved substantially; however, the deficiency is deemed not to have a significant adverse effect on banking operations because parent banking organizations are mostly publicly traded companies subject to strong transparency standards.
  - It is expected that international standards and best practices are applied by all participants in the BVI.

### D. Detailed Assessment: Principle 1 — Objectives, Autonomy, Powers, and Resources
- Principle 1 summary: An effective system of banking supervision will have clear responsibilities and objectives for each agency, operational independence and adequate resources, a suitable legal framework including authorization and supervisory powers, legal protection for supervisors, and arrangements for information sharing and confidentiality.

- Principle 1(1): Clear responsibilities and objectives
  - Description: FSCA Section 4(1) establishes the functions of the FSC, including regulation and supervision of “regulated persons” pursuant to the BTCA; Section 4(2) emphasizes protection of the public.
  - Assessment: Compliant
  - Comment: Essential criteria are met; laws and regulations provide an adequate framework for prudential operation and supervision of banks.

- Principle 1(2): Operational independence and adequate resources
  - Description: The FSCA was created to segregate financial supervision from the ministry of finance and to provide budgetary and operational independence. The FSC reports to a six-member Board; Board members appointed by the executive council for terms not to exceed three years. The managing director’s appointment by the Board is not subject to a fixed statutory term, and just cause for termination is not required. FSCA provides that, as agreed with the executive council, the FSC will retain between 7.5 percent and 15 percent of its collections; if no agreement is reached, the FSC receives the same amount of funding as in the previous year.
  - Assessment: Largely Compliant
  - Comment: Segregation and term designation of the Board provide substantial independence and budgetary safeguards. To be fully compliant, the person ultimately responsible for supervision should have a fixed statutory term to minimize possibility of undue pressure.

- Principle 1(3): Legal framework for authorization and ongoing supervision
  - Description: Part II of the FSCA covers the “Licensing and Supervisory Committee” (the Committee), chaired by the FSC managing director; Section 32 of the FSCA grants power to require information; Section 20 of the BTCA provides powers including license revocation; Section 29 of the FSCA establishes broad powers to share information; Section 41 of the FSCA allows issuance of prudential regulations with executive council approval. DBVI is not under prudential supervision.
  - Assessment: Largely Compliant — steps to become fully compliant are underway.
  - Comment: With the exception of the DBVI, the BVI complies with criteria of this principle. Legislation is being drafted to bring the DBVI under FSC regulatory authority.

- Principle 1(4): Powers to address compliance and safety and soundness
  - Description: FSCA provides broad supervisory powers; Section 37 establishes power to take enforcement action; FSC has unfettered access to banks’ files.
  - Assessment: Compliant
  - Comment: FSCA and BTCA provide FSC with extensive powers to address compliance, safety, and soundness concerns.

- Principle 1(5): Legal protection for supervisors
  - Description: Section 50 of the FSCA states: “No action shall be brought against (a) the FSC or any FSCer or member of the Committee or an employee or agent of the FSC for anything done, in good faith, in exercise of powers or performance of duties conferred or imposed by this Act or any financial services legislation ...”
  - Assessment: Compliant
  - Comment: FSCA provides adequate immunity; however, it would be desirable to introduce certainty on whether supervisory staff is covered for costs in defending their actions.

- Principle 1(6): Information sharing and confidentiality
  - Description: Section 29 of the FSCA establishes restrictions on disclosure with exceptions permitting sharing to assist foreign regulatory authorities with prior Board approval; the Financial Services (International Cooperation) Act provides additional gateways; both laws require confidentiality except with prior written consent of the Board.
  - Assessment: Compliant
  - Comment: The FSC has clear authority to share information and require confidentiality.

### E. Detailed Assessment: Principle 2 — Permissible Activities (introductory excerpt)
- Principle 2 summary: Permissible activities of licensed institutions must be clearly defined, and use of the word “bank” in names should be controlled.
- Description excerpt: Section 2 of the BTCA defines “bank” as “a person carrying on a banking business.” “Banking business” is defined as “ the business of receiving (other than from a bank or trust company) and holding on current, savings, deposit or similar account money that is repayable by check or order and is capable of being invested by way of advances to customers ...”

_The assessment of BVI compliance with the Basel Core Principles was prepared as part of the IMF Module 2 for Offshore Financial Centers and authored by Mr. Joseph O’Neill._

### Section 16 of the BTCA adequately limits the use of the word “bank”, “savings”, “savings

### Section 16 of the BTCA and supervisory framework assessment

### Use of the term “bank” and deposit-taking prohibition
- Section 16 of the BTCA adequately limits the use of the word “bank”, “savings”, “savings and loans” and other terms and their derivates.
- Section 16(c) prohibits the solicitation or receiving deposits from the public without a license.
- Assessment: Compliant.
- Comments: The BTCA clearly requires that the activity of deposit taking be engaged solely in a bank, and adequately limits the usage of the term “bank” and its derivates.

### Principle 3 — Licensing criteria
- Part II of the BTCA establishes general licensing requirements.
- The Bank and Trust Companies Regulations, 1991 provide detailed forms and information to be submitted for a bank or trust license, including names of directors, shareholders, officers, and managers.
- For directors and officers, extensive information is required: previous professional experience, previous addresses, education, criminal record, and disciplinary actions by any professional or regulatory body.
- On November 26, 1993, the executive council approved “Guidelines for Banking Licensing” which include requirements that:
  - only branches of banks with “well established and proven track record and which are subject to effective consolidated supervision by their supervisory authorities” are authorized;
  - licenses will be granted only if the place of incorporation, mind and management are within the same jurisdiction;
  - only permit management with proven experience;
  - only allow fit and proper people to undertake the functions envisioned;
  - require filing an “appropriate and sustainable business plan”;
  - require adequate capital in relation to the business plan;
  - require direct confirmation from the country in which the institution or its parent is incorporated that the authority: (a) consents to the establishment of the institution; (b) will exercise consolidated supervision, including the host BVI; and (c) will cooperate in the sharing of regulatory information.
- Section 4(5) of the BTCA establishes a broad power to refuse to grant a license, which is not subject to appeal.
- Section 12 of the BTCA establishes minimum capital requirements: US$2 million for a general banking license and US$1 million for a restricted banking license. The FSC may require additional capital consistent with the nature of the business sought.
- Part II of the FSCA establishes the “Licensing and Supervisory Committee” with the power to issue or not approve any application.
- Assessment: Compliant.
- Comments: Reviewed licensing procedures for change in control of two entities operating in the BVI; procedures applied by the FSC evidence compliance. The FSC may consider documenting detailed evaluation of home-country consolidated supervisors.

### Principle 4 — Ownership change controls
- Section 14 of the BTCA prohibits the transfer of shares or beneficial interests without the prior written approval of the FSC.
- Guidelines and Operating Procedures require transfers above 25 percent of ownership be approved by the Licensing and Supervisory Committee; transfers of 25 percent or less may be approved by the head of the division.
- For transfers resulting in a controlling interest, the FSC requires the bank to apply for a new license.
- Branches may request an exemption from Section 14; FSC ascertains home country legislation and practices before granting exemptions.
- Assessment: Compliant.
- Comments: Legal and administrative practices comply with the principle.

### Principle 5 — Investment criteria
- Current laws and regulations do not cover limitations as to acquisitions and investments.
- No limitation exists as to placing risks with affiliated entities.
- The FSC has begun to inquire about this issue through yearly prudential visits.
- Assessment: Noncompliant.
- Comments: Jurisdiction lacks legal and regulatory guidelines to comply with the principle.

### Principle 6 — Capital adequacy
- Section 12 of the BTCA establishes minimum capital requirements: US$2 million for a general banking license and US$1 million for a restricted banking license. The FSC may require additional capital consistent with business nature.
- In practice, the FSC administratively requires general-license banks and most restricted-license banks to comply with an 8 percent leveraged capital requirement. This requirement is not applied to foreign banks that operate in the BVI as branches.
- The DBVI is currently not legally subject to a prudential capital requirement, despite accepting deposits from the public.
- Assessment: Materially noncompliant—steps to become fully compliant are underway.
- Comments:
  - Lack of adequate legal and regulatory requirements causes material noncompliance despite FSC administrative procedures.
  - The FSC intends to recommend an amendment to the BTCA to provide a 10 to 12 percent minimum capital requirement.
  - The FSC may consider implementing for local branches a net credit due to affiliate’s requirement, akin to a capital requirement.
  - Lack of restrictions as to placing funds with affiliates allows any capital requirement to be easily circumvented.

### Principle 7 — Credit policies
- FSC’s independent evaluation of bank credit policies is limited to prudential visits consisting of meetings with management and discussion of operations and risk management, including credit administration, measurement, and monitoring.
- Assessment: Materially noncompliant—steps to become fully compliant are underway.
- Comments:
  - Current legal and regulatory structure does not establish requirements for specific internal controls.
  - Prudential visits lack depth required to independently verify management representations.
  - FSC will soon issue a regulation requiring banks to submit copies of approved policies and procedures.
  - FSC intends to implement more in-depth, on-site examinations during the second half of 2003 to address the principle.

### Principle 8 — Loan evaluation and loan-loss provisioning
- Current laws, regulations, and practices do not provide for evaluating the quality of or providing reserves for specific assets.
- Prudential visits include inquiries into delinquency, provisions, and reserves.
- Assessment: Materially noncompliant—steps to become fully compliant are underway.
- Comments:
  - Legal and regulatory structure does not establish requirements for specific reserves for credit risk.
  - Prudential visits lack depth to independently assess adequacy of provisions and reserves.
  - FSC intends to implement more in-depth, on-site examinations during the second half of 2003.

### Principle 9 — Large exposure limits
- Form BS, a quarterly regulatory report, requires each bank to detail the 10 largest credit exposures to the “nonbank sector,” aggregating all credit facilities to the same borrower and detailing exposure by individual companies.
- Current legal and regulatory framework does not establish prudential limits.
- FSC administratively uses 25 percent of the bank’s capital as a lending limit.
- During prudential visits, credit concentration is discussed with management.
- Assessment: Materially noncompliant—steps to become fully compliant are underway.
- Comments:
  - Prudential limits to a single borrower or related groups are not addressed in the BTCA or regulation.
  - Current supervisory practices allow unlimited exposure to banking institutions.
  - FSC intends to issue Guidance Notes in coming months addressing large exposures, connected lending, and related-party transactions.

### Principle 10 — Connected lending
- As part of prudential visits, FSC inquires about procedures for extending credit to related companies and individuals.
- No limits are established regarding maximum exposure to related parties.
- Assessment: Noncompliant—steps to become fully compliant are underway.
- Comments:
  - FSC intends to issue Guidance Notes to address prudential requirements including connected lending and related-party transactions.
  - FSC advises transactions with related parties will be subject to the same prudential limitations as transactions with third parties.
  - Current legal and regulatory structure does not establish limits; some banks have credit exposure to affiliates which exceed total capital.

### Principle 11 — Country risk
- Current legal and regulatory structure does not contemplate country and transfer risk.
- Prudential visits include foreign exchange management but do not specifically include country risk or transfer risk.
- Assessment: Noncompliant—steps to become fully compliant are underway.
- Comments: Current legal, regulatory structure and supervisory practices do not cover country risk.

### Principle 12 — Market risks
- FSC lacks specific legal or regulatory requirements relating to market risk.
- Prudential visit questionnaires inquire on foreign exchange risk and overall interest rate management but do not specifically address other market risk issues.
- Currently, no capital charge is assessed in relation to market risk.
- Assessment: Materially noncompliant—steps to become fully compliant are underway.
- Comments:
  - FSC has begun to assess a portion of market risk through questionnaires during prudential visits.
  - Current supervisory model does not cover many market risk issues and lacks detailed testing techniques to assure policies and procedures are followed and effective.
  - FSC is expected to implement an on-site supervision module during the second half of 2003.

*Source: IMF assessment (cr0493).*

### 2003. Through such procedures the FSC’s staff should be better able to assess and supervise

### Principles 13–25: Assessment of the Financial Services Commission’s Supervision (2003)

### Risk management and other risks (Principle 13)
- Requirement: Banks must have a comprehensive risk management process (board and senior management oversight) to identify, measure, monitor, and control all other material risks and, where appropriate, hold capital against these risks.
- Description: Supervision encompasses procedures described in Principle 16, including detailed questions regarding liquidity, interest rate risk, operational risk, and comprehensive risk management practices. The quarterly reporting package of maturities is utilized to help monitor liquidity risk.
- Finding: No specific regulatory requirements or limitations exist regarding interest rate risk, liquidity risk, foreign exchange risk or operational risk.
- Assessment: Materially noncompliant—steps to become fully compliant are underway.
- Comments:
  - The FSC has begun to assess most types of risk through questionnaires utilized during prudential visits, obtaining information on internal controls, policies and procedures, and management of liquidity, interest rate, and operational risk.
  - The FSC has yet to implement detailed testing techniques to assure that banks’ policies and procedures are properly followed and effective.
  - The FSC is expected to implement an on-site supervision module during the second half of 2003.

### Internal control and audit (Principle 14)
- Requirement: Supervisors must determine that banks have internal controls adequate for the nature and scale of their business, including delegation of authority, separation of functions, reconciliation, safeguarding assets, and independent internal or external audit and compliance functions.
- Description:
  - Prudential visits inquire about internal controls, policies, procedures, and corporate governance; questionnaire includes a specific section on the internal audit function.
  - The FSCA requires regulated persons to designate a Compliance Officer whose responsibilities include: (i) establishing and maintaining a manual of compliance procedures; (ii) ensure staff comply with financial services legislation, the internal manual of compliance procedures and the Regulatory Code issued by the FSC; and (iii) act as liaison with the FSC and prepare and submit required reports.
  - The legal and regulatory structure does not specify the responsibilities of the Board of Directors.
  - The FSC is in advanced stages of implementing the Compliance Officer concept and intends to issue guidelines at the end of 2002 identifying board responsibilities and the internal audit function.
- Assessment: Materially noncompliant—steps to become fully compliant are underway.
- Comments:
  - Lack of detailed review and testing leaves the FSC uncertain whether internal controls and internal audit are appropriately implemented and functioning adequately.
  - Implementation of the Compliance Officer requirement, corporate governance guidelines, and in-depth on-site exams next year should significantly improve oversight.

### Money laundering (Principle 15)
- Requirement: Supervisors must determine that banks have adequate policies, practices, and procedures, including strict "know-your-customer" rules, to prevent misuse by criminal elements.
- Description:
  - The Anti-Money Laundering Code of Procedures (AMLCP) requires banks to have policies, practices, and procedures focused on minimum customer due diligence for new and existing business, ongoing monitoring, and suspicious transaction reporting. AMLCP is supplemented by Anti-Money Laundering Guidance Notes, incorporated by reference.
  - AMLCP requires identification on the basis of official identification documents, identification of beneficial ownership, and retention of customer identification records; banks must obtain satisfactory evidence if doubts arise.
  - Customer due diligence may be carried out directly by the bank or by eligible introducers meeting minimum criteria.
  - All banks must appoint a compliance officer under the FSCA; AMLCP specifically requires a compliance officer for AML/CFT policies and training, and a Reporting Officer to ensure suspicious transactions are reported to the Reporting Authority. The Reporting Officer and Compliance Officer may be the same person; appointment of the Compliance Officer requires FSC approval, although the approval process has not yet begun.
  - Under the PCCA, persons who report suspicious transactions are protected from liability for prosecution for ML and from breach of confidentiality for disclosure to the RA. Suspicious activity reporting is currently voluntary, though consideration of mandatory reporting is underway.
  - Banks are required to provide information of sufficient quality and quantity to enable investigative officers to determine transactions and obtain court orders if necessary.
  - Implementation of full supervision for AML/CFT measures has not been completed; the Development Bank of the Virgin Islands is not subject to AML/CFT measures under the AMLCP.
  - Commercial banks in the BVI are subsidiaries or branches of banks in jurisdictions with AML/CFT measures; home state supervisors have authority to ensure compliance in BVI branches/subsidiaries, but particulars of compliance cannot be known until on-site inspections with file review and transaction testing are undertaken.
- Assessment: Largely Compliant
- Comments: No comments.

### On-site and off-site supervision (Principle 16)
- Requirement: Effective supervision should consist of both on-site and off-site supervision.
- Description:
  - FSC receives quarterly Form BS (balance sheet and income statement with memorandum information) and requires filing of a maturity analysis of assets and liabilities. Form BS is highly summarized and lacks sufficient detail (e.g., levels of delinquency).
  - FSC began on-site prudential visits in 2001: meetings with top management lasting a few hours to a day, using the Bank Prudential Visit Questionnaire covering credit risk, liquidity, foreign exchange risk, interest rate risk, AML, management evaluation, internal audit, and information technology.
  - Prudential visit procedures are under continuous development; current questioning, analysis and follow-up provide a very high level perspective with lack of independent verification.
- Assessment: Materially noncompliant—steps to become fully compliant are underway.
- Comments:
  - More detailed information and independent testing are needed for highly effective supervision.
  - FSC expected to implement a much more comprehensive on-site supervision module during the second half of 2003, which will enable staff to better assess and supervise banks’ risks.
  - 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.

### Bank management contact (Principle 17)
- Requirement: Supervisors must have regular contact with bank management and a thorough understanding of operations.
- Description:
  - FSC has regular contact through prudential visit process; FSC staff meets top management at least once a year.
  - The Director of Banking and Fiduciary Services meets with the Banking Association quarterly; the FSC’s managing director meets periodically with the Banking Association.
  - For subsidiaries operating in the BVI the FSC staff meets with the Board of Directors.
- Assessment: Compliant
- Comments: Yearly prudential visits and collaborative efforts provide ample contact with bank management.

### Off-site supervision (Principle 18)
- Requirement: Supervisors must collect, review, and analyze prudential reports and statistical returns on a solo and consolidated basis.
- Description:
  - Section 15(3)(c) of the BTCA and Section 32 of the FSCA grant the FSC powers to demand information and documents necessary to discharge functions and ensure compliance.
  - FSC currently receives quarterly balance sheet, income statement and maturity analysis; information lacks sufficient detail to perform adequate off-site supervision (see Principle 16).
- Assessment: Materially noncompliant—steps to become fully compliant are underway.
- Comments:
  - FSC has explicit powers to require information but current reports are of limited supervisory value.
  - FSC is modifying quarterly regulatory reporting to include more in-depth information (see Principle 16).

### Validation of supervisory information (Principle 19)
- Requirement: Supervisors must have means of independent validation of supervisory information via on-site examinations or external auditors.
- Description:
  - FSC currently does not have a formal program to validate supervisory information.
  - Supervisory information for banks operating under a subsidiary structure is validated against audited financial statements for the last quarter.
  - As part of implementing in-depth on-site examinations, FSC should consider steps during on-site work to verify accuracy of supervisory information received.
- Assessment: Materially noncompliant—steps to become fully compliant are underway.
- Comments:
  - FSC currently validates only a small portion of regulatory information.
  - Implementation of on-site examination program during 2003 is expected to include validation of supervisory information.

### Consolidated and globally consolidated supervision (Principles 20 and 23)
- Requirement: Supervisors must supervise banking groups on a consolidated basis and practice global consolidated supervision for internationally active organizations.
- Description:
  - Currently no foreign subsidiaries or branches of banks incorporated in the British Virgin Islands; FSC has legal power to authorize foreign subsidiaries or branches with no limitations.
- Assessment: Not applicable (Principle 20); Not applicable (Principle 23)
- Comments: Principles do not apply as no BVI-incorporated banks have subsidiaries or foreign branches. All banks operating in the BVI are either branches of foreign banks, subsidiaries of foreign banks, or stand-alone banks.

### Accounting standards (Principle 21)
- Requirement: Supervisors must be satisfied banks maintain adequate records in accordance with consistent accounting policies allowing a true and fair view, and publish financial statements that fairly reflect condition.
- Description:
  - Section 17 of the BTCA requires banks to file audited financial statements three months after year-end.
  - Licensing Guidelines section 3(g): “The applicant will appoint approved auditors who will perform that work according to internationally accepted auditing standards.”
  - FSC accepts audited financial statements in accordance with the standards of a bank’s country of origin.
  - FSC does not require branches to file audited financial statements. Neither the FSC nor the banking industry publishes detailed information on banks’ financial condition.
- Assessment: Materially noncompliant—steps to become fully compliant are underway.
- Comments:
  - FSC intends to modify the BTCA to clearly establish accounting standards to be utilized.
  - Branches operating in the BVI, which account for more than half of local banking operations, are not subject to independent external audits.
  - Lack of regulatory requirements results in no transparency as to financial information of the local banking industry.

### Remedial measures (Principle 22)
- Requirement: Supervisors must have adequate measures to bring timely corrective action, including ability to revoke license.
- Description:
  - Section 20(2) of the BTCA empowers the FSC to take remedial actions when a licensee has: (i) ceased to carry on banking business; (ii) has gone into liquidation or is wound up or is otherwise dissolved; (iii) has made any arrangement or composition with its creditors; (iv) is unable or appears likely to become unable to meet its obligations as they fall due; (v) is carrying on business in a manner detrimental to the public interest, the interest of its depositors or the interests ... of other creditors; (vi) has contravened any provision of the BTCA; or (vii) has failed to comply with a condition of its license, to (a) revoke the license, (b) impose new or additional conditions upon the licensee, (c) appoint an advisor to the licensee, (d) appoint a person to take control, or (e) any other action the FSC thinks fit.
- Assessment: Largely Compliant—steps to become fully compliant are underway.
- Comments:
  - FSC has adequate legal powers to take corrective action.
  - Due to shortfalls in on-site and off-site supervision and weaknesses in prudential standards, remedial actions do not appear to occur on a timely basis in practice.
  - Strengthening prudential standards and supervisory programs should enable timely detection and early corrective action.

### Coordination with other supervisors (Principle 24)
- Requirement: Consolidated supervision requires contact and information exchange with other supervisors, primarily host country authorities.
- Description:
  - The Head of the Banking Division meets sporadically with foreign consolidated supervisors of each bank operating in the BVI; license application reviews show considerable interaction with foreign regulators, though documentation of meeting results is limited.
  - FSC is in conversations with supervisors (Federal Reserve, FSA, Puerto Rico, Cayman, and Barbados) to sign cooperation and information exchange agreements and appears to have practical relations and substantial interaction with counterparts.
- Assessment: Largely Compliant—steps to become fully compliant are underway.
- Comments:
  - FSC should continuously evaluate parent banking organizations and maintain communication with consolidated supervisors to be abreast of issues affecting banking groups.
  - FSC should consider investing substantial resources in intimate coordination with consolidated supervisors and may coordinate limited scope joint examinations of local operations.

### Equal treatment of foreign bank establishments (Principle 25)
- Requirement: Local operations of foreign banks must be conducted with the same high standards as domestic institutions and supervisors must be able to share information needed by home country supervisors.
- Description:
  - Banking industry (except the Virgin Islands Development Bank) is entirely foreign institutions. For prudential standards, different standards are applied depending on license type, but same standards are applied to all banks with the same license type.
  - Class I restricted licenses (which do not engage in business in the British Virgin Islands) in practice are not subject to the same administrative capital requirement.
- Assessment: Compliant
- Comments: Laws and regulations do not establish different regulatory treatment for foreign institutions compared to local institutions. All banks operating in the BVI, except the DBVI, are of foreign origin.

*Assessment and findings presented by the team (2003).*

### 1. Objectives, Autonomy, Powers, and Resources

### 1. Objectives, Autonomy, Powers, and Resources

### 1.1–1.6 Core institutional attributes
- Listed core areas: Objectives; Independence; Legal framework; Enforcement powers; Legal protection; Information sharing.

### Cross-cutting issues and prioritized remediation (paragraph 15)
- Four major issues to be addressed promptly:
  - Priority should be given to recruiting additional qualified staff. Current staffing levels are inadequate to perform in-depth effective supervision of the BVI’s financial system. The FSC has adequate financial resources and has the flexibility adequately to compensate its personnel. The FSC may also consider utilizing consultants to perform various detailed testing procedures.
  - The FSC, with the assistance of KPMG, is in the process of creating on-site supervision modules for multiple regulated persons including banks, trust and insurance companies. The successful implementation of these on-site supervision modules coupled with solving the staffing shortcomings will significantly influence the future effectiveness of the FSC’s supervision.
  - The head of the FSC currently lacks legislative certainty. Full regulatory independence would be provided if the person with the ultimate supervisory and enforcement responsibilities had a fixed term appointment and if greater transparency were provided in the event of separation.
  - The jurisdiction generally lacks transparency as to financial information on the market participants. The FSC is encouraged to engage in a process to substantially increase the level of transparency.

### Recommended action plan to improve compliance with the Basel Core Principles (Table 4 — selected entries)
- Legal framework for bank supervision (CP 1.3)
  - Recommended action: Place the Development Bank under the full authority of the FSC.
  - Response of Authorities: To be implemented by end-2003 or early 2004.
- Prudential Standards (CP 5,6,7,8,9,10,11,12,13)
  - Recommended action: Implement prudential standards consistent with international standards and in manner to protect the safety and soundness of the system and the interests of depositors and creditors.
  - Response of Authorities: See comments below.
- Internal Control and Audit (CP 13)
  - Recommended action: Implement Corporate Governance Standards and formal requirements for internal audit.
  - Response of Authorities: See comments below.
- On-site and off-site supervision (CP 16,18)
  - Recommended action: Implement on-site supervisory program and implement changes to off-site supervisory reporting and analysis.
  - Response of Authorities: To be implemented.
- Information Validation (CP 19)
  - Recommended action: As part of the implementation of on-site supervision, include the verification of regulatory reporting with bank records.
  - Response of Authorities: To be implemented.
- Off-site supervision (CP 18)
  - Recommended action: Design methodology and add resources for effective and comprehensive understanding and analysis of audit and regulatory reports. Should continuously coordinate with home supervisor.
  - Response of Authorities: To be implemented.
- Cooperation with Other Supervisors (CP 24)
  - Recommended action: The FSC may consider increasing interaction with home country supervisors to increase understanding of the consolidated entity, risks assumed, and effectiveness of on-site/off-site supervision.
  - Response of Authorities: To be implemented.

### Authorities’ response and supervisory developments (paragraphs 16–22)
- On-site supervision
  - The FSC has signed off on the Fiduciary/Company Management On-site Monitoring Program and the Banking On-site Monitoring Program is expected to be signed off on shortly.
  - Although a formal on-site inspection program had not been in place, the Bank Prudential Visit Questionnaire has provided insights into banks’ operations; a new Bank Prudential Visit Questionnaire will allow the FSC to assess banks’ asset quality amongst other things.
- Supervisory approach
  - The FSC follows a risk based approach to supervision, concentrating supervisory work on asset liability management, financial performance, capital adequacy requirements, and management of credit risk.
- Prudential standards and guidance
  - Draft guidelines for concentration and liquidity risks, developed along international standards, are with the banking industry for consultation.
  - Proposed standards for credit policies and large exposure were developed to be consistent with the BCP.
  - No specific rules have been set for banks’ loan and investment policies and practices; these are considered management responsibilities, but the FSC expects banks to identify, monitor and control credit risk.
  - Clear and precise rules with regards to large exposure have been developed.
  - No specific loan classification or provisioning rules have been issued but the FSC expects banks to have internal policies consistent with international best practice.
- Internal controls and testing
  - Banks are required by the FSC to take reasonable care to establish and maintain systems and controls appropriate to the nature and scale of their operations.
  - BIS papers on Internal Controls and Operational Risks were issued to the banks as well as Interest Rate Risk.
  - Independent internal audit functions exist (conducted by head office or parent bank); the quality of systems, controls and internal audits will be tested on an on-going basis when the FSC commences on-site inspections.
- Country risk and related-party monitoring
  - Country risk is not significant for BVI banks as most loans are to domestic companies or individuals; where exposures exist they are to OECD and G-10 countries.
  - Connected lending is monitored from prudential returns through sections titled Related Party Deposits and Related Party Loans and Advances.
  - All bank licenses were approved and granted on the explicit understanding that banks would be regulated according to BIS standards.
- Financial disclosure
  - The FSC 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 in preparation (to be implemented by end-2004, completed items noted)
  - Being drafted and due to be implemented by end-2004: bank licensing; liquidity management (completed); large exposures (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).

### AML/CFT assessment: methodology, scope, and institutional capacity (paragraphs 23–34)
- Assessment context and methodology
  - An IMF-led Offshore Financial Sector (OFC) assessment of the British Virgin Islands (BVI) was conducted November 11–23, 2002.
  - A detailed assessment of the anti-money laundering (AML) and combating the financing of terrorism (CFT) regime used the Methodology for Assessing Compliance with Anti-Money Laundering and Combating the Financing of Terrorism Standards (AML/CFT Methodology), endorsed by the Financial Action Task Force (FATF) in October 2002 and the Fund and Bank Boards in November 2002.
- Assessment team composition and tasks
  - The assessment was conducted by a team of assessors under Fund staff supervision and an independent AML/CFT expert (IAE) not under substantive Fund supervision.
  - IMF staff and experts reviewed AML/CFT laws, regulations, supervisory and regulatory systems for prudentially regulated financial institutions (banking, insurance, securities) and trust and company service providers (TCSPs).
  - Criminal law enforcement and implementation aspects were assessed by an IAE from the Norwegian Ministry of Justice; implementation of AML/CFT measures for money remitters was also assessed.
- Sources and limits of the assessment
  - The assessment was based on review of existing legislation, regulations, supervisory guidelines and documentation provided by authorities, including responses to IMF questionnaires and aide-mémoires on AML/CFT progress.
  - Planned legislative changes and proposals were noted and commented upon as reflections of authorities’ responses to identified needs but did not form a basis for assessment ratings.
  - The mission met with the FSC, Attorney General’s Chambers (AGC), the Financial Investigations Unit of the Royal Virgin Islands Police (Police FINU), the Financial Secretary, Customs Office, and private sector representatives involved in AML/CFT implementation.
- Vulnerabilities and risk environment
  - Two primary vulnerabilities to ML and FT:
    - The BVI is located in an increasingly important transshipment corridor for trafficking of cocaine from producer countries to the south and consumer countries to the north; in 1998 the CFATF found drug trafficking to be the major problem addressed by the police.
    - The BVI is a major offshore financial center with a dominant share of the global market for international business corporations (IBCs); CFATF concluded incidences of money laundering may occur, particularly at layering and integration stages.
  - IBCs can provide a “nearly ‘impenetrable layer of protection around the ownership of assets’” and have been criticized when formed without commercial or financial justifications other than to conceal assets, circumvent laws, or evade taxes.
- Primary AML/CFT legal and supervisory framework
  - Primary pieces: Proceeds of Criminal Conduct Act, 1997 (PCCA); Anti-Money Laundering Code of Practice, 1999, as amended in 2000 and 2001 (AMLCP); Reporting Authority (Constitution and Procedure) Order, 1998; Anti-Money Laundering Guidance Notes for the BVI Financial Services Sector (Guidance Notes).
  - The AMLCP specifically incorporates the Guidance Notes into its requirements and renders the Guidance Notes subject to sanction for noncompliance, though the Guidance Notes state they represent best practices.
  - Drug trafficking provisions: Drug Trafficking Offenses Act 1992, as amended in 2000; Drug Trafficking Offenses (Designated Countries and Territories) Order, 1996.
  - Other relevant legislation supporting supervision: Banks and Trust Companies Act 1990 (BTCA); Financial Services Commission Act (FSCA); Company Management Act, 1990 (CMA); Mutual Funds Act 1996 (MFA); Insurance Act, 1994 (IA).
- International cooperation
  - Specific legislation for international cooperation and mutual legal assistance: Criminal Justice (International Cooperation) Act, 1993 (CJIC); Financial Services (International Cooperation) Act, 2000 (FSIC); and a Mutual Legal Assistance (United States of America) Act, 1990.
  - The BVI regularly uses these instruments for delivering mutual legal assistance and for providing assistance to international supervisors; it receives more requests from abroad than it sends, though the Attorney General’s Chamber reported a steady rise in BVI requests (no specific figures provided).
- Financing of terrorism measures
  - The BVI is subject to two UK statutory instruments applicable to Overseas Territories: 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), addressing major FT requirements under the 1999 UN Convention for the Suppression of Financing of Terrorism and UNSCR 1373.
- Scope of AML/CFT coverage and supervisory responsibilities
  - Major AML/CFT supervisory legislation is designed to apply broadly to banks and trust companies, insurance business, company management, mutual fund management/administration, money remittance or transmission, activities where client money is held or managed by an attorney-at-law or accountant, and the business of acting as a company secretary.
  - The Development Bank of the Virgin Islands was not yet subject to prudential supervision (scheduled later in 2003) and was not yet subject to AML/CFT due diligence, record keeping, or internal controls requirements, though subject to suspicious transaction reporting laws.
  - Money remitters (estimated by the FSC to be three known entities) were not subject to licensing or prudential supervision, but a proposed licensing and regulatory act was expected to be enacted in the first half of 2003.
  - A single supervisor, the FSC, is responsible for both prudential supervision and ensuring compliance with AML measures.
- Institutional capacity and gaps
  - The FSC was established by the FSCA in January 2002 and has multiple statutory and regulatory remits; it is building staff to cover AML/CFT enforcement, including filling vacancies in the Legal and Enforcement Division.
  - Full implementation of on-site supervision had not been completed and current depth of skill was not yet at levels necessary for effective and comprehensive AML/CFT supervision.
  - The mission noted significant progress in assembling supervisory tools, completing internal manuals for inspection of financial sectors, and building capacity to exercise the FSC’s supervisory mandate relevant to AML/CFT.

*Source: IMF OFC assessment chapter "1. Objectives, Autonomy, Powers, and Resources" (cr0493).*

### 35.      The FSC Board and Management exhibit strong commitment to ensuring that the FSC

### 35.      The FSC Board and Management exhibit strong commitment to ensuring that the FSC

### FSC commitment, supervisory enhancements, and implementation challenges
- The FSC Board and Management exhibit strong commitment to ensuring that the FSC becomes an effective and well resourced regulator.
- Assessors consider a period of implementation and structural enhancement necessary to fully and effectively incorporate international standards into the FSC’s supervision.
- The Director, Insurance Business, agreed that on-site inspections of Insurance managers and their required compliance would provide evidence of alleged deficiencies.
- Because there were not yet IAIS principles specifically on AML/CFT, guidance notes based on IAIS principles would be suitable at this stage.
- The Director of Banking and Fiduciary Services proposed amending the AMLCP to require all due diligence to be kept in the BVI in line with the Basle CDD Paper.

### Reporting Authority (RA), investigative structure, and proposed Financial Investigative Agency (FIA)
- The Reporting Authority (RA) was established under the Proceeds of Criminal Conduct Act and is the financial intelligence unit responsible for receiving and disseminating suspicious transaction reports (STRs).
- The RA is independent of the FSC, consists of three members appointed by the governor, and is not a regulatory body.
- Membership of the RA:
  - Head: the managing director of the FSC.
  - Member: head of the Financial Investigations Unit of the Royal Virgin Islands Police Force (Police FINU) — the investigative arm of the RA.
  - Member: a Senior Crown Counsel from the AGC.
- The deputy managing director of the FSC is the Secretary for the RA.
- The RA has been a member of the Egmont Group since 1999.
- The investigative authority of the RA is derived from the Police FINU head being a member of the RA.
- The FSC, the AGC and the Joint Anti-Money Laundering Coordinating Committee (JAMLACC) are responsible for setting AML laws, regulations, guidelines and codes of conduct.
  - The JAMLACC promoted AML guidance, training, and education, played a key role in the enactment of the AMLCP and prescribed the Guidance Notes, but is not active at present.
- On counter-terrorist financing (FT):
  - Two Statutory Instruments passed by the United Kingdom vest responsibility for FT reporting and detection with the governor; the AGC provides support with respect to FT orders.
  - Authorities advise that FT orders to date have not resulted in any identification or freezing of FT related assets.
- The AGC has responsibility for prosecutions of ML and FT offenses; prosecutions in the BVI are few with most resources focused on developing usable evidence for prosecutions abroad.
  - The AGC has a dedicated Commercial Crimes Unit with expertise in ML and financial crimes.
- Authorities proposed restructuring by enacting a Financial Investigative Agency (FIA), a separate statutory agency with full police powers to conduct financial intelligence and investigative functions and to process STRs and mutual legal assistance requests.
  - The FIA would be comprised of staff seconded from the Police, Customs, Immigration, AGC, and other relevant agencies.
  - Authorities advise that the FIA should be constituted by the second quarter of 2003.

### Detailed assessment context
- The detailed assessment was conducted using the October 11, 2002 version of Methodology for assessing compliance with the AML/CFT international standard, i.e., criteria issued by the Financial Action Task Force (FATF) 40+8 Recommendations (the Methodology).

### I — Criminalization of ML and FT (findings and analysis; compliance with criteria 1–6)
- Description of legal framework and international instruments:
  - BVI criminal provisions for ML and FT are contained in multiple instruments, including the Proceeds of Criminal Conduct Act (PCCA), the Drug Trafficking Offenses Act (DTOA), 1992, and two Statutory Instruments issued by the United Kingdom applicable to overseas territories.
  - The BVI is dependent on the United Kingdom for multilateral conventions and responses to United Nations Resolutions and is not separately a party to multilateral or bilateral conventions on money laundering.
  - Money laundering is criminalized in the BVI in accordance with the Vienna and Palermo Conventions.
  - The BVI has not requested the U.K. to extend the Palermo Convention to the territory as yet because of issues surrounding wire tapping and surveillance; consolidation of related authorization mechanisms is an objective before requesting extension.
  - Two U.K. Statutory Instruments:
    - No. 3366 in 2001, The Terrorism (United Nations Measures) (Overseas Territories) Order.
    - No. 1822 in 2002, the Anti-Terrorism (Financial and Other Measure) (Overseas Territories) Order.
    - As a result of these two instruments, the BVI is in full compliance with the 1999 United Nations Convention for the Suppression of the Financing of Terrorism.
  - Decision of the executive council on November 6, 2002 to officially ask the U.K. to extend the 1999 Convention to the BVI.
  - Statutory Instrument 3366 authorizes the Governor of the BVI to issue orders necessary to implement FT lists contained in UNSCRs; the BVI’s response to UNSCR 1373 was completed as part of the U.K.’s response.
- Specific criminal provisions:
  - PCCA Sections 28–30 criminalize ML: Section 28 (enlisting another to retain benefit of criminal conduct), Section 29 (acquisition, possession or use of proceeds), Section 30 (concealing or transferring proceeds).
  - Section 31 criminalizes tipping off about an STR or a money laundering investigation.
  - Predicate offenses for Sections 28–30 of the PCCA extend to all serious offenses, meaning indictable offenses triable at the High Court before a jury; generally indictable offenses are subject to three years imprisonment at minimum (Section 2(5)(d) of the PCCA).
  - The PCCA predicate offenses do not include drug offenses; DTOA 1992 previously criminalized money laundering on the basis of the Vienna Convention and captured proceeds of drug trafficking (e.g., DTOA Section 23B).
  - In both PCCA and DTOA, the predicate offense need not have occurred in the BVI so long as the offense constituted a predicate offense within the territory (Section 2(1) PCCA and Section 2(1) DTOA).
  - The AGC advises the PCCA extends to persons who have committed money laundering as well as both money laundering and the predicate offense; conviction of a predicate offense is not necessary to prosecute for money laundering.
  - “Proceeds of criminal conduct” are defined broadly in the PCCA (Section 2(1) and 2(5)); Section 29 applies to property that directly or indirectly represents the proceeds of crime.
- FT criminalization under Statutory Instruments:
  - Statutory Instrument 2002 No. 1822 criminalizes:
    - Fundraising for terrorism (Section 6);
    - Use and possession of money or other property known or reasonably suspected to be used for terrorism (Section 7);
    - Entering into funding arrangements where funds are known or reasonably suspected to be used for terrorism (Section 8);
    - Money laundering by involvement in arrangements facilitating retention or control of terrorist property (Section 9);
    - Failing to disclose to a constable a belief or suspicion of a terrorist financing offense in Sections 6–9.
  - Statutory Instrument 2001 No. 3366 criminalizes:
    - Collection of funds for the purposes of terrorism (Section 3);
    - Making funds available directly or indirectly to benefit a person who commits or facilitates terrorism (Section 4).
  - Section 4 of Statutory Instrument 1822 and Section 3 of Statutory Instrument 3366 specify that FT actions include actions occurring outside the territory.
  - The FT offenses apply to all persons, including legal entities under the PCCA and Section 1(5) of Statutory Order No. 3366; however, FT offenses in Statutory Order 1822 are not specifically extended to legal entities.
- Mental element, penalties, and enforcement practice:
  - Intentional element for ML offenses: defendant knows or suspects that money, property or assets represent proceeds of criminal conduct; AGC advises intentional element may be inferred under a “should have known” standard from objective circumstances.
  - Criminal penalties for ML under PCCA Sections 28–31:
    - Summary conviction: imprisonment not exceeding six months or a fine not exceeding US$3,000.
    - Conviction on indictment: imprisonment not exceeding 14 years and a fine not exceeding US$20,000. (Sections 28(8), 29(11), 30(4) of the PCCA).
  - DTOA Section 23B penalties:
    - Summary conviction: imprisonment of not more than six months or a fine of up to US$10,000.
    - Conviction upon indictment: imprisonment of up to 14 years or a fine of up to US$50,000.
  - FT offenses under Statutory Instrument No. 1822:
    - Conviction on indictment: penalty of imprisonment not exceeding five years, to a fine.
    - Summary conviction: imprisonment of up to six months and a fine up to a statutory maximum.
  - FT offenses under Statutory Instrument No. 3366:
    - Conviction upon indictment: imprisonment for a term not exceeding seven years or a fine.
    - Summary conviction: imprisonment up to six months or a fine up to £5,000 (about US$7,890).
- Findings on effectiveness and recommendations:
  - Criminal provisions are generally compliant with international standards and consistent with the Vienna and Palermo Conventions; FT is criminalized consistent with the International Convention for the Suppression of the Financing of Terrorism.
  - Criminal provisions for ML are not extensively used for prosecution within the BVI because most investigative evidence is provided for foreign prosecutions.
  - Recommendation: Increase prosecutions for ML and FT where evidence supports domestic prosecutions to better utilize BVI criminal provisions and to develop investigative evidence for foreign prosecutions.
  - Implication: BVI legal provisions for ML are largely compliant with FATF Recommendations 4 and 5; FT offenses in the two Statutory Instruments comply with SR II requirements.

### II — Confiscation of proceeds of crime or property used to finance terrorism (findings and analysis; compliance with criteria 7–16)
- Description and scope of confiscation regime:
  - PCCA confiscation provisions are directed primarily to recovering a sum of money representing the benefit derived from the ML offense, rather than direct confiscation of property laundered or instrumentalities used in non-drug ML offenses.
  - DTOA contains specific provisions for confiscation of instrumentalities of ML associated with drug crimes; PCCA forfeiture provisions do not contain similar language.
  - AGC asserts inherent power of the courts allows for confiscation of instrumentalities, but actual cases of confiscation of laundered property or instrumentalities of non-drug ML have not been cited.
  - Sections 6 and 12 of the PCCA provide for confiscation of a sum determined by the court upon conviction for a money laundering offense; amount represents the benefit derived by the defendant.
  - PCCA confiscation provisions extend to the value of the property laundered but not expressly to instrumentalities used in or intended to be used to commit an ML offense or predicate crime.
  - Forfeiture of cash is contained in DTOA Section 35 for cash from drug offenses.
  - Forfeiture of other property connected to commission of an offense may be subject to Criminal Code Section 26 if relating to enumerated provisions (Sections 79, 80, 81, or 101 of the Criminal Code).
  - Drugs (Prevention of Misuse) Act (Cap. 178) authorizes forfeiture of all drugs and instrumentalities associated with the offense.
  - Although PCCA lacks explicit provision for forfeiture of assets laundered or instrumentalities of non-drug ML, enforcement of confiscation orders under PCCA may be effectuated against realizable property that includes laundered assets.
  - PCCA provides provisional measures for freezing/seizing property that is or may become the subject of confiscation (Sections 16, 17 & 18).
    - Applications made ex parte to a judge in chambers by a prosecutor, subject to giving notice to affected persons (Sections 17(4) and 18(2) of the PCCA).
  - No specific PCCA provision for confiscation of property of organizations found primarily criminal in nature; Statutory Instrument 3366 authorizes the governor to freeze funds associated with terrorism and financing of terrorism.
    - AGC notes Section 4 of the Public Order Act (Cap. 63) proscribes quasi-military organizations and empowers the High Court to dispose of property of such organizations, including forfeiture to the Crown.
    - Section 16 of Statutory Instrument 1822 authorizes forfeiture of terrorist cash, including cash intended for terrorism or representing property obtained through terrorism.
  - AGC advises property of equivalent value may be forfeited if subject property is not available.
  - Civil forfeiture is contemplated under general common law principles and is available upon application to the High Court.
- Powers to trace and identify assets, and administrative authorities:
  - PCCA Section 36 authorizes a police officer to apply to the High Court for production orders for materials needed to investigate an ML offense; AGC advises scope is sufficiently wide to encompass orders to trace and identify property that may become subject to confiscation.
  - PCCA Section 6(1) requires the court to determine whether the offender has benefited from relevant criminal conduct prior to ordering confiscation; court has wide authority to trace proceeds.
  - Magistrate general powers include investigating all charges not empowered to be tried summarily (Section 22(c) MCP).
  - Administrative authorities:
    - FSCA Section 30(1) authorizes the FSC Board to request information from persons connected to a financial services business.
    - FSCA Section 32 authorizes the FSC to request information or production of documents by notice and to apply for a search warrant in relation to enforcement under financial services legislation.
    - FSCA Section 37 authorizes the FSC to appoint examiners to conduct investigations on its behalf in relation to enforcement actions.
    - Cumulative effect: These provisions imbue the FSC with statutory powers to trace and identify assets of regulated persons through enforcement mechanisms.
  - Recommendation: Specific administrative authority to identify and freeze assets for a short period would be helpful.

*Source: Detailed assessment conducted using the October 11, 2002 version of the Methodology for assessing compliance with the AML/CFT international standard (FATF 40+8 Recommendations).*

### Section 4(3) of the PCCA specifically allows for voiding of gifts made by defendants convicted of a ML offense.

### cr0493 - Section 4(3) of the PCCA specifically allows for voiding of gifts made by defendants convicted of a ML offense.

### Legal framework for voiding gifts, freezing, and confiscation
- Section 4(3) of the PCCA:
  - Specifically allows for voiding of gifts made by defendants convicted of a ML offense.
  - Requires the court to consider transfers of property by the defendant either as outright gifts or where the consideration rendered is significantly less than the property transferred.
  - Where consideration rendered is significantly less than the property transferred, the court must consider the rights of any bona fide or innocent third party recipient by taking into account the value of the consideration rendered by the third party.
- Freezing and seizing provisional measures:
  - Additional orders to void contracts may be sought through the courts under Section 17(4) and 18(2) of the PCCA (per the AGC).
- Statutory Order 3366 (Section 5):
  - Authorizes the governor to freeze funds where there is reasonable grounds to suspect that the funds are for, or being held on behalf of, a person who commits, attempts to commit, facilitates, or participates in acts of terrorism or a person controlled by a suspected terrorist.
  - The governor’s authority to freeze funds is not limited to lists provided by the U.N. under Section 5 of Statutory Order 3366.
- Statutory Instrument 1822 (Section 5(7)):
  - Allows a recipient of an order that freezes funds associated with terrorism to apply to the governor for an order setting aside the freezing.
- Seizure and realization (Section 3(5)):
  - Requires consideration of the effect of sale on the value of any beneficial interest in the property held by a bona fide third party.
- AGC practice regarding bona fide third parties:
  - The party must make an affirmative application to the court by seeking a civil order to assert rights over the property forfeited or confiscated.
  - The burden of proof falls on the applicant party.
- Asset sharing and mutual legal assistance:
  - Confiscated assets and forfeited property are divided among the jurisdictions involved; compensation of innocent third party victims is provided for.
  - BVI has asset sharing arrangements with the United States and is negotiating an arrangement with Canada through the Foreign and Commonwealth Office.
  - As a general rule, BVI shares confiscated and forfeited assets with other jurisdictions that have an interest in the property and where criminal proceedings have been or will be initiated in the other jurisdiction.
  - Assets confiscated or forfeited under mutual legal assistance requests are transmitted directly to the requesting jurisdiction.
- Statistics on freezing:
  - Authorities have not compiled statistics on frozen funds; the Attorney General advises that no funds have been frozen as a result of the UNSCRs.

### Analysis of effectiveness
- Confiscation and provisional measures:
  - Confiscation for proceeds of criminal conduct, including direct and indirect benefit derived from money laundering and provisional measures for freezing of assets, are assessed as adequate.
  - Forfeiture provisions applying to property laundered and instrumentalities of ML are not clearly defined in the law outside the context of narcotics and a short list of relevant crimes.
  - AGC advises courts have inherent power to forfeit instrumentalities to the Crown or in any manner considered fit; absence of specific forfeiture provisions in the PCCA does not mean laundered property cannot be subject to forfeiture.
  - AGC asserts the PCCA regime authorizes the prosecutor to apply for a confiscation order in relation to laundered property connected to an established offense.
  - Under Sections 15 through 20 of the PCCA, it appears such authority applies to property laundered or instrumentalities of ML only when enforcing confiscation orders after the defendant fails to pay, rather than permitting direct forfeiture of proceeds laundered or instrumentalities of ML.
  - It is not clear under what circumstances confiscation orders have been enforced against property or assets laundered under the PCCA authority.
- Terrorist financing:
  - There are specific provisions for freezing, restraint and forfeiture of assets used to finance terrorism or intended to support terrorist activities.
- Data and resourcing gaps:
  - Authorities do not formally keep statistics, although they assert the information is readily known.
  - Formal, meaningful, and reliable statistics would help evaluate resource and staffing needs, guide deployment of limited resources, and enhance reputation for effective confiscation controls.
  - Training regarding confiscation is addressed under general investigative trainings attended.
  - There is an apparent lack of staff in the Legal and Enforcement section of the FSC; further training may be required when staffing is completed.

### Recommendations and policy comments
- Legislative and administrative changes recommended:
  - The PCCA or other legislation should provide for a specific forfeiture provision that allows for forfeiture of all property laundered and instrumentalities associated with a ML offense.
  - Additional authority should be provided to administrative bodies to identify and trace assets suspected of being ML or FT related.
- Operational improvements:
  - Systems for executing confiscation authority and managing disposition of confiscated assets are not fully developed in the BVI and should be strengthened.
  - Comprehensive statistics on freezing, seizure, and confiscation should be compiled and maintained, including information on the types and amount of property frozen, seized and confiscated and information concerning the ML offense or predicate offense.
- Usage and enforcement:
  - Confiscation provisions in the PCCA and DTOA appear to have been put to limited use; as a result, the level of assets seized and confiscated is not readily available.
  - Additional authority for provisional measures and confiscation are needed to address property laundered or instrumentalities used for ML and FT to achieve full compliance with FATF Recommendation 7 and 38 and Special Recommendation III.
  - Measures in place must be used to maximum effect to inhibit movement of proceeds of crime, property laundered and instrumentalities of crime.

### Implications for FATF compliance
- Assessment summary:
  - BVI’s legal provisions for confiscation are largely compliant with the minimum requirements of FATF Recommendation 7 and SR III insofar as the legal measures allow for confiscation upon conviction of the benefit of ML, and there are some provisions for instrumentalities as well as the possibility of in rem action for property laundered.
  - Nevertheless, legal provisions for freezing, seizure, and confiscation of assets are limited on their face and, in practice, may not be sufficient to cover property laundered or instrumentalities of ML, except for those related to a limited list of predicate crimes.
  - Additional authority for provisional measures and confiscation is needed to address property laundered or instrumentalities used for ML and FT to achieve full compliance with FATF 7 and 38.

### The FIU (Reporting Authority, RA): structure, powers, and reporting processes
- Establishment and composition:
  - The Reporting Authority (RA) is the financial intelligence unit in the BVI, established under Section 27 of the PCCA and constituted by the Reporting Authority (Constitution & Procedure) Order, 1998.
  - The RA comprises the managing director of the FSC (who is head of the RA), the Head of the Police FINU, and a Senior Crown Counsel from the Attorney General’s Chamber.
  - The Deputy managing director of the FSC is the Secretary of the RA.
  - The Reporting Authority has been a member of the Egmont Group since 1999.
- STR reception, analysis, and dissemination:
  - The RA is empowered to receive and disseminate STRs; it is the conduit for exchange of information with counterpart FIUs abroad.
  - As practice, STRs are distributed to all members of the RA; if needed, a meeting or consultation among RA members is convened.
  - The head of the Police FINU frequently conducts preliminary analysis for the RA and determines whether additional police investigative resources should be devoted.
  - If the STR raises regulatory issues, the RA may disclose information to the FSC for regulatory purposes; FSC participation in the RA means the FSC can decide whether the STR has regulatory impact.
- STR filing and forms:
  - Reporting parties are required to send all STRs to the RA pursuant to Section 28(2) of the PCCA and Paragraph 14(1)(f) of the AMLCP.
  - The STR form is not prescribed by law; Appendix F of the Guidance Notes suggests use of a standard form as the minimum content, though other forms with equivalent information may be substituted.
  - The BVI does not have mandatory currency transaction reporting.
- Guidance Notes and JAMLACC:
  - Guidance Notes for suspicious activity detection and reporting are the responsibility of the Joint Anti-Money Laundering Coordinating Committee (JAMLACC), comprised of private sector individuals and public sector heads (including heads of the FSC, RA and Customs).
  - JAMLACC has issued Guidance Notes but is not very active.
  - Guidance Notes address major indications and typologies but do not provide evolving typologies or industry alerts; they are being revised for terminology harmonization with the AMLCP and expected to be completed by early 2003.
  - The RA has final approval over the Guidance Notes and issues alerts on scams or attempted fraud schemes from time to time.
- Legal uncertainty and authority to request information:
  - The RA and Police FINU have authority to request additional information and documentation from reporting parties in the analysis of financial transactions; this authority is grounded in the voluntary nature of STR reporting.
  - The STR form requests sufficient quantity and quality of data to indicate grounds for suspicion, indicate any suspected offense, and enable an Investigating Officer to apply for a court order if necessary.
  - If initial STR filing lacks information, the RA will ask the reporting party for more information before considering the STR complete.
  - Limits of the authority to request additional information under this mechanism have not been challenged in court to date.
  - The FSC has authority to request information by written notice needed to ensure compliance with financial services legislation pursuant to Section 32 of the FSCA.
  - Authorities consider the practical arrangement sufficient but acknowledge legal uncertainty because judgment of sufficiency currently rests with the reporting entity rather than the receiving entity.
  - It is advisable that administrative authority to obtain additional information necessary for analysis be made more concrete in legislation or regulation.
- Access to databases and information sharing:
  - RA members have direct access to key databases: managing director of the FSC to commercial registry and FSC databases; Senior Crown Counsel to court records and Attorney General’s databases; Head of Police FINU to police databases including INTERPOL, land registry and vehicles.
  - Other databases (e.g., Customs) are available by request from the RA.
  - The RA has access to the Egmont Group encrypted database (ESW).
  - There is an intelligence task force, the National Intelligence Committee, comprised of Customs, Immigration, Police and Drug officials for exchange of intelligence.
- STR filing regime, sanctions, and enforcement:
  - Under the PCCA, filing of STRs is voluntary and filing protects reporting entities from criminal liability for money laundering; there are no direct criminal sanctions for failure to file STRs.
  - Paragraph 18 of the AMLCP imposes sanctions for failure to establish procedures for recognizing and reporting suspicious transactions: fines up to five thousand dollars for summary convictions and up to fifteen thousand dollars for convictions on indictment.
  - Paragraphs 88 through 90 of the Guidance Notes state that reporting officers “should” file STRs when information substantiates a suspicion; “should” in the Guidance Notes does not carry the same weight as “shall” in law or regulations and is not read as mandatory.
  - The FSC has not invoked enforcement measures to make the Guidance Notes mandatory; implementation of Guidance Notes provisions has not been fully incorporated into the supervisory process.
  - The FSCA authorizes the FSC to take enforcement actions for contravention of the AMLCP, including revoking or suspending a license, appointing an examiner, issuing a directive to cease a class of business, or not to enter into any new contracts for any class of business.
- Information flow to law enforcement:
  - The direct gateway between the RA and domestic law enforcement runs through the Head of the Police FINU, a member of the RA.
  - Section 28(7)(a) of the PCCA authorizes the RA to disseminate received information to any law enforcement agency in the territory.
  - There should be monitoring, record keeping, and statistics regarding information passed from the RA to the Police FINU that is transformed into an official investigation; there is also a need for certainty in the disposition of STRs.
  
*Source: cr0493 - Section 4(3) of the PCCA specifically allows for voiding of gifts made by defendants convicted of a ML offense.*

### Section 28(7) of the PCCA authorizes the RA to disclose any information received to any law enforcement

### Section 28(7) of the PCCA authorizes the RA to disclose any information received to any law enforcement

### Legal authority for disclosure and international exchange
- Section 28(7) of the PCCA authorizes the RA to disclose any information received to any law enforcement agency in any other country to:
  - report the possible commission of an offense;
  - initiate a criminal investigation respecting the matter disclosed;
  - assist with any investigation or criminal proceedings respecting the matter disclosed; or
  - generally give effect to the provisions of the PCCA.
- Disclosures to foreign law enforcement authorities require the consent of the Attorney General prior to disclosure.
- The Attorney General may impose conditions on further disclosure.
- The RA advises that disclosures to counterpart FIUs, pursuant to the Egmont Group Principles Information Sharing, do not require approval of the Attorney General.
- The RA has an MOU with the Belgian FIU to facilitate the exchange of information.
- The RA should share (and should be authorized to do so) nonpublic financial information with counterpart FIUs, subject to international provisions on privacy and data protection as elaborated upon in the Egmont Group Principles of Information Exchange.

### Statistics on Suspicious Transaction Reports (STRs)
- The RA does not keep official or formal statistics on STRs received, transmitted to the Police FINU or other domestic law enforcement authority, to foreign FIUs or law enforcement, or on disposition of STRs.
- General statistics provided by the authorities on STRs received:
  - 1998: 18 STRs received
  - 1999: 27 STRs received
  - 2000: 26 STRs received
  - 2001: 62 STRs received
  - 2002, to date: 45 STRs received
- Since 1998 the RA has received about 180 reports.
- The authorities estimate that about ¼ of the STRs are relevant in relation to cases handled by foreign jurisdictions.
- The number of received STRs is recorded; all information is scanned and secured in data-files, but material is not subject to qualitative analysis for statistical or strategic intelligence purposes.
- Authorities provided that they received 791 requests dealing with IBCs intelligence in 2001.

### RA structure, operational relationships, and effectiveness
- The RA falls under the ministry of finance as established under the PCCA, but currently the RA is budgeted through the FSC.
- The RA mainly derives its financial intelligence and investigative powers from its members: the managing director of the FSC, the Head of the Police FINU, and a Senior Crown Counsel.
- The Police FINU appears to conduct the main financial intelligence analysis and subsequent investigations on an integrated basis.
- The relationship between the RA and the Police FINU lacks formal structure, particularly with respect to analysis of financial intelligence.
- The structure is not formalized; tasks and powers division between the RA and the Police FINU is unclear.
- Suspicious transaction reporting is voluntary in the BVI, which may account for relatively low STR numbers given the size of the financial sector.
- The RA has no systematic contact with reporting institutions; interaction is limited to meetings and occasional alerts on scams or attempted fraud schemes.
- Lack of detailed statistics impedes assessment of operational effectiveness of the RA and Police FINU in processing STRs and providing feedback to reporting institutions.
- The current structure makes it difficult to assess undue influence or conflicts of interest among RA members; there are no internal rules or guidelines for RA operations.

### Training, data security, and information management
- The head of the Police FINU is an experienced financial crimes investigator and has conducted internal financial investigation training for Police FINU.
- Police FINU members undertake formal training for financial crimes in the U.K. and regional Caribbean programs; they also attend training from the Egmont Group, C.A.L.P., and FinCEN.
- Planned training: future Police/Customs and tax officers will be trained as financial investigators and criminal analysts.
- High priority is placed on the integrity and security of STR disclosures:
  - The RA maintains a separate database and a manual file of STRs.
  - Secure backups are regularly made of information obtained through STRs.
  - The electronic database contains scanned images of STRs and supporting documents, is indexed, checked against existing records, and is secured and separated from other operational Police FINU databases.
  - Additional information can be added to files but the image of the STRs and supporting documents will remain unaltered.
- The RA advises it can retrieve statistics as necessary and has a database on STRs from which necessary statistics could be constructed.
- The RA does not provide statistics to the government for information or reporting purposes, although some information is submitted through an annual report to the executive council.

### Analysis of effectiveness and operational limitations
- The RA is a statutory body with limited primary powers: to receive STRs and disseminate these to law enforcement locally and abroad.
- Structural limitations and limited access to financial information and indirect access to law enforcement information reduce the RA’s impact in:
  - promoting attention to complex or unusual transactions;
  - increasing reporting of STRs; and
  - providing comprehensive analysis of financial intelligence obtained from STRs.
- Guidelines for reporting of STRs are provided at only the most basic level; further information on evolving typologies is not regularly conducted.
- The FIU lacks a proper status within the BVI institutional framework; proposed restructuring to create the FIA may alleviate this.
- The number of STRs—and limited information on their use—suggests potential need for a more stringent identification and reporting system established by statute and enforceable by criminal authorities.

### Recommendations and policy measures
- The following recommendations and necessary measures are identified:
  - The FIA should be established and made operational as soon as practicable;
  - Clarify the division of tasks and powers between RA and the FIU to secure independence, integrity and confidentiality;
  - Work out a data-based system for producing reliable and targeted statistics with regard to the contents and the follow-up of STRs;
  - Further develop feedback routines and communication with the reporting institutions in order to identify trends and typologies and keep up motivation in the reporting institutions;
  - Contemplate changes with respect to the status and staffing of the RA. The RA should have more clearly defined tasks and powers;
  - Consider enacting a suspicious transaction reporting law;
  - Consider enacting an obligation to provide additional material regarding a suspicious transaction report—both spontaneously and upon request—statutory or subject to explicit regulations; and
  - The RA should be provided more authority and resources to increase its analytical function and to ensure that valuable financial intelligence received through STRs is properly analyzed, that supporting financial and law enforcement information can be obtained, and that the analysis conducted can be transmitted efficiently to law enforcement and regulatory authorities for maximum use.
- The RA should consider publishing an annual report that, in addition to statistical information, provides information on typologies and trends relevant to the industry subject to the anti-money laundering regime.
- Clearer and more formalized processes for sharing and use of financial intelligence submitted to the RA should follow to encourage the widest possible domestic and international cooperation.
- International exchange of financial information possessed by the RA should be enhanced to achieve full compliance with FATF Recommendation 32.

### Law enforcement, investigative powers and cooperation
- The Police FINU is responsible for investigating all financial crimes, including ML offenses disclosed through STRs.
- Reports of suspicions of FT are to be reported to the governor, who provides the information to the AGC for action.
- The number of requests received from abroad and limited resources foster a reactive approach to investigations; focus has been on providing investigative materials for investigations and prosecutions abroad.
- When requests for investigation in the BVI are received, authorities give sufficient attention and effective delivery of necessary investigative materials.
- The Magistrates’ Code of Procedure, Article 22, provides for a wide range of orders for search, seizure, and interrogation of witnesses.
- There are provisions for wire tapping under both the Telephone Act and the Telecommunications Act.
- Controlled delivery is authorized under the Drug (Prevention and Misuse) Act.
- To exercise necessary investigative tools, close cooperation among the Police FINU, RA, and other police and law enforcement officials is required domestically and abroad.
- The proposed FIA should have clear procedures for exchange of information to enable the widest possible use of investigative techniques necessary for prevention and detection of ML and FT offenses.

*Source: cr0493 (IMF).*

### Section 36 of the PCCA authorizes the Police to obtain orders for the production of information if there are

### Section 36 of the PCCA authorizes the Police to obtain orders for the production of information if there are reasonable grounds to suspect that these are relevant to investigating the proceeds of criminal conduct

### Legal authorities, task force composition, and information access
- Section 36 of the PCCA authorizes the Police to obtain orders for the production of information when there are reasonable grounds to suspect relevance to investigating the proceeds of criminal conduct.
- Authorities have established an intelligence task force that includes Customs, Police, Immigration, and the Drug Unit.
- Once the FIA is constituted it should be an official member of any task force formed and should have access to all information available to the task force.

### FIA establishment, staffing, funding, and operational considerations
- Executive council decision taken to establish the FIA; a bill is being drafted and provisioning exists in the 2003 budget for the FIA.
- Proposed staffing: add eleven staff members to the FIA, in addition to the three current staff members of the Police FINU.
- FIA staffing model: staffed from members seconded from the Police FINU, Customs, Tax, Civil Service and the AGC; subordinated to the RA; independently funded and internally controlled with a steering committee from parent agencies and the governor’s office.
- Proposed powers: expected that the FIA will have the powers of the Police and Customs and other powers as may be necessary; these powers should be expressly delineated in the enabling legislation forming the FIA.
- Operational recommendations:
  - Review whether resources and staffing are sufficient once the FIA is established.
  - Provide ad hoc powers to bring in expertise (e.g., forensic accounting) for deeper investigations.
  - Clearly delineate procedures distinguishing financial intelligence analysis from transformation of intelligence into investigative evidence admissible in court.
  - Steering Committee should ensure implementation and maintenance of necessary controls.
  - Internal procedures should reduce potential conflicts of interest among various bodies; autonomy and integrity must be safeguarded.
  - Clearly regulate the relationship between the RA and the FIA, including limits on access to agency-specific information and professional secrecy issues.
  - Define authority over deployment of FIA resources.

### Current law enforcement capabilities, resource constraints, and investigative powers
- Police FINU currently responsible for investigating all financial crimes, including money-laundering offenses.
- Reports on the financing of terrorism are to be reported to the governor, who provides the information to the AGC for action.
- AGC vested with prosecutorial responsibility and for providing mutual legal assistance from formal international requests and MLATs.
- Police FINU and AGC appear adequately staffed and funded to provide investigative support for investigations and prosecutions abroad, but authorities recognize additional staff and funds are needed.
- Domestic investigative activity:
  - Because of the BVI’s role in international business, Police FINU spend considerable time executing mutual legal assistance; domestically initiated investigations are few.
  - Number of staff limits capacity for in-depth investigations for both domestic and international cases.
- Investigative powers:
  - Available powers seem generally adequate but could be extended.
  - Authorities are reviewing the legal framework to enhance investigative powers and expand scope and effectiveness of investigative tools.
  - Attention should be paid to problems encountered under the current structure in establishing the FIA’s operational framework.
  - Authorities should monitor initial FIA operations closely to identify operational refinements.

### Statistics, reporting, and typologies
- Some statistics are available in forms, but there is no program for regularly and formally updating statistics on law enforcement activities.
- Statistics exist for the FIU (criteria 23, 25, and 35) and for mutual legal assistance from the AGC.
- Need for integrated and comprehensive statistics across all aspects of law enforcement investigation and prosecution.
- Recommendation: RA should maintain integrated statistics beginning with STR filings through ultimate disposition of cases.
- Some statistics on seizures are developed by the Police FINU for internal purposes.
- According to authorities, BVI has assisted foreign authorities in the freezing of substantial values over the last decade.
- Targeted statistics related to law enforcement activities, including freezing, seizing, and confiscation of the proceeds of crime, should be developed.
- Within domestic law enforcement, there appears to be adequate understanding and dissemination of typologies information.

### Training, technical capacity, and analyst development
- Members of the Police FINU have regularly attended training programs on ML.
- Planned future training: Police/Customs and tax officers will be trained as financial investigators and criminal analysts.
- Appropriate training will be made available for other employees in computers and criminal analysis.
- A budget will be set to allow personnel to attend conferences and training to update skills in their field of expertise.

### Analysis of effectiveness of law enforcement response
- Police FINU and AGC are capable of conducting money laundering investigations but face scarce resources and very limited numbers of domestic cases.
- Substantial number of requests for MLA strongly indicates present staffing of the FIU is not sufficient to take a more pro-active approach to ML/FT cases.
- Nature of ML/FT crimes: concealed/hidden; sufficient and qualified manpower and appropriate technical means are crucial to reveal, investigate and prosecute cases.
- Cooperative investigations and controlled delivery are authorized and undertaken; regular coordination occurs with United States Customs authorities.

### Recommendations and comments (law enforcement)
- Review resources and staffing for the FIA once established.
- Delineate FIA powers in enabling legislation; ensure clear procedures to separate intelligence analysis from admissible investigative evidence.
- Implement internal procedures to reduce conflicts of interest and protect autonomy, integrity, and professional secrecy.
- Monitor initial FIA operations closely to identify further operational refinements.
- Provide for ad hoc expertise to support complex investigations (e.g., forensic accounting).

### International co-operation and mutual legal assistance framework
- Criminal Justice International Cooperation Act (CJIC) is the major legislative basis for mutual legal assistance in AML/CFT matters.
  - Sections 5, 6, and 7 of the CJIC authorize providing evidence, including seizure of records, search of premises and seizure of evidence, and enforcement of foreign forfeiture orders.
- Financial Services (International Cooperation) Act, 2000 (FSIC):
  - Sections 4 and 5 allow sharing of records in possession of the FSC with foreign authorities.
- PCCA provides specifically for the enforcement of external confiscation orders for ML.
- Mutual legal assistance is limited only insofar as the BVI requires dual criminality for the provision of evidence and records.
- AGC advises contemplated amendments to the CJIC to widen assistance and to authorize police to interrogate witnesses directly under MLA requests (currently interrogation under the CJIC may only be carried out by court order).
- Evidence (Proceedings in Foreign Jurisdictions) Act 1988 authorizes assistance in civil matters.
- BVI has a mutual legal assistance treaty with the United States; mutual legal assistance may also be provided directly under the CJIC and FSIC without treaties.
- Mutual legal assistance laws and agreements supplemented by the sharing of financial intelligence through the Egmont Group and participation in INTERPOL.
- Police FINU report gateways exist for direct information exchange with other police units and foreign law enforcement may make requests directly to Police FINU; no legal impediments to direct sharing of information with foreign police, though it is unclear whether police-to-police exchange includes full dissemination of case-specific information or whether transmittal of actual evidence requires more formal mechanisms.

### Effectiveness and trends in international cooperation
- Provision of mutual legal assistance is generally effective, efficient and timely; BVI authorities appear well equipped for a high level of requests requiring multiple investigative techniques.
- Mutual legal assistance requests have tripled in the last seven years.
- Since 1992, authorities have compiled statistics on mutual legal assistance requests broken down by type of action necessary, entities involved, and other features; statistics demonstrate an increasing number of enquiries.
- Confidentiality provision in Mutual Legal Assistance (United States) Act of 1990: prohibits disclosure of particulars of the request to any person for a period of ninety days from the date of receipt of the request.
- Extradition is permitted for individuals charged with crimes punishable by imprisonment of over twelve months.
  - Extradition instruments include: Extradition Treaty (US/UK) of 1977 as amended by Supplemental Treaty of 1985; Fugitive Offenders (Virgin Islands) Order of 1967; Extraditions Act of 1989 (UK); Extradition (Overseas Territory) Order of 2002.
  - AGC advises that extradition of nationals is permissible.
- Additional measures: persons connected with terrorism may be denied entry, deported, detained pending deportation, or declared undesirable via stop lists at ports of entry; National Intelligence Committee (2001) recently formed.

### Recommendations and comments (international cooperation)
- Further develop statistics in the area of international cooperation, including freezing, seizing, and confiscation of assets.
- Contemplated changes to the CJIC and the establishment of the FIA would further enhance ability to execute requests for assistance expediently.
- Consider additional bilateral agreements to strengthen compliance with FATF Recommendation 34.
- Additional legal provisions necessary to ensure broadest possible scope of legal assistance for FATF Special Recommendation V.

### Implications for FATF compliance (as stated)
- Implications cited for compliance with FATF Recommendations 3, 32, 33, 34, 37, 38, 40, SR I, SR V.
- For FATF Recommendation 37: provision of mutual assistance, including in criminal matters, is adequately addressed in the CJIC and the FSIC, but execution of compulsory measures arising from MLA requests is inconsistent in practice; procedures for invoking and executing CJIC and FSIC provisions should be made clearer and formalized.
- Additional authority required to achieve compliance with FATF 32 to ensure substantive and effective exchange of information concerning suspicious transactions.
- Bilateral agreement with the United States covers a large portion of requests; additional bilateral agreements should be considered to strengthen FATF 34 compliance.

### Supervisory framework for financial institutions and customer identification
- No confidentiality law or secrecy provision inhibits implementation of preventive measures for financial institutions.
- FSC responsible for ensuring implementation of AML/CFT requirements pursuant to Sections 4, 37 and 38 of the FSCA; the PCCA and AMLCP are included in schedule of the FSCA.
- Section 37(1)(a)(ii) incorporates both the AMLCP and any guidelines issued, including the Guidance Notes.
- FSC coverage includes banks and trust companies, mutual funds and mutual fund managers, insurance business, company management, money remitters or check encashment, and any activity in which money belonging to a client is held or managed by lawyers or accountants.
- Under Section 38 of the FSCA, the FSC has authority to revoke licenses for violations of the AMLCP.
- Direct, on-site supervision in place for trust and company service providers and being implemented more fully for banking, insurance, mutual funds and mutual fund managers, but implementation not completed and level of compliance cannot be readily ascertained.
- Money remitters are not yet directly subject to licensing and supervision; a bill has been proposed to bring money remitters under FSC supervision.
- AMLCP and Guidance Notes provide KYC, record keeping, ongoing monitoring, STR reporting, internal procedures, controls, and audit requirements.
- Implementation limitations:
  - On-site supervision not yet fully in place; transaction testing and file verification not fully implemented.
  - Reliance on eligible introducers to conduct KYC on behalf of BVI financial intermediaries raises concerns; further verification needed to ensure introducers meet statutory requirements.
  - Money remitters not licensed and supervised; implementation in money remitters is noncompliant.
- Recommendations for FSC:
  - Complete implementation and regularly use on-site inspections to verify AML/CFT compliance.
  - Implement specific transaction testing as part of on-site inspections and internal audit testing by reporting persons.
  - Pay particular attention to adherence to KYC requirements by eligible introducers.
  - Consider requiring external auditors to provide certifications on AML/CFT compliance and to make direct reports to the FSC, noting that such a requirement would require legislative changes.

### Customer identification requirements (summary)
- Anonymous accounts are not authorized.
- Reporting parties required to identify customers as soon as reasonably practicable after a continuing business contact is first made and for occasional customers upon production of satisfactory evidence of identity (Paragraphs 4 and 5 of AMLCP).
- No threshold for customer identification in one-off transactions.
- Paragraph 4(5) AMLCP: reverification required when doubts arise; Paragraph 4 requires that when satisfactory evidence is not obtained, the business relationship or transaction shall not proceed further.
- For introduced business, Paragraph 6 AMLCP requires eligible introducers to conduct due diligence and maintain records and to supply verification when requested; Paragraph 6(7) provides that where satisfactory evidence is not obtained or produced, the transaction or relationship shall not proceed further.
- Appendix A of the Guidance Notes provides guidelines for introduction of clients by local reliable introducers.
- As a result, the regulated person does not have direct responsibility for conducting customer due diligence of introduced business and may not know if due diligence has been properly conducted unless the regulated person affirmatively requests the information.

*Source: IMF content unit "cr0493 - Section 36 of the PCCA authorizes the Police to obtain orders for the production of information if there are"*

### Section 4(1) of the AMLCP requires establishment of identification procedures in relation to new and continuing

### cr0493 - Section 4(1) of the AMLCP requires establishment of identification procedures in relation to new and continuing

### Identification requirements and statutory exceptions
- Section 4(1) of the AMLCP requires establishment of identification procedures in relation to new and continuing business relationships.
- Section 4(2) exceptions where verification procedures do not apply:
  - reasonable grounds for believing the applicant is a regulated person;
  - an authorized financial institution in a FATF or CFATF country with AML/CFT laws at least equivalent to the BVI;
  - an attorney or accountant.
- Section 4(3) exception where identification procedures are not required:
  - reasonable grounds for believing the applicant acts in the course of a business relation to which a regulatory authority outside the territory exercises regulatory functions and is based in a FATF or CFATF country with AML/CFT laws at least equivalent to the BVI.

### Acceptable verification documentation and subjects of verification
- Paragraph 66 of the Guidance Notes: valid passport, national identity card, armed forces identity card, or drivers license bearing a photograph is sufficient to establish identity of individuals.
- Paragraph 72 of the Guidance Notes: documents that can verify companies include:
  - certificate of incorporation;
  - name and address of beneficial owners or persons on whose instructions the signatories on the account are empowered to act;
  - memoranda and articles of association;
  - resolution, bank mandate, signed application form or any valid account-opening authority;
  - copies of powers of attorney.
- Verification subjects explicitly include:
  - individuals, partnerships and companies (including corporate trustees);
  - intermediaries and other institutions (associations, foundations, charities, etc.);
  - individual trustees (treated as verification subjects unless previously verified and relationship has not terminated);
  - all partners of a firm applying for business (limited partners need not be verified unless significant investors; general partner of a limited partnership is the verification subject).
- Requirements on beneficial ownership:
  - Guidance Notes paragraph 31: require verification and reading “principals” in the widest possible sense, including beneficial owners.
  - Guidance Notes paragraphs 35 and 37: require verification of partnerships’ and companies’ ultimate beneficial owners.
  - Guidance Notes paragraph 41: where an institution suspects an undisclosed principal, monitor customer activities to ascertain if the customer is an intermediary.
  - Guidance Notes Paragraph 77: authority to suspend account relationships and return funds held to the applicant’s order until sufficient beneficial ownership information is provided.

### Recordkeeping, electronic transfers, and remitters
- Paragraph 100 of the Guidance Notes: in electronic transfers, institutions must retain records of payments with sufficient detail to enable establishment of the identity of the remitting customer and identity of the ultimate recipient.
- Money remitters:
  - money remitters are subject to the AMLCP but are not regulated on a prudential basis;
  - a proposed bill to regulate money remitters, including licensing and supervision, has been drafted (no enactment date provided in source).
- Record retention requirements:
  - Paragraphs 7 and 9 of the AMLCP require financial institutions to maintain records on customer identity for at least five years.
  - Paragraph 9: retention for five years from completion of occasional transaction activities, or when business relationship ended, or if relationship not ended, from last transaction.
  - Paragraph 8: maintain records of all transactions carried out or on behalf of a customer for at least five years; records must be sufficient to identify source and recipient of payments to compile an audit trail.
  - Paragraph 97 of the Guidance Notes: RA may request institution keep records for more than five years if an investigation has been initiated.
  - Paragraph 96 and paragraphs 98 through 103: detail audit trail, entry records, ledger records, supporting records, and contents including personal identity and details of securities and investments.
- Records must be kept in a “readily retrievable” form (hard copy, microform, or electronic data). Records held by third parties qualify only if the third party can and will disclose them when required.

### Supervision, inspections, and effectiveness analysis
- Current supervisory activity:
  - FSC advises on-site inspections for trust and company service providers currently include KYC inspection procedures;
  - FSC advises that on-site inspections of banks, insurance, and mutual funds will conduct sampling of customer identification requirements when implemented.
  - One bank has numbered accounts; it is not a commercial bank and its accounts require customer identification and due diligence in accordance with the AMLCP.
- Effectiveness findings:
  - Legal provisions (AMLCP and Guidance Notes) set standards sufficient to prevent anonymous accounts and require obtaining true customer identity.
  - Implementation is lagging: supervision of implementation has not yet been completed and substantive inspections on compliance with KYC obligations are not yet being conducted across financial sectors.
  - Concerns that beneficial ownership information is not regularly obtained, particularly when due diligence is carried out by eligible introducers.
  - Risk-based procedures for banking KYC are not sufficiently developed: specific procedures to incorporate Basel Customer Due Diligence Paper provisions, including provisions for Politically Exposed Persons (PEPs) and enhanced procedures for higher risk customers and private banking, are not in place.
  - Low level of STRs filed relative to size of financial community raises questions about implementation of suspicious transaction monitoring obligations.
  - The AMLCP and Guidance Notes do not identify jurisdictions with weak AML/CFT systems; no specific alerts concerning jurisdictions with weak AML/CFT systems have been issued by the RA to date.
  - Guidance Notes do not yet specifically require enhanced scrutiny for wire transfers that do not contain originator information.

### Recommendations and supervisory priorities
- Immediate improvements needed:
  - implement and complete on-site inspections and sampling of customer identification to assess compliance with identification of beneficial owners;
  - inspection procedures should assess whether beneficial ownership information is regularly obtained and evaluate quality and validity of information obtained.
- Enhancements to Guidance Notes and supervisory practice:
  - specify that all customer due diligence information obtained for introduced business be transmitted to the regulated entity for confirmation and be accessible in the BVI offices of regulated entities;
  - develop risk-based procedures for banking KYC incorporating the Basel Customer Due Diligence Paper, including provisions for PEPs and enhanced procedures for higher risk customers and private banking;
  - require Guidance Notes or RA alerts to instruct enhanced scrutiny for wire transfers lacking originator information consistent with the FATF Interpretive Note on Special Recommendation VII when adopted.
- Eligible introducers:
  - verify whether supervisory controls and inspections adequately test whether eligible introducers meet statutory requirements under the AMLCP and adhere to KYC obligations.
- Money remitters and fund transfer information:
  - enact the proposed bill to regulate independent money remitters, including licensing and supervision;
  - bill should include mandatory information to be attached to fund transfers, in particular the name, address, and account number (when being transferred from an account);
  - give attention to FATF Special Recommendation VII and its interpretative note.
- Suspicious transaction reporting:
  - consider measures to strengthen filing of STRs: current framework permits rejection and returning of funds without filing, and STR reporting for ML is voluntary under the PCCA (with FT reporting mandatory under Statutory Order 1822, Article 12 and Schedule 1).
  - clarify internal procedures requirement: AMLCP Paragraph 14(1) requires written internal reporting procedures to the Reporting Officer (RO), but AMLCP does not specifically require procedures for management and key staff to identify suspicious transactions or to report to the RO; Guidance Notes Paragraph 84 advises that key staff should know reporting chain and procedures without delay.
- Typologies and guidance updates:
  - update ML transaction typologies in Appendix D and elsewhere as regional and local trends emerge and as discussed at C-FATF meetings.

### Implications for FATF recommendations and compliance
- Recommendations 10 and 11:
  - Legal provisions are, as written, sufficient to achieve the minimal requirements of FATF Recommendations 10 and 11; however, implementation gaps reduce practical compliance.
- Recommendation 12:
  - BVI is compliant with respect to keeping of records; legal requirements allow reconstruction of individual transactions for adequate compliance with FATF Recommendation 12.
- Recommendation 14 and SR VIII:
  - Level of scrutiny required is adequate in law but not sufficiently supported by a requirement to file an STR; financial institutions may reject transactions and return funds instead of filing an STR, undermining compliance with FATF Recommendation 14.
- Special Recommendation VII (wire transfers):
  - Guidance Notes do not yet require enhanced scrutiny for transfers without originator information; authorities should consider issuing guidance in line with FATF Interpretive Note on SR VII when available.
- Overall assessment:
  - Legal framework for identification, recordkeeping, and suspicious transaction recognition is largely adequate on paper, but supervisory implementation, effective verification of beneficial ownership, oversight of eligible introducers, enhanced due diligence practices (including PEPs), and STR filing practices require immediate and significant improvement to reduce risk of misuse of BVI financial service providers.

*Source: The IMF assessment of the AMLCP and Guidance Notes.*

### Appendix E of the Guidance Notes suggest a format for internal reporting and Appendix F sets forth the standard form

### Appendix E of the Guidance Notes suggest a format for internal reporting and Appendix F sets forth the standard form

### Reporting obligations, legal protections, and tipping-off
- Reporting persons are protected under Section 28(2)(a) of the PCCA: disclosures to the RA of a suspicion or belief that any funds or investments are derived from or used in connection with criminal conduct, or disclosure of the matters on which such suspicion or belief is based, shall not be treated as a breach of any restriction on disclosure and shall not give rise to any civil liability.
- Section 31 of the PCCA prohibits tipping off concerning an investigation that is being or is about to be conducted into money laundering when disclosure of information to any other person is likely to prejudice that investigation or proposed investigation.
  - Section 31 is broadly worded and applies to authorities as well; unjustified or unauthorized disclosures of information would constitute an offense.
- The law does not provide for the RA or other competent authority to order blocking or freezing of transactions when a STR is filed.
  - Authorities express hesitation to move toward blocking/freezing powers because of concerns about becoming “constructive trustees” for the funds and potential liability for loss or damage.
  - The report notes that temporary freeze measures are effective in other common law jurisdictions and suggests corresponding provisions for immunity from liability can be enacted.

### Analysis of effectiveness — Suspicious Transaction Reporting (STR)
- Currently, suspicious transaction reporting is voluntary; filing of STRs provides a safe harbor from liability for ML for the reporting person.
- Voluntary STR regime has been sufficient for generating reports on obviously suspicious transactions and activities, but:
  - There may be gaps where transactions considered questionable are refused by reporting parties rather than reported.
  - Systemic opportunities for detecting suspicious or unusual activities may be lost.
- Authorities advise that mandatory STR reporting is contemplated.

### Recommendations and comments — STR regime
- To fully capture potential unusual and suspicious transactions, reporting should be mandatory.
- Increasing reporting will require:
  - Additional specialized guidance on typologies and trends.
  - Additional requirements for financial intermediaries to adapt internal reporting procedures and controls.
- Legal protections should be strengthened:
  - Provide affirmative protection from liability for disclosing information through an STR.
  - Provide protections for responding to requests for further information in support of an STR.
- There should be specific authority for the RA or the Police FINU to block transactions or accounts for a limited period after a SAR is received.
  - Legislation can be designed to limit liability for direct and consequential damages for any blocking; the report finds authorities’ concerns about creating a constructive trust unpersuasive.

### Internal controls, compliance, and audit — Description (compliance with Criteria 58-61 and sector-specific criteria)
- The AMLCP requires financial institutions to construct written policies for suspicious transaction detection and ensuring compliance.
  - Paragraph 14 of the AMLCP requires written internal procedures for suspicious transaction detection and reporting and contemplates designation of a Reporting Officer (who may be the same person as the compliance officer under Paragraph 12).
  - Paragraph 15 requires training for all directors, partners, all persons involved in management, and all key staff on the PCCA, regulations, and the AMLCP.
  - Paragraph 16 requires training for senior and specialist staff on internal policies and procedures, customer identification, record keeping, recognition and handling of suspicious transactions.
  - Paragraph 17 requires refresher training once every year.
- Guidance Notes 105–107 provide further details on training duties; Paragraph 106 reminds key staff of personal legal liability for failure to perform the duty of vigilance; Paragraph 107 sets out training programs by commercial role.
- Paragraph 13 of the AMLCP provides for a due diligence audit to be conducted by the FSC or a person designated by the FSC to verify compliance with the AMLCP or any other directive related to money laundering.
  - There is no specific requirement for an audit testing function for AML/CFT measures under the institution’s own audit mechanism (internal or external).
  - The FSC should prescribe audit procedures for internal or external audit of AML/CFT and make such audit testing reports available for enhanced supervision.
- Paragraph 12 requires appointment of a compliance officer to be approved by the FSC; Article 34 of the FSCA requires the appointment of a compliance officer who may with FSC approval also be appointed compliance officer for AML under Paragraph 12 of the AMLCP.
  - The FSC has drafted a form for approval of compliance officers but has not required submission of these approval forms to date.
  - Paragraph 12(2)(b) and (c) require the compliance officer to establish and maintain a manual of compliance procedures and ensure staff compliance; the FSC is to prescribe specific guidelines.
  - The FSC has not yet invited reporting persons to submit appointment of compliance officers for approval under these provisions.
- Guidance Notes paragraphs 5 and 157: regulated institutions must ensure branches, subsidiaries, and representative offices operating in other jurisdictions observe standards at least equivalent to the Guidance Notes.

### Analysis of effectiveness — Internal controls
- Legal provisions for internal controls are sufficient in design: AMLCP requires procedures on client identification, record keeping, internal reporting, internal controls, training, registers of money laundering enquiries, and appointment of a compliance officer approved by the managing director of the FSC.
- What is lacking is complete and thorough implementation and on-site and off-site supervision to ensure adherence to requirements and incorporation of required internal controls.
- The level of implementation by financial institutions, particularly outside the banking sector, does not appear sufficient; effectiveness of programs is underdeveloped.
- Authorities do not verify that principles for internal controls are applied to branches or subsidiaries outside the jurisdiction to a consistently enforceable standard.

### Recommendations and comments — Internal controls
- The FSC should:
  - Finalize the application form for approval of compliance officers.
  - Finalize guidelines for duties of compliance officers as soon as reasonably practicable.
  - Consider organizing targeted training for compliance officers.
  - Prescribe audit procedures for internal or external audit of AML/CFT to test compliance with the AMLCP and Guidance Notes and require audit testing reports be made available to the FSC.
- Financial institutions should:
  - Implement adequate screening procedures to ensure high standards when hiring employees, beyond fit and proper tests and compliance officer approval.

### Implications for FATF Recommendations (related to STRs and internal controls)
- Implications for compliance with FATF Recommendations 15, 16, 17, 28:
  - STR reporting in the BVI is relatively weak and insufficient to inform the FIU and law enforcement about potential criminal activities misusing the financial sector.
  - The voluntary nature of STR reporting is of greatest significance.
  - Legal protections for financial institutions, directors, and staff for reporting suspicious transactions should be strengthened.
  - There should be specific authority to block transactions/accounts for a limited period after a SAR is received.
- Implications for compliance with FATF Recommendations 19, 20:
  - While AMLCP and Guidance Notes impose requirements on internal control programs, implementation and effectiveness are underdeveloped, especially outside the banking sector; compliance with FATF Recommendation 19 is not complete.
  - The application of AML/CFT controls to branches and subsidiaries operating abroad is not sufficiently defined in an enforceable legal instrument.

### Integrity standards — Description and analysis (Criteria 62 and 63; sector-specific)
- Fit and proper tests are required for obtaining and maintaining licenses for regulated entities, including banking and trust companies, company managers, and for insurance.
  - Mutual fund managers and investment managers are not currently subject to a fit and proper test.
- Section 16 of the FSCA empowers the Licensing and Supervisory Committee of the FSC to supervise regulated persons to ensure continued satisfaction of fit and proper criteria.
- The FSC advises applications for licenses must be renewed annually.
- The BVI has an adequate system for fit and proper tests applied to banks, company managers, and insurance; FSC has broad powers to assess fitness and properness, including reputation and prior criminal record.
- There is concern about misuse of companies with bearer shares; authorities are moving forward with a legislative proposal to immobilize bearer shares by requiring deposit with recognized financial institutions in the BVI or abroad.

### Recommendations and comments — Integrity standards
- Fit and proper requirements should be required for mutual fund managers and investment advisers, and broker/dealers, as contemplated.
- Enact the proposal for immobilization of bearer shares and develop measures to ensure company managers and other financial intermediaries can ascertain beneficial owners through this mechanism.

### Implications for FATF Recommendation 29
- Fit and proper tests must be applied to mutual fund managers and investment advisers for compliance with FATF Recommendation 29.
- FSC supervision of fit and proper tests appears generally adequate with annual relicensing; compliance should be enhanced by incorporating supervision for fit and proper into on-site and off-site inspection procedures.

### Enforcement powers and sanctions — Description (Criteria 64 and sector-specific)
- Enforcement tools are broadly provided in the FSCA; enforcement actions in the FSCA may be applied for failure to follow the Guidance Notes.
  - Section 37(1)(a)(ii) of the FSCA empowers the FSC to take enforcement action against a regulated person if the person has contravened or is in contravention of the AMLCP or such other enactments, or guidelines relating to money laundering.
  - Section 38 authorizes the FSC to revoke or suspend the license or certificate of a regulated person if the FSC is entitled to take enforcement action under Section 37.
  - Section 39 authorizes the FSC to apply for a protective order preventing the regulated person or any person from transferring, disposing, or otherwise dealing with property, or to appoint an administrator to take over and manage the financial services business, among other actions.

*Source: Guidance Notes, AMLCP, PCCA, FSCA, and related assessments as presented in the provided content.*

### Section 40 authorizes the FSC to issue a directive to a regulated person directing that person to cease engagement in

### Section 40 authorizes the FSC to issue a directive to a regulated person directing that person to cease engagement in

### Section 40 directive and enforcement powers
- Section 40 authorizes the FSC to issue a directive to a regulated person directing that person to cease engagement in any class or type of business, or not to enter into any new contracts for any class of business.

### Analysis of effectiveness of enforcement
- The legal provisions for sanctions and enforcement are adequate.
- At this stage of implementation, provisions have not been applied for violations relating to ML/FT.
- Procedures for the FSC to invoke enforcement tools and guidance on the application of specific sanctions to particular types of misconduct or to failure to comply remain incompletely defined.

### Recommendations and comments on enforcement
- Enforcement tools available to the FSC are compliant.
- Effective implementation of enforcement tools will require:
  - Additional resources.
  - Development of internal procedures within the FSC.
  - Additional training.

### Resourcing and organizational capacity (Legal and Enforcement Division)
- Current staffing shortfalls in the FSC’s Division for Legal and Enforcement include vacancies for:
  - Director,
  - Two deputy directors,
  - One enforcement officer.
- Staffing needs must be more robust to effectively implement the requirements of the PCCA, AMLCP, and the Guidance Notes.
- Compliance levels within the financial sector cannot be properly monitored or ascertained until staffing is complete and such staff is properly trained.
- The managing director of the FSC advises that a number of these vacant positions will be filled in early 2003.

### Information-sharing authority, procedures, and practice
- Section 29 of the FSCA provides gateways for disclosure and gathering of information.
  - The FSC has authority to disclose any information, document, record, statement, or thing to other regulatory, judicial or law enforcement authorities both locally and overseas for purposes of legal assistance in the investigation of a criminal activity upon prior written consent of the Board of the FSC.
  - No court authorization is necessary.
- The Financial Services (International Cooperation) Act (FSIC) governs supervisory sharing of information with foreign regulatory authorities.
  - Sections 4 and 5 of the FSIC allow for sharing of records in the possession of the FSC with foreign authorities.
  - FSIC provisions must be read in conjunction with Sections 30 and 32 of the FSCA.
- The FSC formalizes information-exchange procedures via an undertaking to ensure compliance with the two laws.
  - Practice: requests that reveal sufficient detail are immediately treated as formal requests; the requesting authority is asked to sign the undertaking and return the original.
  - Concurrently, FSC will use its compulsory powers under Sections 30 and 32 of the FSCA to obtain the necessary information.
  - When the undertaking is signed, the information will be forwarded.
  - The undertaking sets out controls governing the requests including an appendix excerpting the relevant provisions of the law.
  - As a general matter, the FSC advises that the party receiving the information from the FSC requires only the FSC Board’s consent in order to further disclose the information. Further use provisions are set out in Sections 29 and 49 of the FSCA.
- If requests for information do not contain sufficient detail:
  - FSC treats these as informal requests and will send the requestor all publicly available information it has.
  - The requestor has the opportunity to provide more specific details to obtain non-public information under the formal process.
- At the time of the mission, only the managing director and the deputy director were authorized to decide upon requests; currently the director and deputy director of the Legal Services Division may also decide.
- Operational timelines and volumes:
  - All requests are initially responded to within 1 week.
  - Non-formal requests are completed within 1–2 weeks.
  - Formal requests are completed on average, within 2–3 months.
  - From January 2002 through November 2002, the FSC had processed 9 of 13 formal requests and had completed a total of 30 informal requests.

### Analysis of effectiveness of cooperation
- Legal requirements for cooperation at both the domestic and international levels are sufficient to efficiently ensure the exchange of information necessary.
- On the domestic side, implementation of cooperation with domestic competent authorities, including the Police and the AGC, should be reviewed.
- Experience in invoking cooperative measures should inform potential enhancements to ensure the broadest possible cooperation is being used.
- Efforts should ensure the broadest exchange of information is executed, including the exchange of confidential supervisory information subject to adequate protections on confidentiality and data protection.

### Recommendations and comments on cooperation
- Unfilled positions in Legal and Enforcement should be filled immediately with qualified staff.
- Training should begin immediately to ensure that the enforcement tools and sanctions available to the FSC are meaningfully invoked.

### Implications for compliance with FATF Recommendation 26
- The legal framework confers broad authority on the FSC to ensure that financial institutions subject to the AMLCP and the Guidance Notes adopt sufficient, in depth policies for internal controls, and to guard against money laundering.
- The AMLCP provisions are sufficiently detailed to permit the FSC to exercise a strong hand in ensuring that financial institutions have both adequate polices and procedures in place, follow these procedures, and guard against money laundering.
- At this stage, the FSC must focus on the effectiveness of the internal controls adopted by supervised financial institutions.
- FATF Recommendation 26: Adequate AML programs in supervised banks, financial institutions or intermediaries; authority to cooperate with judicial and law enforcement — Rating: Largely Compliant (Based on Criteria 66).

### Controls and monitoring of cash and cross-border transactions (FATF Recommendation 22, 23)
- FATF Recommendation 22 — Description:
  - The BVI does not have a specific system for detecting or monitoring the physical cross-border transportation of cash at present.
  - Because the BVI uses the U.S. dollar, it would be difficult to estimate in absolute terms the appropriate level of cash movements across the border.
  - The BVI does maintain statistics of liquidity in banks, which have the most cash intensive business.
  - The Financial Secretary and Customs Service advise that a proposed customs form and declaration will require all persons entering BVI to declare cash of over US$5,000.
  - Most cash entering outside of the banking system is seen to come through the airport and the West End seaport where ferries come in.
  - The Customs Office advises that there are major cash seizures every few months, with amounts up to US$30,000 seized.
  - BVI laws authorize the Customs Office to seize and hold cash for up to 72 hours without a court order and, if needed, a magistrate’s order may be obtained.
  - During the holding period the burden falls on the owner of the cash to prove that the funds derived from a legal source.
- FATF Recommendation 23 — Description:
  - Cash reporting is not feasible in the BVI, given the size of the jurisdiction and the limited resources available to law enforcement and other authorities.
  - Authorities advise that cash is not the major basis for transactions within the BVI; checks are most frequently used and credit cards are widely and increasingly relied upon for transactions.
  - The very size of the jurisdiction makes large cash transactions notable when carried out, and the Guidance Notes specifically provide that reporting persons should pay particular attention to large and unusual cash transactions.

### Findings from ratings table (selected entries)
- Examples of ratings and criteria:
  - Recommendation 1 — Rating: Largely Compliant.
  - Recommendation 14 — Rating: Materially non compliant.
  - Recommendation 21 — Rating: Materially non compliant.
  - Recommendation 26 — Rating: Largely Compliant (Based on Criteria 66).
  - Recommendation 32 — Rating: Compliant.

*Source: IMF assessment content unit cr0493 — Section 40 and related analyses and recommendations.*

### 34.2 and 35.1 Largely Compliant

### 34.2 and 35.1 Largely Compliant

### Overall compliance matrix and key ratings
- 34.2 and 35.1: Largely Compliant
- 34, 34.1, 36, and 37: Compliant
- 37 (procedures for mutual assistance in criminal matters for production of records, search of persons and premises, seizure and obtaining of evidence for ML investigations and prosecution): Compliant (references: 27, 34, 34.1, and 35.2)
- 38 (authority to take expeditious actions in response to foreign countries’ requests to identify, freeze, seize and confiscate proceeds or other property): Largely Compliant (references: 11, 15, 16, 34, 34.1, 35.2, and 39)
- 40 (ML an extraditable offense): Compliant (references: 34 and 40)
- SR I (take steps to ratify and implement relevant United Nations instruments): Compliant (references: 1 and 34)
- SR II (criminalize the FT and terrorist organizations): Compliant (references: 2.3, 3, and 3.1)
- SR III (freeze and confiscate terrorist assets): Compliant (references: 7, 7.3, 8, and 13)
- SR IV (report suspicious transactions linked to terrorism): Compliant (55)
- SR V (provide assistance to other countries’ FT investigations): Compliant (references: 34, 34.1, 37, 40, and 41)
- SR VI (impose AML requirements on alternative remittance systems): Not applicable (references: 45, 46, 46.1, 47, 49, 50, 50.1, 52, 53, 54, 55, 56, 57, 58, 58.1, 59, 60, 61, and 62)
- SR VII (strengthen customer identification measures for wire transfers): Non compliant (references: 48 and 51)

### Assessment of Effectiveness — Criminal Justice Measures and International Cooperation
- I — Criminalization of ML and FT
  - Legal provisions for criminalization are in line with international standards.
  - Weakness: provisions are rarely used to pursue domestic prosecutions and the sufficiency of the criminal provisions has not been tested.
- II — Confiscation of proceeds of crime or property used to finance terrorism
  - Authority for confiscation of a sum representing proceeds of crime upon conviction is effectively used.
  - Provisional measures for freezing and seizing assets relating to both ML and FT are effectively used.
  - Confiscation provisions for instrumentalities of crime and property laundered are more limited outside of the drug context.
  - Comprehensive statistics are not maintained on confiscation.
- III — The FIU and processes for receiving, analyzing, and disseminating financial information and other intelligence at the domestic and international levels
  - The FIU is functioning effectively for receiving and disseminating financial information and intelligence.
  - The FIU is not imbued with optimum ancillary authority for effective analysis at the pre-investigative stage.
- IV — Law enforcement and prosecution authorities, powers and duties
  - Law enforcement powers and prosecution authorities’ powers are adequately provided in the legislative framework.
- V — International cooperation
  - International cooperation is highly developed and is efficiently executed.

### Assessment of Effectiveness — Legal and Institutional Framework for All Financial Institutions
- I — General framework
  - Legal and institutional framework is well designed in legislation to allow for optimum levels of effectiveness.
  - Implementation remains to be completed.
  - Concern: lack of coverage of money remitters and of the Development Bank of the BVI.
- II — Customer identification
  - Customer identification is legally sound.
  - Potential gap: effectiveness of customer due diligence undertaken on behalf of regulated persons by eligible introducers needs verification through on-site inspections.
- III — Ongoing monitoring of accounts and transactions
  - Monitoring is minimally set forth in legislation and supervisory materials; would benefit from stronger affirmative requirements for scrutiny of relationships.
  - Nature of suspicious transaction reporting allows regulated persons to withdraw from a transaction without engaging in additional scrutiny or filing an STR.
  - Specific insurance industry, targeted, and trust and company service provider guidance would enhance monitoring.
- IV — Record keeping
  - Record keeping requirements are adequate.
- V — Suspicious transactions reporting
  - STR reporting is comparatively weak structurally and in volume, given the marketplace and vulnerabilities of the territory.
  - Recommendation: institute statutory suspicious transaction reporting.
- VI — Internal controls, compliance and audit
  - Legislative and institutional measures for internal controls are adequate.
  - FSC’s relative infancy and need to implement on several fronts has limited thorough, ongoing on-site supervision.
- VII — Integrity standards
  - Fit and proper requirements are consistently applied except for mutual funds and mutual fund managers.
- VIII — Enforcement powers and sanctions
  - Sanctions and enforcement powers are adequate.
- IX — Cooperation between supervisors and other competent authorities
  - Cooperation authority is adequate.
  - Implementation must be completed; unfilled positions in Enforcement areas of the FSC should be filled.

### Recommended Action Plan — Criminal Justice Measures and International Cooperation
- I — Criminalization of ML and FT
  - (No separate bullets beyond table heading in source.)
- II — Confiscation of proceeds of crime or property used to finance terrorism
  - The PCCA or other legislation should provide for a specific forfeiture provision that allows for forfeiture of all property laundered and instrumentalities associated with a ML offence.
  - Additional statutory authority for administrative bodies, such as the FSC or the RA, to identify or freeze assets for a short period of time could be useful.
  - Authorities should consider formally keeping statistics on the amounts of property frozen, seized, and confiscated relating to ML, the predicate offenses, and FT.
  - Formal, meaningful and reliable statistics would assist resource and staffing evaluation and enhance reputation for effective confiscation controls.
- III — The FIU and processes for receiving, analyzing, and disseminating financial information and other intelligence at the domestic and international levels
  - It is advisable that the authority of the RA or the Police FINU to obtain additional information be specified in legislation or regulation.
  - The RA should monitor, record, and keep statistics on information passed from the RA to the Police FINU that is transformed into an official investigation.
  - Records should be kept with respect to the disposition of STRs.
  - The RA should keep statistics on STRs received, STRs analyzed and disseminated, and STRs resulting in investigation, prosecution or convictions.
  - It would be advisable for the RA to maintain integrated statistics throughout the process beginning with STR filing through ultimate disposition of cases.
- IV — Law enforcement and prosecution authorities, powers and duties
  - A review of the current structure should be undertaken to determine its operational limits; attention to outcomes should inform the operational framework of the FIA.
  - Initial operations of the FIA should be monitored closely to identify refinements needed on an operational basis.
  - In constituting the FIA, ensure adequate structure for operations and clear procedures distinguishing financial intelligence analysis from transmittal into investigative evidence admissible in court.
  - The FIA should have a clear gateway for exchange of information to enable the widest possible use of investigative techniques necessary for preventing and detecting ML/FT offenses.
  - When the FIA is established, review whether resources and staffing are adequate to fulfill its mandate.
- V — International cooperation
  - (No separate bullets beyond table heading in source.)

### Recommended Action Plan — Legal and Institutional Framework for Financial Institutions
- I — General framework
  - The FSC should complete implementation of on-site inspections; inspection procedures and manuals should be completed.
  - Special attention to assessing whether beneficial ownership information is regularly obtained and sufficient, particularly when due diligence is carried out by eligible introducers.
  - Regulation of independent money remitters should be completed, including licensing and supervision procedures.
  - When the FATF completes the Interpretative Note on Special Recommendation VII, the FSC should consider issuing a corresponding alert to financial intermediaries on the need for enhanced scrutiny.
- II — Customer identification
  - Implementation of on-site inspections is required.
- III — Ongoing monitoring of accounts and transactions
  - (No additional bullets beyond table headings in source.)
- IV — Record keeping
  - (No additional bullets beyond table headings in source.)
- V — Suspicious transactions reporting
  - Consider enacting a mandatory suspicious transaction reporting system.
  - Consider specific authority of the RA or FINU to obtain additional information after an STR is filed, or vest such authority in the FSC.
  - Consider authorizing the RA or FSC with authority to freeze or block transactions or assets for a brief period after an STR has been filed, with additional protections for disclosure through STRs by reporting persons.
- VI — Internal controls, compliance and audit
  - Consider opportunity for the FSC to prescribe audit procedures for internal or external AML/CFT to test compliance with the AMLCP and Guidance Notes.
  - It is advisable that such audit testing reports be made available to the FSC.
  - The FSC should complete the form for approval of the appointment of compliance officers; guidelines for duties of compliance officers should be finalized.
- VII — Integrity standards
  - Apply fit and proper tests to mutual funds and mutual fund managers, and to money remitters, when sectoral acts are amended/enacted.
  - Immobilization of bearer shares should proceed expeditiously to limit misuse of corporate vehicles.
- VIII — Enforcement powers and sanctions
  - Vacancies in the FSC’s Division for Legal and Enforcement should be filled as soon as reasonably practicable.
  - Robust staffing and training are needed to effectively implement AML/CFT legal framework requirements.
- IX — Cooperation between supervisors and other competent authorities
  - Ensure domestic cooperation procedures provide for the broadest exchange of information, including exchange of confidential supervisory information subject to adequate protections on confidentiality and data protection.

### Authorities’ response to the assessment — planned legislative and operational steps
- With reference to recommended actions, many will be fulfilled upon enactment/amendment of key legislation.
- Confiscation (PCCA 1997)
  - The Proceeds of Criminal Conduct Act (PCCA) (1997) provides generally for making confiscation orders in relation to property that is income or profit derived from the proceeds of crime.
  - There is no provision contemplated for specific forfeiture of instrumentalities associated with a money laundering offence within the intended amendment to the PCCA.
- Short-term 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 in response to requests from foreign investigation agencies or law enforcement authorities including the Commissioner of Police.
- FIU information powers
  - FIA Act Section 4(2)(d) allows the Agency to require production of any information it considers relevant to its functions, which would include obtaining additional information from financial institutions as follow up to STRs.
  - The FIA Act does not establish procedures distinguishing financial intelligence analysis from transmittal into investigative evidence, but guidelines exist in practice; section 5 provides for issuing directions as to policy to be followed by the Agency.
- Money Services Act and other enactments
  - The proposed Money Services Act (regulation, supervision, licensing, fit and proper tests) should be enacted within the second quarter of 2004.
  - The FIA Act (Section 20) requires the FSC to issue guidelines governing suspicious transaction reporting procedures.
  - 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 72 hours subsequent to receipt of a disclosure.
  - The Mutual Funds (Amendment) Act has been drafted with a time frame for enactment within the first quarter of 2004 to provide for fit and proper tests.
  
### IAIS assessment and insurance sector institutional setting
- Assessment methodology
  - Assessment undertaken as part of the IMF Module 2 for offshore financial centers.
  - Based on: (1) a self-assessment against IAIS Core Principles; (2) relevant laws and regulations; (3) analysis of FSC practices and procedures; and (4) discussions with supervisory staff of the FSC.
  - Assessment prepared by Mr. Tomas Power.
- Information and methodology used
  - Reviewed FSC Act, Insurance Act of 1994, Insurance Regulations of 1995, draft amendments, and on-site inspection manuals awaiting implementation.
  - Discussed staff training and recruitment plans; interviewed largest insurance brokerage, largest independent audit firm, and largest captive insurer manager (manages over 100 captives).
- Institutional and macroprudential overview
  - The insurance sector is a significant element of the entire financial sector in the British Virgin Islands.
  - The BVI has focused on attracting nondomestic insurance business, particularly captive insurers.
  - Historical note: 241 of the 263 captives are organized for US-based risks.
  - The Financial Services (International Cooperation) Act, 2000 established a regulatory framework designed to provide strong supervisory standards.
  - The Insurance Act, 1994 and Insurance Regulations, 1995 will need amending to harmonize with the Financial Services Act and to eliminate ambiguities; the FSC has prepared a thorough analysis of necessary amendments.

*International Monetary Fund*

### 55.      The latest available data indicate that there are 293 insurance companies licensed in

### Insurance sector and supervisory framework (BVI)

### Market structure and participants
- The latest available data indicate that there are 293 insurance companies licensed in the BVI.
- There are a total of 263 captive insurers.
- 241 of the captives are organized to insure US-based risks.
- There are 13 insurance agents, 11 insurance brokers, 12 insurance managers, and 7 loss adjusters.

### Premiums and scale of activity
- Domestic insurance activity generated approximately US$40 million in premium.
- The captive industry wrote over US$400 million in premium.
- Approximately 95 percent of the captive business is written by single-parent captives.

### Captive insurer characteristics and market dynamics
- A captive insurer is organized and operated primarily to insure the risks of the founders; insurance is not sold to the public at large.
- Captive insurers generally have comparatively low capitalization requirements compared to standard commercial insurance companies; in some jurisdictions capital need not be paid in but can consist of letters of credit or other types of instruments.
- There has been a steady growth of captives worldwide in the recent past of approximately 10 percent annually; the growth rate of the BVI captives closely tracks this global growth.
- 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 BVI, signaling a likely increase in the number of captives.

### Rationale for regulatory oversight of captives
- Prudential rules for captive insurers often differ materially from those applicable to insurers marketing to the general public, but differences pertain to recognizing fundamental differences while still monitoring solvency, investments, asset-liability matching, and sufficiency of reserves.
- Even when the policyholder is the owner (as in a captive), liability insurance creates third-party beneficiaries; regulators must adopt standards to maintain confidence that insurers can meet contractual obligations irrespective of ownership.
- Insurance regulators have an affirmative duty to exercise the same degree of care in supervising captives as for commercial insurers, given public policy concerns and prerequisites (e.g., liability insurance required to practice a profession).

### Organization and independence of the insurance supervisor (FSC)
- The Financial Services Commission Act of 2001 (FSC Act) establishes the functions of the Financial Services Commission (the FSC), created to segregate the financial supervisor from the Ministry of Finance and provide budgetary and operational independence.
- The FSC reports to the Board of the Commission, which is composed of six members, including the Managing Director as an ex-officio member.
- Board members are appointed by the Executive Council for terms not to exceed three years.
- The appointment of the Managing Director by the Board is not subject to a fixed statutory term, and just cause for termination is not required.
- The FSC Act provides that the FSC will retain between 7.5 percent and 15 percent of its collections as agreed with the Executive Council; if no agreement is reached, the FSC is to receive the same amount of funding as in the previous year.
- Part II of the FSC Act establishes the Licensing and Supervisory Committee (the Committee), composed primarily of the FSC Managing Director (who chairs it), the Deputy Managing Director, and the heads of the regulatory and supervisory divisions; the Committee receives, reviews, and determines applications for authorizations and licenses of insurance entities and supervises regulated institutions.
- Section 32 of the FSC Act provides the FSC with the power to require any information reasonably required for discharging its functions and ensuring compliance with financial services legislation.

### Accountability, powers, and resources
- Part III of the FSC Act outlines financial and reporting provisions, including requirements for completion of the Commission’s audit and subsequent submission to the Executive Council along with a written report of the Commission’s operations and activities for each financial year; these documents must be laid before the Legislative Council within three months.
- A Financial Services Appeal Board provides an appeals mechanism from decisions of the Commission and its organs (sections 42 through 46 of the FSC Act).
- The FSC has specific statutory powers (summarized from Part V of the FSC Act), including:
  - under sections 30 and 32, power to require persons engaged in financial services business to furnish information;
  - under section 34, requirement for regulated persons to appoint compliance officers and description of their responsibilities;
  - under section 35, ability to conduct compliance inspections of regulated persons;
  - under sections 36 to 40, enforcement powers to appoint investigating examiners, revoke or suspend authorizations, apply to the court to protect business or property of regulated persons, and issue directives;
  - under section 41, power to issue, with the approval of Council, regulatory codes for conduct of regulated persons and officers and agents;
  - under sections 53 through 56, details of offenses the Commission may prosecute and compound.
- The Insurance Act of 1994 (as amended), which came into force in 1995, supplements the FSC Act for insurance business and sets out the framework for regulation, authorization and supervision of insurance business; the Insurance Act details further aspects of licensing, certificates, and grounds for canceling and varying licenses and certificates (sections 29 & 30).
- The Insurance Director is a seasoned professional with 40 years of international experience at all levels of the insurance business.
- The FSC has sufficient fiscal autonomy and budget size to discharge its statutory duties; it also has authority to contract for professional services as needed.
- There is currently one vacancy in the staff of the Insurance Director.

### Supervisory processes, decision-making, and professional standards
- Regulatory processes (authorization, supervision, enforcement, cancellation/revocation of authorization, and appeals) are clear and consistent across legislation and regulations.
- Each regulatory division has procedures manuals elaborating internal practices; the Insurance Directorate has prepared guidance notes for firms and detailed inspection manuals for on-site use.
- The Licensing and Supervisory Committee brings senior supervisory expertise together, enhancing consistency and enabling rapid, informed decision-making, including convening emergency meetings.
- Staff frequently attend conferences and seminars conducted by the FSA, the NAIC, the United Nations Conference on Trade and Investments and The Offshore Group of Insurance Supervisors.
- The FSC has exacting standards on confidentiality and more flexibility to hire professional staff at wages comparable to the financial services industry.
- With planned introduction of on-site inspections, care must be taken to provide necessary resources for execution.

*Source: The mission.*

### Section 12(1) of the Insurance Regulation 1995 gives the Commission the ability to appoint an

### cr0493 - Section 12(1) of the Insurance Regulation 1995 gives the Commission the ability to appoint an

### Regulatory powers to examine and investigate
- Section 12(1) of the Insurance Regulation 1995 gives the Commission the ability to appoint an accountant to examine the books and records.
- Section 37 of the Insurance Regulation 1995 empowers the Commission to appoint an examiner to conduct an investigation on its behalf.

### Conflict of interest and staff conduct rules
- The Commission is revising an employees’ handbook to address receiving gifts and invitations from license holders.
- FSC Staff are precluded from having financial interests in the firms they regulate.
- Section 3 of the Insurance Act was repealed and amended by the FSC Act to state:  
  “The Commission or any of its employees shall not directly or indirectly be interested  
  (a) as a shareholder in any company that is licensed under this act as an insurer carrying on insurance business in or from within the BVI; or  
  (b) as a shareholder in a company or a partnership that is authorized under this act to act as an insurance manager, agent, or broker.”

### Assessment, staffing, and succession
- Assessment: Observed
- Comments: The Director of Insurance is planning to retire and steps must be taken to identify a successor with high qualifications given the relative inexperience of the existing staff—particularly with the introduction of an on-site inspection process being planned.

### Funding and penalties
- While a conflict of interest would make it inappropriate that the funding of the FSC include penalties that it assesses, legislation precludes the FSC from receiving penalties that are judicially determined.
- Penalties that are removed from the direct authority of the FSC may be suitable to include (in whole or in part as determined by the court) as a funding source for the FSC.

### Licensing (Principle 2)
- Principle summary: Companies wishing to underwrite insurance in the domestic insurance market should be licensed. Where the insurance supervisor has authority to grant a license, the insurance supervisor:
  - in granting a license, should assess the suitability of owners, directors, and/or senior management, and the soundness of the business plan, which could include proforma financial statements, a capital plan, and projected solvency margins; and
  - in permitting access to the domestic market, may choose to rely on the work carried out by an insurance supervisor in another jurisdiction if the prudential rules of the two jurisdictions are broadly equivalent.
- Description:
  - The Insurance Act, Section 10 defines what is deemed to be carrying on insurance business and Section 11 provides that no person may carry on insurance business without a license.
  - Section 57(i) identifies the types of intermediaries which require a certificate of authority.
  - Amendments to the Insurance Act will expand the definition of intermediaries to encompass other individuals and companies such as insurance consultants.
  - The act does not differentiate between captives, domestic companies, reinsurance companies, and credit life and disability companies in setting licensing standards.
  - Part II of the FSC Act introduces The Licensing and Supervisory Committee as the authority responsible for licensing; the tasks of the committee are listed under section 16.
  - Licensing requirements are defined in Part A of the Insurance Regulations.
  - The Commission has detailed application forms for insurance; there is only one insurance company application form for captives, domestic companies, and reinsurance companies, and requirements for each are quite similar.
  - Standards are rigorous with emphasis placed on fitness and propriety as well as demonstrated capacity; the standards appear to be applied both in form and in fact.

*Source: cr0493*

### Section 13 of The Insurance Act indicates that no insurer shall be licensed unless it is a body

### cr0493 - Section 13 of The Insurance Act indicates that no insurer shall be licensed unless it is a body corporate or the unincorporated association of underwriters at Lloyds

### Licensing, fit-and-proper, and application requirements
- Section 13 of The Insurance Act: no insurer shall be licensed unless it is a body corporate or the unincorporated association of underwriters at Lloyds.
- Fit-and-proper criterion:
  - Not explicitly addressed in statute; in practice the principle of fit and proper has been adopted.
  - Shareholder questionnaires, Directors’ and Officers’ Questionnaires, and CVs are required.
  - Questionnaires include a declaration that owners, directors, and officers have not had criminal proceedings brought against them.
- Business plan/application requirements:
  - Application contains a guideline calling for five year projections.
  - Business plan guide requests a feasibility study, planned areas and type of business, method of solicitation, source of business, classes, underwriting details, claims and accounting techniques, deductibles, excess, retention, reinsurers and limits, proportion of unrelated business, underwriting guidelines, commission structure, dividend and loan policy, and projections.
- Policy specimens and wording:
  - The Commission has authority under section 32 of the FSC Act to request information on policy language and rates.
  - The FSC currently does not regulate policy wording or premium rates.
  - Amendments to the Insurance Act (to be in place at year’s end per the source) will provide for policy specimens to be submitted with the application and the subsequent issuance of new types of policies.
- Formation documents, actuaries, auditors:
  - All companies must file formation documents (see section 13 of Insurance Act 1994).
  - Actuaries and auditors are to be approved pursuant to section 42(1) and 22(a).
  - Applications must be completed and approved prior to authorization.

### Capitalization, capital adequacy, and solvency (Section 14 and related)
- Statutory minimum capital (Section 14):
  - $100,000 for general insurers.
  - $200,000 for life insurers.
  - $300,000 for a company writing both general and long-term.
- FSC powers over capital:
  - FSC may require an insurer to increase its fully paid up capital or reserve fund to such greater amount as the governor may determine for the nature and volume of the insurance business.
  - FSC requires consolidated statements where appropriate to eliminate gearing of supervisory capital.
- Capital adequacy assessment and recommendations:
  - Capital adequacy requirements should reflect size, complexity, and business risks.
  - FSC has authority to intervene under Section 14 but faces practical limits due to information access.
  - Recommendation: promulgate a formalized dynamic set of risk-sensitive performance indicators tailored to the BVI market; initially make them indicators rather than compulsory benchmarks.

### Corporate governance and internal controls (Principles 4 and 5)
- Corporate governance:
  - No corporate governance standards required for captives given their nature; FSC relies on home jurisdiction standards for foreign-domiciled firms.
  - FSC to launch on-site inspections with protocols to assess corporate governance of captives and their insurance managers.
  - Recommendation: require insurance managers to establish corporate governance standards for dealings with FSC and captives; issue guidance notes requiring immediate reporting of material changes in ownership/control.
- Internal controls:
  - BVI industry structure makes traditional internal control standards difficult to apply to captives.
  - FSC will require insurance management firms to have appropriate management-control procedures and to adhere to quality assurance standards; insurance managers likely to serve as compliance officers.
  - Clear, unambiguous recordkeeping and reporting requirements for insurance manager/compliance officers are recommended.
  - On-site inspections are essential as a compliance incentive.

### Assets and liabilities (Principles 6 and 7)
- Assets:
  - Standards exist respecting permissible investments, prohibitions on concentrations, required diversification by class, and valuation standards in the Insurance Regulations.
  - Captives subject to financial reporting standards and solvency margin requirements under core principle 8; Section 14 gives FSC authority to require prudent surplus levels.
  - Assessment: statutory authority observed; enforcement limited by lack of on-site inspections historically.
- Liabilities:
  - FSC has authority under Section 10 of the Insurance Regulations to require sufficient provisions for reasonably ascertainable liabilities.
  - Challenges arise from prior limited capacity to conduct on-site inspections; improvements in financial reporting and staff training are underway.
  - Recommendation: expand off-site analysis through targeted test-checks of particular insurers once inspection program is operational.

### Derivatives and off-balance-sheet items (Principle 9)
- Derivatives:
  - FSC has not had occasion to address accounting for derivatives because insurers have not engaged in the practice.
  - Adequate authority exists respecting off-balance-sheet items and disclosure requirements.
  - Recommendation: issue a guidance note on permissible uses of derivatives and proper reporting/accounting; adopt a conservative stance allowing derivatives primarily for hedging.

### Reinsurance (Principle 10)
- Authority and practice:
  - FSC can prohibit taking credit for reinsurance ceded that is not true reinsurance or where reinsurer ability may be impaired.
  - Ceding insurer bears responsibility to demonstrate bona fides of assuming reinsurer.
  - FSC can share information with other regulators regarding troubled unlicensed reinsurers.
- Concern and enforcement:
  - Major concern: captive insurers may claim credit for reinsurance that is not true reinsurance.
  - On-site inspections will assist in monitoring such activities.
  - Recommendation: critically evaluate any reinsurance credit claimed by captives given limited access to reinsurance markets.

### Market conduct and consumer protection (Principle 11)
- Market conduct expectations for insurers and intermediaries:
  - Act honestly, with due skill, care, diligence; treat customers fairly; avoid conflicts of interest; maintain complaints handling; organize and control affairs effectively.
- Current framework and gaps:
  - Licensing system promotes skills and propriety of service intermediaries; brokers required to carry Errors & Omissions insurance.
  - No precise statutory language governing unfair trade practices or unfair claim settlement practices.
  - BVI does not regulate insurance contract language nor require standards for contract provisions.
  - FSC does not yet conduct market conduct inspections; such inspections are planned.
- Recommendations:
  - Consider requiring direct-writing insurers to maintain policyholder complaint logs for on-site inspection review.
  - Consider adopting standard insurance contract coverage rules and unfair trade practice and claim settlement regulations.
  - Proposed amendments include comprehensive professional liability insurance requirement for service intermediaries.

### Financial reporting (Principle 12)
- Reporting regime and authority:
  - FSC has authority to establish reporting standards; Section 22 requires insurers to submit annually independently audited financial statements.
  - Regulation 12 allows FSC to order insurers to hire independent experts at insurer’s expense if doubts arise.
- Operational status:
  - FSC has instituted a functional financial reporting system and improved data collection capacity.
  - On-site inspection implementation (planned for early 2003 per source) will complement financial reporting and enforcement.
- Recommendation: continue implementation of on-site inspections to complete supervisory toolkit.

### On-site inspections and enforcement (Principles 13 and 14)
- On-site inspections:
  - FSC has statutory authority to conduct on-site inspections but had not yet adopted inspection manuals or completed staff training at the time of assessment.
  - On-site inspections are considered vital to ensure “certain discovery” as a compliance incentive.
  - Assessment: material nonobservance until inspections commence and staff are trained.
- Sanctions and remedial powers:
  - Broad enforcement powers under Part V of the FSC Act and provisions in the Insurance Act, including:
    - Section 16(1): discretion to grant or refuse licenses.
    - Section 26(k): power to cancel insurer’s license for business detrimental to public interest.
    - Section 37: circumstances for enforcement action.
    - Section 38: power to revoke or suspend licenses or certificates.
    - Section 39: power to apply to court for protective orders, appoint administrators, winding up, search warrants.
    - Section 40: power to issue directives to cease classes/types of business or other directives.
    - Insurance Act section 50(1): grounds to apply to court to wind up an insurer.
  - FSC documents actions thoroughly and issues time-bound orders; may require recovery plans and implement directives.
  - FSC does not currently have power to impose fines or public reprimands.
- Recommendations:
  - Grant FSC authority to impose monetary penalties as an intermediate remedial tool.
  - Expedite institution of on-site inspections and ensure staff training to avoid credibility risk.

### Cross-border operations and cooperation (Principles 15 and 16)
- Cross-border supervision:
  - FSC Act anticipates authority to address cross-border issues, but in practice the BVI’s domestic industry is primarily captives so little action has been required.
  - FSC relies on home supervisors for foreign-domiciled firms writing direct business in the BVI.
- Coordination and cooperation:
  - FSC Act section 4(1)(n) mandates FSC to enter into memoranda of understanding with regulatory and law enforcement agencies domestically and abroad.
  - Section 4(1)(i) charges FSC with providing legal and regulatory assistance to foreign regulatory authorities.
  - Recommendation: consider requiring an MOU between BVI and the applicant’s domicile or a detailed “Certificate of Good Standing” from the chief insurance supervisory official of the applicant’s jurisdiction as a prerequisite to application and approval.

*Source: IMF assessment of the Financial Services Commission and The Insurance Act (cr0493).*

### Part IV of the FSC Act, entitled “Gateways for Disclosure and Gathering of Information”, and

### Part IV of the FSC Act — Gateways for Disclosure and Gathering of Information

### Legal gateways and scope of disclosure
- Section 29 permits disclosure by the FSC of any information, document, record, or statement made or disclosed to the Commission only in several limited circumstances.
- Permitted disclosures include responses:
  - On a request by:
    - (i) a high ranking officer of a competent authority in an international organization recognized by the Board,
    - (ii) a high ranking officer of the law enforcement authority in a country or jurisdiction approved by the Board, for the purpose of legal assistance in the investigation of a criminal activity;
  - For the purpose of enabling or assisting a foreign regulatory authority, including a trading, security, or exchange authority, in a country or jurisdiction approved by the Board in discharging duties or exercising powers corresponding to those under the FSC Act or any subsidiary legislation made there under or under any financial services legislation.
- Section 29(3) requires that the authority receiving the disclosure must be required not to transmit the material disclosed to it to any other person except with the prior consent of the Board of the FSC.
- Section 4(1)(n) gives the FSC full authority to determine the terms of any agreement or understanding with another regulator as to the types of information to be shared and the basis for sharing it.
- The FSC’s practice has been to request that regulators seeking regulatory cooperation give an undertaking to provide similar assistance when requested; this does not require strict reciprocity but allows for broad mutuality.
- The FSC can obtain information on behalf of foreign regulators under the gateway provisions in conjunction with the procedural provisions under the Financial Services (International Co-operation) Act, No. 18 of 2000, which:
  - Prescribes criteria to be taken into account when deciding whether to exercise compulsory powers to obtain information or documents not in the FSC’s possession;
  - Allows the FSC to require written undertakings from the foreign regulator, such as to provide corresponding assistance when requested by a BVI authority and to make a contribution towards the costs of the exercise of the compulsory powers;
  - Prescribes the procedure for obtaining information by compulsion and provides certain safeguards.

### Practical use and inter-agency cooperation
- The FSC routinely uses the gateway for enabling or assisting foreign regulatory authorities to respond to a large number of routine inquiries from foreign counterparts regarding regulatory status of entities in the BVI.
- The FSC receives feedback from investigative bodies, usually the Financial Investigations Unit of the Royal Virgin Islands Police Force, concerning financial investigations relating to the FSC’s work.
- The Insurance Directorate has established lines of communication through the Off-Shore Group of Insurance Supervisors, the NAIC, and the UK’s Financial Services Commission.

### Assessment
- Assessment: Observed
- Comments: The FSC has the necessary tools for assisting foreign regulators and obtaining reciprocal assistance.

---

### Principle 17 — Confidentiality (Insurance Core Principle)

### Legal framework for confidentiality
- Section 29(1) of the FSC Act provides that any information, document, record, statement, or thing made or disclosed to the Commission, Board, a member of the Committee, or any person acting under their authority in the course of discharging any function or duty or exercising any power under the FSC Act or any subsidiary legislation made there under or under any financial services legislation (which includes the insurance legislation) concerning any person in relation to such enactment is privileged and must not be disclosed except as provided in subsection 29(2).
- Section 49(1) makes confidential certain specific categories of information in the Commission’s possession and prohibits disclosure by a Commissioner, officer, employee, agent, or adviser of the FSC except as provided in subsection 49(2).
- Sections 29(2) and 49(2) provide limited exceptions to the restrictions on disclosure, including the exception allowing the FSC to disclose information to other regulators.
- There is no freedom of information legislation in the BVI and no provisions that would override the FSC’s confidentiality requirements.
- Section 48 requires every Commissioner and staff member of the FSC to subscribe to an oath to maintain the confidentiality of information coming to them in the course of their duties with the FSC.

### IAIS Principle 17 requirements and observations
- Principle statement: All insurance supervisors should be subject to professional secrecy constraints in respect of information obtained in the course of their activities, including during the conduct of on-site inspections. The insurance supervisor is required to hold confidential any information received from other insurance supervisors, except where constrained by law or where the insurance supervisor who provided the information provides authorization for its release.
- Assessment: Observed
- Comments: None.

---

### Summary Observance of IAIS Insurance Core Principles

- Principles Grouped by Assessment Grade:
  - Observed: 13 — 1, 2, 3, 6, 7, 8, 9, 10, 12, 14, 15, 16, 17
  - Broadly observed: 1 — 11
  - Materially non-observed: 3 — 4, 5, 13
  - Non-observed: 0
  - Not applicable: 0

---

### Recommended Action Plan — Selected Recommendations and Authorities’ Responses

- CP 1 (Organization of an Insurance Supervisor)
  - Issue: Legislation precludes the FSC from receiving penalties that are judicially determined.
  - Recommended action: Consider making penalties determined by the court as a funding source for the FSC.
  - Authorities’ response: To be considered.

- CP 2 (Licensing and Changes in Control)
  - Issue: There is not now a single comprehensive compilation of all licensing requirements.
  - Recommended action: Compile a checklist of licensing requirements once the new Insurance Act has been adopted.
  - Authorities’ response: To be implemented.
  - Issue: The FSC Act provides for formal Memoranda of Understanding between BVI and other jurisdictions, but does not require that such an MOU be in place as a prerequisite to granting a license to an applicant licensed in a foreign jurisdiction.
  - Recommended action: Require that an MOU between the BVI and the jurisdiction of the applicant’s domicile be a prerequisite to application and approval or that a “Certificate of Good Standing” be executed by the chief insurance supervisory official of the applicant’s jurisdiction of domicile.
  - Authorities’ response: To be implemented.

- CP 3 (Changes in Control)
  - Issue: The FSC obtains only yearly information on controlling persons.
  - Recommended action: Issue a guidance note requiring immediate reporting of any material changes in ownership, control, or partial control (for either the direct parent of the captive or of the “parent of the parent”).
  - Authorities’ response: To be implemented.

- CP 4 and CP 5 (Corporate Governance and Internal Controls)
  - Issue (CP 4): The nature of the insurance business in the BVI makes direct supervision of corporate governance standards difficult; no companies have a physical presence in the BVI.
  - Recommended action (CP 4): Consider requiring insurance managers to establish corporate governance standards both for the manager’s dealings with the FSC and for its dealings with the captive insurer itself.
  - Authorities’ response: To be implemented.
  - Issue (CP 5): The industry situation does not easily lend itself to strong internal control standards; insurance management firms will be nexus between captive and FSC.
  - Recommended action (CP 5): Adopt clear and unambiguous requirements for recordkeeping and reporting for the insurance manager/compliance officer.
  - Authorities’ response: To be implemented.

- CP 7, CP 8, CP 9 (Prudential Rules)
  - CP 7 recommended action: Consider including test-checks of particular insurers to determine if greater detail for internal (off-site) analysis would be useful. Authorities’ response: To be considered.
  - CP 8 recommended action: Consider promulgating a formalized dynamic set of risk-sensitive performance indicators (indicators only and not inflexible compulsory benchmarks) based on study of models that best fit the BVI market and make this freely available to insurers, insurance managers, and compliance officers. Authorities’ response: To be considered.
  - CP 9 recommended action: Issue a guidance note dealing specifically with permissible uses of derivatives and proper reporting and accounting treatment; initially limit derivatives to hedging particular assets or liabilities, or classes of the same. Authorities’ response: To be considered.

- CP 11 (Market Conduct)
  - Issue: Neither the FSC Act nor the Insurance Act contains precise language governing unfair trade practices, nor is there any statutory scheme proscribing unfair claim settlement practices.
  - Recommended action: Consider establishing requirements for direct writing insurers to maintain policyholder complaint logs available to the FSC during on-site inspections; consider adopting standard insurance contract coverage and unfair trade practice and claim settlement regulations.
  - Authorities’ response: To be implemented.

- CP 13 (Monitoring, Inspection, and Sanctions)
  - Issue: There is no regular program of on-site inspections.
  - Recommended action: Complete preparations of manuals and training for on-site inspections, and implement plan for inspections.
  - Authorities’ response: Implemented.

- CP 14 (Sanctions)
  - Issue: While the FSC has broad authority to impose a wide range of penalties, it does not have authority to impose money penalties.
  - Recommended action: Consider amending legislation to allow levying of money penalties.
  - Authorities’ response: To be considered.

---

### IOSCO — Objectives and Principles of Securities Regulation: Main Findings (Securities Regulation Assessment)

### Institutional setting and legal framework
- The regulatory system for securities was assessed as part of the IMF OFC mission to the BVI during November 2002.
- The Mutual Funds Act, 1996, as amended (the MF Act), implemented January 1997, provides for registration of public mutual funds and recognition of private and professional funds, and governs licensing of mutual fund managers and mutual fund administrators operating in or from the BVI.
- The Financial Services Commission Act, 2001 (the FSCA) created the FSC as a single independent supervisory agency and gives it authority to administer, enforce, carry out, and give effect to provisions of laws related to financial services in the BVI.
- The Financial Services (International Cooperation) Act, 2000 sets out detailed requirements for information sharing with foreign regulators and foreign law enforcement agencies.

### Market structure and data points
- 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 rest are either professional funds or private funds.
- The BVI regulator does not collect data on the size of mutual funds authorized in the jurisdiction.
- As of the end of September 2002, 490 licenses had been granted for mutual fund administrators and managers operating in or from the jurisdiction. One administrator license and 75 fund manager licenses were granted in the first nine months of 2002.
- Mutual funds are not required to have managers or administrators that are licensed by the FSC. Very few of the licensed managers or administrators are physically located in the BVI.
- There is no stock exchange in the BVI, nor any facility for the issue of securities other than mutual funds. There is no retail market for securities of any kind in the jurisdiction. There are no self-regulatory organizations in the BVI.

### Main findings and recommended regulatory enhancements
- Overall assessment: The regulatory system that governs securities in the BVI appears to function fairly well; legislation and guidelines form a sound foundation, and the FSC has the authority required to regulate the segments of the securities industry operating in or from the BVI.
- The most pressing issue is the need for additional human resources to:
  - (a) implement an effective system of oversight of fund managers and fund administrators and of the mutual funds themselves;
  - (b) staff the enforcement function at the FSC.
- The FSC needs:
  - A regulation setting out the prospectus disclosure requirements applicable for public funds;
  - Enhanced disclosure obligations of mutual funds;
  - Strengthened business conduct rules and requirements for books and records, internal controls, and risk management systems for mutual fund managers and mutual fund administrators;
  - Requirements that all managers, administrators, and other mutual fund functionaries, such as custodians, segregate client assets effectively.
- The FSC recognizes these issues and is actively engaged in various projects, including completing a new Code of Practice, intended to address identified weaknesses and gaps.

*International Monetary Fund — Assessment excerpts from the BVI financial sector review (sections on Part IV of the FSC Act, Confidentiality/Principle 17, Recommended Action Plan, and IOSCO assessment).*

### 80.      Strength of the regulator. The responsibilities of FSC are clear and objective. It is

### Strength of the regulator

### Overview
- The Financial Services Commission (FSC) has responsibilities that are described as clear and objective.
- The FSC is operationally independent and publicly accountable to the government and to the administrative courts in the exercise of its functions.
- Staff meet high expectations of professionalism; processes are clear and consistently applied.
- All laws, regulations, and public Guidelines administered by the FSC are publicly available at least within the BVI; availability and transparency outside the jurisdiction should be improved.
- Consultation processes could be made more open and inclusive to solicit input from the public beyond local market participants.

### Independence and accountability
- Statutory framework:
  - The Financial Services Commission Act, 2001 (FSCA) provides the FSC’s general framework and authority.
  - The FSCA was enacted by the Legislative Council of the Virgin Islands and came into force on January 1, 2002.
  - The Mutual Funds Act, 1996, as amended, (the MF Act) was effective January 2, 1998.
- Funding and financial independence:
  - The FSC is funded primarily by fees charged to market participants for new authorizations and renewals.
  - Under the FSCA, the FSC is entitled to retain between 7.5 percent and 15 percent of the fees it collects; the rest are forwarded to the government.
  - The actual percentage retained is negotiated between the FSC and the executive council pursuant to s. 20(2) of the FSCA through a budgeting process described in s. 24 of the FSCA.
  - One consideration in determining the retained percentage is "the need to maintain the independence and viability of the FSC.”
  - More than half of the government's revenue comes from fees for incorporation of international business companies under the International Business Companies Act, a statute administered by the FSC.
- Governance and appointments:
  - FSC Board members are appointed by the executive council for terms not exceeding three years; appointments are "at pleasure".
  - The Board comprises four to six Commissioners and the managing director as an ex officio member.
  - Section 5(4) of the FSCA states that all Commissioners “are fit and proper and have relevant knowledge, experience and expertise which could aid the Commission in the performance of its functions."
  - Conflict rules: s. 8(5) of the FSCA states a Commissioner "shall not act as a delegate of any government, commercial, financial or other interest with whom he may be connected and shall not accept directions from any person or authority in respect of his duties ask Commissioner.”
- Accountability mechanisms:
  - The FSC is required to make an annual report (including audited financial statements) to the executive council, which is then tabled with the legislature.
  - Decisions of the FSC generally are subject to appeal to the Financial Services Appeals Board established under Part VI of the FSCA, with important exceptions:
    - s.44(1) notes there is no appeal from decisions of the Licensing and Supervisory Committee (LSC) with regard to refusing a license under any of the financial services legislation administered by the FSC.
    - There is no appeal from any decision to refuse a license, registration, or recognition under the MF Act.
    - The period in which to appeal is 14 days and there is no procedure to extend the period in appropriate circumstances.
  - The MF Act provides that FSC is not bound to give reasons for its decisions on any refusal to grant a license, registration, or recognition under that act.
- Observations and recommended changes:
  - The regulator is not required to give reasons for all significant decisions.
  - The requirements for expertise at the board level are not extensive and conflict of interest provisions for the board are not very robust.
  - Recommendation: amend the law to require the FSC (and the LSC) to give reasons for all decisions (other than those of a routine or minor nature).
  - Recommendation: consider developing a more detailed conflicts policy, particularly regarding permissible business relationships between Board members and regulated persons or their affiliates.

### Powers, resources, and capacity
- Statutory authority:
  - s. 13 of the FSCA: "the FSC may do all things necessary for, or reasonably ancillary or incidental to, the pursuance of the carrying out of its duties, functions or powers under this act or any financial services legislation.”
  - Section 4(1) lists core functions, including supervision, regulation, monitoring, development of legal/regulatory mechanisms, maintaining foreign regulatory relations, protecting the public, and entering into memoranda of understanding.
  - Section 4(2) directs the FSC to have regard to:
    - (a) the protection of the public, including investors, whether within or outside the BVI;
    - (b) the protection and enhancement of the reputation of the BVI as a financial services center; and
    - (c) the reduction of crime and other unlawful activities relating to financial services business.
- Specific powers and enforcement tools (Part V of FSCA and MF Act):
  - Power to require persons engaged in financial services businesses to furnish information (s. 30, 32).
  - Obligation that every regulated person appoint compliance officers and the description of their responsibilities (s. 34).
  - Ability to conduct compliance inspections of regulated persons (s. 35); note definition of regulated persons extends only to those listed in Schedule 2 to the FSCA.
  - Enforcement powers: appoint investigating examiners, revoke or suspend authorizations, apply to the court for orders to protect businesses or property of regulated persons, and issue directives (s. 36–40).
  - Power to issue, with the approval of Council, regulatory codes (s. 41).
  - Offenses the FSC may prosecute and compound (ss. 53–56).
  - MF Act powers: grant licenses and certificates; cancel and vary licenses and certificates (sections 29 & 30); prescribe Codes of Practice for mutual fund managers and mutual fund administrators (section 25A); advise the executive council to make regulations (section 42).
- Resource and capacity gaps:
  - The FSC has comprehensive inspection, investigation, surveillance, and enforcement powers, but some limitations on when these powers may be exercised (for example, requirement of a suspicion of a breach before appointing an examiner) should be eliminated.
  - Monetary penalties may not always be imposed for breaches and may not be an effective deterrent; they should be reexamined.
  - A critical issue: the FSC has not implemented an effective system to exercise its powers in inspection, surveillance, and enforcement.
    - There is no comprehensive system of on-site or off-site inspections; enforcement activities are undertaken on an ad hoc basis.
    - A new computer-based audit and inspection program is being developed.
    - Regular reporting requirements for fund managers and administrators are being developed.
    - The most pressing problem is the need for additional resources and staff to implement an effective oversight system of fund managers, fund administrators, and mutual funds.
    - Investigation and enforcement abilities are limited by the lack of staff.

### Cooperation and information sharing
- The FSC has very broad authority to share information with domestic and foreign counterparts.
- No significant practical impediments exist to providing assistance to foreign regulators carrying out regulatory activities.
- Legislative alignment needed:
  - Relevant provisions in legislation dealing with information sharing and assistance should be conformed to remove artificial constraints on what may be shared and with whom.
  - Example: definitions used in the FSCA should be revised to ensure they do not limit the FSC’s ability to share information with other regulators when those regulators inquire regarding securities activities over which the FSC has no corresponding authority (e.g., market manipulation).

### Issuer, mutual fund, intermediary, and secondary market regulation
- Issuer regulation:
  - No primary market issues of securities in the BVI other than mutual funds, and no market for corporate control.
  - The FSC’s lack of statutory authority in issuer regulation is not a weakness in current circumstances.
  - Accounting and auditing standards applied are high and internationally acceptable.
  - Recommendation: processes for approving an auditor and recognizing a jurisdiction for the purposes of the MF Act should include an express assessment of the quality of accounting and auditing standards to be applied.
- Mutual fund regulation:
  - Entry standards for fund managers and fund administrators are generally satisfactory.
  - Gaps and recommendations:
    - Rules governing conflicts of interest between fund managers, their related companies, and the funds they manage need more comprehensive treatment.
    - Strengthen business conduct rules and requirements for books and records, internal controls, and risk management systems for mutual fund managers and mutual fund administrators.
    - Require mutual fund assets to be segregated from the assets of the fund manager, the custodian, or other service providers (an express requirement applicable to all market participants).
    - Initial disclosure (prospectus) requirements for public mutual funds should be set out in regulation.
    - Continuous disclosure obligations of mutual funds need improvement; public disclosure of material changes should be more timely.
    - The FSC should establish a supervision program for fund managers and fund administrators combining periodic receipt/review of financial information and reports with on-site visits.
- Market intermediary regulation:
  - Market intermediaries are not currently subject to regulation in the BVI.
  - Given the absence of retail securities intermediation activities, this gap may not be serious.
  - The FSC is drafting legislation (the Investment Business Act, 2003) to govern activities of all persons carrying on investment business in the BVI; the consultation process for rulemaking would be set out in that statute.
- Secondary markets regulation:
  - The FSC has no authority to oversee securities exchanges, other trading systems, or clearing and settlement systems.
  - There is no organized market in securities in the BVI, nor any trading or clearing and settlement system operating in or from the BVI; the FSC does not expect these facilities to be established in the foreseeable future.

### Detailed assessment highlights (Principles Relating to the Regulator)
- Principle 1: The responsibilities of the regulator should be clear and objectively stated.
  - Description: FSC is the sole regulatory authority responsible for capital markets activities in the BVI; responsibilities are clearly set out in legislation (FSCA and MF Act).
  - Assessment: Implemented.
  - Comments: Absence of clear authority over market intermediaries, issues of securities other than mutual funds, and markets or clearing systems is not a practical problem now but would need to be addressed if activities change. FSC has recommended legislature enact specific legislation to regulate market intermediaries in or from the jurisdiction.
- Principle 2: The regulator should be operationally independent and accountable in the exercise of its functions and powers.
  - Description: FSC is an autonomous agency created by statute; reports to the executive council; Board must "take into account such general directions as may be given to the FSC" by the executive council (FSCA s.6 (2)).
  - Assessment: Broadly implemented.
  - Comments: Regulator not required to give reasons for all significant decisions; appeal period is 14 days with no extension procedure; conflict of interest provisions could be strengthened.
- Principle 3: The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.
  - Description: FSCA provides broad authority (s. 13) and lists functions (s. 4(1)); Part V and the MF Act provide inspection, compliance, and enforcement powers and instruments.
  - Observations: Broad legal powers exist, but effective exercise of these powers is constrained by resource and implementation gaps (see Enforcement and supervisory capacity above).

*Source: Financial Services Commission Act, 2001; Mutual Funds Act, 1996; assessment text of FSC powers and practices as presented in the source unit.*

### Section 29(2)(d) and (e) of the FSCA and the Financial Services (International Cooperation) Act

### Section 29(2)(d) and (e) of the FSCA and the Financial Services (International Cooperation) Act

### Information-sharing authority and scope
- Section 29(2)(e) of the FSCA permits sharing of information “[f]or the purpose of enabling or assisting a foreign regulatory authority, including a trading or a security or exchange authority, in a country or jurisdiction approved by the Board in discharging duties or exercising powers corresponding to those under this act or any subsidiary legislation made hereunder or under any financial services legislation."
- “Financial services legislation” is defined in the FSCA as any of the specific legislation listed in Schedule 2 to the act.
- Given that the FSC does not presently regulate securities market intermediaries, markets, or trading systems, it is uncertain whether the power permits sharing information with securities regulators pursuing inquiries regarding market intermediaries or secondary market activities.
- The report notes the information-sharing provision “seems quite broad” but is constrained by the statutory definition of “financial services legislation.”

### Legal and functional limitations of FSC powers
- The FSC lacks specific authority over:
  - market intermediaries;
  - primary issues of securities other than mutual funds;
  - secondary market trading generally;
  - stock exchanges; and
  - trading systems.
- The FSC has some control over certain officers and certain directors of licensed entities as part of license terms, but:
  - it does not have direct power over individual employees of licensed firms, as they are not licensed;
  - violations by employees would be the responsibility of the firm for which the employee worked;
  - the FSC could not ban a person from being employed by a licensed firm, although it could punish the firm for malfeasance by that employee.

### Organizational structure and staffing
- The FSC is headed by a Board of FSCers currently comprised of six members, including the managing director. The FSCers are persons with extensive experience in the financial services sector.
- Beneath the Board and managing director, staff includes a deputy managing director and a permanent staff currently numbering 75 total.
- Staff are assigned to several regulatory and support divisions each headed by a director with several years of experience and professional training.
- The Investment Business Division, charged with regulating mutual fund business, is headed by a Director with over 15 years of experience in regulatory and compliance practices and is supported by five additional regulators, as well as other administrative staff.
- Industry representatives viewed the staff as knowledgeable, competent, and helpful.
- The FSC has not experienced much turnover in staff; salaries did not appear to hamper hiring qualified staff, but there is a shortage of qualified persons in the BVI that makes hiring more difficult.
- The budget is not a limiting factor in ensuring staff have sufficient training to carry out their functions.
- The recently created Legal and Enforcement Division has no trained enforcement staff yet and there are a limited number of staff at the FSC with experience in on-site supervision of regulated entities; these gaps are well known to FSC management.

### Assessments and summary judgments
- Assessment: Partially implemented. (regarding overall powers and resources)
- Assessment: Broadly implemented. (Principle 4: clear and consistent regulatory processes)
- Assessment: Implemented. (Principle 5: professional standards and confidentiality)
- Assessment: Not applicable. (Principles 6 and 7: SROs)
- Assessment: Broadly implemented. (Principle 8: inspection, investigation, and surveillance powers)
- The report comments that the legislation gives the FSC the key powers it needs given the nature of the market in the BVI at the moment but does not give the FSC all powers contemplated by the IOSCO Principles.
- Staff resources for on-going supervision of authorized entities—including enforcement and on-site and off-site supervision—need to be increased substantially.

### Transparency and regulatory processes (Principle 4)
- Laws, regulations and some guidelines governing financial services activities in the BVI are publicly available in paper form in the BVI; the government website is outdated and contains limited information (for example, the FSCA is not posted).
- A new website operated by the FSC is in development and will contain public information including legislation, regulations, guidelines, guidance notes, and public registers kept by the FSC.
- Application forms setting out specific requirements are available from the FSC; checklists used to review applications and prospectuses are not publicly available.
- Most decisions of the FSC are subject to appeal to the Financial Services Appeals Board established under the FSCA; decisions of the Appeal Board are stated to be not subject to further appeal.
- The period for appeal is 14 days and there is no provision for extending the time period.
- The internal processes of the LSC follow general principles of natural justice and generally give applicants or licensees the opportunity to make representations before adverse decisions.
- Before revoking a license under the MF Act, the FSC must give notice of the grounds and allow written representations (s. 30).
- The FSCA and the MF Act generally provide that the FSC is not bound to give reasons for refusals to grant a license, registration, or recognition, although the LSC Guidelines provide that reasons for denial will be given if requested by the applicant; the FSC must give reasons for other decisions (for example, under s. 20(4) of the MF Act for refusing recognition to a private or professional fund).
- The FSC consults with local industry participants before finalizing new legislation, guidelines, or policies, but the consultation process is informal and not publicly disseminated; there is no practice of publishing proposed rules for general public comment outside the BVI.
- Industry members generally viewed the FSC as operating fairly and consistently.
- Recommendations/comments:
  - The consultation process could be more transparent and open to a wider array of participants (local or overseas).
  - The new website and the publication of the Code of Practice will improve transparency.
  - “Reasons for all nonroutine decisions made by the FSC should always be given, even when they are not requested by the applicant.” Consideration should be given to publishing significant decisions to provide guidance to market participants.

### Professional standards and confidentiality (Principle 5)
- Staff must comply with a code of conduct in an employee manual covering performance standards, rules against conflicts of interest, and confidentiality requirements; this expands on the rules of professional conduct for public officers set out in the General Orders of the government.
- The LSC has adopted guidelines for its members (Managing Director, Deputy Managing Director, heads of regulatory and supervisory divisions) imposing additional requirements regarding conflicts of interest and confidentiality; breach may give rise to disciplinary proceedings.
- All FSCers and staff must take a statutory Oath of Confidentiality sworn before a judicial official.
- The FSCA and the MF Act contain confidentiality provisions making disclosure of information, other than as expressly permitted or by order of a court of competent jurisdiction, an offence punishable by fine and/or imprisonment.
- There is no formal oversight program in place at the FSC to monitor staff compliance with these standards.
- Comment: The standards of professionalism, confidentiality, and ethics are very high.

### Self-regulation (Principles 6 and 7)
- There are no self-regulatory organizations (SROs) in the BVI.
- There is no formal process or express authority in the BVI for recognition of an organization as an SRO, nor any powers to oversee the activities of an SRO.
- Assessment: Not applicable. Comment: Given the nature of the industry in the BVI and the types of activities presently carried on, this is appropriate.

### Inspection, investigation, and enforcement powers (Principles 8 and 9)
- The FSC has powers to obtain information under s. 30(1) and 32(1) of the FSCA.
- Authority to inspect premises, business and assets of a financial services business carried on in or from within the BVI after giving reasonable notice of its intention to inspect is provided by s. 35(2); the power is to be exercised “for the purposes of prudential supervision” (an undefined term the FSC interprets liberally as any regulatory purpose).
- Section 35(4) contemplates the possibility of a foreign regulatory authority participating in such an inspection.
- The FSC may appoint an examiner “where the FSC is entitled to take enforcement action” under s. 36 of the FSCA; the definition of entitlement to take enforcement action is set out in s. 37 and includes situations where the FSC is of the opinion that the regulated person is insolvent, has contravened the act or other financial services legislation, or is carrying on business detrimental to the interests of the public or its clients.
- Powers of an examiner appointed under s. 36 are fairly broad; the FSC can appoint any “competent person” to act as an examiner (s. 36(1)).
- Under s. 36 of the MF Act, the FSC has power to require persons registered under that act to provide information to the FSC.
- All persons participating in compliance inspections or investigations are subject to stringent confidentiality requirements under the FSCA.
- Assessment: Broadly implemented. Comments:
  - The FSC has a wide range of powers to conduct inspections for compliance and investigation purposes, but the power to appoint an examiner is premised on a suspicion that a breach of the act has taken place.
  - Limitations on occasions for exercising these powers may not be a practical problem now due to liberal interpretation and industry cooperation, but the provisions have not been widely used or tested in court.
  - The report recommends that section 35(2) would be improved if the reference to “prudential” were deleted.
  - The FSCA should be amended to allow the FSC to conduct an investigation without first having a suspicion of a breach of the law.

- Additional detail on information-gathering and inspection powers (Principle 9):
  - Under s. 30(1) and 32(1) the FSC can obtain information from market participants.
  - Under s. 32, sources of information extend to a regulated person, a person connected to a regulated person, a person carrying on financial services business, or any person reasonably believed to have the information (s. 32(2)).
  - Under s. 36 of the MF Act, the FSC can require persons to provide documents, records, books, etc., necessary to determine compliance with the MF Act or regulations.
  - Under s. 35(2) the FSC may inspect premises, businesses, and assets after giving reasonable notice for the purposes of prudential supervision.

*Source: IMF country report cr0493.*

### Section 38(1) of the FSCA gives the FSC the power to revoke or suspend the license of a

### cr0493 - Section 38(1) of the FSCA gives the FSC the power to revoke or suspend the license of a

### Enforcement powers and sanctions
- Section 38(1) of the FSCA gives the FSC the power to revoke or suspend the license of a regulated person.
- The MF Act (s. 29) gives the FSC power to impose terms and conditions on a regulated entity, to cancel the registration of a mutual fund licensee or to withdraw the approval for a mutual fund, which shuts down its ability to carry on business in the BVI.
- FSCA s. 40 gives the FSC the power to issue binding directives where it is entitled to take enforcement action.
- S. 56 of the FSCA gives the FSC the power to compound an offense (enter into a binding settlement with an offender).
- A draft FSC (Amendment) Act awaiting legislative approval would add powers including:
  - the power to declare that a person is not "fit and proper";
  - the power to seek an injunction from a court to prevent a breach or continued breach of law;
  - the power to issue a directive requiring the substitution of any functionary of a mutual fund.
- Assessment: Broadly implemented.
- Comment: The full range of relevant enforcement powers are in place, and proposed amendments to the MF Act will expand these powers further.

### Penalties, prosecutions, and timeliness
- FSCA s. 53 & 54 are the offence/penalty sections of the act. Not every breach is an offence.
- Maximum penalties under the FSCA: a maximum fine of only US$25,000 and/or 5 years in jail.
- Section 40 of the MF Act sets out offenses; monetary penalties range up to US$50,000 and imprisonment for a maximum of two years.
- Note: in most cases the penalty actually imposed is the withdrawal of the registered person's license to carry on business.
- The FSC may initiate or refer matters for civil or criminal prosecution; prosecutions are done in front of the courts (other than imposing terms and conditions, suspending a license, or canceling a license).
- Given the importance of financial services markets, FSC matters are dealt with on an expedited basis; staff indicated it was possible to get a protective order or an order freezing assets on 24 to 48 hours notice.
- Comment/Recommendation: It is not clear if the fines under the FSCA and the MF Act are an effective deterrent. Consideration should be given to increasing the monetary amounts and to making the maximum fines and penalties consistent across various acts administered by the FSC.

### Inspection, investigation, surveillance, and enforcement resourcing (Principle 10)
- The FSC has issued directives or notices allowing staff to inspect premises and records; inspections have been mostly prudential and have reviewed compliance, systems, controls, and procedures.
- The FSC has issued directives and notices requiring production of asset records, financial statements, and other documents relevant to regulated persons.
- Directives have been issued ordering mutual funds to cease and desist for contraventions of the MF Act or refusal to grant licenses or certificates.
- Current practice and gaps:
  - Exercise of inspection, investigation, and enforcement powers is on an ad hoc basis; there is no routine program of on-site or off-site inspections.
  - No mutual fund manager or administrator is required to file routine reports.
  - The FSC does not require filing of financial statements by mutual funds registered or recognized under the MF Act.
  - There are no personnel in the FSC dedicated to inspections or enforcement; these activities are performed by regular staff in licensing divisions.
- Capacity developments:
  - FSC engaged a major consulting firm to develop a computer assisted compliance and inspection program and a regular reporting system to enable focused on-site and off-site supervision.
  - The FSC has created a Legal and Enforcement division and has financial resources to staff it, but no trained inspection or enforcement staff had been hired as of the time of review.
- Assessment: Partially implemented.
- Comments and recommendations:
  - Lack of staff with appropriate training and experience is a significant impediment.
  - The FSC should increase staff resources for inspections and enforcement as soon as possible.
  - Completion and implementation of the new compliance program should be expedited.
  - The FSC should continue sending staff to relevant international training programs (e.g., North American Association of Securities Administrators annual compliance training) and seek technical assistance (e.g., from the US Securities and Exchange Commission).

### Information sharing and cooperation with domestic and foreign counterparts (Principles 11–13)
- Legal basis and gateways:
  - The FSCA (s. 4(1)(i)) expressly mandates the FSC to provide legal and regulatory assistance to foreign regulatory authorities.
  - Part IV of the FSCA (“Gateways for Disclosure and Gathering of Information”) allows disclosure of any information, document, record or statement made or disclosed to the FSC for specified purposes, including:
    - to any person for the purpose of discharging any duty or exercising any power under the FSCA or subsidiary legislation;
    - on the order of a court for criminal or civil proceedings;
    - on request by high ranking officers of competent authorities or law enforcement authorities in approved countries or jurisdictions for legal assistance in criminal investigations;
    - for enabling or assisting a foreign regulatory authority in a country or jurisdiction approved by the Board in discharging duties or exercising powers corresponding to those under the FSCA.
- FS(IC)A (procedural framework):
  - FS(IC)A contains detailed requirements that would routinely be included in a MOU (identification of circumstances for assistance; types of information; confidentiality safeguards; permitted uses).
  - S. 4 of the FS(IC)A lists matters to be considered when deciding whether to grant foreign requests and types of conditions that may be attached (e.g., corresponding assistance, contribution to costs).
  - FS(IC)A empowers FSC to require persons to furnish information or documents in connection with a foreign request and prescribes penalties for non-cooperation.
  - Under s. 5 of the FS(IC)A the FSC can direct any person to provide information, produce documents, and provide other assistance; s. 5(2) allows orders compelling compliance; s. 5(3) allows examinations under oath; s. 5(9) provides immunity for persons rendering assistance or disclosing information under the act.
- Registers and confidentiality:
  - Under s. 6 of the MF Act the FSC keeps a public register of licensed, registered, or recognized persons under the Act; the register is open for public inspection on FSC premises and contains specific address and status information but does not include shareholders, officers, or directors (although FSC collects that information).
  - Receiving regulatory authorities may not disclose nonpublic information except with the written consent of the FSC.
- Authority to appoint third parties and foreign supervisors:
  - The FSC may appoint third parties as representatives in examinations, including foreign supervisory authorities, subject to the same confidentiality constraints and requiring written permission to use or transmit disclosed information.
- Practice and limitations:
  - The FSC responds routinely to inquiries from foreign counterparts regarding regulatory status pursuant to Part IV gateway.
  - There may be limitations arising from s. 29(2)(e) and the statutory definition of financial services legislation when a foreign regulatory body seeks information on activities not presently regulated by the FSC (e.g., market intermediary functions not regulated in the BVI).
  - Recommendation: Broaden language in s. 29(2)(e) to allow provision of information when the foreign regulator is exercising powers with respect to regulated or supervised financial services activities under its own enabling legislation.
- MOUs:
  - S. 4(n) of the FSCA gives FSC the power to enter into MOUs. The FSC had not entered into MOUs with securities regulators at the time of review; it intended to pursue MOUs with jurisdictions such as the U.S. and Hong Kong that had approached them.
  - BVI law does not require an MOU before sharing information; FS(IC)A contains procedural requirements that obviate the need for MOUs.
  - Assessment (Principle 11): Broadly implemented.
  - Assessment (Principle 12): Implemented.
  - Assessment (Principle 13): Implemented.
  - Comment: While the legal framework is comprehensive, it may be prudent to establish MOUs with principal correspondent jurisdictions to streamline procedures.

### Issuers, accounting, and auditing (Principles 14–16)
- Market context:
  - Neither domestic nor international business companies law, nor financial services legislation, addresses offering securities to the public; there is no primary market for securities in the BVI other than for mutual funds.
  - Assessments for Principles 14 and 15: Not applicable.
- Accounting and auditing for mutual funds (MF Act s. 13):
  - Every registered public fund shall prepare financial statements in respect of each financial year in accordance with generally accepted accounting principles.
  - Financial statements must be:
    - audited by an auditor acceptable to the FSC ("the approved auditor") in accordance with generally accepted auditing standards;
    - accompanied by the report of the approved auditor including a statement of accounting principles applied and auditing standards applied;
    - provided to or made available for examination by all investors of the registered public fund.
- Approved auditor process and recognition of jurisdictions:
  - The process for approving auditors is set out in the internal procedures manual of the Investment Business Division and requires auditors to be entitled to practice as public accountants in a recognized country or jurisdiction and to provide company profile, latest accounts, partner/manager details, professional indemnity insurance, accounting/auditing standards to be applied, list of global and BVI mutual fund clients, and evidence of approval to audit mutual funds in home jurisdiction.
  - Recognized jurisdictions currently include the U.K., the U.S., Bermuda, Luxembourg, Switzerland, the Channel Islands (Guernsey, Jersey, and the Isle of Man), Hong Kong, France, Belgium, the Netherlands, Singapore, Spain, Gibraltar, and Malta.
- FSC practices and gaps:
  - The FSC does not approve accounting principles or audit standards applied nor does it set out required contents of financial statements; the only requirement is that standards and principles be disclosed in financial statements.
  - Financial statements are not routinely provided to the FSC.
  - Under the MF Act there is no requirement that the auditor be independent of the entity being audited (although professional standards in most auditors' home countries would impose independence).
  - As a practical matter, most public funds are subject to GAAP applicable in the EU or US; accountants and auditors within the BVI apply International Accounting Standards (IAS).
- Assessment: Partially implemented.
- Comments and recommendation:
  - Where an auditor is proposed from a jurisdiction not adopting IAS or similar standards, the FSC should consider an express assessment of the quality of accounting principles and auditing standards as part of approving an auditor or recognizing a jurisdiction under the MF Act.
  - Standards and principles should be equivalent to those of the IAS.

### Regulation of collective investment schemes and service providers (Principle 17)
- Licensing and eligibility:
  - The standards and eligibility of those wishing to manage or administer a collective investment scheme in or from the BVI are determined by the FSC under authority granted in the MF Act.
  - The MF Act establishes that no person shall, in or from within the BVI, carry on or hold himself out as carrying on business as a manager or administrator of a mutual fund unless licensed under the Act.
  - MF Act s. 24(2) requires the FSC to be satisfied that the applicant:
    - (a) is a fit and proper person to be engaged in the business proposed;
    - (b) has or has available adequate knowledge, expertise, resources, and facilities necessary for the nature and scope of the business proposed;
    - (c) has appointed an auditor satisfying such conditions as may be prescribed by the FSC.
  - The act does not apply to foreign incorporated managers and administrators whose operations are based entirely in a foreign jurisdiction even if they act for a BVI constituted fund.
- Fit and proper and ongoing oversight:
  - The FSC has published a Guideline explaining the “fit and proper” assessment.
  - Managers and administrators are evaluated on integrity, financial stability, competence, and track record; FSC staff make detailed inquiries regarding resources and facilities before licensing.
  - All applicants must provide full details of ultimate beneficial owners; opaque ownership structures are not accepted.
  - Licensees are required to provide prior notification of material changes; amendments trigger reassessment under s. 24 conditions.
- FSC statutory powers relevant to collective investment schemes:
  - register a public mutual fund — MF Act s. 11(1);
  - require a custodian and that the custodian be functionally independent from the manager/administrator — MF Act s. 11(2);
  - conduct compliance audits for prudential purposes — FSCA s. 35(2);
  - require disclosure of material facts (at a very general level) — MF Act s. 14(2);
  - investigate and take remedial and enforcement actions — FSCA s. 36-40 and MF Act s. 29;
  - recommend to the executive council that regulations be made relating to prospectus content for public funds — MF Act s. 42(1a).
- Supervisory gaps and planned measures:
  - No routine off-site or on-site examinations of mutual fund managers or administrators at present.
  - No routine reporting requirements, no requirement to file financial statements, no capital requirements, and no internal control requirements currently.
  - In the near future, receipt and monitoring of audited accounts of managers and administrators will form part of supervision; these statements will be subject to monitoring standards under development.
  - BVI resident managers and administrators will be subject to regular compliance inspections.
  - Prospectuses are extensively reviewed against internal procedures manual criteria during registration or licensing, but there is no direct regulation of public fund disclosure.

*Source: International Monetary Fund assessment of Financial Services Commission powers and practices as summarized above.*

### Section 25A of the MF Act empowers the FSC to issue a Code of Practice to regulate the

### cr0493 - Section 25A of the MF Act empowers the FSC to issue a Code of Practice to regulate the

### Code of Practice: scope and implementation
- The staff of the FSC have drafted a very extensive Code of Practice discussed with industry participants and expected to be implemented in early 2004.
- The Code provides detailed requirements and guidance on:
  - standards of conduct, particularly fitness and properness;
  - conduct of business, including advertising, duties to clients, safekeeping of client assets, advising on mutual funds, and administration of mutual funds;
  - compliance, reporting, records, and complaints;
  - financial resources, including capital resources of licensees, books and records, internal controls, audit, and financial reporting to the FSC;
  - licensing requirements, including that for individuals;
  - penalties for noncompliance.
- The Code includes appendices with forms and additional guidance.
- The draft Code would require mutual fund managers and administrators to notify the FSC if their capital falls below the minimum requirements set by the Code.

### Conflicts of interest and fiduciary duties
- Other than reference to functionally independent custodians, there are no express legislative requirements addressing conflicts of interest; conflicts are a topic to be included in the Code of Practice under s.25A.
- Under the draft Code:
  - conflicts of interest in the management or administration of a mutual fund would be generally prohibited unless fully disclosed in the prospectus or in another report to the directors of the fund, and fair treatment of the interests of the mutual fund was assured.
- Directors would be subject to common law duties to declare any conflict and abstain from voting where there was a conflict.
- Common law fiduciary duties would require fiduciaries (including the investment manager and directors) to put the interests of the fund first; transactions with material conflicts would generally be prohibited unless full disclosure and consent of all beneficiaries or court approval obtained.
- Assessment: Partially implemented.
- Comments and recommendations:
  - Conflict rules governing relationships and transactions between a public fund and its operators are minimal.
  - Few rules govern relationships between the mutual fund and service providers or related companies; no rules govern use of related companies for trading or custodial services, except that the custodian must be functionally independent of the administrator and manager.
  - Recommendation: Deal with conflicts more comprehensively; require all relationships between managers, administrators, other functionaries, and service providers to be set out in the fund prospectus, along with the fund’s policy on dealing with related companies.
  - Recommendation: Institute a program of regular inspections and require managers and administrators to file annual audited financial statements and other regulatory reports.

### Legal forms, asset segregation and custodial arrangements (Principle 18)
- Description:
  - A mutual fund can be organized as a corporation, unit trust, or partnership under BVI law (or other law); most are incorporated under the International Business Companies Act.
  - Mutual funds organized under BVI law are subject to general bankruptcy legislation applying the British common law principle of tracing.
  - No rules require fund assets to be segregated from assets of the fund manager, administrator, custodian, or other funds managed/ administered by those functionaries.
  - The draft Code would apply extensive segregation and record-keeping requirements to all who hold or manage assets or cash belonging to mutual funds or individual clients, but the Code will only apply to BVI licensed administrators and managers.
  - FSC is considering preparing regulations specifically related to clients' monies and segregation of assets to apply standards to all public funds regardless of where functionaries are located.
  - Public mutual funds are required to have a custodian that is functionally independent of its manager and administrator; in practice most custodians are separate companies, banks or trust companies, and very few custodians are BVI domiciled companies.
- Assessment: Partially implemented.
- Comments and recommendations:
  - Lack of clear requirement to identify and segregate fund assets is a serious shortcoming, compounded by lack of detailed books and records requirements for managers and administrators.
  - If a fund or fund manager became insolvent, tracing and recovery of client/fund assets would be difficult and expensive.
  - Recommendation: FSC should issue specific books and records and segregation requirements that apply to all functionaries (managers, administrators, custodians, and other service providers) who hold BVI registered public mutual fund assets.

### Disclosure, prospectus content and liability (Principle 19)
- Description:
  - Section 13 (2) MF Act: all public funds must provide or make available annual audited fund reports and accounts to all investors; prepared in accordance with generally accepted accounting principles and audited in accordance with generally accepted auditing standards. The applicable accounting principles and auditing standards must be disclosed in the financial statements.
  - Legislation does not prescribe when financial statements must be made available to investors nor what must be contained (no requirement for audited statements of net asset value or for a portfolio summary).
  - Section 14 (1) MF Act: all public funds must publish a prospectus approved or authorized by the board of directors; section 14 (2) requires every prospectus to provide full and accurate disclosure of information investors would reasonably require.
  - FSC has not published rules regarding required contents of a prospectus nor made regulations under s. 42(1a) MF Act; Investment Business Division uses an administrative checklist requiring disclosure of:
    - identification of names and addresses of directors, custodians, trustees, administrators, investment advisors, registrars, and auditors;
    - all charges imposed on the fund or investor, including initial purchase fee, redemption charges, annual fee of the manager, custodian, investment advisor, and any performance fee payable;
    - details of the constitution of the fund: date, place, type of entity, share classes, and voting rights;
    - investment objectives, types of investments, investment restrictions, special investments, limits, and use of borrowing;
    - information about valuation process and where information regarding value of an investor’s investment can be found;
    - accounting issues;
    - risk factors, including conflicts of interests and difficulties in valuing assets;
    - summary of investors' statutory rights;
    - description of subscription and redemption process, suspensions, winding up, etc.
  - Any change in this information must be reflected in an amended prospectus published within 14 days and filed with the FSC and provided to each investor.
  - MF Act s. 16(2)(b) imposes liability on the mutual fund and board members aware of misrepresentation or who would have been aware if they had made a reasonable investigation; no statutory liability on underwriters, auditors, lawyers, or other experts (who may be liable at common law for negligent misrepresentation).
- Assessment: Partially implemented.
- Comments and recommendations:
  - Nonfinancial disclosure in practice is extensive, but legally there are no specified disclosure requirements; financial disclosure and continuous disclosure obligations are minimal and not timely.
  - Recommendation: Mutual funds should be subject to continuous disclosure requirements to make immediate public disclosure of material changes and notify investors promptly; consideration of posting notices on the FSC website suggested.
  - Recommendation: FSC should issue regulations setting requirements for both financial and nonfinancial disclosure for public mutual funds.
  - Recommendation: Extend statutory liability under s. 16 for prospectus misrepresentations to all parties involved in preparing or authorizing the prospectus, particularly lawyers and auditors (authorities’ response: disagree, citing directors’ ultimate responsibility).

### Asset valuation, net asset value and redemption policies (Principle 20)
- Description:
  - No specific legal or regulatory requirements set prospectus contents regarding:
    - fair and accurate valuation of investments and correct calculation of net asset value;
    - provision of information about asset value and pricing policies to allow assessment of performance over time;
    - consistent use of a set of accounting rules and disclosure of which rules are used in valuation;
    - minimum frequency of valuation.
  - No limits on illiquid investments; changes and limitations on redemption rights are not subject to prior regulator approval.
  - Investment Business Division checklist requires prospectus disclosure about asset valuation process and subscription/redemption processes when vetting fund registration.
  - FSC performs no routine oversight via reporting or on-site inspections to check that disclosed valuation policies are followed in practice.
- Assessment: Not implemented.
- Comments and recommendations:
  - No requirements governing consistent accounting rules for asset valuation or disclosure of rules used to investors.
  - No rules or guidelines for valuation of illiquid securities.
  - No monitoring of compliance with prospectus-disclosed valuation policies and no regulatory oversight to ensure net asset value calculations are done properly.
  - No regulatory approval required before redemptions may stop.
  - Recommendation: Develop binding guideline or regulation on asset valuations and related disclosure provisions.
  - Recommendation: Registered mutual funds should not be permitted to change redemption policies or cease redemptions without FSC permission, granted only in the investors’ collective interest.

### Market intermediaries and related principles (Principles 21–24)
- Description:
  - No statutory provisions regulating activities of market intermediaries (dealers, brokers, underwriters, investment managers) in the BVI; not evident significant securities intermediation occurs within BVI.
  - FSC has recommended government introduce legislation to license and regulate market intermediaries, including investment managers, investment advisers, market makers, and broker/dealers; proposed legislation would include:
    - minimum entry standards; minimum and ongoing capital requirements; books and records, internal control and compliance requirements; fit and proper requirements for firms and key personnel; duties to clients; audit and insurance requirements; FSC powers regarding licensing, oversight, inspections; rulemaking powers including consultation process; penalties for breaches.
  - Under s. 25A MF Act the draft Code would set minimum capital and ongoing capital requirements, books and records requirements, and internal control and risk management systems for mutual fund managers and mutual fund administrators, with intention to have similar requirements apply to all market intermediaries.
  - Under the FSC all regulated persons are required to establish policies and procedures to ensure compliance and appoint a responsible compliance officer.
  - Draft Code sets extensive conduct of business standards (examples include due care and diligence, written contact with customers, transaction reports and periodic account statements no less than annual, know-your-client requirements, disclosure of conflicts, staff training, confidentiality, policies to put client interests first).
- Assessments:
  - Principle 21: Not applicable.
  - Principle 22: Not applicable.
  - Principle 23: Not applicable.
  - Principle 24: Not applicable.
- Comments and recommendations:
  - If made applicable to all market intermediaries, the Code would meet conduct of business expectations.
  - Authorities’ response: draft Code requirements intended to be extended; proposed Investment Business Act and FSCA powers to apply.

### Secondary market, exchanges, clearing and settlement (Principles 25–30)
- Description and assessment:
  - No financial services legislation gives FSC authority to regulate exchanges or trading systems; there is no secondary market trading of securities within the BVI and no organized exchanges or OTC markets operating in or from the BVI.
  - FSC does not have authority to oversee or license clearing and settlement systems; however, there are no clearing and settlement systems operating in the BVI.
  - Principles 25–30: Not applicable.
- Comments:
  - Given current level of secondary market development, FSC’s lack of authority to oversee these systems poses no immediate issue.

### Summary implementation status (Table 15)
- Implemented: 4 (Principles 1, 5, 12 and 13)
- Broadly Implemented: 5 (Principles 2, 4, 8, 9, and 11)
- Partly Implemented: 7 (Principles 3, 10, and 16 through 20)
- Not Implemented: 0
- Not applicable: 14 (Principles 6, 7, 14, 15, and 21 through 30)

### Recommended action plan highlights and authorities’ responses (selected items)
- Principle 2: Consider amending legislation to require FSC to give reasons for all non-routine decisions; consider a more detailed conflicts policy for board members. Response: Under consideration.
- Principle 3: Increase staff resources for on-going supervision and enforcement. Response: To be implemented.
- Principle 4: Make licensing and approval processes publicly available; enhance transparency and consultation. Response: Forms, specific requirements and checklists are made available (though not on website); intention to include more information on website; consultation process being enhanced.
- Principle 9: Ensure fines under FSCA and related legislation are effective deterrents. Response: Under consideration.
- Principle 10: Increase staff resources for inspections/enforcement; expedite completion and implementation of audit and compliance program. Response: Agree; audit and compliance program finalized but cannot be implemented until Code of Practice is issued; expected to be implemented end of Q1 2004.
- Principle 11: Broaden legislative language on information sharing. Response: Under consideration.
- Principle 16: Assess quality of accounting principles and auditing standards applicable in a jurisdiction before recognizing auditors/jurisdictions under MF Act; standards should be equivalent to IAS. Response: Agree, expected end of Q1 2004.
- Principle 17: Deal with mutual fund conflicts comprehensively; require disclosure of relationships between managers, administrators, functionaries and service providers; require filing of annual audited financial statements with FSC; institute regular inspections. Response: To be formal requirement under proposed public fund regulations; reporting requirements included in draft Code of Practice; expected end of Q1 2004 (Code of Practice) and end of Q2 2004 (Proposed Public Funds Regulations).
- Principle 18: Impose books and records and asset segregation requirements for all functionaries holding BVI registered public mutual fund assets. Response: Predominantly covered for managers and administrators in draft Code of Practice; FSC has no remit over custodians or other functionaries. Expected end of Q1 2004.
- Principle 19: Issue prospectus regulations; require immediate disclosure of material changes; extend statutory liability for misrepresentations to all parties involved in preparing/authorizing prospectus. Response: Agree to prospectus regulations and continuous disclosure (expected end of Q2 2004); disagree on extending statutory liability beyond directors.
- Principle 20: Enact binding rules on mutual fund asset valuations and related disclosure; prohibit public mutual funds from ceasing to redeem securities without notification to FSC. Response: Agree for public mutual funds; include in proposed public fund regulations expected end of Q2 2004; partially agree that notification of cessation should be required, expected end of Q2 2004.

*Source: International Monetary Fund assessment and recommended action plan on mutual funds regulation and the draft Code of Practice under s.25A of the MF Act.*

### 89.      This review is based upon the premise and fact that there is no international group of

### Review of Trust and Company Service Providers (CSPs) — Key Findings

### Premise and guidance
- The review is based on the premise and fact that there is no international group of company and trust service providers (CSPs), as there is for banking, insurance, and securities, and there are no international standards for the licensing and supervision of CSPs.
- Two recent jurisdictional reviews focused on broad principles to be applied as guidance for best practice:
  - Review of Financial Regulation in the Crown Dependencies, November 1998 (Edwards Report).
  - Review of Financial Regulation in the Caribbean Overseas Territories and Bermuda, October 2000 (KPMG Report).
- The Trust and Company Service Providers Working Group of the Offshore Group of Banking Supervisors (OGBS) prepared a Statement of Best Practice (finalized on September 6, 2002) rather than minimum standards because many jurisdictions do not regulate trust and company service providers or do not include them in anti-money laundering legislation.
- A draft methodology for assessment of the supervision of trust and company service providers was circulated by OGBS on October 11, 2002, but the IMF had not adopted it; the review used principles from the OGBS Statement of Best Practice as guidance.

### Institutional setting and market structure — British Virgin Islands (BVI)
- As at June 30, 2002, the BVI had 501,353 incorporated international business companies (IBCs).
- The actual number of active IBCs is estimated by the FSC and industry representatives to be between 300,000 and 400,000; many IBCs are struck off the register; no final figure will be available before the end of 2002.
- IBCs are incorporated under the International Business Companies Act, 1984 (IBC Act); the Registrar of Corporate Affairs is responsible for incorporation of IBCs and domestic companies under the Companies Act, 1985.
- IBCs are primarily used as holding companies for shares, trust property, and other assets; a smaller number are used for private investment activity.
- The IBC client base tends to come from the Far East, Europe, and Latin America.

### Legal framework for registered agents, company management, and trust business
- Section 38 of the IBC Act: an international business company must at all times have a registered office in the BVI maintained by the company or its registered agent.
- A registered agent (section 39 of the IBC Act) can be licensed:
  - either under the Company Management Act, 1990 (CM Act); or
  - or under the Banks and Trust Companies Act, 1990 (BTC Act) to carry on the business of company management.
- Company management (CM Act, and by reference in BTC Act) includes:
  - (a) the registration of companies under the Companies Act or the IBC Act;
  - (b) the provision of registered agent services for companies incorporated under the IBC;
  - (c) the provision of registered office services for companies incorporated under the Companies Act or the IBC Act;
  - (d) the provision of directors or officers for companies; and
  - (e) the provision of nominee shareholders of companies.
- A registered agent licensed under the BTC Act is automatically licensed to conduct trust business, defined in section 2(1) of the BTC Act as:
  - (a) acting as a professional trustee, protector or administrator of a trust or settlement;
  - (b) managing or administering any trust or settlement; and
  - (c) company management as defined in the CM Act.
- A license to conduct trust business is referred to as a General Trust License in section 10(1)(d) of the BTC Act. Not all General Trust License holders are registered agents.

### Licensing statistics and requirements (as of October 31, 2002)
- Licenses issued by the Banking and Fiduciary Services Division of the FSC:
  - 20 licenses for Company Management Services, under the CM Act;
  - 96 licenses for Restricted Trust Business under the BTC Act;
  - 92 licenses for General Trust Business under the BTC Act.
- Sixty-nine of the 92 General Trust Business license holders have also been registered as registered agents, which would bring the total number of registered agents (including the 20 CM Act licenses) to 89.
- Of the 89 registered agents, 88 belong to the BVI Association of Registered Agents.
- All CSPs are required to maintain a principal office in the BVI.
- The Banking and Fiduciary Services Division of the FSC consists of a Director, four regulators, and one administrative assistant.

### Types of trust licenses and restrictions
- A holder of a Restricted Trust License under section 10(1)(e) of the BTC Act:
  - may not conduct the business of company management, and therefore cannot be a registered agent;
  - may act as a professional trustee, protector, or administrator of a trust or settlement, and manage or administer any trust or settlement (i.e., trust business excluding company management), up to a maximum of 25 trusts, all of which must be listed in the original license application;
  - any addition or change to the list of trusts in the original license application requires a new application and a subsequent reassessment of the applicant.
- All licenses are valid until December 31 of the year in which they are issued and are renewable during January of the next year.

### Registry of Corporate Affairs — functions and practices
- The Registry of Corporate Affairs registers companies, limited partnerships, and trademarks; maintains and updates registers and files; ensures filed documents meet legislative requirements; responds to queries locally and overseas; provides services to registered agents; provides search information; and receives and accounts for all revenue.
- Companies may be beneficially owned by anyone; there are no stated restrictions on who can beneficially own a company, so a company may ultimately be beneficially owned by beneficiaries of a trust.
- IBCs can only be incorporated by registered agents who have due diligence obligations under the Anti-Money Laundering Code of Practice and related Guidance Notes.
- The Registrar is not able to give precise figures on how many IBCs that have the power to issue bearer shares actually do so.
- Amending legislation to the IBC Act to implement immobilization of bearer shares by requiring deposit with authorized custodians or recognized custodians has been finalized; an amendment to the BTC Act to define and establish authorized custodians will consequently have to be undertaken.
- The IBC Act allows directors to be individuals or companies and does not prohibit nominee directors; disclosure of true identity of directors to the Registrar is optional.
- The Registrar is not obliged to independently verify information submitted for registration or to ascertain beneficial ownership; available ownership information includes the share register which is publicly available under the Companies Act, 1985, and if filed, under the IBC Act.
- Where information is reasonably required for the FSC to discharge its functions, it has powers under section 30 of the FSCA to obtain information in possession of company management service providers; such information may only be disclosed by the FSC under the exceptions listed in section 29(2) of the FSCA.
- Under section 5 of the Financial Services (International Cooperation) Act, 2000, the FSC may direct any person, once satisfied the assistance requested is warranted, to furnish information or produce documents relevant to a foreign regulatory request.

### Supervision and compliance practices for CSPs
- The trust and company service providers industry is regulated and supervised under the IBC Act, Companies Act, CM Act, BTC Act, and FSCA.
- Company service providers licensed under the CM Act:
  - must submit annual returns within six months of the financial year end;
  - must furnish a Certificate of Compliance issued by an independent auditor to the FSC, in the terms of section 17 of the FSCA.
- The Certificate of Compliance requirement is to be introduced in proposed amendments to the BTC Act (BTC Act currently does not contain such a provision).
- General trust licensees are required to file annual audited statements within three months of their financial year’s end. Restricted trust licensees are exempt from this requirement.
- Capital and deposit requirements:
  - Company service providers under section 10 of the CM Act must maintain a minimum paid-up capital of US$25,000.
  - General trust licensees under section 12(3)(a) of the BTC Act must maintain a minimum fully paid-up capital of US$250,000.
  - Restricted trust licensees are exempt from minimum capital requirements.
  - Under section 12(3)(b) of the BTC Act, general trust licensees are required to make an investment deposit with the FSC.
- General trust licensees may not change their name or operate outside the BVI any subsidiary, branch, agency, or representative office without prior written approval of the FSC (section 18 of the BTC Act).
- Both the CM Act and the BTC Act require prior FSC approval for:
  - Transfer, issue, or disposal of shares or other interest;
  - Appointment of directors and senior officers;
  - Inclusion of a subsidiary on its license by a general trust licensee;
  - Change in name; and
  - Establishment of a subsidiary, branch, agency, or representative office outside the BVI.
- Both the CM Act and the BTC Act may require service providers to effect insurance against relevant risks.
- On-site inspection by the Banking and Fiduciary Services Division of all registered agents and licensees takes place on a regular basis and in accordance with a questionnaire covering the principles in the OGBS Statement of Best Practice; specific transaction testing is not yet fully implemented as part of on-site inspection or as a requirement for internal audit testing by reporting persons.

### Industry self-regulation
- The BVI Association of Registered Agents was established in 1996 and approved a Code of Conduct at an Extraordinary Meeting on December 20, 1996; the Code was revised in May 2002.
- Nearly all registered agents in the BVI, except one initially, are members of the Association.
- The Association and many members have implemented recommendations and requirements of the OGBS Statement of Best Practice and support anti-money laundering legislation and the proposed Draft International Business Companies (Amendment) Act, 2002 to introduce immobilization of bearer shares.

### Cross-border cooperation and information sharing
- Section 29 of the FSCA sets out restrictions on disclosure of information disclosed to the FSC and exceptions when disclosures are permitted.
- Section 29(2)(e) of the FSCA allows disclosure to enable or assist a foreign regulatory authority in a country or jurisdiction approved by the FSC Board, provided the receiving authority agrees not to transmit the disclosed information to any other person except with prior consent of the FSC Board.
- The FSC distinguishes between routine informal inquiries and formal inquiries for legal or regulatory assistance; formal requests are handled under the Financial Services (International Cooperation) Act, 2000 (FS(IC) Act), which sets criteria for exercise of compulsory powers and allows the FSC to require written undertakings, such as corresponding assistance and contribution toward costs.
- 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, not CSPs themselves.

*The review was conducted as an IMF assessment of the BVI regulatory and supervisory framework for company and trust service providers.*

### 119.     The extent to which the BVI Director of Banking and Fiduciary Services can hold

### 119.     The extent to which the BVI Director of Banking and Fiduciary Services can hold confidential information received from a regulating authority in another jurisdiction

### Legal constraints and confidentiality
- The ability of the BVI Director of Banking and Fiduciary Services to hold confidential information received from a regulating authority in another jurisdiction depends on:
  - the law in the jurisdiction providing the information; and
  - the conditions attached by the foreign regulating authority sharing the information.
- Section 29(1) of the FSCA provides that any information and disclosures made to the FSC or any of its organs and representatives in the course of discharging any function or duty or exercising any power under applicable legislation, is privileged and must not be disclosed except as provided in the circumstances enunciated in section 29(2) of the FSCA.

### Assessment of the FSC and the Banking and Fiduciary Services Division
- Since the coming into force on January 1, 2002 of the FSCA, and the establishment of the FSC as a regulatory authority independent from government, great strides have been made to ensure oversight of CSPs is undertaken in accordance with international best practice.
- When measured against the OGBS Statement of Best Practice, the FSC and its supervisory organs—in this case the Banking and Fiduciary Services Division—are:
  - structurally, and as far as methodology is concerned, in substantial compliance with the principles expounded in the Statement of Best Practice.
- An ongoing project of monitoring and measuring the Division’s policies against the methodology paper, issued by the OGBS as a follow-up to their statement of best practice, is currently underway in the Division.

### Staffing, training, and industry engagement
- The Banking and Fiduciary Services Division is staffed by individuals who have all previously worked in a banking or other financial services environment.
- Continued training and attendance by staff at international fora to keep abreast of pertinent regulatory developments are a high priority.
- All staff members bar one have attended the 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 the staffing capacity.
- The Division runs a summer internship program providing exposure and potential employment opportunities to BVI students.
- Industry representatives have expressed a high regard for the integrity and dedication of the Division in the execution of its statutory duties.

### Identified need for enhanced supervisory activity
- Given the imperative to undertake more detailed and structured on-site inspection of CSPs in view of its very large IBC client base, and in particular the need to assess compliance with the OGBS statement of best practice (including that action can be taken where there is evidence of noncompliance), specific enhancements are recommended.

### Recommended Actions (numbered as in source)
- 123. Consider engaging with the CSPs industry (perhaps through the offices of the ARA) and auditing firms to introduce a staff secondment program, both to and from the private sector.
  - Establish a modus operandi to overcome potential conflicts of interest and confidentiality issues.
  - Expected benefit: cross-pollination of skills and perspective to deepen understanding and cooperation between regulator and industry.
- 124. Devise a detailed three to five year recruitment and succession program for the purpose of implementing a long-term enhancement and deployment of skills strategy.
- 125. Implement specific transaction testing as part of both on-site inspection and as a requirement for internal audit testing by reporting persons.
  - Supervisory controls should pay particular attention to adherence to KYC requirements by eligible introducers.

### Authorities’ response
- The immobilization of bearer shares has been implemented.

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_Source: https://www.imf.org/-/media/files/publications/ofca/english/cr0493.pdf_