## cr0524 - Preface ## Source details **Canonical URL:** [cr0524 - Preface](https://www.imf.org/-/media/files/publications/ofca/english/cr0524.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr0524.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr0524.pdf.json) --- ### Preface and mission - At the request of the Turks and Caicos authorities, an IMF team conducted a Module 2 Offshore Financial Center (OFC) assessment of the Turks and Caicos Islands (TCI), February 3–14, 2003. - The mission assessed compliance of TCI regulatory and supervisory arrangements with internationally accepted standards and evolving good practices, with detailed assessments for banking, insurance, and the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regime. - Conclusions are based on information available as of the dates of the mission. - Mission team included John M. Abbott (Mission Chief, MFD) and specialists in LEG, MFD, insurance, AML/CFT, and an independent anti-money laundering expert whose portions are shown in italicized text in the assessment. ### Executive summary — supervisory framework (A) - Scope and structure - Supervisory structure covers banking, insurance, mutual funds, investment brokers, trusts, trustees, companies’ registration, and company service providers. - Banking sector - Consists of seven banks (note: elsewhere as of end-September 2002 there were eight licensed banks). - Total bank on-balance sheet assets were $480 million (as of end-September 2002). - The largest bank, the TCI branch of Barclays Bank, accounts for more than half of all banking assets. - Insurance sector - Specialized insurance in the form of producer-owned reinsurance companies (PORCs) is a major and growing offshore line of business. - Trusts and corporate vehicles - Trusts and company vehicles underpin an active trust and company service provider sector. - Identified weaknesses - Legal and institutional framework requires further strengthening; FSC transformed into a statutory body but numerous gaps remain. - Statutory structure for the FSC does not provide the effective operational independence required by international standards. - FSC underfunded and understaffed; regulatory compliance functions (including AML regulations compliance) are neglected due to inability to fill a vacant compliance officer position. - FSC has not formally been given responsibility for checking compliance with AML regulations across the entire financial sector. ### Executive summary — AML/CFT framework (B) - Vulnerabilities and casework - TCI’s economic and financial structure and corporate vehicles make it vulnerable to money laundering. - A variety of money laundering cases involving TCI have been prosecuted or are under investigation. - Legal framework and obligations - Legislation is comprehensive and formally covers almost all requirements of the FATF 40 plus 8 Recommendations. - Regulated sector required to establish procedures for customer identification, record-keeping, internal reporting, and employee training under the Proceeds of Crime Money Laundering Regulations (PCMLR). - PCMLR do not create a positive duty to report suspicious transactions (STRs); failure to report suspicious transactions is not established as a positive duty. - Operational arrangements and shortfalls - Financial Crimes Unit (FCU) of the police actively investigates financial crime and cooperates with overseas enforcement agencies. - Money Laundering Reporting Authority (MLRA) is not an operational body and does not qualify as an FIU. - Chronic staff shortages and lack of adequate powers at all levels have prevented effective regulatory enforcement in AML/CFT. - Recommendations include establishing an operational FIU, strengthening STR reporting and analysis, and strengthening police and court capacities for AML/CFT. ### Executive summary — cross-border information exchange and cooperation (C) - Supervisory cooperation - FSC cooperation with overseas financial supervisors is regulated by ordinance establishing gateways for information exchange; FSC generally has adequate powers to access supervisory information, except trust and company information is inhibited by confidentiality restrictions. - Overseas assistance requires authorization by the licensing committee, a procedure that risks compromising sensitive data. - Judicial and law-enforcement cooperation - Domestic laws enable a range of drug-related mutual legal assistance under CJICO 1998 and enforcement of overseas confiscation orders under PCODCTO 2001. - A bilateral U.K.-U.S. MLAT extended to TCI and U.K. statutory instruments on terrorism provide additional judicial cooperation basis. - FCU cooperates internationally via WCCIT membership but is not a member of the Egmont Group and has concluded no MOUs with other FIUs. ### Key recommendations (summary) - Financial Services Commission (FSC) - Revise FSCO to strengthen legal basis for operational independence of supervisors. - Reduce role of active private practitioners on the Board and Licensing Committee. - Authorize additional staff positions in banking, insurance, and AML/CFT compliance with sufficient funding. - Amend financial ordinances to give FSC authority to impose graduated sanctions. - Banking supervision - Augment staff and increase scope and frequency of risk-based on-site examinations focusing on internal controls, credit risk, market risk, capital, consolidated supervision, and AML/CFT compliance. - Amend BCO to give FSC authority to set prudential rules administratively and issue expanded guidelines using Basel Committee documents as appropriate. - Insurance supervision - Develop fully documented, risk-based on-site and off-site monitoring; publish internal procedures for discretionary exceptions; issue actuarial standards for valuation of liabilities. - AML/CFT - Establish an operational FIU meeting Egmont criteria. - Provide adequate staffing and resources to FSC for AML/CFT examinations; empower FSC to access customer files and impose penalties to ensure compliance. - Strengthen police legal authority and capacity and courts’ administration for AML/CFT enforcement. ### Report structure and volumes - Assessment organized in two volumes: - Volume I: overview and summary findings. - Volume II: detailed findings on compliance with Basel Core Principles for Effective Banking Supervision, IAIS Insurance Core Principles, and Methodology for Assessing Compliance with AML/CFT Standards. - Volume I sections include overview of financial system and summary findings on strengths and vulnerabilities. ### Overview of the financial system — selected statistics - Geography and demographics - TCI is an Overseas Territory of the United Kingdom; location: 145 kilometers north of Haiti and the Dominican Republic and 925 kilometers southeast of Miami. - Territory comprises some 40 islands with a total land area of 500 square kilometers. - Estimated population: 20,000. - Macroeconomic indicators - GDP per capita in 1998: $6,000 with an estimated growth rate of 5 percent. - Fiscal and monetary environment - TCI is a “zero tax” jurisdiction (no income, capital gain, wealth, gift, or inheritance tax); no tax treaties with any jurisdictions. - Major government revenue sources: stamp duties, customs receipts, and fees from offshore financial activities. - U.S. dollar used as local currency; no central bank or monetary authority; no restrictions on movement of funds. ### Financial services sector — structure and key figures - Banking (as of end-September 2002 and related developments) - As of the end of September 2002, there were eight licensed banks: six national banks and two offshore banks with no banking operations in TCI. - Three banks conduct largely retail banking and account for the bulk of bank assets and deposits. - Foreign exchange exposure limited due to U.S. dollar use; banks generally do not engage in derivative transactions. - Since September 2002, branches of Barclays Bank and of CIBC merged and restructured as TCI subsidiaries of a jointly owned Bahamas bank holding company. - The branch of the Bank of Nova Scotia is restructuring as a TCI subsidiary of a Bank of Nova Scotia holding company in The Bahamas. - Insurance (as of end 2002) - 3,013 licensed insurance companies, of which: - 2,857 are credit life, extended warranty, and mortgage guarantee PORCs; - 143 are captives; - 8 are local direct writers of general insurance; - 5 are long-term insurance companies. - PORCs typically owned by U.S. retailers provide reinsurance for credit life and product warranty insurance. - Trusts, company managers, mutual funds, and companies - 22 licensed trustees (5 restricted licenses; 17 nonrestricted). - 30 licensed company managers. - 1 licensed mutual fund. - 17,755 companies in total, including: - 13,952 exempt companies; - 3,509 ordinary companies; - 199 foreign companies; - 75 limited-liability companies; - 20 limited partnerships. - PORCs account for 22 of the exempt companies. ### Governance, legal framework, and financial supervision — institutional setting - Political and legal framework - TCI is an internally self-governing overseas territory of the United Kingdom with a ministerial system; the governor is appointed by the Crown and retains responsibility for internal security, external affairs, defense, the public service, and offshore finance. - Legislature consists of 19 persons (13 elected); executive council consists of 9 members: the governor, 6 ministers, and 2 ex officio members (chief secretary and attorney general). - Court system: magistrate’s court, supreme court, court of appeal (all sit in TCI), and Privy Council in London as final appellate body. - FSC creation, mandate, staffing, and funding - FSC established as a statutory body in May 2002; board of directors composed of 7 to 9 persons including permanent secretary, finance, and managing director as ex officio members; other directors appointed by the governor. - Under Financial Services Commission Ordinance 2001, a licensing committee (ex officio board members plus appointees) exercises executive responsibility for licensing and supervision. - FSC staff: 17 persons with an additional 5 positions currently vacant. - Managing director has administrative responsibility and is also superintendent of banking and mutual funds; deputy managing director is superintendent of trustees and company managers with no staff specifically assigned. - Insurance supervision: superintendent of insurance assisted by one administrative officer and one clerical assistant. - FSC funding under transitional arrangements: subventions from government budget; FSC Ordinance fee-funding provision not enacted; employee compensation aligned with civil service salaries and subject to government approval. - Licensing committee meets approximately once per month; currently 3 non-ex officio members are practitioners active in the financial industry; frequent recusals invoked under disclosure of interest policy. - Day-to-day FSC operations diffused; on-site prudential bank examinations limited and unsystematic; no program of on-site insurance examinations; targeted AML/CFT compliance examinations pending recruitment of a compliance officer. ### Legal and institutional framework for AML/CFT - Legislative framework and guidance - PCMLR adopted in 1999 established customer identification, record-keeping, internal reporting, and employee training requirements; PCMLR do not create a positive duty to report STRs. - PCMLR supported by nonbinding AML guidance notes issued jointly by FSC and MLRA. - MLRA designated to receive STRs but is not an operational FIU. - FCU handles STRs and investigates money-laundering offenses in absence of a centralized FIU. - Criminal and confiscation provisions - Multiple statutes criminalize money laundering; confiscation provisions exist but are limited to value orders; civil forfeiture not available. - 2001 amendment to PCO (PCODCTO) enables recognition and enforcement of overseas confiscation orders. - Professional privileges for lawyers are broad and may adversely impact ML investigations. - Law-enforcement and intelligence - FCU is primary law-enforcement agency for STRs and serious financial crime; FCU has good working relations with AG’s chambers and foreign authorities. - Intelligence gathering and cross-border exchanges would be improved by creation of a formal FIU and Egmont Group participation. ### System-wide regulatory issues and recommendations on FSC independence - Key findings - FSC statutory establishment has not achieved operational independence recommended by KPMG and international standards. - Private practitioners constitute a majority of both the board and licensing committee, posing risk of regulatory capture; recusals are common. - Governor retains authority to instruct FSC; government influences FSC via budgetary restrictions and vetting of licensing committee decisions by executive council. - Mission recommendations to enhance independence - Limit active private practitioners to a minority on the board and exclude them from the licensing committee. - Consider inviting experienced nonresidents to join the board and licensing committee. - Alternatively abolish the licensing committee and replace with a strong executive committee under the managing director. - Implement FSC ordinance fee-funding provisions via formal arrangement with government to ensure adequate funding. ### Implementation weaknesses and operational priorities - Implementation weaknesses - Financial ordinances give FSC weak enforcement powers; sanctions largely limited to revoking licenses or pressing criminal charges. - Inadequate and unreliable funding undermines staff recruitment and supervisory activities. - Implementing regulations and supervisory guidance yet to be developed for much new legislation. - No systematic monitoring for AML/CFT compliance; prudential regulation of banks requires more attention than current staffing allows. - Recommended immediate actions - Fill vacant compliance officer position as immediate priority. - Recruit additional 5 staff proposed in budget by mid-2003. - Delegate day-to-day banking supervision to a qualified professional with adequate staff to carry out on- and off-site supervision per Basel Principles. - Amend financial ordinances to provide FSC power to impose graduated administrative sanctions. - Consider contracting qualified examiners as interim measure to begin targeted AML/CFT compliance examinations and exploit synergies with external auditors. ### Basel Core Principles (BCP) — main supervisory findings and recommended actions - Overall assessment - Prudential regulations and their implementation need improvement; supervisory independence and poor implementation are dominant weaknesses. - Selected CP findings and actions - CP 1 (Objectives, autonomy, powers, resources): Lack of operational independence (CP 1(2)); licensing procedures not matching legal provisions (CP 1(3)); need to harmonize legal framework (CP 1(4)). - CPs 2–5 (Licensing and structure): Licensing, ownership, and structuring criteria largely satisfied; weaknesses in consolidated supervision (CP 5). - CPs 6–15 (Prudential rules): Serious weaknesses in credit policies, loan evaluation and provisioning, large exposures limits, connected lending, internal control, and AML (CP 7, CP 10, CP 13, CP 14, CP 15). - CPs 16–20 (Methods of ongoing supervision): Substantial resource deficit and major on-site supervision weakness; AML supervision is a supervisory gap. - CP 21 (Information requirements): FSC compliant. - CP 22 (Formal powers): Authority generally adequate but remedial actions range limited; consider giving FSC additional powers on revision of BO and FSCO. - Recommended actions (selected) - Limit private practitioners on board/licensing committee; consider nonresident members or abolition of licensing committee. - Give FSC power to set prudential standards administratively. - Develop comprehensive on-site credit risk program; recruit experienced staff and circulate Basel Committee guidance on credit risk. - Require lending to connected parties at arm’s length and give LC discretion to deduct such loans from capital. - Reinforce internal control framework and involve external auditors; develop on-site supervision methodology and require auditor review of key supervisory returns. ### IAIS Insurance Core Principles assessment — industry structure and supervisory findings - Industry profile and PORCs - Insurance industry established in 1989; PORCs are dominant: 2,857 out of 3,013 licensed insurers. - Licensing of PORCs continued at about 200 per annum despite 2002 U.S. scrutiny slowdown. - PORC capital requirement is $5,000 (no written policy); PORCs historically exempt from many reporting and prudential requirements. - PORC exemptions and regulatory changes - PORCs previously exempt from filing audited or actuarial statements, annual financial reports, having local insurance managers, meeting capital requirements for other reinsurers, filing a solvency statement, placing a deposit with FSC or having TCI bank accounts, and paying annual license fees for credit life PORC. - In response to KPMG, FSC introduced requirement to file annual financial statements and to impose an annual fee of $100; 2002 IO amendments require PORCs to file annual financial statements effective by year-end 2003. - Supervisory capacity and actuarial standards - Insurance supervision focuses on licensing and filings; staff resources do not permit on- and off-site supervision. - No specific actuarial standards; SOI requires an actuarial report for life insurers once every three years but not for general insurers; no actuaries in TCI. - Recommendation: external auditors required to provide an annual letter from their consulting actuary attesting adequacy of technical provisions until legislation and resources are improved. - Legal, governance, market-conduct, and sanctions - IO and FSC Ordinance provide framework for licensing, supervision, sanctions and legal protection; SOI has authority but insufficient operational independence and resources. - Regulatory transparency is inadequate: no FSC website, no annual report produced to date. - Recommendations include issuing corporate governance standards, internal controls guidance, clearer procedures for exemptions, market-conduct directives, and a broader range of administrative remedies. ### Confidentiality, information sharing, and recommended insurance actions - Confidentiality - FSC has adopted confidentiality requirements but must address information sharing with law-enforcement agencies; IO and confidentiality regulations restrict disclosure for exchange-control and income-tax purposes. - Authorities cite Confidential Relationships Ordinance as gateway for law enforcement to obtain information when required. - Recommended insurance action plan (selected highlights) - Amend FSC Ordinance to bar industry representatives from Licensing Committee; eliminate requirement for SOI to obtain LC authorization for funding investigations; provide adequate qualified staff and publish annual report and guidelines. - Require business plans to include investment policy; issue outsourcing directive to ensure SOI access to third-party providers. - Develop on-site examination programs, extend SOI authority to inspect third parties, broaden remedial powers, enforce timely filing of audited financials, implement PORC annual statements YE 2003, and require management-signature compliance statements. ### AML/CFT assessment (FATF 40+8) — main findings and gaps - Assessment scope and date - Assessment based on AML/CFT legislation, FSC/MLRA guidance notes, and discussions with officials; based on information available as of February 13, 2003. - Main findings - TCI formally complies with the majority of the FATF 40+8 Recommendations but significant shortcomings remain in key areas, notably Recommendations 2, 14, 15, 20, 21, and 26. - Shortcomings include lack of clear requirements for beneficial owner verification, STR reporting, monitoring unusual or complex transactions, effective supervision, and confidentiality restrictions preventing supervisory access to client information. - Conclusion: TCI needs a consolidated legal framework, effective supervision, an FIU meeting Egmont criteria, adequate staff and resources, and a collaborative industry to reduce misuse risk. ### Criminalization, confiscation, and FIU recommendations - Criminalization - ML criminalized broadly consistent with Vienna and Palermo Conventions; ML offenses extend to proceeds from all serious (indictable) offenses; mens rea: “knows or has reasonable cause to suspect”; self-laundering covered; corporate liability possible. - Recommendation: harmonize and unify ML offenses into a single statute eliminating drug/non-drug distinctions. - Confiscation and monitoring orders - Confiscation available via value orders; civil forfeiture not available. - Recommendation highlights: provide for confiscation of laundered property even if intermingled; extend proceeds definition to property “derived from or obtained through” offences; introduce civil forfeiture; provide tracing powers including account monitoring orders; protect bona fide third parties; declare contracts designed to frustrate confiscation voidable. - FIU and STRs - No FIU meeting Egmont criteria; MLRA functions as a coordination body without staff; FCU acts de facto FIU but is not an Egmont member. - STR processes unclear; PCMLR does not explicitly compel STR filing for all regulated entities; reporting arrangements inconsistent. - Recommendations: establish an Egmont-compatible FIU; compel all regulated entities to report suspicious transactions; ensure FIU access to necessary information and authority to disseminate to counterparts and impose penalties for nonreporting. - FCU resourcing - FCU staffing: one detective inspector, two sergeants, and one constable to investigate all major fraud, STRs, ML matters, and requests for assistance; assessed as inadequate. - Recommendation: add an additional four officers and appoint a director of the FIU; attach an on-staff attorney specializing in ML and asset forfeiture prosecutions to FCU. ### Preventive measures, supervisory authority, and identified regulatory gaps - Scope of preventive measures - Preventive measures applicable to banking, insurance, mutual funds, corporate and trust services, and other “relevant financial business” (including money remitters, investment dealers, and credit card issuers) but not currency exchange offices. - Supervisory authority and limitations - FSC licenses and supervises banks, insurance, mutual funds, and company/trust services but cannot impose fines or administrative penalties; FSC lacks explicit legal powers to supervise AML/CFT compliance and enact administrative AML regulations. - Oversight impaired by inadequate resources and confidentiality laws that prevent FSC access to customers’ personal information except in banking. - PCMLR preventive measures and explicit exemptions - PCMLR contain mandatory procedures on customer identification, employee training, record keeping, and internal reporting—but: - STR reporting system underdeveloped; legal duty to report STRs not clearly mandated except in FT cases. - No obligation to obtain evidence of customer identity when introduced by another regulated entity. - Record-keeping requirement limited to being able to obtain identification evidence rather than keeping copies. - No provisions on minimum information for wire transfers; opening anonymous accounts not prohibited by law. - No provision for ongoing monitoring of accounts; guidance notes nonmandatory. - Branches’ AML controls not necessarily applicable to foreign branches/subsidiaries. - No employment screening (“fit-and-proper”) standard for employees in regulated entities. - Recommendations for nonprudential sectors - Subject money remitters to registration; effectively enforce investment dealers and money remitters AML requirements. - Consider AML/CFT measures for cash-intensive businesses (gambling, jewelry stores, real estate brokers, currency exchanges) including mandatory STRs, prohibiting cash purchases above thresholds, and registration for currency exchanges. ### Recommended action plan to improve FATF compliance (selected) - Scope and harmonization - Harmonize and unify ML provisions; update PCMLR and provide for adequate penalties including license revocation for breaches. - Provisional measures and confiscation - Amend PCO to permit confiscation of laundered property and instrumentalities; provide tracing powers and consider civil forfeiture. - Customer ID, record-keeping, and wires - Reduce/eliminate exemptions to identification requirements; prohibit anonymous accounts; allow supervisory access to all client information. - Make originator/recipient information mandatory on funds transfers. - STRs and FIU - Introduce mandatory STR reporting duty; lower standard of suspicion to include unusual transactions; create an FIU meeting Egmont criteria and empower MLRA to define STR format and give directions to financial institutions. - Supervisory powers and enforcement - Empower FSC with authority, mandate, and resources to conduct on-site and off-site AML/CFT supervision and to enact mandatory AML regulations. ### Authorities’ response and implementation intentions (selected) - FSC governance and resources - Authorities noted IMF concerns and proposed legislative provisions to give FSC power to set prudential standards administratively and obtain access to client information without a court order. - FSC appointed a Bank Examiner and a Compliance Officer after draft report publication; FSC staff recruitment and budget proposals for FY 2003/04 include authority to fill six positions. - Banking and insurance reforms - FSC recruited a bank/trust examiner and issued Basel Committee credit-risk guidance to banks. - FSC engaged CARTAC to prepare a bank supervisory manual and insurance manual; CARTAC assistance and CALP training planned. - PORCs: FSC to implement PORC annual financial statements filing from year ending 2003 and introduce an annual fee of $100. - AML/CFT reforms and international cooperation - TCI concurs with establishing an Egmont-compliant FIU and requiring mandatory STR reporting to the FIU. - TCI will seek legislative approval to permit supervisory access to client information and to make mandatory identity verification, record-keeping, ongoing monitoring, and inclusion of originator information on wire transfers. - TCI will consider expanding CJICO to all indictable offences and pursue extensions of MLATs and mutual assistance; government will draw recommendations to attention of U.K. Government where required. *Source: IMF Module 2 assessment of the Turks and Caicos Islands (February 3–14, 2003).* ### Preface................................................................................................................. ### cr0524 - Preface ### Preface and Mission - At the request of the Turks and Caicos authorities, an IMF team conducted a Module 2 Offshore Financial Center (OFC) assessment of the Turks and Caicos Islands (TCI), February 3–14, 2003. - The mission assessed the extent to which regulatory and supervisory arrangements for the TCI financial sector comply with internationally accepted standards and evolving good practices, with detailed assessments for banking, insurance, and the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regime. - Conclusions of the assessment are based on information available as the dates of the mission. - Mission team: - John M. Abbott (Mission Chief, MFD) - Peter Csonka (LEG) - Marcel Maes (Consultant, MFD) - Azeem Motani (Insurance Consultant, MFD) - Ernesto Lopez (AML/CFT Consultant, MFD) - Emma Warrack (Administrative Assistant, MFD) - Basil Collie (Drug Enforcement Unit, Royal Bahamas Police Force) participated as the independent anti-money laundering expert (IAE); portions attributable to the IAE are shown in italicized text in the assessment. ### Executive Summary — Supervisory Framework (A) - The supervisory structure covers banking, insurance, mutual funds, investment brokers, trusts, trustees, companies’ registration, and company service providers. - Banking sector: - Consists of seven banks (noting elsewhere that as of the end of September 2002 there were eight licensed banks). - The banking sector is small but pivotal to TCI’s financial structure. - Insurance sector: - Specialized insurance in the form of producer-owned reinsurance companies (PORCs) is a major and growing offshore line of business. - Trusts and corporate vehicles underpin an active trust and company service provider sector. - Strengthening needs identified: - Legal and institutional framework requires further strengthening. - FSC transformed into a statutory body with additional autonomous powers, but numerous gaps remain—many involving inadequate powers for supervisors. - Statutory structure for the FSC does not provide the effective operational independence required by international standards. - Implementation weaknesses: - FSC is underfunded and understaffed. - Banking supervision resources should be augmented given financial and reputational risks. - Regulatory compliance functions, including AML regulations compliance, are neglected due to inability to fill a vacant compliance officer position. - FSC has not formally been given responsibility for checking compliance with AML regulations across the entire financial sector. - The report contains numerous recommendations to address these weaknesses. ### Executive Summary — Anti-Money Laundering Framework (B) - Vulnerabilities and casework: - TCI’s economic and financial structure and corporate vehicles make it vulnerable to money laundering. - A variety of money laundering cases involving TCI have been prosecuted or are under investigation. - Legal framework: - Legislation is comprehensive and formally covers almost all requirements of the FATF 40 plus 8 Recommendations. - Regulated sector required to establish and maintain procedures for customer identification, record-keeping, internal reporting, and employee training. - Failure to report suspicious transactions is an offense; a positive duty to report such transactions has not been established. - Operational arrangements: - Financial crimes unit of the police is actively involved in investigating financial crime and cooperates closely with overseas enforcement agencies. - Professional privileges enjoyed by lawyers are relatively broad and may adversely impact ML investigations. - The Money Laundering Reporting Authority (MLRA) is not an operational body and does not qualify as an FIU. - TCI legislation provides adequately for forfeiture and confiscation of proceeds of crime. - Judicial system and courts administer the AML/CFT regime efficiently. - Implementation shortfalls: - Chronic staff shortages and lack of adequate powers at all levels have prevented effective regulatory enforcement in AML/CFT. - Lack of compliance checking is a fundamental weakness in preventive measures. - FSC has responsibility for oversight but has not been given formal responsibility for ensuring compliance with AML regulations and lacks qualified staff for this function. - Recommendations include establishing an operational FIU, strengthening STR reporting and analysis, intelligence gathering, and criminal justice administration for AML/CFT. ### Executive Summary — Cross-Border Information Exchange and Cooperation (C) - Supervisory cooperation: - FSC cooperation with overseas financial supervisors is regulated by specific ordinance establishing gateways for information exchange. - FSC generally has adequate powers to access supervisory information, including client information of regulated firms. - Exception: access to information related to trusts and companies is inhibited by confidentiality restrictions. - Overseas assistance requires authorization by the licensing committee, a procedure that risks compromising sensitive data. - Judicial and law-enforcement cooperation: - Domestic laws enable a range of drug-related mutual legal assistance under the CJICO 1998 and enforcement of overseas confiscation orders under the PCODCTO 2001. - A bilateral U.K.-U.S. MLAT, extended to TCI, and various U.K. Statutory Instruments dealing with financing of terrorism in Overseas Territories provide additional basis for judicial cooperation. - Overseas mutual assistance requests are channeled through the governor and the attorney general’s chambers (non-U.S.-related) or the chief magistrate (U.S.-related). - Law enforcement assistance can be obtained via ICPO-Interpol channels or informal arrangements. - FCU cooperates with international investigators through membership in the White Collar Crime Investigation Team (WCCIT), but: - FCU is not a member of the Egmont Group and has concluded no MOUs with other FIUs. - Networks for information exchange are limited, particularly with administrative FIUs. - No formal arrangements authorize TCI law-enforcement authorities to conduct cooperative investigations or coordinated seizure and forfeiture actions with other jurisdictions, although such cooperation is reported to exist. ### Key Recommendations (summarized from Table 1) - Financial Services Commission (FSC) - Consider revising the FSCO to strengthen the legal basis for operational independence of supervisors. - Reduce the role of currently active private practitioners on the Board of FSC and on the Licensing Committee. - Authorize additional staff positions in banking, insurance, and AML/CFT compliance with funding sufficient to recruit and retain qualified staff. - Amend financial ordinances to give FSC authority to impose graduated sanctions consistent with the severity of infractions. - Banking Supervision - With additional staff, increase scope and frequency of on-site, risk-based examinations focusing on internal controls, credit risk, market risk, capital, consolidated supervision, and AML/CFT compliance; exploit synergies with external auditors. - Amend BCO to give FSC authority to set prudential rules administratively and issue expanded guidelines and best practice papers using Basel Committee documents as appropriate. - Insurance Supervision - With additional resources, develop a fully documented, risk-based framework for on-site and off-site monitoring of licensed insurers. - Develop and publish internal procedures establishing criteria by which the Insurance Ordinance (IO) will exercise discretion to grant exceptions to norms for licensing, capital, solvency, and prudential rules. - Issue actuarial standards for valuation of liabilities. - AML/CFT - Establish an operational Financial Intelligence Unit. - Provide adequate staffing and resources to FSC to enhance on-site AML/CFT examinations, with particular attention to internal controls, customer identification, account monitoring, and fit and proper tests. - Empower FSC to have access to all supervised institutions’ customer files and to impose penalties to ensure compliance with AML/CFT regulations. - Strengthen legal authority and capacity of the police to analyze and investigate AML/CFT crimes and the courts to administer and enforce AML/CFT legislation. ### Introduction and Report Structure - The report presents findings of the Module 2 assessment of TCI and is organized in two volumes: - Volume I: overview and summary findings. - Volume II: detailed findings on compliance with Basel Core Principles for Effective Banking Supervision, IAIS Insurance Core Principles, and the Methodology for Assessing Compliance with AML/CFT Standards. - Volume I organization: - Section II: overview of the financial system and the regulatory and supervisory framework. - Section III: summary findings on strengths and vulnerabilities in the financial system. ### Overview of the Financial System — Background (selected statistics) - Geography and demographics: - TCI is an Overseas Territory of the United Kingdom. - Location: 145 kilometers north of Haiti and the Dominican Republic and 925 kilometers southeast of Miami. - Territory comprises some 40 islands with a total land area of 500 square kilometers. - Estimated population: 20,000. - Macroeconomic indicators: - GDP per capita in 1998: $6,000 with an estimated growth rate of 5 percent. - Fiscal and monetary environment: - TCI is a “zero tax” jurisdiction (no income, capital gain, wealth, gift, or inheritance tax). - No tax treaties with any other jurisdictions. - Major government revenue sources: stamp duties, customs receipts, and fees from offshore financial activities. - U.S. dollar used as local currency. - No central bank or monetary authority. - No restrictions on movement of funds into or out of TCI. ### Overview of the Financial System — Financial Services Sector (structure and key figures) - General: - Financial services include banking, specialized insurance, trusts, and corporate structures. - Incorporation and licensing of PORCs is the most dynamic portion of offshore financial business; banking business has been static and is undergoing consolidation. - Vast majority of transactions conducted with and between nonresidents; many banking clients have economic attachment to the island. - Banking (as of end of September 2002 and related developments): - As of the end of September 2002, there were eight licensed banks: six national banks and two offshore banks with no banking operations in TCI. - Three banks conduct a largely retail banking business and account for the bulk of bank assets and deposits. - Total bank on-balance sheet assets were $480 million. - Foreign exchange exposure is very limited due to use of the U.S. dollar. - TCI banks generally do not engage in derivative transactions. - The largest bank, the TCI branch of Barclays Bank, accounts for more than half of all banking assets. - Branches of two Canadian banks provide retail services. - Two smaller banks specialize in private client business and one specializes in wholesale banking. - Two offshore banks carry on banking business in Panama and Venezuela, respectively. - Since September 2002, branches of Barclays Bank and of CIBC merged and restructured as TCI subsidiaries of a jointly owned Bahamas bank holding company. - The branch of the Bank of Nova Scotia is in the process of restructuring as a TCI subsidiary of a Bank of Nova Scotia bank holding company in The Bahamas. - Insurance (as of end 2002): - 3,013 licensed insurance companies, of which: - 2,857 are credit life, extended warranty, and mortgage guarantee PORCs; - 143 are captives; - 8 are local direct writers of general insurance; - 5 are long-term insurance companies. - No statistics available on total assets of the insurance sector or indicators of financial performance. - PORCs typically owned by U.S. retailers provide reinsurance for credit life and product warranty insurance; the insurance is underwritten by a U.S. direct writer, who reinsures all or most of the risk with the TCI reinsurance company owned by the producer. - Trusts, company managers, mutual funds, and companies: - 22 licensed trustees (5 restricted licenses; 17 nonrestricted). - 30 licensed company managers. - 1 licensed mutual fund. - 17,755 companies in total, including: - 13,952 exempt companies that are not permitted to do business in TCI; - 3,509 ordinary companies; - 199 foreign companies; - 75 limited-liability companies; - 20 limited partnerships. - No information collected on business activities of exempt companies; many are understood to be asset-holding vehicles for corporations and individuals. - PORCs account for 22 of the exempt companies. *Source: IMF Module 2 assessment of the Turks and Caicos Islands (February 3–14, 2003).* ### 6. TCI is an internally self-governing overseas territory of the United Kingdom with a ### TCI: governance, legal framework, and financial supervision ### Political and legal framework - TCI is an internally self-governing overseas territory of the United Kingdom with a ministerial system of government. - The governor, appointed by the Crown, runs the government and retains responsibility for internal security, external affairs, defense, the public service, and offshore finance. - The governor appoints the judiciary, the attorney general, and the chief secretary. Under legislation adopted in 2001, the Financial Services Commission (FSC) reports directly to the governor. - The legislature consists of 19 persons, of whom 13 are elected. - Executive council composition and responsibilities: - Executive council consists of 9 members: the governor, 6 ministers, and 2 ex officio members (the chief secretary and the attorney general). - The chief minister is also the minister of finance, development, and commerce. - Legal system and courts: - Legal system based on the English model but with a written constitution protecting fundamental rights and freedoms. - Most law derives from ordinances passed in the legislative council and from legislation specially extended to TCI by the United Kingdom; common law applies where statutory law does not apply or requires interpretation. - Court system comprises the magistrate’s court, supreme court, court of appeal (all sit in TCI), and the Privy Council in London as the final appellate body. - The supreme court has the same jurisdiction and powers as the high court of England. - The legal profession is represented by a statutorily constituted bar association. ### Supervisory structure and FSC organization - Creation and mandate: - FSC established as a statutory body in May 2002; previously a department within the ministry of finance. - As a statutory body, FSC has a board of directors composed of 7 to 9 persons, including the permanent secretary, finance, and the managing director of the FSC as ex officio members; other directors appointed by the governor. - Under the Financial Services Commission Ordinance 2001, executive responsibility for licensing and supervision is exercised by a licensing committee comprised of the ex officio board members and one or more board-nominated appointed members. - FSC acts as a single regulator responsible for licensing and supervision of all institutions licensed under TCI financial legislation covering banking, insurance, trusts, trustees, mutual funds, investment dealers, company managers, and company registration. Each function has a superintendent accountable to the board via the licensing committee. - Staffing and resources: - FSC staff: 17 persons with an additional 5 positions currently vacant. - The managing director has administrative responsibility for FSC and is also superintendent of banking and mutual funds. - The deputy managing director is superintendent of trustees and company managers with no staff specifically assigned to support supervisory functions. - Insurance supervision: superintendent of insurance (SOI) assisted by one administrative officer and one clerical assistant. - Companies’ registration: seven staff, including the registrar of companies. - Registrar of trade marks assisted by one staff. - Legal support provided by the attorney general’s chambers as needed. - Funding and budget: - FSC Ordinance provides that FSC will be funded by fees, charges or penalties payable under the financial services ordinances, but this section has not been enacted. - Under transitional arrangements, FSC is being funded by subventions from the government budget; FSC’s budget is determined by the government. Employee compensation rates aligned with civil service salaries and subject to government approval. - Staff recruitment slow and senior-level turnover high, reportedly because salaries are noncompetitive. - Budget proposed for FY 2003/04 (yet to be approved) includes the authority to fill six positions. - Decision-making and operational practice: - Licensing committee meets approximately once per month and is responsible for granting/withdrawing licenses and virtually all nonroutine supervisory matters. - Currently 3 non-ex officio members of the licensing committee are practitioners active in the financial industry. The committee has a disclosure of interest policy requiring members to recuse themselves when interests conflict; recusal is invoked frequently. - Decisions by the licensing committee are transmitted to the board of directors for confirmation and, as practice, significant decisions are referred to the executive council for clearance. The board is accountable to the governor. The governor may exempt parties from licensing requirements, instruct FSC to investigate a licensee, or exchange information with overseas authorities. - Day-to-day FSC staff operations are diffused across activities; insurance staff focus on routine licensing and filings; drafting of implementing regulations and standardized operating procedures for supervisory activities remain to be developed. - On-site prudential examination of banks is limited in scope and unsystematic. No program of on-site examinations of insurance licensees has yet been initiated; on-site examination of other nonbank licensed firms is very limited. Bank returns are subject to a new program of off-site monitoring of quantitative returns. Reviews of filings by insurance firms, trust companies, and company managers appear limited. - FSC has not been given explicit responsibility for ensuring compliance with the anti-money laundering regulations, but oversees AML as part of general regulatory compliance. Targeted examination for AML/CFT compliance is in abeyance pending recruitment of a compliance officer. ### Legal and institutional framework for AML/CFT - Legislative framework and guidance: - Proceeds of Crime Money Laundering Regulations (PCMLR) adopted in 1999 established requirements for customer identification, record-keeping, internal reporting, and employee training. PCMLR do not create a positive duty to report suspicious transactions (STRs); AML obligations are underpinned by an offense of failing to have procedures and training set up and maintained. - PCMLR supported by nonbinding AML guidance notes issued jointly by the FSC and the Money Laundering Reporting Authority (MLRA). MLRA designated under PCMLR as the body that receives STRs but is not an operational body and does not meet Egmont Group requirements to qualify as an FIU. - Financial crimes unit (FCU) of the police deals with STRs and investigates money-laundering offenses in the absence of a centralized FIU. - Criminal and confiscation provisions: - Several overlapping statutory provisions criminalize money laundering. Comprehensive provisions exist for confiscation or forfeiture of proceeds of crime but are limited to value orders. TCI does not have a civil forfeiture regime. - 2001 amendment to the PCO (the PCODCTO) enabled recognition and enforcement by TCI of overseas confiscation orders made in designated countries or territories. - Production orders are available to help ML and FT investigations; account-monitoring orders can only be used for FT investigations. Professional privileges enjoyed by lawyers are relatively broad and may impact adversely on ML investigations. - Law-enforcement and intelligence: - Financial crimes unit (FCU) of the criminal investigations division (CID) is the primary law-enforcement agency for receiving, analyzing, and investigating serious financial crime, STRs, and foreign requests for assistance. - FCU has very good working relations with the attorney general’s chambers, other law-enforcement agencies, banks, financial institutions, and foreign law-enforcement agencies; case reviews show notable success, including assistance to overseas authorities. - Intelligence gathering and cross-border information exchanges would be improved significantly by creation of a formal FIU and participation in the Egmont Group. ### Recent regulatory developments and reforms - Response to external review: - Major changes introduced over the past two years in response to international pressures and the KPMG report of October 2000. KPMG recommended operational independence and strengthened authority for FSC, professionalization of prudential supervision, liberalizing supervisor access to client information, and systematic monitoring and enforcement of AML requirements. The report contained numerous recommendations requiring new legislation or amendments. - In response on February 8, 2001, the TCI government undertook to introduce new or significantly amended legislation across banking, insurance, securities, trustees, mutual funds, and company service providers, and to establish a formal framework for monitoring compliance with Proceeds of Crime (Money Laundering) Regulations. Not all KPMG recommendations were accepted or addressed in the initial legislative program; further measures were anticipated. - Since the KPMG report, 22 individual pieces of financial sector legislation, regulation, or guidance have been adopted by TCI. ### System-wide regulatory issues and supervisory independence - Key findings: - Establishment of FSC as a statutory body has not achieved the operational independence recommended by KPMG and called for by international standards. - Private practitioners constitute a majority of both the board of directors and the licensing committee, posing the risk of regulatory capture—particularly concerning given the licensing committee’s central role. This structure undermines the authority of the managing director and professional FSC staff; recusals by board and committee directors are common. Even absent conflicts, privileged access to competitive information by private board/committee members is a concern in the small TCI financial community. - The governor retains authority to give instructions to FSC; government exerts active influence via budgetary restrictions and the practice of vetting key licensing committee decisions by the executive council. - Mission recommendations to enhance FSC independence: - Currently active private practitioners should be limited to a minority of positions on the board of directors and excluded from the licensing committee. - Consider inviting experienced nonresidents to join the board and serve on the licensing committee (a practice followed in the Crown Dependencies). - Alternatively, consider abolishing the licensing committee and replacing it with a strong executive committee under the managing director, reporting to the board for policy and budgetary matters. - Implement the FSC ordinance provisions regarding funding of FSC through fees paid by the financial sector based on a formal arrangement between the government and FSC to ensure FSC receives an adequate share of fees to fund supervisory practices that meet international standards. ### Implementation of financial supervision: capacity and reforms needed - Findings on implementation weaknesses: - Recent legislation strengthened the legal framework, but implementation needs substantial strengthening. - Governance structure lodges executive decision making in a non-executive licensing committee, most of whose members are active practitioners, providing little autonomy to the managing director and inhibiting supervisory initiative. - Financial ordinances give FSC weak enforcement powers; sanctions largely limited to revoking a license or pressing criminal charges. - Inadequate and unreliable funding undercut FSC’s ability to recruit and retain staff and to initiate supervisory activities beyond barebones budget authorization. - FSC staff devoted to ongoing supervision (as distinct from routine licensing and registration) is inadequate; many basic supervisory functions are neglected or incomplete due to staff turnover or lack of staff. Implementing regulations and supervisory guidance have yet to be developed for much new financial legislation. No systematic monitoring for AML/CFT compliance is being carried out. Prudential regulation of banks requires more time and attention than the banking superintendent can provide given other administrative responsibilities. Middle management and technical skills need augmentation. - Recommended actions: - The vacant position of compliance officer should be filled with a qualified professional as a matter of immediate priority. - The additional 5 staff proposed in the budget should be recruited by mid-2003. - Day-to-day responsibility for banking supervision should be delegated to a qualified professional with adequate staff support to carry out on- and off-site supervision at the standard called for in the Basel Principles. - FSC should be organized along functional lines independent of the statutory requirement for individual superintendents to be assigned responsibility for administration of each financial ordinance. - Financial ordinances should be amended to give FSC powers to impose graduated administrative sanctions consistent with the severity of the issue to ensure compliance with supervisory requirements. - As an interim measure while structural changes are implemented, FSC should consider using its authority to appoint investigators to engage one or more qualified contractual examiners to begin targeted AML/CFT compliance examinations. FSC should also consider creating greater synergies with external audit work already conducted in licensed firms. ### Implementation of the AML/CFT regime: institutional gaps and priorities - Institutional roles and gaps: - Relevant institutions: (1) FSC—regulatory and supervisory oversight but lacks clear legal grounds and enforcement powers to ensure AML/CFT compliance; (2) police (FCU)—responsible for analyzing STRs and investigating ML and FT but with limited intelligence-gathering capability; (3) MLRA—designated to receive STRs but functions more as an informal coordination group and not an operational FIU; (4) attorney general’s chambers—prepare legislation, prosecute ML and FT, assist with production and restraint orders and assistance to overseas jurisdictions; (5) customs—controls cross-border cash movements; TCI courts issue compulsory orders on application by the attorney general. - Coordination is ensured by MLRA, but no policy initiatives have been taken by MLRA since its inception in 2001. Legislation is comprehensive but needs consolidation and updating in several key areas. - Risks and priorities: - Despite progress, TCI remains exposed to the risk of being misused for ML and FT. The AML/CFT regime appears reactive to external pressures rather than driven by a local strategy. - MLRA should collectively analyze vulnerabilities of TCI—particularly those related to corporate facilities offered by the jurisdiction—and keep the overall AML/CFT regime under review to ensure effectiveness. - Key priorities include establishing an operational FIU with access to all relevant information; ensuring adequate staffing and resources for FSC to enhance AML on-site inspections; empowering FSC to access supervised institutions’ customer files; and giving FSC authority to impose regulatory penalties as necessary. ### Authorities’ response (excerpt) - Authorities noted IMF concerns about appointment of active practitioners on the FSC Board and the recommendation to consider non-resident board members or abolish the licensing committee in favor of a strong executive committee under the managing director. - Authorities stated that safeguards exist in the Financial Services Ordinance to mitigate conflicts where board members’ industry interests conflict with duties as directors. *Source: IMF assessment of the Turks and Caicos Islands.* ### Section 23 of the Ordinance makes it a requirement that a director who has any direct or ### cr0524 - Section 23 of the Ordinance makes it a requirement that a director who has any direct or ### Conflict of interest, disclosure, and sanctions - Section 23 of the Ordinance requires a director who has any direct or indirect personal, professional, business, or pecuniary interest in any matter to be considered by the board to disclose the nature of his interest to the board after the commencement of a meeting at which the matter is to be discussed and before that matter is considered by the board. - Criminal sanctions for failure to disclose: - On summary conviction: fine of $10,000. - On conviction on indictment: fine of $50,000. - Industry engagement: - Industry representatives confirmed confidence in the Board of the FSC and in the appointment of current members to serve on the Licensing Committee. - Appearance of conflict: - Authorities commit to taking appropriate measures to remedy any appearance of conflict of interest for the Licensing Committee. ### Funding, staffing, and transparency measures - Government commitment: - Government has always given assurance that the Commission will be adequately resourced. - Government has undertaken to put in place a formal arrangement based on the provisions in the Financial Services Ordinance to achieve greater transparency. - Budget projections and corporate planning: - FSC’s Corporate Plan for the year 2003/2004 and related budget projections were based on decisions to make funding more transparent. - Projected and actual recruitments (projections include): - Recruitment of a Bank/Trust Examiner to carry out examination of the financial institutions in the Islands. - Recruitment of a Deputy Superintendent of Insurance to assist in the supervision of the industry and carry out on-site inspection of companies licensed under the Insurance Ordinance. - Recruitment of a Superintendent of Mutual Funds and Collective Investment Schemes. - Recruitment of a Compliance Officer to carry out compliance checks in the industry as part of the supervisory team of the departments in the FSC and under the provisions of the Proceeds of Crime Ordinance. - Implementation update: - The FSC has, since the publication of the draft report, appointed a Bank Examiner and a Compliance Officer as part of its established complement of staff. ### Assessment context and methodology - Assessment details: - Assessment of compliance with the Basel Core Principles for Effective Supervision (BCP) was carried out February 3–14, 2003, in the context of the IMF Offshore Financial Center (OFC) program. - The assessment used the Basel Core Principles Methodology document and was prepared by Mr. Marcel Maes, Banking Consultant, MFD, assisted by John Abbott, MFD. - Evidence base: - The assessment was based in part on an FSC self-assessment, review of laws and regulations, interviews with FSC staff, and discussions with financial industry representatives. ### Institutional and supervisory setting - Legal framework and banking licenses: - Banking sector operates under the Banking Ordinance and Subsidiary Legislation, consolidated to May 1998, and the Banking (Special Provisions) Ordinance and Subsidiary Legislation, consolidated to May 1998. - Two types of licensed banks: - “national banking license”: permits banks to conduct business in and from TCI, with TCI citizens and with those who are ordinarily or temporarily resident. - “overseas banking license”: enables banks to conduct business from within TCI, but not with TCI residents. - Banks may hold one or both types of license, provided that segregated accounting or a separate entity is utilized. - Supervisory responsibilities and resourcing: - Within the FSC, the banking superintendent has statutory responsibility for administering the bank ordinance and is also the managing director of FSC. - Direct support staff for both functions includes one administrative assistant and one clerical assistant. - Recruitment of additional staff for banking supervision has been frustrated by budgetary and salary limitations. - Executive responsibility for all significant licensing, supervisory, and enforcement actions rests with the FSC’s licensing committee. - Anti-Money Laundering (AML) responsibilities: - No specific legal enforcement powers have been given to the FSC solely for ensuring effective implementation of the Anti-Money Laundering Regulations. - The banking supervisor exercises responsibility for AML compliance by banks as part of overall responsibility for compliance with applicable legal obligations. ### Main findings: supervisory independence and implementation weaknesses - Two principal issues that could impair operational independence and effectiveness: - Supervisory independence: - Establishment of the FSC as a statutory body has not achieved the operational independence recommended by the KPMG Report. - Private practitioners constitute a majority of both the board of directors and the licensing committee, posing risk of regulatory capture; this is particularly concerning for the licensing committee. - Recusals by board and committee directors are common. - Governor retains authority to give instructions to the FSC on key operational matters. - Government exercises active influence via budgetary restrictions, including ad hoc authorization for funding of special investigations beyond budgeted limits. - Implementation of financial supervision: - Recent legislation has substantially enhanced the TCI legal framework for financial supervision, but implementation is poor. - Governance structure places executive decision making in a non-executive licensing committee composed largely of active practitioners, providing little autonomy to the managing director and professional staff, and inhibiting supervisory initiative. - Financial ordinances give FSC only weak enforcement powers with sanctions largely limited to revoking licenses or pressing criminal charges. - Inadequate and unreliable funding undercut FSC’s ability to recruit and retain staff and to initiate supervisory initiatives. - FSC staff devoted to ongoing supervision is inadequate; many basic supervisory functions are neglected or left incomplete because of staff turnover or lack of staff. - Implementing regulations and supervisory guidance have yet to be developed for much of the new financial legislation. - No systematic monitoring of the TCI financial sector for compliance with AML/CFT requirements is being carried out; regulatory compliance is inadequately checked. - Prudential regulation of banks requires more time and attention than the banking supervisor can provide, given her dual responsibilities. ### Basel Core Principles detailed findings (by theme and CP references) - General: - The detailed assessment demonstrates that prudential regulations and their implementation still need improvement; supervisory independence and poor implementation dominate weaknesses. - Objectives, autonomy, powers, and resources (CP 1): - Many key elements of an effective legal framework are in place, but weaknesses include: - Lack of independence of the FSC (CP 1(2)). - Licensing procedure not matching legal provisions (CP 1(3)). - Need to harmonize the legal framework (CP 1(4)). - Right of the governor to issue guidelines to the supervisor could potentially impair its independence. - Licensing and structure (CPs 2–5): - Most criteria for licensing, ownership and structuring of banks are well satisfied. - Weaknesses in consolidated supervision detract from compliance with CP 5. - Prudential regulations and requirements (CPs 6–15): - Prudential regulations and requirements do not compare favorably with international standards and “best practices.” - Serious weaknesses noted in credit policies, loan evaluation and provisioning, large exposures limits, connected lending, other risks, internal control, and AML. - Methods of ongoing supervision (CPs 16–20): - FSC has a substantial resource deficit and banking supervision is not able to fulfil its mandate for ongoing supervision. - On-site supervision is a major weakness. - AML supervision represents a supervisory gap. - TCI’s general reputation as a well-regulated jurisdiction and related economic interests may be at stake. - Information requirement (CP 21): - Assessment confirmed FSC’s compliance with CP 21. - Formal powers of supervisors (CP 22): - Authority of the supervisor is generally adequate, but the range of remedial actions available is limited. - On a future revision of the BO and the FSCO, authorities may wish to consider giving the FSC additional powers. - Cross-border banking (CPs 23–25): - (Assessment continues beyond the excerpt provided.) *Assessment carried out February 3–14, 2003, in the context of the IMF Offshore Financial Center (OFC) program.* ### 56. While various improvements in operational practices would be desirable, the criteria ### Recommended Actions to Improve Compliance with the Basel Core Principles; Authorities’ Response; IAIS Insurance Core Principles Assessment (Turks and Caicos Islands) ### Recommended Actions to Improve Compliance with the Basel Core Principles - Independence (CP 1(2)) - Currently active private practitioners be limited to a minority of the positions on the board of directors and excluded from the licensing committee. - Consideration be given to inviting experienced nonresidents to join the board and serve on the licensing committee, a practice that is followed in the U.K. and the Crown Dependencies. - Alternatively, consideration should be given to abolishing the licensing committee and replacing it with a strong executive committee under the managing director and reporting to the board for policy and budgetary matters. - The provisions of the FSC ordinance regarding funding of FSC through fees paid by the financial sector be implemented based on a formal arrangement between the government and the FSC that insures that FSC receives a share of the fees paid by the financial sector adequate to fund supervisory practices that meet international standards. - The case for additional resources should benefit from an in-depth analysis of the supervisory objectives and the means needed to fulfill those objectives. - A review of the business process of prudential supervision should be organized in order to enhance its efficiency and an appropriate change process should be agreed upon in the very near future. - Legal Framework (CP 1(3)) - It should be envisaged to give the FSC powers to set prudential standards administratively. - Investment Criteria (CP 5) - The LC needs a court order to have access to the name of any settlor or to the name of any trust or to any publication relating to a trust. The effectiveness of FSC’s consolidated supervision may therefore be seriously hampered. Compliance with CP 5 necessitates the BO or the TLO to be amended. - Credit Policies (CP 7) - The FSC has to develop a comprehensive on-site credit risk program. Additional experienced resources are therefore to be put in place in order to allow the FSC to fulfill this objective without further delay. - Synergies with the external auditors can also be developed in order to close this prudential gap as soon as possible. - To add to this program, the FSC may want to consider reinforcing the need for the application of international credit risk “best practices” by providing a copy of the Basel Committee guidance on this subject to all banks. - The Turks and Caicos Regulation has to be completed by introducing a requirement that decisions on connected lending should be made on an at arm’s length basis. - Connected Lending (CP 10) - Introducing the requirement to extend loans to connected parties at market conditions should amend the banking regulation. - Simultaneously, the LC should be given the discretionary power to deduct on a case-by-case basis such loans from capital when assessing capital adequacy or to require collaterization. - The external auditors should be mandated to inform the shareholders and include in their annual statements a report on connected lending. - Other Risks (CP 13) - The scope and frequency of the on-site examination process has to be enhanced and additional resources (middle management staff) are therefore to be provided for. - Internal Control and Audit (CP 14) - The LC should highlight the pivotal importance of the internal control function by circulating the reference document, “Framework for internal control systems in banking organizations,” September 1998. - The external auditors could be associated with this initiative and asked to report on the application of the principles contained in the document by the individual banks. - Money Laundering (CP 15) - The FSC should be provided with the authority, the mandate, and the resources to develop an adequate on-site and off-site supervision program, which ensures compliance with any AML law and regulations applicable to financial institutions under its supervision. - The LC should be able to appoint without further delay an experienced compliance officer in order to set in train periodical checks of the banks’ money laundering controls and their systems for preventing, identifying and reporting fraud. - Given the backlog in this domain, the LC may want to consider the appointment of one or more experts. - The existing guidance notes should be revisited and expanded; this exercise could profit from the Crown Dependencies joint consultation paper entitled: “Overriding Principles for a Revised Know Your Customer Framework.” - On-site and Off-site Supervision (CP 16) - The LC should prioritize the completion of the on-site supervision methodology and ensure that the methodology in place is reassessed to ensure that it provides for a consistent approach and clearly defined deliverables for bank examiners and external auditors. - Validation of Supervisory Information (CP 19) - The establishment of a coherent process for planning and executing on-site visits. - The requirement that key supervisory returns are examined at least annually by the auditors and a report submitted to the LC. - Annual trilateral meetings between the LC, the external auditors and the licensed bank. - Additional efforts to increase the synergy between the LC and the external auditors. The transmission of a copy of their annual management letter to the LC should be made mandatory. ### Authorities’ Response: Assessment of Compliance with the Basel Core Principles - Core Principle 1 (2)—Independence and adequate resources - Authorities note comments regarding independence of the Financial Services Commission. - Core Principle 1 (3)—Legal Framework - Authorities propose to introduce legislative provisions for the FSC to have power to set prudential standards administratively to regulate licenced financial institutions to internationally accepted standards. - Core Principle 5—Investment Criteria - Authorities concur consolidated supervision is hindered by lack of legislative authority to request settlor/trust names without a court order. - Authorities confirm steps taken: proposed legislation had its first reading in the Legislative Council to give power to the FSC to have access to client information of all licensed entities. - Core Principle 7—Credit Policies - Authorities concur inadequate staffing hampered the FSC’s ability to develop and implement a comprehensive on-site credit risk programme. - Proposed actions: - introduce prudential standards provisions to give the FSC authority to meet with auditors annually to review financial institutions’ financial returns and to require auditors provide the FSC with a copy of the auditor’s management letter to each regulated institution. - amend the Banking Regulations to require institutions to make lending decisions to counterparties connected to the institution at arm’s length basis. - Operational steps: - FSC recently recruited a bank/trust examiner to enable comprehensive on-site inspection and to implement a programme to visit each institution biennially. - FSC issued the Basel Committee publication on Principles for the Management of Credit Risk to all bank financial institutions licensed in the Islands. - Core Principle 10—Connected lending - Authorities propose to: - amend the Banking Ordinance to introduce the requirement that loans to counterparties connected to lending institutions should be extended at market conditions; - amend the Banking Ordinance to give discretionary powers to the Licensing Committee to adjust capital adequacy where loans are extended to connected counterparties; - introduce legislation requiring auditors to include in their annual audited accounts a statement giving details of credit facilities extended to counterparties connected to the lending institution. - Core Principle 13—Other Risks - Authorities agree to enhance scope and frequency of on-site examinations and note recruitment of suitably qualified staff. - Core Principle 14—Internal Control and Audit - Authorities issued “Framework for Internal Control Systems in Banking Organisations” to all bank financial institutions and auditors approved by the Permanent Secretary, Finance in July 2001. - Core Principle 15—Money Laundering - Authorities note IMF recommendations on acquiring adequate resources and appointing an experienced compliance officer; FSC projected in its budget for the financial year 2003-2004 allocation of adequate resources. - FSC had already taken on revisiting existing AML guidance notes but had put the project on hold pending the FATF revision; the revised FATF 40 Recommendations were issued in July 2003 and FSC proposes to complete a review of guidance once authorities agree IMF recommendations for legislative changes against the revised standards. - Core Principle 16—On-site and off-site Supervision - FSC contacted CARTAC, which prepared a bank supervisory manual containing on-site supervision methodology. - FSC contacted Caribbean Anti Money Laundering Programme (CALP) for assistance in training the compliance officer and bank/examiner; CALP is scheduled to carry out training in TCI during January 2004. - Core Principle 19—Validation of Supervisory Information - Authorities concur with recommendations to establish coherent processes for planning/executing on-site visits; require annual auditor examination of key supervisory returns; hold annual trilateral meetings between the Licensing Committee, external auditors and licensed banks; and mandate submission of auditors’ management letters to the Licensing Committee. ### IAIS Insurance Core Principles Assessment (overview and industry structure) - Assessment preparation and methodology - Assessment prepared by Mr. Azeem Motani, Manager, Financial Institutions, Office of the Superintendent of Financial Institutions, Canada, as part of the IMF Offshore Financial Center Assessment of the Turks and Caicos Islands. - Assessment followed the IAIS Core Principles Methodology and used a self-assessment prepared by the SOI in the FSC, review of the IO, regulations, guidelines, extracts from licensing files, monitoring files, and other supervisory documents, and discussions with FSC staff and TCI insurance industry representatives. Contact was also made with North American and British Virgin Islands insurance supervisors and a Canadian direct writer. - Industry profile and key statistics - The TCI insurance industry was established in 1989 and has become one of the world’s largest credit life reinsurance jurisdictions. - PORCs constitute the bulk of the TCI insurance industry, representing 2,857 out of 3,013 licensed insurers. - Intensified scrutiny by U.S. Internal Revenue in 2002 led to a slight slowdown of licensing of PORCs; licensing continues at the rate of about 200 per annum. - Captive insurance companies accounted for a small share; as of December 31, 2002, there were 143 U.S.-owned captives. - Domestic market: 8 domestic general insurance companies doing exclusively domestic business; 5 domestic subsidiaries or branches of foreign life insurers providing long-term insurance. - Intermediaries: 6 brokers/agents and 6 licensed insurance managers. - The 13 domestic insurers are identified as the firms that would pose the greatest risk to the FSC and warrant greater supervisory efforts. - PORCs (Producer-Owned Reinsurance Companies) - PORCs provide reinsurance for credit life insurance, product warranty insurance, and mortgage insurance; typically owned by U.S. retailers who offer the insurance as an adjunct to primary business. - Structure: U.S. direct writer underwrites and reinsures risk with the TCI PORC owned by the producer; underlying insurance tends to be short-term, low risk, and highly profitable. - PORC advantages cited: U.S. tax incentives (net insurance premium income up to $1.5 million taxed at a preferential low rate), low cost of incorporation and licensing in TCI, low capital, and minimum regulatory requirements compared to U.S. states. - Risk mitigation: U.S. direct writer typically requires a custodial account of assets approved by the direct writer at least equal to liabilities assumed; direct writer reports annually to the U.S. regulator the amount of liabilities ceded to the PORC and amount of reserve security; these reports are audited by the U.S. regulator. - Operational notes: the direct writer often acts as a U.S.-based “insurance manager” performing premium receipt, claims payment, and administrative tasks including financial statements and tax returns. - Regulatory stance - The FSC has taken the position that PORCs pose minimal risk to TCI and can be exempted from normal supervisory and prudential requirements based on factors including: PORCs are legitimate under U.S. law; they do not do business in the TCI; they do not have a physical presence in the TCI; they do not have TCI bank accounts; the U.S. direct writer is strongly collateralized; loss experience is minimal; and direct writers are supervised by U.S. regulators. *IMF Offshore Financial Center Assessment of the Turks and Caicos Islands.* ### 65. Based on this risk assessment PORCs have enjoyed exemptions from requirements ### Based on this risk assessment PORCs have enjoyed exemptions from requirements ### PORC exemptions and recent changes - PORCs have enjoyed exemptions from requirements: - to file audited or actuarial statements; - for annual financial reports; - to have a local insurance manager; - to meet the capital requirements for other reinsurers; - to file a solvency statement to be certified annually by an independent auditor; - to place a deposit with the FSC or have that liquid assets or a bank account in TCI; - to pay annual license fees for credit life PORC. - To date, PORCs have only been required to file an annual compliance certificate but, in response to the KPMG report, the FSC has introduced the requirement to file annual financial statements and is in the process of introducing an annual fee of $100. - Based on 2002 amendments to the IO, PORCs will be required to file annual financial statements effective by year-end 2003. - In the case of PORCs, the capital requirement is $5,000, but there is no written policy in this regard. ### Financial reporting, data availability, and profitability - Due to confidentiality restrictions, no data on individual companies were obtained and there is no industry analysis done by the FSC. - Financial reporting is not required; hence, no reliable figures relating to total gross premiums, assets or capitalization are available. - The sector is understood to be profitable to the insurer and practitioners alike. - Until now, financial information has not been requested from PORCs. ### Supervisory capacity and practices - Insurance supervision in TCI focuses primarily on licensing new insurance companies and administering filings by existing licensees. - Staff resources do not permit on- and off-site supervision although the need for such programs is recognized. - The SOI has the authority, but not the ability (based on current resources and absence of methodology), to meet most of the IAIS Core Principles for insurance. - The principles regarding licensing, change of ownership, capital adequacy, sanctions, cross-border cooperation, and confidentiality appear to be the strongest aspects of FSC’s supervisory regime. - The SOI does not have a program for conducting on-site examinations, although the IO gives the SOI the necessary powers to do so. - The insurance supervisor does not have the authority to extend on-site inspections to third parties such as companies providing outsourcing services (e.g., data processing) to the insurer. - Insurers have a history of late filings and the recently introduced penalties are not being implemented. - Certain PORC returns are not being signed by the appropriate level of senior management responsible for the accuracy of these returns. - The insurance supervisor does not have an ongoing documented framework for the monitoring of the condition and performance of the companies. ### Actuarial standards, valuation of liabilities, and technical provisions - There are no specific standards for the valuation of liabilities (including technical provisions). - The SOI requires an actuarial report for life insurers once every three years but not for general insurers. - There are no actuaries in TCI. The IO recognizes Canadian-, U.K.-, and U.S.-qualified actuaries. - The SOI does not prescribe professional standards for actuarial valuations. - The failure to require actuarial reports for all insurers (exemption for PORCs is acceptable) is a significant weakness in the supervisory process. - Recommendation from the assessment: Until the FSC amends the legislation to require annual actuarial valuations and develops adequate resources to undertake a review of the technical provisions reserves, the external auditors should be required to provide an annual letter from their consulting actuary attesting to the adequacy of the technical provisions of their regulated TCI clients. ### Legal, governance, and market-conduct issues - The legal system is based on British Common Law; there is a need to address inconsistencies, consolidate, and amend existing IOs. - There is inadequate transparency in the regulatory system: the FSC has no public web site, it does not yet produce an annual report, and, in the opinion of the industry, there has been inadequate consultation when revising legislation or guidelines. - The legal profession seems to be adequate and the judicial system appears to work adequately for the insurance companies; very few insurance claims end up in court. - The legal framework could usefully be updated to address various gaps identified by the general insurance industry, such as the absence of a statute of limitations for accident claims. - There is no insurance protection/guaranty fund in view of the small size of the market. - The IO and the FSC Ordinance provide a suitable framework covering licensing, supervision, sanctions, and legal protection for supervisors; the SOI has the authority but not the ability (based on current resources and absence of methodology) to meet most of the IAIS Core Principles for Insurance. - The FSC has not issued any standards on corporate governance. The IO does not directly require the board of directors to address any of the requirements of CP 4, and these requirements are not covered in the Companies Act either. - The FSC has not issued adequate guidance on internal controls. There is no direct requirement for the board of directors to address internal control issues. - The licensing legislation allows brokers to act also as agents, which could create an opportunity for conflict of interest, but there is no disclosure requirement. - Policy-holder protection and market-conduct practices should be given more attention since price competition among the small number of domestic insurers appears limited. ### Main findings and operational issues (summary) - The 2001 legislative amendments establishing the FSC as an independent and single regulatory and supervisory body, together with the 2002 amendments to the IO, have addressed several concerns raised in the KPMG report and provide an excellent platform for further refining the independence, structure, and powers of the FSC. - The IO and the FSC Ordinance identify supervisory objectives, supervisory authority, and enforcement powers of the SOI and FSC. - There is a need for more operational independence and greater clarity in certain areas, such as overlaps in the respective roles of the FSC board, the licensing committee, and the SOI. - The insurance supervisor is not operationally independent from either political authorities or the insurance companies that it supervises in the execution of its supervisory tasks. - The SOI needs to adopt more clear, transparent, and consistent regulatory and supervisory processes; the IO and the guidelines give the SOI significant discretion in implementing the legislation, especially for PORCs. - The criteria for setting differing requirements and granting exemptions, although appropriate in the case of PORCs, are not documented or circulated to the industry. ### Prudential rules, capital, and reinsurance - The IO provides wide-ranging general powers, but the SOI does not require insurers to have in place an overall strategic investment policy, formulated and approved by the board of directors, which addresses the control requirements of the Principle. - The Business Plan should be expanded to require the filing of an investment policy. - The SOI relies heavily on the business plan, the annual compliance reports from the insurer, and identification of noncompliance by the auditor who is then required to report breaches to the SOI. - The SOI does not have procedures in place to verify the adequacy of the technical provisions or adequate skilled resources, other than himself, to make an assessment of the adequacy of the technical provisions. - The IO’s capital adequacy requirements appropriately reflect the size, complexity, and business risks of the insurers in TCI; however, the SOI has significant discretion with respect to the actual capital requirement. - The insurance supervisor has the authority to oversee reinsurance arrangements. Insurance companies are required to evaluate credit exposures to reinsurance companies, but no specific requirements have been established with respect to such credit risk. ### Monitoring, sanctions, and cross-border matters - The SOI has several significant powers to impose sanctions under the legislation; however, the range of remedies available needs to be broadened so that the SOI can tailor the sanctions based on the severity of the situation. - The IO addresses a significant number of the cross-border criteria. However, the process for the SOI to refuse a license for a foreign establishment in TCI, or to impose additional conditions on a license, is not transparent. *Source: cr0524 - 65. Based on this risk assessment PORCs have enjoyed exemptions from requirements* ### 90. The FSC has adopted and adequately addressed the confidentiality requirement, but it ### cr0524 - 90. The FSC has adopted and adequately addressed the confidentiality requirement, but it ### Confidentiality and information sharing - The FSC "has adopted and adequately addressed the confidentiality requirement" but "needs to address the issue of sharing information with law-enforcement agencies." - The IO (Insurance Ordinance) and confidentiality regulations "do not allow the SOI to disclose information relating to exchange-control regulations and income-tax-collection purposes." - Authorities state that the Confidential Relationships Ordinance "provides a gateway for law enforcement to obtain information from the FSC and other entities when it is required for furthering their investigation." ### Recommended Action Plan (selected highlights from Table 2) - Organization of an Insurance Supervisor (CP1) - Amend the FSC Ordinance to bar industry representatives from membership in the Licensing Committee to eliminate potential conflicts of interest and leakage or abuse of confidential supervisory and client information. - Eliminate the requirement for the SOI to obtain Licensing Committee authorization for funding any investigations or examinations. - Provide adequate funding to hire at a reasonable salary, adequate, qualified staff to conduct on- and off-site examinations. - Publish an annual report as required in the Ordinance and preferably post it on a FSC website together with all guidelines and procedures. - Develop internal procedures explaining criteria for granting exemptions from, or deviating from, established requirements. - Adopt clearer, more transparent, and consistent regulatory and supervisory processes; encourage the AG to make drafts of legislation and guidelines available for public consultation before they are issued. - Licensing and Changes in Control (CPs 2–3) - Set out in law or regulations the reasons for which a license application can be declined (for example, a previous conviction for dishonesty—tax evasion). - Require business plans to explicitly provide information on capital or solvency margins. - Issue a directive on outsourcing requiring insurers’ third-party service providers to give an undertaking allowing the SOI access to their premises and records. - Require documents of formation to provide information on actuaries. - Corporate Governance and Internal Controls (CPs 4–5) - Issue standards on corporate governance and internal controls based on IAIS requirements tailored to the domestic insurance industry. - Require insurers to provide the SOI with a copy of the management letter from the external auditor. - Prudential Rules (CPs 6–10) - Require business plans to include the investment policy, as approved by the board of directors, addressing the requirements of Principle 6. - Develop an examination program to verify adequate internal controls and ensure assets are managed in accordance with investment policy and legal/regulatory requirements. - Obtain sufficient resources to meet the requirements of CP6–EC5, EC 7, AC 1, and AC2. - Consider requiring the external auditor to provide an annual letter from its consulting actuary attesting to the adequacy of technical provisions or require annual actuarial returns for general and life insurers. - Make transparent the process for setting reduced capital requirements; expand the Guideline on Issue of Licenses to address actual capital requirements for PORCs and the related rationale. - Ensure companies review capital adequacy internally on a quarterly basis even if FSC reporting is annual. - Monitor reinsurance placement and the credit rating of reinsurers. - Market Conduct (CP 11) - Issue directives requiring insurers and intermediaries to exercise necessary knowledge, skills, and integrity in dealing with customers. - Require brokers who also act as agents to disclose this conflict to the customer. - Monitoring, Inspection, and Sanctions (CPs 12–14) - Develop a program of regular on-site examinations and risk-based procedures for each type of company operating in TCI; obtain necessary resources. - Grant authority to extend on-site inspections to third parties providing outsourcing services (e.g., data processing). - Perform market conduct examinations to assess treatment of customers. - Revise the IO to allow the SOI to: - hire a third party at insurer's expense and charge the company for third-party work or investigation; - require insurers to hire independent auditors or actuaries for specific items when supervisor doubts accuracy. - Develop an ongoing documented framework for monitoring the financial condition and performance of companies. - Enforce timely filing of audited financial statements and other returns, including through fines or other penalties for late or inaccurate filing. - Implement PORCs filing of annual financial statements effective YE 2003. - Broaden range of remedies available so the SOI can tailor sanctions based on severity; develop written procedures for implementing and following up remedial actions. - Cross-Border Operations, Supervisory Coordination and Cooperation, and Confidentiality (CPs 15–17) - Make the process for refusing a license for a foreign establishment in TCI, or imposing additional conditions on a license, more transparent. - Document administrative actions taken to support cross-border cooperation. - Clarify regulations and procedures for sharing of information with law enforcement agencies. ### Authorities’ response and implementation intentions - Organizational and resourcing actions - The FSC is recruiting for a suitably qualified Deputy Superintendent of Insurance. - CARTAC was engaged to prepare a procedure manual for the FSC; CARTAC "has now completed a draft of the Bank’s Manual and on completion of this draft will proceed to prepare a draft manual for the Insurance Sector." - CARTAC is "50% funded by CIDA with contributions from IDB, Ireland, IMF, UK, UNDP and the US." - Licensing, governance, and prudential rules - A revised business plan was circulated and "will be implemented in January 2004." - The Board concurs that a corporate governance document should be prepared covering all areas of the FSC’s functions. - Legislative approval will be sought to make mandatory: - submission of a statement on investment policy in business plans; - insurers’ submission of the external auditor’s Management Letter and auditors’ statements on internal controls. - The Superintendent will prepare a paper for the Licensing Committee on transparency in setting lower capital requirements; following a policy decision by the Board, approval will be sought to bring revised capital adequacy and solvency margin provisions into legislation. - On-site inspections, sanctions, and reporting - Development of plans for on-site inspection was underway prior to the assessment and will be carried out by CARTAC. - Legislative approval will be sought to: - extend SOI authority to inspect third parties and conduct market examinations; - introduce a graduating scale of remedies and sanctions administratively imposed by the Licensing Committee; - allow the SOI to hire a third party at an insurer’s expense and charge the company for third-party work or investigations; - require insurers to hire independent auditors or actuaries when the supervisor has doubts as to accuracy. - The Insurance Department is developing a data information system to monitor and track returns and ensure timeliness; penalties for late submission will be implemented. - Filing of annual financial statements by PORCs "will be implemented from year ending 2003" and a recommendation will be made to Executive Council to require the Chief Executive Officer and one director to sign annual compliance statements. - Confidentiality and law enforcement access - Authorities note that the FSC "has adequately addressed the confidentiality requirement" but acknowledge the need to address information-sharing with law enforcement; they point to the Confidential Relationships Ordinance as the mechanism for law enforcement access when required for investigations. ### AML/CFT assessment (FATF 40+8 Recommendations) - Report scope and methodology - The Report on the Observance of the FATF 40 Recommendations and 8 Special Recommendations (FATF 40+8) was prepared by a team of Fund staff, experts under Fund supervision, and an independent expert selected by the authorities to assess AML/CFT law enforcement matters. - The assessment is based on review of TCI AML/CFT legislation and regulations, nonbinding guidance notes issued by the FSC and the MLRA for institutions regulated by the Proceeds of Crime (Money Laundering) Regulations 1999 (PCMLR), and discussions with the governor, senior officials, and industry representatives. - The assessment is based on information available as of February 13, 2003. - Main findings - "The TCI has a robust, but rather complex legal, institutional, and supervisory regime for AML/CFT." - Major legislative steps included adoption of the PCMLR in 1999 and extension of the ATFOMOTO to TCI in 2002. - TCI "formally complies with the majority of the FATF 40+8 Recommendations, but significant shortcomings remain in key areas, such as, Recommendations 2, 14, 15, 20, 21, and 26." - Shortcomings relate to lack of clear requirements and/or compliance regarding: - verifying the identity of beneficial owners of business introduced by trustees and other corporate service providers; - reporting suspicious transactions (STRs); - monitoring unusual or complex transactions; - supervising effectively compliance with AML/CFT regulations; - confidentiality regulations preventing supervisory access to client information. - The assessment concludes that, after a first phase of reactive legislation, TCI needs to implement a genuine AML/CFT policy supported by a consolidated and clear legal framework, effective supervision, an FIU meeting Egmont Group criteria, adequate staff and resources, and a collaborative industry. Without these efforts, TCI will "continue to be exposed to the risk of its financial and corporate services being misused for illegal purposes." *Source: Report on the Observance of the IAIS Insurance Core Principles and the FATF 40+8 Recommendations (assessment team; assessment based on information available as of February 13, 2003).* ### 94. ML is criminalized in TCI in a manner broadly consistent with the Vienna and ### cr0524 - 94. ML is criminalized in TCI in a manner broadly consistent with the Vienna and ### Criminalization of money laundering (ML) - ML in TCI is criminalized in a manner broadly consistent with the Vienna and Palermo Conventions, even if the latter has not been ratified by the U.K., nor extended to TCI. - ML offenses extend to proceeds derived from all serious (indictable) offenses. - Mens rea requirements are “knows or has reasonable cause to suspect.” - Self-laundering is covered. - Corporate bodies can be held liable for money laundering. - ML is criminalized by four statutes and drug and nondrug ML regimes run parallel, creating issues of consistency. - Recommendation: TCI needs to harmonize and unify all applicable ML offenses by removing distinctions between drug and nondrug ML and consolidating dispersed provisions into one statute governing the criminalization of ML. - Separately, the PCMLR imposes criminal liability on regulated entities for failure to establish and maintain appropriate internal AML controls, although the ML definition in the PCMLR needs updating to reflect currently applicable ML and FT laws. ### Criminalization of terrorist financing (FT) and sanctions - FT is criminalized in TCI by the U.K. Statutory Instrument (the ATFOMOTO) based on the 1999 UN International Convention for the Suppression of the Financing of Terrorism. - The relevant Order in Council extending the application of the Convention to TCI has not yet been published. - Adequate and dissuasive sanctions are available for persons who commit ML or FT offenses. ### Confiscation of proceeds of crime or property used to finance terrorism - Courts have authority to make value orders to confiscate the value of benefits derived from crime, including ML and FT. - Officials claim power to confiscate instrumentalities used, or intended for use, in the commission of ML/FT offenses under general criminal law. - Confiscation is mandatory and conviction-based under the PCO and CDTO. - Civil forfeiture is currently not possible but is being contemplated. - Courts can forfeit drug or terrorist cash independently from criminal proceedings. - TCI can restrain crime-related property or terrorist funds subject to confiscation, though the scope regarding funds/property of terrorist organizations or their financiers is unclear. - No specific measures exist to facilitate identification and tracing of property subject to confiscation, except in FT cases (monitoring orders). - General confiscation regime lacks sufficient powers to identify and trace criminal proceeds; compulsory powers (production orders and search warrants) focus on written records rather than following the money trail. - TCI law does not specifically regulate protection of bona fide third parties in connection with these powers, though certain protections exist. - Recommendations to enhance confiscation regime (proposed revisions to the PCO): - (1) Specifically provide for confiscation of laundered property, even if intermingled with legal property, and of instrumentalities used in or intended for use in ML or FT. - (2) Extend the definition of proceeds to any property “derived from or obtained through” the commission of an offense in accordance with the Palermo Convention (Article 1-e). - (3) Allow, based on the U.K. Proceeds of Crime Act 2002, civil forfeiture orders to recover assets derived from any unlawful conduct in a nonconviction-based procedure, subject to ensuring legitimate rights to property. - (4) Provide a range of powers to enable tracing of proceeds following the model of the U.K. Regulation of Investigatory Powers Act 2001 (RIPA), including at a minimum account monitoring orders. - (5) Provide specific protection for the rights of bona fide third parties, as set forth in the Palermo Convention (section 12–8) or Strasbourg Convention (section 22). - (6) Make specific provision for declaring contracts that aim to frustrate confiscation orders void or voidable. ### Law enforcement considerations on confiscation and asset forfeiture - Laws governing asset forfeiture and money-laundering investigations are comprehensive. - Attorney General’s chambers and the FCU work closely and have had notable successes in money-laundering cases. - Confiscation/forfeiture matters are a priority; several serious fraud-/money-laundering matters are subject to judicial proceedings. - A number of restraint orders have been obtained by the FCU. - Recommendation: Amend law to allow for all properties confiscated under various ML/FT acts to be placed in a confiscated asset fund. ### Financial intelligence unit (FIU) and STR processes - No FIU exists in TCI that meets the Egmont Group’s definition. - Section 27 of the PCO set up the MLRA to assist in receiving, analyzing, and disseminating disclosures of financial information, but the MLRA functions as a high-level coordination body rather than as a real FIU; it seldom meets, has no staff, and receives only a negligible number of STRs. - The FCU of the police functions as the day-to-day FIU and receives the majority of STRs directly from reporting entities. - STR reporting arrangements are unclear under TCI law; law does not specifically mandate filing of suspicious transaction reports apart from FT cases, although large exemptions apply. - The FCU analyzes STRs, conducts criminal investigations into money laundering, and shares information with foreign counterparts and cooperative investigative officers based in Miami (USA) through membership of WCCIT. - The FCU is not a member of the Egmont Group and has not concluded MOUs with other FIUs; networks for information exchange are limited, particularly with administrative FIUs. - No formal arrangements authorize TCI law-enforcement authorities to conduct cooperative investigations or coordinated seizure-and-forfeiture actions with other jurisdictions, although such cooperation is reported to exist. - Recommendations to improve FIU effectiveness: - Set up an FIU that meets the Egmont Group’s requirements. - Explicitly compel all regulated entities to report suspicions of money laundering. - Ensure the future FIU has access to necessary information for analyzing STRs, sufficient powers to order penalties for nonreporting, and authority to disseminate financial information to other authorities, including foreign counterpart FIUs. ### Staffing and resourcing of FCU as de facto FIU - Current FCU staffing: one detective inspector, two sergeants, and one constable to investigate all major fraud matters, STRs, money-laundering matters, and requests for assistance from law-enforcement agencies worldwide. - Assessment: Current staffing is inadequate for the workload. - Recommendation: Add an additional four officers to the unit as soon as possible. - Recommendation: Appoint a suitable person as director of the FIU and provide manpower and resources to properly run it; regional assistance can be sought. ### Law enforcement and prosecution powers and duties - The FCU and the Attorney General’s chambers are responsible for investigation and prosecution of ML and FT. - Laws permit broad powers to compel production of records through court orders to “make material available” to determine whether someone benefited from crime or the extent and whereabouts of proceeds. - Protected information (legal privilege, secrecy, or other restrictions) cannot be disclosed unless restrictions are waived by production orders; attorney-client privilege is included among legal privileges. - More robust information-gathering methods (account monitoring orders) are only available in FT and other terrorism investigations. - Recommendations: - Amend the Proceeds of Crime Ordinance to allow for monitoring orders. - Attach an on-staff attorney specializing in money-laundering and asset forfeiture prosecutions to the FCU to reduce dependence on the Attorney General’s chambers and enable integrated investigator-attorney cooperation. ### International cooperation: laws, procedures, extradition, and statistics - TCI has laws and informal arrangements facilitating AML/CFT cooperation, though statute scope is limited to drug-related mutual legal assistance under the CJICO 1998 and enforcement of overseas confiscation orders under the PCODCTO 2001. - A bilateral U.K.-U.S. MLAT extended to TCI by the MLAUO, and various U.K. statutory instruments on financing of terrorism in Overseas Territories, provide further basis for mutual legal assistance. - Mutual assistance from TCI generally does not require a treaty (MLAT) but is subject to reciprocity; assistance cannot be given if conduct would not constitute an offense in TCI. - Because TCI levies no income tax, no assistance can be given to foreign states with regard to income-tax offenses; the government has given an undertaking, subject to conditions, to introduce legislation to provide such assistance by 2005. - Overseas mutual assistance requests are channeled through the governor and the Attorney General’s chambers (non-U.S. related) or the chief magistrate (U.S. related). - Law-enforcement assistance can be obtained via ICPO-Interpol or informal arrangements. - Extradition between TCI and Commonwealth countries is controlled by orders under the U.K. Fugitive Offenders Act 1967 and the U.K. Extradition Act 1870 as amended, and new extradition arrangements entered into force in 2002 for crimes punishable with imprisonment of at least 12 months under a U.K. statutory instrument extended to TCI (the EOTO). - The Extradition (Terrorist Bombings) Order 2002 has been extended to TCI. - TCI is able to extradite its own nationals to other states. - Statistics: TCI did not provide statistics on assistance rendered or a list of countries that assisted TCI; assistance appears to be provided informally in all forms of criminal matters, with strong police-to-police assistance and person-to-person contact aiding AML/CFT investigations. ### Preventive measures for financial institutions (prudentially-regulated sectors) - Main sectors subject to AML/CFT preventive measures: banking; insurance; mutual funds; corporate and trust services; and any other “relevant financial business” listed in the regulations (extending to money remitters, investment dealers, and credit card issuers), but not currency exchange offices. - Recommendations: - (1) Effectively enforce licensing and control requirements for investment dealers. - (2) Subject money remitters to registration by the FSC. - Supervision and enforcement: - The FSC licenses and exercises prudential supervision over banks, insurances, mutual funds, corporate and trust service providers, but not other financial institutions. - FSC performs “fit-and-proper” checks on key officers, verifies compliance with ordinances, and grants and revokes licenses, but cannot impose fines or other administrative penalties. - The FSC lacks authority to enact administrative regulations to develop the AML regime. - Law does not provide the FSC (or any other authority) specific powers to supervise compliance with AML/CFT regulations; it has a general function to “protect the public against financial loss arising out of the dishonesty, incompetence or malpractice of persons engaged in the financial services business.” - Oversight is impaired by inadequate resources and strict confidentiality laws that prevent FSC access to customers’ personal information except in the banking sector. - Recommendation: Prompt amendment of financial legislation and appropriate funding of the FSC. - Preventive measures under the PCMLR: - All AML/CFT preventive measures are contained in the Proceeds of Crime Money Laundering Regulations 2000 (PCMLR); breach is a criminal offense. - No other administrative AML/CFT provisions exist except non-mandatory guidance notes by the FSC and the MLRA. - Mandatory regulations require procedures on (1) customer identification; (2) employee training; (3) record keeping; and (4) internal reporting of suspicious transactions—formally complying with international standards. - Protections exist for persons furnishing information to competent authorities; “tipping-off” is penalized. - Measures to avoid misuse of shell corporations: immobilizing bearer shares and requiring shareholder records to be maintained within the jurisdiction. - Explicit exemptions and regulatory gaps requiring correction: - (1) STRs—Banks have a general obligation to report a customer’s conduct “contrary to any law,” but a fully developed suspicious-transaction-reporting system does not exist, save for reports related to terrorist financing (although the regulated sector seems to be exempted from this duty). - (2) Internal controls—Regulations do not require implementing an internal control system for compliance; duties of “reporting officers” do not include regulatory compliance. - (3) Identification—No obligation to obtain evidence of customer identity where introduced by another regulated entity or acting on behalf of another (includes trust and company service providers). - (4) Record keeping—It is sufficient to be able to obtain evidence of a customer’s identity if requested by authorities, without actually keeping copies of identification documents. - (5) Wires—No provisions on minimum information required for wire transfers; opening anonymous accounts is not prohibited by law (banking practices normally meet standards). - (6) Monitoring—No provision for ongoing monitoring of accounts or detecting unusual/economically illogical transactions (Guidance notes provide nonmandatory examples). - (7) FIU—A financial intelligence unit meeting Egmont Group criteria capable of sharing information domestically and internationally does not exist. - (8) Branches—AML controls are not necessarily applicable to foreign branches or subsidiaries of a domestic institution. - (9) Employment screening—No “fit-and-proper” screening of employees to ensure high integrity standards. ### Preventive measures for nonprudentially-regulated, macro-relevant sectors - Institutions under AML obligations: Investment dealers and money remitters are subject to general AML provisions but lack supervisory/regulatory authority; enforcement arrangements are necessary. - Businesses not yet subject to AML obligations: Given offshore risks and a strong cash culture, preventive measures and enforcement authorities are necessary for gambling, jewelry stores, real estate brokers, and currency exchanges. - Recommendations for nonprudential sectors: - Require reporting of suspicious transactions. - Prohibit check payments in casinos. - Prohibit purchase of real estate or jewelry with cash above a certain threshold. - Establish mandatory registration of currency exchanges. - Issue guidance to financial institutions on special risks posed by these customers. - Enact specific provisions to mitigate AML risk of currency exchanges, including registration, suspicious transaction reporting, and cash payment controls. ### Summary assessment against FATF recommendations - TCI formally complies with the majority of the FATF 40+8 Recommendations, but significant shortcomings remain in key areas despite government efforts. - Consolidation of existing ML statutes and review of the PCMLR in indicated areas are considered necessary to make the AML/CFT regime more robust. - Supervision of the AML/CFT preventive framework needs to become more systematic and effective to enhance operational impact. *Source: IMF assessment (cr0524).* ### 117. Revision Table 1 summarizes recommended actions in areas related to the FATF ### cr0524 - 117. Revision Table 1 summarizes recommended actions in areas related to the FATF ### Recommended Action Plan to Improve Compliance with the FATF Recommendations - Scope of the Criminal Offense of Money Laundering (FATF 4–6) - Harmonize and unify ML provisions; update PCMLR and provide for adequate penalties, including license revocation for breaches. - Provisional Measures and Confiscation (FATF 7) - Amend PCO to allow confiscation of laundered property and instrumentalities. - Provide adequate powers for tracing assets, including monitoring orders. - Consider introduction of civil forfeiture. - General Role of Financial System in Combating ML (FATF 8–9) - Subject investment dealers and money remitters to registration. (already subject to AML/CFT). - Implement AML/CFT preventive measures (and appoint authorities to enforce their compliance) for businesses such as gambling, jewelry stores, real estate brokers, and currency exchanges. - Customer Identification and Record-Keeping Rules (FATF 10–13) - Reduce or eliminate the exemption from identification requirements applicable to transactions made by, or through other regulated entities. - Prohibit the establishment of anonymous or fictitiously named accounts. - Allow supervisory access to all client’s information (even if confidential). - Increased Diligence of FIs (FATF 14–19) - Introduce AML/CFT reporting duty to report suspicious transactions. - Lower the standard of suspicion to include unusual transactions and provide clear guidance that reporting entities need not suspect a specific predicate offense. - Make it a legal obligation to monitor and detect unusual transactions. - Create an FIU corresponding to Egmont criteria. - Provide the MLRA with authority to define mandatory STR format and give mandatory directions to FI. - Implementation and Role of Regulatory and Other Administrative Authorities (FATF 26–29) - Provide the FSC with the authority, mandate and resources necessary to develop an adequate on-site and off-site supervision of compliance with any AML/CFT legislation. - Give the FSC authority to develop AML/CFT legislation by enacting mandatory regulations. - Other Forms of Cooperation—confiscation, mutual assistance, and extradition (FATF 33–35) - Expand CJICO to all indictable offenses and provide for enforcement of overseas orders for provisional and investigative measures. - Initiate extension of MLAT with Canada to TCI. - Eight Special Recommendations on Terrorist Financing — VII. Wire Transfers - Make it mandatory to include originator/recipient information on funds transfers. ### Other Recommended Actions (Table 4) - Law Enforcement and Prosecution - Ensure adequate funding, training and staff for all law-enforcement agencies. ### Authorities’ Response: Criminal Justice Measures and International Co-operation - Criminalization of ML and FT - The TCI Constitution does not give it powers to ratify international treaties and would require the UK to extend their application to TCI by Order in Council. - TCI will draw the recommendation to the attention of the United Kingdom’s Government. - TCI authorities noted recommendation to update the Proceeds of Crime Ordinance to include in the Proceeds of Crime (Money Laundering) Regulations (PCMLR) the definition of money laundering offences as set out in the Criminal Justice (International Co-operation) Ordinance (CJICO) and the Anti-Terrorism (Financial and Other Measures) (Overseas Territories) Order 2002 (ATFOMOTO) and that penalties should include breaches and the revocation of a licence of a regulated entity. - TCI proposes to take the recommendations forward to the Legislative Council. - Confiscation of proceeds of crime or property used to finance terrorism - IMF recommended amending the PCO to specifically provide for confiscation of laundered property, even if intermingled with legal property, and of instrumentalities used or intended to be used for ML/FT. - TCI response: "We do not concur. We consider the recommendation unnecessary in view of the general power of confiscation on conviction." - TCI agrees to amend the Proceeds of Crime Ordinance to: - extend the definition of proceeds to any property “derived from or obtained through” the commission of an offence in accordance with the Palermo Convention. - provide specifically protection for the rights of bona fide third parties as set out in the Palermo Convention. - include specific provision to declare contracts that aim to frustrate confiscation orders void or voidable. - The FIU and processes for receiving, analyzing, and disseminating financial information - TCI concurs with the recommendation that a FIU should be established that meets the Egmont Group requirements. - TCI concurs that regulated entities should be required to report all suspicious transactions reports to the FIU. - Law Enforcement and prosecution authorities’ powers and duties - Recommendation to ensure adequate funding, staffing and training for all law enforcement agencies has been noted and is being addressed as an ongoing project. - International Co-operation - Authorities noted IMF recommendation that CJICO should be amended to apply to all indictable offences, specifically enforcement of overseas tracing, production and monitoring orders, and to authorise co-operative investigations and asset sharing with overseas jurisdictions. ### Legal and Institutional Framework for Financial Institutions - General Framework - TCI concurs that investment dealers and money remitters should be subjected to AML/CFT legislation; these activities are covered in the PCMLR in Schedule 1 under “Relevant Financial Business Activities”. - For cash-intensive businesses (gambling, jewellery stores, real estate brokers, currency exchanges) a study is being carried out to ascertain the level of activities in each sector; consideration will be given to introduce legislation where there is significant business activity. - Legislative approval will be sought to give the FSC discretionary powers to obtain, without a Court Order, any type of information held by regulated institutions, including confidential information about their customers or information subject to any privilege. - Customer Identification - TCI will introduce amendments to make it mandatory for all relevant financial businesses to verify the identity of their accounts and to reduce the exemption from identification requirements applicable to transactions made by, or through other regulated entities. - TCI will permit supervisory access to all clients’ information. - TCI will require institutions to include originator information on funds transfers. - Banking sector reports no institutions operating anonymous accounts; TCI will seek legislative approval to prohibit creation of such accounts in the future. - Ongoing monitoring of accounts and transactions - TCI will seek legislative approval to make it mandatory that financial institutions monitor, detect and analyze unusual transactions and give enhanced scrutiny to wire transfers that do not contain complete originator information (currently in the Anti-Money Laundering Guidelines). - TCI will include a list of general and objective alerts for each regulated sector in the revised money laundering guidelines (based on parameters such as money thresholds, risk jurisdictions, politically exposed persons, common laundering schemes). - Record Keeping - TCI concurs that FSC, the MLRA and the FIU when established should be allowed access to all records and customer files, even before judicial proceedings are initiated. - TCI concurs that the PCMLR should be amended to require keeping of all records, including: - the customer’s and beneficiary’s name, address or other identifying information normally recorded by the intermediary - the nature and date of the transaction - the type and amount of currency involved - the type and identifying number of account involved - TCI will amend the PCO to make mandatory the keeping of identification records (current legislation restricted to keeping instructions on how and where to obtain identification evidence). - TCI will make provisions that all financial institutions be required to monitor, detect and analyze unusual transactions and to give enhanced scrutiny to wire transfers that do not contain complete originator information. - Suspicious transactions reporting - TCI concurs with IMF recommendation and the revised FATF 40 Recommendations that legislative changes should be introduced to make mandatory the reporting of suspicious transactions and to provide the MLRA with authority to define mandatory suspicious transactions reporting format and give directions to financial institutions. - Internal controls, compliance and audit - TCI does not agree that the PCMLR be amended to make mandatory the range of regulatory compliance controls recommended, citing undue burden on small businesses. - TCI concurs that where a compliance officer is appointed in a regulated entity the person should be approved by the Licensing Committee of the FSC and that regulated institutions should submit to the FSC annual audited reports of regulatory compliance with AML legislation. - Integrity standards - Investment Dealers Regulations were introduced at the end of June 2003 and draft legislation is being prepared to regulate Money Remitters. - Enforcement powers and sanctions - TCI concurs with recommendations on enforcement powers and sanctions and confirms: - decision taken to provide the FSC with the authority, mandate and resources to develop an adequate on-site and off-site supervision programme to ensure compliance with AML/CFT laws and regulations applicable to supervised entities. - steps will be taken to identify appropriate authorities for enforcement in sectors not currently under FSC supervision, such as gambling and real estate. - Money remitters are likely to be designated under FSC’s control. - There are no entities licensed under the Business Licensing Ordinance to carry out currency exchange activity in the Islands. - TCI will not change the Governor’s regulatory powers under sections 26 and 32 of the PCO (powers of the Governor in Council). - Co‑operation between supervisors and other competent authorities - TCI concurs with establishing an FIU that meets Egmont Group criteria. - Banking, Insurance and Trustee Licensing Ordinances allow Superintendents to exchange information with overseas regulatory authorities without recourse to the Licensing Committee; similar provisions may be necessary in the Mutual Fund and Investment Dealers Ordinances. - The recommendation that FSC should be given adequate resources as detailed in the Basel Core Principles Assessment has been addressed. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr0524.pdf_