## cr0591 - Preface ## Source details **Canonical URL:** [cr0591 - Preface](https://www.imf.org/-/media/files/publications/ofca/english/cr0591.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr0591.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr0591.pdf.json) --- ### Preface — scope, mission, and team - Assessment: Offshore Financial Center Assessment Report for the Cayman Islands of supervision in banking, insurance, and securities based on: - the Basel Committee’s Core Principles for Effective Banking Supervision, - the IAIS’s Insurance Core Principles, - IOSCO’s Objectives and Principles of Securities Regulation. - AML/CFT assessment: based on the October 2002 AML/CFT Methodology. - Mission dates: September 29 to October 10, 2003. - Mission composition included: - Ms. Mary G. Zephirin (Mission Chief), Messrs. Salim Darbar and Nigel Davies, and Ms. Nancy Rawlings (all MFD); - Messrs. Stefan Niessner (Deutsche Bundesbank), Timothy Sullivan (Consultant), Michael Deasy (Central Bank of Ireland); - Ms. Margaret Cotter (Consulting Counsel, LEG); - Ms. Nirmaleen Jayawardane (Mission Assistant, MFD); - An independent assessment expert, Ms. Amalin Flanegin (Public Prosecutor, Aruba), evaluated law enforcement sections. - Meetings held with the Governor, Cabinet members, senior CIMA managers and staff, the Cayman Islands Stock Exchange CEO, public officials, industry associations, financial institutions, and auditors. - Data: tables updated to include end 2003 data; textual data largely that available at the time of the mission. ### Executive Summary — key findings - The Cayman Islands is a major supplier of cross-border financial services: - US$1 trillion in international banking assets of banks headquartered in over 55 different jurisdictions in 2002. - Second largest jurisdiction in terms of number of captive insurance companies. - Important domicile for hedge funds. - Cayman Islands Stock Exchange (CSX) provides a listing service primarily for mutual funds and specialist debt securities; CSX performs no trading. - AML/CFT regime: effective with a developed compliance culture following legal reforms and supervisory improvements since 2000. - Since 2001 legislative, rule, and guideline development improved regulation; 2003 Monetary Authority Law (MAL) amendment enhanced CIMA autonomy by: - granting licensing powers to CIMA; - excluding official members of cabinet from CIMA’s Board of Directors; - reinforcing international cooperation among CIMA’s four principal functions. - Regulators: CIMA is the primary regulator apart from the Stock Exchange Authority. ### Strengths and vulnerabilities — high-level observations - Overall: implementation of financial regulation and supervision broadly complies with assessed standards. - Cross-cutting issues affecting regulators and supervision: - CIMA’s operational autonomy could be strengthened: - Governor in Cabinet may give general directions to CIMA, potentially inhibiting autonomy. - Provisions requiring Governor in Cabinet approval for issuance/amendment of rules, statements of principles, or guidance should be removed. - CIMA should be able to enter into memoranda of understanding (MOUs) on its own authority. - Enforcement powers should include the ability to impose meaningful administrative fines. - Serious staff shortage at CIMA; authorities encouraged to prioritize recruitment, training, outsourcing, secondment, deepening data collection, and broadening automated analysis to meet planned staff complement by end of 2004. - International cooperation mechanisms require strengthening by removing requirement that CIMA consult government authorities prior to answering non-routine foreign regulator information requests. - Banking supervision largely complies with Basel Core Principles but would benefit from technical enhancements. - AML/CFT regime: robust but complex; recommended consolidation and reinforcement including: - consolidate legal provisions and extend international conventions, - strengthen preventive measures and proceeds tracing, - provide FIU ability to transmit information without approval, - tighten customer due diligence with regulated overseas introducers, - formalize internal controls and audit practices, - verify AML compliance of newly regulated market intermediaries. - Insurance sector: good practices need regularization into regulations, rules, and guidelines; staffing increases prioritized. - Securities regulation: largely accords with IOSCO except mutual funds supervision; regime for funds open to the public needs strengthening; supervisory powers should be explicit in the Mutual Funds Law; acute staffing shortages. ### Key recommendations (selected) - CIMA — Powers and Resources: - Remove requirement that Governor in Cabinet approve issuance/amendment of CIMA rules, guidance, etc., in the Monetary Authority Law (MAL) (2003 Revision). - Urgently address CIMA staff deficits by recruitment, training, outsourcing, or secondment. - Enhance the fine (currently at a maximum of C$1,000) for breaches of regulations and rules to provide a credible deterrent. - Banking: - Strengthen prudential guidance and requirements to improve compliance with Basel Core Principles. - AML/CFT: - Ensure the UN International Convention for the Suppression of the Financing of Terrorism (1999) is extended to the Islands and that the Palermo Convention is extended following U.K. ratification. - Adopt stricter and more explicit preventive measures including internal audit and wire transfers (wire transfers at least within the two-year phase-in period); enhance the compliance officer function. - Ensure terrorism financing laws allow effective restraint of property of those who finance terrorism. - Consider limiting broad exemption from identification requirements in the MLR for international business and strengthen mechanisms for introduced business. - FIU should be able to share SAR information with other FIUs on the basis of the Egmont agreement without prior Attorney General approval; FIU Director should be able to enter into agreements with overseas FIUs without prior consent of the AML Steering Group. - Insurance: - Formalize existing good practices into regulations, rules, and guidelines appropriate to the Cayman industry. - Prioritize increasing staff resources. - Securities: - Provide detailed consumer protection requirements for mutual funds open to the public. - Amend the Mutual Funds Law to align with modern supervisory norms, including specific inspection powers as in section 16 of SIBL. - Place authority for supervision of the CSX in CIMA, replacing the current Authority. - Cross-Border Cooperation: - Remove requirement that CIMA consult with the Attorney General and the Financial Secretary before sharing non-routine information with foreign supervisors; allow CIMA to use its own judgment. - Remove requirement that CIMA obtain approval from the Governor in Cabinet before entering into MOUs. ### Report structure and context - Module II OFC assessment conducted at the Government’s invitation from September 29–October 10, 2003, under the OFC Assessment Program (Executive Board approval July 2000). - Volume I: financial system description, regulatory and supervisory arrangements, and Reports on Standards and Codes (ROSCs). - Volume II: detailed assessments based on Basel Core Principles, IAIS Insurance Core Principles, IOSCO Objectives and Principles, and the AML/CFT methodology for FATF 40+8 Recommendations. *Offshore Financial Center Assessment Report for the Cayman Islands (mission: September 29–October 10, 2003).* --- ### Geography, population, and economy - Geography and population: - The Cayman Islands consist of Grand Cayman, Cayman Brac, and Little Cayman. - Total land mass: about 100 square miles. - Population: 43,000 (2002 estimate), about 60 percent Caymanian. - Location distances: about 480 miles south of Miami; 180 miles northwest of Jamaica; 150 miles south of Cuba. - Estimated per capita income in 2002: US$35,000. - Government and legal system: - Constitutional framework: Constitution Orders of 1972 and 1993. - Status: overseas territory of the United Kingdom. - Executive: Cabinet presided over by the Governor; Cabinet has eight members (three appointed by Governor: chief secretary, attorney general, financial secretary; five voted in by 15 elected Legislative Assembly members). - Judicial: Summary Court, Grand Court, Court of Appeal; appeals to U.K. Privy Council possible. - Economic arrangements: - Currency: Cayman Islands dollar, fixed at US$1.25. - Taxation: No direct taxes. - Fiscal position: fiscal surplus estimated at 4.6 percent of GDP in 2003. - Credit rating: Moody’s sovereign rating Aa3. ### Labor and employment - In 1999 about 58 percent of the workforce were expatriates with work permits. - In 1998 the banking and insurance sectors together provided 11 percent of employment. ### Financial sector overview and key statistics (selected) - Professional network: about 12 large law firms; all four major international accounting firms present. - Company and license types: - Exempted companies cannot operate domestically except in support of external business (Section 193 of Companies Law, 2003 Revision). - “A” licenses permit full domestic and international business; “B” licenses restrict business to international markets. - Mutual funds (number of funds): - 2,271 (1999), 3,014 (2000), 3,648 (2001), 4,285 (2002), 4,808 (2003). - Mutual fund administrators: - 176 (1999), 202 (2000), 217 (2001), 230 (2002), 195 (2003). - Stock market listings and market capitalization (in millions of US dollars as reported): - Number of listings (excluding programs): 385 (1999), 418 (2000), 710 (2001), 735 (2002). - Market capitalization: 34,936 (1999), 38,140 (2000), 36,298 (2001), 43,944 (2002). - Insurance (numbers and gross assets in millions of US dollars): - A License insurance companies: 32 (1999), 29 (2000), 30 (2001), 28 (2002), 28 (2003). - B License insurance companies: 498 (1999), 517 (2000), 543 (2001), 600 (2002), 644 (2003). - Pure captives: 303 (1999), 303 (2000), 317 (2001), 356 (2002), 387 (2003). - Gross assets for B License: 12,027 (1999), 14,836 (2000), 14,993 (2001), 17,733 (2002), 19,247 (2003). - Gross assets for pure captives: 7,165 (1999), 8,348 (2000), 8,951 (2001), 9,941 (2002), 11,569 (2003). - Banking (selected counts and assets): - “A” License banks: number of banks 4 (1999–2003). - “A” License bank assets: 4,535 (1999) and 5,733 (2003) (in millions of US dollars reported). - “B” License banks: numbers 262 (1999), 267 (2000), 243 (2001), 213 (2002), 192 (2003). - “B” License bank assets: 503,255 (1999) and 558,364 (2003) (in millions of US dollars as reported). - Bank and trust numbers: 27 (1999), 27 (2000), 27 (2001), 26 (2002), 23 (2003); assets reported in table context as 145,570 and 121,985. ### Banking sector operations and Basel-related statistics - Banks primarily serve institutional functions; over 90 percent of business is interbank bookings. - End 2002 counts: 30 “A” license banks and 353 “B” license banks (five with restricted license). - Category counts (end of 2002): - Category “A” Banks: 30 licensees at end 2002. - Category “B” Banks: 353 licensees. - Restricted “B” Bank: 5 licensees. - Banking asset figures: - Assets of locally incorporated banks: C$641 million in 1998; C$1.11 billion in 2002. - Total international assets and liabilities held by banks in the Cayman Islands: US$1.04 trillion, of which 70 percent originate from the Americas. - Capital requirements: - Minimum capital adequacy ratio: 12 percent for local retail banks and subsidiaries of banks licensed outside the Cayman Islands. - Minimum capital adequacy ratio: 15 percent for privately owned banks. - Supervision: - BSD supervises banks with a comprehensive risk-based program: continuous off-site surveillance, periodic on-site inspection, ongoing communications with licensees and home supervisors. - Inspection frequency: annual inspections of retail banks and banks where CIMA is home supervisor; other licensees with physical presence inspected every two years; routine inspections of local offices of subsidiaries and branches scheduled at least every second or third year. ### CIMA: organizational structure, powers, and resources - Regulatory scope: CIMA regulates banking, insurance, investments, securities, fiduciary services, company managers, money services, and other financial service providers, except CSX (regulated by Stock Exchange Authority). - MAL (2003 Revision) outcomes: - No CIMA director may be a member of Cabinet. - CIMA given direct powers to issue and revoke financial services licenses. - Up to 10 directors appointed by the Governor for renewable three-year terms; four directors are overseas directors. - Managing Director appointed by the Governor; Governor may terminate appointment after consultation with Board on Board recommendation. - Two board members are managing directors of licensees but do not sit in meetings affecting the licensee’s business. - CIMA staffing: - Staff at time of mission: 87. - Planned staff complement by end of 2004: 125. - Banking Supervision Division: over 300 banks under jurisdiction and only 26 positions (apparent understaffing). - Powers and limitations: - CIMA may access books, records, and documents and request information from relevant persons. - MAL allows CIMA to share supervisory information with other supervisors, but non-routine disclosures require notifying the Attorney-General and Financial Secretary. - Enforcement powers limited by a C$1,000 maximum fine for breaches of rules under some provisions; recommendation to increase monetary penalties to significant amounts. - CIMA can enter into MOUs but MAL currently requires Governor in Cabinet approval for such MOUs. ### Regulatory divisions and functions - CIMA regulatory divisions: banking, insurance, investments, securities, fiduciary services. - Support divisions: Legal Division; Compliance Division; Policy and Research Division. - BSD supervises banks, banks with trust licenses, and non-bank financial institutions. - Insurance Division supervises domestic and captive insurers, managers and intermediaries. - Investments Division supervises mutual funds (including fund administrators) and market intermediaries. ### Stock Exchange Authority (SXA) and CSX oversight - SXA composition: Financial Secretary, Managing Director of CIMA, Attorney General (or designate), Deputy Financial Secretary, plus two Governor-appointed members. - SXA statutory powers: obliging CSX to establish/change rules and approving major policies and rules. - Governor in Cabinet may regulate tenure of SXA members and basic procedures. - Recommendation: consider transferring supervision of CSX from SXA to CIMA. ### Fund industry and service providers - Fund industry: - About ninety percent of funds are hedge or hedge-type funds (defined as funds which short sell). - Typical minimum investor subscription: US$50,000. - Investor target: sophisticated investors. - Eighty percent of fund sponsors are from United States. - Over 4,000 mutual funds domiciled by end 2003. - Mutual fund licensing breakdown (end-year totals to 2003): - Administered: 617 (1999), 701 (2000), 659 (2001), 641 (2002), 592 (2003). - Licensed: 44 (1999), 50 (2000), 52 (2001), 51 (2002), 48 (2003). - Registered: 1,610 (1999), 2,263 (2000), 2,937 (2001), 3,593 (2002), 4,168 (2003). - Administrators at end September 2003: - 84 full administrators, 108 restricted administrators, 10 exempted administrators. - About 200 fund administrators overall; 108 restricted administrators without a physical presence at end September 2003. - Administrators’ functions: provide director/trustee/general partner services; transfer fund shares; calculate NAVs; ensure regulatory compliance; some provide full back office and investment management (most investment management activity carried out overseas). - Mutual funds: registered funds minimum subscription US$50,000; licensed funds theoretically open to public though in practice targeted at sophisticated investors; fewer than ten funds truly available to the public. - Recommendations: introduce formal consumer protection requirements for funds open to the public; revise upwards the US$50,000 threshold. ### Company and trust service providers - Governance: Companies Management Law (2003 Revision) and regulations; supervised by Fiduciary Services Division. - Licensing categories: - Corporate service license for basic services; companies management license for substantive functions; trust companies licensed under Banks and Trust Companies Law (2003 Revision); insurance and fund managers licensed under insurance and SIBL. - Compliance requirements: - Segregation of licensee funds from managed company funds. - Annual audits supplied to CIMA, including audit of compliance with PCCL and regulations. - Carry liability insurance. - Supervision for AML/CFT purposes. - Selected statistics: - Number of company service providers: 44 (1999), 51 (2000), 66 (2001), 82 (2002), 77 (2003). - Company managers (full): 44 (1999), 51 (2000), 66 (2001), 81 (2002), 72 (2003). - Number of trust companies: 225 (1999), 233 (2000), 242 (2001), 228 (2002). - Nominee trust: 110 (1999), 109 (2000), 115 (2001), 117 (2002), 106 (2003). --- ### AML/CFT assessment — main findings and recommendations - Assessment timeframe: information as of October 9, 2003. - Developments and legal changes: - 2000: Money Laundering Regulations (MLR) adopted. - 2001: Terrorism (United Nations Measures) (Overseas Territories) Order 2001 (TUNMOTO) extended. - 2003: Terrorism Law (TL) enacted. - Achievements: - Mandatory suspicious activity reporting (SARs), enhanced CFT coverage, immobilization of bearer shares, regulatory coverage for money service providers, improved gateways for information sharing, clear AML compliance responsibilities. - CI conducted retrospective due diligence on relationships predating September 2000. - Criminalization and confiscation: - ML criminalized broadly consistent with Vienna and Palermo Conventions; offenses extend to proceeds of all serious (indictable) offenses; self-laundering and corporate liability covered. - FT criminalized based on 1999 UN ICSFT, but Order in Council extending ICSFT to CI was not yet in place at time of assessment. - Confiscation provisions exist; amendments suggested to PCCL to specifically provide for confiscation of laundered property and make confiscation mandatory for non-drug related offenses. - FIU and information flows: - FIU meets Egmont standards; analyzes SARs; access to a wide range of databases; shares information regularly with foreign counterparts but SARs shared only with Attorney General authorization. - PCCL amendments provide FIU enhanced powers including requiring supplemental SAR information and applying for freezing orders. - Recommendations: FIU Director should be able to sign working agreements with foreign counterparts without prior consent of AML Steering Group; permit FIU to disclose SARs to foreign FIUs without Attorney General consent; FIU should publish yearly reports. - Law enforcement and cooperation: - Adequate powers exist to compel production of records; some investigative powers (e.g., account monitoring orders) limited to terrorism investigations. - MLAT requests processed by Attorney General’s Chambers in six weeks. - From 1986 to 2003, 219 requests from the U.S. to CI were processed. ### Preventive measures and MLR issues (selected recommended changes) - Make mandatory that financial businesses verify identity of customers rather than merely “maintain procedures to identify.” - Require retention for at least 5 years after the end of the business relationship of business correspondence and post account opening non-transaction records. - Require internal audit function to test AML/CFT compliance and broaden compliance officer duties to management level. - Reevaluate regulations permitting reliance on due diligence performed by regulated entities elsewhere; require eligible introducers to provide names/addresses of controllers and attest to due diligence performed. - Adopt legal requirement regarding minimum information to accompany wire transfers within the two-year FATF phase-in period. - Reassess Attorney General consent requirement before FIU disclosure of SARs and CIMA disclosure procedures. - Make administrative fines available as sanctions for supervisors. ### Authorities’ response and post-mission developments - Authorities: Attorney General’s Chambers and CIMA consider IMF assessment of AML/CFT as “compliant” or “largely compliant” for most Recommendations except FATF 17 and 20. - FATF 17 (tipping-off): Attorney General’s Chambers expressed reservations about extending tipping-off offense to mere suspicion. - Post-mission: FRA vacancies filled; Government requested U.K. in August 2004 to extend ICSFT to the Cayman Islands; CIMA to address many GN changes within 2005 workprogramme; implementation proposals on administrative fines under development. --- ### Securities regulation and IOSCO assessment — key points - Assessment basis: review of legislation, statements of guidance/guidance notes, and a completed draft IOSCO assessment template submitted by CIMA. - Market structure and statistics: - Stock Exchange: listing-only function; about 700 listings (vast majority mutual funds); 6 member brokers (5 affiliated to banks); established 1997. - Mutual funds (end September 2003): 4,693 funds (4,037 registered; 50 licensed; 606 administered). - Registered funds minimum investing threshold: US$50,000. - Licensed funds theoretically open to the public but practically targeted at sophisticated investors; fewer than ten funds truly available to the public. - Overwhelming majority of funds are hedge or hedge-type. - SIBL: Securities Investment Business Law came into effect July 2003; existing intermediaries had until January 2004 to apply for a license. - General preconditions: supervisory regime reflects developed countries’ approaches; sound legal, taxation, and accounting system. ### Principle-by-principle summary and recommendations - Regulator (Principles 1–5): responsibilities clearly set; CIMA operates independently broadly but legal provisions involving Governor could compromise independence and should be deleted; securities division has a very serious staff deficit. - Self-regulatory organizations (Principles 6–7): CSX limited to listing; arguments for CIMA to regulate CSX. - Inspections, investigations, enforcement (Principles 8–10): CIMA has broad powers; inspection powers over mutual fund administrators should be explicit in Mutual Funds Law; consider additional reporting (e.g., half-yearly management accounts). - Information sharing (Principles 11–13): provision for sharing with overseas regulators exists but non-routine requests require advice of Financial Secretary and Attorney General; recommend giving CIMA sole responsibility. - Collective Investment Schemes (Principles 17–20): regime designed for sophisticated investors; for funds open to public current regime inadequate—absence of standard consumer protection requirements; recommendations include prescriptive consumer protection, require all funds to calculate NAVs, revise US$50,000 threshold upward (CIMA proposed US$100,000), provide for cancellation of registered/administered funds, and revise Mutual Funds Law to include specific inspection provisions. - Market intermediaries (Principles 21–24): SIBL can provide sound basis provided adequate staffing; amend section requiring auditor who detects serious shortcomings to notify licensee at same time as CIMA to avoid compromising CIMA’s corrective action and potential AML tipping-off issues. - Secondary market (Principles 25–30): not applicable (CSX does not trade). ### Key securities recommendations (selected) - Substantially increase resources and prioritize training in securities division. - Introduce prescriptive consumer protection regime for funds open to the public. - Revise Mutual Funds Law to align with modern supervisory concepts and SIBL. - Revise upwards the registered funds threshold of US$50,000. - Consider transferring supervisory responsibility for CSX to CIMA. ### Authorities’ response (selected) - CIMA: IMF assessed securities regulation as “implemented” or “broadly implemented” for 17 Principles, “partially implemented” for eight, “not implemented” for one, four “not applicable.” - CIMA proposes HR plan implementation for Investment & Securities Division in 2005; proposed increases in registered funds threshold to US$100,000; developing rules on NAV calculation; issuing RF-2 reporting form for mutual funds in early-mid 2005. - MAL amendments: Section 50(1) MAL amended in January 2004 to extend scope of MOUs beyond consolidated supervision. --- ### Insurance sector — structure, supervision, and recommendations - Market composition (as at September 29, 2003): - 769 insurance licensees: 28 domestic Class “A” Insurers, 615 Class “B” Insurers, 28 Licensed Managers, 22 Brokers, 76 Agents. - Class “A” insurers: 4 locally incorporated companies and 24 branches of non-Cayman companies. - Offshore market: Class “B” companies not permitted to underwrite domestic business. - 87 percent of offshore business emanates from North America. - Major premium classes by volume: workers’ compensation 25 percent, medical malpractice 25 percent, products liability 17 percent. - Supervision: - Insurance supervision based on Insurance Law (2003 Revision). - Insurance Division of CIMA had nine staff at mission time, budgeted to increase to fourteen. - High supervisory workload: 425 business plan changes and 195 prudential meetings in first half of 2003. - On-site inspections suspended at time of mission due to staffing; recommenced in December 2003 (focused inspections resumed November 2003). - Prudential policy gaps and recommendations: - Need to consider and formalize asset valuation, liability valuation, solvency, and capital adequacy conventions appropriate to company types and lines of business. - Prudential rules to be risk-based and embodied in law, regulation, or rule for transparency and consistency. - Extend computerized reporting system to collect more data and automate analysis to allow staff to focus on risk-based on-site inspections. - IMF assessment: IAIS 17 Core Principles assessed as “observed” or “largely observed” for 11 Principles and “materially non-observed” for six (mainly due to staffing or lack of codified rules). - Authorities’ response: vacancies filled subsequently (two senior analysts and one analyst); staffing needs prioritized at Board level; aim to implement HR plan for Insurance Division in 2005; prepare recommendations to government regarding Insurance Law changes in early 2005; IT study and mapping of upgrades commenced. --- ### Basel Core Principles (CP) assessment — summary - Assessment dates: September 29 to October 10, 2003. - Assessors: Mr. Timothy Sullivan and Mr. Stefan Niessner. - Assessment basis: laws, regulations, CIMA documents, manuals, reporting forms, meetings, and CIMA self-assessment. - Banking sector license and structure: - Category “A” Banks: 30 licensees at end 2002. - Category “B” Banks: 353 licensees. - Restricted “B” Bank: 5 licensees. - BSD also supervises two small credit unions, a building society, and a small development bank. - Banking assets and preconditions: - Assets of locally incorporated banks: C$641 million in 1998; C$1.11 billion in 2002. - Total international assets/liabilities: US$1.04 trillion; 70 percent originate from the Americas. - Minimum capital adequacy ratios: 12 percent for local retail banks and subsidiaries of foreign banks; 15 percent for privately owned banks. - Supervisory methodology: - Prudential regulations generally in accordance with Basel standards; required minimum risk capital standards two-tiered and significantly above Basel Accord minimums. - CIMA issuing rules and guidance on risk management, internal controls, internal audit, corporate governance, and AML implementation. - Off-site surveillance, on-site inspection, and reporting programs in place. - Formal enforcement: - CIMA may require actions for BTCL contraventions; guidelines on ladder of compliance; limited personal liability powers; monetary penalties under MAL limited to C$1,000 in some contexts; recommendation to increase fines. - Cross-border supervision: - Banks prepare supervisory reports on a global consolidated basis. - Prior CIMA approval required for banks to open subsidiaries/branches outside Cayman Islands. - CIMA assesses home supervisor consolidated supervision before granting licenses to branches/subsidiaries. - Authorities’ response to IMF recommendations: - IMF assessed banking supervision as “compliant” or “largely compliant” with all 30 recommendations included in the 25 Core Principles; legislative proposals on CPs 3 and 5 submitted to government; proposal on CP 22 under development. - MAL changes under consideration to permit unsolicited supervisory information exchanges and to reconsider Governor’s approval role. *Source: Offshore Financial Center Assessment Program mission assessing the Cayman Islands Monetary Authority (CIMA).* ### Preface................................................................................................................. ### cr0591 - Preface ### Preface — scope and mission - The Offshore Financial Center Assessment Report for the Cayman Islands assesses supervision in the banking, insurance, and securities sectors on the basis of: - the Basel Committee’s Core Principles for Effective Banking Supervision, - the IAIS’s Insurance Core Principles, - IOSCO’s Objectives and Principles of Securities Regulation. - An assessment of the anti-money laundering and combating the financing of terrorism (AML/CFT) regime was carried out based on the October 2002 AML/CFT Methodology. - The assessments were carried out during a mission from September 29 to October 10, 2003. - Mission composition included: - Ms. Mary G. Zephirin (Mission Chief), Messrs. Salim Darbar and Nigel Davies, and Ms. Nancy Rawlings (all MFD); - Messrs. Stefan Niessner (Banking Supervision, Deutsche Bundesbank), Timothy Sullivan (Consultant, Banking Supervision), and Michael Deasy (Securities Supervisor, Central Bank of Ireland); - Ms. Margaret Cotter (Consulting Counsel, LEG); - Ms. Nirmaleen Jayawardane (Mission Assistant, MFD); - An independent assessment expert, Ms. Amalin Flanegin, Public Prosecutor, Aruba, Kingdom of the Netherlands, evaluated the law enforcement sections of the methodology. - Meetings were held with His Excellency, the Governor; other members of Cabinet; senior managers and staff of the Cayman Islands Monetary Authority (CIMA); Ms. Valia Theodoraki, Chief Executive Officer, Cayman Islands Stock Exchange; other public sector officials; industry associations; various financial institutions; and auditors. - Data in the tables of the report were updated to include end 2003 data. Data cited in the text is largely that available at the time of the mission. ### Executive Summary — key findings - The Cayman Islands is a major supplier of cross-border financial services: - US$1 trillion in international banking assets of banks headquartered in over 55 different jurisdictions in 2002. - The Cayman Islands is the second largest jurisdiction in terms of the number of captive insurance companies. - An important domicile for hedge funds. - The Cayman Islands Stock Exchange provides a listing service primarily for mutual funds and specialist debt securities, but performs no trading. - There is an effective regime to combat money laundering and the financing of terrorism, with a developed compliance culture following legal reforms and improved supervisory procedures since 2000. - Since 2001, legislative, rule, and guideline development introduced an increasingly effective system of regulation; CIMA was provided with improved autonomy by the 2003 amendment of the Monetary Authority Law. - CIMA was endowed with licensing powers; official members of cabinet were excluded from its Board of Directors; international cooperation was reinforced among its four principal functions. - CIMA is the only regulator, apart from the Stock Exchange Authority. ### Strengths and vulnerabilities — high-level observations - Implementation of financial regulation and supervision complies broadly with standards in assessed areas. - Issues affecting regulators and supervision across sectors: - CIMA’s operational autonomy could be strengthened: - The possibility for the Governor in Cabinet to give general directions to CIMA potentially inhibits operational autonomy. - Provisions requiring the Governor in Cabinet’s approval for the issue and amendment of rules and statements of principles or guidance should be removed. - CIMA should be able to enter into memoranda of understanding on its own authority. - CIMA’s enforcement powers would be strengthened by the ability to impose meaningful administrative fines. - CIMA suffers from a serious staff shortage; authorities are strongly encouraged to prioritize recruitment, training, outsourcing, secondment, deepening data collection, and broadening automated analysis to meet the staff complement planned by end 2004. - Mechanisms for international cooperation require strengthening by removing the requirement that CIMA consult with government authorities prior to answering non-routine requests for information from foreign regulators. - Banking supervision largely complies with the Basel Core Principles but would benefit from technical enhancements to prudential guidance and requirements. - AML/CFT regime is robust and complex; further consolidation and reinforcement recommended: - Consolidate legal provisions and extend international conventions. - Strengthen and clarify requirements for preventive measures and proceeds tracing. - Provide the FIU with the ability to transmit information without approval. - Tighten customer due diligence requirements with regulated overseas introducers. - Formalize internal controls and audit practices. - Verify compliance with AML requirements on newly regulated market intermediaries. - Insurance sector: good practices need regularization and formalization in regulations, rules, and guidelines; increasing staff resources or substitutes should be prioritized. - Securities regulation and supervision largely accord with IOSCO principles except for mutual funds supervision: - The regime for mutual funds needs strengthening for funds open to the public. - Supervisory powers should be explicitly reflected in the Mutual Funds Law rather than derived from general powers of the Monetary Authority Law. - Acute staffing shortages need to be addressed. ### Key recommendations (selected, as summarized) - CI Monetary Authority — Powers and Resources: - Remove requirement that the Governor in Cabinet approve issuance/amendment of CIMA rules, guidance, etc., in the Monetary Authority Law (MAL) (2003 Revision). - Urgently address CIMA staff deficits by recruitment, training, outsourcing, or secondment. - Enhance the fine (currently at a maximum of C$1,000) for breaches of regulations and rules to provide a credible deterrent. - Banking: - Strengthen prudential guidance and requirements to improve compliance with the Basel Core Principles. - AML/CFT: - Ensure the UN International Convention for the Suppression of the Financing of Terrorism (1999) is extended to the Islands and that the Palermo Convention is extended following ratification by the U.K. - Adopt stricter and more explicit preventive measures in areas including internal audit and wire transfers (the last at least within the two-year phase in period); enhance the compliance officer function. - Ensure terrorism financing laws allow effective restraint of property belonging to those who finance terrorism. - Consider limiting broad exemption from identification requirements in the MLR for international business and strengthen mechanisms for introduced business. - FIU should be able to share SAR information with other FIUs on the basis of the Egmont agreement without prior approval of the Attorney General; FIU Director should be able to enter into agreements with overseas FIUs without prior consent of AML Steering Group. - Insurance: - Formalize existing good practices into regulations, rules, and guidelines appropriate to the Cayman industry. - Prioritize increasing staff resources. - Securities: - Provide detailed consumer protection requirements for mutual funds open to the public. - Amend the Mutual Funds Law to align with modern supervisory norms, including specific inspection powers as in section 16 of SIBL. - Place authority for supervision of the Cayman Islands Stock Exchange (CSX) in CIMA, replacing the current Authority. - Cross-Border Cooperation: - Remove requirement that CIMA consult with the Attorney General and the Financial Secretary before sharing non-routine information with foreign supervisors; allow CIMA to use its own judgment. - Remove requirement that CIMA obtain approval from the Governor in Cabinet before entering into memoranda of understanding (MOUs). ### Introduction and report structure - The Module II OFC assessment was conducted at the invitation of the Government of the Cayman Islands from September 29–October 10, 2003, under the OFC Assessment Program approved by the Executive Board of the Fund in July 2000. - Volume I describes the financial system and regulatory and supervisory arrangements and provides Reports on Standards and Codes (ROSCs). Volume II provides detailed assessments based on: - the Basel Core Principles for Effective Banking Supervision, - the IAIS Insurance Core Principles, - IOSCO Objectives and Principles for Securities Regulation, - the AML/CFT methodology for assessing compliance with the Financial Action Task Force 40+8 Recommendations. *Offshore Financial Center Assessment Report for the Cayman Islands (mission: September 29–October 10, 2003).* ### 3. The Cayman Islands consists of three islands, Grand Cayman, Cayman Brac, and ### The Cayman Islands consists of three islands, Grand Cayman, Cayman Brac, and Little Cayman ### Geography and population - Total land mass of about 100 square miles. - Population of 43,000 (2002 estimate), about 60 percent of whom are Caymanian. - Location distances: - about 480 miles south of Miami, - 180 miles northwest of Jamaica, - 150 miles south of Cuba. - Estimated per capita income in 2002 was US$35,000. ### Government and legal system - Constitutional framework established by Constitution Orders of 1972 and 1993. - Status: - An overseas territory of the United Kingdom (one analysis traces this to the 1670 Treaty of Madrid). - Parliamentary democracy since 1831. - Branches: - Executive: the Cabinet, presided over by the Governor. - Cabinet has eight members. - Three members appointed by the Governor—the chief secretary, attorney general, and the financial secretary—and also have seats in the Legislative Assembly. - Five Cabinet members (ministers) are voted into office by the 15 elected members of the Legislative Assembly. - The Governor has reserve authority over defense, external affairs, internal security, the police, and the public service. - The Financial Secretary’s portfolio (Finance & Economics) includes financial institutions, the Monetary Authority, and statistics. - Legislative: Legislative Assembly. - Judicial: Summary Court, Grand Court, and Court of Appeal. - Grand Court is a superior court of record administering common law and equity of England and locally enacted laws. - Court of Appeal consists of a president and not less than two judges of appeal; further appeals possible to the Judicial Committee of the U.K. Privy Council. - Judges appointed by the U.K. Secretary of State for the Foreign and Commonwealth Office; the Governor appoints one as Chief Justice on the Secretary of State’s advice. - Governor appoints magistrates on the advice of the Chief Justice. - All legislation requires the assent of the Governor and the U.K. Secretary of State; the Governor can impose legislation with the Secretary of State’s consent if judged “in the interests of public order, public faith, and good government.” ### Economic arrangements and activity - Currency: Cayman Islands dollar, fixed at US$1.25. - Taxation: No direct taxes. - Main economic sectors: tourism and financial/business services (no current estimates of their contribution to GDP provided). - Fiscal position: fiscal surplus is estimated at 4.6 percent of GDP in 2003. - Credit rating: Moody’s sovereign rating for CI is Aa3. ### Labor and employment - In 1999, about 58 percent of the workforce was expatriates with work permits, predominantly from the Caribbean, Central America, the United States, Canada, the United Kingdom, and Ireland. - No current estimates of employment in the financial sector provided; in 1998 the banking and insurance sectors together provided 11 percent of employment. ### Financial institutions and markets — overview - Professional network: about 12 large law firms; all four major international accounting firms have local offices; several smaller accounting firms also present. - The Cayman Islands specializes in alternative risk management, securitization, and capital market structures and transactions. - Company and license types: - Exempted companies cannot operate domestically except in support of external business (Section 193 of Companies Law, 2003 Revision). - “A” licenses permit full domestic and international business; “B” licenses restrict business to international markets. - Sectoral legislation allows restricted licenses to do business only with persons or companies listed in the license. ### Financial sector key statistics (selected) - Table-level summaries (as provided by CIMA): - Mutual funds: - Number of Mutual Funds: 2,271 (1999), 3,014 (2000), 3,648 (2001), 4,285 (2002), 4,808 (2003). - Number of Mutual Fund Administrators: 176 (1999), 202 (2000), 217 (2001), 230 (2002), 195 (2003). - Stock market: - Number of listings (excluding programs): 385 (1999), 418 (2000), 710 (2001), 735 (2002). - Market capitalization: 34,936 (1999), 38,140 (2000), 36,298 (2001), 43,944 (2002) (in millions of US dollars as reported). - Insurance (numbers of licenses and gross assets): - A License insurance companies: 32 (1999), 29 (2000), 30 (2001), 28 (2002), 28 (2003). - B License insurance companies: 498 (1999), 517 (2000), 543 (2001), 600 (2002), 644 (2003). - Pure captives: 303 (1999), 303 (2000), 317 (2001), 356 (2002), 387 (2003). - Gross assets for B License: 12,027 (1999), 14,836 (2000), 14,993 (2001), 17,733 (2002), 19,247 (2003) (in millions of US dollars). - Gross assets for pure captives: 7,165 (1999), 8,348 (2000), 8,951 (2001), 9,941 (2002), 11,569 (2003) (in millions of US dollars). - Banking (selected counts and assets): - “A” License banks: Number of banks 4 (1999–2003). - “A” License bank assets: 4,535 (1999) and 5,733 (2003) (in millions of US dollars reported in Table 3/4). - “B” License banks: Numbers 262 (1999), 267 (2000), 243 (2001), 213 (2002), 192 (2003). - “B” License bank assets: 503,255 (1999) and 558,364 (2003) (in millions of US dollars as reported). - Bank and trust numbers and assets reported separately in tables (e.g., bank and trust numbers: 27 (1999), 27 (2000), 27 (2001), 26 (2002), 23 (2003); assets reported as 145,570 and 121,985 in the table context). - Geographical distribution (2002 and 2003) highlights: - A License banks and B License banks both numbered 4 A-license banks in 2002 and 2003; B-license banks numbered 213 (2002) and 192 (2003). - Assets by region (examples): Europe assets for B License banks reported as 276,487 (2002) and 326,940 (2003); USA assets reported as 132,752 (2002) and 147,457 (2003) (in millions of US dollars as presented). - Securities market details (end-year data to 2003): - Number of Listed Issues: 404 (1999), 441 (2000), 736 (2001), 754 (2002). - Mutual Funds (end-year totals): 291 (1999), 305 (2000), 587 (2001), 613 (2002). - Market Capitalization (in millions of US dollars): 34,936 (1999), 38,140 (2000), 36,298 (2001), 43,944 (2002). - Mutual Funds (classified by license type) — Number: 2,271 (1999), 3,014 (2000), 3,648 (2001), 4,285 (2002), 4,808 (2003). - Mutual Fund administrators by license type (number): 176 (1999), 202 (2000), 217 (2001), 230 (2002), 195 (2003). ### Banking sector operations and functions - Banks primarily serve institutional functions; over 90 percent of their business is interbank bookings. - At end 2002: 30 “A” license banks and 353 “B” license banks (five of which had a restricted license). - “A” licensees include one private domestically-owned bank (Cayman National Bank) and four international banks serving the domestic market; these are universal banks offering banking and investment services, including mutual funds. - U.S. banks commonly provide overnight accounts via offshore branches (sweep accounts) to pay clients more favorable interest rates. - Activities provided by banks include retail banking (by “A” licensees), structured finance, corporate banking for their group, corporate investments for headquarters, private banking, and mutual fund administration. ### Insurance sector structure and business lines - As of September 2003: - 28 “A” license insurance companies conducting domestic business. - 613 “B” license or captives, 370 of which are single parent captives, with 15 writing life at September 2003. - Captives administered by 28 licensed insurance managers. - Specialties: - Health care captives for non-profit agencies in the USA are a developed specialty. - Captives typically cover large deductibles on medical malpractice insurance. - Premium composition and lines: - The captive business represents 25 percent of total premiums (one-third in terms of company numbers). - Workers’ compensation insurance and products liability represent about 25 percent and 17 percent, respectively. - Almost all workers’ compensation is reinsurance (U.S. law requires insurance be provided by domestically admitted insurers); captives use approved U.S. insurers as fronting carriers and pay them a fee for assuming the risk, which is retroceded to the captive. ### Securities and mutual funds industry - Over 4,000 mutual funds domiciled in the Cayman Islands by end 2003. - About 200 fund administrators, 108 of whom are restricted administrators without a physical presence at end September 2003. - Administrators provide director, trustee, and general partner services; transfer fund shares; calculate NAVs; ensure regulatory compliance; and some provide full back office services and investment management, but most investment management activity is carried out overseas. - Mutual fund licensing breakdown (number by license type for end-year totals to 2003): - Administered: 617 (1999), 701 (2000), 659 (2001), 641 (2002), 592 (2003). - Licensed: 44 (1999), 50 (2000), 52 (2001), 51 (2002), 48 (2003). - Registered: 1,610 (1999), 2,263 (2000), 2,937 (2001), 3,593 (2002), 4,168 (2003). - Mutual fund administrators by license type (number): Exempted 21 (1999) to 10 (2003); Restricted 82 (1999) to 103 (2003) with intermediate years; Full 73 (1999) to 82 (2003). *Source: CIMA; Moody’s Investors Service, Cayman Islands Analysis, August 2003; Cayman Islands Compendium of Statistics, 2002; purchasing power parity estimate from the cited source.* ### 15. About ninety percent of the funds are hedge or hedge-type funds (defined as ### cr0591 - 15. About ninety percent of the funds are hedge or hedge-type funds (defined as ### Fund industry and service providers - About ninety percent of the funds are hedge or hedge-type funds (defined as funds which short sell). - Typical minimum investor subscription: US$50,000. - Investor target: sophisticated investors. - Eighty percent of fund sponsors are from United States; others include the United Kingdom, Hong Kong SAR, and Japan. - Cayman Islands (CI) attractiveness factors for hedge fund location: - No income tax. - Large number of lawyers specialized in engineering structures consistent with offering documents. - Specialist hedge fund auditors. - A few asset management firms cater mainly to high net worth individuals and institutional clients based in the Caribbean, Latin America, and the Far East; they also provide investment services for the captive insurance market. - All such firms have Qualified Intermediary status in the United States. ### Regulatory framework, oversight, and market integrity — institutional structure - Cayman Islands Monetary Authority (CIMA) is the regulatory authority for all financial institutions and services, including company managers and money services, except the CSX (regulated by the Stock Exchange Authority). - Monetary Authority Law amendment (2003) outcomes: - No CIMA director may be a member of Cabinet (previous prohibition concerned members of the Legislative Assembly). - CIMA given direct powers to issue and revoke financial services licenses. - Up to 10 directors appointed by the Governor for renewable periods of three years. - Managing Director appointed by the Governor; Governor may terminate appointment after consultation with the Board on the Board’s recommendation. - Four directors are overseas directors. - Two board members are managing directors of licensees but do not sit in meetings affecting the licensee’s business. - CIMA staffing: - Staff at time of mission: 87. - Planned staff complement by end of 2004: 125. - 2003 salary survey: salaries comparable with the industry except for a few posts. - Management judges recruitment and retention will depend on training, promotion prospects, and outreach by the authority. ### CIMA organizational and prudential supervision arrangements - CIMA regulatory divisions: banking, insurance, investments, securities, fiduciary services. - Support divisions: Legal Division; Compliance Division (deals with institutions where problems have been encountered); Policy and Research Division (drafts rules and guidance). - Banking Supervision Division (BSD) supervises banks, banks with trust licenses, and non-bank financial institutions. - Insurance Division supervises domestic and captive insurers, together with managers and intermediaries. - Investments Division supervises mutual funds (including fund administrators) and market intermediaries (asset managers, stockbrokers, financial advisors). ### Stock Exchange Authority (SXA) and CSX oversight - SXA composition: Financial Secretary, Managing Director of CIMA, Attorney General (or designate), Deputy Financial Secretary, plus two other Governor-appointed members. - SXA statutory powers include obliging CSX to establish and change rules and approving major policies and rules of the Exchange. - Governor in Cabinet may regulate tenure of SXA members and basic procedures of meetings and determinations. ### Anti-money laundering and combating the financing of terrorism (AML/CFT) - AML/CFT regulated through: - Misuse of Drugs Law, - Proceeds of Criminal Conduct Law, - Terrorism (UN Measures) (Overseas Territories) Order, - Terrorism Law 2003, - Related regulations, - Joint CIMA-industry guidance notes. - Wide range of financial service providers, certain real estate and legal services subject to criminal sanction for breach. - CIMA responsible for monitoring AML compliance via supervisory divisions in conjunction with prudential supervision. - Temporary gaps in AML supervision coverage for newly-regulated market intermediaries. - Cayman Islands’ FIU is a member of the Egmont group; AML regime coordinated by a Steering Committee of senior public servants. - Areas recommended for strengthening: - Ensure property belonging to those who finance terrorism can be effectively restrained. - Enhance ability to identify and trace criminal proceeds and terrorist financing. - Adopt stricter and more explicit preventive requirements in internal audit and wire transfers. - Issue guidance to all FSPs regarding internal controls and mandatory audits. - Tighten certain guidance notes and ensure mechanisms safeguard risks associated with eligible introducers and access to identification records of clients introduced from abroad. ### Companies and trust service providers - Governed by Companies Management Law (2003 Revision) and accompanying regulations; supervised by Fiduciary Services Division of CIMA. - Wide range of service providers included: law firms, asset managers, providers of registered office, company secretary, alternate director facilities, administering offices, trust service providers. - Licensing: - Corporate service license required for basic services (company formation, filing statutory returns). - Companies management license required for providers controlling assets, acting as secretary, authorized custodian, or other substantive functions. - Trust companies licensed under Banks and Trust Companies Law (2003 Revision). - Insurance and fund managers licensed under insurance and securities investment business laws. - Compliance requirements for licensees: - Segregation of licensee’s funds from managed company funds. - Annual audits supplied to CIMA, including audit of compliance with the PCCL, PCCL regulations and any codes of conduct. - Carry liability insurance. - Supervision for AML/CFT purposes. - Selected statistics for company and trust service providers (as presented): - Number of company service providers (by type of license): 1999: 44; 2000: 51; 2001: 66; 2002: 82; 2003: 77. - Company Service Providers (specific): 1999: 0; 2000: 0; 2001: 0; 2002: 1; 2003: 5. - Company managers (full): 1999: 44; 2000: 51; 2001: 66; 2002: 81; 2003: 72. - Number of trust companies (by type of license): 1999: 225; 2000: 233; 2001: 242; 2002: 228. - Trust (full): 1999: ....; 2000: 54; 2001: 55; 2002: 58; 2003: 49. - Trust (restricted): 1999: ....; 2000: 62; 2001: 63; 2002: 67; 2003: 73. - Nominee trust: 1999: 110; 2000: 109; 2001: 115; 2002: 117; 2003: 106. ### Strengths and vulnerabilities in regulatory and supervisory arrangements — summary findings - Overall assessment: CIMA’s supervision complies well with the standards considered. - Main vulnerability: serious lack of staff in all supervisory divisions, affecting implementation of supervisory policy in some areas. - Mitigating factors: use of staff from non-supervisory divisions, secondment from other agencies, ability to use external auditors. - Operational independence: CIMA has operational independence, but risks of infringement by government (Governor in Cabinet) powers exist. - Examples of potential infringement: - Approval of the Governor in Cabinet required for issuance or amendment of rules and guidance. - Approval required for signing memoranda of understanding (MoUs) with overseas regulatory authorities. - Enforcement powers limitation: C$1,000 ceiling on fines for breach of rules considered insufficient. ### Sectoral findings and recommendations - Banking - Strengths: - Well-developed banking infrastructure with internationally experienced and qualified workforce. - Up-to-date laws, rules, and guidance that generally meet international standards. - Sound and comprehensive licensing process for new entrants. - Well-developed on-site inspection and off-site monitoring integrated into supervisory planning. - Recommendations / vulnerabilities: - Establish procedures for consolidated supervision at holding company level of locally incorporated banks. - Branches of foreign banks licensed to serve local clientele are not required to have assigned capital; no prudential limits can be fixed for such branches — reliance on home supervisor’s consolidated supervision. - AML/CFT - Strengths: - Sound legal basis and robust legal framework resulting from major regulatory revisions over past four years. - Intense awareness and a sound supervisory program; Cayman Islands has been a leader in AML programs in the Caribbean. - Recommendations: - Consolidate provisions to address potential inconsistencies and remove unnecessary complexity. - Strengthen specific requirements to improve tracing, restraint, and preventive controls. - Implement Securities Investment Business Law for market intermediaries and issue guidance to FSPs regarding internal controls and mandatory audits. - Securities - Findings: - Regulation according to IOSCO principles well implemented except in the mutual fund area. - Main vulnerability: acute lack of staff. - High priority: nearly doubling staff planned by end 2004 and filling head and deputy head posts that were vacant at assessment time. - Mutual Funds Law requires revision to incorporate modern supervisory norms; inadequate consumer protection criteria for funds open to the general public. - Recommendation: transfer supervisory responsibility for the stock exchange from the Stock Exchange Authority to CIMA. - Insurance - Findings: - Measures and policies for insurance supervision are sound. - Implementation jeopardized by lack of staff, which hindered on-site supervision in the past year. - Recommendation: formally set out policies and procedures to give enhanced legal force, a risk-based focus, and reduce potential for inappropriately differential treatment of licensees. - Cross-Border Cooperation and Information-Sharing - Monetary Authority Law sets assistance to overseas regulatory authorities as a major function of CIMA but contains clauses that could infringe effectiveness of cooperation. - CIMA negotiating MoUs with foreign regulators where Cayman institutions have subsidiaries or branches; Monetary Authority Law requires approval of the Governor in Cabinet for such MoUs. - Authority must consult with the Financial Secretary and Attorney General before meeting non-routine regulatory requests; consultation requirement provides potential for interference though Attorney General has not objected to disclosure historically. ### Basel Core Principles assessment — overview and key statistics - Assessment undertaken with agreement of CIMA under the Offshore Financial Center (OFC) Assessment Program using the Core Principles Methodology. - Assessment dates: September 29 to October 10, 2003. - Assessors: Mr. Timothy Sullivan (formerly Office of the Comptroller of the Currency) and Mr. Stefan Niessner (Deutsche Bundesbank). - Assessment basis: review of laws, regulations, prudential guidelines, CIMA documents, meetings with CIMA staff, financial institutions, lawyers, and accountants; review of CIMA on- and off-site supervision manuals and reporting forms; Cayman Islands prepared a formal self-assessment before the mission. - Banking sector structure and license counts: - Three kinds of banks: - Category “A” Banks (may carry on banking business within and outside the Cayman Islands): 30 licensees at the end of 2002. - Category “B” Banks (not allowed to take deposits from persons resident in the Cayman Islands other than another bank or invest in assets representing claims on Cayman residents except limited exceptions): 353 licensees. - Restricted “B” Bank (restriction may be imposed that license holder not receive or solicit funds by trade or business from persons other than listed in undertaking): 5 licensees. - BSD also supervises two small credit unions, a building society, and a small development bank. - Banking asset figures: - Assets of locally incorporated banks: C$641 million in 1998; C$1.11 billion in 2002. - Total international assets and liabilities held by banks in the Cayman Islands: US$1.04 trillion, of which 70 percent originate from the Americas. - Capital requirements observed: - Minimum capital adequacy ratio: 12 percent for local retail banks and subsidiaries of banks licensed outside the Cayman Islands. - Minimum capital adequacy ratio: 15 percent for privately owned banks (banks that are not subsidiaries or branches of other banks). - Other observations: - Banks usually maintain capital well above the minimum ratios. - Data on aggregate return on assets and return on equity were not available. - Preconditions for effective banking supervision generally in place: no current macroeconomic vulnerabilities affecting prudential safeguards; public infrastructure supports enforcement of financial contracts; comprehensive laws supported by professional lawyers and judges; court system efficient; accounting/auditing profession using US-GAAP or IAS (IFRS). - No deposit insurance in the Cayman Islands. - CIMA cannot act as lender of last resort since CIMA’s liabilities must be covered for not less than 90 percent by foreign assets and CI dollar is pegged to the U.S. dollar. *Source: Offshore Financial Center Assessment Program mission assessing the Cayman Islands Monetary Authority (CIMA).* ### 41. Objectives, Autonomy, Powers, and Resources (CP 1)—Besides its monetary ### 41. Objectives, Autonomy, Powers, and Resources (CP 1)—Besides its monetary functions, the principal function of CIMA ### Institutional mandate, powers, and supervisory scope - Principal function: regulate and supervise banking business carried on in or from within the Cayman Islands in accordance with the Monetary Authority Law (MAL) and the Banks and Trust Companies Law (BTCL). - Required to promote and maintain a sound financial system in the Cayman Islands. - Responsible for authorization of banking establishments and their ongoing supervision. - Powers include access to books, records, and documents of any licensee and the ability to request any information from any relevant person. - Entitled to share supervisory information with other relevant supervisory authorities. ### Governance, independence, and resources - CIMA acts independently in day-to-day supervision. - The Governor may, after consultation with the Board of Directors, give CIMA general directions and approves CIMA’s budget. - Members of the Board of Directors, including the Managing Director of CIMA, are appointed by the Governor. - Staffing: Banking Supervision Division (BSD) has over 300 banks under its jurisdiction and only 26 positions, indicating apparent understaffing. - A 2003 salary survey indicated that salaries are comparable with the industry, except for a few posts. - CIMA, its Directors, and its employees are provided with legal protection while discharging their duties in good faith. ### Licensing, structure, and scope of banking activity - Only licensed banks may receive deposits from the public and use the word “bank” or any derivatives in their title. - The Banks and Trust Companies (License Application and Fees) Regulation (BTCLAF) sets required applicant information and licensing criteria. - Licensing process assesses ownership structure, fitness and propriety of directors and senior management, operating plan and internal controls, and projected financial condition. - Generally grants licenses only to branches and subsidiaries of banks licensed outside the Cayman Islands; CIMA assesses whether the home supervisor conducts consolidated supervision in accordance with internationally recognized standards. - Restrictions without prior CIMA approval: - No shares in a bank may be issued or transferred. - A locally incorporated bank may not open, outside the Cayman Islands, a subsidiary, branch, agency, or representative office. - Acquisition of a stake in another entity is treated as a change to the business plan and needs prior approval. ### Prudential framework and supervisory methodology - Prudential regulations generally in accordance with Basel standards; required minimum risk capital standards are two-tiered and significantly above those required by the Basel Capital Accord. - CIMA is issuing rules and detailed guidance on management of primary risks, internal control systems, internal audit programs, corporate governance, and anti-money laundering implementation. - These guidelines are used in practice via CIMA’s policies and complementary off-site surveillance and on-site inspection processes. - Banking Supervision Division operates a comprehensive risk-based supervision program: continuous off-site surveillance, periodic on-site inspection, ongoing communications with licensees and home supervisors. - Detailed supervisory policies and procedures exist for off-site and on-site processes; a comprehensive regulatory reporting program is in place. - Inspection frequency: - Annual inspections of retail banks and banks where CIMA is the home country supervisory authority. - Inspections of other licensees with a physical presence in the jurisdiction are conducted every two years. - Routine on-site inspections of local offices of subsidiaries and branches of foreign banks scheduled at least every second or third year; other banks prioritized by risk assessment. ### Information, reporting, and auditor relations - CIMA and the accounting profession require the use of international accounting, auditing, and reporting practices and standards; exceptions are known and understood by CIMA. - Audited financial statements are provided to CIMA annually and reviewed by CIMA-approved auditors. - Relations and cooperation between CIMA and the audit industry are effective. ### Formal enforcement powers and limitations - Where CIMA considers a bank has contravened the BTCL it may require any action it considers necessary. - Guidelines issued on the ladder of compliance clarify non-compliance procedures. - Limited powers to hold managers and directors personally liable; Rules under the MAL may provide for penalties on banks and/or management up to C$1,000. - CIMA can provide assistance and disclose requested information for routine regulatory requests; for non-routine requests CIMA must notify the Attorney-General and the Financial Secretary before disclosing. - MAL allows CIMA to enter into MoUs to assist consolidated supervision by foreign supervisors. ### Treatment of foreign banks and cross-border supervision - Banks must prepare supervisory reports on a globally consolidated basis. - Prior CIMA approval required for banks to open, outside the Cayman Islands, subsidiaries, branches, agencies, or representative offices. - CIMA assesses oversight of foreign offices and capability of local management before approval. - Subsidiaries of foreign banks are subject to the same prudential and regulatory reporting requirements as domestic banks; branches face equivalent licensing and reporting requirements but not all the same prudential requirements as locally incorporated banks. - CIMA facilitates visits by foreign regulators and routinely conducts joint inspections. ### Recommended actions (summary) - Legislative and regulatory changes advised to strengthen CIMA’s independence and enforcement: - Reconsider the Governor’s role in approval of regulations, rules, statements of principal and guidance, and signing of MoUs. - CIMA should use existing authority to impose monetary penalties for violating prudential requirements issued in the Rules. - MAL should be amended to increase the currently permitted minimal monetary penalties to significant amounts. - Consider requiring assigned capital for “A” licensed branches that provide retail banking services to protect local customers comparably to locally incorporated banks. - Table 8: Selected recommended action points (paraphrased as discrete recommendations) - CP 1(2) Independence: CIMA should be able to issue rules and statements of guidance without the approval of the Governor. - CP 3 Licensing Criteria: CIMA should require that applicants maintain initial capital funds in cash in the jurisdiction. - CP 5 Investment Criteria: Criteria for judging proposals for investment and acquisition should be included in law or regulation. - CP 7 Credit Policies: CIMA should develop and implement a Statement of Guidance on Investment Risk Management. - CP 8 Loan Evaluation and Loan-Loss Provisioning: CIMA should require that loan loss provisioning reporting include off-balance sheet items; provide for implementation of an asset classifications system in each licensee. - CP 10 Connected Lending: Require board approval and independent credit administration monitoring for connected/related party transactions exceeding specified limits. - CP 11 Country Risk: Complete issuance of Statement of Guidance on Country/Transfer Risk. - CP 18 Off-Site Supervision: Include information on asset classifications in regular required reporting. - CP 22 Remedial Measures: Use existing authority to impose monetary penalties and amend MAL to increase permitted monetary penalties to significant amounts. - CP 24 Host Country Supervision: Amend MAL to permit MoUs for consolidated supervision by CIMA and permit unsolicited supervisory information to host country supervisors. - CP 25 Supervision of Foreign Banks’ Establishments: Amend MAL to permit CIMA to provide unsolicited supervisory information to home country supervisors. ### Authorities’ response to IMF recommendations - IMF mission assessed banking supervision as “compliant” or “largely compliant” with all 30 recommendations included in the 25 Core Principles; recommendations are under review or implementation unless otherwise indicated. - Legislative proposals on CPs 3 and 5 have been submitted to government; a proposal from CIMA on CP 22 is under development. - For CPs 24 and 25: MAL does not restrict disclosure where information is already public or where disclosure would assist CIMA in carrying out supervisory duties; legislative change to expressly permit unsolicited supervisory information to home/host supervisors will be put forward by CIMA for government consideration. - Regarding CP 1(2): CIMA considers current process allows for transparency and accountability and does not interfere with operational independence. - For CPs 7, 8, 10, 11, 18: Response requires new or amended Rules or Statements of Guidance; necessary Statements of Guidance or Rules on Investment Securities and Derivative Risk Management; Loan Loss Provisioning; Asset Classification; Credit Risk Management; Country and Transfer Risk Management have either been issued for consultation or are under development. --- ### B. FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism — information, methodology, and main findings - Assessment basis: review of Cayman Islands (CI) AML/CFT legislation and regulations and guidance notes issued by CIMA and industry; discussions with the Governor, senior CI officials, and industry representatives. - Assessment timeframe: based largely on information available as of October 9, 2003. - Main AML/CFT findings and recent developments: - Achieving compliance with international standards has been a top priority; intense AML/CFT awareness in the business community. - Following a June 2000 FATF listing of CI as a non-cooperative country and territory (NCCT), CI devoted substantial attention to AML/CFT improvements; FATF removed CI from the NCCT list in June 2001. - Key legal and regulatory changes: - 2000: Money Laundering Regulations (MLR) adopted. - 2001: Terrorism (United Nations Measures) (Overseas Territories) Order 2001 (TUNMOTO) extended to CI. - 2003: Terrorism Law (TL) enacted. - Enhancements achieved: mandatory suspicious activity reporting, enhanced CFT coverage, immobilization of bearer shares, regulatory coverage for money service providers, improved gateways for information sharing, clear designations of AML compliance responsibilities. - CI conducted retrospective due diligence on relationships predating September 2000 (one of only two jurisdictions reported to have done so). ### Criminal justice measures and international cooperation - Criminalization: - Money laundering (ML) is criminalized broadly consistent with Vienna and Palermo Conventions; offenses extend to proceeds of all serious (indictable) offenses; self-laundering covered; corporate liability for ML. - ML criminalization occurs across several statutes (drug and non-drug regimes run parallel), creating consistency issues to be addressed. - Evidentiary burden to establish assets are proceeds of another’s offense is substantial. - Financing of terrorism (FT) is criminalized based on the 1999 UN ICSFT, but an Order in Council extending ICSFT application to CI is not yet in place. - Adequate and dissuasive sanctions are available for both ML and FT offenses. - Confiscation: - CI laws permit confiscation of the value of benefits derived from offenses. - For drug trafficking and drug-related ML, confiscation is mandatory and conviction-based. - For non-drug related offenses, confiscation is not mandatory though considered in practice. - Modifications to the PCCL needed to specifically provide for confiscation of laundered property and to ensure confiscation is mandatory. - Courts can forfeit drug or terrorist cash independently from criminal proceedings; civil forfeiture is under consideration. - Measures to facilitate identification and tracing of property are needed for domestic matters and to support foreign requests. - CI’s authority to confiscate proceeds and property used to finance terrorism has been used; training is provided regularly. ### Financial Intelligence Unit (FIU) and information flows - FIU functions and powers: - FIU meets Egmont standards; analyzes SARs; has access to a wide range of databases; shares information regularly with foreign counterparts (though SARs shared only with Attorney General authorization). - Recent PCCL amendments provide the FIU with explicit enhanced powers including ability to require supplemental SAR information and to apply for orders freezing bank accounts. - Guidance on reporting should be provided; FIU or CIMA should have authority to mandate reporting form and methods. - Recommendation: meaningful administrative fines for AML/CFT failures should be made available. - Attorney General consent currently required before disclosure of SARs to foreign FIUs should be reevaluated; consider permitting disclosures by the FIU. - PCCL should be modified to permit disclosures to foreign authorities in ML matters relating to drug trafficking. - FIU does not keep statistics on prosecutions and convictions but is addressing this; yearly FIU report publication should be established (to date only included as a small section of the annual Royal Cayman Islands Police report). - Director of the FIU should have full authority to sign working agreements with foreign counterparts without prior consent of the AML Steering Group. - FIU provides feedback to reporting entities and should continue to supply SAR-derived trend and typology information. ### Law enforcement, prosecutions, capacity, and cooperation - FIU and Attorney General’s Chambers responsible for ML/FT investigations and prosecutions. - Adequate powers exist to compel production of records; more robust information-gathering methods (e.g., account monitoring orders) are limited to terrorism-related investigations. - CI law enforcement may conduct cooperative investigations and coordinate seizure and forfeiture with other jurisdictions. - FIU and Police judged adequately staffed for ML/FT investigations; FIU to include civilian analysts who must be recruited and trained promptly. - Need for more feedback from the FIU about trends and typologies discovered in SARs. - International cooperation: - Statutes, a U.K.-U.S. treaty applicable to CI, and informal arrangements permit extensive AML/CFT cooperation. - MDICL revisions enhance mutual legal assistance by making the law available in non-drug matters and permitting assistance at the investigatory stage. - Enforcement of foreign confiscation orders available under the PCCL. - Powers to freeze assets of terrorists and financiers may be limited by restrictive PCCL provisions. - Extradition available with Commonwealth countries, overseas territories, the United States, and several European countries; CI can extradite its own nationals. - Extension of the ICSFT to CI would allow extradition to any ICSFT party for FT. - MLAT requests processed by the Attorney General’s Chambers in six weeks. - From 1986 to 2003, 219 requests from the U.S. to CI were processed. - Attorney General’s Chambers has sufficient trained staff and funds to handle requests. - CI can deport persons under certain circumstances under Immigration Law. - Law enforcement assistance can be obtained via police Interpol channels or informal arrangements. *Source: IMF assessment of Cayman Islands institutional and AML/CFT framework (assessment information current as of October 9, 2003).* ### 62. Supervision/enforcement—CIMA licenses and exercises prudential supervision over ### cr0591 - 62. Supervision/enforcement—CIMA licenses and exercises prudential supervision over ### Scope of CIMA's supervisory and enforcement powers - CIMA licenses and exercises prudential supervision over banks, insurance, mutual funds, securities investment business, corporate and trust service providers, and money services businesses including money remitters and currency exchange operations. - CIMA performs “fit-and-proper” checking of key officers, verifies institutional compliance with applicable laws, and grants and revokes licenses. - CIMA has authority to adopt administrative rules to develop the AML regime; in that case administrative fines would be available. - The law provides CIMA with specific powers to monitor compliance with AML/CFT regulations. ### Guidance Notes (GN13) and compliance expectations - CIMA, in conjunction with professional associations, issued revised GN13 under the MLR updating an April 2001 version. - The GN cover all relevant financial activities and company management, building societies, money transmission services, real estate services, custodian services and advice, and services relating to capital structure undertakings. - The GN reflect international standards and best practices regarding: - customer identification, - record keeping, - transaction monitoring, - suspicious activity detection and reporting, - training, - compliance, and - high-risk clients/activities. - The GN are not legally binding, but courts are to take them into account in determining compliance with the regulations. - Enhancement is desirable in certain areas, such as insurance and securities and the functions of the compliance officer. ### Licensing, KYC, on-site examinations, and supervisory resources - CIMA places great emphasis on strong due diligence in licensing and KYC for all prudentially regulated sectors. - On-site examinations are being conducted in all sectors; however, increased resources would allow greater coverage of licensed entities. - AML compliance is emphasized in examinations and follow-up is conducted on recommendations. - CIMA has access to all information as provided by laws and regulations. ### Reliance on eligible introducers and third-party due diligence - The GN allow FSPs to rely on eligible introducers in certain instances, with the FSP ultimately responsible for: - identifying the ultimate controller of the financial activities, and - ensuring that adequate and accessible identification records are available. - It is desirable that FSPs ensure third parties have effective customer due diligence measures and are well regulated and supervised. - Recommended additional safeguards: - require eligible introducers to provide names and addresses of controllers of the financial activities and attest to the customer due diligence conducted, - ensure speedy accessibility of identification documents. ### Internal audit, compliance testing, and guidance - Although internal audit and compliance are stressed in the GN, FSPs are not specifically required to establish an internal testing function; this requirement is indirectly addressed via on-site inspection programs that review internal audit functions. - CIMA has issued guidance to banks on internal controls and internal audits and should consider issuing similar guidance to all sectors, noting the need for audits relating to AML. ### Banking-sector specific assessment - CIMA’s Banking and Trust Supervision Department has implemented AML requirements for the banking sector. - Few branches and subsidiaries located abroad; no AML/CFT requirements exist about applying home jurisdiction minimum standards to subsidiaries. - Limited guidance and supervision exist for foreign branches. ### Insurance-sector specific assessment - CIMA’s Insurance Supervisory Department has conducted onsite inspections for all domestic life insurers. - Additional resources would permit increased supervisory oversight of the captive insurance industry. - Property and casualty insurance business is not covered by the AML requirements; this area has been deemed low risk in Cayman. - Consideration should be given to enhancing the GN to alert institutions to certain suspicious activities in the industry and the importance of internal controls. ### Securities-sector specific assessment - The Investment Supervisory Department has effectively implemented AML requirements for investment firms, including mutual fund administrators. - The Cayman Stock Exchange (CSX) regulates membership rules of member brokers and has ensured compliance with AML requirements. - Regulatory oversight responsibility is currently being transferred to CIMA as a result of SIBL. - CIMA is conducting the licensing process for market intermediaries who are members and non-members of CSX; on-site inspections may be necessary, particularly for non-members that may not have been previously regulated. ### Trust, company management, and other service providers - Trust and company service providers are considered “eligible introducers” under the MLR and are included in the assessment. - CIMA’s Fiduciary Supervisory Division supervises trust companies and company management service providers and applies the same high standards in licensing and KYC. - An on-site inspection program reflects the Offshore Group of Banking Supervisors’ Trust and Company Service Providers Statement of Best Practice. - Company managers must submit audited financial statements to CIMA; financial reporting by the companies is not required. - Company manager directors must submit a certificate of compliance with AML requirements on an annual basis. - CIMA should continue vigilance and incorporate new international guidance into supervisory processes. ### Preventive measures — legal and institutional framework (MLR issues and recommended changes) - The MLR require Cayman Islands FSPs to have procedures regarding customer identification, suspicious transaction reporting, employee training, and record keeping. - Laws protect those who make reports and tipping-off is penalized. - Modifications suggested to address weaknesses include: - harmonizing the standard for reporting in drug trafficking, FT, and other matters; - making administrative fines available as a sanction for supervisors; - amending the MLR to require that FSPs verify identity of customers and maintain records, not merely that procedures be in place; - providing more specific guidance on renewals of identity and on maintenance of records for transactions considered but not reported as suspicious. - Additional recommended legal and regulatory changes: - require internal audits (to supplement guidance); - expand reporting officer duties to include monitoring of compliance deficiencies and situate such officials at management level rather than staff level; - reevaluate regulations permitting extensive reliance on due diligence performed by regulated entities elsewhere with no obligation to obtain supporting evidence; - require maintenance of business correspondence and other post account opening non-transaction records; - change provisions permitting reobtaining of evidence of identity in some circumstances; - adopt a tipping-off offense for drug trafficking ML and make the current tipping-off offense apply from the moment suspicion arises. - Responsibility for FT and interface between MLR and FT needs clarification. - A legal requirement regarding minimum information to accompany wire transfers should be in place at least within the two-year period set forth in the FATF standard. - Approval and consultation requirements before FIU disclosures of SAR information and before CIMA disclosures should be revisited. - AML controls should be made applicable to foreign subsidiaries of domestic institutions. ### Table 9 — Selected Recommended Action Plan items (FATF-oriented) - FATF 7 (Provisional measures and confiscation): - Ensure that under the PCCL, courts must always consider whether proceeds exist, and confiscate proceeds. - Amend the PCCL to provide specifically for the confiscation of laundered property. - Keep specific records of the SARs used in police investigations and prosecutions. - FATF 8–9 (General role of financial system in combating ML): (recommendations implied) - FATF 10–13 (Customer identification and record-keeping rules): - Make it mandatory that financial businesses verify the identity of their customers, rather than “maintain procedures to identify.” - Address renewal of identity if doubts appear. - Amend the record-keeping obligation so procedures must be in place together with an obligation to keep identification and transaction records. - Provide for retention for at least 5 years after the end of the business relationship of business correspondence and post account opening non-transaction records. - Require ready access to a copy of identity documents. - FATF 14–19 (Increased diligence of financial institutions): - Direct FSPs to maintain files on all transactions brought to relevant officers’ attention and on complex transactions examined. - Amend tipping-off offence to apply from the moment a person has suspicion, not only when an investigation is contemplated or in train, and provide a tipping-off offense for drug trafficking ML. - Amend the MLR to include explicit reference to an internal audit function to test compliance with AML/CFT regulations. - Ensure an adequate compliance officer function broader than reporting and at management level. - FATF 20–21 (Measures to cope with countries with insufficient AML measures): - Require foreign subsidiaries observe, at a minimum, home jurisdiction requirements and clarify obligations for foreign branches through guidance and supervision. - FATF 32 (Administrative Cooperation—Exchange of information relating to suspicious transactions): - Permit the FIU Director to make disclosures of SARs to foreign FIUs without Attorney General consent. - Ensure the PCCL, as amended, permits disclosures to overseas authorities in drug trafficking ML matters. - FATF 36–40 (Other forms of cooperation—mutual assistance on ML): - Amend the PCCL to provide for powers enabling tracing of proceeds including account monitoring orders. - Ensure tracing and monitoring orders are available in support of foreign requests. - Special recommendations on terrorist financing (8 SRs), including: - Review FT laws to ensure the ability to restrain property of terrorist organizations and persons who finance terrorism (SR III). - Enact provisions permitting identification and tracing of proceeds at foreign request and adequate freeze powers (SR V). ### Authorities’ response and specific comments - The Attorney General’s Chambers and CIMA note IMF mission assessments of AML/CFT implementation against the FATF 40 + 8 as “compliant” or “largely compliant” for all Recommendations rated, except FATF 17 and 20. - FATF 17 (tipping-off): - The Attorney General’s Chambers expresses reservations about applying tipping-off provisions from mere suspicion (pre-SAR), arguing criminal law requires certainty and that prosecution for tipping-off based on mere suspicion would be difficult. - The view is that the offense is more appropriate where an investigation is contemplated or in train. - FATF 20 (foreign branches/subsidiaries): - Few branches or subsidiaries of locally incorporated banks are located abroad. - For entities where CIMA is host supervisor, the Authority receives confirmation from foreign branches that their AML procedures are of equivalent standard to those in the Cayman Islands. - Other comments: - FATF 7: PCCL provides for confiscation of the value of laundered property; authorities view this as wider in scope than recommended amendment. - FATF 10–13: Authorities contend MLRs effectively mandate intended record-keeping in practice and that law enforcement access provisions ensure availability of records. - FATF 32: Authorities note onward disclosures occur in a timely manner in practice and that Attorney General consent has not impeded disclosures; consent requirement will be kept under review and is compared to similar U.S. BSA arrangements. - SR III (terrorist property): Definitions and freezing provisions in TL and schedule 2, paragraph 5 may not cover all eventualities of possession vs. intended use; Chambers will revisit language to tighten coverage. ### Post-mission developments and follow-up - FRA vacancies noted by the mission have been filled; the FRA is now fully staffed. - The Cayman Islands Government, via the Attorney General, requested of the U.K. in August 2004 that the ICSFT be extended to the Cayman Islands. - CIMA proposes to address many mission recommendations relating to GN changes within the Policy, Strategy & Relations sub-committee work programme for 2005. - CIMA confirmed: - the MLR cover mutual funds and fund administrators and an on-site programme exists to test compliance with reporting arrangements; - Statements of Guidance on internal controls have been issued for banks, insurance companies and securities investment business and on internal audit for banks; - implementation proposals on administrative fines are being developed; - an efficient internal protocol is in place covering consultation on non-routine assistance to overseas supervisors. ### IOSCO assessment (securities regulation) - The IMF assessment of observance of the IOSCO Objectives and Principles of Securities Regulation in the Cayman Islands was undertaken as part of the offshore financial center assessment program to assess compliance by regulatory authorities with the Principles. - Securities sector in the Islands covers the Stock Exchange, mutual funds, and investment intermediary business. - Except for the Stock Exchange (supervised by the Stock Exchange Authority), all securities business is supervised by CIMA. - The Monetary Authority Law (2003 Revision) sets out broad supervisory powers of CIMA. - The Stock Exchange Law (2001 Revision) grants power to the Stock Exchange Authority to supervise the Exchange. - The Mutual Funds Law (2003 Revision) and the Securities Investment Business Law (2003 Revision) supplement the Monetary Authority Law; both are supplemented by regulations and statements of guidance/guidance notes issued by CIMA. *Source: IMF assessment chapter on Cayman Islands supervision and enforcement.* ### 78. The assessment was based on a review of the relevant legislation and the statements ### cr0591 - 78. The assessment was based on a review of the relevant legislation and the statements ### Assessment methodology and information sources - The assessment was based on a review of the relevant legislation and the statements of guidance/guidance notes. - It used a completed draft of the IOSCO assessment template submitted by CIMA. - The assessment was supplemented by: - The Review published in 2000 on behalf of the U.K. Government on Financial Regulation in the Caribbean Overseas Territories and Bermuda. - Other private sector reports available on the website. - Detailed discussions with relevant representatives from CIMA, the Stock Exchange, and the private sector. - The assessment applied the Fund’s Guidance Notes for Assessing Implementation of IOSCO’s Objectives and Principles of Securities Regulation. ### Market structure and key statistics - Stock Exchange: - The Stock Exchange has a listing function only (i.e., it does not engage in trading). - Currently there are about 700 listings on the Exchange, the vast majority being mutual funds. - The Exchange has 6 member brokers, 5 of which are affiliated to banks. These are execution brokers only. - The Exchange was established in 1997. - Mutual funds and administrators (as of end September 2003): - Under the Mutual Funds Law, CIMA has 4,693 funds at end September 2003. - 4,037 are registered. - 50 are licensed. - 606 are administered funds (administrator provides the Principal Office). - Registered funds have a minimum investing threshold of US$50,000 and are targeted at sophisticated investors. - Licensed funds are, in theory, open to the public but in practice also targeted at sophisticated investors; fewer than ten funds could be described as truly available to the public. - The overwhelming majority of funds are hedge or hedge-type funds. - The Law provides for an exempt class of fund—funds with less than 15 investors where the majority are capable of appointing or removing the manager. - Close-ended funds fall outside the scope of the Law. - Mutual fund administrators (MFAs) at end September 2003: - 84 full administrators. - 108 restricted administrators. - 10 exempted administrators. - Intermediaries and Securities Investment Business Law: - The Securities Investment Business Law (SIBL) came into effect in July 2003 and provides for licensing and supervision of investment business firms. - Existing intermediaries have until January 2004 to apply for a license. - In addition to the six brokers, it appears that less than ten other entities will be included under SIBL. - Market for retail intermediary business does not exist in the Islands. - Exemptions: intermediaries dealing exclusively with sophisticated persons (e.g., knowledgeable investors investing at least US$100,000 in the case of each transaction) and/or high net worth individuals (e.g., an individual with a net worth of at least US$1 million) can seek an exemption from the provisions of the Law. ### General preconditions for effective securities regulation - The supervisory regime broadly reflects those of developed countries and is influenced by EU legislation and rules given the Islands’ connection with the United Kingdom. - A sound legal, taxation and accounting system appears to be in place in the Islands. ### Principle-by-principle assessment—summarized findings - Regulator (Principles 1–5) - Regulatory responsibilities of the Monetary Authority (CIMA) are clearly set down in various pieces of legislation and applied in a clear, consistent manner. - CIMA operates independently in broad terms, but a number of provisions in the Laws and Regulations, generally involving the power of the Governor, could compromise this independence; it is recommended these be deleted. - The securities division suffers from a very serious deficit in staff numbers; recruitment is underway. - Self-regulatory organizations (Principles 6–7) - The Stock Exchange has the sole right to operate one or more exchanges; currently one exchange confines activities to listing only. - The Exchange ensures compliance by its broker members with membership rules and is supervised by the Stock Exchange Authority (SEA), a statutory body independent of CIMA. - Strong arguments exist for CIMA to become the regulator of the Stock Exchange. - Inspections, investigations, and enforcement (Principles 8–10) - CIMA has sufficiently broad powers to carry out inspections, investigations, and enforcement. - Inspection powers over mutual fund administrators should be explicit in the Mutual Funds Law rather than relying on a general provision in the Monetary Authority Law. - CIMA should consider receiving additional information (e.g., half-yearly management accounts) from all licensees as an additional means of early detection of difficulties. - Information sharing and cooperation (Principles 11–13) - There is provision for sharing information with overseas regulators, but some clauses introduce subjectivity into decisions on whether information should be passed to overseas regulators. - For non-routine requests, the advice of the Financial Secretary and the Attorney General must be sought. - Memoranda of understanding (MOUs) are permitted but only with the permission of the Governor in Cabinet and currently restricted to requests to assist overseas regulators to supervise on a consolidated basis. - Issuers (Principles 14–16) - The Stock Exchange listing rules provide for full, accurate, and timely disclosure of financial results and other material information. - All holders of securities are to be treated in a fair and equitable manner. - Accounting and auditing standards are in line with best international practice. - Collective Investment Schemes (Principles 17–20) - The supervisory regime is designed to accommodate funds targeted at sophisticated/institutional investors; the majority of funds are targeted at that market. - Three categories of regulated mutual funds: “registered,” “licensed,” and “administered.” - Registered funds carry a minimum subscription of US$50,000. - Licensed funds have no minimum subscription and are theoretically open to the general public. - Administered funds have no minimum subscription and their principal office is provided by a licensed mutual fund administrator within the Islands. - For funds open to the public, the current regime is inadequate: absence of standard consumer protection requirements (e.g., segregation of client assets). - Recommendation: CIMA should introduce formal consumer protection requirements for funds open to the general public. - Recommendation: CIMA should revise upwards the threshold of US$50,000 (fixed in 1993) for registered funds to reflect international norms. - In general, the Mutual Funds Law is in need of overhaul and should include provisions similar to those in the Securities Investment Business Law. - Market Intermediaries (Principles 21–24) - SIBL should provide a sound basis for effective supervision of intermediaries provided adequate and well-trained staff are available. - Section 19 of SIBL requires an auditor who becomes aware of serious shortcomings to immediately give written notice to CIMA and the licensee at the same time; this could compromise CIMA’s ability to take corrective action and could amount to tipping off in the anti-money laundering context. - Recommendation: amend the Law so such reports are received by CIMA only. - Secondary Market (Principles 25–30) - Not applicable because the Stock Exchange does not engage in trading. ### Key recommendations in securities supervision (bullet list as set out) - Substantially increase resources and prioritize training. - Introduce a more prescriptive regime from a consumer protection perspective for mutual funds open to the public. - Revise Mutual Funds Law generally to bring it more in line with modern supervisory concepts. - Revise upwards the threshold figure of US$50,000 for registered funds. - Consider transferring responsibility for the Stock Exchange to CIMA. ### Recommended action plan (selected items by principle references) - Principles Relating to the Regulator (CP 1–5) - Remove legal impediments that could compromise independence. - Increase staff numbers and prioritize training. - Principles of Self-Regulation (CP 6–7) - Remove provision in SIBL that stipulates that a broker must receive a copy of CSX inspection report at same time as CIMA. - Amend Stock Exchange Law to give Stock Exchange Authority clear authority to carry out inspection of Exchange. - Carry out inspection of Exchange. - Consider transferring supervisory responsibility for the Stock Exchange from the Stock Exchange Authority to CIMA. - Principles for the Enforcement of Securities Regulation (CP 8–10) - Ensure sufficient staff numbers to continue inspection program, particularly following introduction of SIBL. - Consider obtaining additional information (e.g. half yearly management accounts) from licensees to enhance supervision. - Principles for Cooperation in Regulation (CP 11–13) - Give CIMA sole responsibility for dealing with requests from overseas regulators. - Consider removing provisions which introduce an element of subjectivity into decision-making on overseas requests for information. - Provide for exchange of information between CIMA and the Stock Exchange Authority. - CIMA should have sole discretion in deciding with whom to enter into an MOU. - Extend the scope of MOUs beyond consolidated supervision. - Principles for Collective Investment Schemes (CP 17–20) - Introduce a more prescriptive regime from a consumer protection perspective for funds open to the general public. - Require all funds to calculate their net asset values. - Revise upwards the threshold figure of $US50,000 for registered funds. - Provide for the cancellation of registered and administered funds. - Revise Mutual Funds Law generally to bring it more in line with modern supervisory concepts (e.g., include a parallel provision to s. 16 SIBL; include specific inspection provisions in MFL rather than rely on general supervisory powers in MAL). - Principles for Market Intermediaries (CP 21–24) - Ensure sufficient staff resources to implement SIBL. - Remove provision which requires an auditor’s report to be sent to the licensee at the same time as it is being sent to CIMA. ### Authorities’ response (summary) - CIMA notes the IMF mission assessed securities regulation as: - “implemented” or “broadly implemented” for 17 Principles, - “partially implemented” for eight, - “not implemented” for one, - with four “not applicable.” - CP 1–5 - CIMA does not consider the legal impediments to independence rise to the level asserted by the mission. - Section 33(1) of MAL allows issuance of “general directions as appear to the Governor to be necessary in the public interest”; the only such direction issued was in October 2000 regarding aggressive marketing policies. - Section 49(3) requires CIMA to send a copy of each non-routine request for assistance from an overseas regulator to the Financial Secretary and the Attorney General; CIMA notes this does not amount to a veto on providing assistance. - Regarding staffing, CIMA is actively addressing staff numbers, funding, and training and aims to implement the agreed HR plan for the Investment & Securities Division in 2005. - CP 6–7 - The Stock Exchange Authority (SEA) notes the mission’s assessment of CSX operations is positive and will consider recommendations regarding CSX inspections by the SEA. - An inspection of the CSX commissioned by the SEA using external consultants was overtaken by the IMF assessment and not pursued at that time. - CP 8–10 - CIMA proposes to introduce in early-mid 2005 a new periodic reporting form (RF-2) for mutual funds to obtain additional information. - CP 11–13 - CIMA does not consider Section 49 MAL decision-making involves objectionable subjective elements and notes similar provisions exist in other jurisdictions (e.g., Section 169(4) of the U.K. Financial Services & Markets Act 2000). - CIMA has developed criteria for MOUs; criteria have been approved by Cabinet and Cabinet has approved all MOUs submitted for approval. - The scope of MOUs has been extended beyond consolidated supervision by virtue of an amended Section 50(1) MAL enacted in January 2004. - CP 17–20 - CIMA has made initial recommendations to government to revise the MFL, including increasing the registered funds threshold to US$100,000. - CIMA proposes to address related IMF recommendations in early-mid 2005. - A Statement of Guidance regarding cancellation of registered and administered funds has been issued. - CIMA is developing rules on net asset value calculation (CP 20, the sole “not implemented” assessment). - CP 21–24 - CIMA will address the IMF recommendation regarding auditors’ reports with a view to making a recommendation to government on the relevant MFL provision. *Assessment based on the Fund’s Guidance Notes for Assessing Implementation of IOSCO’s Objectives and Principles of Securities Regulation and related reviews and consultations.* ### 99. There are currently 769 insurance licensees; 28 domestic Class “A” Insurers, ### cr0591 - 99. There are currently 769 insurance licensees; 28 domestic Class “A” Insurers, ### Insurance sector structure and market composition - There are currently 769 insurance licensees; 28 domestic Class “A” Insurers, 615 Class “B” Insurers, 28 Licensed Managers, 22 Brokers, and 76 Agents. - Class “A” insurers are permitted to underwrite domestic risk; there are 4 locally incorporated companies and 24 branches of non-Cayman companies in this class. - Class “B” companies are not permitted to underwrite domestic business and constitute the offshore insurance market. - Market origin and class composition (as at September 29, 2003): - 87 percent of offshore market business emanates from North America. - Major classes of business by premium volume: workers’ compensation 25 percent, medical malpractice 25 percent, products liability 17 percent. ### Regulatory and supervisory framework - Supervision is based on the Insurance Law (2003 Revision). - The Cayman Islands Monetary Authority (CIMA) has the duty to supervise insurance activity and is established as an independent Authority pursuant to the Monetary Authority Law. - Professional infrastructure: - Accountants and lawyers support business operations; insurance managers are often qualified accountants. - There is one actuary on the Island employed by a firm of accountants; additional actuarial services are available from elsewhere. - Industry, professionals, and the Authority work closely to maintain the Islands’ reputation and financial well-being as an international financial center. ### General preconditions for effective supervision - The legislative framework for insurance supervision has been in place since 1979; the current Insurance Law is the fifteenth revision and contains a wide range of grounds for supervisory intervention and remedies. - The Insurance Division of CIMA has made rapid progress upgrading its legal base and working practices, but further progress is needed to give a substantive legal or regulatory base to some central prudential requirements. ### Main findings and supervisory challenges - High supervisory workload and licensee density: - There were 425 business plan changes and 195 prudential meetings in the first half of 2003. - The Insurance Division comprised nine staff at mission time, with headcount budgeted to increase to fourteen. - On-site inspections: - The program of on-site inspections was in abeyance at the time of the mission but planned to recommence when Division was at full strength. - Authorities indicated on-site inspections recommenced in December 2003. - On-site inspections are identified as a key supervisory tool to ensure adherence to corporate governance and internal controls. - Resource constraints: - Shortage of resources is a pervasive supervisory issue affecting frequency and scope of supervisory events. - Market risk considerations: - The Cayman insurance sector chiefly comprises offshore captive insurers. - Captives are commonly regarded as lower risk due to limited policyholder base, but major classes are third party liability protections where beneficiaries are other than the policyholders; consumer protection is therefore broader than policyholder protection. - Prudential policy gaps and recommendations: - Recommendations propose that the Authority consider prudential conventions over asset valuation, liability valuation, solvency, and capital adequacy. - Considerations should account for: - Asset price volatility, which has become more pronounced in recent years. - Reserve volatility, historically high in liability classes of business. - Capital buffers necessary to protect consumers. - The nature of the Cayman market. - Prudential rules governing assets, liabilities, solvency, and capital adequacy should be risk-based and formalized in law, regulation, or rule to ensure transparency and consistent application. - Data and analytics: - The Insurance Division has an effective automated system for collection and analysis of supervisory filing data. - Filing data could be extended to include information required in business plans to broaden analytical capabilities and reduce manual input into ad hoc supervisory events. - Automation would allow staff to spend greater time on risk-based activities such as focused on-site inspections. ### Recommended action plan (summary of Table 11) - Organization of an Insurance Supervisor (CP 1) - Staffing levels should be increased to supervise the large number of licensees in the jurisdiction (CP1). - Licensing and Changes in Control (CPs 2–3) - (No specific action text provided in excerpt.) - Corporate Governance and Internal Controls (CPs 4–5) - Implement a systematic program of risk-based on-site inspections (CP 4). - Embody supervisory working practices in law, regulation, or rule, as appropriate (CP4). - Prudential Rules (CPs 6–10) - Consider asset, liability, solvency, and capital adequacy conventions appropriate for the types of company, lines of business, and the nature of the Cayman insurance sector and embody them in law, regulation, or rule as appropriate (CPs 6, 7, and 8). - Market Conduct (CP 11) - (No specific action text provided in excerpt.) - Monitoring, Inspection, and Sanctions (CPs 12–14) - Undertake a feasibility study to extend the computerized reporting system, collecting more data and automating more analytical processes, with the aim of releasing staff resources to more risk-based processes such as focused on-site inspections (CP 12). - Cross-Border Operations, Supervisory Coordination and Cooperation, and Confidentiality (CPs 15–17) - (No specific action text provided in excerpt.) ### Authorities’ response and implementation status - IMF mission assessment summary: - Insurance regulation assessed against the IAIS 17 Core Principles as “observed” or “largely observed” for 11 Principles and “materially non-observed” for six; the latter based on either lack of staff or lack of codification of rules or practices. - CP 1 (staffing) - Five staff vacancies at time of mission. - Subsequently, two senior analysts and one analyst were hired. - Staffing needs are being dealt with at Board level as a priority; it is aimed to implement the agreed HR plan for the Insurance Division in 2005. - CP 4–5 (inspections and formalization) - The Insurance Division already has a programme of risk-based on-site inspections; full inspections were suspended because of staff shortages. - Full inspections resumed in March 2004; focused inspections resumed in November 2003. - A revised risk analysis procedure is to be implemented for the 2005 timetable for on-site inspections. - Formalisation of supervisory working practices is being addressed. - CP 6–10 (prudential rules) - The mission recommendation is being actively considered, with a view to making recommendations to government regarding changes required to the Insurance Law in early 2005. - CP 12–14 (IT and reporting) - The Operations Division of CIMA has commenced a study of the present IT system and is mapping, on a divisional basis, the necessary upgrades. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr0591.pdf_