## cr0592 ## Source details **Canonical URL:** [cr0592](https://www.imf.org/-/media/files/publications/ofca/english/cr0592.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr0592.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr0592.pdf.json) --- ### Institutional and market‑structure overview - Regulatory authority: Cayman Islands Monetary Authority (CIMA) established under the Monetary Authority Law (MAL) (2003 Revision); responsibilities include licensing and supervision of banking, insurance, mutual funds, company management, trustee/fiduciary services, money transmission and currency exchange services. - CIMA governance and independence: - CIMA operationally independent but certain powers require Governor approval (e.g., issuance of rules/statements under Section 34; MOUs under Section 50). - Board appointment: Members including the Managing Director appointed by the Governor; no CIMA director may be a member of Cabinet or the Legislative Assembly. - Legal protection: CIMA, its Directors and employees immune for acts in good faith; liability only where act/omission was in bad faith. - Staffing and resourcing: - CIMA staff complement: 87 (target: 125 by end 2004). - BSD (Banking Supervision Division): over 300 banks under jurisdiction and only 26 positions; five vacancies in BSD at time of assessment. - Insurance Division: budgeted headcount 14; current vacancies at time of assessment: 5; Insurance Division comprised nine members at mission time and supervised 769 licensees. - Supervisory approach: - Risk‑based supervision combining continuous off‑site surveillance (quarterly reporting) and periodic on‑site inspections; on‑site inspection frequency: annual for retail/home‑supervised banks; every two years for other locally present licensees. - CIMA requires consolidated supervisory reports and supervises banking groups on a consolidated basis where appropriate. ### Key fiscal, financial, and market statistics (preserve numeric figures exactly) - Assets from local banks increased from C$641 million in 1998 to C$1.1 billion in 2002. - Total international assets and liabilities held by banks in the Cayman Islands: US$1.04 trillion; 70 percent originate from the Americas. - Minimum capital adequacy ratios applied in practice: - 12 percent for subsidiaries of banks licensed outside the Cayman Islands; - 15 percent for privately owned banks. - Macroeconomic and fiscal indicators: - fiscal surplus estimated at 4.6 percent of GDP in 2003; - outstanding debt of 130 million US dollar paid off by issuing a bond with a maturity of 15 years, rated aa3; - inflation rate 2.4 percent. - Insurance sector (captives) at September 30, 2003: - TOTALS by primary class: Number of Companies 613; Total Premiums 4,676,477; Net Income 336,171; Net Worth 3,595,680; Total Assets 18,641,921. - Workers’ Compensation: Number of Companies 128; Total Premiums 1,147,979; Net Income 44,332; Net Worth 867,005; Total Assets 2,843,730. - Life: Number of Companies 15; Total Premiums 208,018; Net Income 20,053; Net Worth 357,004; Total Assets 2,101,185. - Products Liability: Number of Companies 9; Total Premiums 790,471; Net Income 151,707; Net Worth 252,607; Total Assets 2,081,301. - Mutual funds and securities: - As of June 2003, under the Mutual Funds Law, CIMA has licensed/registered 4457 funds: 3835 registered; 46 licensed; 576 administered. - Registered funds minimum investing threshold: US$50,000 (threshold fixed in 1993). - Stock Exchange listings: about 700 listings; 6 member brokers (5 affiliated to banks). ### Banking supervision — Basel Core Principles (principal findings) - Assessment context: - Assessment conducted using the Core Principles Methodology under the Offshore Financial Center Assessment Program; assessors: Timothy Sullivan and Stefan Niessner; mission in September and October 2003. - Legal powers and remit (CP 1): - CIMA’s functions include regulation and supervision under MAL and BTCL; powers to access books, records and request information; entitlement to share supervisory information with other authorities (subject to MAL safeguards). - Board and resource constraints: BSD understaffed with 26 positions for over 300 banks. - Assessment excerpts: Principle 1(1) — Compliant; Principle 1(2) — Largely Compliant (independence constrained by Governor approval for rule issuance); other sub‑elements largely Compliant or Largely Compliant. - Licensing and structure (CPs 2–5): - Only licensed banks may receive deposits or use the term “bank”; BTCLAF prescribes application and fit‑and‑proper requirements (shareholders >10 percent disclosure, two years accounts, three references, police clearance). - Minimum net worth: not less than C$400,000 or greater sum determined by CIMA; most new subsidiaries initial net worth at least C$5,000,000. - Assessment: Principle 2 — Compliant; Principle 3 — Largely Compliant. - Prudential framework (CPs 6–15): - Capital base components preserved verbatim (Tier 1 and Tier 2 composition and deductions as listed). - Off‑balance sheet conversion factors and risk weightings in place (0, 10, 20, 50, 100 percent; conversion factors 0, 20, 50, 100 percent as described). - Minimum capital adequacy ratios in practice: 12 percent (subsidiaries of foreign banks) and 15 percent (privately owned banks). - Market risk: derivatives reported but not included in capital adequacy; no capital requirement for market risk in practice; CIMA view: low market risk and limited derivative activity justify exclusion for now; recommendation to include market risk when sophisticated products become more widely used. - Assessments: Principle 6 — Compliant; other CPs subject to new Rules and Statements of Guidance finalized in early October 2003. - Supervisory powers and enforcement (CPs 16–22): - CIMA authority to revoke licenses, substitute directors/officers, appoint controllers, require remedial action (Section 14(1)(vi) BTCL); ladder of compliance in place. - Monetary penalties under MAL limited (up to C$1,000 for breach of rules); recommendation to increase available administrative fines. - On‑site inspection/manuals in place; off‑site quarterly monitoring reports produced within 21 days of period‑end; annual audited financial statements required within 90 days of period‑end. - Assessments: CP16 onward generally Compliant or Largely Compliant, with resource concerns noted. ### Anti‑Money Laundering / Counter‑Terrorist Financing (AML/CFT) - Legal framework and institutional arrangements: - MLR (2000) and PCCL (2001 Revision) provide preventive and criminal measures; TUNMOTO (2001) extended and Terrorism Law (TL) enacted in 2003. - FIU restructured (PCCL amendments Oct 2003) into Financial Reporting Authority (FRA) as civilian FIU for receipt/analysis/dissemination of SARs; Financial Crime Unit (FCU) to investigate referred SARs. - AML Steering Committee coordinates policy; FRA oversight by Steering Group (Attorney General chair). - Criminalization and confiscation: - ML and FT criminalized broadly; ML offences cover proceeds from all serious (indictable) offences; FT provisions in TL; ICSFT not yet extended to Cayman Islands (post‑mission request by Government to U.K. in August 2004 to extend ICSFT). - Confiscation regime: - Confiscation mandatory under MDL for drug trafficking; PCCL applies to other indictable crimes; orders are value‑based. - Recommendations include amendments to PCCL to provide expressly for confiscation of laundered property and account monitoring/tracing powers. - SARs regime and FIU statistics (preserve reported figures): - SARs filings: 2002 total 433; to 9/29/03 total 227. - 2002 breakdown: Banks & trusts 257; CIMA 35; CSPs 38; Law firms 46; Money transmittors 6; Accountants 18; Securities 10; Realtors 8; Insurance 8; CSX 0; others 17. - FRU onward disclosures 2002: OD total 75; FRU total 161; FinCEN 38; FBI 19; SEC 12; CIMA 8; RCMPs 4; DEA 5. - Restraints and seizures examples: 2002 a.o. US$1.6 million restrained by UK injunction; US$300,000 locally restrained civilly; 2003 a.o. US$100,000 locally restrained; US$10.2 million restrained by MLAT in two matters. - Preventive measures and guidance: - MLR require CDD, record‑keeping for not less than five years, internal reporting procedures and employee training; GN issued jointly by CIMA and industry provide sectoral guidance. - Customer identification: retrospective due diligence required for relationships predating September 1, 2000; deadline for completion September 30, 2003. - Wire transfers: no statutory originator information requirement; GN encourage inclusion of originator details and enhanced scrutiny for incomplete information; SR VII adoption phase‑in noted. - Supervisory implementation and gaps: - CIMA inspection manuals include AML sections; inspections performed across sectors though capacity constrained (e.g., Insurance on‑site inspections suspended then resumed). - Identified gaps and recommended reforms include: - Permit FIU Director to disclose SARs to foreign FIUs without Attorney General consent. - Amend MLR/PCCL to ensure ML definition covers FT ML offence; expand enforcement tools (meaningful administrative fines for supervisory breaches). - Strengthen record‑keeping obligations from “procedures” to explicit maintenance, including business correspondence and post‑account opening records for at least five years. - Introduce explicit account monitoring / production powers and consider civil forfeiture mechanisms. - Address tipping‑off inconsistencies (Recommendation 17 rated Materially non‑compliant) and harmonize reporting standards across ML and FT. ### Securities, mutual funds, and corporate services - Securities Investment Business Law effective July 2003; intermediaries had until January 2004 to apply for licenses. - Market structure and thresholds: - Registered mutual funds: 3835; Licensed funds: 46; Administered funds: 576; total funds licensed/registered 4457 as of June 2003. - Registered funds minimum investor subscription: US$50,000 (fixed in 1993); IMF recommendation to revise threshold upwards (post‑mission, CIMA proposed US$100,000). - Supervisory capacity and issues: - Securities division staff total 13 at time of assessment; planned increase to 20–25 by end 2004; five staff left previous year. - Concern: Mutual Funds Law lacks explicit inspection power over fund administrators; recommendation to overhaul Mutual Funds Law and introduce consumer protection for funds open to the public. - Stock Exchange: listing function only; 700 listings (vast majority mutual funds); 6 member brokers (5 affiliated to banks); Channeling of auditor reports to both CIMA and licensee under Section 19 identified as impeding corrective action — recommendation to amend so auditors report to CIMA only. ### Insurance supervision and captives - Legal base: Insurance Law (2003 Revision) assigns insurance supervision to CIMA. - Market composition and supervisory workload: - Total insurance licensees 769 as at September 30, 2003: 28 domestic Class “A” Insurers; 613 Class “B” Insurers; 28 Licensed Managers; 22 Brokers; 76 Agents. - Offshore (Class “B”) business: 87 percent emanated from North America as at September 29, 2003. - Major offshore premium classes: Workers’ Compensation 25 percent; Medical Malpractice 24 percent; Products Liability 17 percent. - Findings and deficiencies: - IAIS Core Principles: Observed 8; Largely observed 3; Materially non‑observed 6 (including Principle 1 Organization of an Insurance Supervisor, Principle 6 Assets, Principle 7 Liabilities, Principle 8 Capital Adequacy, Principle 9 Derivatives, Principle 13 On‑Site Inspection). - Specific weaknesses: lack of formalized asset valuation, liability valuation, solvency and capital adequacy conventions; on‑site inspection program disrupted due to staff constraints (on‑site inspections abeyance in 2003 then recommenced). - Supervisory metrics and activity (Jan–Jun 2003 actual vs budget): Issue of new licenses Actual 48; Budget 25. Receipt of annual returns Actual 668; Budget 720. Business plan changes Actual 425; Budget 350. On‑site inspections Actual 0; Budget 10. - Recommendations: - Formalize risk‑based prudential rules on asset valuation, liability valuation, solvency and capital adequacy in law/regulation. - Increase staffing to implement continuous, risk‑based on‑site inspections; extend reporting forms to capture business‑plan level data and automate analytical processes. ### Principal policy recommendations and action plan (selected, verbatim/precise) - Governance and independence: - "CIMA should be able to issue rules and statements of guidance without the approval of the Governor." (CP 1(2) Independence) - "The MAL should be amended to permit MOUs for consolidated supervision by CIMA and permit CIMA to provide unsolicited supervisory information to host country supervisors." (CP 24) - Licensing, capital and prudential rules: - "CIMA should require that applicants maintain initial capital funds in cash in the jurisdiction." (CP 3 Licensing Criteria) - "Criteria for judging proposals for investment and acquisition should be included in law or regulation." (CP 5 Investment Criteria) - "CIMA should develop and implement a Statement of Guidance on Investment Risk Management." (CP 7 Credit Policies) - Proposed BTCL amendments would require banks not to have a capital adequacy ratio less than ten percent and give CIMA power to require capital funds in cash in the Cayman Islands. - Supervisory practices, reporting and enforcement: - "CIMA should require that loan loss provisioning reporting include off-balance sheet items. CIMA should provide for the implementation of an asset classification system in each licensee." (CP 8) - "CIMA should include information on asset classifications in its regular required reporting." (CP 18 Off‑Site Supervision) - "CIMA should use its authority to impose monetary penalties and the MAL should be amended to increase the permitted monetary penalties to significant amounts." (CP 22 Remedial Measures) - "CIMA should complete the issuance of its Statement of Guidance on Country/Transfer Risk." (CP 11) - AML/CFT specific: - Permit FIU Director to disclose SARs to foreign FIUs without Attorney General consent. - Amend PCCL/MLR to ensure ML definition covers FT ML; strengthen confiscation, tracing and account monitoring powers; provide for meaningful administrative fines for supervisory failures. - Harmonize reporting standards and address tipping‑off gaps (Recommendation 17 rated Materially non‑compliant). - Insurance and funds: - Revise the Mutual Funds Law and consider raising the registered funds threshold from US$50,000 (1993 level) — post‑mission CIMA proposed US$100,000 and is developing net asset value rules and a Statement of Guidance on cancellation of registered/administered funds. - For insurance, formalize asset, liability, solvency and capital adequacy conventions and resume risk‑based on‑site inspection program. ### Assessments and ratings (selected summary) - Basel Core Principles: many Principles assessed Compliant or Largely Compliant; resource constraints and Governor approval provisions limit full compliance in some areas. - FATF 40+8 (summary compliance sample): - Recommendation 1 — Compliant; - Recommendation 7 — Largely Compliant; - Recommendation 10 — Largely Compliant; - Recommendation 17 — Materially non‑compliant (tipping‑off timing issue); - SR I — Compliant; SR III — Largely Compliant; SR V — Largely Compliant. - IAIS Core Principles for Insurance: - Observed: 8; Largely observed: 3; Materially non‑observed: 6. - IOSCO assessment summary: - Implemented: 12; Broadly Implemented: 5; Partly Implemented: 8; Not Implemented: 1; Not applicable: 4. ### Operational capacity issues and follow‑up actions noted - CIMA to develop or has developed: - Off‑Site Monitoring Manual and On‑Site Inspection Manual with reporting timetables (quarterly returns within 21 days; annual audited statements within 90 days). - New Rules for Licensees Holding Banking Licenses under BTCL (2003 Revision) finalized early October 2003, and multiple Statements of Guidance (Credit Risk, Loan Loss Provisions, Interest Rate Risk Management, Liquidity Risk Management, Operational Risk, Internal Audit, Internal Control, Corporate Governance, Foreign Exchange Risk Management). - Authorities’ response and implementation status (as stated): - IMF recommendations under review or implementation; some legislative proposals submitted (e.g., CPs 3 and 5) and others under development (e.g., CP 22). - FRA/FIU vacancies reported filled post‑mission; proposals to extend ICSFT to Cayman Islands requested to U.K. in August 2004. - CIMA developing monetary fines regime and further GN/rules; revisions to Mutual Funds Law and draft rules/Statements of Guidance in process. *Source: IMF assessment and CIMA materials reflected in the IMF mission report (cr0592).* ### 3.1 Cayman Captives by Primary Class of Business at September 30, 2003 ......................65 ### 3.1 Cayman Captives by Primary Class of Business at September 30, 2003 ### Assessment methodology and scope - The assessment of compliance with the Basel Core Principles for Effective Banking Supervision (BCP) was performed using the Core Principles Methodology in the context of the Offshore Financial Center (OFC) Assessment Program. - The assessment was undertaken in September and October 2003. - Assessors: Timothy Sullivan and Stefan Niessner. - The domestic and offshore sectors were not subject to separate assessments because they are both covered by the same legislation and supervised by the Banking Supervision Division (BSD) of the Cayman Islands Monetary Authority (CIMA). - Information sources used: - Applicable laws, regulations, prudential guidelines, and CIMA documentation, including on- and off-site manuals, statistical and reporting forms, and anonymous prudential reports of individual banks. - Meetings with CIMA staff (primarily the head of the BSD and deputies and BSD’s legal counsel), representatives of financial institutions, lawyers, and accountants. - A formal self-assessment prepared by the Cayman Islands prior to the mission. - Five-part qualitative assessment scale used: - compliant - largely compliant - materially noncompliant - noncompliant - not applicable ### Institutional and market-structure overview - CIMA responsibilities and operations: - CIMA is responsible for licensing and supervision of the domestic banking sector as well as offshore banks. - BSD conducts routine off-site surveillance based on a quarterly reporting system and an on-site inspections program. - Arrangements for sharing information with foreign supervisors are in place. - Bank categories and activities: - Category “A”-Banks may carry on banking business within and outside the Cayman Islands (30 at the end of 2002). - “B”-Banks may carry on banking business with restrictions (353 “B”-Banks referenced). - CIMA generally grants licenses only to branches and subsidiaries of banks licensed in a country or territory outside the Cayman Islands and assesses whether the home supervisor conducts consolidated supervision. - Internationally active banks provide advisory brokerage, investment management, trusts, SPV products, custodial services, and corporate services; banking services often facilitate these other services. ### Key statistics and fiscal/financial indicators - Assets from local banks: - increased from C$641 million in 1998 to C$1.1 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 standards in practice: - minimum capital adequacy ratio of 12 percent for subsidiaries of banks licensed outside the Cayman Islands and 15 percent for privately owned banks. - BSD staffing and bank coverage: - BSD with over 300 banks under its jurisdiction and with only 26 positions. - Macroeconomic indicators: - fiscal surplus estimated at 4.6 percent of GDP in 2003. - outstanding debt of 130 million US dollar was paid off by issuing a bond with a maturity of 15 years, rated aa3. - inflation rate 2.4 percent. ### Preconditions for effective supervision and legal/institutional framework - Legal and institutional environment: - Comprehensive set of laws governing the financial sector supported by professional lawyers and judges. - Court system described as efficient. - Accountants and auditors use US-GAAP or IAS (IFRS) for audits; no separate Cayman accounting standards established. - Monetary and crisis support constraints: - No deposit insurance in the Cayman Islands. - CIMA cannot act as lender of last resort because CIMA’s liabilities must be covered for not less than 90 percent by foreign assets and because the CI dollar is pegged to the US dollar. - Macroeconomic context: - No macroeconomic vulnerabilities identified that could impair prudential safeguards or financial stability at time of assessment. ### Principal findings (selected principle-by-principle highlights) - CP 1 — Objectives, Autonomy, Powers, and Resources: - CIMA’s principal function includes regulation and supervision of banking business under the Monetary Authority Law (MAL) and the Banks and Trust Companies Law (BTCL). - CIMA is required to promote and maintain a sound financial system and has powers to access books, records, and documents of licensees and to request information from relevant persons. - CIMA is entitled to share supervisory information with other relevant supervisory authorities. - CIMA is operationally independent from the Governor; however, the Governor may give general directions after consultation with the Board when deemed necessary in the public interest and approves CIMA’s budget. - Board appointment and governance: - Members of the Board of Directors including the Managing Director of CIMA are appointed by the Governor. - No CIMA director may be a member of Cabinet or the Legislative Assembly. - Four of the directors are overseas directors and two directors are managing directors of licensees but do not sit in meetings affecting those licensees. - Legal protection: - CIMA, its Directors, and employees are provided with legal protection while discharging duties in good faith; they are not liable in damages unless the act or omission was in bad faith. - Resource constraint: - BSD appears understaffed given over 300 banks and only 26 positions. - CPs 2–5 — Licensing and Structure: - Only licensed banks may receive deposits from the public and use the word “bank” or derivatives in their title. - The Banks and Trust Companies (License Application and Fees) Regulation (BTCLAF) sets licensing information requirements and criteria. - Licensing assesses ownership structure, fitness and propriety of directors and senior management, operating plan and internal controls, and projected financial condition. - CIMA will not grant a license unless it receives required information and licensing criteria are fulfilled. - Restrictions on share issuance and transfers without CIMA approval; CIMA may take corrective actions if acquirers are not fit and proper. - Locally incorporated banks may not open external subsidiaries, branches, agencies, or representative offices without prior CIMA approval; acquisitions of stakes in other entities are treated as changes to business plans requiring prior approval. - CPs 6–15 — Prudential Regulations and Requirements: - Banks operate within a prudential regulatory framework largely modeled after standards used in the United Kingdom and generally in accordance with Basel standards. - Two-tiered minimum risk capital standards applied in practice based on perceived differences in risk related to bank ownership; these are significantly above those required by the Basel Capital Accord. - CIMA is implementing rules and detailed guidance for management of primary risks, with guidance developed for: - credit risk, provisioning, large exposures and connected lending, foreign exchange risk, interest rate risk, liquidity risk, and operational risk. - Guidance still to be developed on investment risk and country/transfer risk. - Guidance on internal control systems, internal audit programs, and corporate governance is being prepared and awaits final approval of the Governor; existing policies and supervisory practices are already used in practice. ### Operational and supervisory capacity issues - Staffing and resourcing: - BSD staffing level of 26 positions appears inadequate for supervision of over 300 banks. - A 2003 salary survey indicated salaries are comparable with the industry except for a few posts. - Supervisory practices: - CIMA employs a combination of routine off-site surveillance (quarterly reporting) and an on-site inspections program. - Standards in pending rules and guidance are already applied in practice through previously-issued policies and complementary surveillance and inspection processes. *Assessment of compliance with the Basel Core Principles for Effective Banking Supervision conducted by Timothy Sullivan and Stefan Niessner in September and October 2003 under the Offshore Financial Center Assessment Program.* ### 18. Comprehensive guidance on anti-money laundering, which sets out the detailed ### 18. Comprehensive guidance on anti-money laundering, which sets out the detailed ### Anti-money laundering guidance and monitoring - Comprehensive guidance on anti-money laundering, which sets out the detailed requirements for implementing the requirements of the anti-money laundering laws and regulations, has been issued to the banks. - Implementation of the requirements of the law, the regulations, and the guidance is being monitored in practice through CIMA’s off-site surveillance and on-site inspection processes. ### Methods of ongoing supervision (CPs16–20) - The Banking Supervision Division of CIMA operates a comprehensive and effective risk-based supervision program, consisting of continuous off-site surveillance, periodic on-site inspection, and ongoing communications with the jurisdiction’s licensees and, where applicable, their home country supervisory authority. - Detailed supervisory polices and procedures have been developed and implemented for both the off-site and on-site processes. - The diverse nature of the licensee population requires independent assessment of each licensee to determine the necessary risk-based scope of supervision. - CIMA supervises the banking groups for which it is responsible on a consolidated basis. ### Access, reporting, and inspection frequency - The law permits CIMA to have unrestricted access to the licensees’ business activities and records, facilitating both the off-site and on-site processes. - A comprehensive regulatory reporting program has been put in place. - Quarterly monitoring reports are produced by CIMA analysts. - CIMA conducts annual inspections of retail banks and banks where it is the home country supervisory authority. - Inspections of other licensees with a physical presence in the jurisdiction are conducted every two years. - CIMA also conducts overseas inspections of branches and subsidiaries. - Contact with licensee management is maintained through both the off-site and on-site activities. ### Information requirements (CP 21) - CIMA, in general, and the accounting profession require the use of international accounting, auditing, and reporting practices and standards. - Exceptions are known to and understood by CIMA. - Comprehensive regulatory reporting requirements are in place and reporting is regularly provided to CIMA. - Audited financial statements are provided to CIMA annually, prepared by auditors approved by it. - Meetings are held with the licensee’s external auditor during each on-site inspection. - CIMA is authorized to use auditors to conduct special audits and other investigations on its behalf. - An amendment to the banking law is being drafted that would place on the external auditor the obligation to report to CIMA on solvency, non-compliance with laws, and other significant matters that the auditor becomes aware of during the audit. - Relations and cooperation between CIMA and the audit industry are effective. ### Formal powers of supervisors (CP 22) - Whenever CIMA is of the opinion, for example, that: - a bank is or appears likely to become unable to meet its obligation as they fall due; - a bank has contravened the BTCL; - a person holding a position as a director, manager or officer of a bank’s business is not a fit and proper person to hold the respective position; it may: - revoke the license; - require the substitution of any director or officer of the bank; - appoint a person to advise the bank on proper conduct of its affairs; - appoint a person to assume control of the bank’s affairs; - require any action to be taken by the bank as it considers necessary. - CIMA has issued guidelines on the ladder of compliance to clarify the procedures that it will follow in case of non-compliance by a bank. - CIMA has only limited powers to hold managers and directors personally liable, since rules issued by CIMA under the MAL may only provide for the imposition of penalties on banks and/or on the management for breach of such rules up to C$1,000. - CIMA’s ability to arrange a take-over by or a merger of a failing bank with a healthier institution is somewhat hampered by the fact that customers may file liquidation proceedings at the Court without CIMA’s consent. ### Cross-border banking (CPs 23–25) and international cooperation - Although there is no explicit provision in the BTCL that gives CIMA the objective to supervise banks on a consolidated basis, CIMA requires banks to prepare all relevant supervisory reports on a globally consolidated basis. - Without the prior approval of CIMA, no locally incorporated bank shall open, outside the Cayman Islands, a subsidiary, branch, agency, or representative office. - In the process of approval, CIMA assesses whether management is maintaining proper oversight of the bank’s foreign branches, joint ventures, and subsidiaries, and whether the local management of any overseas offices has the necessary expertise to manage those operations in a safe and sound manner. - One of the principal functions of CIMA under the MAL is to provide assistance to overseas regulatory authorities. - CIMA may in the case of a routine regulatory request disclose to the overseas authorities requested information. - In the case of a non-routine regulatory request, CIMA has to notify the Attorney-General as well as the Financial Secretary before disclosing the requested information. - The MAL allows CIMA to enter into MOUs for the purpose of assisting consolidated supervision by the foreign supervisor. *Source: Cayman Islands Monetary Authority (CIMA) assessment as reflected in the supplied content.* ### 26. Subsidiaries of foreign banks are subject to the same prudential and regulatory ### 26. Subsidiaries of foreign banks are subject to the same prudential and regulatory reporting requirements as domestic banks ### Supervision of foreign bank subsidiaries and branches - Subsidiaries of foreign banks are subject to the same prudential and regulatory reporting requirements as domestic banks; branches of foreign banks are subject to the same regulatory reporting requirements as locally incorporated banks but are not subject to the same prudential requirements. - The large exposure limit of branches is based on their head offices’ capital and the Rules for Large Exposures do not apply to branches. CIMA requires and verifies that branches follow their head offices’ large exposure limits, which are expected to be similar to CIMA’s. - Branches do not have to have a donation capital; CIMA does not calculate any capital adequacy ratios for branches. - On-site inspections of local offices of subsidiaries and branches of foreign banks are scheduled by CIMA at least every second or third year based on risk assessment. - CIMA’s ongoing supervisory process includes meetings with home country regulators, facilitation of visits of foreign regulators to the Cayman Islands, and routine joint inspections for the purpose of consolidated supervision. - Inspections of other entities are prioritized based on CIMA’s risk assessment. ### Institutional framework, powers, and assessments (Principle 1) - The Cayman Islands Monetary Authority (CIMA) is the only regulatory authority for banks operating in the Cayman Islands; responsibilities and functions are set out in the Monetary Authority Law (MAL) and the Banks and Trust Companies Law (BTCL). - BTCL provisions include licensing requirements, change of ownership and control, approval of appointment of directors, and capital adequacy; supplemented by Rules for all Licensees Holding Banking Licenses (2003 Revision) and Statements of Guidance. - CIMA can take supervisory actions including license revocation, restriction on activities, changes in management, assuming temporary management, and assistance in restructuring or merging banks. - Assessment: Principle 1(1) — Compliant. - CIMA was granted operational independence in March 2003; powers previously vested with the Governor are now reserved for the Board of Directors and/or the Management Committee of CIMA, though the Governor may give general directions after consultation with the Board. - Board composition: members including the Managing Director are appointed by the Governor; no CIMA director may be a member of Cabinet or the Legislative Assembly; four directors are overseas directors; two directors are managing directors of licensees but do not sit in meetings affecting those licensees. - Staffing and resources: - CIMA staff receive structured banking supervisory training from multiple international institutions. - A 2003 salary survey indicated salaries at CIMA are comparable with the industry, except for a few posts. - BSD (Banking Supervision Division) staffing: over 300 banks under jurisdiction and only 26 positions in the BSD; there are five vacancies in the BSD. - BSD is supported by the Compliance Division, Legal Division, and Policy and Research Division; CIMA may commission external auditors for focused inspections. - CIMA budget: C$8,400,000 (set up by CIMA, approved by the Governor). - Assessment: Principle 1(2) — Largely Compliant. - Comment: CIMA’s independence is constrained because the Governor must approve the issuance of prudential rules and statements of principles and guidance; staff shortages could impact supervisory capacity. - Legal powers and access to information: - Under the BTCL and MAL, no banking business may be transacted without a valid CIMA license; CIMA may inspect license applications and revoke licenses for non-compliance. - CIMA may issue or amend Rules or Statements of Principle or Guidance after consultation with the private sector and approval of the Governor. - CIMA has access to books and records and may require audited annual accounts and quarterly submissions including balance sheet, statement of income and expense, ten largest loans and depositors, large exposures, past due loans, and interest rate sensitivity. - Assessment: Principle 1(3) — Compliant. - Enforcement powers: - CIMA may require actions to ensure compliance, require substitution of directors or officers, or revoke licenses when banks act detrimentally to depositors or contravene BTCL. - Assessment: Principle 1(4) — Compliant. - Legal protection: - BTCL and MAL provide CIMA, its Directors, and employees with legal protection for acts done in good faith; no liability in damages unless acts were in bad faith. - Courts that dismiss actions against CIMA or its staff mean they do not have to carry costs of defending; in-house lawyers may provide legal advice and act in proceedings. - Assessment: Principle 1(5) — Compliant. - Comment: CIMA should consider issuing a statement that it will provide staff legal advice and funds to cover defence costs when discharging duties. - Information sharing: - Under the MAL, CIMA must provide assistance to overseas regulatory authorities and may disclose information acquired in the course of duties subject to safeguards (adequate legal restrictions on further disclosure, recipient assurances, necessity for regulatory functions). - With Governor approval CIMA may enter into MoUs with overseas authorities to assist consolidated supervision; CIMA has signed MoUs with Brazil and Jamaica and is negotiating with the Isle of Man and Panama. - Overseas authorities may be authorized to conduct on-site inspections in the Cayman Islands and must sign confidentiality agreements; CIMA decides case-by-case whether to join foreign supervisors in inspections. - Assessment: Principle 1(6) — Compliant. ### Permissible activities and licensing (Principles 2 and 3) - Definition and control of use of “bank”: - “Bank” defined as a person carrying on banking business (receiving and holding money repayable by check or order and investing by advances or otherwise). - Only licensed banks may solicit or receive deposits from the public; building societies and credit unions may receive member deposits. - Use of the word “bank” or derivatives is restricted to licensed banks, except with CIMA’s approval. - Conducting banking business without a license: summary conviction fine of C$10,000 and imprisonment for one year; continuing offence: fine of C$1,000 for each day the offence continues. - Assessment: Principle 2 — Compliant. - Licensing criteria and process: - Banks and Trust Companies (License Application and Fees) Regulation (BTCLAF) prescribes application information; CIMA will not grant a license without necessary information and fulfilled criteria. - Shareholder information required for applicants includes: - name of each shareholder holding more than 10 percent of issued share capital or voting rights; - annual accounts for two previous years and parent undertaking accounts where applicable; - three references (two character, one financial); - personal questionnaire; - police clearance certificate. - Applicants currently limited to branches and subsidiaries of banks licensed outside the Cayman Islands; CIMA requires confirmation from home supervisor that there is no objection and that consolidated supervision is conducted. - Manager/director/officer evidence required: - two effective directors (one with sound professional banking knowledge and experience); - three references (two character, one financial); - personal questionnaire; - police clearance certificate. - CIMA must refuse a license where persons would not be fit and proper; fit and proper assessment is initial and continuing. - Banks must have at least two directors; prior approval required before appointment of directors or senior officers. - Business plan and financial projections required, including proposed initial assets and projected assets/liabilities for next two years. - CIMA assesses compliance with its draft statements of guidance on corporate governance, internal audit, internal control, and operational risk management. - Minimum net worth: not less than C$400,000 or greater sum determined by CIMA; most newly established subsidiaries have an initial net worth of at least C$5,000,000; banks must maintain required net worth at all times. - False or misleading information to CIMA: summary conviction fine of C$10,000 and imprisonment for one year. - Assessment: Principle 3 — Largely Compliant. - Comment: Applicants are not currently required to maintain initial capital in cash; proposed amendment to BTCL would give CIMA power to require capital funds in cash in the Cayman Islands. ### Ownership, acquisitions, and investment criteria (Principles 4 and 5) - Ownership transfers and control: - No shares in a bank may be issued or transferred without prior CIMA approval (exemption possible for publicly traded banks if notified of changes); acquisitions of more than 10 percent require notification and may require CIMA assessment. - CIMA assesses fitness and propriety of persons acquiring control or ownership using the same criteria as licensing. - CIMA confirms names and holdings of all shareholders, including ultimate beneficial owners, during on-site inspections. - Assessment: Principle 4 — Compliant. - Comment: Consideration that CIMA might be entitled to issue administrative acts directly to potential acquirers who fail to provide sufficient information or are unsuitable; CIMA should be informed of changes in management of legal-person shareholders. - Investment and major acquisition approvals: - Prior approval required for a Cayman-incorporated bank to open a subsidiary, branch, agency, or representative office outside the Cayman Islands or to acquire stakes in other entities. - In assessing acquisitions CIMA considers business activities, risks to the bank, management, jurisdiction, and the bank’s resources; law does not explicitly define these criteria. - Investments in other entities count as exposures and are restricted to 25 percent of the capital base. - Assessment: Principle 5 — Largely Compliant. - Comment: Laws and regulations do not provide explicit criteria to judge individual acquisition and investment proposals; new Rules and Statements of Guidance do not specifically address investment policy or investment risk management. CIMA should consider establishing Rules and a Statement of Guidance that set out criteria used to review acquisitions and investments. - Draft revisions to BTCL under consultation seek to limit investments in shares of any commercial entity and in real estate to 20 percent of a bank’s net worth unless otherwise approved by CIMA; consultation expected to be completed by the end of 2003. ### Capital adequacy framework (Principle 6) - Definition and computation: - Banks must maintain net worth (excess assets over liabilities) as required by license; CIMA may require increases in paid-up capital. - All locally incorporated banks submit quarterly financial statements enabling CIMA to compute capital adequacy ratios for subsidiaries. - Capital base components (verbatim structure preserved): - Tier 1 Capital - Shareholders’ equity - issued and fully paid-up common stock - + additional paid-up capital in excess of par or nominal value - + unappropriated retained earnings - +/- current year’s net income or loss - - treasury stock - + minority interests, in the case of consolidated reports only - - minus goodwill and other intangible assets - + Tier 2 Capital (≤ 100 percent of Tier 1 Capital) - unsecured subordinated debt (≤ 50 percent of Tier 1 Capital) - + hybrid debt/equity instruments - + general loan loss reserves (≤ 1.25 percent of risk weighted assets) - - Deductions from Tier 1 and Tier 2 Capital - investment in equity and subordinated debt instruments in subsidiaries and affiliates, that are not included in consolidated reports - + securities owned in subsidiary and other affiliated entities engaged in banking or other financial business such as leasing; factoring; securities trading, brokering and underwriting; and insurance, in the case of consolidated reports only - connected loans - + locked-in connected lending (lending of a capital nature to a connected party) - Subordination, maturity, and haircut rules: - Unsecured subordinated debt: minimum original fixed term to maturity of at least five years; subordinated to all other liabilities/debt; during last five years to maturity a discount factor of 20 percent per year is applied. - Hybrid debt/equity instruments: minimum original fixed term to maturity of at least five years; unsecured, subordinated and fully paid-up; not redeemable at holder’s option or without prior CIMA consent; available to participate in losses without forcing bank to cease trading; should allow deferment of debt service/payment where profitability or liquidity would not support payment. - Risk weightings applied by CIMA: - 0 percent, 10 percent, 20 percent, 50 percent, and 100 percent to bank assets with specific asset classes mapped to each weighting as described in the framework. - Off-balance sheet conversion factors for non-derivative items: - 0 percent conversion factor for undrawn portions of credit commitments and contingencies with original maturity of one year or less, or unconditionally cancellable at any time. - 20 percent conversion factor for short-term letters of credit. - 50 percent conversion factor for undrawn portions of commitments with original maturity over one year; transaction-related contingencies and non-financial guarantees; note issuance and revolving underwriting facilities. - 100 percent conversion factor for direct credit substitutes, standby letters of credit, repurchase agreements, and forward asset purchases. - Minimum capital adequacy requirements in practice: - Locally incorporated banks required to maintain minimum capital adequacy ratio of 12 percent for subsidiaries of banks licensed outside the Cayman Islands and 15 percent for privately owned banks. - Assessment: Principle 6 — Compliant. - Comments: - Derivative contracts are reported but not included in capital adequacy calculations. - No capital requirements for market risk including foreign exchange and commodity risk. - CIMA’s view: low market risk and limited derivative activity in banks’ books, plus capital adequacy ratios of 12 percent and 15 percent respectively, provide enough buffer to exclude market risk for now. - CIMA assesses exposure to market risk and derivative activities during on-site inspections. - CIMA should monitor banking sector developments and include market risk in capital adequacy computations when sophisticated activities/products become more widely used. - Proposed BTCL amendment would: - give CIMA power to require a bank to maintain capital funds in cash in the Cayman Islands in such amounts and manner as CIMA considers necessary; - require banks not to have a capital adequacy ratio less than ten percent (or such percentage as may be determined by CIMA) as calculated in accordance with CIMA’s specified form, content, and manner; - allow CIMA to vary the capital adequacy ratio for a bank in light of risks and relevant factors; - clarify that failure to comply with capital adequacy requirements may be treated by CIMA as carrying on business detrimentally, enabling remedial actions. ### Credit policies and risk management (Principle 7) - New Rules and guidance: - CIMA issued new Rules for all Licensees Holding Banking Licenses under the Banks and Trust Companies Law (2003 Revision) finalized in early October 2003. - Section 3 (Credit Risk) of the new Rules requires banks to adopt a sound system for managing credit risk and specifies minimum elements: (a) establish an appropriate credit risk environment; (b) operate a sound credit-granting process; (c) maintain an appropriate credit administration, measurement, and monitoring process; and ensure adequate controls over credit risk. - CIMA issued a Statement of Guidance on Credit Risk Management which restates prior Policy on Credit Risk Management (January 2003) and provides guidance on new Rules. - The Statement of Guidance incorporates by reference the Basel Committee Principles for the Management of Credit Risk and Best Practices for Credit Risk Disclosure. - Subsidiaries of international banks may implement parent credit risk policies modified to meet CIMA requirements. - Scope and limitations: - New Rules and Statement of Guidance do not make specific reference to investment policy, making of investments, or ongoing management of investment portfolios; no separate guidance issued on investment risk management. - Statement of Guidance requires the board to review and approve at least annually the credit risk strategy and significant credit risk policies. - The Statement addresses credit environment, credit-granting process, administration, monitoring, controls, conflicts of interest, external pressures, and information systems; some operational details are incorporated by reference to Basel Committee papers. - Supervisory verification: - BSD conducts off-site surveillance and periodic on-site inspections that include review, assessment, and verification of implementation of new Rules and Statement of Guidance on credit risk; off-site and on-site work also address investment risk. - Assessment: Principle 7 — (description provided; rules and guidance issued) *Source: Cayman Islands Monetary Authority (CIMA) framework and assessment as set out in the Detailed Assessment of Compliance of the Basel Core Principles.* ### Section 13(3)(a) of the) BTCL provide that CIMA may require the provision of any information ### cr0592 - Section 13(3)(a) of the) BTCL provide that CIMA may require the provision of any information ### Statutory information‑gathering authority - Section 13(3)(a) of the BTCL and Section 34(8) of the MAL provide that CIMA may require the provision of any information that may be reasonably required in connection with its regulatory functions. - The statutory authority facilitates the BSD’s comprehensive review of matters related to: - credit and investment risk management; - loan loss provisioning; and - country risk management. - The BSD’s quarterly collection of prudential and financial information includes on- and off-balance sheet exposures, provisioning, large exposures, and information on investments; however, reporting does not currently include data on classified assets. *Assessments and comments in the source attribute the authority to CIMA and its use by the BSD.* ### Principle 8 — Loan evaluation and loan‑loss provisioning Findings - CIMA issued new Rules for Licensees Holding Banking Licenses under the Banks and Trust Companies Law (2003 Revision); CIMA finalized these rules in early October 2003. - Section 6.1 of the new Rules requires that “a licensed bank must set out its policy on making loan loss provisions in a written statement.” - CIMA issued a new Statement of Guidance on Loan Loss Provisions (Allowances) that addresses: - loan impairment (recognition and measurement); - adequacy of the overall allowance; - income recognition; and - responsibilities of the board of directors and management. - The Statement of Guidance: - requires board approval of loan loss provisioning policies and regular reporting to the board on loan loss provision and loan impairment; - assigns management responsibility for monitoring loan quality, valuation, recognition and provisioning for actual, expected, and probable losses, and maintaining systems and controls; - requires evaluation of large credits individually, periodic assessment of guarantees and collateral, and processes for recognition of impairment and collectibility; - includes delinquency recognition, conversion to non-accrual status, and loan restructuring processes; - permits subsidiaries of international banks to implement parent provisioning policies, modified as necessary to meet CIMA requirements; - does not mandate specific provisioning levels; licensees determine provisioning based on their asset structure. - BSD conducts ongoing off-site surveillance and periodic on-site inspections that review implementation and operation of the new Rules and Statement of Guidance. - External auditors evaluate provisioning policies and procedures during annual audits of financial statements. - Section 14(1)(vi) of the BTCL allows CIMA to “... require such action to be taken by the licensee as the Authority considers necessary,” providing authority to require strengthening of lending policies and provisioning. Assessment - Largely Compliant. Recommendations / Comments - CIMA should modify the new Statement of Guidance on Loan Loss Provision (Allowances) to: - specifically address the required inclusion of “off-balance sheet exposures”; and - include a “classifications” process in its requirements. - Information on asset classifications should be periodically collected. - CIMA should either amend the new Rules and Statement of Guidance or, preferably, develop a separate new Rule and new Statement of Guidance to specifically address all Investment Risk Management issues. ### Principle 9 — Large exposure limits Findings - Boards must set large exposure policies covering exposures to individual customers, group related/associated persons, connected parties, banks, countries, and economic sectors. - Definitions: - “Group” and “Control” definitions are provided as per the Rules (power via shares, voting, or other agreement). - “Exposure” includes actual and potential claims, undrawn facilities, commitments to purchase/underwrite, loans, leases, guarantees, contingent liabilities, investments, derivative contracts, and similar instruments. - Reporting and limits: - Banks must report all exposure in excess of 10 percent of its total capital base quarterly to CIMA on a solo and consolidated basis. - A bank must not incur an exposure to an individual borrower or group of closely related/associated counterparties that exceed 25 percent of its total capital base. - Branches may not have exposures that exceed 25 percent of the capital of their head offices. - The total of all large exposures exceeding 10 percent of a bank’s capital base must not exceed 450 percent of the bank’s total capital base. - Exposures of one year or less to banks in Zone A countries, eligible securities firms, and multilateral development banks; exposures to or guaranteed by central governments and central banks from Zone A countries; and certain Zone A central government exposures denominated and funded in the same currency are excluded from the 25 percent calculation. - Exposure secured by cash (including certificates of deposit issued by the bank held by the bank) or back-to-back exposure may amount to up to but not exceed 100 percent of the bank’s capital base, subject to same-country-and-currency, maturity, and legally binding set-off requirements. - Banks must notify CIMA immediately of any temporary breach of the 25 percent large exposure limits. - Cross‑border consolidated supervision exception: - CIMA may permit exposures to exceed 25 percent but not more than 50 percent of the Cayman bank’s capital base if specific conditions are met, including parental guarantee, pre-notification, home supervisor confirmation of consolidation, Basel Core Principles supervision of parent, and CIMA’s opinion of parental financial strength. - Monitoring: - Large exposures are monitored via analysis of quarterly financial statements and reviewed during on-site inspections. Assessment - Compliant. Comments / Recommendation - To ensure corrective-action powers under the BTCL, consideration might be given to establishing the principles of the large exposure regime in the BTCL. ### Principle 10 — Connected lending Findings - Boards must set large exposure policy statements including connected parties. - Limits and definitions: - Aggregate of all exposures to connected counterparties must not exceed 10 percent of the bank’s total capital base (does not apply to connected counterparties engaged in banking activities and subject to consolidated and cross-border supervision; those are subject to the 25 percent large exposure limit). - Unsecured exposures to connected counterparties must not exceed 1 percent of the bank’s capital base. - Locked-in connected lending (capital nature lending to a connected party) is to be deducted from the capital base. - “Connected counterparty” defined to include directors, controlling shareholders, officers, immediate relatives (spouse, children, parents, siblings), and affiliated companies. - Operational requirements: - All extensions of credit should be on an arm’s-length basis; credits to connected counterparties should be authorized on an exception basis, monitored with particular care, and steps taken to control or mitigate non-arm’s-length lending risks. - Banks must have procedures preventing loan beneficiaries from participating in loan assessment or decision making. - Banks report quarterly to CIMA related‑party loans and advances (group companies; directors, controllers and their associates; non-group counterparties associated with directors and controllers; and due from banks) and must flag related‑party items in large exposure reports. - CIMA reviews aggregate lending to connected and related parties during on-site inspections. Assessment - Largely Compliant. Comments / Recommendations - CIMA does not require that transactions with connected or related parties exceeding specified amounts or otherwise posing special risks be subject to approval by the bank’s board of directors. - Banks are not required to monitor loans to connected parties through an independent credit administration process. - Consideration should be given to establishing principles on lending to connected counterparties in the BTCL. - CIMA is considering re‑drafting the Rules on Large Exposures and the related Statement of Guidance to provide discretion to vary limits for exposure to connected parties that are engaged in banking activities and subject to consolidated and cross‑border supervision on an individual basis. ### Principle 11 — Country risk Findings - CIMA’s new Rules (finalized in early October 2003) require each bank’s board to set a large exposures policy including exposures to countries (Section 5.2). - The new Rules set general large exposure limits but do not set aggregate country risk exposure limits; Section 5.4 creates exceptions related to certain exposures to banks, central governments, central banks in a specific group of countries, and multilateral development banks. - The new Statement of Guidance on Large Exposures (and Section 7 of that Statement) addresses the licensee’s obligation to monitor concentrations in particular countries and geographic regions, using systems tailored to the licensee’s operations. - Licensees set their own country risk guidelines and limits; subsidiaries may implement parent country risk policies modified to meet CIMA requirements. - Section 3.3.5 of the Statement of Guidance on Loan Loss Provision (Allowances) includes country risk as a credit quality factor. - Transfer risk is not addressed in the new Rules or either new Statement of Guidance. - CIMA has begun drafting a new Rule and Statement of Guidance specifically on country risk and transfer risk. - BSD supervision: - Off-site surveillance and on-site inspections review country risk policy implementation; - BSD staff receive training to monitor market risks; - BSD quarterly reporting includes international claims and liabilities by country, instrument, and currency; - Country risk issues are included in credit risk and loan loss provisioning reviews during inspections; - External auditors may review country risk exposures in annual audits. Assessment - Largely Compliant. Comments / Recommendations - CIMA does not currently require banks to have adequate policies and procedures for identifying, monitoring, and controlling transfer risk, nor for maintaining appropriate reserves against transfer risk. - CIMA should complete development and implementation of the Rule and Statement of Guidance specifically dealing with country risk and transfer risk (drafts are already under way). - CIMA should develop more specific on-site examination procedures for country risk and transfer risk. *Source: IMF assessment material summarizing CIMA rules, Statements of Guidance, BSD reporting and supervisory practices as presented in the supplied content.* ### 2003. There are no proposed new Rules regarding foreign exchange risk or other market-related ### cr0592 - 2003 ### Foreign exchange and market-related risks - No proposed new Rules regarding foreign exchange risk or other market-related risks in 2003. - CIMA issued a new Statement of Guidance on Foreign Exchange Risk Management (the Statement of Guidance). - The Statement of Guidance provides a standard of best practice for implementation of an effective and sound foreign exchange risk management system and addresses, inter alia: - board and senior management oversight and responsibilities; - strategy, monitoring, and control; - establishing limitations; - dealing with contingencies. - Banks may set their own foreign exchange risk-related limitations, as appropriate to their business, which are reviewed by CIMA during ongoing supervisory processes. - Subsidiaries of international banks may implement parent foreign exchange risk policies and procedures, modified as necessary to meet CIMA requirements. - CIMA has authority to require licensees to increase capital and may: - impose a specific capital charge pursuant to Section 8 of the BTCL; - impose specific limits on any market risk exposure pursuant to Section 14(1)(vi) of the BTCL. - An amendment to the BTCL has been drafted to provide CIMA authority to require a licensee to maintain capital by specifically taking into account risks arising from the licensee’s activities. - CIMA’s existing policy requires risk capital ratios in excess of international standards and is viewed by CIMA as providing coverage for any possible market risk—see CP 6. ### Contingency planning, stress testing, and market-risk activities - The Statement of Guidance provides for contingency planning and stress testing processes to measure vulnerabilities. - Sophisticated modelling (e.g., VaR) is not mandated nor deemed necessary. - BSD senior management asserts that, other than hedging foreign exchange and interest rate risk, sophisticated business activities and products that generate significant market risk (e.g., derivatives) are not in general use in the current market. - In limited instances where such risk exists: - the BSD includes review of those activities in its supervision; - each licensee’s external auditor would also review such risk taking. - CIMA requires licensees to receive its approval before engaging in new business activities; the approval process includes a determination of whether the new venture would produce market risk and whether the licensee has the expertise to understand and deal with such risk. ### Supervision, surveillance, and inspection regarding market risk - The BSD conducts ongoing off-site surveillance and periodic on-site inspections that include review, assessment, and verification of implementation and operation of requirements in the Statement of Guidance—see CP 16 for further details. - BSD staff receive training to ensure expertise necessary to monitor market risks. - Section 34(8) of the MAL and Section 13(3)(a) of the BTCL permit CIMA to require provision of any information reasonably required in connection with regulatory functions, facilitating BSD’s comprehensive review of market risk—see CP 18 for further details. - BSD’s quarterly collection of prudential and financial information includes information on derivative instruments and foreign exchange contracts. - On-site inspections include review of market risk policies and procedures and their effective implementation, including: - policies and procedures for identifying, measuring, monitoring, and controlling risk; - management of the limitations process; - verification of implementation and quality of information, management, and control systems; - adherence to limitations imposed. - CIMA’s Bank Supervision On-Site Inspection Manual includes broad coverage of market risk and a more detailed section on foreign exchange risk. - The inspection process does not include review of periodic stress testing and contingency planning; justification given that sophisticated products that generate significant market risk do not currently exist in this market. ### Assessment and recommendations (Market risk) - Assessment: Compliant. - Comments: - CIMA should monitor developments in the banking sector closely to assess whether it must establish Rules and a Statement of Guidance on market risk once sophisticated business activities and products that generate significant market risk (e.g., derivatives) are in broader use. - Inspection procedures should include consideration of stress testing and contingency planning, where necessary. ### Principle 13 — Other Risks (Interest rate, liquidity, operational) - CIMA issued new Rules for all Licensees Holding Banking Licenses under the Banks and Trust Companies Law (2003 Revision) finalized in early October 2003. - Section 4 (Interest Rate Risk) of the new Rules requires boards to approve strategies and policies for interest rate risk management and requires senior management to monitor and control such risks; policies and procedures must be commensurate with licensee activities and operating limits must be established and enforced. - Section 7 (Liquidity) of the new Rules requires that “... banks must maintain adequate liquidity taking into account the nature and scale of their business.” Limits set by banks must ensure ability to meet obligations as they fall due and CIMA may impose limits on a case-by-case basis. - No new Rules regarding operational risk or other material risks. - CIMA issued: - a new Statement of Guidance on Interest Rate Risk Management (the IRR Statement of Guidance); - a new Statement of Guidance on Liquidity Risk Management (the LR Statement of Guidance); - a new Statement of Guidance on Operational Risk Management (the OR Statement of Guidance), which restates, with nominal format changes, former Guidelines on Operational Risk Management issued in January 2003. - IRR Statement of Guidance addresses board and senior management oversight; risk management policies and procedures; risk measurement and stress testing, monitoring, and control functions; and internal controls; it incorporates by reference the Principles for the Management and Supervision of Interest Rate Risk issued by the Basel Committee on Banking Supervision. - LR Statement of Guidance addresses ongoing liquidity management, measuring and monitoring net funding requirements, managing market access, contingency planning, foreign currency liquidity management, and internal controls. - OR Statement of Guidance addresses development of an appropriate risk management environment and risk identification, measurement, monitoring, and control; it is based on Part 1 of Sound Practices for the Management and Supervision of Operational Risk issued by the Basel Committee and incorporates Part 2 by reference as further guidance for large complex institutions. - Licensees may set their own limitations and policies, which CIMA reviews for appropriateness; subsidiaries of international banks may implement parent policies modified as necessary to meet CIMA expectations. - BSD conducts off-site surveillance and periodic on-site inspections covering requirements of new Rules and Statements of Guidance—see CP 16; BSD staff receive relevant training. - Section 34(8) of the MAL and Section 13(3)(a) of the BCTL permit CIMA to require provision of any information reasonably required to review management of interest rate, liquidity, and operational risks—see CP 18. - BSD’s quarterly collection includes information on interest rate sensitivity and liquidity (e.g., large depositors, off-balance sheet assets and liabilities, and re-pricing maturities). - On-site inspections review interest-rate, liquidity, and operational risk policies and procedures and their effective implementation; CIMA’s Bank Supervision On-Site Inspection Manual includes detailed sections on interest rate risk, liquidity risk, and operational risk. - The inspection process does not include review of periodic stress testing and contingency planning; justified by the absence of sophisticated products that generate significant interest rate risk in the market. - CIMA retains authority to require licensees to increase capital (Section 8 of the BTCL) and to impose specific limits on any risk exposure (Section 14(1)(vi) of the BTCL); an amendment to the BTCL has been drafted to allow CIMA to require licensees to maintain capital taking into account risks arising from their activities. - CIMA believes its policy requiring risk capital ratios in excess of international standards provides sufficient coverage for possible risks—see CP 6. - Licensees are not generally required to provide public information on their risk management programs; however, a few licensees are required to provide information to the public due to diverse ownership and structure. - Assessment: Compliant. - Comments: - Inspection procedures should include consideration of stress testing and contingency planning, where necessary. - Licensees with publicly-traded shares required to provide public disclosure should include information on their risk management program in that disclosure. ### Principle 14 — Internal Control and Audit - New Rules finalized in early October 2003 include Section 1 (Internal Controls—General) requiring that “… all licensees must take reasonable care to establish and maintain such systems and controls as are appropriate to their business.” - CIMA issued: - a new Statement of Guidance on Internal Audit—Banks (the IA Statement of Guidance); - a new Statement of Guidance on Internal Control in Banks (the IC Statement of Guidance); - a new Statement of Guidance on Corporate Governance (the CG Statement of Guidance). - IA Statement of Guidance addresses scope of audit function; permanence, independence, and impartiality; internal audit charter; professional competence of audit staff; audit operations, procedures, and management; audit access to all activities and records; audit committee of the board; and outsourcing of audit services. - IC Statement of Guidance addresses management and board responsibilities; control culture and oversight; risk recognition and assessment; control activities and segregation of duties; information and communication; monitoring activities and correcting deficiencies. - CG Statement of Guidance establishes best practice guidelines for corporate governance and addresses role, structure, and responsibilities of the board; risk management, conflicts, and complaints; the audit function; and regulatory relations. - Licensees may adopt parent internal control and internal audit policies for subsidiaries/branches of international banks, modified as necessary; CIMA reviews for appropriateness. - CIMA expects all banks to have an internal audit function reporting to the board or audit committee; many licensees receive internal control/internal audit services from parent head/regional offices. - External auditors review internal controls and internal audit activities during annual audit; CIMA requires all external audits be conducted by one of the four recognized international accounting firms. - The Companies Law does not provide internal control, internal audit, and corporate governance principles for effective control over risk management; CIMA provides these principles through Rules and Statements of Guidance. - CIMA requires pre-approval of all directors and senior managers pursuant to Section 12 of the BTCL and may deny or revoke approval; CIMA may require substitution of directors/officers pursuant to Section 14 of the BTCL. - BSD conducts off-site surveillance and periodic on-site inspections that include review, assessment, and verification of implementation and operation of requirements in new Rules and Statements of Guidance; BSD staff receive training. - Section 34(8) of the MAL and Section 13(3)(a) of the BTCL permit CIMA to require provision of any information reasonably required to review internal controls, internal audit, corporate governance/risk management. - BSD’s quarterly collection of prudential and financial information forms the core of its comprehensive database on licensee activities. - On-site inspections review internal controls, internal audit, and risk management systems, policies, and procedures per new Rules and Statements of Guidance; CIMA’s Bank Supervision On-Site Inspection Manual includes detailed sections on internal controls, internal auditors, information systems, and compliance. - Inspections assess management and board oversight responsibilities; policies and procedures for identifying, measuring, monitoring, and controlling risk; management of the limitations process; security programs; implementation and quality of information, management, and control systems; and delegation of responsibilities. - Assessment: Compliant. - Comments: None. ### Principle 15 — Money Laundering - Anti-money laundering requirements are primarily contained in: - the Proceeds of Criminal Conduct Law (2001 Revision) (the PCCL); - the Misuse of Drugs Law (2000 Revision); - the PCCL-Money Laundering Regulations (2003 Revision); - the PCCL-Money Laundering Amendment) Regulations, 2003; - the PCCL-Money Laundering (Amendment) (Client Identification) Regulations, 2001; - the PCCL-Money Laundering (Amendment)(No. 2) Regulations, 2002. - CIMA originally issued Guidance Notes on the Prevention and Detection of Money Laundering in the Cayman Islands (the Guidance Notes) in April 2000. - The BSD is responsible for ensuring banks have implemented and monitor compliance with the laws and regulations pursuant to the PCCL-Money Laundering Regulations (2003 Revision) and the Guidance Notes. - Licensees may set their own anti-money laundering policies and procedures, reviewed by CIMA; subsidiaries may implement parent policies modified to meet laws, regulations, and Guidance Notes. - BSD conducts ongoing off-site surveillance and periodic on-site inspections that include review, assessment, and verification of implementation and operation of laws and regulations—see CP 16; BSD staff receive training including sessions from banking, accounting, and legal associations, financial institutions, and foreign regulatory and supervisory authorities. - Section 34(8) of the MAL and Section 13(3)(a) of the MAL permit CIMA to require provision of any information reasonably required to review licensee anti-money laundering programs—see CP 18. - BSD has begun to collect semi-annually information from licensees on their anti-money laundering programs as part of regular reporting requirements; CIMA will collect information on non-compliant accounts. - CIMA’s Bank Supervision On-Site Inspection Manual includes a detailed section on anti-money laundering. Inspections review anti-money laundering policies and procedures for conformity with laws, regulations, and Guidance Notes and verify monitoring, control, record-keeping, training, audit, and compliance policies and systems. - Inspections review internal auditor and compliance officer work and discuss anti-money laundering program with external auditor. - Scope of inspection of anti-money laundering activities includes: - client identification processes; - records requirements and retention periods; - suspicious transactions recognition and reporting requirements; - management responsibility (including responsibilities of the money laundering reporting officer); - communications with and training of staff. - Sections 22, 23, and 27 of the PCCL ensure reporters of suspicious transactions are not held liable for appropriate reporting. - Section 14 of the BTCL provides CIMA authority to take action against a licensee that does not comply with its anti-money laundering obligations. *International Monetary Fund — cr0592 (2003).* ### Section 49 of the MAL provides CIMA the authority to appropriately share information on ### Section 49 of the MAL provides CIMA the authority to appropriately share information on ### Anti–Money Laundering (AML) authority and obligations - Section 49 of the MAL: - Provides CIMA the authority to appropriately share information on money-laundering activities with other supervisors and with relevant judicial authorities. - Provides for the confidential treatment of information received as part of the supervisory process and for disclosure of such information in certain defined circumstances. - Guidance and statements: - Guidance Notes provide for an effective compliance culture. - The newly-issued Statement of Guidance on Corporate Governance provides that business should be conducted in a sound and prudent manner with integrity, due care, and professional skills. - Reporting obligations and in-house expertise: - CIMA has the obligation to report suspicious transactions pursuant to Sections 15 and 16 of the PCCL-Money Laundering (Amendment) Regulations, 2003. - CIMA reports through its own money laundering reporting officer, who also provides in-house specialist expertise on anti-money laundering, fraud, and other financial crimes. - Assessment: - Assessment: Compliant. - Comments: None. ### On-site and off-site supervision (Principle 16) - Supervisory framework and resources: - CIMA’s BSD has developed and implemented a comprehensive and effective risk-based banking supervision system based on a mix of ongoing off-site surveillance and periodic on-site inspections, supplemented by regular, meaningful communication with licensees. - BSD staff are provided with training designed to ensure they have the actual level of expertise necessary to conduct surveillance and inspections. - Legal powers and information access: - Section 13 of the BTCL empowers CIMA to examine the business of a licensee as it sees fit through regular reporting or as otherwise necessary. - Section 13(4) of the BTCL allows CIMA to authorize any other person to assist it in the performance of its functions (e.g., reporting accountants). - Section 34(8) of the MAL and Section 13(3)(a) of the BTCL provide that CIMA may require provision of any information reasonably required in connection with its regulatory functions, including internal and external audit reports. - Section 10 of the BCTL requires submission of annual audited financial statements of each locally-incorporated licensee and an audited annual report for the parent of each licensee not locally-incorporated. - Off-Site Monitoring Manual and outputs: - CIMA has implemented an Off-Site Monitoring Manual setting objectives, responsibilities, and methodologies for ongoing off-site surveillance. - Off-site surveillance reports are produced quarterly and include analysis of solvency, asset quality, profitability, liquidity, concentrations, interest rate sensitivity, investments, and other matters as appropriate. - Analyses are usually based on trends for the licensee through the previous five quarters. - BSD produces a quarterly “watch list” on institutions about which there is concern, furnished to CIMA’s board of directors. - On-Site Inspection Manual and scope: - CIMA has implemented an On-Site Inspection Manual setting objectives and methodologies and inspection programs covering all areas of risk within the licensee. - Scope of on-site inspections is determined based on the licensee’s risk profile through pre-inspection planning using off-site surveillance and prior on-site results. - On-site inspections are performed by the analysts responsible for the licensee’s off-site surveillance, under BSD managers’ supervision. - Frequency: - On-site inspections are conducted annually on all retail banks and those banks for which CIMA is the home country supervisor. - Inspections of other banks that have a physical presence are conducted every two years. - Inspections of all other entities are prioritized based on CIMA’s risk assessment of the bank. - CIMA has conducted on-site visits to review operations of overseas branches and subsidiaries. - Meetings with licensee external auditors are part of on-site inspections; work of internal auditors is used where appropriate. - Oversight and quality review: - The Cayman Islands Government’s internal audit department conducts audits of the procedural aspects of the BSD’s off-site function. - A subcommittee of CIMA’s board of directors is preparing to implement a new program to review the effectiveness of BSD’s supervision program; the review will be conducted by three directors with extensive banking supervisory/financial knowledge and experience. - Assessment: - Assessment: Compliant. - Comments: None. ### Bank management contact and supervisory engagement (Principle 17) - Prudential meetings and frequency: - BSD conducts prudential meetings at least annually with banks that carry on business in the domestic market and the privately-owned banks. - BSD conducts prudential meetings at least every two years with the branches and locally-incorporated subsidiaries of international banks. - Meeting participants and topics: - Meetings are usually attended by bank senior management and may include board members, internal and/or external auditors, department heads, etc., as necessary. - Typical agenda items: bank performance, off-site surveillance or on-site inspection issues, corporate strategies, anti-money laundering, risk management, and other ongoing prudential matters. - BSD also meets with parent and regional management, compliance staff, and internal auditors of international banks during their visits. - Regulatory liaison and approvals: - The Statement of Guidance on Corporate Governance requires the board to appoint a liaison board member to deal with regulatory matters. - CIMA requires licensees to obtain prior approval for any changes to business activities or products and expects timely notification of material adverse developments; institutions do make such reports. - CIMA requires prior approval for all new directors and senior management; approval includes a thorough fit and proper determination and assessment of specific experience and qualifications. - Assessment: - Assessment: Compliant. - Comments: None. ### Off-site supervision, reporting requirements, and data collection (Principle 18) - Legal authority and reporting timeliness: - Section 34(8) of the MAL and Section 13(3)(a) of the BTCL authorize CIMA to require provision of any information reasonably required, including internal and external audit reports. - Annual audited information must be provided within 90 days after the period-end. - Quarterly returns must be submitted within 21 days of period-end. - Section 10 of the BCTL requires submission of annual audited financial statements of each locally incorporated licensee and an audited annual report for the parent of each licensee not locally incorporated. - Standardized reporting content and limitations: - The standardized quarterly prudential and financial reporting provides information, on a solo and consolidated basis, for on- and off-balance sheet assets and liabilities, profit and loss, capital adequacy (including reserves), liquidity, large exposures, loan loss provisioning and delinquencies, market risk, and deposit sources. - The reporting does not include information on asset classification in regular reporting, although some licensees have been required to provide special reporting. - Accounting standards: - CIMA and the local accounting profession require licensees to report using Generally Accepted Accounting Principles or International Accounting Standards (International Financial Reporting Standards). - A few exceptions exist where the licensee’s home country regulators require a different regulatory reporting system; CIMA is aware of aberrations that such reporting produces. - New Rules and enforcement: - CIMA has issued new Rules for all Licensees Holding Banking Licenses under the Banks and Trust Companies Law (2003 Revision). - Pursuant to Section 2 of the new Rules, financial institutions must submit annual financial statements and prudential reports and statistical returns by the dates stipulated in the reporting guidance and/or the law; the new Rules also require preparation of such reports in accordance with CIMA’s instructions. - Section 34(7) of the MAL authorizes CIMA to impose monetary penalties for failure to comply with a rule. - CIMA is considering whether to establish monetary fines for late filing of returns. No fines are planned for mis-reporting, inaccuracies, or persistent errors. - Senior management of the licensee is responsible for the accuracy of the returns and is required to sign them. - Consolidated information on parents and group components: - Section 34(8) authorizes CIMA to request information on companies and individuals related to the licensee relevant to assessing financial condition and risks. - CIMA requires annual consolidated audit reports of all parent companies and may require information on other parent organization components as necessary. - There is no “holding company” supervision; each financial services component is separately supervised by separate divisions within CIMA that share information among themselves. - Systems and data management: - BSD’s off-site surveillance program uses financial and prudential information provided by licensees for ongoing monitoring; results of off-site monitoring inform on-site inspection planning. - CIMA has developed an automated information system to assist in data management and analysis; BSD analysts maintain non-financial information on the system. - Assessment and recommendations: - Assessment: Largely Compliant. - Comments / Recommendations: - CIMA should complete the process necessary to establish monetary fines for late regulatory reporting. - CIMA should consider imposing fines for persistent inaccuracies in returns. - CIMA should consider adding information on asset classifications to its quarterly prudential and financial reporting. ### Validation of supervisory information (Principle 19) - Validation mechanisms: - CIMA conducts independent validation of supervisory information through on-site inspections using its own analysts/inspectors and has authority to use others (including external auditors) pursuant to Section 13(4) of the BTCL. - The On-Site Manual provides objectives, responsibilities, and methodologies to validate supervisory returns and determine the reliability of information. - On-site processes include independent verification of corporate governance/risk management programs, determination of reliability of information, and obtaining additional information about the licensee. - A meeting with bank management follows inspections to discuss results and recommendations; meetings may involve the bank’s directors depending on issues. - External audit interaction and obligations: - The jurisdiction has a well-qualified audit profession primarily represented by the four international accounting firms. - Section 10(1) of the BTCL requires that the auditor of each licensee be approved by CIMA; CIMA only approves audits by the four international firms for bank licensees. - CIMA’s Policy on the Approval of an Auditor for a Regulated Institution (May 2002) sets assessment criteria and available sanctions. - CIMA requires each licensee to provide a copy of their external auditor’s management letter. - CIMA may direct a licensee to engage an external auditor for special audits or contract directly with external auditors for such services; CIMA determines the scope and oversees completion. - CIMA meets periodically with the Cayman Islands Association of Professional Accountants to discuss mutual issues. - Proposed legislative enhancement: - An amendment to the BTCL is being drafted to place on the external auditor an additional obligation to report to CIMA certain specified information discovered during the audit (relating to solvency, non-compliance with pertinent laws, carrying on business in a fraudulent manner, and other significant matters). - Assessment and recommendation: - Assessment: Compliant. - Comments / Recommendation: - CIMA should encourage the Legislative Assembly to enact the proposed BTCL amendments once they are introduced. ### Consolidated supervision and group oversight (Principle 20) - Consolidated supervision approach: - Section (6)(1)(b)(i) of the MAL states one of CIMA’s principal functions is “... to regulate and supervise financial services business carried on in and from within the Islands...” - There is no bank holding company regulation/supervision in the jurisdiction. - Sectoral divisions within CIMA regulate and supervise individual components (e.g., banking, insurance, trust companies) of financial services groups headquartered in the jurisdiction and maintain information and knowledge on each component. - Non-financial activities of these companies are not formally included, but consolidated group financial information is analyzed. - Although there is no formal process for consolidation of supervisory results, sectoral supervisors within CIMA work together on matters of shared interest and share information on financial condition, risk management, and controls for component companies. - The BSD regulates all banking components of financial services companies on a consolidated basis. - There is little non-banking business in the banks; what little exists is included in the BSD’s risk-based supervisory process. *Source: cr0592 - Section 49 of the MAL provides CIMA the authority to appropriately share information on (IMF).* ### Section 13(1)(b) gives CIMA the authority the examine all of the affairs of and businesses of ### cr0592 - Section 13(1)(b) gives CIMA the authority the examine all of the affairs of and businesses of ### Supervision of Affiliates, Subsidiaries, and Overseas Branches - Section 13(1)(b) gives CIMA authority to examine all of the affairs of and businesses of licensees, including those conducted through overseas branches or subsidiaries and affiliates. - BSD has conducted on-site inspections of overseas branches and subsidiaries of licensees. - Financial and prudential information is obtained on a solo and consolidated basis. - Information on affiliates may be obtained pursuant to Section 34(8) of the MAL and Section 13(3)(a) of the BTCL. - Section 11(a) of the BTCL requires CIMA’s approval for a licensee to establish a foreign subsidiary, branch, agency, or representative office. - CIMA requires prior approval for changes to business activities or products and for adding new business activities or products. - The BTCL and CIMA’s prudential standards, as set out in the new Rules and Statements of Guidance, apply on a consolidated basis. - There are no impediments to the direct or indirect supervision of all affiliates and subsidiaries of the banking organization. - Previously licensed banks with non-financial corporate or individual ownership: - Are required to have physical presence in the Cayman Islands. - Are subject to direct and indirect supervision and regulation as detailed above. - Must meet a higher risk capital adequacy ratio of 15 percent. - Face limitations on business with their affiliates; further restrictions are being considered. - Are subject to fit and proper determinations on individual and corporate shareholders. - Assessment: Compliant. ### Accounting Standards, Reporting, and Audit Interaction (Principle 21) - Section 34(8) of the MAL and Section 13(3)(a) of the BTCL authorize CIMA to require provision of any information reasonably required for regulatory functions, including internal and external audit reports. - Section 34(8) authorizes requests for information on companies and individuals related to the licensee; such information must be provided on reporting forms and according to CIMA instructions. - Reporting timeliness: Information must be provided within 90 days of period-end. - Section 10 of the BTCL requires submission of annual audited financial statements of each locally incorporated licensee and an audited consolidated annual report for the parent of each licensee not locally incorporated. - There is no statutory or regulatory requirement for publication of annual financial information to shareholders of publicly traded licensees. - CIMA does not set the scope of regular annual external audits or internal audits, though both are reviewed during on-site inspection. - On-site inspections validate the reliability of supervisory returns; annual audited financial statements are reconciled to supervisory returns of the same quarter-end date. - CIMA meets with external auditors during on-site inspections; external auditors’ management letters are furnished to CIMA. - A draft amendment to the BTCL would impose an obligation on external auditors to report to CIMA specified information (solvency, non-compliance with laws, fraudulent business conduct, and other materially significant matters) and would give CIMA specific authority to revoke approval of an external auditor; currently revocation may be effected under Section 14(1)(vi) of the BTCL. - Accounting frameworks: CIMA and the local accounting profession require reporting using Generally Accepted Accounting Principles or International Accounting Standards (International Financial Reporting Standards); some exceptions exist where home country regulators require different reporting. - Section 13 of the BTCL permits CIMA to direct a licensee to engage an external auditor to conduct a special audit or provide other services; CIMA may contract directly with the external auditor for such services and determines the scope and oversight of these engagements. - Section 49 of the MAL provides for maintenance of confidentiality of information acquired by CIMA and specifies circumstances for disclosure. - Assessment: Compliant. - Comment: CIMA should encourage the Legislative Assembly to enact the proposed BTCL amendments, once they are introduced. ### Remedial Measures and Enforcement (Principle 22) - Under the BTCL, CIMA may act when it forms the opinion that a bank: - Is or appears likely to become unable to meet obligations as they fall due; - Is carrying on business detrimental to the public interest, depositors, or other creditors; - Has contravened the BTCL or failed to comply with a condition of its license; - Has direction and management not conducted in a fit and proper manner; - Has a director, manager, or officer who is not fit and proper; or - Has a person acquiring control or ownership who is not fit and proper. - Remedial powers include: - Revocation of the license; - Imposition of conditions or further conditions on the license; - Requiring substitution of any director or officer; - Appointing a person to advise the bank on proper conduct of its affairs; - Appointing a person to assume control of the bank’s affairs; - Requiring any action CIMA considers necessary (examples: additional auditing of provisions, restriction on dividends, restrictions on loans to related parties, level of liquid assets). - Practical limitations: CIMA’s ability to arrange a take-over or merger of a failing bank is hampered because customers may file liquidation proceedings at the Court without CIMA’s consent. - CIMA’s ladder of compliance: - Uses a collaborative approach for minor problems. - Factors considered when deciding action: nature and extent of contravention; remedial action prospects; bank’s willingness and ability to cooperate; bank’s compliance history; fitness of directors and officers; whether issues indicate a pattern. - Process: inform bank of contravention and request remedial action; bank must notify CIMA of remedial action; if ineffective, CIMA makes recommendations within a prescribed period; if non-compliant, CIMA places the bank on a watch list, may require a letter of commitment from the Board, may ask an external auditor to perform an audit/investigation and report to CIMA, and may increase scope/frequency of inspections or reporting. - If still non-compliant, CIMA may issue specific directives and impose or expand business restrictions; final stage involves Compliance Division applying actions available under the BTCL. - Monetary penalties: - Rules under the MAL may provide for imposition of monetary penalties up to C$1,000 for breach of such rules. - CIMA is considering including monetary penalties in its reporting rule for delay in reporting by the bank. - Assessment: Largely Compliant. - Comment: CIMA does not currently utilize its authority to impose monetary penalties provided in the MAL; the monetary penalties in the MAL are minimal and provide little deterrence. Recommendation: No liquidation proceedings should be filed without CIMA’s consent to ensure depositors’ protection. ### Globally Consolidated Supervision (Principle 23) - The BTCL does not explicitly state an objective to supervise banks on a consolidated basis, but CIMA requires consolidated supervisory reports. - CIMA’s requirement for consolidated reporting is based on BTCL provisions allowing CIMA to examine affairs or business of any bank carrying on business in or from within the Cayman Islands by regular returns or other manners. - For subsidiaries, banks must submit audited annual accounts of the subsidiary to CIMA. - Prior approval required for opening a subsidiary, branch, agency, or representative office outside the Cayman Islands. - In the approval process, CIMA assesses: - Management oversight of foreign branches, joint ventures, and subsidiaries; - Whether local management of overseas offices has necessary expertise; - Reporting lines and proposed business relative to expertise of management; - Quality of the foreign supervisor, its ability to share relevant information with CIMA, and the legal framework in that jurisdiction. - Once an overseas office is established, CIMA extends inspections to overseas offices. - Examples of Cayman banks’ overseas establishments: branches and subsidiaries in Panama, Cyprus, and on the Isle of Man. - CIMA may require closing of overseas offices or restrict their business activities. - Assessment: Compliant. ### Host Country Supervision and Information Exchange (Principle 24) - One principal function under the MAL is to provide assistance to overseas regulatory authorities; CIMA has a history of cooperating with overseas authorities. - Disclosure procedures: - For a routine regulatory request, CIMA may disclose requested information to overseas authorities. - For a non-routine regulatory request, CIMA must notify the Attorney-General and the Financial Secretary before disclosing requested information. - A routine regulatory request is defined as information for allowing the overseas authority to carry out day-to-day functions (license approvals, approval of regulated persons, registration of applicants). - Factors CIMA must consider when deciding whether to assist an overseas authority: - Whether corresponding assistance would be given to CIMA; - Whether inquiries relate to breaches with no close parallel in the Cayman Islands; - Seriousness of the matter; - Importance of the information; - Whether, in light of advice from the Attorney-General or Financial Secretary, it is in the public interest to give assistance. - The Attorney-General has not advised CIMA not to disclose information so far. - MoUs: - The MAL allows CIMA to enter into MoUs only for the purpose of assisting consolidated supervision by the foreign supervisor. - CIMA is negotiating MoUs with regulatory authorities in jurisdictions where Cayman banks have subsidiaries or branches; these MoUs will formalize working relationships. - CIMA has conducted overseas inspections and focused visits in Europe, the United States, and Central America. - Assessment: Largely Compliant. - Comments and recommendations: - Consider amending the MAL to allow CIMA to enter into a MoU not only for consolidated supervision by foreign supervisors but also for any other purpose with approval of the Governor and the Financial Secretary. - Recommend amending the MAL to clarify that CIMA may provide unsolicited information to host supervisors concerning specific offices in the host country and significant problems in the head office or group as a whole, and to allow MoUs where CIMA is responsible for consolidated supervision. - Note: Requiring approval of another authority to enter into MoUs and to take into account another authority’s advice for non-routine disclosures can give room for political interference and weaken CIMA’s independence. ### Supervision Over Foreign Banks’ Establishments (Principle 25) - Subsidiaries of foreign banks are subject to the same prudential and regulatory reporting requirements as domestic banks. - Branches of foreign banks: - Are subject to the same licensing and regulatory reporting requirements as locally incorporated banks, but are not subject to the same prudential requirements. - Large exposure limits for branches are based on their head offices’ capital; CIMA’s Rules for Large Exposures do not apply to them, though CIMA verifies they follow head office large exposure limits. - Branches do not have assigned capital and CIMA does not calculate capital adequacy ratios for them. - Supervisory inspection frequency: Based on risk assessment, routine on-site inspections of subsidiaries and branches of foreign banks are scheduled at least every second or third year. - Licensing and ongoing supervision of branches/subsidiaries: - CIMA will not grant a license to a branch or subsidiary unless it receives confirmation from the home supervisor that there is no objection, there are no regulatory concerns with the parent or management, and the branch or subsidiary will be included in consolidated supervision of the parent. - Applicants must submit an organizational chart showing parent, subsidiaries or branches, sister companies (affiliates), and respective home country supervisors. - Information sharing and confidentiality: - For routine regulatory requests, CIMA may disclose information to overseas authorities. - For non-routine requests, CIMA must notify Attorney-General and Financial Secretary before disclosure. - CIMA must satisfy itself that the overseas authority is subject to adequate legal restriction of further disclosure, including an undertaking of confidentiality, before disclosing information. - MoU practice: - MAL permits MoUs for assisting consolidated supervision by foreign supervisors. - MoUs with Brazil and Jamaica include spontaneous provision of information to assist overseas authorities even without a prior request. - CIMA provides home supervisors information on material remedial actions it takes regarding operations of a bank from that country, after consultation with that authority. - Cooperative practices: - CIMA inspectors visit home countries and meet with home country regulators. - CIMA facilitates visits of foreign regulators to the Cayman Islands and routinely conducts joint inspections. - Regulators that have conducted on-site inspections, commissioned external audits, or made supervisory visits include: the Central Bank of Brazil, the United Kingdom Financial Supervisory Authority, the Bermuda Monetary Authority, the Isle of Man Financial Services Commission, the Swiss Federal Banking Commission, and a number of United States regulatory agencies. - Assessment: Largely Compliant. - Comments and recommendations: - Concerning prudential supervision of branches, CIMA relies on the home supervisor for ensuring capital adequacy of the group and fitness and propriety of directors and management, but CIMA assesses the home supervisor’s conduct of consolidated supervision before licensing and during supervision. - Recommend amending the MAL to clarify that CIMA may provide unsolicited information to the home supervisor concerning specific subsidiaries and branches under CIMA’s jurisdiction. - CIMA may consider requiring assigned capital for branches licensed to provide services to customers in the local banking market (i.e., "A"-licensed branches providing retail banking services) to provide comparable protection to those customers as locally incorporated banks. - Reiterate that requiring approval of another authority to enter into MoUs, and taking into account another authority’s advice for non-routine disclosures, may allow political interference and weaken CIMA’s independence. *Source: cr0592 (IMF assessment based on CIMA, MAL, and BTCL provisions).* ### 1. Objectives, Autonomy, Powers, and Resources ### 1. Objectives, Autonomy, Powers, and Resources ### Key findings on objectives, independence, legal and enforcement framework - The Monetary Authority Law (MAL) (2003 Revision) sets out broad supervisory powers of the Cayman Islands Monetary Authority (CIMA). - CIMA is responsible for supervision of all financial services except the Stock Exchange, which is regulated by the Stock Exchange Authority. - While CIMA operates broadly independently, provisions in the Laws and Regulations—particularly involving the power of the Governor—could compromise operational independence (e.g., Section 33 and Section 50 of the MAL). - The Governor retains authority to approve issuance of rules, statements of principal and guidance, and signing of MOUs with other supervisory authorities by CIMA. - CIMA has sufficiently broad powers to carry out inspections, investigations and enforcement, but explicit inspection powers over mutual fund administrators should be included in the Mutual Funds Law rather than relying on a general provision in the MAL. - Information-sharing provisions with overseas regulators exist but contain subjective clauses; for non-routine overseas requests the advice of the Financial Secretary and the Attorney must be sought. Memoranda of understanding are permitted only with the Governor’s permission and currently restricted to consolidated supervision assistance. ### Statistics and structural market data (preserve numeric values exactly) - The Stock Exchange currently has about 700 listings; the vast majority are mutual funds. - As of June 2003, under the Mutual Funds Law, CIMA has licensed/registered 4457 funds: - 3835 are registered - 46 licensed - 576 administered - Registered funds have a minimum investing threshold of US$50,000. The US$50,000 threshold was fixed in 1993. - There are 183 licensed fund administrators on the Islands. - The Stock Exchange has 6 member brokers, 5 of which are affiliated to banks. - The Stock Exchange was established in 1997. - The Securities Investment Business Law came into effect in July 2003; existing intermediaries have until January 2004 to apply for a license. ### Deficiencies and supervisory capacity issues - The securities division of CIMA suffers from a very serious deficit in staff numbers; recruitment is underway but will take time for an effective division to emerge. - The Mutual Funds Law is in need of overhaul, particularly when compared to the Securities Investment Business Law. - The current regime is inadequate for funds open to the general public: there is an absence of standard consumer protection requirements (e.g., segregation of client assets). - Section 19 of the Securities Investment Business Law creates an undesirable reporting requirement for auditors (simultaneous notice to CIMA and the licensee) that could compromise corrective action and risk tipping-off; the Law should be amended to provide for receipt by CIMA only. ### Recommended action plan (selected recommendations preserved verbatim) - CIMA should be able to issue rules and statements of guidance without the approval of the Governor. (CP 1(2) Independence) - CIMA should require that applicants maintain initial capital funds in cash in the jurisdiction. (CP 3 Licensing Criteria) - Criteria for judging proposals for investment and acquisition should be included in law or regulation. (CP 5 Investment Criteria) - CIMA should develop and implement a Statement of Guidance on Investment Risk Management. (CP 7 Credit Policies) - CIMA should require that loan loss provisioning reporting include off-balance sheet items. CIMA should provide for the implementation of an asset classification system in each licensee. (CP 8 Loan Evaluation and Loan-Loss Provisioning) - CIMA should require that transactions with connected or related parties exceeding specified limits have board approval and loans to connected and related parties be monitored by an independent credit administration process. (CP 10 Connected Lending) - CIMA should complete the issuance of its Statement of Guidance on Country/Transfer Risk. (CP 11 Country Risk) - CIMA should include information on asset classifications in its regular required reporting. (CP 18 Off-Site Supervision) - CIMA should use its authority to impose monetary penalties and the MAL should be amended to increase the permitted monetary penalties to significant amounts. (CP 22 Remedial Measures) - The MAL should be amended to permit MOUs for consolidated supervision by CIMA and permit CIMA to provide unsolicited supervisory information to host country supervisors. (CP 24 Host Country Supervision) - The MAL should be amended to permit CIMA to provide unsolicited supervisory information to home country supervisors. (CP 25 Supervision of Foreign Banks’ Establishments) ### Specific operational recommendations mentioned in narrative - The Cayman Islands Legislative Assembly may wish to reconsider the involvement of the Governor in approval of issuance of rules, statements of principal and guidance, and signing of MOUs with other supervisory authorities by CIMA. - CIMA should use its existing authority to impose monetary penalties for violating prudential requirements issued in the Rules; the MAL should be amended to increase the currently permitted, minimal monetary penalties to significant amounts. - CIMA may wish to consider requiring assigned capital for branches of foreign banks licensed to provide services to customers in the local banking market (i.e., “A”-licensed branches that provide retail banking services). ### Authorities’ response and implementation status (as stated) - CIMA notes the IMF mission assessed banking supervision as “compliant” or “largely compliant” with all 30 recommendations included in the 25 Core Principles; the mission’s recommendations are under review or implementation unless otherwise indicated. - Implementation of some IMF recommendations would require legislative changes to either the BTCL or the MAL. Legislative proposals on CP’s 3 and 5 have already been submitted to the government; a proposal from CIMA on CP 22 is under development. - Regarding CP’s 24 and 25, the MAL does not restrict disclosures where the information is already public or where disclosure would assist CIMA in carrying out its supervisory duties under the Law; legislative change to expressly permit unsolicited supervisory information to home/host country supervisors will be put forward by CIMA for consideration by the government. - Regarding CP 1(2), CIMA believes the current process allows for transparency and accountability and does not interfere with its operational independence. - For CP 7, 8, 10, 11, 18: 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 to industry for consultation or are under development. ### IOSCO assessment summary (securities regulation) - Assessment methodology: Methodology for Assessing Implementation of IOSCO Objectives and Principles of Securities Regulation; assessment influenced by Cayman Islands market structure. - Regulator (Principles 1–5): Responsibilities clearly set; independence broadly present but affected by Governor-related provisions; securities division understaffed. - Self-regulatory organizations (Principles 6–7): Stock Exchange has listing-only function; supervised by Stock Exchange Authority; recommendation that CIMA become its regulator has convincing arguments. - Inspections, investigations and enforcement (Principles 8–10): CIMA has broad powers but inspection power over mutual fund administrators should be explicit in the Mutual Funds Law; consider requiring additional information (e.g., half-yearly management accounts) from licensees. - Information sharing and cooperation (Principles 11–13): Provisions exist but are subjective; MOUs require Governor’s permission and are restricted to consolidated supervision assistance. - Issuers (Principles 14–16): Stock Exchange listing rules provide for full, accurate and timely disclosure; accounting and auditing standards in line with best international practice. - Collective Investment Schemes (Principles 17–20): Regime designed for sophisticated/institutional investors; overwhelming majority of funds are hedge or hedge-type funds; recommendations to introduce consumer protection for funds open to the general public and to revise the US$50,000 threshold upwards. - Market Intermediaries (Principles 21–24): Securities Investment Business Law (effective July 2003) is a solid piece of legislation but requires adequate trained staff to operate; Section 19 should be amended so auditors report only to CIMA. - Principles for the Secondary Market (Principles 25–30): Not applicable because the Stock Exchange does not engage in trading. *IMF assessment (cr0592 - 1. Objectives, Autonomy, Powers, and Resources).* ### Section 34 allows CIMA to issue or amend rules or statements of principles or guidance ### Section 34 allows CIMA to issue or amend rules or statements of principles or guidance ### Operational independence and governance - Section 34 allows CIMA to issue or amend rules or statements of principles or guidance concerning the conduct of licensees and money laundering regulations only with the approval of the Governor. - Under Section 49 of the Law, all but routine queries from overseas regulators must be referred to the Attorney-General and Financial Secretary; routine regulatory requests are defined separately. - Stock Exchange Authority composition and appointment/removal provisions: - Authority membership comprises the Financial Secretary (Chairman), CIMA, the Attorney-General and not less than two other members appointed by the Governor. - Stock Exchange Authority Regulations (2001 Revision): Regulation 6 — “The Governor may, at any time, revoke the appointment of any member.” Regulation 2 — “The members of the Authority shall hold office during the pleasure of the Governor.” - It appears these provisions apply only to the non-specified members (i.e., not to the Financial Secretary, CIMA, or the Attorney-General). - Assessment: Partly implemented. - Comments and recommendations: - The provisions requiring Governor approval for CIMA rule changes and referral requirements for overseas queries could compromise operational independence. - It is suggested that CIMA should have the sole power to deal with all legitimate regulatory queries from overseas regulators and that it should be at CIMA’s judgment whether to refer them to the Attorney-General and Financial Secretary. - Tenure of members of any supervisory body should be subject to objective criteria and dismissal should be for stated reasons only. ### Accountability and reporting - Monetary Authority Law: - Section 40 requires the Authority to prepare annual audited accounts. - Section 41 provides for an independent review of the Authority’s performance of any of its functions. - Securities Investment Business Law: - Section 16 requires the Authority to maintain a general review of securities business and submit an annual report thereon to the Governor in Council. - No similar provision exists in the Mutual Funds Law. - Assessment: Partly implemented. - Recommendation: Insert a provision similar to Section 16 of the Securities Investment Business Law into the Mutual Funds Law. ### Powers, resources, and capacity (Principle 3) - Description of statutory powers: - Securities Investment Business Law contains wide supervisory powers (authorization, attaching conditions to licenses, inspection powers, enforcement/revocation powers). - Mutual Funds Law appears adequate except: there is no provision to cancel/rescind a registered or administered fund (issue addressed under Principle 17). - Stock Exchange Authority has no explicit provision to inspect the Stock Exchange (issue addressed under Principle 7). - Resource constraints in the securities division: - Current staff numbers total 13. - The division is without a head or deputy head and five staff members have left in the past year. - CIMA is relying on overtime to meet workload. - Board planned a staff complement of between 20 and 25 by end 2004. - Recruitment of a head is at an advanced stage. - Assessment: Partly implemented. - Comments and recommendations: - Lack of staff is a major shortcoming; while plans to increase numbers exist, cohesion will take time. - A well thought out training program is essential to manage the influx of staff. ### Regulatory processes and consultation (Principle 4) - Laws, Regulations and guidance notes set out supervisory powers and processes clearly. - CIMA is required by law to consult the industry when proposing new statements of guidance/guidance notes. - Enforcement due process: - Section 17(3) requires CIMA to notify a licensee of any proposed action; the licensee may make representations and decisions may be appealed to the Court. - Licensees may seek judicial review of CIMA decisions. - Assessment: Fully implemented. - Comments: None. ### Professional standards and confidentiality (Principle 5) - Confidentiality and penalties: - Section 49 of the Monetary Authority Law: breach of confidentiality by any director, officer, employee, agent or advisor is an offence. - On summary conviction: fine of US$12,500 and imprisonment for one year. - On conviction on indictment: fine of US$62,500 and imprisonment for three years. - Conflict-of-interest rules: - Section 18 requires directors and senior management of CIMA to declare any interest in any licensee being discussed in their presence. - CIMA has issued Codes of Conduct and Codes on Conflicts for Directors; staff provisions are in the staff handbook. - Assessment: Fully implemented. - Comments: None. ### Self-regulation and the Cayman Islands Stock Exchange (Principles 6–7) - SRO structure and activity: - The sole SRO is the Cayman Islands Stock Exchange (Exchange), established in 1997 pursuant to the Stock Exchange Company Law 1996. - Exchange publishes listing rules, membership rules and the code on takeovers and mergers. - Exchange provides a listing function only; mutual funds comprise the vast majority of its 700 listings. - The Exchange has six broker members (five of six are part of banking groups); brokers are execution only. - Following the Securities Investment Business Law (2003 Revision), brokers are now supervised by the Monetary Authority; the Exchange retains responsibility for implementing broker membership rules. - Information exchange impediment: - Part V of the Securities Investment Business Law requires the Exchange to submit a written report to CIMA when it becomes aware of a serious issue involving a broker, but the Exchange must simultaneously send a copy to the institution in question—this is an impediment to free exchange of information. - Assessment for SRO use: Implemented. - Recommendation: Delete the legal requirement to send a copy of an investigatory report to the broker at the same time as sending it to CIMA to facilitate free exchange of information. - Stock Exchange Authority oversight (Principle 7): - Authority established under the Stock Exchange Law, 1996; responsible for “the policy, regulation and supervision of the Exchange.” - Membership: Financial Secretary (Chairman), CIMA, Attorney General and not less than two other members appointed by the Governor. - The Authority has no employees; meetings generally quarterly but only two meetings held in the year to October 2003. - The Stock Exchange Law makes no provision for the Authority to carry out an inspection of the Exchange even though it seems accepted that it can; to date no inspection has taken place. - Assessment: Partly implemented. - Recommendations: - Amend legislation to give the Authority clear authority to carry out an inspection of the Exchange and, given the Exchange’s six-year existence, conduct an inspection. - Consider whether the Exchange should be supervised by CIMA rather than the Authority, given CIMA’s supervisory framework and recent assumption of broker supervision; Section 36 of the Securities Investment Business Law provides for cooperation between CIMA and the Exchange on supervision. ### Inspection, investigation, surveillance and enforcement (Principles 8–10) - Inspection and investigation powers: - Section 16 of the Securities Investment Business Law sets out CIMA’s inspection, investigation and surveillance powers over securities firms, including examining affairs by returns, on-site inspections, auditor’s reports, and other means. - Mutual Funds Law does not give CIMA explicit power to examine the books and records of a mutual fund; Section 23 allows CIMA to instruct a regulated mutual fund to have its accounts audited and submitted to it. - No explicit Mutual Funds Law inspection/investigation powers for mutual fund administrators; CIMA inspects administrators under Section 36(i) of the Monetary Authority Law (a general provision permitting actions incidental or consequential to its duties). - Assessment: Broadly implemented. - Recommendation: CIMA should seek explicit powers to directly examine the books and records of a mutual fund and to carry out inspections and investigations of mutual fund administrators similar to the Securities Investment Business Law. - Enforcement powers: - Section 17 of the Securities Investment Business Law: revocation of licenses, impose conditions, apply to Court for orders to protect clients, remove directors/officers, appoint controllers, etc. - Section 18: injunctions, restitution and disgorgement orders. - Section 20: where a breach is suspected CIMA can apply to the Court for entry into premises. - Section 30 of the Mutual Funds Law: CIMA can revoke a mutual fund license, impose conditions, remove promoters/operators, appoint a controller, etc.; however, no provision exists for cancelling/rescinding registration for a registered or administered fund (issue under Principle 17). - Assessment (enforcement powers): Fully implemented. - Inspection and compliance program implementation: - CIMA carries out on-site inspections of licensees; inspections of fund administrators occur roughly once every three years and this target appears met. - CIMA uses a detailed inspection manual and a risk-based approach (regulatory history, size, number of funds under administration, complaints). - Section 19 (Securities Investment Business Law) obliges external auditors to inform CIMA if they become aware of licensee difficulties; Section 34 of the Mutual Funds Law contains a similar provision. - Recommendations: - Consider requiring licensed entities in the securities sector to submit half yearly management accounts to assist earlier detection of difficulties. - When introducing rules relating to net asset values of funds (Principle 20), require funds to submit these calculations at regular intervals to help identify difficulties. - Assessment: Broadly implemented. - Comments: Adequate and well trained staff are needed to carry out these functions. ### Cooperation and exchange of information (Principles 11–12) - Section 49 of the Monetary Authority Law governs exchange with overseas regulators and distinguishes “routine regulatory requests” (day-to-day licensing/approval/registration matters) from other requests (e.g., market abuse/manipulation). - Routine requests can be dealt with by CIMA without reference to any other body. - For non-routine requests, CIMA must notify the Financial Secretary and the Attorney-General, who can give advice; Subsection (4) lists factors CIMA must take into account, including: - (a) whether inquiries relate to possible breach of a law with no close parallel in the Islands or assert a jurisdiction not recognized by the Islands; - (b) the seriousness of the matter, the importance to the inquiries of the information sought in the Islands; - (c) except in the case of a routine regulatory request, whether, in light of advice from the Attorney-General or the Financial Secretary, it is not in the public interest to give the assistance sought. - These provisions could introduce subjectivity into decision-making that may prevent transmission of information that should have been transmitted from a regulatory perspective. - Operational exchange statistics (CIMA quoted): - Between 2 May 2002 and 23 September, 2003 CIMA received 158 requests for information; 154 have been responded to and 4 are pending. - Of the 154 responded: 146 were routine and 8 were non-routine. The 8 related to issues such as share manipulation and false information. - Domestic information exchange: - Section 36 of the Securities Investment Business Law provides for exchange of information between CIMA and the Stock Exchange (following transfer of broker supervision). - No provision exists for exchange of information between CIMA and the Stock Exchange Authority. - Assessment: Partly implemented. - Recommendations: - Consider giving CIMA the sole right to decide how to deal with requests from overseas regulators. - Consider deleting clauses that introduce subjectivity into decision-making regarding overseas requests. - Provide for exchange of information between CIMA and the Stock Exchange Authority. - Note: Principle 12 description should be read in conjunction with Principle 11. *cr0592 — IMF assessment and recommendations* ### Section 50 of the Monetary Authority Law allows CIMA, with the approval of the Governor, to ### cr0592 - Section 50 of the Monetary Authority Law allows CIMA, with the approval of the Governor, to ### Memoranda of Understanding and Assistance to Foreign Regulators (Section 50; Principle 13) - Legal provision: Section 50 of the Monetary Authority Law allows CIMA, with the approval of the Governor, to enter into memoranda of understanding with overseas regulatory authorities for the purpose of assisting consolidated supervision by such authorities. - Assessment: Partly implemented. - Recommendation/comments: - It is suggested that CIMA should not have to have the approval of the Governor to enter into memoranda of understanding with overseas regulators. - It is suggested that the scope of such memoranda should go beyond consolidated supervision. - Complementary assistance power (Section 34(9)): - Description: Section 34(9) states that where CIMA is satisfied assistance should be provided in response to a request by an overseas regulator, it may direct in writing a regulated entity or a person reasonably believed to have relevant information to provide CIMA with all necessary documents and give CIMA such assistance as specified in writing. Where an entity/person fails to comply, CIMA may apply to the Court to have that entity/person comply with the direction. - Assessment: Fully implemented. - Comments: None. ### Principles for Issuers (Principles 14–16) - Principle 14 — Disclosure of financial results and material information: - Description: Listing Rules issued by the Stock Exchange set out disclosure rules; Chapter 2 contains general listing requirements and procedures intended to ensure investor confidence, fair, open and orderly issue and marketing of securities, and sufficient information for investor assessment. Listing department monitors compliance, reviews initial documentation, oversees continuing obligations, and requires submission of audited annual accounts. - Specific rule: Rule 9.67 specifies disclosure requirements including notification to the Exchange without delay of any material change to the issuer’s constitutional documents, any change in rights of shareholders, and any material change in the general character or nature of the issuer. - Assessment: Fully implemented. - Comments: Both the rules and the oversight of their implementation by the Exchange appear satisfactory. - Principle 15 — Fair and equitable treatment of holders of securities: - Description: Listing Rules (Section 2.7 and continuing obligations) require equal treatment of holders of the same class, directors to act in the interests of shareholders as a whole, and issuer obligations on new developments, equality of treatment, exercise of rights, dividends, and financial information. Listing department monitors compliance. Company law (Section 94 of the Companies Law) provides for court winding up where a company may be wound up and remedies for oppressed minority shareholders. - Assessment: Fully implemented. - Comments: Both the rules and the oversight of their implementation appear satisfactory. - Principle 16 — Accounting and auditing standards: - Description: All licensees in the securities sector must prepare annual audited accounts and submit copies to CIMA. For mutual funds audited overseas, the local office of the auditor which carried out the audit must sign-off on the accounts. CIMA requires auditors with internationally recognized qualifications. The “big four” and specialist hedge fund auditors operate on the islands and operate to best international practice. - Assessment: Fully implemented. - Comments: Required accounting and auditing standards are generally acceptable accounting standards recognized internationally. ### Principles for Collective Investment Schemes (Principles 17–20) - Principle 17 — Eligibility and regulation of those who market or operate collective investment schemes: - Legal framework: Mutual Funds Law (2003 Revision) provides for three types of funds: licensed funds, administered funds, and registered funds. - Current counts and classifications: - Licensed funds: 46 - Administered funds: 576 - Registered funds: 3835 - Exempt class: funds with less than 15 investors where the majority can appoint/remove the manager - Licensed funds open to the public: in practice fewer than ten - Registered funds account for more than 85 percent of total funds. - Minimum investor subscription for registered funds: US$50,000. - Fund administrators: - Three permitted types: full administrators, restricted administrators, exempted administrators. - Current counts: - Full administrators: 98 - Restricted administrators: 77 - Exempted administrators: 8 - Description of supervision and requirements: Law sets broad principles (fit and proper, prospectus content, ability to impose conditions, appoint a controller, obligation to submit annual audited accounts, ability to revoke a license; no provision to cancel/rescind registration for registered or administered funds). - Observations and recommendations: - Registered funds regime considered adequate subject to amendments for cancellation of registration and reconsideration of the US$50,000 threshold. - US$50,000 threshold (originally set in 1993) is low by international standards and recommended to be revised upwards. - For funds open to the public, broad principles are insufficient for consumer protection; CIMA should introduce detailed rules addressing conflicts of interest, use of delegates, and guidance on "spreading investment risks" (e.g., diversification). - Once rules are established, CIMA should monitor compliance on a continuous basis. - Assessment: Partly implemented. - Comments: Mutual Funds Law would benefit from a revision and inclusion of provisions similar to the Securities Investment Business Law. - Principle 18 — Legal form, structure, segregation and protection of client assets: - Description: Collective investment schemes may take form of a limited company, unit trust, or partnership. No provision for segregation of client assets at present; draft guidelines are being prepared. - Assessment: Partly implemented. - Recommendation: CIMA should draw up detailed binding rules relating to segregation of client assets for funds open to the public. - Principle 19 — Disclosure necessary to evaluate suitability and value for investors: - Legal provision: Section 3(6) requires the offer document to describe investments in which the fund invests in all material respects and contain other information necessary for a prospective investor to make an informed decision. - Recommendation: CIMA should draw up detailed rules for funds open to the public specifying investor rights, information on promoters and associated parties, investment objectives and policy, procedures for purchases, redemptions and pricing of units, risks, fees and charges. - Assessment: Partly implemented. - Comments: Important that the investing public has as much information as possible to inform decisions. - Principle 20 — Asset valuation, pricing and redemption of units: - Description: No regulation yet ensuring a proper and disclosed basis for asset valuation and pricing/redemption of units; CIMA is in the process of drawing up such a rule. - Recommendation: When rules are drawn up, require each fund to submit details of its net asset value at regular intervals (e.g., monthly or quarterly) to serve as a supervisory tool and to enable calculation of total net asset value of funds licensed/registered by CIMA. - Assessment: Not implemented. - Comments: In practice, funds calculate net asset value, but CIMA should draw up detailed requirements. ### Principles for Market Intermediaries (Principles 21–22) - Principle 21 — Minimum entry standards for market intermediaries: - Background: Prior to July 2003 there was no dedicated provision for supervision of investment intermediaries. Securities Investment Business Law, 2003 (effective July 2003) requires authorization from CIMA for intermediaries engaged in investment business. - Exemptions: - Intermediaries dealing exclusively with sophisticated persons (regulated entities and knowledgeable investors investing at least US$100,000 in the case of each transaction) and/or high net individuals (an individual with a net worth of at least US$1million) can seek an exemption. - Regulatory features: Detailed fit and proper criteria, initial and ongoing capital requirements based on EU rules, powers for on- and off-site regulation, auditor reporting obligations, provisions for penalties and license withdrawal. - Regulations issued under Section 11 address: advertising by intermediaries; full and proper disclosure to clients; standards for dealing with clients and clients’ assets; standards for financial conduct and record keeping and reporting; disclosure requirements for commissions or other inducements; arrangements for settlement of disputes. CIMA is preparing guidance notes in consultation with industry. - Auditor reporting concern: Under Section 19, if an auditor becomes aware of serious shortcomings (including anti-money laundering systems) he must immediately give written notice to CIMA and the licensee. Recommendation: amend the Law to provide for receipt of such reports by CIMA only (to avoid compromising corrective action and avoid tipping off). - Transitional/coverage note: Existing intermediaries have until January 2004 to apply for authorization. Six broker members of the Stock Exchange will now be regulated under the Law rather than by the Exchange. In addition, fewer than ten other firms (mostly affiliated to banks) will initially be regulated under the Law; these firms largely serve institutions and high net worth individuals. Retail intermediary business market is effectively non-existent on the islands. - Assessment: Broadly implemented. - Comments: Legislation provides a framework for effective supervision except for simultaneous receipt of auditor’s report; effectiveness depends on sufficient and appropriately trained staff. - Principle 22 — Initial and ongoing capital and prudential requirements: - Description reference: This description should be read in conjunction with that of Principle 21. *Source: the report.* ### Section 11(2)(d) of the Securities Investment Business Law (the “Law”) requires a licensee to ### cr0592 - Section 11(2)(d) of the Securities Investment Business Law (the “Law”) requires a licensee to ### Financial requirements and capital adequacy - Section 11(2)(d) requires a licensee to establish financial requirements and specify standards for financial conduct and record keeping and reporting. - A Regulation under the same Section sets out the capital adequacy requirement; CIMA prepared a draft guidance note for consultation on the calculation of the ratio. - The capital adequacy requirement is based on EU law. - Initial capital requirements: - US$125,000 for asset managers, brokers, etc. - US$22,500 for advisors. - Ongoing capital requirement: - Intermediaries must hold capital in line with the EU Capital Adequacy Directive, which takes into account activities and risk factors (counterparty and position risks). - Intermediaries must hold the higher of: - initial capital; or - the equivalent of one quarter of relevant annual expenditure. - CIMA may adjust relevant annual expenditure if: - there is a significant change in the licensee’s circumstances or activities; or - the licensee has a material proportion of its expenditure incurred on its behalf by third parties and such expenditure is not fully recharged to the licensee. - Reporting frequency: - Brokers: monthly capital adequacy returns. - All others: quarterly returns. - Assessment by the IMF mission: Broadly implemented. - IMF comment: These requirements meet best international practice but will only be effective if there are sufficient staff to implement them. ### Internal organization, operational conduct, and client protection (Principle 23) - Principle summary: Market intermediaries should comply with standards for internal organization and operational conduct to protect clients, ensure proper risk management, and place primary responsibility on management. - Legal and regulatory measures: - The Law, relevant Regulations and draft guidance notes address internal systems and controls and risk management. - Regulation on financial requirements and standards (Section 6) requires licensees to maintain internal systems and controls and risk management processes adequate for the size, nature and complexity of their securities investment business. - A separate Regulation on conduct of business covers advertising standards, standards for dealing with clients (client agreements and complaints procedures), and client assets and money. - Section 3(4) of the Regulations requires licensees to maintain at all times professional indemnity and appropriate insurance to cover the professional liability of senior officers and business interruptions. - Assessment by the IMF mission: Broadly implemented. - IMF comment: The Law, Regulations and draft guidance notes are sufficient to meet the Principle; staffing problems remain an issue. ### Procedures for intermediary failure and supervisory powers (Principle 24) - Principle summary: There should be procedures to deal with the failure of a market intermediary to minimize investor losses and contain systemic risk. - Regulatory powers: - Section 17 of the Securities Investment Business Law gives CIMA a wide range of remedies where it knows or has reasonable grounds to believe a licensee: - is or appears likely to become unable to meet obligations as they fall due; - is behaving fraudulently; - has failed to comply with relevant laws or regulations; or - has mismanaged its business. - Remedies include revoking the license, imposing conditions, applying to the Court for protective orders for clients or creditors (including injunction or restitution), appointing a controller, removing directors, and other measures. - Section 18 allows the Court to grant an injunction where there is a reasonable likelihood a licensee will contravene the Law or Regulations or engage in fraudulent activity; the Court may order restoration steps for parties to transactions. - Assessment by the IMF mission: Fully implemented. - IMF comment: Sections 17 and 18 provide sufficiently wide-ranging powers to minimize damage, loss to investors and contain systemic risk. ### Secondary market supervision and trading systems (Principles 25–30) - Principle 25 (authorization/oversight of trading systems): - The Stock Exchange currently provides listing facilities only; no trading is undertaken. - The Exchange has developed an electronic web-based trading platform and is developing systems to commence trading in domestic and international equity securities. - Assessment: Not applicable. - Principle 26 (ongoing supervision of exchanges and trading systems): - The Stock Exchange is supervised by the Stock Exchange Authority (SEA). - The Exchange monitors listings and member brokers through listing rules and membership rules. - Assessment: Not applicable. - Principle 27 (transparency of trading): - Exchange monitors and publishes net asset values (NAV) of listed mutual funds; each listed fund must report NAV at least quarterly (in practice many report daily, weekly or monthly). - Reporting to the Exchange is via a secure internet page; prices are published immediately on the mutual fund listing page and sent to Bloomberg. - The Exchange monitors NAV changes via a fully automated process; exception reports are generated every morning; automatic e-mails to issuers who fail to post NAVs on time. - Assessment: Fully implemented. - Principle 28 (detect and deter manipulation and unfair trading practices): - Securities Investment Business Law, 2003: Section 24 outlaws creating false or misleading appearance of active trading or market/price; Section 25 outlaws insider dealing and defines insiders. - Exchange membership rules contain detailed rules on market manipulation and insider dealing and permit sharing information with supervisory or law enforcement authorities domestically or abroad. - Exchange is a Member of the Intermarket Surveillance Group for confidential market information sharing. - Assessment: Fully implemented. - Principles 29–30 (large exposures/default risk; clearing and settlement oversight): - No trading on the Exchange and brokers act as intermediaries only; issues do not arise. - Assessment for both: Not applicable. ### Summary observance of IOSCO Objectives and Principles - Table 2.2 assessment counts: - Implemented: 12 (Principles 1, 4, 5, 6, 9, 13, 14, 15, 16, 24, 27, 28) - Broadly Implemented: 5 (Principles 8, 10, 21, 22, 23) - Partially Implemented: 8 (Principles 2, 3, 7, 11, 12, 17, 18, 19) - Not Implemented: 1 (Principle 20) - Not applicable: 4 (Principles 25, 26, 29, 30) ### Recommended actions (summary) and authorities’ response - Recommended actions (selected highlights): - 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 requiring brokers to receive a copy of CSX inspection reports at the same time as CIMA. - Amend Stock Exchange Law to give SEA clear authority to inspect the Exchange; carry out inspection; consider transferring supervisory responsibility for the Stock Exchange from SEA to CIMA. - Principles for the Enforcement of Securities Regulation (CP 8–10): - Ensure sufficient staff for inspection program; consider obtaining additional information (e.g., half yearly management accounts) from licensees. - Principles for Cooperation in Regulation (CP 11–13): - Give CIMA sole responsibility for dealing with requests from overseas regulators; consider removing subjective provisions in overseas information requests; provide for information exchange between CIMA and SEA; CIMA to have sole discretion for MOUs and extend scope beyond consolidated supervision. - Principles for Collective Investment Schemes (CP 17–20): - Introduce a more prescriptive consumer protection regime for funds open to the general public. - Require all funds to calculate their net asset values. - Revise upwards the threshold figure of US$50,000 for registered funds. - Provide for cancellation of registered and administered funds; revise Mutual Funds Law generally to modern supervisory concepts. - Principles for Market Intermediaries (CP 21–24): - Ensure sufficient staff resources to implement the Securities Investment Business Law. - Remove provision requiring an auditor’s report to be sent to the licensee at the same time as it is sent to CIMA. - Authorities’ response (selected highlights): - CIMA does not consider the alleged legal impediments to independence to be of the asserted level; Section 33(1) MAL allows issuance of general directions by the Governor in the public interest (only one such direction issued in October 2000). - Section 49(3) MAL requires CIMA to send copies of non-routine overseas assistance requests to the Financial Secretary and Attorney General; CIMA is not legally bound to follow their advice. - CIMA is addressing staffing at Board level and aims to implement the agreed HR plan for the Investment & Securities Division in 2005. - SEA notes the IMF assessment of the CSX operations is positive and will consider recommendations; an SEA-commissioned inspection of CSX was overtaken by the IMF assessment. - CIMA proposes a new periodic reporting form (RF–2) for mutual funds in early-mid 2005. - CIMA has developed criteria for MOUs, approved by Cabinet; scope of MOUs extended beyond consolidated supervision via amended Section 50(1) MAL enacted in January 2004. - CIMA has made initial recommendations to government to revise the MFL, including increasing the registered funds threshold to US$100,000 and issued a Statement of Guidance regarding cancellation of registered and administered funds. - CIMA is developing rules on net asset value calculation (CP 20). - CIMA will address the recommendation regarding auditors’ reports with a view to recommending changes to the relevant MFL provision. ### IAIS Core Principles assessment overview and captive insurance statistics - The IAIS Core Principles assessment drew on the Insurance Law (2003 Revision), Monetary Authority Law (2003 Revision), On-Site and Off-site Inspection Manuals, Staff Handbook, Reporting Schedule for Prudential And Statistical Returns to CIMA 2002–2003, and supervisory filing formats; and the KPMG Review of Financial Regulation in the Caribbean Overseas Territories and Bermuda (2000). - Insurance sector composition at the time of the mission: - Total insurance licensees: 769 - 28 domestic Class “A” Insurers - 613 Class “B” Insurers - 28 Licensed Managers - 22 Brokers - 76 Agents - 4 locally incorporated Class “A” companies and 24 branches of non-Cayman companies. - Offshore market (Class “B”) business: 87 percent as at September 29, 2003 emanated from North America. - Major offshore classes by premium volume: Workers’ Compensation 25 percent, Medical Malpractice 24 percent, Products Liability 17 percent. - Cayman captives by primary class of business at September 30, 2003 (selected rows; figures preserved as in source): - Accident & Health: Number of Companies 9; Total Premiums 35,478; Net Income 14,652; Net Worth 106,662; Total Assets 117,585. - Auto Liability: Number of Companies 19; Total Premiums 98,356; Net Income 20,781; Net Worth 90,958; Total Assets 192,514. - Credit Life: Number of Companies 17; Total Premiums 133,581; Net Income 13,675; Net Worth 397,201; Total Assets 781,649. - Deferred Variable Annuities: Number of Companies 13; Total Premiums 2,139; Net Income 3,687; Net Worth 25,901; Total Assets 1,389,891. - General Liability: Number of Companies 57; Total Premiums 172,704; Net Income 26,252; Net Worth 172,589; Total Assets 904,834. - Life: Number of Companies 15; Total Premiums 208,018; Net Income 20,053; Net Worth 357,004; Total Assets 2,101,185. - Products Liability: Number of Companies 9; Total Premiums 790,471; Net Income 151,707; Net Worth 252,607; Total Assets 2,081,301. - Professional Liability: Number of Companies 61; Total Premiums 380,440; Net Income 67,070; Net Worth 330,310; Total Assets 1,403,537. - Property: Number of Companies 66; Total Premiums 267,125; Net Income 47,344; Net Worth 385,489; Total Assets 1,741,126. - Workers’ Compensation: Number of Companies 128; Total Premiums 1,147,979; Net Income 44,332; Net Worth 867,005; Total Assets 2,843,730. - TOTALS (by primary class table): Number of Companies 613; Total Premiums 4,676,477; Net Income 336,171; Net Worth 3,595,680; Total Assets 18,641,921. - Cayman captives by organizational form at September 30, 2003 (selected rows; figures preserved as in source): - Alternative Financing Vehicle: Number of Companies 18; Total Premiums 74,401; Net Income (4,407); Net Worth 21,150; Total Assets 1,245,051. - Association: Number of Companies 71; Total Premiums 348,246; Net Income 13,101; Net Worth 267,308; Total Assets 1,193,258. - Group Captive: Number of Companies 43; Total Premiums 523,477; Net Income 12,281; Net Worth 426,579; Total Assets 1,304,224. - Open Market Insurer: Number of Companies 32; Total Premiums 221,302; Net Income 23,960; Net Worth 455,702; Total Assets 3,040,156. - Pure Captive: Number of Companies 370; Total Premiums 3,290,873; Net Income 296,116; Net Worth 2,321,977; Total Assets 11,122,180. - Segregated Portfolio Company (341 Cells): Number of Companies 72; Total Premiums 201,875; Net Income 14,776; Net Worth 94,982; Total Assets 661,089. - TOTALS (organizational form table): Number of Companies 613; Total Premiums 4,676,477; Net Income 336,171; Net Worth 3,595,680; Total Assets 18,641,921. *Source: IMF mission assessment, laws, Regulations, CIMA, and Stock Exchange material as cited in the assessment.* ### 51. The supervision of insurance activity is based on the Insurance Law (2003 ### The supervision of insurance activity is based on the Insurance Law (2003 Revision) ### Supervisory framework and institutional responsibilities - Supervision is based on the Insurance Law (2003 Revision). - The Cayman Islands Monetary Authority (CIMA) is charged with undertaking insurance supervision. - CIMA was established as the supervisory authority pursuant to the Monetary Authority Law. - The Insurance Division of CIMA has made rapid progress in upgrading its legal base and working practices but further progress is still needed to give a substantive legal or regulatory base to some central prudential requirements. - The legislative framework for insurance supervision dates from 1979, with the current Insurance Law at its fifteenth revision. ### Professional infrastructure and market characteristics - There is a strong professional infrastructure with accountants and lawyers supporting business operations; insurance managers are experienced professionals, often qualified accountants. - There is one actuary on the Island who is employed by a firm of accountants, but there appears to be an adequate supply of actuarial services from elsewhere. - The Cayman insurance sector chiefly comprises offshore captive insurers. - Captives are commonly regarded as lower risk than open market insurers because each has a very limited policyholder base; however, major classes of business are third party liability protections where beneficiaries are other than the policyholders, making consumer protection a broader issue than policyholder protection. - It is appropriate to impose prudential requirements that protect beneficiaries in such circumstances. ### Main findings and supervisory capacity - There is a very high number of licensees and a high frequency of supervisory events: - 425 business plan changes in the first half of 2003. - 195 prudential meetings in the first half of 2003. - At the time of the mission, the Insurance Division comprised nine highly competent members of staff and the headcount was budgeted to increase to fourteen. - The program of on-site inspections went into abeyance when staff resources were temporarily depleted but were understood to be re-commencing in December 2003. - On-site inspections are a key supervisory tool to ensure adherence to strong corporate governance procedures and internal controls. - The shortage of resources is a pervasive supervisory issue; the abeyance of on-site inspections due to the absence of one member of staff evidences the shortfall in CIMA’s ability to provide continuous, high-quality supervision. - Strong governance reduces operational risks and focused inspections in governance and other prudentially important areas increase sector stability. ### Prudential conventions, risks, and recommended formalization - Recommendations are proposed for CIMA to consider prudential conventions over: - Asset valuation. - Liability valuation. - Solvency. - Capital adequacy. - Considerations for these conventions should account for: - Asset price volatility, which has become more pronounced in recent years. - Reserve volatility, which is historically high in liability classes of business. - The 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. *Source: IMF mission report.* ### 58. The Insurance Division has an effective automated system for the collection and ### 58. The Insurance Division has an effective automated system for the collection and ### Organizational independence, mandate, and governance - The Cayman Islands Monetary Authority (CIMA) was established under the Monetary Authority Law (MAL) current version dated June 10, 2003, which establishes the independence of the Authority subject to certain overriding controls (e.g., Sections 11–14 on appointment and dismissal of Directors). - Insurance Law s5(1) sets out the duties of the Authority with respect to insurance supervision, covering issuance and revocation of licenses, assessment of licensees and the market, and compliance with law. - The Authority, its officers and employees are immune from liabilities arising from their actions on behalf of the Authority provided that they acted in good faith (MAL s43). - Assessment for Principle 1 (Organization of an Insurance Supervisor): Materially non-observed. - Comments: Close association between supervisor, professions, and market participants raises doubts about the clarity and certainty of supervisory independence. ### Decision-making structure - Four decision-making groups, in increasing order of authority: - (a) Assessment meetings: twice-weekly informal staff meetings that discuss and prepare cases for escalation; agendae retained. - (b) Management Committee: Heads of Divisions, Legal Department, Compliance Department and Managing Director; formal with minutes; authority to issue licenses for Class "B" Insurers; members subject to a specific Code of Conduct. - (c) Executive Board: formal proceedings and minutes retained; empowered to issue licenses to Class “A” Insurers and must approve the use of sanctions against all licensees. - (d) Full Board: formal proceedings; referrals for uncertain, unusual, or particularly sensitive cases; empowered to take advice from third parties, including legal advice from QC. ### Staffing, workload, and automated reporting system - Insurance Division budgeted headcount: 14 staff; current vacancies at time of assessment: 5 vacancies (division under-resourced). - Supervises 769 licensees (as at September 30, 2003): 615 Class “B” Insurers, 28 Class “A” Insurers, 28 Licensed Managers, 22 Brokers, and 76 Agents. - The Insurance Division has an effective automated system for the collection and analysis of data from supervisory filings. Recommendation: extend supervisory filings to include some of the information required to be given in a business plan to broaden analytical capabilities and reduce manual input into ad hoc supervisory events, allowing staff to spend greater time on risk-based activities such as focused on-site inspections. - Supervisory activity (six months from January to June 2003) — Actual and Budget: - Issue of new licenses — Actual: 48; Budget: 25 - Receipt of annual returns — Actual: 668; Budget: 720 - Changes of shareholder / director — Actual: 279; Budget: 300 - Business plan changes — Actual: 425; Budget: 350 - On-site inspections — Actual: 0; Budget: 10 - Enforcement actions — Actual: 5; Budget: 15 - Prudential meetings — Actual: 195; Budget: 250 - Proposals for Regulatory Laws — Actual: 5; Budget: 1 - Comment: Heavy workload per headcount (9 active staff at time), many events time-consuming and technically demanding (e.g., examination of business plan changes). ### Licensing, fit & proper and changes in control - Insurance Law s5(1)(d): duty of CIMA to grant or revoke insurance licenses. - Entities requiring license set out in Insurance Law s4: Class “A” Insurers; Unrestricted Class “B” Insurers; Restricted Class “B” Insurers; Insurance Agents; Insurance Brokers; Insurance Sub-agents; Insurance Managers; Principal Representative. CIMA no longer issue licenses for Sub-agents or Principal Representatives. - Class definitions: - Class “A” insurer: permitted to assume domestic risk. - Unrestricted Class “B” insurer: permitted to assume risk arising outside the Cayman Islands. - Restricted Class “B” insurer: permitted to assume risk arising outside the Cayman Islands from a specifically approved counterparty or counterparties. - Insurance Law s3 and s6: offence to carry on insurance business without a license. - CIMA has a draft policy paper on licensing covering fit & proper, ownership, financial resources, internal controls, record keeping, KYC, compliance, and business plan contents; ratification and publication would enhance transparency. - Licensing decision-making: CIMA not legally bound to issue a reason for denial of license, though Handbook states CIMA should record decisions and reasons and, where appropriate, communicate them to applicant. - Insurance Law s8(1): prior approval required for transfers or disposals of shares in excess of 5 percent of a licensee (exemption for publicly quoted companies under s8(2)). - Assessment for CPs 2–3: Observed. ### Corporate governance and internal controls - Corporate governance provisions in Insurance Law, Onsite Inspection Manual, and a draft Core Policy Paper (subject to public consultation). - Insurance Law s5(1)(b): duty to examine affairs of any licensee to satisfy compliance and sound financial position. - On-site Inspection Manual: for Class “A” Insurers requires assessment of key decision-making center, role of Cayman board, strategic plan, foreign supervisors’ comments, management efficiency and suitability, attitude towards internal controls and accountability. - Insurance Manager assessment covers: functional divisions; technical competence; adequacy of supporting staff; extent/effectiveness of managing director supervision; availability/competence of professional support. Managers rated on scale 1 to 5; majority rated “2”, others “3”. - Assessment for Principle 4 (Corporate Governance): Largely observed. - Assessment for Principle 5 (Internal Controls): Observed. - Comment: Full implementation limited by suspension/abatement of onsite inspections at assessment time; systematic risk-based onsite inspections recommended. ### Assets, liabilities, capital adequacy, derivatives, and reinsurance - Asset valuation and reporting: - Insurance Law s7(4): Class “A” Insurers must prepare independently audited financial statements under GAAP (GAAP not defined in law; most report under US GAAP; others under UK GAAP, Canadian GAAP or IAS). - Insurance Law s7(6): all Class “A” and Class “B” companies carrying on long term business must have assets and liabilities actuarially certified on an annual basis. - For domestic branches, Insurance Law s7(1) liability protection scheme requires retention of liquid assets at least equal to Cayman liabilities; quarterly reporting. - CIMA policy paper: “Asset Management and Investment Strategy For Insurance Companies.” - Unofficial limit: equities no more than 20 percent of assets (monitored through reporting system). - Assessments: - Principle 6 (Assets): Materially non-observed. Comment: Standardization and formalization of asset valuation conventions required. - Principle 7 (Liabilities): Materially non-observed. Law/regulations impose no specific standards on establishment or valuation of liabilities; CIMA relies on directors, auditors and actuaries; no confidence levels stipulated; unofficial captive reserve funding at 75 percent confidence level exists but is not monitored. - Principle 8 (Capital Adequacy and Solvency): Materially non-observed. Statutory capital: Insurance Law s9 and s10 require net worth >= C$100,000 for non-life insurers, C$200,000 for life insurers, C$300,000 for composite insurers; Guideline states capital requirements are US$120,000 and US$240,000 for non-life and life insurers respectively; locally incorporated Class “A” insurers subject to unofficial C$3million capital rule. - Principle 9 (Derivatives and “Off-Balance Sheet” Items): Materially non-observed. Derivatives generally not allowed as an extra-statutory requirement applied case-by-case; proposed derivative activity notified via investment strategy and business plan processes. - Principle 10 (Reinsurance): Observed. Practices include vetting at licensing, review of reinsurance contracts in annual filings, biennial prudential meetings; unofficial rule: reinsurers should have AM Best rating of A or better. ### Financial reporting, ratios, and monitoring - Reporting formats: three formats depending on license type: locally incorporated Class “A”; approved external Class “A” branches; Class “B” Insurers. - Insurance Law reporting references: s10(2) for locally incorporated Class “A”; s7(1)–(5) and s10(1) for approved external Class “A”; s10(3) for Class “B”. - Supervisory returns are submitted electronically (with hard-copy back-up); CIMA system can generate monitoring ratios and overdue returns reports. - Ratios used for monitoring include: - Statutory solvency ratio — Net earned premium to surplus - Trade based solvency ratio — Gross premium to surplus - Net earned premium to admitted surplus ratio — Same as statutory solvency ratio after deducting non-admitted assets (e.g., fixed assets) from surplus - Loss ratio - Expense ratio - Combined ratio - Investment yield - Net combined ratio — Addition of two preceding ratios - Change in net written premium — Change compared to prior year - Return on invested assets - Return on equity - Excess (deficit) room for equity investment — Expressed as an absolute amount; excess or shortfall of equity investments compared to 20 percent of assets (reflecting unofficial equities limit) - Filing frequencies: All Class “A” Insurers report quarterly; majority of filings in US GAAP; Class “B” electronic forms limited to Income Statement and Balance Sheet, no breakdown by type of business. - Assessment for Principle 12 (Financial Reporting): Largely observed. - Recommendation: undertake a feasibility study to extend use of the computerized reporting system to collect more business-plan-level data and automate analytical processes to free resources for risk-based supervision; extend reporting requirements so full diversity of business underwritten is reported. ### On-site inspections, enforcement, and sanctions - On-site Inspection Manual: technically comprehensive, covers Class “A” Insurers and Insurance Managers; details planning, performing and follow-up procedures. - On-site inspection history: since 1998 all Class “A” companies had full or focused inspections; seven insurance managers had full onsite inspection; focused inspections may be performed without notice. - At assessment date: no onsite inspections were carried out in 2003 to date of mission (CIMA asserts they subsequently recommenced); focused inspections resumed in November 2003; full inspections resumed March 2004 per Authorities’ response. - Assessment for Principle 13 (On-Site Inspection): Materially non-observed. Comment: discontinuance due to non-availability of one member of staff indicates vulnerability. - Sanctions powers: Insurance Law s12 (cease and desist), s13 (broad remedial powers) including suspension and revocation; all sanctions must be approved by the board and published in the Gazette. - Enforcement examples (three cases): - Case 1 (Class “A” external insurer): failure to supply filings, breach of liability support scheme, onsite inspection revealed serious weaknesses; actuary appointed at company’s expense. - Case 2 (Class “B” insurer): fell below required net worth and failed to supply audited financial statements; license suspended; controller appointed; recovery actions in progress. - Case 3 (Class “B” insurer): post-sale dispute and directors’ resignations led to license suspension (2000); Authority appointed controllers; petition to wind up and appoint Joint Official Liquidators lodged. - Assessment for Principle 14 (Sanctions): Observed. ### Cross-border operations, cooperation, and confidentiality - Cross-border supervision: - Insurance Law s3: all entities carrying on insurance business must be licensed; branches and companies receive equal treatment in licensing regardless of home state. - CIMA approves all changes to business plans to prevent unauthorized expansion into other jurisdictions or lines. - CIMA require letters of good standing from home state supervisor for branches located within the Cayman Islands on an annual basis, together with accounts. - Assessment for Principle 15 (Cross-Border Business Operations): Observed. - Coordination and cooperation: - At mission date, Insurance Division had not concluded MOUs though authorities informed two were concluded in January 2004; MAL s50 governs MOU creation (Governor approval, notification to Financial Secretary, publication in Gazette). - MAL s49 sets basis for exchange of information with other supervisors; s49(4)(a) imposes a reciprocity condition but not strict reciprocity. - Assessment for Principle 16 (Coordination and Cooperation): Largely observed. Comment: amendment to MAL s49 and establishment of MOUs would improve assessment. - Confidentiality: - MAL s49 contains confidentiality provisions covering disclosure by directors, officers, employees, agents or advisors of CIMA; disclosures that are criminal offences carry fines or imprisonment; section describes permissible disclosures and conditions for exchanging information with other authorities. - CIMA Staff Handbook requires employees to sign an annual declaration of secrecy; infractions may lead to disciplinary action, immediate dismissal or criminal prosecution. - Assessment for Principle 17 (Confidentiality): Observed. - Comment: publication of sanctions in the Gazette (Insurance Law s13(6)) may place some sensitive information in the public domain. ### Overall IAIS Core Principles observance and recommended action plan - IAIS 17 Core Principles observance summary (Table 3.4): - Observed: 8 — Principles 2, 3, 5, 10, 11, 14, 15, 17 - Largely observed: 3 — Principles 4, 12, 16 - Materially non-observed: 6 — Principles 1, 6, 7, 8, 9, 13 - Non-observed: 0 - Not applicable: 0 - Recommended action plan highlights (Table 3.5): - CP 1: Staffing levels should be increased to supervise the large number of licensees in the jurisdiction. - CPs 4–5: Implement a systematic program of risk-based on-site inspections; embody supervisory working practices in law, regulation or rule. - CPs 6–10: Consider asset, liability, solvency, and capital adequacy conventions appropriate for types of company and lines of business and embody them in law, regulation or rule. - CPs 12–14: Undertake a feasibility study to extend the computerized reporting system, collect more data and automate analytical processes to release staff resources to risk-based processes such as focused on-site inspections; extend reporting requirements so that full diversity of business underwritten is reported. - CPs 15–17: Enhance cross-border operations, supervisory coordination and cooperation, and confidentiality arrangements (e.g., MOUs; statutory amendments where appropriate). ### Authorities’ response (summary of actions underway or planned) - Staffing (CP 1): Following mission, two senior analysts and one analyst were hired; implementation of agreed HR plan for Insurance Division aimed for 2005. - CPs 4–5: Risk-based on-site inspection programme resumed in March 2004; focused inspections resumed in November 2003; enhancements planned with revised risk analysis procedure for 2005 timetable. - CPs 6–10: Mission recommendations actively considered; recommendations to government regarding changes required to the Insurance Law targeted for early 2005. - CPs 12–14: Operations Division commenced study of present IT system and is mapping necessary upgrades on a divisional basis. *Source: IMF mission assessment of the Cayman Islands Monetary Authority (Insurance Division).* ### 59. This assessment is based on a review of CI AML/CFT legislation and regulations, ### Assessment based on a review of Cayman Islands AML/CFT legislation and regulations ### Scope and basis of the assessment - The assessment was based on a review of CI AML/CFT legislation and regulations, as well as nonbinding guidance notes issued by CIMA and industry applicable to institutions regulated by the Proceeds of Criminal Conduct (Money Laundering) Regulations (MLR). - The assessment team held discussions with the governor, senior officials from a number of CI government departments and agencies, and representatives of industry. - The assessment is based on the information available at the time it was completed on October 9, 2003, and in a few instances reflects information submitted after completion of the assessment visit. - The detailed assessment was conducted using the October 11, 2002 version of Methodology for assessing compliance with the AML/CFT international standard, i.e., criteria issued by the Financial Action Task Force (FATF) 40+8 Recommendations (the Methodology). ### Progress and overall findings on AML/CFT framework - Efforts to achieve compliance with international standards have been a top priority in the Cayman Islands in recent years; there is intense awareness of AML/CFT in the business community. - The Cayman Islands devoted substantial attention and resources to improving the anti-money laundering legal and institutional framework and supervision since being identified by FATF as a non-cooperative country and territory in June 2000. - FATF removed the Cayman Islands from the NCCT list in June 2001 after enactment of comprehensive anti-money laundering measures and steps to implement them. - FATF ceased monitoring the Cayman Islands in June 2002 in recognition of improvements made. - The Cayman Islands continues to take steps to achieve conformity with the FATF 40+8 Recommendations. ### Key legislative and regulatory developments - Major revisions and improvements in the past four years include: - 2000: Adoption of the MLR. - 2001: Extension of the Terrorism (United Nations Measures) (Overseas Territories) Order 2001 (TUNMOTO) to the Cayman Islands. - 2003: Enactment of the Terrorism Law (TL). - Resulting measures include mandatory suspicious activity reporting, immobilization of bearer shares, regulatory coverage for money service providers, improved gateways for information sharing, clear designation of responsibilities for monitoring AML compliance, and enhanced CFT coverage. - The Cayman Islands is one of only two jurisdictions reported to have conducted retrospective due diligence on relationships predating September, 2000. - The MLR apply to financial and non-financial institutions carrying out “relevant financial business” including: banking, insurance and trustee businesses, mutual fund administration, company management, currency exchange, money remittance, portfolio management, securities investment, and real estate brokerage. - The MLR are supplemented with AML Guidance Notes (GN) issued jointly by CIMA and industry. ### Institutional arrangements and capacity - Relevant institutions in place: - CIMA: regulatory and supervisory oversight. - FIU (Financial Reporting Unit): receives, analyzes and disseminates SARs. - Police authorities: investigate ML and FT crimes. - Attorney General’s Chambers: prepares legislation, prosecutes ML and FT, assists in obtaining production and restraint orders, and provides assistance to overseas jurisdictions. - Coordination is facilitated by the AML Steering Committee. - The FIU is being restructured from a former police-type unit to a largely civilian organization with powers and responsibilities defined in law, including ability to apply for freeze orders and to require supplemental SAR information. - The FIU has direct access to several databases through the Joint Intelligence Unit (JIU), supporting SAR analysis; the JIU is the link between the FIU and the RCIP Financial Crime Unit. - Exchange of SAR-related information with foreign FIUs requires prior approval of the Attorney General’s Chambers; PCCL amendments require prior consent of the AML Steering Group for FIU to enter into arrangements with foreign FIUs, which may delay information exchange. - Authorities reported sufficient manpower and knowledge; officers receive regular specialized training from international and regional organizations. - With assent by the Governor to the latest Bill amending PCCL, the FIU will require more staff members, e.g., analysts. - The FIU is well equipped with modern accommodation; Customs has only one vessel for patrols, limiting searches and patrols. - The FIU provides feedback to reporting entities and should continue to provide information on trends and typologies discovered in SARs on a regular basis. ### Criminalization of ML and FT, and related legal mechanisms - Money laundering (ML): - ML is criminalized broadly consistent with the Vienna and Palermo Conventions. - ML offenses extend to proceeds derived from all serious (indictable) offenses; mens rea includes knowing, or suspecting or believing; self-laundering is covered; corporate bodies can be held liable. - Drug trafficking ML: criminalized under Sections 47 and 48 of the MDL for facilitating retention/control of drug trafficking proceeds and concealing, disguising or transferring such proceeds. - ML for other crimes: criminalized by Sections 22–25 of the PCCL covering facilitating retention/control of proceeds; arrangements to secure funds/property; acquisition/use/possession knowing property is proceeds; concealing/disguising/ converting/transferring to avoid prosecution or confiscation; and tipping off. - PCCL created four ML offenses: assisting another to retain benefit of criminal conduct (section 22); acquisition/possession/use of property representing proceeds (section 23(1)); concealing/transferring proceeds (section 24); tipping off (section 25). - Under Section 5(7)(c) of the PCCL, ML extends to all offenses other than drug offenses that may be proceeded with by indictment. - Under Section 22(10) of the PCCL, extraterritorial crimes may serve as predicate offenses for ML. - Under the MDL, drug trafficking and drug trafficking ML extend to extraterritorial acts. - Under both PCCL and MDL, ML applies to any type of property representing proceeds of crime (MDL Sections 47(2), 48(1), 48(2), 48(3); PCCL Sections 22(2), 23(1), 24(1), 24(2)). - Authorities indicated conviction of the predicate offense is not necessary to establish assets were proceeds, but there must be evidence that a crime was committed and proceeds linked to the offense; a recent court ruling requires sufficient evidence that the court would be “bound to conclude” that funds were proceeds. - The MLR impose criminal liability on relevant financial businesses that fail to establish and maintain certain anti-ML procedures and provide training; the MLR define “money laundering” by cross-reference to MDL sections 47–48 and PCCL sections 21–23. The ML definition should be extended to ensure MLR applicability to the separate ML offence for FT established in the TL. - Financing of Terrorism (FT): - TUNMOTO (2001) implemented UN Resolution 1373 and criminalized financing of terrorism on the basis of the ICSFT; Section 3 criminalizes provision/collection of funds with knowledge or intent they will or may be used for terrorism; Section 4 criminalizes making funds or financial services available to benefit persons committing or facilitating an act of terrorism. - TUNMOTO’s definition of “terrorism” (Section 2) uses a generic harm/damage/risk-based formulation capturing actions designed to influence government or intimidate the public for political, religious, or ideological causes, and includes extraterritorial “action,” persons, property and public. - TUNMOTO does not explicitly criminalize financing of terrorists or terrorist organizations; ancillary offences such as attempt or participation in FT offences are covered by the Penal Code (1995 Revision) and Section 49 of the Interpretation Law deems offences to cover attempts unless a contrary intention appears. - The recently enacted TL criminalizes FT in a more detailed and comprehensive manner: - TL Section 20 (Use and Possession) extends liability to use of money/property for terrorism and to possession if the perpetrator intends or has reasonable cause to suspect they may be used for such purpose. - TL Section 22 contains a separate money laundering provision prohibiting arrangements facilitating another’s retention or control of terrorist property. - Entity and intent coverage: - ML and FT offences apply to both persons and entities; CI law attributes criminal liability to legal entities (Interpretation Law Section 3 defines “person” to include corporations, clubs, societies, associations or other bodies). - Authorities indicated intent for ML and FT may be inferred from objective factual circumstances in CI courts; no law specifically addresses this inference. ### Confiscation, forfeiture, and international cooperation - Laws provide authority to issue orders to confiscate the value of benefits derived from crimes, including ML and FT; FT-specific provisions address identification and tracing of criminal proceeds. - Civil forfeiture provisions are under consideration. - Mutual legal assistance and extradition: - The United Kingdom’s MLAT with the United States was extended to the Cayman Islands by the Mutual Legal Assistance (United States) Law, providing a basis for assistance to and from the United States. - Incoming mutual assistance requests are channeled through the Attorney General’s Chambers (non-U.S.-related) or the Chief Justice (U.S.-related), acting in an administrative capacity. - Generally, the Cayman Islands can provide mutual assistance without an MLAT, but assistance is subject to reciprocity. - Drug trafficking related mutual legal assistance is available under the MDICL; enforcement of overseas confiscation orders is available under the PCCL. - Legislation enacted in January 2004 (after the mission) extends the MDICL to non-drug trafficking related matters, permits assistance at the investigatory stage, and makes a wider range of assistance available. - Extradition between the Cayman Islands and Commonwealth countries and other OTs is controlled by the Extradition (Overseas Territories) Order 2002 and various treaties and orders; extradition is available for crimes punishable with imprisonment of at least 12 months, including all principal ML and FT offenses. Extradition arrangements also exist with the United States and several European countries. - Cooperation and information exchange: - Laws and informal arrangements provide a basis for cooperation in AML/CFT matters. - Exchange of SAR-related information with foreign FIUs requires prior approval of the Attorney General’s Chambers; PCCL amendments require prior consent of the AML Steering Group for FIU arrangements with foreign FIUs, potentially delaying exchange. ### Preventive measures and supervision - The MLR require procedures on customer identification, employee training, record keeping, and internal reporting of suspicious transactions; breach of the MLR is a criminal offense. - Extensive GN issued by CIMA and industry provide guidance on customer identification, record keeping, transaction monitoring, suspicious activity detection, reporting, training, compliance, and high risk clients/activities. - Financial service providers (FSPs) have strengthened internal policies and procedures over the past two years in accordance with new laws, regulations and GN. - Extensive efforts by FSPs, authorities, and professional associations to train and educate the financial industry in AML/CFT obligations; many in industry actively participate internationally and provide leadership to other jurisdictions. ### Implementation gaps and recommended improvements - A number of modifications and improvements are recommended to strengthen the AML/CFT framework and improve implementation; in several instances industry practice in the Cayman Islands already meets recommended measures. - Specific identified implementation issues include: - The MLR’s ML definition should be extended to explicitly encompass the separate ML offence for FT established in the TL to ensure clear applicability. - Prior-approval/consent requirements for exchange of SAR-related information with foreign FIUs (Attorney General’s Chambers or AML Steering Group) may delay timely information sharing and should be reviewed. - The FIU will need additional analysts and staff as responsibilities expand under PCCL amendments. - Customs operational capacity is constrained by having only one vessel for patrols, limiting search and patrol operations. - Continued provision of feedback by the FIU on SAR trends and typologies to reporting entities is recommended. *The assessment was completed on October 9, 2003.* ### Section 11(4) of TUNMOTO, both a body corporate and any officer who consented or was neglectful is liable ### Section 11(4) of TUNMOTO, both a body corporate and any officer who consented or was neglectful is liable ### Liability and penalties for ML and FT - The criminal offences of ML are subject to penalties ranging from fines to 14 years of imprisonment. - If prosecution proceeds on indictment, the fine imposed by the court may be any amount the court determines. - Criminal offences for FT are subject to penalties ranging from seven years and fines under TUNMOTO to 14 years and fines under TL. - The penalties under the MLR at Section 5(2) for regulatory offenses are: - a fine of five thousand dollars on summary conviction and imprisonment; and - a fine (determined by the court) if there is conviction after an indictment. - A ladder of regulatory sanctions is available through supervisory authorities including revocation of license; administrative fines are not currently available as CIMA has not issued rules. ### Institutional framework, staffing, and operational arrangements - The Financial Reporting Unit (FRU), appointed by the Governor under section 21 of the PCCL as the Reporting Authority, is currently staffed by: - one Director and six officers from the RCIP: two detective inspectors, one detective sergeant and three detective constables. - The FRU has sufficient computer resources and: - receives SARs; - investigates or onwardly discloses to foreign investigative agencies where necessary; - prepares and submits files to the Attorney General’s Chambers for ruling and prosecution where appropriate. - Any disclosures of SARs outside CI require the Attorney General’s approval according to PCCL; a standing protocol provides for a 24-hour turn-around. - Under the new structure, the RCIP Financial Crime Unit will investigate all financial crime including investigations triggered by SARs (and not the new FIU). The Financial Crime Unit will be housed in the same accommodations where the FRU is currently housed and will consist of: - one detective superintendent, two chief inspectors, three inspectors, five detective sergeants and ten detective constables. - In general, criminal investigations, including money laundering investigations, are undertaken by the RCIP (total amount of officers 322). They prepare files and submit these to the Attorney General’s Chambers for ruling and prosecution where appropriate. - The Attorney General’s Chambers has a staff complement of six Crown Counsel (criminal). Case Controllers are appointed for large money laundering prosecutions when necessary. - On-the-job training has been provided to two prosecutors and further training was scheduled for October 5–11, 2003 in Trinidad and Tobago organized by the Caribbean anti-money laundering programme (CALP); two prosecutors were to attend. - The Terrorism Law 2003 introduces the obligation to disclose information concerning terrorism and terrorist financing to the FIU. ### Analysis of effectiveness (mission findings) - The mission considers ML is criminalized broadly in accordance with the Vienna Convention, but: - the complexity and lack of consolidation across various ML provisions create issues of consistency. - the PCCL contains a broad provision criminalizing acquisition, possession and use of another’s proceeds; the MDL has a more limited provision regarding acquisition without consideration or inadequate consideration. - purpose to avoid prosecution or confiscation appears in both the MDL (Sections 48–1, 48–2) and PCCL (Sections 24–1, 24–2) but not in the TL (Section 22). The mission considers that this requirement adds to complexity and creates an additional burden on prosecution. - under the Vienna Convention, purpose to avoid prosecution is limited (applies only for third party liability and as one of two possible purposes), whereas CI provisions make it applicable more broadly, potentially making proof more difficult. - The Palermo Convention has not yet been ratified by the U.K.; therefore its application has not been extended to CI. - Authorities in CI are considering provisions of the U.K. Proceeds of Crime Act (PCA) for adoption and planning a consolidated approach to criminal ML offenses; a single comprehensive set of provisions would simplify the current complex approach. - Current judicial precedent requires a high level of evidence to establish that funds were proceeds—evidence such that the court would be “bound” to conclude funds were proceeds—potentially necessitating presentation of nearly the entire criminal case against the predicate offence offender; this is particularly difficult where the predicate offence occurred overseas. - For FT, CI has adopted measures to implement UN resolutions, passed a TL that criminalizes FT to supplement TUNMOTO; these provisions criminalize financing of terrorism on the basis of the ICSFT Convention. The ICSFT has not yet been extended to CI. - Offences of ML and FT apply to persons who knowingly engage in activities and the intent element may be inferred from objective circumstances. - The restructuring separating SAR handling (new FIU) and investigation (Financial Crime Unit) is assessed by the IAE to support effective operations, provide clear separation of duties, and protect confidentiality of information from reporting entities. ### Recommendations and comments - Ensure that following the ratification of the Palermo Convention by the U.K., its application is extended to CI within a reasonable timeframe. - Have the ICSFT extended to CI. - Harmonize ML offenses with one another and expand the MDL’s limited provision regarding acquisition of laundered property. - Update the definition of ML in the MLR to include references to the FT money laundering offense. - Consider addressing through legislation the evidentiary burden for establishing funds are proceeds (which does not require the prosecution to, in essence, prove the predicate offense). - Fill vacancies at the new FIU as soon as possible to enable it to fulfil its duties. ### Implications for compliance with FATF Recommendations (as assessed) - Recommendation 1: Compliant - Recommendation 4: Compliant - Recommendation 5: Compliant - SR I: Compliant - SR II: Compliant ### Confiscation regime (scope, procedures, and powers) - CI confiscation regime is mainly regulated through the PCCL and MDL and generally constitutes a sound basis for recovering criminal proceeds from any criminal conduct. - The MDL enables confiscation with regard to drug proceeds; the PCCL applies to all other indictable crimes. The TL provides explicitly for confiscation relating to FT offenses; the PCCL is available currently for FT. - Confiscation is conviction-based under the PCCL and MDL: - It is clearly mandatory under the MDL and appears permissive under the PCCL language, but authorities indicate courts in practice consider PCCL factors to determine proceeds to be confiscated. - Under the MDL (Sections 30–37) the court must order confiscation if it determines the person benefited from drug trafficking; the amount recovered is the amount the court assesses to be the value of the defendant’s proceeds of drug trafficking (Section 35(1), MDL). - In assessing amount, the court uses the standard of proof applied in civil proceedings and may rely on assumptions (e.g., property in the defendant’s possession may be assumed to be proceeds), which can be rebutted by the defendant. - Proceeds of criminal conduct are defined as “the benefit” from criminal conduct (Section 31(1), MDL). - The payment of the amount is enforced as if it were a fine, including the possibility of imprisonment in default. - As under MDL (Section 2), “drug trafficking offenses” include the ML offenses defined at sections 47–48 of MDL; confiscation powers extend to defendants accused of drug ML. - The PCCL applies to all crimes other than drug trafficking with a penalty of 2 years imprisonment or more and is available for underlying criminal conduct that is terrorist related; FT offenses of TUNMOTO and TL (Section 5) are subject to confiscation under the PCCL. - The CI confiscation regime is generally value-based and: - does not specifically address confiscation of laundered property or instrumentalities used in or intended for ML offenses; - a CI confiscation order is a value order without a link between an asset subject to confiscation and its availability; it can be enforced against any kind of property regardless of how obtained. - Instrumentalities are addressed by a general provision, Section 190 of the PC: instrumentalities may be seized, the court may direct they be kept or sold, and revert to the State if within a 12 month period no person establishes a right to such property to the satisfaction of the court (Section 190, CPC). - Non-conviction civil recovery: plans exist to introduce PCA-like legislation for non-conviction based civil recovery, but current legislation allows civil forfeiture in several situations: - Section 26(1) MDL: a constable or customs officer may seize and detain cash representing a person’s proceeds of drug trafficking; Section 27(1) allows a magistrate to order forfeiture of this cash (civil standard of proof). - Section 31 of the Penal Code: forfeiture available in cases of official corruption. - Section 190 of the CPC: recovery of proceeds without conviction available in some circumstances; property may be seized where there is reason to believe it has been obtained by an offense and if no one establishes a right within twelve months it reverts to the state. - Restraint orders and seizure of cash: - MDL (Section 26) permits police to seize cash believed to be drug trafficking proceeds or intended for drug trafficking. - On application by a prosecutor (if necessary ex parte), courts can order restraint of property under MDL and PCCL; restraint orders prohibit dealing with realizable property and enable provisional freezing or seizure of money or property liable to confiscation. - Seized property subject to a restraint order may be managed by a receiver. - For restraint orders under the PCCL, charges must be lodged within 21 days (Section 9(2), PCCL); for drug offenses, charges must be forthcoming within a reasonable period. - For FT there is a specific provision regarding freezing of FT funds. - Identification, tracing and production powers: - CI does not have separate legal provisions addressing identification and tracing powers for crimes under PCCL or MDL. - Under PCCL and MDL, police may obtain production orders, but neither provides for customer identification or account monitoring orders for ML investigations or tracing assets (TL contains such provisions for FT matters). - PCCL (Section 29) allows police to apply ex parte for an order “to make material available” (production/disclosure order) to determine whether someone benefited from crime or the extent/whereabouts of proceeds; conditions include material likely being of substantial value and no applicable legal privilege. Access may include entering premises or obtaining computer data in visible and legible form. Legal privilege (including attorney-client privilege) bars disclosure unless waived by the production/disclosure order. - PCCL (Section 30) provides for search warrants where production orders are not complied with or are inappropriate; MDL (Sections 44–45) contains similar provisions for drug trafficking investigations. - Protection of third parties and variation of orders: - The PCCL allows any person affected by a restraint order to apply for variation or discharge (Section 10(7)). - Under PCCL Section 12(8), before realizing property subject to confiscation the court must give reasonable opportunity to persons holding an interest to make representations. - PCCL Section 14(4) requires court powers relating to restraint, charging orders and realization to be exercised to allow persons other than the defendant or recipient of gifts from the defendant to retain or recover value of property held by them. - MDL provides for notice and opportunity to make representations to persons affected by a restraint order (Section 39(3)(c) and 40(7), MDL). - TL Section 28(7) and Schedule 3, Section 5 provide opportunities for owners or persons with an interest to be heard and for notice and hearing of persons affected by restraint orders. - Voidance of contracts to frustrate confiscation orders: - PCCL Section 14(6) provides that in exercising powers of restraining and realizing property pursuant to a confiscation order, the Court shall take no account of any obligations of the defendant or recipient of gifts that conflict with obligations to satisfy the confiscation order. - Freezing without UN listing: - By Section 5 of TUNMOTO, where the Governor has reasonable grounds to suspect funds are held for or on behalf of a person who commits, attempts to commit, facilitates or participates in terrorism, or is controlled by such a person, he may direct those funds are not to be made available except under license; names need not appear on a UN list for such freezing to occur. - The TL provides for restraint orders prohibiting dealing with any property that could be forfeited including property the offender had reasonable cause to suspect might be used for terrorism (Schedule 3). *Source: cr0592 - Section 11(4) of TUNMOTO, both a body corporate and any officer who consented or was neglectful is liable* ### Section 5, TL. ### Section 5, TL. ### Restraint and forfeiture of terrorist funds - CI has legal authority to freeze (restrain) terrorist funds or other property under the TL (Section 5), but it is unclear to what extent funds or property belonging to those who finance terrorism or to “terrorist organizations” can be seized or restrained. - The TL refers to restraint from dealing in property as to which a forfeiture order could be made. - Forfeiture for soliciting terrorist property extends to property in the offender’s possession and control at the time of the offense and which he knew or had reasonable cause to suspect would or might be used for the purposes of terrorism. - Mission uncertainty: whether property of a person or of an organization that finances terrorism or is a terrorist organization as such, property other than which is likely to be used for the purposes of terrorism, can be restrained or frozen. - Appears that the language of the TL and TUNMOTO may not permit general restraint on the property of terrorist financiers or terrorist organizations. - There is legal authority to freeze property in connection with terrorist financing but it has not yet been required to be used. ### Asset handling, sharing, and recordkeeping - There is no formal asset forfeiture fund; seized funds are paid into general revenue for accounting purposes, then segregated internally by the Treasury to be applied to AML and anti-narcotics purposes. - Since 1992, all seized funds have been dedicated to AML and anti-narcotics purposes, with the court, the Attorney General and Chief Officer of Finance making recommendations to the Cabinet on application of such funds. - Authorities do not believe a formal asset forfeiture fund is necessary given current volume/monetary amounts. - Asset sharing agreements exist between CI and the United States, and a UK agreement extended to CI applicable for sharing with Canada; asset sharing occurs on a regular basis. - Confiscation records are kept by the authorities. ### Confiscation, provisional measures, and statutory scope - Confiscation and provisional measures provisions in CI are similar to those in other common law jurisdictions and are quite comprehensive. - Generally a conviction must be obtained for confiscation, although CPC Section 190 provides an alternative where a defendant has passed away or absconded, and in other circumstances. - Confiscation orders are value based; all benefits derived from criminal conduct, including income earned on proceeds, are subject to confiscation. - Confiscation is clearly mandatory for drug trafficking; for other crimes it could be viewed as permissive, though practice is that confiscation is considered and ordered to the extent assets are available in every case. - The confiscation scheme addresses criminal proceeds but does not address laundered property separately and directly; recommendation to provide for confiscation of such property. - CI has not enacted specific provisions relating to identification and tracing; PCCL and MLR general confiscation regimes should be supplemented with full powers to enable timely identification and tracing of criminal proceeds liable to confiscation. - Compulsory powers (disclosure/production orders, search warrants) are designed more to procure disclosure of written records rather than to follow the money trail swiftly and efficiently. - CI has not adopted special provisions for automatic confiscation of assets of companies established solely for criminal purposes; consideration should be given to such provisions. - PCCL and MDL include protection of third party rights. ### Confiscation-related statistics and law enforcement seizures - PCCL restraint provisions were used 22 times since 1997, frequently in cooperation with overseas law enforcement authorities resulting in confiscation of cash and real estate. - RCIP figures for 2002: - Total detected criminal offences: 2140. - Offences related to the Misuse of Drugs Law involving cannabis: 458. - Offences involving cocaine: 293. - Drugs Task Force seizures in 2002: - Cannabis: 6,681 kg. - Cocaine: 410.6 kg. - Marine and land units also seized assets such as canoes and cars. - Customs Narcotics Enforcement Team seizures (January 1, 1996 to December 31, 2002): - Five vessels and six vehicles seized. - Cocaine: 3,988.50 pounds. - Cannabis: 1,0793.51 pounds. - Restraint related to SARs: - 2002: a.o. US$ 1.6 million restrained by United Kingdom injunction; US$ 300,000 locally restrained civilly. - 2003: a.o. US$ 100,000 locally restrained; US$ 10.2 million restrained by MLAT in two separate matters. ### Training and capacity building - In-house and external training is provided to prosecutors and magistrates. - In-house training is provided to RCIP and Customs officers at the Regional Drug Training Center in Jamaica. - Recommendation to provide training on newest trends and typologies discovered by the FIU from SARs on a more regular basis. ### Analysis of effectiveness (confiscation and provisional measures) - Confiscation scheme is extensive; recommendation to review and update overall scheme in light of recent developments in other countries (e.g., U.K.’s Proceeds of Crime and Regulation of Investigatory Powers Acts). - Consideration suggested for: - A civil forfeiture scheme based upon civil law. - Specific provisions addressing identification and tracing. - Measures ensuring restraints are always available at early investigation stages. - Ensuring third party rights are fully protected for drug trafficking money laundering. ### FIU (FRU/FRA) structure, reporting obligations, and powers - CI has had an FIU, the FRU, since 1989; in 2001 CI's FIU became a member of the Egmont Group. - PCCL Amendment 2003 established the Financial Reporting Authority (FRA) with a Director, an attorney, an accountant and other necessary personnel, appointed by the Governor after consultation with the AML Steering Group (chaired by the Attorney General, including senior law enforcement, CIMA managing director, and the Financial Secretary). - FRA responsibilities include receiving, analyzing and disseminating disclosures of financial information regarding proceeds or suspected proceeds, including ML and FT (Section 21A, PCCL Amendment 2003). - FRA is to receive all domestic disclosures regarding proceeds of crime and all disclosures from other FIUs; empowered to apply to the Grand Court for freezing a bank account for a 21 day period. - Section 27 PCCL: required reporting to the FIU where a person knows or suspects another is engaged in ML and the information came to him/her in the course of trade, profession, business or employment; failure to disclose is an offense. - FT reporting: under TL, regulated and public sector reporting required if one knows or suspects or has reasonable grounds for knowing or suspecting FT (Schedule 1, Section 1, TL). - For drug offenses, reporting is a defense to liability for assisting drug traffickers (Section 47, MDL); MDL disclosures for drug trafficking are to constables of rank Inspector or above, but PCCL Amendment 2003 provides FRA shall receive all such disclosures (Section 21A(10). - CIMA Guidance Notes include sections on identification of complex and unusual transactions; no formal guidance specifically for FT transactions though FRA assisted CIMA in Notes. - No legal requirement for use of a standard SAR form; Section 21L PCCL Amendment 2003 allows FIU to issue guidelines on forms and procedures with AML Steering Group approval. - FIU authority to require any person to provide information to clarify or amplify disclosures (Section 21A(2)(c)); may seek production orders if information not forthcoming. - FIU access to wide range of financial, administrative and law enforcement information; planned law enforcement liaison (JIU) to provide full access to police information and databases; access to immigration, vehicle registration, company records, court judgments, passport, land and property title documents, commercial databases; liaises with CIMA for regulatory information. - FIU not authorized by law to order sanctions for failure to comply with reporting obligations; CIMA may take administrative actions including license revocation but not currently administrative fines; any fine limited to $1000 dependent on issuance of rules not yet issued or planned. - Criminal sanctions: - Failure to disclose knowledge or suspicion of ML (PCCL): upon conviction after indictment up to two years imprisonment and/or a fine (unlimited); upon summary conviction a fine up to $50,000. (Section 27(10), PCCL). - Failure to disclose knowledge or suspicion of FT crimes: upon conviction after indictment imprisonment up to five years and a fine (unlimited); upon summary conviction imprisonment for six month and a fine of $4,000. (Schedule 1, Section 1(13)). - No similar offense for drug ML. ### FIU disclosure, international cooperation, and statistics - FIU authorized to disseminate financial information/intelligence domestically where there is prima-facie evidence of criminal conduct or where the FIU has cause to suspect criminal conduct (Sections 22(8)(a) and 23(9)(a), PCCL Amendments 2003). - May disclose information to CIMA or other institutions/persons designated in writing by the Steering Committee (Sections 22(8)(b) and 22(9)(a)). - Authorized to share financial information outside CI with any FIU in any other country for conduct which constitutes an offence to which the Law applies (excluding drug trafficking offences); for disclosures of SARs themselves, Attorney General consent is required (PCCL, Sections 22(6), 22(8)(c), 23(7), 23(9)(c)). - MOUs are not necessary but may be entered into with Steering Group consent; PCCL provisions on disclosures to overseas authorities appear to relate only to non-drug trafficking matters as Schedule 3(1)(b) excludes drug trafficking. - For information disclosed outside CI, the Attorney General imposes conditions setting forth adequate safeguards to protect the information (PCCL, Sections 22(6) and 23(7)). - SARs filings (January 1, 2002 up to September 29, 2003): - 2002: total 433 (Banks & trusts 257; CIMA 35; CSPs 38; Law firms 46; Money transmittors 6; Accountants 18; Securities 10; Realtors 8; Insurance 8; CSX 0; others 17). - To 9/29/03: total 227 (Banks & trusts 144; CIMA 27; CSPs 19; Law firms 20; Money transmittors 5; Accountants 5; Securities 4; Realtors 1; Insurance 0; CSX 1; others 1). - FRU onward disclosures (OD) by main recipient, and requests (RQ) (January 2002 to September 29, 2003): - 2002: OD total 75; LRQ (a) 143; FRQ (b) 60; FRU total 161. (Breakdowns include FinCEN 38; FBI 19; SEC 12; CIMA 8; RCMPs 4; DEA 5). - To 9/29/03: OD and request breakdowns including FinCEN 9; FBI 6; SEC 19; CIMA 5; RCMPs 5; DEA 4; TFOs 4; US Customs 8; RCIP 25; Misc 22; LRQ 52; FRQ 16; Total 83. - Overseas informal requests not relating to SARs: - 2002: 60. - 2003: 89. - Offences identified from SARs 2002 and 2003: - 2002: fraud 160; terrorist funding 19; drug trafficking 15; internet fraud 9. - 2003: fraud 74; terrorist funding 20; drug trafficking 17; internet fraud 6; money laundering 15. - Disclosures from other law enforcement agencies to the FIU: - 2002: 5 from Customs Fraud Enforcement Division. - Disclosures from FIU to other law enforcement agencies: - 2002: 5 to Customs Fraud Enforcement Division. - 2003: 7 to Customs Fraud Enforcement Division. - Spontaneous referrals of information relative to SARs made by the Reporting Authority both locally and overseas: estimate for 2003 is 40. - Statistics are not specifically kept by the FIU for the number of SAR-related prosecutions and convictions; in the last twelve months (six occasions) several matters have been submitted to the Attorney General for consideration of prosecution after SAR receipt/analysis/investigation. - CI does not require reporting of large currency transactions; FIU considers it unlikely that cash is being imported to CI due to strict Customs border controls; Customs would report such imports to the FIU. ### Recommendations and comments (as provided) - 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. - Amend the PCCL to provide for a range of powers enabling tracing of proceeds including account monitoring orders, as is currently under consideration (Model could be U.K.’s Regulation of Investigatory Powers Act 2001). - Consider a civil forfeiture scheme based on the U.K. Proceeds of Crime Act 2002 to recover assets derived from any unlawful conduct in a non-conviction based procedure subject to ensuring protection of legitimate rights to property. - Review FT laws to ensure a full ability to restrain the property of terrorist organizations and persons who finance terrorism. - Keep specific records of the SARs used in police investigations and prosecutions. - Provide training on the newest trends and typologies discovered by the FIU from SARs on a more regular basis. ### Implications for compliance with FATF Recommendations 7, 38, SR III - Recommendation 7: Largely compliant (confiscation not mandatory; need provision for confiscation of laundered property; specific statistics not available of SARs used in police investigation and prosecutions). - Recommendation 38: Largely compliant (range of tracing powers). - SR III: Largely compliant (questions on ability to restrain certain property of terrorist financiers and terrorist organizations). *Source: Section 5, TL of the IMF assessment of the Cayman Islands (CI).* ### 1. receiving, analyzing and disseminating disclosures of financial information ### 1. receiving, analyzing and dissemining disclosures of financial information ### Receiving, analyzing and disseminating disclosures of financial information - receiving, analyzing and disseminating disclosures of financial information ### Responding to informal and formal requests for assistance in financial crime matters - responding to informal and formal requests for assistance in financial crime matters ### Investigation of money laundering cases by gathering the evidence for prosecution decision - investigation of money laundering cases by gathering the evidence for prosecution decision *Source: IMF, cr0592 - 1. receiving, analyzing and disseminating disclosures of financial information.* ### 4. investigation in response to mutual assistance requests relating to money laundering ### 4. investigation in response to mutual assistance requests relating to money laundering ### Amendments to PCCL and FRA/FIU structure - Amendments to PCCL in October 2003 restructure the framework by separating receipt of SARs from investigation. - The reporting side, to be named the Financial Reporting Authority (FRA), will be the FIU, in charge of receiving, analyzing and disseminating disclosures of financial information and will be comprised of civilians. - The Governor can appoint, after consultation with the Anti-Money Laundering Steering Group, the persons to fill the vacant positions. - A detective inspector will be attached to the FRA and will have access to databases of the Police, Immigration, Customs, Prison and conviction files, in the JIU. - After review by the FRA, SARs will be disclosed to the Financial Crime Unit (FCU) as necessary; the FCU will undertake all investigations into financial crime, including SARs referred by FRA. - FRA composition: a director, a lawyer, an accountant and such other persons having suitable qualifications and experience to become analysts. ### FRA powers and disclosure restrictions - FRA power: require in writing from any person information (excluding information coming to a professional legal adviser in privileged circumstances) for the purpose of clarifying or amplifying information disclosed to the FRA; non-compliance is an offence. - Pursuant to section 23 of the PCCL, the FIU shall not further disclose SAR information to foreign authorities without the consent of the Attorney General. - The Attorney General may impose conditions on further disclosure of SAR information. Presently these conditions are: - a) the information disclosed can only be used for the specific purpose of assisting in a specific investigation; - b) prior approval should be requested before using any material for any other purpose; - c) formal request is necessary before using any material as evidence in any proceeding; and - d) restrain or confiscation of funds can only be done through the PCCL. - The FIU may disclose information in relation to criminal conduct to any law enforcement agency in CI. - The FIU is a member of the Egmont Group since 2001. ### Oversight, reporting and guidance - Under the new statutory framework, the work of the FRA will be overseen and inspected by the Anti-Money Laundering Steering Group, consisting of the Attorney General (chairman), the Financial Secretary (deputy chairman), the Commissioner of Police, the Collector of Customs, the Managing director of the CIMA and the Solicitor General. - Pursuant to the amendment of the PCCL, the FRA is required to collect, compile and annually publish statistical information regarding disclosures. - The FIU has been granted authority to issue guidance regarding the form and manner of reporting; current arrangements with a recommended form have proven satisfactory to date. - CIMA may take administrative actions against entities it regulates for failure to comply with the reporting obligation, including license revocation; meaningful administrative fines are not yet available. ### Analysis of Effectiveness — FRA/FIU operations and industry engagement - The CI has a FIU, the FRU, that was admitted to the Egmont Group in 2001. FRU and its successor the FRA receives reports, evaluates and disseminates them. - CIMA, as the supervisory authority, has issued guidelines and GNs to assist financial institutions in identifying suspicious transactions. - Under new provisions, the FIU has broad authority to require additional information from any person to supplement an SAR. - The FIU has full powers to gather additional documentation, and access to a wide range of public and non-public databases. - Administrative sanctions available through CIMA include license revocation but not currently fines. - Structural issue: PCCL requirement for Attorney General consent for onward disclosure of SARs to foreign FIUs may pose a potential barrier to quick and effective sharing of information and should be reconsidered. - FRU has been giving feedback to reporting entities on a regular basis; FRA should continue and expand feedback emphasizing suspicious patterns, trends and typologies (e.g., underground banking). - Recommendation to reinstate on-line access to the company’s registry to facilitate FRA work. - FRA authority to exchange information with an FIU exists even without an MOU; section 21A(2)(e) of the amended PCCL requires Steering Group consent before the FRA director can sign an MOU. The Steering Group should expedite consent and prepare standard arrangements for approval in advance. ### Key recommendations and comments (FRA/FIU and reporting framework) - 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. - Take actions necessary to make meaningful administrative fines available for failure to report. - Add information on identifying FT transactions to GN. - Provide guidance to the public that all reports go to the FRA notwithstanding provisions of other laws. - Permit the FIU or CIMA to mandate (rather than suggest) reporting form and methods. - FRA: continue to provide feedback on a regular bases, based on its own experience with SAR’s and latest trend and typologies, to financial and non-financial entities and law enforcement agencies on ML and FT through news media and/or forums and at seminars. - FRA: create information booklets about suspicious patterns used for ML and FT in financial and non-financial entities based on FRA experience with SARs. - Provide to FRA on-line access to the company registry database. - FRA: prepare standard arrangements for MOU to submit for approval to the Steering Group at one of its first meetings. - Keep statistics of number of prosecutions and convictions by JIU. ### Implications for FATF Recommendations - Recommendation 14: Compliant - Recommendation 28: Compliant - Recommendation 32: Largely compliant (ability to disclose in drug matters; disclosures with AG consent) ### Law enforcement and prosecution authorities — responsibilities and capabilities - Designated law enforcement authorities for ML and FT investigations: FRU (and in new structure the Financial Crime Unit) in conjunction with the RCIP; files are prepared for the Attorney General for prosecutions. - Controlled delivery and undercover operations: not forbidden and used routinely, primarily in respect of drug trafficking offences by the Drugs Task Force and by Customs; Barbados Plan of Action (1996) used as basis for controlled delivery; agreement for such activities covered by article 11 of the Vienna Convention 1988. - Drugs Task Force (DTF) comprises 23 officers from police and customs, charged with investigating drug trafficking into the islands. - The Anti-Money Laundering Steering Group formally established by PCCL amendments will be responsible for general oversight and promotion of collaboration between regulators and law enforcement. - Current FIU adequately staffed; future FRA will include new positions (lawyer, accountant, analysts). - Equipment and resources reported for FIU: 2 high-speed scanners, some 20 computers, Supertext location and document retrieval software and other analytical programs. - Annual budget: C$500,000 excluding salaries (C$500,000). - DTF has only one vessel to patrol the coasts of the Cayman Islands. - Attorney General’s Chambers staff complement: six Crown Counsel (criminal). ### Investigations, prosecutions, training and enforcement actions - According to FIU information, on several occasions in the last twelve months files were submitted to the Attorney General resulting in conviction following SAR analysis and investigation; several other investigations are ongoing that may result in charges. - Examples of onward disclosure leading to overseas action: - ENRON matter in the USA: onward disclosures used by US authorities to formulate MLAT requests, resulting in arrest and indictment in the USA. - Onward disclosure uncovered a US$350,000 fraud in the USA leading to MLAT requests and indictment. - FIU-provided statistics on investigations in connection with SARs in 2002 and 2003: - Results of SAR’s 2002 - 273 positive (investigation discovered or instigated) - 127 negative - 34 pending - Results of SAR’s 2003 (to Sep. 29, 2003) - 123 positive - 63 negative - 41 pending - CIMA reported four enforcement actions related to ML/FT over the past five years: two pertaining to licensed banks and two to licensed company managers; in all four cases controllers recommended liquidation and the licensees are in process of being wound up or have been dissolved. - FRU cooperates with local law enforcement; trends and typologies discovered by FRU are disseminated via the JIU. - Training: - Several officers attended training by CALP, CFATF and IMF/World Bank. - Special training and certification for financial investigators provided to an officer of the FRU. - Three officers at the FRU taking courses provided by the International Compliance Association (UK). - In-house training to RCIP officers and prosecutors in Legal Department 2000 to 2003; further training arranged for October 2003. - Financial Crime Unit investigators to receive training January 12–23, 2004 provided by the CALP. - Supertext exhibit handling system training scheduled for October 10, 2003 for four officers to become trainers. - Personal development plans and full program including in-house training and mentoring to be instituted. ### Analysis of Effectiveness — law enforcement tools and recommendations - Authorities have clear designations of responsibility with dedicated offices and personnel. - New FRA positions need to be filled as soon as possible with capable persons. - Investigative tools available, with courts accepting controlled deliveries in appropriate circumstances. - Law enforcement can compel production of financial records by applying to the Grand Court (Sections 29, PCCL and Section 44, MDL). - Production orders compel persons, including corporate persons, in possession of material to hand it over or give access; non-compliance can lead to search orders. - TL provides for account monitoring orders, but neither PCCL nor MDL provide for such orders for money laundering investigations and tracing of assets; consideration is being given to enacting specific provisions for account monitoring and tracing. Recommendations and comments (law enforcement and FRA resourcing) - Recruitment of additional staff of the FRA as soon as possible. - Provision of training to new personnel of the FRA and allocation of substantial annual budget to provide regular information about money laundering and terrorist financing to financial and non-financial sectors to raise awareness. Implications for compliance with FATF Recommendation 37 - 37: Compliant. ### International co-operation and mutual assistance - As an OT of the U.K., CI cannot enter into treaty relations on its own; it has a formal bilateral MLAT with the United States executed by the C.I., the U.S. and the U.K., brought into force by the MLAUSL, with general application in criminal matters and covering assistance including taking testimony, production orders, search and seizure, immobilizing and forfeiting criminally obtained assets; treaty applies to offenses punishable by imprisonment of 12 months or more and thus includes ML. - Mutual assistance does not generally require an MLAT but is subject to reciprocity and dual criminality; absence of income taxes means dual criminality is not met for most income tax related matters, except where MLAT provisions supplement dual criminality (e.g., United States). - Domestic legislation enabling mutual assistance: - MDICL: applicable for drug trafficking offences including drug money laundering; provides production orders, service of judicial documents, search and seizure, tracing of proceeds, taking evidence, immobilization of assets, assistance in forfeiture and restitution; assistance available if action requested could be carried out in CI and other statutory conditions met (Section 8(1) MDICL). - CI has designated all countries that are parties to the Vienna Convention for restraint applications under the Misuse of Drugs (Drug Trafficking Offences) (Designated Countries) Order 1991. - For non-drug ML matters: Evidence (Proceedings in Other Jurisdictions) (Cayman Islands) Order 1978 (EPOJ) and Section 3(b)(iii) of the CRPL enable production of documents and witness examination and permit lifting of secrecy where police are authorized by the Governor. - Post-mission amendments (January 2004) extend provisions of the MDICL to all offenses, enabling more comprehensive mutual assistance for non-drug offences. - For FT: once the ICSFT is extended to CI, CI may provide mutual legal assistance to any parties to the ICSFT. - PCCL provides for registration and enforcement of external confiscation and restraint orders for designated countries (all FATF countries designated); PCCL applies to all offences triable on indictment and to conduct outside jurisdiction as if occurred within, enabling recognition and enforcement of foreign ML or FT-related confiscation orders if underlying offence is indictable in CI. - No specific investigative powers in PCCL for identification, tracing and seizure of criminal proceeds on behalf of another jurisdiction; only general production orders and search warrants available. - Attorney General’s Chamber serves as Central Authority for non-US mutual assistance; Chief Justice serves as Central Authority for MLAT with the United States. - Assistance provided for ML-only offences and where a person committed both predicate and ML offences. - CI law enforcement assistance routes: police-to-police channels, Interpol, WCCIT, and FIU exchanges via Egmont Group and FINCEN as permitted by PCCL 23(9). - Controlled deliveries and cooperative investigations with other jurisdictions practiced; CI courts accept evidence from controlled deliveries. - Extradition: - Extradition controlled by U.K. Extradition Act and Orders in Council extended to CI. - United States of America (Extradition) Order 1976 in place between CI and U.S. for conduct punishable by 12 months or more. - Extradition (Overseas Territories) Order 2002 provides extradition between CI and designated commonwealth countries for conduct punishable by 12 months or more; ML punishable by minimum term of imprisonment of 2 years in CI, so extradition arrangements apply to ML. - European Convention on Extradition Order 1990 extended to CI allows extradition with Finland, Hungary, Israel, Liechtenstein, Norway, Poland, and Switzerland for offences punishable by 12 months or more. - CI able to extradite its own nationals and does not object to doing so. - If ICSFT extended to CI, CI will be able to extradite to any country party to ICSFT. - Standards for evidentiary/intention elements between requesting country and CI do not impede mutual assistance where CI’s standard “knows or suspects” covers requesting country’s “reasonable grounds to suspect.” - Practical information flows: police-to-police exchanges via JIU; daily exchanges of various information with FBI, US Customs, WCCIT. - Exchange of SAR-related information between CI FIU and overseas FIUs requires approval of the Attorney General. - Average processing times: - MLAT request for production of documents by Attorney General’s Chambers: six weeks. - FIU request for information: if FIU already has information, processing time no more than two days; if FIU needs to generate an SAR, about two weeks on average. - In urgent matters the FIU is able to process requests immediately. *Source: cr0592 - 4. investigation in response to mutual assistance requests relating to money laundering (IMF).* ### Part 6 of the Terrorism Law 2003 deals with extradition and mutual assistance in criminal matters. ### Part 6 of the Terrorism Law 2003 deals with extradition and mutual assistance in criminal matters ### Statistics on mutual legal assistance and requests - Under the MLAT law there have been 219 requests from the U.S. to the Cayman Islands and twenty requests by Cayman Islands to the USA over the period 1986 to 2003. - The FIU received in 2002, besides requests related to SARs, 60 overseas requests for assistance from 16 different countries, mainly from US, Czech Republic, Brazil, and Austria. - The nature of the offences involved was various, but fraud and money laundering were the most frequently involved in the requests received. - Two requests involved terrorist financing. - Out of the 60 requests, thirty-six were responded to within one week of receipt. - All requests were responded to. - The FIU received in 2003 89 overseas requests for assistance from 25 different countries, mainly from USA, Mexico, Austria, Italy and Canada. - The nature of the offences involved was various, but fraud and money laundering were again the most frequently involved in the requests received. - Seven requests involved terrorist financing. - Out of the 89 requests 65 were responded to within one week of receipt. - All requests were responded to. - Seven requests have been refused due to a lack of information provided by the requester. - One request was refused because the information was previously provided and on one occasion the FIU was unable to generate the information requested. - Feedback is received from the requesting agencies by the FIU. ### Coordination, seizures, forfeiture, and extradition framework - The Attorney General’s Chambers in conjunction with the RCIP, FIU and DTF coordinate seizures and forfeiture actions. - Requests are received by the Attorney General’s Chambers where the Senior Crown Counsel in charge of International Co-operation will coordinate and give effect to the request. - If it is a money laundering matter, the FIU will be requested to provide a police officer for assistance. - The Attorney General’s Chambers will prepare the application to the Court and when the order is received from the Court, it is executed. - The framework for asset sharing (there are agreements with the USA and Canada) is utilized. - Extradition arrangements are in place, providing for extradition for offences punishable by imprisonment of 12 months of more. - Part 6 of the Terrorism law 2003 deals with extradition and mutual assistance in criminal matters. - According to information provided by the Attorney General’s Legal Department, Part 7, Section 62–72 of the Immigration Law provides for deportation of a person who has been convicted of an offence which carries a term of more than 6 months imprisonment, or if the person is considered by the Governor as being undesirable. - Four crown counsels at the Attorney General’s chambers are in charge of requests. - For the Portfolio of Legal Affairs C$5.1 million is allocated in the annual budget. ### Analysis of effectiveness - CI has a generally sound framework in place for the provision of mutual assistance through domestic provisions and international treaties and arrangements. - For non-drug trafficking matters, except for the U.S. where there is an MLAT in place, assistance at the investigatory stage is limited. - This concern, which is of particular concern as it relates to FT, has been addressed post-mission through amendments to MDICL (January 2004). - For drug trafficking money laundering, the MDICL provides for a full range of assistance which is available at the investigative stage. - For other offenses, while CI is able to, and does, provide a wide range of compulsory assistance including bank records at overseas request, at the time of the mission the assistance is available only if criminal proceedings have been instituted, except in the case of U.S. requests for which a MLAT applies. - Authorities have recognized the issue of the limitations of the EJOC and CRPL in the provision of mutual assistance in non-drug matters prior to the filing of criminal charges, as well as the limitations regarding the kinds of assistance that are permitted. - Although some forms of assistance are at times available through other channels (for instance through FIU channels if it is a matter as to which a SAR has been filed), these limitations pose barriers to the full and effective provision of international assistance in non-drug matters. - Authorities have now passed legislation that would have the effect of extending the provisions of MDICL to other offenses, thus making assistance available at the investigatory stage as well as making a wider range of assistance available. - Extension of the full range of mutual assistance, as well as assistance at the investigatory stage for all serious crimes on, at a minimum, a dual criminality basis, is important to have a fully effective framework in place. - The current limitation in Schedule 1 of the MDICL to Vienna Convention countries appears to have had the effect in some instances of making assistance unavailable through this channel to countries not a party to the Vienna Convention, but to whom the Convention has been extended. This should be addressed in the course of the contemplated current extension of the MDICL to a wider range of offenses. - In the absence of becoming a party to the ICSFT, CI is able to provide mutual assistance (within the constraints noted above) and extradition in FT matters. - Extension of the MDICL to serious offenses including the FT crimes was important, so that assistance is available at the investigative stage. - While a provision of the TL makes mutual assistance and extradition available to all parties to the ICSFT, this provision will be unavailable until the ICSFT is extended by the U.K. to CI. - Depending upon the breadth of the provisions of the extension of the MDICL (with respect to range of countries to which it becomes applicable), the extension of the ICSFT may become very important to CI’s ability to provide assistance to some countries. - Exchange of information is being done on all levels. - The fact that SAR-related information can only be provided to foreign agencies with prior approval of AG might cause delays. ### Recommendations and comments - Extend to all serious crimes mutual legal assistance at the investigatory stage and the full range of kinds of assistance (as is set forth in the MDICL). This occurred on a post-mission basis (January 2004). - Ensure that the ICSFT is extended to the CI within a reasonable time frame. - In conjunction with the extension of the MDICL to all serious crimes, ensure assistance is available to the widest range of countries and amend limitations to current list of Vienna Convention countries. - Ensure that tracing and monitoring orders are available in support of foreign requests. ### Implications for compliance with FATF Recommendations - 3: Compliant - 32: Compliant - 33: Compliant - 34: Compliant - 37: Compliant - 38: Largely Compliant (tracing and monitoring orders, specific statistics of SARs used in police and prosecution investigations) - 40: Compliant - SR I: Compliant - SR V: Largely Compliant (tracing and freeze issues) *Source: cr0592 - Part 6 of the Terrorism Law 2003 deals with extradition and mutual assistance in criminal matters.* ### 76. In order to assess compliance with the following criteria assessors must verify that: ### 76. In order to assess compliance with the following criteria assessors must verify that: ### I — General Framework (compliance with criteria 43 and 44) - Legal framework: - Each regulated sector has its own legislation: the Banking and Trust Companies Law, Insurance Law, Mutual Funds Law, the Securities Investment Business Law and the Money Services Law, regulating licensing, revocation of licenses, supervisory powers, inspection, reporting requirements, record keeping, disclosure, and penalties. - Other relevant laws: - The MAL defines CIMA as the regulatory and supervisory body for all financial institutions. - The MLR establishes preventive measures that all “relevant financial businesses” must have (identification, record-keeping, internal reporting procedures, employee training) and criminalizes failure to have such procedures and training. - CRPL establishes the duty of nondivulgence of information concerning any property and criminalizes breach of confidentiality. - Guidance Notes (GN), issued jointly by CIMA and industry associations, provide general interpretative guidance on anti-money laundering obligations; courts will consider them but they are not mandatory. - Scope of the AML regulations: - MLR applies to persons carrying on "relevant financial business" including licensed banking, insurance (not including property and casualty), trustee services, mutual fund administration, mutual funds, company management business, cooperative society business, acceptance of deposits by building societies, and a list of other financial activities in Schedule 2 of MLR (money transmission services, financial leasing, portfolio management or advice, securities investment business, money broking, services related to sale/purchase/mortgage of land, trading in money market instruments/foreign exchange/derivatives, issuing/administering means of payment including credit cards, traveller’s checks and banker drafts, etc.). - Money transmission and currency exchange providers must be licensed under the Money Services Law. - Attorneys and accountants are subject to MLR when engaged in relevant financial businesses; consideration is being given to legislation requiring an annual certificate of compliance with the MLR for attorneys and accountants, with false statements constituting an offence. Upon enactment of a draft accountants law, licensed accountants will be required to file a statement of compliance. - GN provide sector-specific guidance for the real estate industry (when identity must be verified, documentary evidence of source of funds, etc.). - Regulator / supervisor: - CIMA, established under MAL, is the regulatory authority for the financial sector and is responsible for regulation and supervision of “financial services business” (Section 6(1)(b) and 2, MAL), including banking, insurance, mutual funds and mutual fund administration, company management, trustee/fiduciary services, money transmission and currency exchange services. - SIBL (effective July 2003) requires licensing of persons dealing in or managing securities, arranging deals in securities, and advising on securities as of January 2004. - CIMA has authority specifically to monitor FSPs’ compliance with money laundering regulations (Section 6(1)(b), MAL). - Duty on CIMA and its employees/agents to report suspicions of ML to the FIU (Sections 15–16 MLR). - Confidentiality: - CRPL makes it a criminal offence to divulge confidential information concerning professional business unless divulged pursuant to directions of the Grand Court or exceptions in the law (Section 5; Section 2 defines confidential information). - Exceptions: disclosure permitted to a constable of rank Inspector or above investigating a jurisdictional offence; if authorized by the Governor investigating an offence committed elsewhere (assuming dual criminality); or as permitted by any other law. Section 3 lists circumstances where confidentiality is inapplicable; Section 4 provides directions on confidential information as evidence. - Despite general confidentiality duties, confidentiality provisions do not limit CIMA’s access to records held by FSPs; CIMA may, at reasonable times and by written notice, require provision of information and production of specified documents (Section 38(8), MAL). - Disclosure of information to authorities: - Section 27(4) PCCL: disclosure to the Reporting Authority of suspicion/belief of ML shall not be treated as breach of any restriction imposed by statute or otherwise. - Section 43(3) MDL: disclosure to authorities of suspicion/belief shall not be treated as breach of any restriction upon disclosure. - Section 15(1) MDICL: compliance with a request to divulge confidential information or give testimony will not be an offence under CRPL by reason only of such disclosure/testimony. - Protection for disclosure regarding FT or terrorist property: Section 17(3) TL provides no civil or criminal proceedings shall lie against any person for disclosing information in good faith that may assist in preventing terrorism or securing arrest/prosecution; Section 8(2) TUNMOTO provides similar non-treatment of disclosures as breaches. - Under Section 49 MAL, confidentiality is lifted for CIMA making disclosures for domestic law enforcement requests and for assisting CIMA to exercise functions. CIMA files SARs and thereby discloses to the FIU. - Section 22 PCCL: FIU may disclose to domestic law enforcement agencies if there is prima facie evidence or cause to suspect criminal conduct, and may disclose to CIMA; overseas disclosure of SARs requires Attorney General consent. - Section 10 MLAUSL: conformity with a request to divulge confidential information or give testimony will not be an offence under CRPL. - Section 29(8)(b) PCCL: orders to make material available directed to any person have effect notwithstanding obligations of confidentiality under CRPL or any other law/common law. - Designated competent authorities: - CIMA: competent authority with primary responsibility for ensuring effective implementation of FATF 40 with respect to preventative measures (Section 6, MAL). - Attorney General: competent authority for prosecutions under the ML and FT laws and for mutual legal assistance. - FIU: competent authority for making and receiving SARs for both ML and FT. - An AML Steering Committee (Attorney General, Financial Secretary, Commissioner of Police, Collector of Customs, Managing Director of CIMA, Solicitor General) serves as central coordinating body for AML and practically for FT; responsible for oversight of CI’s AML policy and, under PCCL Amendments 2003 (assent December 2003), for policy and general administrative oversight of the newly structured FIU (Section 21B, PCCL Amendments 2003). - Guidance Notes Committee, chaired by CIMA’s MD with private sector representatives, develops AML guidance and meets at least quarterly. - Supervision and inspections: - CIMA conducts on-site inspections of financial institutions to verify compliance with legal requirements including ML measures, reviews compliance with MLR through on-site inspections and internal/external audit reports, requires remedial measures for non-compliance, and reviews attention to UN and other lists. - CIMA supervises banks and money services businesses and has a reporting role with respect to CFT. - Money Services: - Money services business regulated by CIMA under the Money Services Law; carrying on money services business without a licence is an offence (Section 4). - Section 18(2): CIMA required to take all necessary action to ensure proper and just implementation of the law. - CIMA reports violations: where ML/FT suspected CIMA would make a SAR and/or report unlicensed operations to the RCIP which will investigate and lay charges where appropriate. - CIMA communicated to known money transmitters at enactment in 2000 to obtain licences; CIMA believes all remitters are licensed. ### Analysis of Effectiveness — Legal and Institutional; Implementation - Legal and Institutional findings: - Statutory provision exists for lifting confidentiality requirements for AML/CFT purposes. - There is clear designation of authority for monitoring preventative measures for AML compliance; designation is not explicit for CFT. - Implementation findings: - April 2001: CIMA issued “Guidance Notes on the Prevention and Detection of Money Laundering in the Cayman Islands” to FSPs in accordance with the Money Laundering Regulations, 2000; a revised version was issued in September 2003 with sections added on real estate, high-risk countries, wire transfers, and non-profit associations. GN apply to all relevant FSPs and provide a framework for internal AML/CFT policies and procedures across sectors; GN do not cover FT. - CIMA’s inspection manuals for banks and trust, insurance, mutual fund administration, and company management include AML compliance programs incorporating GN principles; inspection procedures include review of policies/procedures, auditors’ reports, Board minutes, compliance with internal/regulatory policies, KYC sampling of client files, and verification that suspicious activity report logs are maintained. Findings and recommendations are included in inspection reports and closely monitored. - Property and casualty insurance providers are exempt from “relevant financial business” definition and thus excluded from AML requirements; CIMA supervises them and exemption appears reasonable given low AML risk. - Recommendations (excerpted): - Amend the MAL and/or other appropriate laws to designate responsibility for CFT. - Consider incorporating guidance regarding the activities of securities brokers, advisors, and managers into the GN. - Implication for FATF Recommendation 2: 2: Compliant. ### II — Customer identification (criteria 45–48 and sector-specific criteria) - Legal requirements: - MLR prohibits forming business relationships or carrying out one-off transactions unless a person in relevant financial business maintains identification procedures meeting specified requirements (Section 5(1)). - Persons obliged to identify customers: those carrying on relevant financial business (licensed banking and trust, insurance, mutual fund administration, company management, cooperative society businesses, acceptance of building society deposits, and others in the Second Schedule). - When identification is required: - Identification as soon as is reasonably practicable after first contact: production of satisfactory evidence of identity or procedural measures producing satisfactory evidence. - One-off (occasional) transactions: identification required if: - the institution knows or suspects the applicant is engaged in money laundering or is acting on behalf of a person engaged in money laundering (Section 7(3)); - the amount is $15,000 or greater in a single transaction (Section 7(4)); - there are several linked transactions payable by or to the applicant with the amount $15,000 or greater (Section 7(5)). - Consequence of lack of identification: “where that evidence is not obtained the business relationship or one-off transaction in question shall not proceed any further.” (Section 7(1)). - Evidence of identification: - Regulated institutions must obtain satisfactory evidence of a client’s identity (Section 7(1)(a)). - Evidence is satisfactory if (Section 11(1)): - it is reasonably capable of establishing that an applicant is the person he claims to be; and - the person obtaining the evidence is satisfied, in accordance with procedures maintained under the regulations, that the evidence does establish the applicant’s identity. - Payments debited from a bank account at a bank licensed in CI or regulated in a country with equivalent legislation (all FATF countries and some others as set forth in the Third Schedule) may be acceptable evidence of identity where reasonable for the payment to be made by post or electronic means and reasonable for details to be sent by telephone or electronic means (Section 8). - GN recommend identification documents be original or certified copies, presigned and with photograph (current valid passport, driver’s license, employer or armed forces card) and verification of name and address by specified methods (GN, Sections 3.14, 3.15, and 3.17). - If applicant acts otherwise than as principal, reasonable measures must be taken to establish identity of any person on whose behalf the applicant acts (Section 9). - Timely identification: - Identification required as soon as is reasonably practicable after first contact; account taken of nature of relationship, geographical location, practicality of obtaining evidence before money passes, and amount of transaction (Section 11(2)). - Transitional and retrospective requirements: - Business relationships formed prior to September 1, 2000: Section 17 of amended 2001 MLR required retrospective due diligence on relationships established prior to September 1, 2000; the deadline for completion was September 30, 2003. FSPs were given two years to comply and were required to report total number and value of accounts for which proper identification was not obtained. - CIMA adopted a flexible system for introduced business allowing an introducer’s assurance that the existing relationship was bona fide where appropriate. - Exemptions and third-party reliance: - Exemption: no requirement to obtain identity evidence where reasonable grounds exist for believing the applicant is carrying on relevant financial business (Section 10(a)). - Third-party reliance (Section 9(4)): where applicant is overseen by a Schedule 3 (generally FATF) country overseas regulator, a CI institution may accept a written assurance from the applicant that CDD on the principal has been obtained and recorded. - Practical concern: broad exemption for identification evidence between two “relevant financial businesses” could be abused; in practice banks generally require proof of identification from all customers even when introduced. - Wire transfers: - No legally binding requirement in CI law to include detailed originator and beneficiary information on funds transfers and related messages; GN encourage inclusion of details in payment/message systems such as SWIFT (GN 4.10) and this appears common banking practice. - CI recognizes adoption period should be no longer than two years after adoption of the interpretative note. - GN revisions encourage FSPs to obtain originator information on wire transfers; bankers indicated internal policies often include detailed information and some prohibit acceptance of wire transfers without originator information. Requiring originator/beneficiary information would strengthen guidance and align with international standards; the international standard allows a two-year adoption period. - Anonymous accounts and renewal of identity: - GN and MLR effect prohibit anonymous or fictitious-name accounts by requiring proper identification and record-keeping; no specific statutory prohibition but supervisors and institutions regard anonymous accounts as forbidden. - There are no specific requirements regarding renewal of identity if doubts appear. - Industry practice and implementation: - Majority of client base is institutional; private clients also important. Universal banking structure predominates; some FSPs provide multiple services. - FSPs have developed graduated customer acceptance policies, identify high-risk categories, apply enhanced due diligence to higher risk clients with senior management approval, and in some cases adopt “no tolerance” policies (e.g., PEPs, “hold mail” accounts, casinos, pornography operators). - FSPs conduct due diligence on intermediaries; if not satisfied, FSP conducts its own due diligence. - Use of commercial software to aid customer due diligence is common. - GN recommend multiple source documents and use of public sources (World-Check database, internet, other public databases). - Anonymous and numbered accounts: internal policies prohibit such accounts although not specifically detailed in regulation/GN. - FSPs file SARs for prospective clients refused services; circulation of such information may function like tipping off in practice although tipping off offence does not exist. - Trusts and private banking: GN require enhanced scrutiny for clients from high-risk countries, unexplained beneficiary changes, unexplained anonymity/confidentiality requests, beneficiaries with no apparent connection to settlor, source of assets, objectives of settlor, or unexplained urgency in establishing a trust. - Bearer shares: allowed by law but since April 2002 required immobilization by recognized custodian or CIMA-authorized custodian holding instruments to order of beneficial owner; demand decreased significantly since immobilization. - Correspondent banking: Cayman banks generally do not provide correspondent banking services abroad; foreign banks wishing to provide correspondent services have been subject to visits and due diligence by Cayman banks. - Introduced business: GN allow FSPs to accept introductions from intragroup sources, entities/persons covered by Cayman regulations or financial institutions in countries with equivalent legislation, and professional intermediaries in Schedule 3 countries where written assurance and senior management approval are provided. In practice most FSPs conduct their own KYC and place little reliance on introducers; intragroup introductions are not always used. - Analysis of Effectiveness — Customer identification: - Anonymous accounts: viewed as forbidden by supervisors and regulated institutions based on identification obligations; banks reported having never had such accounts. - Wire transfers: current provisions are guidance; banks report including detailed originator and beneficiary information as internal policy. - Third-party due diligence: broad reliance allowed and potential vulnerability exists with the exemption for operations between two “relevant financial businesses”; in practice banks tend not to use the exemption and require identification from all customers. - GN objective: ensure FSPs obtain full understanding of business relationship and nature of business, identify high-risk customers/businesses, and apply enhanced due diligence as appropriate. - For prospective clients whose identity cannot be obtained, the regulation requires that “the business relationship or one-off transaction in question shall not proceed any further.” - Securities: mutual fund administrators supervised by CIMA are required to apply KYC; market intermediaries (brokers, advisors, managers) not yet licensed by CIMA are in practice implementing internal AML/CFT programs, oversight has been conducted by Cayman Islands Stock Exchange and not all such entities are exchange members. Licensing process for persons currently involved in securities investment business has a deadline of January. *Source: Assessment document.* ### 2004. Persons commencing securities investment business since July 29, 2003, are required to apply for a new ### 2004. Persons commencing securities investment business since July 29, 2003, are required to apply for a new license. ### Securities licensing and inspections - CIMA expects approximately 25 to apply for a license. - CIMA intends to conduct on-site inspections on licensees using a risk-based approach (i.e., non-members of the Exchange or non-bank affiliates—approximately 8 to 10). - Since the non-members were subject to MLR, CIMA considers it prudent to include an AML inspection during these inspections. - Recommendation: - Consider conducting an AML review of prospective licensees deemed to be “high risk” during the licensing process for securities brokers, advisors, and managers. ### Insurance sector: customer identification and payments to third parties - The GN provide details regarding types of applicants for business and procedures for obtaining identification and information to be maintained. - Notes could be enhanced to make clear that identification needs to be verified if claims, commissions, and other monies are to be paid to persons other than the policyholder. - Insurance-specific observations: - Insurance managers appear to monitor clients closely; captives maintain books and records on-site and are required to have audited financial statements submitted to CIMA. - Some insurance managers acting as third party administrators may handle claim payments after approval; one captive indicated it does not maintain details of claim settlement including discharge documentation. - Insurance Law requires providers to report to CIMA changes in beneficial ownership, business plans, and dividend payments. - Recommendations: - Consider enhancing the GN with respect to customer identification in the insurance sector where claims, commissions and other monies are paid to persons other than policyholders. - Consider enhancing GN to encourage insurance providers to be particularly vigilant to risks such as single premium unit-linked policies, unusual early redemption of an insurance policy, payment of claims or high commission to an unusual intermediary. - Stress importance of solid internal controls within insurance entities. ### Trusts and company service providers (CSAs) - GN provide a separate section on company managers and require company managers to conduct due diligence on introducers or intermediaries to ensure eligibility and to obtain written assurance regarding beneficial ownership and access to documents. - Company Managers: GN and inspection manual require records to be maintained so a client’s transactions can be isolated, the nature identified, where it took place and the form. ### Introduced business and eligible introducers - GN support accepted practice of relying on eligible introducers to perform KYC due diligence, but cast a wide net by allowing intermediaries from a Schedule 3 country to introduce business to Cayman FSPs. - Eligibility under Schedule 3 may consider reports from international/regional associations; the standard for “satisfactory evidence” is that required in the Schedule 3 country, which may be of a different degree than in Cayman. - FSPs are ultimately responsible for obtaining proper identification of the ultimate client and ensuring proper customer due diligence has been conducted by a regulated entity. - Concerns and suggested enhancements: - FSPs should establish adequate mechanisms to ensure intermediary has engaged in a sound due diligence process. - Eligible introducer form could be made clearer regarding disclosure of beneficial owners, shareholders, or controllers so that independent contact with the ultimate customer by the FSP may occur if necessary. - Introducers could attest that proper CDD has occurred and the FSP has ready access to the customer information. - Recommendations: - Consider revising the eligible introducer’s form to require disclosure of controller, beneficial ownership, and to require the introducer to attest to performing proper customer due diligence and that information will be made available upon request without delay. - Consider appropriate limitations on the exemption in the MLR from identification requirements applicable to transactions made by, or through other financial businesses, to, for instance, low risk transactions and incorporate into the exemption provision in the MLR that a FSP is ultimately responsible for ensuring adequate due diligence procedures and satisfactory documentary evidence from the introducer. ### Ongoing monitoring of accounts and transactions (Criteria 49-51, sector criteria) - FSPs must maintain procedures for filing SARs and duties to disclose are enforced by criminal sanctions where there is knowledge or suspicion of ML or FT. (GN 4.1–4.5) - GN suggest an MLRO would be “well advised” to record reasons for a decision not to report a suspicion. (GN 5.24) - GN provide guidance that FSPs should exercise additional caution and conduct enhanced due diligence on individuals and entities based in high risk countries (GN 3.47-3.49). - GN provide examples of suspicious transactions (Appendix K) and suggest monitoring accounts to ensure activity is consistent with stated business; systems/controls should be in place for significant changes or inconsistencies. (GN 4.1, 4.2) - Trusts sector GN (Section 8, paragraphs 6 and 7) list circumstances prompting increased vigilance: links with high risk countries, total changes of beneficiaries, unexplained requests for anonymity, beneficiaries with no apparent connection to the settlor, unexplained urgency. - Incoming wire transfers: - CI currently has no specific requirement, only guidance, for enhanced scrutiny of wire transfers lacking complete originator information. - GN indicate information accompanying wire transfers should ideally identify the originator and FSPs should ideally have procedures to identify transfers lacking complete information. (GN, Section 4.11) - GN acknowledge verification of incomplete wire transfers may be “overly burdensome.” (Section 4.12, GN) - Lack of originator information may be considered a factor in determining whether a transaction is suspicious. (Section 4.13, GN) - Implementation indicators: - Industry appears vigilant and files SARs when warranted. - FIU received 443 SARs from FSPs and professionals in 2002 and so far in 2003 the FIU has received 227 SARs. - CIMA reviews suspicious activity registers to ensure compliance with policies and procedures, but does not review the actual reports; suggestion to randomly cross-check registers with actual reports. - Computerized programs are utilized to monitor activities; CIMA posts lists of suspected individuals for financing of terrorism from various sources on its websites. - Recommendations: - Make certain there is clear direction to FSPs to maintain files on all transactions brought to the attention of relevant officers and on other transactions that have been examined as complex or unusual with no visible purpose. - Impose an obligation on FSPs, consistent with SR VII and at least within the two-year phase in period, to give enhanced scrutiny to wire transfers that do not contain complete originator information and provide guidance that encourages compliance on an immediate basis. ### Record-keeping (Criteria 52-54 and sector criteria) - Legal requirements: - Under sections 5 and 12 of the MLR, persons carrying on relevant financial business must maintain record-keeping procedures when they engage in a business relationship or carry out a one-off transaction. - Procedures must require keeping records for not less than five years commencing on the date on which the business relationship or one-off transaction was completed. - The MLR requirement is for procedures to be in place rather than that records be maintained. - The record-keeping period of 5 years begins from the date of termination of the relationship with a customer (MLR, Sec.7 (2)). - Section 12 MLR requires records to cover: - (i) where evidence of identity is obtained, a record indicating the nature of the evidence and either a) copy of the evidence; b) information enabling a copy to be obtained; or c) sufficient information to re-obtain identity details; - (ii) a record containing details relating to all transactions carried out by the person in the course of the relevant financial business; - (iii) where insolvency action is taken to recover debt, a record of actions taken to recover such debts for not less than five years commencing on the date on which the first action was taken. - Failure to maintain record keeping procedures is punishable as an offense under Section 5 (2) of the MLR. - GN guidance and practice: - GN summarize law and note kinds of records that will generally comprise transaction records (Section 7.4, GN). - If record-keeping functions are delegated to a person or institution in a Schedule 3 jurisdiction, the FSP must be satisfied records will be maintained in accordance with the regulation and available to CIMA, the FIU and law enforcement upon request. - Where group records are stored centrally off island, records should be retrievable promptly upon request; CIMA requires a 10-day turn around period for documents to be provided in response to an overseas request. - CIMA has full access to all records during on-site inspections; industry compliance officers, MLROs and external auditors have full access during reviews and audits. - Insurance GN specifically require insurance providers to maintain financial statements, copies of direct write policies, reinsurance agreements, policy registers, and loss runs. - Securities GN allow records to be maintained in countries with equivalent legislation (Schedule 3), though industry representatives maintain internal policies require KYC documents to be maintained in-house. - Analysis of gaps: - The MLR and GN are silent with respect to supplementary account information. - No specific requirement extending the five-year period to account-related documents generated after account opening (e.g., business correspondence, account files), although in practice such documents are maintained. - The CI regulation allows that where it is not practicable to keep identity documents, providing sufficient information to re-obtain identity information may suffice. - Enforceability concern: institutions are required to “have record keeping procedures” rather than being clearly obliged to maintain records. - Implementation practice: - FSPs have adopted appropriate record keeping policies; in practice records are maintained in-house or obtainable in a reasonable time (some institutions impose a three day turnaround from offices abroad). - Recommendations: - Amend the record-keeping obligation that record keeping procedures be in place 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 account files and business correspondence. - Provide as a minimum a requirement that there be ready access to a copy of the identity documents. - Enhance GN in the insurance sector section to address additional recordkeeping requirements, including introduced business and discharge documents; specify that records must be “readily accessible.” ### Implications for compliance with FATF Recommendations and Special Recommendations - Implications summarized in source: - FATF Recommendation 10: Largely compliant (only required to maintain procedures to identify; need to address more specifically renewals of identity in cases of doubt; broad exemption to CDD requirements and introduced business regime with exemption provision having the practical effect of exempting all accounts and transactions made although it may not always be reasonable to exempt any transaction between any “relevant financial businesses”). - FATF Recommendation 11: Compliant. - Special Recommendation VII (SRVII): Not yet compliant (awaiting implementation period). - FATF Recommendation 14: Largely compliant (lack of clear direction regarding maintaining files on all transactions brought to attention of relevant officers and other transactions examined and reviewed under ongoing monitoring policies). - FATF Recommendation 21: Compliant. - FATF Recommendation 28: Compliant. - Implication for FATF Recommendation 12: concerns noted regarding enforceability and scope of record retention and access. *Source: 2004 IMF assessment of Cayman Islands AML/CFT framework and CIMA/MLR/GN implementation and recommendations.* ### 12. Largely compliant (lack of requirement on business correspondence and related records; lack of requirement to ### 12. Largely compliant (lack of requirement on business correspondence and related records; lack of requirement to maintain records, with only requirement that there be procedures to maintain). ### V—Suspicious transactions reporting (Criteria 55–57; sector criteria 101–104 for insurance) - Obligation to report - Section 27 of the PCCL: Offense if a person knows or suspects another is engaged in money laundering and the information came in the course of trade, profession, business or employment and is not disclosed to the Reporting Agency as soon as is reasonably practicable. Exception for professional legal advisors where information comes in privileged circumstances. Authorities indicate suspicion includes the concept of willful blindness. - Section 47 of MDL: Reporting is a defense to the offense of assisting drug traffickers. No direct failure to report offense comparable to PCCL. - Section 14 of the MLR: Requires internal reporting system to an appropriate person (the money laundering reporting officer). Procedures must identify the person to whom a report is to be made where information “gives rise to a knowledge or suspicion that another person is engaged in money laundering.” - For FT, Section 8, TUNMOTO: Relevant institutions (both CIMA and persons taking deposits in the course of carrying on deposit taking business) commit an offence if they know or suspect a person is engaged in FT or committing acts of terrorism and do not disclose their suspicion. Disclosures are not treated as breaches of restrictions imposed by statute or otherwise. Section 23 of the TL: Duty to disclose beliefs or suspicions regarding FT that come to an individual in the course of trade, profession, business or employment. - Authorities must report - MLR, sections 15–16: Supervisory authorities must disclose suspicions of ML when they obtain information that leads them to suspect ML while acting in the course of their duties. Disclosure shall not be treated as a breach of any restriction imposed by statute or otherwise. (Section 9(4).) - Reporting officer - MLR, Section 14: Each relevant financial business must identify “the appropriate person” to receive internal reports giving rise to knowledge or suspicion of money laundering. - Liability protection for reporting - PCCL Section 27(4): Disclosure to the Reporting Authority of suspicion or belief that another person is engaged in money laundering “shall not be treated as a breach of any restriction imposed by statute or otherwise.” - MDL Section 43(3): Disclosure to authorities of a suspicion or belief or matter upon which that suspicion or belief is based “shall not be treated as a breach of any restriction upon disclosure imposed by contract or by any law.” - PCCL Amendment 2003 Section 21F: Disclosure to the FIU “shall not be treated as a breach of any restriction upon the disclosure of information by any enactment or otherwise and shall not give rise to any civil liability.” Applies to disclosures for proceeds or suspected proceeds of any kind of criminal conduct, ML, terrorism or FT. - Tipping-off - PCCL Section 25: Offence if a person knows an investigation is being or about to be initiated and discloses information likely to prejudice that investigation or proposed investigation. - Exception: Not an offence to disclose information to a professional legal adviser for the purpose of legal advice, nor for the legal adviser to disclose to the client in connection with advice, unless done in view of furthering any criminal purpose. - No apparent tipping-off offence relating to filing of SARs for drug money laundering. MDL Section 44(9) contains an offence to tip off relating to production orders and search warrants. - PCCL Amendments 2003: FIU may require provision of information to clarify or amplify a SAR disclosure (Section 21A(2)(c)). - Analysis of effectiveness — legal and institutional - Recommendation for a single standard for reporting (preferably “knowing or suspecting or having reasonable grounds to know or suspect” as set forth in the TL) to replace current different standards for drug ML, other crimes and FT. - GN provide useful information on suspicious transactions but should be reviewed and updated for FT. - Legal protections from liability for reporters are reasonably good but could be strengthened to explicitly protect officers, directors and other representatives and to specify that no action, suit or other proceeding would lie against financial institutions or persons acting in good faith. - Tipping off offence limitations: does not appear to apply if a regulated entity tips off its client before making any SAR (no investigation yet); offence applies to any person, not only regulated institutions; no tipping off offence for SAR filings for drug trafficking ML. - Implementation — reporting practices and statistics - GN require FSPs to establish written internal procedures for filing SARs and to appoint an MLRO. - Industry practice: FSPs aware of duty to report; MLRO reviews and submits reports to the FIU if warranted. - 2002 SARs: 433 SARs filed in 2002: - 58 percent received from banks and trusts; - 2 percent from the insurance sector; - 2 percent from the securities sector; - 9 percent from company managers; - 10 percent from attorneys; - 8 percent from CIMA; - 1 percent from money transmitters; - 2 percent from real estate agents; - 4 percent from accountants; - 4 percent from other. - CIMA’s compliance officer functions as CIMA’s MLRO and files SARs to the FIU from licensing or inspection activity. In 2002, 8 percent of SARs submitted to the FIU were from CIMA; to date in 2003, CIMA submitted 27 SARs to the FIU. - GN echo PCCL on tipping off and caution on client disclosures when a report is filed. - GN do not address SAR reporting with respect to FT. - CIMA verifies SAR reporting compliance during on-site inspections. - Securities sector: GN allow Mutual Fund or Mutual Fund Administrator to locate the MLRO outside the jurisdiction or outsource to a third party outside the jurisdiction if certain criteria met; CIMA should establish mechanism to ensure appropriateness and to test implementation. - Recommendations and comments (selected) - Consider a single standard for reporting for drug trafficking ML, other crimes, and FT, preferably that of knowing or suspecting or having reasonable grounds to know or suspect as set forth in the most recent (TF) legislation. - Amend tipping-off offence so it applies from the moment a person has the suspicion, not only when there is an investigation or proposed investigation; provide a tipping-off offence for drug trafficking ML. - Strengthen SAR reporting protection to ensure protection for those connected with the decision to report; explicitly state no action, suit or other proceeding would lie against any financial institution or officer, director, employee or representative in relation to any action taken in good faith in making a SAR. - Establish mechanism to ensure appropriate arrangements for reporting suspicious transactions by mutual funds and mutual fund administrators and to test compliance. - Update GN to require SAR reports related to terrorist financing and refer to the list of terrorists posted on CIMA’s website. - Implications for FATF Recommendations 15, 16, 17, 18, 28 - 15: Compliant - 16: Compliant - 17: Materially non-compliant (no tipping off offense for drug ML; tipping off does not apply in period before SAR is forwarded.) - 18: Compliant - 28: Compliant ### VI—Internal controls, Compliance and Audit (Criteria 58–61; sector-specific criteria) - Procedures and requirements (MLR Sections 5 and 14) - MLR prohibit forming a business relationship or carrying out a one-off transaction unless certain internal procedures are maintained, including: - internal reporting procedures designating an employee as “the appropriate person” to receive reports giving rise to knowledge or suspicion of money laundering; - requirement that such reports be considered with other relevant information by the appropriate person to determine whether knowledge or suspicion exists; - provision that the appropriate person shall have reasonable access to other information which may assist him; - requirement that the appropriate person disclose information or other matter contained in a report to the Reporting Authority where the appropriate person knows or suspects a person is engaged in money laundering; - requirements for record-keeping; - requirements for identification; - “such other procedures of internal control and communication appropriate to forestall and prevent money laundering.” - Training - MLR Section 5: Training must be provided to all employees whose duties include handling relevant financial business on: - recognition and handling of transactions which may be or are being carried out by or on behalf of a person engaged in money laundering; - the business’ internal procedures; - enactments relating to money laundering. - Internal audit and scope - MLR contain no explicit reference to an internal audit function to test the system to ensure adequate compliance, although GN address this. - MLR limited in scope to AML; do not explicitly require CFT internal controls where ML is not involved. - Compliance officer and recruitment - Section 14 MLR: Person must be identified to whom reports are made. GN Section 5.2: MLRO expected to be suitably qualified and experienced and “generally expected that the MLRO would be a senior member of the staff....” - No regulations about screening procedures to ensure high standards when hiring all employees. Fit and proper criteria applied to directors and senior officers and in some instances others. - CIMA assesses fitness and propriety of licensee’s directors and senior officers considering honesty, integrity, reputation and competence. - Subsidiaries and branches - No regulations/directives about applying home jurisdiction minimum standards to any branch or subsidiary in a foreign jurisdiction. MLR applies to licensees under the Banks and Trust Companies Law; branches are licensees. Section 11 of the Banks and Trust Companies Law: licensees incorporated under Companies Law may not open a branch, subsidiary, agency or representative office outside CI without prior CIMA approval. - Analysis of effectiveness — legal and institutional - Internal mechanisms should include an internal audit; in practice many FSPs conduct such audits. - Compliance officers should have broader management-level functions beyond reporting, be authorized to recommend internal AML procedures, and monitor compliance deficiencies. - International standards recommend compliance officers have adequate rank, be appointed by and report to executive officers. - Foreign subsidiaries of CI institutions are not required to observe home jurisdiction requirements; CIMA could take regulatory action against parent for not conducting business in fit and proper manner. No guidance provided for foreign branches. - MLR limited to AML; do not require CFT internal controls where no ML is present (e.g., where FT source of funds is legitimate). - Implementation — practices and supervisory actions - Overall compliance culture within Cayman is very strong; framework for internal controls is adequate. - GN emphasize internal auditing and compliance departments should monitor and update vigilance systems; MLR does not require internal testing function and GN do not specifically require internal testing function. - For larger FSPs, responsibility for AML compliance lies within internal audit or compliance departments; internal reviews conducted in-house, by home office, or outsourced. - CIMA reviews internal auditor’s reports during on-site inspection and reviews external auditor’s reports and management letters noting deficiencies. - CIMA issued quality guidelines to banks on internal audit and internal controls and drafted guidelines for insurance industry. Guidelines suggest internal audit independence and recommend if outsourced, attention to independence. CIMA encourages engagement of two external auditors to perform internal and external audit functions, respectively. Similar guidelines not issued for all industries. - Banking industry largely composed of foreign banking organization subsidiaries and branches; FSPs apply higher standards in some areas. GN do not address whether Cayman standards are observed by foreign branches and subsidiaries. - Extensive training over past two years for authorities, FSPs and professional associations; tools include videos and interactive CDs. GN support training practices; CIMA reviews training during on-site inspections. - Recommendations and comments (selected) - Amend the MLR to include explicit reference to an internal audit function to test compliance with AML/CFT regulations. - Require foreign subsidiaries of CI institutions to observe at minimum home jurisdiction requirements and clarify foreign branch obligations via guidance and supervision. - Ensure an adequate compliance officer function broader than reporting and at management level. - Supplement fit and proper standards with screening procedures to ensure high standards when hiring all employees. - As CFT becomes more integrated, address internal controls, training and audit for FT in the MLR. - CIMA should issue internal audit and internal control guidelines for each financial sector with references to AML/CFT issues. - Tighten internal audit guidelines to require outsourced internal auditing be conducted by an external auditor other than the financial statement auditor. - CIMA should continue quality training and incorporate courses addressing specific financial issues. - Implications for FATF Recommendations 19, 20 - 19: Largely Compliant (no requirement for internal audit (guidance only); compliance officer function limited to reporting and not at management level.) - 20: Materially Non-Compliant (no applicability to foreign subsidiaries of CI institutions or guidance to foreign branches.) ### VII—Integrity standards (Criteria 62–63; sector-specific criterion 114) - Scope and application - CI addresses integrity standards for those holding significant interests or management functions through regulatory statutes in each sector. Statutes apply to directors, management and shareholding interests in excess of 10 percent. - In licensing, CIMA must be satisfied of the good character of the applicant or, for a company, the good character of management and major shareholders. Subsequent appointments of directors, chief executive officers and senior management of licensed financial institutions require CIMA approval. - CIMA evaluates directors and senior management of prudentially supervised financial institutions for expertise and integrity and reviews for criminal or adverse regulatory records. Money remitters and currency changers are subject to fit and proper tests. - Controls to risk of corporate vehicles - Bearer shares have been immobilized. - Requirement for financial institutions, including trust and company management providers, to “know their customer” and keep identifying records. GN suggest FSPs be alert to abuse of shell companies and obtain satisfactory evidence of beneficial owners, directors and authorized signatories. Where a shell company is introduced by a professional intermediary, FSP should follow introduced business procedures set forth in the Notes. *Source: IMF assessment.* ### 3.35 GN. ### 3.35 GN. ### Non-profit organizations and registration - Non-profit organizations are required to be licensed and to register under the Companies Law (2003 Second Revision). - Requirements: maintain a register of members and directors; keep proper books of accounts and minutes of resolutions and proceedings. - Licenses are issued by the Governor in Council. - Constitutional documents must be reviewed and approved as having a suitable charitable object; changes may be made only with the approval of the Governor in Council. - The GN (sections 3.38-3.43) specifically address applicants for business that are associations not-for-profit and suggest vetting of foreign associations that are not-for-profits. ### Fit and proper regime (legal and institutional analysis) Findings: - CIMA applies stringent criteria to determine whether persons are “fit and proper” to act as directors, managers, officers, general partners, promoters, insurance managers or shareholders of licensed entities. - A risk-based approach is undertaken and applicants are risk-rated; the test is applied during the application process and on an on-going basis. - CIMA’s compliance officer conducts due diligence on officers of licensed entities; “Fit and Propriety” Guidelines and Procedures have been issued. - Under the Banking and Trust Law, an approval for an exemption lapses if the director or senior officer becomes bankrupt or is convicted of an offence involving dishonesty. A similar provision exists in the Money Services Law. Criteria used to determine fitness and propriety: - financial soundness; - competence and capability; - honesty, integrity and reputation. Procedures and checks: - criminal backgrounds, complaints, disciplinary actions, and regulatory judgments are checked; - assessment of technical expertise, professional qualification, experience and training to perform the relevant duties; - appropriate credit references are required; - a personal questionnaire must be completed by the applicant for directors, shareholders, managers, officers and ultimate controllers (exercise control of 10 percent or more) covering relevant fit and proper matters. Corporate vehicle controls: - immobilization of bearer shares; - licensing and registration of non-profit organizations; - guidance to be alert for potential for abuse of shell companies. Implementation observations: - CIMA has disapproved a few applicants who did not meet the “fit and proper” criteria. - Financial service providers (FSPs) are requesting the identity of beneficial owners, directors and authorized signatories and are on alert to potential abuses of shell corporations. - Recent revisions to the GN include a section on non-profit organizations, including charities and possible abuses associated with these entities. Implication for FATF: - Implications for compliance with FATF Recommendation 29: 29: Compliant. ### Enforcement powers and sanctions — description - “Relevant financial businesses” obliged to have AML procedures include financial institutions regulated and licensed by CIMA (banks, insurers, trust companies, mutual funds, mutual fund administrators, company management and other related activities) plus a list of additional financial businesses. - Under Section 6 of the MAL, CIMA is charged with regulating and supervising all financial services businesses in CI and with monitoring compliance with the MLR; charged to endeavour “to reduce the possibility of financial services businesses or relevant financial business being used for the purpose of money laundering or other crime.” - Under Section 34 of the MAL, CIMA may, after consultation with the private sector and with the approval of the Governor, issue or amend rules or statements of principle or guidance to reduce the risk of money laundering or other criminal purposes. For rules issued by CIMA, administrative penalties may be imposed for breaches, but no penalty is to exceed $1000 dollars. The rules are to establish the procedure and policy for imposing the penalty. Section 34(7) of MAL. Regulatory powers under sectoral laws (may be used for failure to comply with the MLR): - Banks and Trusts Companies Law—Section 14 - Insurance Law—Section 11 - Mutual Funds Law—Sections 30 and 31 - SIBL - Section 16 Other authorities: - The Attorney General may institute criminal proceedings under the MLR. Under Section 5(2) of the MLR, contraveners are guilty of an offense and liable on summary conviction to a fine of $5000 and upon conviction by indictment to imprisonment for two years and a fine as determined by the court. ### Enforcement powers and sanctions — analysis of effectiveness Legal and institutional assessment: - The framework for supervisory enforcement powers is adequate except with respect to administrative fines. - CIMA has authority to impose graduated measures (orders, license cancellation, substitution of directors/officers, appointment of advisers or controllers) but administrative fines are only possible if a rule has been issued (of which there are none) and the fine is statutorily limited to $1000. ### Implementation — CIMA oversight and inspections (findings and statistics) Inspection procedures include assessment of: - internal control environment including the existence of an internal audit function; - policies and procedures and whether they are being followed; - internal and external auditors reports; - Board of Directors minutes; - verification that the AML compliance program has been approved by the Board of Directors or senior management at head office or local; - compliance with internal and regulatory policies and KYC due diligence review by sampling client files; - maintenance and review of logs of suspicious activity reports. Recent inspection activity and coverage: - Banking and trust supervision department: conducted 27 inspections this past year (100 percent coverage of domestic banks). - Insurance supervisory department: conducted seven on-site inspections of insurance managers between 2001–02 (approximately one-sixth captive insurance business coverage) and 28 inspections of domestic life insurers between 1998–2002 (100 percent coverage). - Investments supervisory department: conducted 25 inspections of mutual fund administrators in 2003 (50 percent coverage of business). - Fiduciary supervision department: conducted 9 inspections of trust companies and 9 inspections of company managers during the past year (approximately one-tenth coverage of business). - Past year inspections focused on ensuring compliance with the retrospective application of customer identification. - Most recommendations from inspections address incomplete identification or recordkeeping files and specific training needs. Follow-up and enforcement process: - CIMA monitors recommendations and performs follow up inspections; progress reports are required to be filed by FSPs indicating status of implementation. - CIMA has issued “Ladder of Compliance” Guidelines; consequences of non-compliance include specific directives, special audits or investigations, imposition or expansion of business restrictions. Action beyond Stage 3 is directed to CIMA’s compliance department. - CIMA has required an external auditor to perform a special investigation related to non-compliance with AML requirements. Sector-specific inspection notes: - Insurance: seven on-site inspections of insurance managers and four Class A insurance companies in 2002; captive insurance coverage was only one-sixth (131/650 captives). Full inspection program suspended in 2003 for full inspections but focused inspections carried out. CIMA expects to conduct a risk-based inspection of 13 insurance managers, 76 captives and six Class A insurance companies in 2004. - Securities: CIMA has not inspected any market intermediaries (brokers, managers, advisors) since the deadline for submitting an application for licensing is January 2004; the stock exchange has been conducting on-site inspections for member firms based on the U.K. supervisory guidelines. CIMA has conducted approximately 50 inspections of mutual fund administrators. - Company Managers: Fiduciary Department conducted 18 on-site inspections of trust and company managers this past year and intends to conduct 18 in 2004 (minimal industry coverage). Repeat of enforcement gap: - The framework for supervisory enforcement powers is adequate except with respect to administrative fines: administrative fines only possible if a rule has been issued (there are none) and the fine is statutorily limited to $1000. Recommendations (enforcement/implementation) - CIMA should begin to focus more on how FSPs are monitoring their activities and identifying suspicious transactions during the next cycle of on-site inspections. - CIMA should increase resources to a level that will allow adequate on-site coverage for all sectors. - Take steps such that CIMA can impose meaningful administrative fines for failures to fulfill AML/CFT obligations in addition to the other administrative measures currently available. ### Cooperation between supervisors and other competent authorities — description Domestic cooperation: - All financial superintendents are under the umbrella of CIMA; they meet frequently, occupy the same premises and freely share information. - The AML Steering Group, chaired by the Attorney General and comprising heads of supervisory and enforcement authorities (AG, Solicitor General, Financial Secretary, CIMA, police, and customs), provides a ready means for cooperation in all matters and has been an active overseer of Cayman’s AML/CFT program. - CIMA provides information to the FIU through the SAR process and assists police investigators in prosecution when warranted. - Gateway for provision of assistance to police authorities as to specific accounts/matters is through the filing of a SAR and through production orders issued by a court in CI. Section 49(2)(a) and (g), MAL. International cooperation: - Under Section 49 (3)–(4) of the MAL, provision is made for the lifting of confidentiality regarding information gathered by CIMA in the case of requests for assistance for overseas regulatory authorities. Requests are considered routine (licensing approvals and fit and proper reviews) or non-routine (all other matters). (Section 49(11) of MAL). - For non-routine requests, CIMA may disclose information “necessary to enable the overseas regulatory authority to exercise regulatory functions including the conduct of civil or administrative investigations and proceedings to enforce laws, regulations and rules administered by the overseas authority” after providing copies of the request to the Attorney General and the Financial Secretary and considering their advice on whether it is in the public interest to provide the assistance. There may be a requirement regarding willingness to provide reciprocal assistance and assurances of safeguards on confidentiality and further use. ### Cooperation — analysis of effectiveness and implementation Legal and institutional concerns: - The requirement for the advice of the AG and Financial Secretary before provision of any non-routine assistance to an overseas administrator has the potential to be a barrier to efficient and effective assistance. - In practice there have been few requests and those handled have been relatively quick; a greater volume of requests and a less efficient administration could impede timely assistance. CIMA capacity and international activity: - CIMA has four regulatory divisions—banking, insurance, investments and fiduciary—supported by a Legal Division, a Compliance Division, and a Policy and Research Division. - CIMA staff complement: 87; planned staffing target: 125 by end 2004. - CIMA is committed to hiring qualified personnel with expertise in AML/CFT and emphasizes training; many senior staff have direct involvement in the international standard setting process. - Staff participation in international AML/CFT fora includes working groups of the Offshore Group of Banking Supervisors and the Basle Committee; regular attendance at CFATF meetings and sector professional associations. - CIMA cooperates well with other domestic competent authorities; gateways for the exchange of information exist and are being used. Operational statistics: - Over the past year, CIMA has received 144 routine requests (domestic) and 12 non-routine (international) requests for information and CIMA has responded to eight, while four are pending. - If a direction has been issued, CIMA requires a 10-day turnaround time for receiving information from the FSP. International inspections and oversight: - Home country supervisors of entities operating in Cayman have conducted several on-site inspections including Brazil, Bermuda, the Isle of Man, and the U.K.; these inspections included review of AML requirements. - Cayman banks have overseas operations in five jurisdictions (Cyprus, Panama, Isle of Man, British Virgin Islands and St. Martin) and on-site inspections including AML reviews have been conducted. - CIMA has conducted overseas on-site inspections of foreign institutions operating in Cayman, including Brazil, Central America and Eastern Europe. - External auditors from other jurisdictions also conduct audits of FSPs in Cayman and have access to all information. Information privacy and FIU access: - Privacy of information is maintained under the Confidential Relationships Preservation Law. - FSPs and the FIU exchange non-confidential information informally at the FIU’s request; other than materials provided as part of a SAR, a production order must currently be presented for the FIU to obtain written documents. - The FIU will have access to additional information upon request through amendments to the PCCL, which was assented to post mission in December 2003. Recommendation (cooperation) - Consider authorizing CIMA to provide overseas assistance for non-routine reports without the consultative process; at a minimum, adopt an internal protocol for responses with consultation met through notification and opportunity to comment within a short time frame. Implication for FATF: - Implications for compliance with FATF Recommendation 26. *Source: cr0592 - 3.35 GN.* ### 26. Compliant. ### 26. Compliant. ### C. Summary Tables of the Assessment — Ratings of Compliance with FATF Recommendations Requiring Specific Action - FATF Recommendation 1 — Based on Criteria 1: Compliant - FATF Recommendation 2 — Based on Criteria 43: Compliant - FATF Recommendation 3 — Based on Criteria 34, 36, 38, 40: Compliant - FATF Recommendation 4 — Based on Criteria 2: Compliant - FATF Recommendation 5 — Based on Criteria 4: Compliant - FATF Recommendation 7 — Based on Criteria 7, 7.3, 8, 9, 10, 11: Largely Compliant - FATF Recommendation 8 — See answers to 10 to 29 - FATF Recommendation 10 — Based on Criteria 45, 46, 46.1: Largely Compliant - FATF Recommendation 11 — Based on Criteria 46.1, 47: Compliant - FATF Recommendation 12 — Based on Criteria 52, 53, 54: Largely Compliant - FATF Recommendation 14 — Based on Criteria 17.2, 49: Largely Compliant - FATF Recommendation 15 — Based on Criteria 55: Compliant - FATF Recommendation 16 — Based on Criteria 56: Compliant - FATF Recommendation 17 — Based on Criteria 57: Materially non-compliant - FATF Recommendation 18 — Based on Criteria 57: Compliant - FATF Recommendation 19 — Based on Criteria 58, 58.1, 59, 60: Largely compliant - FATF Recommendation 20 — Based on Criteria 61: Materially Non Compliant - FATF Recommendation 21 — Based on Criteria 50, 50.1: Compliant - FATF Recommendation 26 — Based on Criteria 66: Compliant - FATF Recommendation 28 — Based on Criteria 17.2, 50.1, 55.2: Compliant - FATF Recommendation 29 — Based on Criteria 62: Compliant - FATF Recommendation 32 — Based on Criteria 22, 22.1, 34: Largely Compliant - FATF Recommendation 33 — Based on Criteria 34.2, 35.1: Compliant - FATF Recommendation 34 — Based on Criteria 34, 34.1, 36, 37: Compliant - FATF Recommendation 37 — Based on Criteria 27, 34, 34.1, 35.2: Compliant - FATF Recommendation 38 — Based on Criteria 11, 15, 16, 34, 34.1, 35.2, 39: Largely Compliant - FATF Recommendation 40 — Based on Criteria 34, 40: Compliant Special Recommendations - SR I — Based on Criteria 1, 34: Compliant - SR II — Based on Criteria 2.3, 3, 3.1: Compliant - SR III — Based on Criteria 7, 7.3, 8, 13: Largely Compliant - SR IV — Based on Criteria 55: Compliant - SR V — Based on Criteria 34, 34.1, 37, 40, 41: Largely Compliant - SR VI — Based on Criteria 45, 46, 46.1, 47, 49, 50, 50.1, 52, 53, 54, 55, 56, 57, 58, 58.1, 59, 60, 61, 62: Not rated - SR VII — Based on Criteria 48, 51: (no rating provided) ### Summary of Effectiveness of AML/CFT Efforts — Major Findings Criminal Justice Measures and International Cooperation - I — Criminalization of ML and FT - ML is criminalized broadly in accordance with the Vienna Convention, but inconsistencies between various ML provisions should be addressed as planned. - FT is criminalized on the basis of the ICSFT by TUNMOTO and the new TL but the ICSFT has not yet been extended to CI. - It is not necessary to convict a person of a predicate offence to establish assets as proceeds, but the level of evidence necessary may effectively require presentation of nearly the entire case. - Offences apply to persons who knowingly engage in activities; intent may be inferred from objective circumstances. - Restructuring of the FRU will separate SAR handling from investigation to prosecution, improving analysis and protecting confidentiality. - II — Confiscation of proceeds or property used to finance terrorism - Confiscation and provisional measures are quite comprehensive; civil forfeiture provisions should be considered and specific identification and tracing provisions adopted. - Confiscation orders are value based; scheme does not address laundered property separately. - Confiscation is mandatory for drug trafficking but could be viewed as permissive for other crimes. - PCCL and MDL provide for protection of third party rights. - Extensive records kept on PCCL restraints, detected criminal offences, seized assets and confiscated drugs, but no specific records kept of SARs used in police investigations and prosecutions. - III — FIU and SAR processes - FIU is a member of Egmont, undergoing restructuring; both new and old FIU perform usual functions, have wide access to databases and authority to disseminate information. - CIMA has issued guidelines on identifying suspicious transactions; regular guidance available. Reporting forms are recommended. - Dissemination of SARs to overseas authorities requires Attorney General consent. - Administrative sanctions, other than administrative fines, are available for failure to report. - FIU provides feedback to reporting entities; director of restructured FIU needs consent of Anti Money Laundering steering group before entering written agreements with other FIUs. - IV — Law enforcement and prosecution - Clear designations of responsibility for investigations; investigative tools available but should be supplemented by specific provisions for account monitoring and tracing. - New posts at restructured FIU must be filled urgently. - V — International cooperation - MDICL, EPOJ, and other statutes facilitate mutual legal assistance; network of treaties, conventions and arrangements exists. - Authorities addressed availability of mutual legal assistance at investigatory stage in non-drug non-US MLAT matters by extending MDICL to non-drug trafficking matters. - Extradition based on dual criminality possible in ML and FT matters to a range of countries; extension of ICSFT would enable extradition for FT to all ICSFT parties. - CI can extradite its own citizens. Legal and Institutional Framework for All Financial Institutions - I — General framework - Statutory provision exists for lifting confidentiality for AML/CFT. - Clear designations for monitoring preventive measures for AML, but not yet for CFT. - II — Customer identification - Anonymous accounts are forbidden; MLR require procedures to identify rather than mandating identification. - Wire transfer provisions currently appear as guidance. - FSPs permitted to rely heavily on third-party due diligence. - Specific provisions for market intermediaries not incorporated into GN. - III — Ongoing monitoring - FSPs must maintain procedures for filing SARs and internal controls; in practice FSPs appear to monitor client activities adequately. - IV — Record keeping - Five year retention period in place for initial customer identification records and transaction records; requirement is to have record keeping procedures rather than maintain records explicitly. - No specific provision for post account opening non-transaction records; MLR permits FSPs to maintain sufficient information to re-obtain identity information. - V — Suspicious transactions reporting - SARs required but reporting standard varies for drug trafficking ML, other crimes and FT. - Protection for reporters reasonably good but could be strengthened; tipping-off provisions could be expanded to cover the period before actual SAR making. - In practice, FSPs are aware of duty to report and use GN forms. - VI — Internal controls, compliance and audit - MLR requires internal procedures for reporting, recordkeeping and identification and training; internal audit is not addressed in MLR though addressed in GN. - FSPs are not advised to designate an AML/CFT compliance officer at management level, only an MLRO. - No requirement for screening all employees though fit and proper criteria apply. - No requirement that foreign branches apply home jurisdiction minimum standards. - VII — Integrity standards - Stringent fit and proper criteria apply at licensing and on an ongoing basis. - Measures address shell corporations and not-for-profits (immobilization of bearer shares, guidance on corporate misuse, registration and licensing of not-for-profits). - VIII — Enforcement powers and sanctions - CIMA has full enforcement and sanction powers except it may not currently impose meaningful administrative fines for AML/CFT failures. - IX — Cooperation between supervisors and other competent authorities - Regular and good cooperation among financial superintendents and with domestic authorities. - Gateway exists for cooperation with foreign supervisors but legal requirement for advice of AG and Financial Secretary before assistance in matters other than license approvals or fit and proper reviews. - CIMA employs high quality experienced staff; increasing staff would allow greater on-site inspection coverage. ### Recommended Action Plan to Improve Legal & Institutional Framework and Strengthen AML/CFT Implementation Criminal Justice Measures and International Cooperation - I — Criminalization of ML and FT - Ensure that following the ratification of the Palermo Convention by the U.K., its application is extended to the CI within a reasonable timeframe. - Have the ICSFT extended to CI. - Harmonize ML offences with one another and expand the MDL’s limited provision regarding acquisition of laundered property. - Update the definition of ML in the MLR to include references to the FT money laundering offence. - Consider addressing through legislation the evidentiary burden for establishing that funds are proceeds. - Fill vacancies at the new FIU as soon as possible. - II — Confiscation of proceeds or property used to finance terrorism - Ensure that under the PCCL a court must always consider whether proceeds exist and confiscate proceeds. - Amend the PCCL to provide specifically for confiscation of laundered property. - Amend the PCCL to provide powers enabling tracing of proceeds including account monitoring orders. - Consider civil forfeiture scheme based on the U.K. Proceeds of Crime Act 2002, subject to protection of legitimate property rights. - Review FT laws to ensure ability to restrain property of terrorist organizations and persons who finance terrorism. - Keep specific records of SARs used in police investigations and prosecutions. - Provide regular training on SAR-discovered trends and typologies. - III — FIU processes domestically and internationally - Permit FIU Director to disclose SARs to foreign FIUs without Attorney General consent. - Ensure PCCL as amended permits disclosures to overseas authorities in drug trafficking ML matters. - Make meaningful administrative fines available for failure to report. - Add information on identifying FT transactions to GN. - Provide public guidance that all reports go to the FIU notwithstanding other laws. - Permit FIU or CIMA to mandate reporting form and methods. - FIU to continue and expand feedback and produce informational booklets on suspicious patterns. - Provide FIU on-line access to the company’s registry. - FIU to prepare standard MOUs for Steering Group approval. - IV — Law enforcement and prosecution - Recruit additional FIU staff urgently, provide training, allocate substantial annual budget for regular AML/FT information to financial and non-financial sectors. - Give frequent feedback to FSPs and other sectors on trends and typologies. - V — International cooperation - Extend mutual legal assistance at investigatory stage to all serious crimes and full range of assistance as set forth in MDICL. (This occurred on a post-mission basis—January 2004) - Ensure ICSFT is extended to CI within a reasonable time frame. - In conjunction with extension of MDICL to all serious crimes, ensure assistance available to widest range of countries and amend limitations to current list of Vienna Convention countries. - Enact provisions permitting identification and tracing of proceeds at foreign request and adequate freeze powers. Legal and Institutional Framework for Financial Institutions - I — General framework - Amend MAL and/or other laws to designate responsibility for FT. - Incorporate guidance regarding securities brokers, advisors, and managers into GN. - II — Customer identification - Enhance GN for insurance sector re claims, commissions, and monies paid to persons other than policy holders. - Revise eligible introducer form to require disclosure of controller, beneficial ownership, and an attestation of proper customer due diligence and availability of information upon request. - Consider appropriate limitations on the MLR exemption from identification requirements for transactions made by/through other financial businesses and state FSP ultimate responsibility for due diligence. - Consider AML review of prospective licensees deemed “high risk” during licensing for securities brokers, advisors and managers. - Make it mandatory that FSPs verify customer identity rather than “maintain procedures to identify.” - Address renewals of identity if doubts appear. - Within two-year FATF period, amend laws to require accurate and meaningful originator information (name, address and account number) on funds transfers to remain with transfers throughout the payment chain. - Tighten GN regarding originator information on all wire transfers. - III — Ongoing monitoring - Direct FSPs to maintain files on all transactions brought to attention of relevant officers and other transactions examined as complex or unusual with no visible purpose. - Impose obligation on FSPs, consistent with SR VII and within two-year phase-in, to give enhanced scrutiny to wire transfers lacking complete originator information. - Enhance GN to encourage insurance providers to be vigilant to industry risks (single premium unit-linked policies, fraudulent claims, reinsurance). - IV — Record keeping - Amend record-keeping obligation to require keeping identification and transaction records. - Provide retention for at least 5 years after end of business relationship of business correspondence and post account opening non-transaction records. - Require ready access to a copy of identity documents. - Enhance GN in insurance sector to address additional recordkeeping requirements and specify records must be “readily accessible.” - V — Suspicious transaction reporting - Consider a single reporting standard for drug trafficking ML, other crimes and FT, preferably knowing or suspecting or having reasonable grounds to know or suspect. - Amend tipping-off offence to apply from moment a person has the suspicion, not only when there is an investigation, and provide a tipping-off offence for drug trafficking ML. - Strengthen protection for SAR reporters to ensure no action, suit or proceeding lies against institutions or individuals acting in good faith. - Have CIMA gain assurance of existence and identity of each MLRO located outside Cayman for mutual funds registered with the authority. - VI — Internal controls, compliance and audit - Amend MLR to explicitly reference an internal audit function. - Require foreign subsidiaries of CI institutions to observe at least home jurisdiction requirements; clarify obligations for foreign branches through guidance and supervision. - Ensure adequate compliance officer function at management level, broader than reporting. - Require adequate screening procedures for hiring all employees as supplement to fit and proper standards. - Integrate CFT into MLR internal controls, training and audit. - CIMA to issue sector-specific guidelines on internal audits and controls referencing AML/CFT. - Tighten internal audit guidelines to require outsourced internal audit engagements be conducted by a different external auditor than that for financial statement audit. - CIMA should continue quality training and incorporate courses addressing specific financial issues. - VII — Integrity standards - (See above recommendations on fit and proper criteria and measures addressing shell corporations and not-for-profits.) - VIII — Enforcement powers and sanctions - CIMA should focus more on how FSPs monitor activities and identify suspicious transactions during next cycle of on-site inspections. - As resources allow, CIMA should increase on-site coverage in all sectors. - Take steps so CIMA can impose meaningful administrative fines for AML/CFT failures in addition to existing measures. - IX — Cooperation between supervisors and other competent authorities - Consider authorizing CIMA to provide overseas assistance in non-routine requests without consultative process or adopt an internal protocol for responses with consultation via notification and a short comment period. Sector-specific (Banking, Insurance, Securities) - Recommendations reference the above measures across sectors, including customer identification, ongoing monitoring, record keeping, internal controls, enforcement powers and cooperation. ### Authorities’ Response to the Assessment — Key Points and Reservations - The Attorney General’s Chambers and CIMA note the IMF mission assessed 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 registers reservations about recommending tipping-off provisions apply from the pre-SAR suspicion stage rather than when an investigation is contemplated or in train. - Argument: tipping-off is a criminal offence and certainty is central to criminal law; prosecuting for tipping-off based on mere suspicion could be difficult because suspicion may not trigger an investigation. - Position: more appropriate to apply the offence where an investigation is contemplated or in train. - FATF 20 (branches and subsidiaries abroad) - Authorities note very 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 equivalent to those in the Cayman Islands. - Other comments - FATF 7: Authorities submit PCCL’s power to confiscate the value of laundered property is wider in scope than the recommended amendment and removes incentive for concealment. - FATF 10–13 (customer identification and record-keeping): Authorities agree with Volume II analysis that in practice record keeping requirements and access provisions ensure availability of customer and transaction records for AML/CFT investigations and prosecution; MLRs effectively mandate intended record-keeping. - CIMA has statutory powers to access books, records and documents at reasonable times for supervisory purposes. - FATF 32: Authorities contend onward disclosures occur in a timely manner in practice; AG consent requirement does not actually impede disclosures to foreign FIUs though potential for barrier will be kept under review. Note comparison to U.S. BSA consent requirements. - SR III: Terrorist property defined in s.18 TL as proceeds from terrorism; freezing under schedule 2, paragraph 5 relates to persons charged under ss 18-22 involving use or intended use of property. Chambers will revisit language to ensure coverage of possession not intended for use. ### Post-Mission Developments and Other Authority Clarifications - FRA vacancies noted by the mission have been filled; FRA is now fully staffed. - In August 2004 the Cayman Islands Government via the Attorney General requested the U.K. to extend the ICSFT to the Cayman Islands. - CIMA proposes to address many mission recommendations related to GN changes in the Policy, Strategy & Relations sub-committee work programme for 2005. - Specific confirmations: - MLR cover mutual funds and fund administrators; an established on-site programme exists to test compliance with reporting arrangements. - Statements of Guidance issued on internal controls for banks, insurance companies and securities investment business and on internal audit for banks. - CIMA is developing implementation proposals on administrative fines. - An efficient internal protocol is in place covering consultation on non-routine assistance to overseas supervisors. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr0592.pdf_