## Offshore Financial Centers Assessment Report for Bermuda (cr0598) ## Source details **Canonical URL:** [Offshore Financial Centers Assessment Report for Bermuda (cr0598)](https://www.imf.org/-/media/files/publications/ofca/english/cr0598.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr0598.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr0598.pdf.json) --- ### Scope, standards, and mission - The Offshore Financial Centers Assessment Report for Bermuda assesses banking, insurance, and securities supervision using: - the Basel Committee’s Core Principles for Effective Banking Supervision, - the IAIS’s Insurance Core Principles (October 2000), - IOSCO’s Objectives and Principles of Securities Regulation. - The AML/CFT assessment used the October 2002 AML/CFT Methodology. - The assessments were carried out during a mission from March 17–29, 2003. The official “Authorities Responses” were received and the report finalized in December 2004. - Mission composition included named IMF and consultant experts (Mission Chief: Mr. R. Barry Johnston; Deputy Mission Chief: Ms. Mary G. Zephirin; mission team members and consultants listed). - An independent law enforcement assessment expert (Assistant Superintendent Erwin Boyce, Royal Barbados Police Force) evaluated law enforcement sections. ### Financial system and institutional context (key facts) - Political and legal context: - Bermuda is an overseas territory of the United Kingdom with internal self-government; the United Kingdom remains responsible for defense, external affairs, internal security, and administration of the police force. - Legal system: English common law, doctrines of equity, and Bermuda statute law dating from 1612. - Geography and demographics: - land mass: 21 square miles; - population: 62,400 (2001 estimate); elsewhere noted as 60,000 in sector context. - location: 570 miles east of North Carolina; one hour ahead of Eastern Standard Time (EST); about two hours flight from New York. - Currency and exchange regime: - Bermudian dollar, pegged to the US dollar at par. - Exchange control legislation remains in force; residents are free to hold foreign currency. - Key financial sector scale metrics: - Gross premiums: $49 billion in 2001. - Number of incorporated insurance companies: some 1,600. - Total consolidated assets of deposit taking institutions (banks and deposit finance companies): $18.7 billion at end-December 2002. - Collective investment schemes: 1,426 classified schemes with assets under management estimated at $68 billion as of end 2002. - Bermuda Stock Exchange total market capitalization: $150 billion at end December 2002; domestic listed companies represented $1.3 billion of total capitalization. - Active insurance companies had $172 billion in assets and wrote over $48 billion in annual gross premiums in 2001. - Bermuda is the world’s largest captive insurance center with some 940 active companies (elsewhere ~900 active captives and 1,200 registered as of December 31, 2002). - Estimated per capita income in 2000: $55,068. - Purchasing power parity GDP per capita: $34,800. - Financial intermediation and international business contributed approximately 26 percent of GDP in constant terms between 1999 and 2001. - Hotel and restaurant sales were 5 percent of output in 2001. - The authorities reported subsequent to the mission the maximum tax rate on income from employment rose to 13.75 percent. - Note: text references “12.5 percent, and stamp duty on property transfer to heirs but no taxes on unearned income.” ### Supervisory framework developments and overall assessment - Institutional developments: - Since 2002 the Bermuda Monetary Authority (BMA) became the single regulator for financial services, following transfer of insurance supervision to the BMA. - Legislative reforms since 1998 updated banking supervision and brought investment firms and collective investment schemes under regulation. - BMA increased staff resources, enhanced staff training, and strengthened supervision across the system. - Overall assessments: - Banking supervision: largely in conformity with the Basel Core Principles. - Investment intermediaries and collective investment scheme regulation: working effectively. - Insurance sector supervision: some deficiencies noted. - Cross-cutting issues: potential compromise to independence of supervision (Ministerial powers of direction and budget approval) and need for increased resources. ### Principal findings, strengths and vulnerabilities - Strengths: - Effective, well-established legal and institutional infrastructure supporting markets. - Centralization of financial supervision in the BMA and strengthened supervisory capacity. - Industry-supported, thorough screening function for insurance sector entry. - Vulnerabilities and deficiencies: - Potential threat to operational independence of BMA due to Ministerial powers to give directions and approve BMA budget. - Need for further formal processes and additional systems for on- and off-site supervision, and additional supervisory resources. - Insurance supervision: broad powers exist but are not yet fully realized; reliance on self-supervision requires enhanced supervisory guidance and capacity. - AML/CFT: no assessments of insurance entities have addressed AML/CFT risk to date; need for more substantial CFT legislation, strengthened FIU, and tightened eligible introducer provisions. - Securities: need centralization of issuer regulation, greater oversight of the Bermuda Stock Exchange (BSX), and further BMA staff training. ### Key regulatory statutes and institutions - Key laws cited: - Bermuda Monetary Authority Act, 1969, as amended. - Banks and Deposit Companies Act, 1999, as amended. - Trusts (Regulation of Trust Business) Act, 2001. - Insurance Act, 1978, as amended (2001 amendment transfers authority to the BMA). - Investment Business Act, 1998 (subsequently replaced by Investment Business Act, 2003). - The Bermuda Monetary Authority (Collective Investment Scheme Classification) Regulations 1998 (CIS Regulations). - Bermuda Stock Exchange Act, 1992. - Companies Act, 1981 (including 60 percent local ownership requirement for domestic business). - AML/CFT institutional framework: - BMA has regulatory and supervisory responsibility for AML/CFT oversight among banking, insurance, investment and trust entities. - National Anti-Money Laundering Committee (NAMLC) issues guidance and includes BMA representation. - Financial Intelligence Unit (FIU) is part of the Police and is a member of the Egmont Group; FIU handles suspicious activity reports and investigative functions. - Principal AML/CFT instruments: Proceeds of Crime Act, 1997; Proceeds of Crime (Money Laundering) Regulations, 1998; Guidance Notes on the Prevention of Money Laundering, 1998 and 2001; Criminal Justice (International Cooperation) (Bermuda) Act, 1994; Terrorism (United Nations Measures) (Overseas Territories) Order, 2001. ### Key recommendations — Banking (selected and verbatim where given) - Operational independence of the supervisor: - "The authorities should consider amending the legislation to remove the Minister of Finance’s (MOF’s) power to give directions to the BMA and approve its budget." - On-site and off-site banking supervision: - "The BMA should consider an increase in the number and breadth of expertise of their banking supervision staff, introduction of a comprehensive examination manual, and adoption of a more formalized system of working papers for on-site examinations." - Validation of supervisory information from banks: - "To complement its examination regime in, for example, capital market activities and information technology, the BMA should consider contracting external auditors or outside professional experts for additional work." - Direct intervention tools and remedial measures (CP 22): - An additional legal provision recommended: legislation providing BMA with more direct intervention tools in the event of an impending bank failure. - Recommendation: BMA should consider communicating examination results and enforcement efforts to each bank’s Board of Directors or its Audit Committee. ### Basel Core Principles — selected findings and action plan - Banking sector metrics: - Two types of licenses: full banking license and deposit company license. - As of December 31, 2002: four licensed banks and one deposit company. - Combined total assets of Bermudian banks in 15 jurisdictions: $18.7 billion for year ending December 31, 2002. - Aggregate loans and advances represented 22 percent of total assets as of December 31, 2002. - Loan/deposit ratio below 25 percent and Bermudian dollar assets less than 15 percent of total assets between 1999 and 2002. - Main CP issues and recommended actions (selected): - CP 1.2 Independence: review MOF powers to give directions and approve budget; undertake in-depth resource analysis and an action plan. - CP 6 and CP 12: replace present proxy system for trading risk by a more appropriate capital requirement system. - CP 8: undertake independent evaluation of banks’ internal loan rating systems; reduce reliance solely on external auditors. - CP 10: enhance policies and examinations for connected lending. - CP 11: establish formal reporting methodology to monitor country risk exposure. - CP 13: augment on-site techniques for interest rate risk, derivatives, and IT; consider outsourcing policy statement. - CP 16: increase professional staff numbers and expertise; develop comprehensive examination manual; formalize working paper system. - CP 18: enhance off-site supervision by fuller analysis of prudential returns to enable peer comparisons and an early warning system. - CP 19: employ Section 39 of BDCA more widely to increase synergies with external auditors. ### Insurance sector — scale, structure, and IAIS assessment highlights - Market scale and structure: - Some 1,600 insurance and reinsurance companies incorporated (fewer active companies). - Active companies had $172 billion in assets and wrote over $48 billion in annual gross premiums in 2001. - Total capital and surplus: $66 billion. - Bermuda captive counts: approximately 900 active captives (1,200 registered) at December 31, 2002; elsewhere noted some 940 active companies. - Total gross premiums of captives: $32.5 billion in 2001; premiums of $10.2 billion attributable to professional insurers and reinsurers. - Insurance supervisory staff at time of mission: 17 persons (3 administrative); subsequently increased to 25 persons directly involved in supervision. - IAIS Core Principles findings: - BMA has broad supervisory powers but does not fully exploit these powers. - Supervisory objectives explicitly include financial stability and soundness but do not consider policyholder protection (materiality limited by small consumer market). - Class-based regulatory framework (Classes 1–4 and Long-term) with Class 3 largest by gross premiums. - Observed need to: - Set more detailed financial rules and information requirements. - Establish stricter asset and liability requirements and limits. - Introduce additional verifications and differentiated approach for domestic insurance. - Provide BMA greater responsibility for corporate governance rules. - Detailed IAIS recommended actions (selected): - Incorporate fit and proper concept in the Insurance Act to align with other prudential sectors. - Require more frequent and detailed information flows between BMA and auditors; require auditors to perform specified checks including internal controls and provide detailed written reports. - Contract independent reviewers to verify company information; grant BMA access to their working papers and capability to check them. - Set minimum rules on calculation of liabilities and adequate cover of technical provisions by secure assets; differentiate gross/net reserves by line of business. - Strengthen sanction powers and introduce explicit recovery and intervention powers short of insolvency (e.g., require written recovery plans, vest temporary control). - Increase number of appointed inspectors for on-site inspections and improve actuarial capabilities in supervision. - Require consolidated and quarterly accounts for Classes 3 and 4; Class 1 companies should file financial statements with Supervisor. - Enhance cross-border information sharing provisions and consider "fast track provisions" conditioned on MoUs. ### Insurance-sector supervisory vulnerabilities and actions taken - Vulnerabilities: - Heavy reliance on co-supervision with industry, actuaries, and independent auditors. - Limited on-site inspection coverage and limited exploitation of BMA powers at time of mission. - Supervisory resource constraints limited full utilization of powers. - Market conduct protections for domestic policyholders limited. - Actions reported subsequent to mission: - Drafting of guidance notes and supporting amendment to the Insurance Act. - Increase in insurance division staffing to 25 supervisors including consulting actuary and regulatory consultant. - BMA developed a more sophisticated risk-based supervisory model, enhanced on-site supervisory elements, and issued guidance notes; amendments to the Insurance Act 1978 were enacted to underpin BMA’s ability to issue guidance notes. ### AML/CFT — FATF assessment main findings and recommendations - Assessment timing and team: - FATF 40 Recommendations and 8 Special Recommendations assessment completed on information available as of March 28, 2003. - Criminalization, confiscation, and FIU: - ML criminalized on basis of Vienna Convention; predicate offenses extend to all indictable offenses. - FT criminalized by way of an Order in Council extended by the UK to Overseas Territories to implement UN Security Council Resolution 1373; Terrorism Order lacked seizure/confiscation provisions specific to terrorist property at time of mission. - FIU: small unit with complement of four officers plus a constable on secondment; member of Egmont Group; received in excess of ten thousand SARs; developed nine money-laundering matters; four confiscation orders to date. - FIU resources inadequate for intelligence/investigative roles; a staffing increase model was accepted and additional staff forthcoming. - Preventive measures and supervision gaps: - BMA undertakes AML/CFT oversight for banking, insurance, investment, and trust entities; BMA represented on NAMLC. - BMA conducts on-site AML/CFT visits to banks and investment firms, but does not conduct on-site visits to insurance entities (auditors perform such visits without BMA AML/CFT guidance). - Introduced business/eligible introducer regime: exemptions for verification when customers introduced by “reliable introducers”; vulnerability identified where verification documents may not be immediately available to Bermuda institutions. - Recommendations included amending introduced business framework, revising eligible introducer certificates (sample certificate amended subsequent to mission), and reviewing PCMLR coverage of exempt persons under the Investment Business (Exemption) Order. - FATF recommended action highlights (selected): - Introduce more substantial CFT legislation; expedite introduction of provisions for terrorist offenses per se. - Consider civil forfeiture provisions and extend confiscation powers beyond drug trafficking offenses. - Amend PCMLR to explicitly require customer identification procedures and record-keeping consistent with FATF Recommendation 12; require retention of transaction records for at least five years. - Require originator information to remain with transfers or related messages through the payment chain within FATF deadlines; enhance scrutiny of wire transfers lacking originator information. - Strengthen FIU operations: limit database access to FIU personnel, provide refresher training, allocate secure offices, clarify FIU powers, consider requiring SARs to be sent directly to FIU. - Extend scope of AML/CFT framework to cover company service providers, accountants and lawyers, and persons acting as intermediaries or dealing in client assets currently exempt under Investment Business (Exemption) Order. - Incorporate provisions to make ML and FT extraditable offenses and strengthen mutual legal assistance provisions (search and seizure). ### Principal areas of concern (AML/CFT) - Lack of on-site surveillance of the insurance sector for AML/CFT risk. - Introduced business regime creates potential vulnerability in KYC arrangements. - Planned updates to Guidance Notes to include: - details of transaction records to be maintained by banks and deposit takers for ML investigations; - guidance related to shell companies, charities, and not-for-profit organizations. ### Securities regulation — IOSCO assessment highlights - Market structure and metrics: - 54 firms licensed under the Investment Business Act. - 1,426 collective investment schemes with $68 billion assets under management as of end-December 2002. - 393 listings on the BSX with total market capitalization of $150 billion as of December 31, 2002; 359 domestic listed companies (including 263 listed investment funds) with total market capitalization of $1.3 billion; 34 international companies cross-listed on onshore exchanges. - 16 trading members on the BSX. - Regulatory framework and issues: - BMA regulates investment firms, collective investment schemes, and has authority under CIS Regulations for classification and supervision of funds; BMA vets company registrations processed by Registrar of Companies. - BSX functions as systems operator and regulator for listed issuers but lacks licensing/inspection regime; new IBA/03 and pending CIS Act intended to grant BMA greater licensing and inspection authority and to license fund administrators. - Identified needs: clearer legal authority over issuers and trading/clearing/settlement systems; enhanced BMA authority to inspect collective investment schemes and to oversee BSX functions. - IOSCO principle findings and recommended actions (selected): - Principles relating to the regulator (P 1–5): remove MOF authority to direct BMA; grant BMA budgetary autonomy; clarify authority over issuers and trading systems. - Issuers (P 14–16): give BMA authority to regulate all public issuers, introduce insider reporting requirements, takeover bid/change of control/related party transaction rules, and enhance shareholder protection. - Collective investment schemes (P 17–20): enhance inspection authority; provide further guidance on conflicts of interest, NAV calculation and publication, segregation of client assets, securities lending, and redemptions; permit BMA to override suspension of redemptions. - Market intermediaries (P 21–24): grant clearer inspection rights; develop contingency plans for intermediary failure; consider on-site prudential inspections for firms handling client assets. - Secondary markets (P 25–30): increase oversight of clearing and settlement systems; develop staff skills for trading systems oversight; fully dematerialize securities; criminalize insider trading and market manipulation; resolve cash account risk. - Overall IOSCO assessment: - Securities regulatory system largely sound; BMA has established credible licensing and supervision for intermediaries and collective investment schemes but legislative and staffing enhancements remain necessary to address issuer regulation and BSX oversight. ### Authorities’ responses (summarized) - BMA and Bermuda authorities welcomed recognition of the robustness of banking and insurance legislation, effectiveness of supervisory framework, and progress made. - Authorities reported actions and commitments in response to recommendations, including: - Engagement with banking industry on Basel II implementation and advancing proposals to address assessors’ enhancement suggestions. - Adoption of practice to communicate examination findings and enforcement actions to banks’ boards subsequent to the mission. - Drafting and enactment of amendments to the Insurance Act 1978 to underpin guidance notes. - Increases in qualified technical staff in the insurance division and development of a risk-based supervisory model with enhanced on-site elements. - Enactment of the new Investment Business Act 2003 and preparation of a new Collective Investment Schemes Act to address mutual fund regulatory gaps. - Initiatives to introduce further enhancements reflecting revised FATF standards and Special Recommendations on anti-terrorist financing measures. *Offshore Financial Centers Assessment Report for Bermuda — Preface and sector assessments (IMF, cr0598).* ### Preface................................................................................................................. ### Preface ### Scope, standards, and mission - The Offshore Financial Centers Assessment Report for Bermuda assesses supervision in the banking, insurance, and securities sectors on the basis of: - the Basel Committee’s Core Principles for Effective Banking Supervision, - the IAIS’s Insurance Core Principles (October 2000), and - IOSCO’s Objectives and Principles of Securities Regulation. - An assessment of the anti-money laundering and combating the financing of terrorism (AML/CFT) regime was carried out based on the October 2002 AML/CFT Methodology. - The assessments were carried out during a mission from March 17–29, 2003. The official “Authorities Responses” were all received, and the report finalized, in December 2004. - Mission composition included: - Mr. R. Barry Johnston (Mission Chief); - Ms. Mary G. Zephirin (Deputy Mission Chief); - Mr. Ian Carrington, Ms. Jennifer Elliott (all MFD); - Messrs. Marcel Maes and Joel Shapiro (Consultants, Banking Supervision); - Ms. Pauline Chasseloup de Chatillon (French Insurance Supervision Commission); - Mr. Wayne C. Metcalf III (Consultant, Insurance Supervision); - Mr. Cheong-Ann Png (Consultant, Legal Department); - Ms. Margaret Boesch (Mission Assistant, IMF Institute). - An independent assessment expert, Assistant Superintendent Erwin Boyce of the Royal Barbados Police Force, evaluated the law enforcement sections of the methodology. - The mission met with Bermuda public officials and representatives from financial institutions, industry associations, auditors, and private lawyers, including: - Mr. Donald Scott, Financial Secretary, Ministry of Finance; - Ms. Cheryl-Ann Lister, Chairman and Chief Executive Officer; - Mr. D. Munro Sutherland, Superintendent of Banking, Trust and Investment; - Mr. Jeremy Cox, Supervisor of Insurance, Bermuda Monetary Authority (BMA); - The Honorable Dame Lois Browne-Evans, Attorney General; - Mr. Kulandra Ratneser, Acting Director of Public Prosecutions. ### Financial system and institutional context (key facts) - Bermuda is an overseas territory of the United Kingdom with internal self-government; the United Kingdom remains responsible for defense, external affairs, internal security, and the administration of the police force. - Legal system: English common law, doctrines of equity, and Bermuda statute law dating from 1612. - Geography and demographics: - land mass: 21 square miles; - population: 62,400 (2001 estimate); - location: 570 miles east of North Carolina; one hour ahead of Eastern Standard Time (EST); about two hours flight from New York. - Currency and exchange regime: - Bermuda issues the Bermudian dollar, pegged to the US dollar at par. - Exchange control legislation remains in force; residents are free to hold foreign currency. - Financial sector structure and scale: - Gross premiums: $49 billion in 2001. - Number of insurance companies incorporated: some 1,600. - Two internationally-active banks dominate the four banks licensed in Bermuda, providing mainly asset administration and management services. - Bermuda is the principal center for the captive insurance industry and a major management center for collective investment schemes. - The Bermuda Stock Exchange supports a small domestic market and secondary trading in international listed companies. ### Supervisory framework developments and overall assessment - In 2002, with transfer of insurance supervision to the Bermuda Monetary Authority (BMA), the BMA became the single regulator for financial services, continuing a process of strengthening the supervisory framework. - Legislative reforms since 1998 have updated banking supervision and brought investment firms and collective investment schemes under regulation. - The BMA has increased staff resources, enhanced staff training, and strengthened supervision across the system. - The AML/CFT framework was enhanced; the legal framework to combat money laundering and the financing of terrorism is described as generally adequate, with well-developed infrastructure for implementation. - Overall assessments: - Banking supervision is now largely in conformity with the Basel Core Principles. - The regulation of investment intermediaries and collective investment schemes is working effectively. - Some deficiencies were noted in the supervision of the insurance sector. - Potential for compromise to the independence of supervision and the need for increased resources were issues across assessments. ### Principal findings and vulnerabilities - Strengths: - Effective, well-established legal and institutional infrastructure supporting markets. - Centralization of financial supervision in the BMA and strengthened supervisory capacity. - Industry-supported, thorough screening function for insurance sector entry. - Vulnerabilities and deficiencies: - Potential threat to operational independence of the BMA due to Ministerial powers of direction and budget approval. - Need for further formal processes and additional systems for on- and off-site supervision, and additional supervisory resources. - Insurance supervision: broad powers exist but are not yet fully realized; reliance on self-supervision requires enhanced supervisory guidance and capacity. - AML/CFT: no assessments of insurance entities have addressed AML/CFT risk to date; need for more substantial CFT legislation, strengthened FIU, and tightened eligible introducer provisions. - Securities: centralization of issuer regulation, greater oversight of the Bermuda Stock Exchange (BSX), and further staff training would strengthen the system. ### Key recommendations (selected and verbatim where given) - Banking - Operational independence of the supervisor: "The authorities should consider amending the legislation to remove the Minister of Finance’s (MOF’s) power to give directions to the BMA and approve its budget." - On-site and off-site banking supervision: "The BMA should consider an increase in the number and breadth of expertise of their banking supervision staff, introduction of a comprehensive examination manual, and adoption of a more formalized system of working papers for on-site examinations." - Validation of supervisory information from banks: "To complement its examination regime in, for example, capital market activities and information technology, the BMA should consider contracting external auditors or outside professional experts for additional work." - AML/CFT - Strengthening CFT legal framework: "More substantial CFT legislation would be necessary for giving effect more fully to the provisions that reflect requirements of international conventions and treaties." - Reinforcing the legislation and resources for the FIU: - "The authorities should consider formally incorporating the FIU as the competent authority in the legal framework." - "The resources of the FIU require strengthening if it is to perform the roles of an intelligence and investigative unit more effectively." - "Further training of the FIU staff is also desirable. Arrangements should also be made for awareness raising among prosecutors and the judiciary." - Insurance sector supervision - "The BMA should provide guidance to the auditors conducting on-site visits to insurance entities in respect of aspects of AML/CFT risk to be assessed during visits." - "The current legal framework for the insurance sector should be amended to include the concept of fit and proper as in the other prudentially regulated sectors." - Corporate governance and reporting: - "The flow of information between the BMA and the auditor should be more detailed and more frequent." - "The supervisor should require the auditor to do specific checks (including the review of internal controls) and the auditor should systematically provide the supervisor with a detailed written report." - "The authorities should contract independent reviewers to verify the information received from companies. The supervisor should have access to their working papers and the capability of checking these, either directly or indirectly." - "While capital adequacy and solvency is defined in a stringent way, the authorities should also set minimum rules on the calculation of liabilities and on the adequate cover of technical provisions by secure assets." - "Financial reporting should be more detailed, distinguishing direct and assumed insurance, lines of business, and type of contracts for reinsurance." - Consumer protection: "It is recommended that procedures be put in place to permit the individual and small corporate policyholder to receive meaningful and understandable information in a timely manner and have easy access to an equitable treatment of complaints." - Securities - Regulation and information sharing on collective investment schemes: "Suggested changes to the Collective Investment Scheme Act and Regulations should be carried through; these would address many of the gaps in collective investment regulation." - Regulation of issuers and secondary markets: "Regulation of issuers should become the direct responsibility of the BMA, who would be responsible for unlisted issuers, for supervision of the BSX regulation of listed issuers, and for the introduction of further rules for shareholder protection." - Resources of the regulator: "Additional staff training is required to enhance technical skills, especially in the areas of inspections and oversight of BSX functions." *Offshore Financial Centers Assessment Report for Bermuda — Preface (IMF).* ### 12.5 percent, and stamp duty on property transfer to heirs but no taxes on unearned income. ### cr0598 - 12.5 percent, and stamp duty on property transfer to heirs but no taxes on unearned income. ### Overview: economic structure and income - Main areas of economic activity: tourism and international business services, particularly insurance. - Financial intermediation and international business activity contributed approximately 26 percent of GDP in constant terms between 1999 and 2001. - Hotel and restaurant sales were 5 percent of output in 2001. - The offshore center generated employment growth every year since 1997 except 2001. - Estimated per capita income in 2000 was $55,068. - Note: authorities reported that subsequent to the mission the maximum tax rate on income from employment has risen to 13.75 percent. - Purchasing power parity GDP per capita has been estimated at $34,800. ### Financial institutions and markets: banking, trusts, and collective investment schemes - Banking sector: - Bermuda has four licensed banks. - The two largest banks have significant international operations focused on asset administration and management. - Banks are highly liquid with low credit and Bermudian exposure: loan/deposit ratio is below 25 percent and Bermudian dollar assets less than 15 percent of total assets between 1999 and 2002. - Total consolidated assets of deposit taking institutions (banks and deposit finance companies) were $18.7 billion at end-December 2002. - Bermuda law requires at least 60 percent domestic ownership of Bermuda companies that undertake domestic business; branches of foreign banks are not eligible for licensing. - Trust sector: - There are 29 trust companies with unlimited licenses. - Unlimited licenses (under the Trust (Regulation of Trust Business) Act, 2001) authorize companies to provide trustee services as a business and to solicit business from the public. - Limited trust licenses, issued to partnerships and individuals, place a ceiling on trust assets that may be held. - Collective investment schemes and investment business: - 1,426 classified collective investment schemes with assets under management estimated at $68 billion as of end 2002. - 54 licensed investment businesses (bulk are portfolio managers or investment advisers); a large number of investment providers are exempt from licensing. - The jurisdiction is a center for offshore operations of large international funds and fund administrators and hosts a number of offshore hedge funds. - Bermuda Stock Exchange total market capitalization was $150 billion at end December 2002; domestic listed companies represented $1.3 billion of total capitalization. ### Insurance industry: scale, structure, and drivers - Industry scale and activity: - Bermuda insurance industry includes some 1,600 insurance and reinsurance companies (incorporated companies; there were fewer active companies). - Active companies had $172 billion in assets and wrote over $48 billion in annual gross premiums in 2001. - The industry attracted increasing numbers of reinsurance and large commercial direct insurers offering alternative risk transfer products. - Bermuda is the world’s largest captive insurance center with some 940 active companies. - Competitive advantages and market drivers: - Initial attraction included low taxes; current dominant attractions are concentration of insurance skills and specialization, and flexibility and timeliness of incorporation. - Concentration of actuaries and specialized underwriters created economies of scale facilitating rapid price and information discovery for risk managers. - Industry arrangements and vehicles (summary of Box 1): - Alternative risk transfer (ART) includes captive insurance and other vehicles targeting specialized corporate needs. - Captive types: single-owner (pure) captives, association captives, protected cell captives (rent-a-captives). - Captives often managed by specialist captive manager firms providing accounting, claims handling, underwriting, reinsurance arrangement, and Principle Representative functions required by the Insurance Act. - Reinsurance diversifies assumed risk across countries and business types and is used to syndicate very large potential losses. - Industry cycles and recent trends (summary of Box 2): - Commercial insurance experiences soft and hard market cycles. - The market hardened following September 11, producing estimated industry losses of $40–50 billion, compared with previous highest of $20 billion associated with Hurricane Andrew. - Hardening led to higher premium rates, increased deductibles, reduced coverage for certain risks, and tougher conditions such as higher credit ratings—factors that attracted capital and stimulated growth in Bermuda, including captive growth. - Some analysts expected the hard market to continue through 2004, while others argued it might be shorter lived. ### Regulatory framework, oversight, and market integrity - Institutional structure: - Since the start of 2002 the Bermuda Monetary Authority (BMA) has been the sole licensing, regulatory, and supervisory authority for Bermuda’s financial services sector. - The BMA is accountable to the Ministry of Finance (MOF) which appoints its Board of Directors; the BMA Board comprises 11 members appointed for a period of three to five years. - Three Board members are executive directors: the Chairman, the Superintendent of Banking, Trust, and Investment, and the Supervisor of Insurance. - Insurance licensing decisions are assisted by the statutory Insurance Advisory Committee. - Key laws governing the sector (listed): - Bermuda Monetary Authority Act, 1969, as amended. - Banks and Deposit Companies Act, 1999, as amended. - Trusts (Regulation of Trust Business) Act, 2001. - Insurance Act, 1978, as amended (2001 amendment transfers authority to the BMA). - Investment Business Act, 1998 (subsequently replaced by Investment Business Act, 2003). - The Bermuda Monetary Authority (Collective Investment Scheme Classification) Regulations 1998 (CIS Regulations). - The Bermuda Stock Exchange Act, 1992. - Companies Act, 1981 (including 60 percent local ownership requirement for domestic business; exempt companies confined to international business). - AML/CFT framework and institutions: - BMA has regulatory and supervisory responsibility for AML/CFT oversight among banking, insurance, investment and trust entities. - National Anti-Money Laundering Committee (NAMLC) issues guidance and includes BMA representation. - Financing of terrorism (FT) is criminalized by way of an Order in Council extended by the United Kingdom to its Overseas Territories to implement UN Security Council Resolution 1373. - The Financial Intelligence Unit (FIU) is part of the Police and is a member of the Egmont Group; it has administrative responsibilities for suspicious activity reports and investigative powers. - Principal instruments to combat money laundering and financing of terrorism: - Proceeds of Crime Act, 1997 and an amendment extending predicate offenses to include proceeds of all indictable offenses (including fiscal offenses). - Proceeds of Crime (Money Laundering) Regulations, 1998 (customer due diligence, record keeping, suspicious activity reporting). - Guidance Notes on the Prevention of Money Laundering, 1998; Guidance Notes on the Prevention of Money Laundering (Fiscal offenses) 2001. - Criminal Justice (International Cooperation) (Bermuda) Act, 1994 (mutual legal assistance). - Terrorism (United Nations Measures) (Overseas Territories) Order, 2001. ### Strengths and vulnerabilities in regulatory and supervisory arrangements - Banking and securities supervision: - BMA employs a risk-focused approach to on-site supervision, concentrating on higher risk areas and using on-site resources accordingly. - BMA’s prime strategic supervisory focus is moral suasion, supported by extensive sanctions and regular meetings with senior management to discuss performance and corrective measures. - BMA supplements on-site work with external auditors to validate prudential returns and perform special audits or investigations as requested. - Supervisory and regulatory framework complies well with the Basel Core Principles. - Concern exists about possible risk to operational independence arising from ministerial power to give directions to the BMA and to approve the budget; however, ministerial power of direction is expressly constrained such that directions cannot be inconsistent with the Banks and Deposit Companies Act (BDCA). - Enhancements to on-site and off-site supervision will require further staffing increases. - Securities regulation: - Regulatory framework and practice in the securities sector is largely sound. - BMA has established a strong licensing and inspection system focused on market intermediaries and collective investment schemes. - Assessment against the IOSCO Principles noted that additional staff training would enhance the BMA’s program. - Proposed legislative changes will address outstanding concerns with respect to licensing, sanctioning and inspection authority. - Collective investment scheme rules need further refinement in certain aspects to reflect requirements imposed in practice. - Issuer regulation and market oversight: - Issuer regulation should be centralized and greater focus given to enhanced shareholder protection rules. - Proposed criminalization of insider trading and market manipulation should be supplemented with an insider transaction reporting system. - The Bermuda Stock Exchange (BSX) functions as a systems operator and regulator; it should be supported by closer oversight by the BMA and development of BMA staff skills in trading systems, issuers, and clearing and settlement. *International Monetary Fund* ### 21. Some deficiencies were noted in the assessment against the IAIS Core Principles. ### Some deficiencies were noted in the assessment against the IAIS Core Principles ### IAIS Core Principles — supervisory findings and recommendations - The Bermuda Monetary Authority (BMA) has broad powers to supervise the insurance sector but does not fully exploit these powers. - The BMA carries out supervisory functions in close cooperation with the insurance industry; the licensing process utilizes an Insurers’ Admission Committee (a sub-committee of the Insurance Advisory Committee (IAC)) to provide recommendations to the supervisor on new licensees. - Supervisory objectives explicitly include financial stability and soundness of financial institutions but do not consider policyholder protection; the materiality of this omission is limited given the relatively small consumer market. - Recommended enhancements: - Set more detailed financial rules, requiring more detailed information from the industry. - Establish stricter requirements on assets and liabilities. - Introduce additional verifications on data provided by companies. - Institute a differentiated approach for domestic insurance. - Provide the supervisor with greater responsibility for setting corporate governance rules. - The assessment used the 2000 IAIS Core Principles as the basis for evaluating Bermuda’s regulatory regime while taking into account the unique features of the Bermudian system. ### Regulated structure of the insurance sector (Box 3) - Bermuda’s insurance sector composition: - Primarily international insurers including single owner captives, insurers providing cover for sophisticated players, and reinsurers. - A small domestic market exists. - Classes of insurer permitted by regulation: - Class 1: a single-parent captive. - Class 2: a single-parent captive where at least 80 percent of net premiums is written for persons related to the owners, or a multi-owner captive underwriting only the risks of their parents or affiliates. - Class 3: an insurer not registrable as Classes 1, 2, or 4. - Class 4: requires statutory capital and surplus of $100 million or more, and explicitly excludes captives registrable as Classes 1 or 2; includes all reinsurers underwriting excess liability insurance and property catastrophe reinsurance. - Long-term: insurer registered for long-term business only. - Registration flexibility: - Any of Classes 1 through 4 may register to carry on only general business, or both long-term and general (composite) insurance business. - Gross premiums by regulatory group, Bermuda Insurance Industry, 2001 (Number 1/ (in million dollars)(percentage)) - Class 1: 3872,0854.30 - Class 2: 4486,38613.19 - Class 3: 52226,03853.77 - Class 4: 3110,20821.08 - Long-term only: 1483,7077.66 - Total: 1,53648,423100.00 - Of which, domestic: 6169.20.35 - General Business: 115.3 - Long-term Business: 53.9 - Observations: - Class 3 is the single largest group in terms of gross premiums, followed by Class 4. - Any class may include reinsurers; domestic insurance is also offered by non-resident insurance undertakings. - Jurisdictional context: - IAIS has adopted principles on minimum requirements for supervision of reinsurers and is revising core principles to explicitly include reinsurers. - Bermuda regulated reinsurance since 1978 and, since 1995, differentiates among groups by risk-based regulatory requirements with regard to minimum capital and surplus, reporting requirements, and inspections, increasing in stringency from Class 1 to Class 4. ### Applicability of IAIS provisions to captives and reinsurance - Market conduct provisions of the IAIS Core Principles have limited applicability to reinsurance; applicability to captive insurance has been questioned. - IAIS noted that single-parent or group reinsurance captives may not pose the same risk as other reinsurers and may therefore be treated differently. - Given the important component of direct insurance and Bermuda’s uniform regulatory regime, the mission assessed the system using the IAIS Core Principles while accounting for limited applicability of certain market conduct provisions. ### Anti‑Money Laundering and Combating the Financing of Terrorism (AML/CFT) - Legal and institutional framework: - Bermuda has a generally adequate legal framework to combat ML and FT. - ML is criminalized on the basis of the Vienna Convention; the scope for predicate offenses extends to all indictable offenses. - Implementation and oversight: - The BMA undertakes AML/CFT oversight through on- and off-site surveillance mechanisms; a number of BMA staff have received specific training for these functions. - Identified needs: - More substantial legislation against FT should be introduced. - The Financial Intelligence Unit (FIU) needs to be strengthened in terms of resources and personnel to carry out investigative and intelligence responsibilities more effectively. - The framework for introduced business and insurance oversight requires further refinement and development to minimize potential abuse. ### Companies and company & trust service providers - High degree of oversight on corporate entry: - Approval responsibilities for incorporations are shared between the BMA and the Ministry of Finance (MOF). - The BMA initially processes and vets all incorporation applications, verifying applicants’ personal details and conducting background checks. - For companies proposing restricted activities, the BMA recommends to the MOF, which undertakes a further review. - The Companies Act, 1981 imposes requirements regarding physical presence, board composition, and resident representatives or officers for corporations. ### Cross-border cooperation and information-sharing - Legal provisions and gateways exist for information-sharing and cooperation with foreign authorities. - The Insurance Act and the Investment Business Act would benefit from amendment or clarification with respect to the sharing of client information. - Proposed amendments to the IBA will address information sharing specific to the securities sector. - Note: Sections 78–81 of the IBA/03 address the issue of information sharing. --- ### Basel Core Principles — overview of the banking sector and main findings - Banking sector structure and scale: - Two types of licenses: a full banking license and a deposit company license (deposit companies are specialized local mortgage lenders). - As of December 31, 2002, there are four licensed banks and one deposit company. - Bermuda’s banks are established in 15 jurisdictions with combined total assets of $18.7 billion for the year ending December 31, 2002. - For the two larger internationally active banks, fee income from trust and related services, investment services and foreign exchange exceeds 50 percent of revenue. - As of December 31, 2002, aggregate loans and advances represented only 22 percent of total assets. - Market structure and restrictions: - Historically, banks were required to be local institutions, at least 60 percent owned by Bermudians; this restriction is now lifted on a case-by-case basis, but legislation still licenses local companies (not branches of foreign banks) and requires banks to provide certain core retail products to the domestic market. - Supervision and capacity: - BMA initiated a risk-focused on-site examination program, greater emphasis on corporate governance, and issuance of policy statements clarifying prudential licensing criteria. - Main findings: - Prudential regulations and powers are strong; all core principles were considered to be compliant or largely compliant. - Two predominant issues: - Independence of BMA: MOF may give general policy directions and must approve BMA’s budget; while these powers have not been exercised historically, their existence may create the impression that BMA’s independence is not fully established. Consideration should be given to reviewing legislation to address MOF policy direction and budgetary approval powers. - Need for further enhancements to on- and off-site supervision, especially in specialized on-site areas, and fuller exploitation of off-site data; an increase in supervisory resources (staffing or outside expertise) will be necessary. - Recommendation: Undertake an in-depth analysis of supervisory objectives to define appropriate resource levels and develop a strategic plan to implement defined objectives. ### Principle-by-principle highlights (selected) - Objectives, autonomy, powers, and resources (CP 1): - Prudential regulations are sound; CP 1 divided into six principles with a high degree of compliance. - MOF policy direction and budgetary approval powers may intrude on BMA operational independence; consider legislative review. - Need for additional resources in banking supervision. - Licensing and structure (CPs 2–5): - An effective licensing authority with fair and equitable criteria is in place. - Prudential regulations and requirements (CPs 6–15): - BMA requires capital commensurate with risk; Bermudian banks operate at capital adequacy levels well in excess of required limits. - BMA has not developed a specific market risk calculation to apply against capital; current proxy system for market risk will have to be replaced. - BMA devotes considerable attention to AML requirements in on-site examinations. - BMA relies principally on external auditors to assess asset quality and loan loss reserves; prudential reporting of connected lending needs enhancement; examiners should undertake independent reviews of internal loan rating systems. - BMA is studying prudential returns to monitor country risk exposures more closely. - BMA should augment on-site techniques for market risk, interest rate risk, financial derivatives, and information technology; outsourcing policy statement recommended (subsequently developed and reported implemented by the authorities). - Methods of ongoing supervision (CPs 16–20): - Risk-focused on-site supervision program established; on-site examinations derive from risk analysis using internal/external audit reports, meetings with management held at least three times per year, and prudential report data. - Off-site supervision has not fully exploited available information; upgraded IT would enable better analysis and peer-group comparisons. - BMA holds annual meetings with senior management of each bank and additional meetings with external auditors and overseas officers. - Information requirements (CP 21): - Requirements established for adequate accounting, records, and internal control systems; BMA evaluates banks’ accounting processes and internal control adequacy. - Formal powers of supervisors (CP 22): - BMA has legal authority to restrict bank activity, suspend or revoke a license, and object to potential controllers or shareholders; in practice, BMA often seeks remedial action via informal moral suasion. *Source: IMF assessment of Bermuda’s financial sector.* ### 51. An additional legal provision that BMA should have in its supervisory arsenal is ### cr0598 - 51. An additional legal provision that BMA should have in its supervisory arsenal is ### Direct intervention tools and remedial measures - An additional legal provision that Bermuda Monetary Authority (BMA) should have in its supervisory arsenal is direct intervention tools in the event of an impending bank failure. - Enactment of such legislation by the government would provide an important modern legal tool and would serve to safeguard the interests of depositors. - Recommendation under CP 22: Legislation providing BMA with more direct intervention tools in the event of an impending bank failure should be enacted by the Bermuda government. - Recommendation under CP 22: BMA also should consider communicating examination results and efforts to enforce compliance with the prudential manner standards to each Bank’s Board of Directors or its Audit Committee. ### Consolidated and cross-border supervision (CPs 23–25) - BMA practices consolidated supervision globally by: - undertaking on-site examination of the branches and subsidiaries of Bermudian banks located overseas; - engaging in on-going dialogues with host country supervisors on a range of issues related to Bermudian banks in the host country jurisdictions; - requiring most prudential returns to be prepared and reported on a consolidated basis (incorporating the activities of overseas locations); - having financial statements of its banks audited on a consolidated basis. - The dialogue with host country supervisors concerns: - specific offices of Bermudian banks; - the overall framework of supervision in which the banking group operates; - significant supervisory problems, if they occur. - While exchange of information can be governed by a memorandum of understanding, most dialogues are conducted informally. ### Basel Core Principles — Recommended Action Plan (selected CP recommendations) - CP 1.2 Independence - The MOF’s powers to give directions to the BMA and the budgetary approval procedure have the potential of intruding on the operational independence of the latter. - It is recommended that the law be reviewed to deal with the concern that the MOF’s policy direction and budgetary approval powers may intrude on the performance of BMA’s functions. - An in-depth analysis of the resources required to fulfill the supervisory objectives is recommended, together with an action plan describing implementation of the objectives. - CP 6 Capital adequacy and CP 12 Market risk - Envisage the replacement of the present proxy system for trading risk by a more appropriate capital requirement system. - CP 8 Loan Evaluation and Loan Loss Provisioning - BMA relies principally on external auditors to evaluate the quality of assets and the adequacy of provisioning. - BMA should consider undertaking its own independent evaluation of a bank’s internal loan rating system to gain insight on implementation of credit risk management policies and management’s ability to manage and monitor outstanding credit risk. - CP 10 Connected Lending - BMA should enhance its current policy addressing connected lending by ensuring that banks have satisfactory means to monitor and control these relationships. - BMA examiners should routinely review these relationships as part of the on-site examination program. - CP 11 Country Risk - BMA should establish a formal reporting methodology to facilitate the monitoring of country risk exposure in its banks. - CP 13 Other Risks - BMA should consider augmenting on-site examination techniques and practices designed to confirm the existence and application of an effective and comprehensive risk management process for interest rate risk and financial derivative instruments, and the adequacy of information technology systems. - Issuance of a policy on outsourcing of bank operations also should be considered. - CP 16 On-site and Off-site Supervision - The maintenance of adequate staff resources remains critical given the bank supervision mandate assigned to BMA. - Some further increase in the number of professionals and the breadth of their expertise should be considered. - A comprehensive examination manual reflecting bank supervision policy and examination procedure is warranted. - A more standardized regimen to document examination conclusions is warranted by adopting a more formalized system of working papers reflecting the work performed during on-site examinations. - CP 18 Off-site Supervision - BMA should consider enhancing the off-site supervision function by analyzing the data obtained in prudential returns more fully, in addition to utilizing the data for checking compliance with law and regulation. - The data can be used to compare performance of the banks in the system, analyze trends, and to create an early warning system. - CP 19 Validation of Supervisory Information - It would be useful for BMA to employ the provisions of Section 39 of BDCA more widely to increase synergies with external auditors. - BMA could request external auditors to perform additional work to complement BMA’s examination regimen in capital markets activities, information technology, or in other predetermined areas. - CP 22 Remedial Measures (see Direct intervention tools and remedial measures above) ### Authorities’ response - The BMA welcomes the assessors’ recognition of the quality of Bermuda’s banking legislation, the effectiveness of the supervisory framework, and the resulting high degree of compliance with the relevant international standards. - Bermuda’s provisions are kept under regular review to ensure they remain adequate. - BMA is engaged with the banking industry in a detailed review of aspects of the current approach as part of its preparations for implementing the Basel II capital accord framework on which international agreement has recently been reached. - BMA will be advancing particular proposals intended to deal with various of the matters identified by the assessors as warranting further enhancement. - The authorities reported that the practice of communicating exam findings and compliance actions to members of the banks’ boards of directors was adopted subsequent to the mission. ### FATF Recommendations — AML/CFT assessment overview - The report on the Observance of Standards and Codes for the FATF 40 Recommendations and 8 Special Recommendations was prepared by a team composed of IMF staff, an expert under IMF supervision, and an expert not under IMF supervision. - The assessment is based on information available at the time it was completed on March 28, 2003. ### Main findings — Criminalization, confiscation, and FIU - Criminalization of ML and FT - Bermuda has a generally adequate legal framework for addressing money laundering (ML) and the financing of terrorism (FT). - ML is criminalized on the basis of the Vienna Convention and the scope for predicate offenses extends to all indictable offenses. - FT is criminalized as an offense by way of an Order in Council extended by the UK to its Overseas Territories, giving effect to the provisions of UN Security Council Resolution 1373. - The Terrorism Order does not include provisions that deal with seizure and confiscation of property that is the proceeds of, or are to be used for terrorism, terrorist acts or acts by terrorist organizations. - At the time of the mission terrorism, per se, was not a criminal offense. Work was underway with a view to introducing legislation in this regard. - Subsequent to the mission a bill addressing a number of these deficiencies was laid before Parliament. - Confiscation of proceeds of crime or property used to finance terrorism - The legal framework provides for a range of enforcement measures such as confiscation and restraint orders as well as production and monitoring orders. - There is less emphasis on non-criminal measures, such as civil forfeiture and penalties. - Financial Investigation Unit (FIU) - The FIU is established as part of the Police and is a member of the Egmont Group. - Under the PCMLR reporting officers (“MLROs”) of Regulated Institutions are required to file SARs to a police officer and not necessarily a police officer of the FIU; Guidance Notes indicate SARs should be filed with the FIU. - The FIU is a small unit with a complement of four officers plus a constable on secondment from the United Kingdom. - Responsibilities include investigating money-laundering offenses, dealing with proceeds of crime matters, receiving, collating, analyzing, and investigating reports of suspicious activity, obtaining production and monitoring orders, and assisting with international FIU requests. - Since creation the unit has received in excess of ten thousand SARs and has developed nine money-laundering matters; most SARs relate to small-scale money transmission cases. - The high level of SARs has skewed focus toward collating and entering information into the data base; much time is spent in data entry activities and responding to reporting institutions. - Notwithstanding resource constraints, there have been nine investigations for money-laundering offenses and four confiscation orders. - As presently constituted, resources are inadequate to perform the roles of an intelligence and investigative unit. - The head of the unit tendered a model for an increase in staff; the model has been accepted and additional staff is forthcoming. - Members have received some training in financial investigation, but further training is desirable; consideration should be given to awareness raising programs for prosecutors and the judiciary and refresher training at the office of the DPP. ### Law enforcement, mutual legal assistance, and secrecy - The legal framework supports information sharing, extradition, and limited mutual legal assistance. - Mutual legal assistance is more limited to serving processes, calling witnesses, and obtaining evidence, and does not extend to facilitating enforcement measures such as search and seizure. - There is no general secrecy law in Bermuda; common law on customer confidentiality does not limit disclosure where relevant, such as pursuant to the public interest. - Regulations and guidance notes could be extended further to cover insurers presently excluded and professionals such as accountants and lawyers. - Principal areas of concern identified: - A more substantial CFT legislation is necessary for giving effect more fully to the requirements of international conventions and treaties. - Establishing the FIU as the competent authority and stating its powers more explicitly would strengthen its position and function. ### Preventive measures for financial institutions and supervision gaps - Infrastructure and guidance - Bermuda has a relatively well-developed infrastructure for AML/CFT implementation. - The National Anti-Money Laundering Committee (NAMLC) serves in an advisory capacity to the MOF and issued Guidance Notes on the Prevention of Money Laundering (Notes) in January 1998 applicable to most prudentially regulated institutions. - BMA has regulatory responsibility for licensed entities in banking, insurance, investment, and trust activity and plays a critical role in the registration of companies, undertaking due diligence on beneficial owners and, for licensed institutions, on directors and senior executives. - Extensive registration processes represent an important first line of defense. - BMA oversight and on-site surveillance - BMA undertakes oversight in relation to AML/CFT through on-site surveillance mechanisms; a number of staff have received specific training and BMA is represented on NAMLC. - Over the last two years, BMA’s on-site visits to banks and investment firms have covered AML/CFT risks. - BMA does not conduct on-site visits to insurance entities; such visits are undertaken by auditors on behalf of BMA. - The authority does not give guidance to auditors on AML/CFT risk aspects to be assessed during visits, and to date no assessments of insurance entities have addressed this risk. - The absence of oversight of insurance entities in respect of AML/CFT risks is considered a weakness in BMA’s surveillance activities. - Initial due diligence by BMA is comprehensive but needs to be supplemented by on-going regulatory initiatives to create an effective AML/CFT regime. - Introduced business and reliable introducers - Bermuda allows licensed institutions to accept business from “reliable introducers” defined in the Proceeds of Crime (Money Laundering) Regulations 1998 and Appendix A to the Notes. - With the exception of Guernsey, the Isle of Man, and Jersey, all countries on the list are FATF members. - Notes indicate institutions are not required to verify identity of customers where the relationship originates through a reliable introducer; introducer must complete an introduction letter confirming customer identity has been verified. - The fact that verification documents may not at all times be immediately available to a Bermuda institution represents a vulnerability in customer-due-diligence arrangements. - At the time of the mission an eligible introducer certificate in an Appendix to the Notes offered an option in which the introducer did not have to assert that identity verification documents are held and will be available on demand; subsequent to the mission the authorities amended the sample certificate to address this concern. - The introduced business regime is under review by the authorities. - Fit and proper requirements - Both the IBA and the BDCA include a definition of fit and proper which includes “a conviction or finding of guilt in respect of any criminal offence other than a minor traffic offence.” - The concept of fit and proper is not included in the IA, and the issue is therefore not addressed as clearly and unambiguously in that legislation. ### Other non-prudentially regulated sectors and legislative coverage - Money service business - Bermuda’s only money service business was run under an agency arrangement by a commercial bank; the agency arrangement was recently terminated and there is currently no significant activity in this area. - The agency was the principal source of the very large number of SARs reported to the FIU. - Trust and company service providers - Trust companies and persons undertaking trust business under the Trusts (Regulation of Trust Business) Act 2001 are captured by the definition of regulated institution under the PCMLR. - There are currently no regulatory arrangements in place for company service providers, nor are they captured by the PCMLR. - Investment Business (Exemption) Order - The PCMLR does not cover persons captured by the Investment Business (Exemption) Order; while acceptable for persons who do not act as intermediaries or deal directly with client assets, it is not clear all exempt persons fall into this category. - Recommendation: The PCMLR should be reviewed to ensure all persons who act as intermediaries or deal in client assets are captured by the legislation and BMA’s supervision in respect of AML/CFT. *Source: International Monetary Fund assessment team (Observance of Standards and Codes — Bermuda).* ### 76. Principal Areas of Concern : ### 76. Principal Areas of Concern ### Principal concerns - The lack of on-site surveillance of the insurance sector in respect of AML/CFT risk is unsatisfactory. - The regime for introduced business creates some potential vulnerability in the KYC arrangements. ### Planned updates and additional guidance - The planned update of the notes should provide further guidance on requirements set out in the law and regulations including: - details of transaction records (other than those necessary to identify the customer) that should be maintained by banks and deposit taking institutions for the purpose of assisting money laundering investigations; and - guidance in relation to shell companies, charities, and not-for profit organizations. ### Summary assessment against FATF Recommendations - Bermuda has a relatively comprehensive legal and institutional AML/CFT framework with good levels of compliance amongst regulated institutions. - The assessment makes a number of recommendations for further strengthening of the framework. - Table 1 and Table 2 in the assessment summarize actions required in relation to the FATF 40+8 Recommendations and other recommendations arising from AML/CFT Methodology criteria. ### Recommended Action Plan to Improve Compliance (selected actions by theme and FATF reference) - General framework of the Recommendations (FATF 1-3) - Authorities should incorporate more specific provisions for mutual legal assistance in enforcement matters, such as powers of search and seizure. - Scope of the criminal offense of money laundering (FATF 4-6) - The authorities may wish to consider whether to incorporate an objective test to the mens rea requirement for the money laundering offenses under Section 43(1) and 45(1) (and Section 44(1) offense). - Provisional measures and confiscation (FATF 7) - Consideration should be given to introducing provisions for civil forfeiture. - Consideration could be given to incorporating relevant provisions for rendering contracts void or unenforceable where parties knew or should have known authorities would be prejudiced in recovering financial claims under the AML/CFT regime. - General role of financial system in combating ML (FATF 8-9) - Revise the reference to insurers under Regulations 2(2)(a)(iv) of the PCMLR to clarify the category of insurers treated as regulated institutions and therefore subject to the PCMLR (and the Guidance Notes). - Review the PCMLR to ensure that all persons conducting investment business who act as intermediaries or deal in client assets are captured by the legislation and covered by the BMA’s supervision in respect of AML/CFT. - Customer identification and record-keeping rules (FATF 10-13) - The PCMLR should be amended to explicitly require that customer identification procedures be followed by regulated institutions. - Authorities should require financial institutions to: - identify their customers on the basis of official or other identifying document; - record their customers’ identity when establishing business relations; - identify and record the identity of occasional customers when performing transactions over a specified threshold; - renew identification when doubts appear as to identity during the business relationship. - Consider amending the framework for introduced business to require that documentation pertaining to customer identity be made available by the introducer to the financial institution without delay. - The BMA should impose a requirement for originator information to remain with transfers or related messages through the payment chain within the deadline established by the FATF. - Increased diligence of financial institutions (FATF 14-19) - Assign adequate resources to the intelligence/investigative units with clearly defined roles: a team for data entry/basic information gathering and a team of investigators for investigations and prosecutions. - Measures to cope with countries with insufficient AML measures (FATF 20-21) - Revise the Regulations to require licensees to report to the BMA instances where foreign branches or subsidiaries are unable to apply AML/CFT standards/requirements equivalent to those required in Bermuda. - Administrative Cooperation – Exchange of information relating to suspicious transactions (FATF 32) - Incorporate more specific provisions for mutual legal assistance in enforcement matters, such as powers of search and seizure. - Other forms of cooperation – Mutual assistance on money laundering (FATF 36-40) - Consider introducing express provisions for the ML offense as an extraditable offense. ### Special Recommendations on Terrorist Financing (8 Special recommendations) - II. Criminalizing the financing of terrorism and associated money laundering - Authorities should expedite initiatives to introduce provisions for terrorist offenses per se and related matters. - IV. Reporting suspicious transactions related to terrorism - Incorporate provisions pertaining to FT at appropriate aspects of the PCA, the PCMLR related laws and regulations and the NAMLC Guidance Notes. - Indicate that the FIU is the appropriate body for receiving SARs and dealing with financial information and intelligence in relation to ML and FT. - Extend the scope of Section 46(1) of the PCA to include FT and specify disclosure to the FIU. - Extend the scope of Section 47 of the PCA to include FT. - V. International Cooperation - Incorporate more specific provisions for mutual legal assistance in enforcement matters, such as powers of search and seizure. - Consider introducing express provisions for the FT offense as an extraditable offense. - VII. Wire transfers - The BMA should impose a requirement for originator information to remain with transfers or related messages through the payment chain within the deadline established by the FATF. - Introduce a requirement to give enhanced scrutiny to wire transfers that do not contain complete originator information within the deadline established by the FATF. - VIII. Non-profit organizations - The revised notes should provide guidance in relation to charities and not-for profit organizations. ### Other recommended actions (selected) - I—Criminalization of ML and FT - Consider whether civil sanctions for ML and FT are suitable for the jurisdiction. - II—Confiscation of proceeds of crime or property used to finance terrorism - Consider introducing provisions for civil forfeiture. - Extend the scope of Section 39(1) of the PCA to investigation of relevant offenses defined under the PCA, not merely drug trafficking offenses, to determine whether a person has benefited from criminal conduct and the whereabouts of proceeds. - FIU operations and capacity - Limit access to the data base to FIU personnel only. - Provide refresher training for FIU staff; consider awareness raising programs for prosecutors and the judiciary. - Investigators should have relevant accreditation; include specific training plans in the overall training program and budget. - Consider amending the PCA or related legislation to require FIs to send SARs directly to the FIU. - State more explicitly the powers of the FIU. - Allocate separate, properly secured offices for the FIU in an accessible location to the commercial centre. - Publish information relating to trends and typologies, while ensuring careful dissemination. - Law enforcement and prosecution - Enhance the FIU’s intelligence cell and build and utilize informants; increase staffing levels. - Make separate budgetary provisions for training. - Intensify Police awareness of the FIU to facilitate information exchange. - Clarify the roles of the DPP and the Attorney General in relation to confiscation, restraining and monitoring orders. - International cooperation - (Actions mirror the recommendations on mutual legal assistance, extradition and related powers.) ### Legal and institutional recommendations for financial institutions and supervisors - General framework - Consider extending the scope of the PCMLR and the NAMLC Guidance Notes beyond currently regulated financial institutions to cover company service providers and professionals (e.g., accountants and lawyers). - Put in place monitoring arrangements to ensure adequate monitoring of AML/CFT systems employed by these entities. - Customer identification - Amend wording in paragraphs 58 and 68 of the Notes to more clearly indicate expected practices. - Amend the notes to provide guidance on reverification, PEPs, non face-to-face customers, and correspondent banking relationships. - Ongoing monitoring - Require financial institutions to keep available for competent authorities findings made in respect of complex, unusual large transactions or unusual patterns of transactions that have no apparent or visible economic or lawful purpose. - Record keeping - Amend Guidance Notes to provide guidance on transaction records (other than those necessary to identify the customer) that should be maintained by deposit taking institutions. - Consider revising Regulation 5 (2) of the PCMLR to ensure that “business records” are understood to mean all necessary transaction records for FATF Recommendation 12. - Require banks and deposit taking institutions to: - maintain all necessary records concerning customer transactions and accounts for at least five years following completion of the transaction (or longer if requested by a competent authority upon proper authority), regardless of whether the account or business relationship is terminated; and - ensure these documents are available to a competent authority. - Internal controls, compliance and audit - Consider incorporating provisions for FT at appropriate instances and require Regulated Institutions to audit their compliance processes. - Consider incorporating provisions for screening of employees under the PCA or the PCMLR. - Provide more detailed guidance on the function of the MLRO in the revised Guidance Notes. - Integrity standards - Consider incorporating provisions prohibiting criminals from holding or controlling a significant investment, or holding a senior position, in a financial institution under the PCA or the PCMLR. - Consider incorporating the concept of fit and proper in the Insurance Act to reinforce vetting procedures and align with the BDCA and the IBA. - Enforcement powers and sanctions - Consider empowering the BMA and the FIU with appropriate powers for enforcement and sanction. - Co-operation between supervisors and other competent authorities - Review BMA resources to ensure adequacy for sustained on-site surveillance in respect of AML/CFT. - The BMA should provide specific directions to auditors of insurance entities indicating AML/CFT issues to be examined during on-site examinations. - Expedite the initiative to amend the IBA to provide for exchange of information between the BMA and foreign regulatory authorities for regulatory purposes. (The new IBA came into effect in January 2004.) ### Authorities’ response - Bermuda welcomes that the assessment confirmed robustness of measures to protect institutions and markets from money laundering and terrorist financing. - Bermuda is engaged in taking steps to introduce further enhancements reflecting revised FATF standards and additional Special Recommendations on anti-terrorist financing measures. - Necessary changes are being carried forward as a priority to continue meeting international standards and protect Bermuda's reputation as a high quality financial services centre. ### IAIS Insurance Core Principles — General and institutional setting - The IAIS assessment was performed as part of an OFC assessment for Bermuda to determine levels of observance of the IAIS Principles and suggest areas for further development. - IAIS Principles issued in October 2000 were geared towards direct insurance; Bermuda’s market—organized around captives, insurance of corporate accounts and reinsurance—makes the assessment more complex. - Bermudian legislation is identical for insurance and reinsurance companies. - Statistics on insurance companies (including reinsurance) are not wide-ranging and the BMA does not keep statistics on supervisory actions; the industry and insurance supervision division provided significant information orally. ### Overview of market structure and key statistics - The BMA became regulator and supervisor for all financial services in January 2002 (insurance supervision previously with the Ministry of Finance). - The insurance industry is the largest sector of Bermuda’s economy, followed by tourism. - Regulatory regime enacted in 1978 was supplemented in 1995 by introduction of four classes of general business companies (Classes 1 and 2 are captives, Class 4 contains the big commercial reinsurers, the residual being in Class 3). - Statistics that distinguish direct and assumed business relate to 29 percent of companies by number and 58 percent by net premiums (in 2001). - Market scale and activity: - 1,600 incorporated insurers (and reinsurers). - 4 banks for comparison. - Active companies having $172 billion in assets. - Writing over $48 billion in annual gross premiums in 2001. - Total capital and surplus is $66 billion. - Bermuda is the largest captive domicile in the world with approximately 900 active captives (but 1,200 registered) at December 31, 2002. - Total gross premiums of captives are $32.5 billion in 2001; premiums of $10.2 billion are attributable to professional insurers and reinsurers. ### General preconditions for effective insurance supervision - The Bermudian insurance industry is supported by a well developed infrastructure including management talent, presence of the Big 4 auditing firms, actuaries, accountants, captive insurance management firms, and legal professionals. - Given the small domestic labor pool, many industry professionals are recruited from abroad, usually staying in Bermuda from one to five years, though many key professionals stay significantly longer. - Since transfer to the BMA, the insurance division has acquired more flexibility in establishing staff salaries and its budget. *Source: IMF assessment of Bermuda (cr0598), "Principal Areas of Concern" and related sections.* ### 85. Bermuda is a country with a population of 60,000 and 1,600 incorporated insurance ### 85. Bermuda is a country with a population of 60,000 and 1,600 incorporated insurance companies ### Background and sector scale - Bermuda has a population of 60,000 and 1,600 incorporated insurance companies (1 company per 38 persons). - Gross insurance premiums amounted to twelve times the GDP in 2001. - At the time of the IMF mission, insurance supervisory staff consisted of 17 persons, 3 of whom were administrative. - The Bermuda Monetary Authority (BMA) relied on market discipline, financial ratios, and outsourcing to monitor the system, with a view that more effective outsourcing could be accomplished. ### Regulatory initiatives and staffing changes - Subsequent to the mission the BMA drafted a number of guidance notes and a supporting amendment to the insurance act. - The insurance division staffing increased to 25 persons directly involved in supervision, including recruitment of a consulting actuary and a regulatory consultant. - The supervisory team is supported by the legal enforcement and policy units. - The guidance notes aim to clarify roles of parties performing important functions in a regime with a high degree of outsourcing, including auditors, inspectors, loss reserve specialists, and principal representatives. - Bermuda will need to enact supporting legislation to give full effect to the Notes. ### Main findings of the IMF Assessment - The BMA conducts supervision in close cooperation with the insurance industry and professionals (actuaries and independent auditors), particularly during licensing. - Supervisory objectives include financial stability and soundness but do not explicitly state protection of the policyholder. - Staff resource limitations at the time of the mission constrained full utilization of BMA powers; staff resources have since increased. - The regulatory regime largely relies on co-supervision with the industry, annual verification by actuaries, and independent auditors. - The IMF recommended increasing BMA oversight by introducing additional verification processes on company-provided data, stricter asset and liability requirements, and more detailed information requirements from the industry. Key summarized findings: - Organization of an Insurance Supervisor: - Insurance supervision department has globally adequate powers. - Efforts underway to raise staff salaries to remain competitive. - Licensing and Changes in Control: - Adequate fit-and-proper vetting in close coordination with industry, which can create potential conflicts of interest. - Corporate Governance and Internal Controls: - Supervisor does not set corporate governance rules; relies on auditors’ review of internal controls without explicit terms of reference. - Prudential Rules: - Need for stricter prudential rules restricting assets (including derivatives) and liabilities (including deduction of reinsurance recoverables). - Capital adequacy and solvency appear more strictly regulated but are undermined by asset and liability deficiencies. - Market Conduct: - Framework aimed at large-scale international market does not differentiate domestic insurance or provide significant customer protection for the small proportion of insured individuals. - Monitoring, Inspection, and Sanctions: - Monitoring and inspection are employed on a very limited scale. - Sanction regime is generally sound but should be expanded to include recovery powers and greater flexibility to correct deficiencies. - Cross-Border Operations, Supervisory Coordination and Cooperation, and Confidentiality: - Legal regime for information sharing exists but is procedurally complex. - Confidentiality protections exist with strict criminal penalties but lack clarity. ### Recommended Action Plan (selected highlights, by IAIS Core Principles) - Organization of an Insurance Supervisor (CP 1) - The Minister should not have the possibility to give directions to the BMA. - BMA should continue to improve its IT system and recruit staff; develop knowledge of actuarial techniques in staff. - Licensing and Changes in Control (CPs 2–3) - Consider increasing quorum requirements of the IAC Admissions Committee. - Complete project to develop explicit fit-and-proper licensing criteria and define business plan requirements. - Make the definition of long-term business more precise. - Require formal notification to the BMA of significant changes in ownership of public companies. - Corporate Governance and Internal Controls (CPs 4–5) - Establish standards for corporate governance and make internal controls an explicit regulatory imposition. - Require more frequent and detailed flow of information between BMA and auditors; explicitly require auditors to perform specific checks (including review of internal controls) and submit detailed written reports. - Ensure companies have detailed internal procedures, clear accountabilities, and appropriate board composition balance. - Prudential Rules (CPs 6–10) - Establish provisions defining asset diversification by type, limit amounts held by asset class, and require appropriate matching of assets and liabilities. - Require reasonably secure assets to cover adequately calculated insurance reserves. - Make annual statutory filings more detailed: gross and net reserves per line of business; specific information on recoveries, loss expense reserves, and liquidation of reserves. - Explicitly state the accounting standard used in statutory filings. - Set a general rule limiting reinsurance recoverables (e.g., exclude not rated or below investment grade reinsurers). - Explicitly allow for a premium insufficiency reserve. - Clarify auditors’ responsibilities regarding data reliability and require a final auditor report stating checks made on general and actuarial data. - Require actuary’s report to include detailed indications on reserving methods and verifications. - Compulsory disclosure of off-balance sheet items is recommended. - Ensure appropriateness of reinsurance programs either by supervisor review or by outsourcing to auditors. - Require auditors to systematically write management letters. - Market Conduct (CP 11) - Address market conduct and customer-related issues for individual or small corporate Bermudian policyholders to ensure meaningful, understandable information, timely disclosure, and equitable complaint handling. - Increase policyholder awareness of the Consumer Affairs Bureau in new insurance policies. - Monitoring, Inspection, and Sanctions (CPs 12–14) - Require more detailed financial reporting distinguishing direct and assumed insurance, lines of business, and reinsurance contract types; expand loss reporting to include liquidation of provisions. - Require explicit written comments from the actuary and/or loss reserve specialist on reserving adequacy. - Regularly update financial returns; require consolidated and quarterly accounts where applicable (at least for Classes 3 and 4). - Class 1 companies should file financial statements with the Supervisor. - Grant BMA access to independent reviewers’ working papers and the capability to check them. - Increase the number of appointed inspectors for on-site inspections. - Strengthen sanction powers by considering: 1) Explicit powers for BMA to require changes in board composition and/or senior management or vest temporary control/management powers in an inspector to rectify hazardous conditions short of insolvency proceedings. 2) Legislation to allow the authority to require submission of a written recovery plan within a relatively short time. 3) Consideration of an expanded range of civil penalties for non-criminal legal requirements breaches. - Cross-Border Operations, Supervisory Coordination and Confidentiality (CPs 15–17) - Strengthen BMA’s regulatory ability over cross-border operations by amending statutory provisions relating to disclosure of information. - Consider “fast track provisions” conditioned on a memorandum of understanding to facilitate timely exchange of information with cooperating authorities. - Consider technical revision of sections of the Insurance Act and the BMA Act to enhance clarity and organization of confidentiality provisions. ### Authorities’ response (summary) - The authorities welcomed recognition of the strength and quality of Bermuda’s business-to-business insurance and reinsurance market and the effectiveness of Bermuda’s regulatory framework for reinsurance. - The authorities noted difficulties in applying IAIS Principles, developed for direct insurance, to a market organized around captives, corporate accounts, and reinsurance. - Since the IMF visit, IAIS Principles were overhauled, including reinsurance-specific standards; Bermuda participated actively in those reviews. - Bermuda moved to develop and enhance its regulatory regime in line with new international standards, with numerous changes introduced and more expected in early 2005. - Amendments to the Insurance Act 1978 were enacted to underpin BMA’s ability to issue guidance notes. - BMA actions taken include increases in qualified technical staff, development of a more sophisticated risk-based supervisory model, and enhancement of on-site supervisory elements. - The BMA Board reviewed IMF recommendations and identified appropriate amendments to the Insurance Act and regulatory framework; actions in train include staff increases, issuance of guidance notes, and enhanced risk-based supervision. *Source: IMF Assessment of Bermuda insurance sector (cr0598).* ### 90. An assessment of the IOSCO Objectives and Principles of Securities Regulation ### An assessment of the IOSCO Objectives and Principles of Securities Regulation (2002) ### Information and methodology used for the assessment - The assessment was undertaken in Bermuda as part of the Offshore Financial Centre assessment mission in March 2003. - Methodology: Bank/Fund Staff Guidance Note for the Assessment of the IOSCO Principles, September 2002. - Information sources reviewed and consulted: - Bermuda legislation, additional guidance and interpretation issued by the Bermuda Monetary Authority (BMA), and BSX rules and regulations. - Interviews with BMA staff and Ministry of Finance staff. - Review of documentation at the BMA. - Interviews with market participants and with the Bermuda Stock Exchange (BSX). ### Institutional and macroprudential setting; market structure - Market characteristics: - Small jurisdiction with a stock exchange, a limited number of full service brokerage firms, and a large and active investment fund and investment fund services sector. - Serves as a hub/offshore conduit for multinational financial services organizations and institutional clients from onshore and offshore jurisdictions. - Home to a large number of hedge funds, investment managers, portfolio managers, and internationally active fund administrators. - Exact market figures and structure: - 54 firms licensed to carry on business under the Investment Business Act (IBA). - As of end-December 2002, 1,426 collective investment schemes in Bermuda with $68 billion assets under management. - Firms relying on exemptions under the IBA are required to file an exemption notice with the BMA. - 393 listings on the BSX with total market capitalization, as of December 31, 2002, of $150 billion. - 359 domestic listed companies (including 263 listed investment funds) with total market capitalization of $1.3 billion. - 34 international companies listed on the BSX are cross-listed on onshore exchanges. - Bulk of trading volume takes place in the after hours crossing market; BSX hosts a pre-public offering mezzanine market with 13 companies traded on this market. - 16 trading members on the BSX—some remote access, non-Bermudian residents not licensed by the BMA. - BSX operates a clearing and settlement system and a depositary (BSD); all systems fully automated. - Market challenges noted: - Trading volume in domestic securities is thin. - Cross-listing of a major stock (Bank of Bermuda) on Nasdaq in 2001 reduced local liquidity. - Investment funds and insurance companies dominate the domestic market. - BSX faces competition as liquidity moves to larger exchanges in Europe and North America. ### Description of regulatory structure and practices - Legal and institutional framework: - Bermuda Monetary Authority Act (BMA Act) establishes the BMA and charges it with regulation of financial institutions including investment firms, collective investment schemes, and the BSX. - Under the IBA, BMA authority for licensing and supervision of market intermediaries. - Bermuda Monetary Authority (Collective Investment Scheme Classification) Regulations (CIS Regulations) give BMA authority for classification and supervision of collective investment schemes. - Companies are registered by the Registrar of Companies, located in the Ministry of Finance; BMA vets registration filings. - BSX is responsible under the Bermuda Stock Exchange Act for regulation of its listed companies, trading members, and for surveillance of trading on the exchange. - Recent and pending legislative developments: - CIS Regulations adopted in February 1998; collective investment schemes had a one-year transition period to comply. - IBA came into effect January 2000; investment businesses had six months to apply or file an exemption with the BMA. - Subsequent to inspection a new IBA has come into force (IBA/03 references in the assessment). - Authorities preparing a new CIS Act and amendments to CIS Regulations to grant BMA greater licensing and inspection authority, and to license and inspect mutual fund administrators where appropriate. ### General preconditions for effective securities regulation - IOSCO preconditions (as identified by IOSCO) include: - No unreasonable barriers to entry and exit from markets and products. - Adequate development of regulatory policy and assessment of its impact. - Appropriate legal, tax, and accounting frameworks. - Effective procedures for efficient resolution of securities market problems. - Sound macroeconomic policies affecting securities market operations. - Assessment conclusion: - These preconditions appear to be in place in Bermuda. ### Principle-by-principle assessment — key findings - Regulator (P 1–5) - BMA operates independently and is publicly accountable. - Authority over all issuers, trading systems, and clearing and settlement systems should be more clearly established in law. - Independence would be enhanced by limiting the Ministry of Finance’s (MOF) ability to give direction to the BMA and by greater budgetary autonomy. - Weaknesses in legal authority over investment firms and collective investment schemes (e.g., right to inspect without notice) were identified. - Clarification needed on ability to share information on individual clients. - Planned/legal changes (new IBA, CIS Act, amendments to CIS Regulations) expected to remedy identified problems. - Staffing: BMA can attract high quality staff but faces retention challenges affecting in-depth technical skills. - Cooperation and information sharing - BMA relies on authority under the BMAA to obtain and share information from investment firms. - In practice, BMA shares information with foreign counterparts including the United States, Canada, and the United Kingdom. - Formal agreements in place with counterparts in Jersey and the Isle of Man. - Issuers (P 14–16) - Regulation of public companies is split: - Listed companies regulated by BSX with prospectus and continuous disclosure obligations. - Unlisted companies subject to prospectus and some continuous disclosure requirements but not to regulatory oversight. - Recommendation: BMA should be given authority to regulate all public companies, including greater oversight of BSX listing function. - Need for new rules: insider reporting requirements, public disclosure of insider reports, takeover bid/change of control/related party transaction requirements. - BSX and BMA should coordinate on issuer regulation. - Collective investment schemes (P 17–20) - BMA has a comprehensive classification system for mutual funds and unit trusts but requires additional inspection authority. - Need for additional guidance notes/interpretation to increase transparency of licensing requirements. - Further rules needed for handling conflicts of interest, calculation and publication of net asset value, segregation of client assets, and securities lending. - BMA should have authority to override a suspension of redemptions. - Market intermediaries (P 21–24) - Licensing requirements and processes comprehensive. - Use of guidance notes and codes of conduct helpful. - BMA has a full inspection program but would benefit from enhanced depth of technical skills among inspection staff. - Market intermediaries subject to capital requirements; on-site prudential examinations are carried out solely by audit firms alongside annual and quarterly reporting to the BMA. - No on-site examinations by BMA staff—BMA could consider on-site inspections of investment firms’ financial conditions. - BMA should develop a contingency plan for potential failure of an intermediary. - Secondary markets (P 25–30) - BMA responsible for oversight of BSX in trading, clearing and settlement roles. - New IBA (IBA/03) will create a full licensing regime for trading systems and clearing and settlement systems and give BMA broader powers over the BSX; currently BSX not subject to licensing regime or inspections though subject to prudential requirements. - Supervision of BSX could be strengthened and BMA should develop staff skills in this area. - Need to develop insider trading and market manipulation rules for general application; government considering criminal-code provisions (subsequent report notes criminalization of insider trading and market manipulation after the mission). ### Comments and overall assessment - Overall assessment: - Securities regulatory system in Bermuda is largely sound. - BMA has established a credible licensing and supervision system for market intermediaries and collective investment schemes in a short period. - Legislative issues remain to provide BMA additional required authority; some addressed in new IBA, others to be addressed in upcoming CIS legislation. - Given market structure dominated by investment advisers and collective investment schemes, regulation of issuers and trading systems has been somewhat neglected. - Recommendation that BMA, after completing intermediary and collective investment reforms, focus on issuer regulation and closer supervision of BSX. - Staffing note: - BMA staff are qualified, professional, and committed. - Difficulty in retaining staff leads to lack of depth in technical skills, particularly in trading system oversight and inspections. ### Recommended Plan of Actions to Improve Implementation of the IOSCO Objectives and Principles of Securities Regulation - Principles Relating to the Regulator (P 1–5) - remove BMAA authority given to the MOF to direct BMA; - grant BMA budgetary autonomy; and - create a separate internal process for reporting under the employee code of conduct. - Principles for the Enforcement of Securities Regulation (P 8–10) - improve authority to inspect collective investment schemes; and - create authority to sanction issuers and trading systems. - Principles for Issuers (P 14–16) - grant BMA authority and responsibility for regulating all public issuers including review of prospectuses and on-going monitoring of continuous disclosure; - develop insider trade reporting requirements and system of transparency for insider activity; and - develop rules related to take-over bids, mergers, changes of control and related party transactions. - Principles for Collective Investment Schemes (P 17–20) - further develop staff technical skills for inspections; and - develop additional guidance for collective investment schemes with respect to licensing and conduct requirements, securities lending, segregation of assets, calculation and publication of net asset value, and redemptions. - Principles for Market Intermediaries (P 21–24) - grant BMA clearer inspection rights; - develop staff technical skills for inspections; - develop a contingency plan for failure of an intermediary; and - consider carrying out on-site prudential inspections of financial condition for firms handling client assets. - Principles for the Secondary Market (P 25–30) - increase oversight of clearing and settlement system; - develop staff skills with respect to clearing and settlement and trading systems; - fully dematerialize securities; - develop standards for performance and risk management of clearing and settlement systems; - criminalize insider trading and market manipulation; and - resolve cash account risk. ### Authorities’ response - The Bermuda Monetary Authority (BMA) response highlights: - Considerable efforts devoted to introducing appropriate regulation for the investment services sector and ensuring effective implementation and policing. - Recognition of progress made in a relatively short time implementing necessary provisions. - Enactment of the new Investment Business Act 2003 replacing the 1998 legislation to ensure a very high level of compliance with the IOSCO Principles for investment businesses. - Government expected to introduce a new Collective Investment Schemes Act into Parliament shortly to address outstanding weaknesses in mutual fund regulation and to introduce a specific licensing regime for fund administration business. - These provisions expected to go a long way toward addressing assessors’ recommendations; BMA will consider recommendations regarding additional regulation of issuers with the Ministry of Finance. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr0598.pdf_