## Detailed Assessment of Compliance of the Basel Core Principles (cr0599) ## Source details **Canonical URL:** [Detailed Assessment of Compliance of the Basel Core Principles (cr0599)](https://www.imf.org/-/media/files/publications/ofca/english/cr0599.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr0599.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr0599.pdf.json) --- ### Overview and methodology - Assessment completed as part of the IMF Offshore Financial Sector (OFC) report. - Team composition: IMF staff, consultants in banking and insurance supervision, a LEG consultant, a mission assistant, and an independent assessment expert for law enforcement sections. - Information sources: - Examination of legal framework; - Self-assessment of the Core Principles; - Extensive discussions with Bermuda Monetary Authority (BMA) staff, external auditors, and commercial bank management. - Compliance scale: compliant; largely compliant; materially non-compliant; non-compliant. Core Principles could be judged Not Applicable where structural/legal features make them inapplicable. ### Institutional and market structure — key facts and statistics - Licensed deposit-taking institutions: - Four licensed banks and one deposit company. - Two banks (Bank of Bermuda and Bank of N T Butterfield) conduct extensive specialized international operations; their combined consolidated deposits represent more than 90 percent of the aggregated deposits of the banking sector. - Financial sector scale and employment: - The broader financial intermediation sector represented 11.8 percent of GDP in 2002. - Total employment in the financial sector amounted to 2,885 in 2002. - Income and business mix: - Typically, some 50 to 60 percent of banks’ income is fee based. - For the largest bank, revenue generated by community banking was 18 percent in 2002. - Balance sheet and liquidity: - At end-September 2002, aggregate loans and advances represented 22.6 percent of total assets. - Interbank deposits comprise fully a third or more of bank assets. - Aggregate bank loans and advances were $3.992 million for the quarter ending September 30, 2002 (approximately 23 percent of total banking assets). - Licensing minima: - Minimum net assets of $10 million for a bank; - Minimum net assets of $1 million for a deposit company. ### Banking supervision — legal mandate, powers, and key assessments - Legal mandate and objectives: - BMA charged under Section 8 of BDCA with full responsibility for supervision of licensed institutions. - BMA established by Bermuda Monetary Authority Act 1969 (BMAA); Section 3 lists principal objects including supervising, regulating, and inspecting financial institutions; the Amendment Act of 2002 added assisting with detection and prevention of financial crime. - Assessment for Principle 1(1) — Clear responsibilities and objectives: Compliant. - Operational independence and resources (Principle 1(2)): - BMA has full licensing and intervention powers under BDCA; accountable to Minister of Finance (MOF); board of eleven members with appointment terms of not less than three years and not more than five years; three executive board members. - Banking & Trust Department head supported by a team of six. - Funding: supervisory fees and income from U.S.-dollar investments backing local currency issue; MOF must approve annual expenditure budget. - Human resources: self-standing rank and salary arrangements implemented early 2003; budget allows appointment of professional experts. - Assessment: Largely compliant. - Recommendations (selected): - Review legislation to address MOF powers to give directions and budgetary approval which could create perception of impaired independence. - Adopt a more clearly zero-based approach to estimating resource requirements. - Systematically use provision to appoint professional experts (or Section 39 BDCA powers) given limited local labor market. - Authorization, supervision, confidentiality and legal protection: - Second Schedule of BDCA specifies minimum licensing criteria; Section 11 restricts deposit-taking business to companies incorporated in Bermuda and licensed by BMA. - BDCA Sections 35–42 provide information and investigation powers; Section 42 additional investigative powers for serious concerns. - Section 52 prohibits disclosure of information; Sections 53–55 set gateways and protections for information sharing; Section 8(4) and BMAA Section 4B provide legal protection for BMA officers except for bad faith. - Assessment: Compliant. - Licensing process and practical requirements: - Applications require detailed ownership information, business plans, financial projections for at least three years, internal organization and control systems, fit-and-proper questionnaires. - Board-approved policies, consolidated supervision and minimum criteria enforced via Statement of Principles. - Assessment: Compliant. - Permissible activities and use of the word “bank”: - Banking license requires provision of minimum services including demand deposits in Bermuda dollars, payment/collection of cheques, savings accounts, overdrafts in Bermuda dollars, real property mortgage lending in Bermuda, foreign exchange services, card facilities. - Deposit companies prohibited from current accounts and must provide saving deposits repayable on notice and loans secured on Bermuda real property not less than 60 percent of balance sheet (Banks and Deposit Companies (Prescribed Minimum Percentage) Order 1999). - Assessment: Compliant. ### Selected prudential areas and CP assessments (banking) - Capital adequacy (Principle 6) - Definitions consistent with Basel Capital Accord; risk weightings used; consolidated minimum ratio 10 percent; solo minimum 8 percent. - BMA expects capital ratios maintained above trigger ratios; in practice international banks operate well in excess of required 10 percent; capital structure mainly Tier 1. - Historical proxy treatment for market risk (see CP 12); assessment: Largely compliant. - Recommendation: Replace proxy system for market/trading risk with a more appropriate capital treatment (move toward Basel II framework). - Credit policies and loan provisioning (Principles 7 and 8) - Periodic on-site evaluations of credit-risk management since 2000; on-site frequency: annually for smaller institutions, every three to five years for larger banks. - BMA collects quarterly information on loan classifications and reserves; external auditors review provisioning as part of year-end audits. - Assessment: Principle 7 — Compliant; Principle 8 — Largely compliant. - Recommendations: - Reduce principal reliance on external auditors for asset quality and provisioning by reviewing banks’ internal loan rating systems as part of examinations. - Large exposures and connected lending (Principles 9 and 10) - Section 38 requires reporting of exposures >= 10 percent of capital; prior consent required if exposure above 25 percent. - BMA issued policy on large exposures; quarterly reporting; external auditors may verify under Section 39. - Connected lending: policy requires arm’s-length treatment; BMA has deducted certain connected lending from Tier 1 capital. - Assessments: Principle 9 — Compliant; Principle 10 — Largely compliant. - Recommendation: BMA examiners should review connected lending during on-site examinations and expand reporting requirements. - Country and market risk (Principles 11 and 12) - Country risk framework limited owing to low exposures outside U.S.; no formal routine reporting but BMA infers exposures from large exposure policies. - Market risk: no specific market risk capital charge; proxy risk-weightings applied; one bank designated part of its portfolio as trading — proxy system inadequate. - Assessments: Principle 11 — Largely compliant; Principle 12 — Largely compliant. - Recommendation: Develop specific market risk capital charge and prepare for Basel II changes. - Other risks, liquidity, internal controls and audit (Principles 13 and 14) - Liquidity policy: maturity mismatch approach; banks must monitor liquidity daily and submit quarterly liquidity return; no lender of last resort or deposit insurance. - Internal control and audit: Statement of Principles and Relationship with Auditors policy; external auditors and internal audit roles defined; Board Audit Committees required to be non-executive. - Assessments: Principle 13 — Largely compliant; Principle 14 — Compliant. - Recommendations: Augment on-site techniques for interest rate risk, derivatives, IT risk; issue outsourcing policy and confirm ability to examine service providers. - Supervision (Principles 16–19, 20, 22, 24) - On-site: risk-focused on-site examinations; pre-exam planning using prudential returns; resource limitations noted (specialist skills). - Off-site: prudential returns due within 20 working days of quarter end; quarterly returns verified on sample basis; BMA underuses data analytics. - Validation: mixture of on-site work and external auditor verification under Section 39. - Consolidated supervision: required by Second Schedule; BMA measures capital consolidated; dialogue with host supervisors maintained. - Remedial measures: BDCA Sections 17 and 18 provide intervention powers and license revocation; law silent on measures to preserve going concern in impending failure. - Assessments: On-site (Principle 16) — Largely compliant; Off-site (Principle 18) — Largely compliant; Validation (Principle 19) — Largely compliant; Consolidated supervision (Principle 20/23) — Compliant; Remedial measures (Principle 22) — Largely compliant. - Recommendations: - Address staffing and specialist expertise gaps; develop comprehensive examination manual and standardized working papers. - Amend legislation to provide BMA with direct intervention tools to facilitate survival as a going concern and prevent creditor-driven liquidation during intervention. - Improve off-site analytics: trend analysis, peer comparisons, early warning system. ### Anti‑Money‑Laundering / Combating Financing of Terrorism (AML/CFT) - Legal framework and institutions: - Principal instruments: Proceeds of Crime Act 1997 (PCA); Proceeds of Crime (Money Laundering) Regulations 1998 (PCMLR); NAMLC Guidance Notes (1998, 2001); Terrorism (UN Measures) Order 2001; CJICBA 1994. - Financial Intelligence Unit (FIU) established 1998 within Commercial Crime Department; member of Egmont Group. - NAMLC in place since 1997; membership includes Financial Secretary (chair), Attorney General, BMA Chair and CEO, Commissioner of Police. - Scope of regulated institutions: - PCMLR applies to licensed deposit-takers, certain insurers, licensed investment providers, trading members of BSX, persons processing CIS subscriptions/redemptions, licensed trust service providers, the Credit Union, bureaux de change authorized by BMA, and Voluntary Regulated Institutions. - Exemptions include certain insurers, exempt investment service providers and certain professionals; NAMLC Guidance Notes mirror PCMLR scope. - Criminalization and predicate offenses: - ML offenses under PCA Sections 43–45; predicate offenses include drug trafficking and "relevant offence" (any indictable offense other than drug trafficking). - Terrorism Order criminalizes provision/receipt of funds for terrorism (Articles 3–6); terrorism per se not yet criminalized under penal law at time of mission; draft Anti-Terrorism (Financial and other Measures) Act 2004 laid in Parliament July 2004. - FIU capacity and SARs: - FIU has received in excess of ten thousand SARs and developed nine money laundering matters; understaffed with four full-time officers; business plan endorsed to increase police and civilian resources including a trained analyst. - No requirement for currency transaction reporting threshold; proposal discussed to add a currency declaration threshold of $10,000. - Confiscation and asset management: - PCA provides for restraint, charging orders and confiscation; Section 55A establishes Consolidated Assets Fund (CAF). - No civil forfeiture without conviction at time of assessment. - Key AML/CFT assessments and compliance ratings (selected): - Bermuda is compliant with Recommendation 1 and Recommendation 4. - Bermuda is largely compliant with Recommendations 5, 7, 8, 10, 11, 12, 14, 15, 16, 17, 18, 19, 20, 21, 26, 28, 29, 32 (some largely), 33, 34, 36, 40. - Materially non-compliant: Special Recommendation I (SR I) — UN International Convention for the Suppression of Terrorism (1999) not extended; SR II, SR III, SR IV, SR V — various gaps in terrorism-related offenses and measures; Recommendation 37 and 38 — deficiencies in mutual legal assistance provisions (search and seizure). - Selected AML/CFT recommendations (condensed): - Expedite introduction of terrorism offenses per se and related measures. - Consider incorporating an objective test for mens rea in specified PCA offenses. - Consider civil sanctions and civil forfeiture provisions. - Formalize FIU’s role in legislation (FIU as competent authority for receiving SARs), clarify dissemination powers and limit access to FIU database to FIU personnel only. - Provide FIU with adequate staffing, training budgets, secure premises, and improved procedures for production and monitoring orders (clarify roles of DPP and Attorney General). - Amend PCMLR to explicitly require customer identification procedures be followed; extend coverage to company service providers and certain professionals. - Require originator information to remain with wire transfers and implement FATF wire-transfer-related measures. ### AML/CFT: customer due diligence, record-keeping, and STRs - Customer identification: - PCMLR Regulation 4 requires identification for business relationships and one-off transactions >= $10,000; small one-off transactions < $10,000 exempt. - Guidance Notes specify acceptable identification documents and corporate verification steps; draft revised Guidance Notes address reverification and PEPs but not yet effective at mission time. - Recommendation: Amend PCMLR to explicitly require compliance with identification procedures and clarify introducer documentation handling. - Record keeping: - Regulation 5 requires retention of identification evidence and transaction records for minimum 5 years from account closure or transaction date; records retained pending police notice. - Recommendation: Revise Regulation 5(2) and Guidance Notes to expand transaction record guidance to meet FATF Recommendation 12. - Suspicious transaction reporting: - PCMLR Regulation 6 requires designation of MLROs and internal reporting procedures; PCMLR and PCA refer to reporting to police officer, yet Guidance Notes prescribe filing to FIU. - Section 46(1) PCA grants safe harbor for good-faith disclosures to police but applies to ML (drug context) and not FT; recommendation to extend protections to FT and specify FIU as recipient. - Assessment: STR framework largely in place, but legal clarifications needed to integrate FT and FIU role. ### FIU, law enforcement, mutual legal assistance and prosecutions - FIU operational limitations: - Understaffed (four full-time officers); overwhelmed by volume of SARs; largely reactive. - FIU has access to production and monitoring orders under PCA Sections 37 and 41; difficulty obtaining timely orders due to procedural uncertainty. - No prosecutions for ML or FT recorded at time of assessment. - Mutual legal assistance, extradition, and confiscation: - CJICBA provides for mutual legal assistance but lacks explicit search and seizure powers; extradition under Extradition Acts extends but few requests to date. - Recommendations: Introduce specific mutual assistance provisions including search and seizure powers; consider extradition provisions for ML/FT offenses. - Training and institutional capacity: - Ongoing need for refresher training for FIU staff, prosecutors and judiciary; budgeted training recommended. - Recommend formalizing FIU mandate and dissemination powers in primary AML/CFT legislation. ### Insurance sector — scope, scale, and supervisory assessment - Market scale and key statistics: - Population: 60,000. - Number of insurance (and reinsurance) companies: 1,600. - Actively writing companies had $172 billion in assets and wrote over $48 billion in annual gross premiums in 2001. - Bermuda largest captive domicile: approximately 940 active captives (1,200 registered) with total gross premiums of $32.5 billion at end-2002. - Insurance supervisory staff: 17 persons in March 2003 (3 administrative); increased to 25 in May 2004 (4 administrative). - Supervisory organization and legal framework: - Insurance supervision transferred to BMA on January 1, 2002; BMA Board expanded to 11 members including Supervisor of Insurance. - BMA powers include licensing, information and on-site inspection powers (Sections 29A, 29B, 30), intervention powers (Section 32), and petition for winding up (Section 35). - Assessment for CP1 (Organization of an Insurance Supervisor): Largely observed. - Key concerns: Ministerial direction power and inability to impose intermediate recovery measures short of court proceedings. - Insurance prudential findings (selected) - Principle 5 (Internal controls): materially non-observed. Recommendations: explicit internal controls as regulatory imposition; require auditors to forward detailed reports to BMA. - Principle 6 (Assets and liquidity): materially non-observed. Liquidity ratio: relevant assets must be no less than 75 percent of relevant liabilities; BMA can permit non-admitted assets case-by-case under Section 56. - Principle 7 (Liabilities and technical provisions): materially non-observed. Recommendations: expand disclosure of gross/net reserves per line, require detailed actuary/ loss reserve specialist reports. - Principle 8 (Capital adequacy and solvency): largely observed. Minimum capital and solvency margin rules by class; table of minima and premium tests applied (see statutory rules). - Principle 9–10 (Derivatives, off-balance sheet, reinsurance): materially non-observed. Recommendations: require disclosure and supervisory review of derivatives, enhance reassessment of reinsurance collectibility and program adequacy. - On-site inspection and enforcement: - Powers to appoint inspectors (Section 30) and to require information exist, but use is constrained by Statement of Principles intended to make 29A/29B infrequent and by limited staff/IT capacity. - Recommendation: increase frequency and depth of inspections, require inspectors’ working papers access, expand remedial powers short of court-initiated liquidation (e.g., require recovery plans, temporary management control). - Insurance sector recommended action highlights: - Clarify ministerial direction limits; improve IT and actuarial capacity; recruit staff to target 30 supervisors. - Strengthen internal controls, reporting, actuarial and loss reserve standards; enhance on-site inspection program and remedial toolset. - Enhance cross-border cooperation provisions and simplify confidentiality gateways. ### Securities and collective investment schemes (IOSCO assessment and IBA/IB/BSX findings) - Market size and structure: - Licensed investment firms: 54 firms under IBA. - Collective investment schemes: 1,426 classified schemes with $68 billion assets under management (end-2002). - BSX listings: 393 listings with total market capitalization $150 billion (359 domestic listed companies with total market capitalization $1.3 billion). - Regulatory framework and reforms: - BMA Act, IBA, and CIS Regulations form the legal basis; a new IBA came into effect January 2004; proposed CIS Act and CIS Regulations under preparation to strengthen fund supervision and grant BMA greater licensing/inspection authority. - Part IV of IBA/03 establishes framework for regulation of recognized exchanges and clearing houses (Assessment: Broadly implemented). - Key securities findings: - Regulator independence and resources: - BMA operates independently and is publicly accountable; ministerial direction and budget approval processes constrain perceived independence. - Staffing challenges: retention and insufficient in‑house technical depth for sophisticated market oversight. - Issuers and disclosure: - Issuer regulation split between BSX and Registrar of Companies; recommendation to grant BMA clearer authority over all public issuers and prospectus/continuous disclosure functions. - Insider trading and market manipulation criminalization incomplete at mission time; subsequent criminal code amendments reported by authorities. - Collective investment schemes: - Classification system comprehensive but inspection powers limited; recommended expansion of guidance on NAV, conflicts, segregation of assets, securities lending and authority to override redemption suspensions. - Market intermediaries: - Licensing and prudential minima present (principal $250,000; agent $100,000; advisors $12,000); quarterly and annual reporting; recommendation to strengthen inspection rights and contingency planning for intermediary failure. - BSX and clearing/settlement: - BSX operates trading, clearing and depositary (BSD) functions; settlement on T+3; deliveries not DvP in current structure; legal status of collateral in cash accounts unclear. - Recommended actions: grant BMA licensing/supervisory authority over exchanges/clearing systems (implemented in IBA amendments effective September 2004), strengthen clearing/settlement standards, resolve cash account legal uncertainties, and pursue full dematerialization. - IOSCO principle implementation summary (selected): - Implemented: 12 principles. - Broadly implemented: 11 principles. - Partly implemented: 7 principles. - Securities sector recommendations (condensed): - Remove ministerial powers that may be perceived to impair BMA independence and secure greater budgetary autonomy. - Grant BMA authority to inspect investment businesses, CIS and BSX, and to supervise issuers more directly. - Enhance laws and processes for insider trading, takeover/related-party transaction rules, and issuer protection. - Improve supervision and contingency planning for market intermediaries and clearing/settlement systems. ### Cross-cutting recommended action plan (selected priorities) - Banking supervision: - Amend BDCA/BMAA to clarify and strengthen BMA operational independence and budget autonomy. - Provide BMA explicit legislative intervention tools for imminent bank failures to preserve going-concern value. - Strengthen market-risk capital treatment and prepare for Basel II implementation. - Expand on-site exam techniques for market, interest rate, derivatives and IT risks; build specialist capacity or engage external experts. - Improve off-site analytics: trend analysis, peer group, early warning indicators. - AML/CFT: - Legislate terrorism offenses per se and extend PCA protections and reporting frameworks to TF. - Formalize FIU mandate and powers in legislation, enhance staffing, training and secure premises. - Amend PCMLR to mandate customer identification procedures, broaden coverage (company service providers, certain professionals) and require originator information on wire transfers per FATF deadlines. - Introduce provisions for civil forfeiture and strengthen mutual legal assistance including search and seizure powers. - Insurance: - Clarify BMA remedial powers (intermediate measures), expand actuarial and loss-reserving standards and reporting, require more granular statutory returns, and broaden on-site inspection frequency and depth. - Improve rules on admissible assets and require admissible assets to cover liabilities prudently. - Securities and CIS: - Strengthen BMA authority over exchanges, clearing/settlement and issuers; implement licensing and inspection powers for BSX and CIS administrators. - Enhance disclosure, NAV, segregation and securities lending standards; adopt contingency plans for intermediary failure and legal clarity for settlement collateral. - Cross-institutional: - Enhance information sharing MOUs, streamline confidentiality gateways, and ensure legal clarity to permit timely supervisory cooperation. *Source: cr0599 (International Monetary Fund).* ### 1. Detailed Assessment of Compliance of the Basel Core Principles....................................8 ### Detailed Assessment of Compliance of the Basel Core Principles ### Overview and Purpose - The assessment of Bermuda’s compliance with the Basel Core Principles for Effective Banking Supervision was completed as part of the IMF Offshore Financial Sector (OFC) report. - The assessment benchmarks the current state of banking supervision, recognizes extensive recent changes, and provides input for the development of an action plan to move toward full compliance with the Core Principles. - The assessment team included IMF staff, consultants in banking and insurance supervision, a LEG consultant, a mission assistant, and an independent assessment expert for law enforcement sections. ### Information and Methodology Used - The assessment was based on: - Examination of the legal framework, both generally and as specifically related to the financial sector; - The self-assessment of the Core Principles; and - Extensive discussions with Bermuda Monetary Authority (BMA) staff, external auditors, and commercial bank management. - Compliance judgments used a four-part qualitative scale: compliant; largely compliant; materially non-compliant; non-compliant. - A Core Principle may be considered not applicable where structural, legal, and institutional features render it inapplicable. ### Institutional and Market Structure — Key Facts - Licensed institutions: - Four licensed banks and one deposit company. - Two banks (Bank of Bermuda and Bank of N T Butterfield) conduct extensive specialized international operations through branches, subsidiaries, and affiliated companies; their combined consolidated deposits represent more than 90 percent of the aggregated deposits of the banking sector. - Financial sector size and employment: - The broader financial intermediation sector represented 11.8 percent of GDP in 2002. - Total employment in the financial sector amounted to 2,885 in 2002. - Income composition and business mix: - Typically, some 50 to 60 percent of banks’ income is fee based. - For the largest bank in Bermuda, revenue generated by community banking was limited to 18 percent in 2002. - Balance sheet and liquidity: - At end-September 2002, aggregate loans and advances represented 22.6 percent of total assets. - Interbank deposits comprise fully a third or more of bank assets. - Banks maintain highly liquid balance sheets with extensive portfolios of high quality marketable securities. - Market and regulatory features: - Deposit companies are specialized local mortgage lenders, not permitted to offer current accounts, and do not operate outside Bermuda. - Historically, banks had to be local institutions with at least 60 percent Bermudian ownership; this restriction has been lifted though legislation still licenses local companies rather than foreign branches. - The BMA’s supervision responsibilities have increased dramatically in recent years, with initiatives including a risk-focused on-site examination program and issuance of prudential policy statements under BDCA’s Second Schedule. ### General Preconditions and Observations - Banking activities and supervisory best practices evolve rapidly; assessment adhered to a common, agreed methodology to provide a reliable measure relative to internationally acknowledged minimum standards. - The assessment required judgment in applying Core Principles to Bermuda’s specific structural, legal, and institutional circumstances. ### Principle 1 — Objectives, Autonomy, Powers, and Resources - Principle summary: Effective banking supervision requires clear responsibilities and objectives, operational independence, adequate resources, a suitable legal framework including authorization and ongoing supervision, powers to address compliance and safety and soundness, legal protection for supervisors, and arrangements for information sharing and confidentiality. Findings (Principle 1(1) — Clear responsibilities and objectives) - Description: - The Bermuda Monetary Authority (BMA) is charged under Section 8 of the Banks & Deposit Companies Act 1999 (BDCA) with full responsibility for supervision of institutions licensed by it. - The BMA was established by the Bermuda Monetary Authority Act 1969 (BMAA); Section 3 of the BMAA lists principal objects including supervising, regulating, and inspecting financial institutions; promoting financial stability and soundness; supervising or approving issue of financial instruments; and advising the Government on banking, financial, and monetary matters. - The Amendment Act of 2002 added assisting with the detection and prevention of financial crime as an additional principal object. - The BDCA (1999) is the most recent update of the banking law; an external review (“the KPMG report” 2000) identified enhancements, most of which the BMA has addressed; the only outstanding matter is the recommended introduction of administrator provisions in insolvency law. - Section 8(2) of the BDCA directs the BMA to keep deposit-taking developments under review. - Section 8(4) instructs the BMA to address an annual report to the Minister of Finance (MOF) and to publish a report on its activities; the BMA issues an annual report and a quarterly “Quarterly Update”. - Assessment: Compliant Findings (Principle 1(2) — Operational independence and adequate resources) - Description: - BDCA grants the BMA full licensing and intervention powers. - The BMA is accountable to the MOF, which appoints the BMA’s Board of Directors, but the BMA is under the direction of its own Board. - Board composition and appointment terms: - The board is composed of eleven members. - Directors are appointed for a period of not less than three years and not more than five years. - Three of the eleven board members are executive board members: the chief-executive member (chairman) appointed by the MOF, the Superintendent of Banking, Trust and Investment (BTI), and the Supervisor of Insurance. - The BMA’s Board recommends and the MOF appoints the Superintendent and the Supervisor. - Banking & Trust Department: - Responsible for supervision of BDCA-licensed institutions, persons licensed under the Trusts (Regulation of Trust Business) Act, and Bermuda’s sole credit union. - A head, supported by a team of six, manages Banking and Trust supervision operations. - Supervisory processes: - Formal supervisory powers (licensing, intervention, revocation) are delegated by the Board to the Superintendent of BTI. - An internal Assessment & Licensing Committee, chaired by the Deputy Director, makes recommendations to the Superintendent. - Funding and budgeting: - The BMA is funded from supervisory fees and income from U.S.-dollar investments backing local currency issue; it generates positive net income each year, shared with Government’s Consolidated Fund per an agreed formula. - The BMAA makes the BMA accountable to the MOF, which must approve the annual expenditure budget. - Human resources: - The BMA developed self-standing rank and salary arrangements, implemented in early 2003, enhancing competitiveness for qualified staff. - The annual budget allows appointment of professional experts, training, and travel. - Assessment: Largely compliant - Comments and recommendations: - The MOF may give the BMA general policy directions not inconsistent with BDCA provisions and the BMA must give effect to such directions; although this power has never been exercised, its existence combined with mandatory budget approval may create the impression that independence is not fully established. - Recommendation: Legislation should be reviewed to address concerns that the MOF’s policy direction and budgetary approval powers may intrude on the BMA’s performance of functions. - Recommendation: Consider a more clearly zero-based approach in estimating ongoing resource requirements for banking supervision. - Recommendation: Given Bermuda’s limited number of banks and labor market constraints, the BMA may need to use systematically the legal provision to appoint professional experts (or employ powers of Section 39 of BDCA) to meet resource needs. - Notwithstanding the above, the mission considers that operational independence of the banking supervisor has not been fundamentally affected in practice. Findings (Principle 1(3) — Suitable legal framework for authorization and ongoing supervision) - Description: - Central to Bermuda’s legal framework for banking supervision is the BMA, established by the BMAA; the BDCA is the core banking law; amendments to the BDCA are being prepared to address additional areas of improvement identified by the BMA. ### Other Notable Operational Observations - Liquidity risk is closely monitored by the BMA given absence of a lender of last resort or deposit insurance mechanism. - Banks’ high profitability from non-traditional services underpins capital growth and enhances supervisory capital ratios. - Interest rates in Bermuda generally track U.S. interest rate changes due to the Bermuda dollar peg to the U.S. dollar. - Cost containment efforts include outsourcing operational or back office activities. *The assessment was completed as part of the IMF Offshore Financial Sector (OFC) report.* ### Section 8 of the BDCA charges the BMA with full responsibility for supervision of the ### Section 8 of the BDCA charges the BMA with full responsibility for supervision of the ### Legal framework and supervisory mandate - Section 8 of the BDCA charges the Bermuda Monetary Authority (BMA) with full responsibility for supervision of the institutions licensed by it. - The Second Schedule of the BDCA (BDA/BDCA) specifies minimum criteria for licensing institutions. - The BDCA was drafted in 1999 and was modeled quite closely on the U.K. Banking Act then in place. - Together, the BMAA and the BDCA, which includes the Second Schedule and the Statement of Principles, provide a comprehensive framework for licensing and ongoing supervision of persons conducting a deposit-taking business in or from within Bermuda. - Section 11 of the BDCA specifies that no person can carry on a deposit-taking business in or from within Bermuda unless that person is a company incorporated in Bermuda and is licensed by the BMA as a bank or a deposit company. - Assessment: Compliant. ### Supervisory powers, information, investigation, and sanctions - The BDCA (Sections 35–41) provides a range of information requirements as well as powers to obtain information and reports. - Section 42 of the BDCA provides additional powers to investigate where more serious concerns arise. - The BDCA creates a number of formal offenses and penalties for breaches and non-compliance. - The BDCA provides a range of regulatory tools enabling the BMA to intervene when particular concerns may arise. - The BDCA includes a range of information powers as well as a number of sanctions. - The effect of the BDCA is to provide the BMA with discretionary powers over when and how to intervene, having regard to its view of the seriousness of any concerns. - According to Section 17 of the BDCA, the BMA is authorized to restrict a license and impose such conditions as it thinks desirable for the protection of the institution’s depositors or potential depositors and for safeguarding its assets or otherwise; a number of possible conditions are listed in Section 17 (2) of the BDCA. - Assessment: Compliant. ### Licensing minimum criteria (Second Schedule) and practical licensing process - The BDCA (Second Schedule: Minimum Criteria for Licensing) stipulates the minimum prudential criteria to be met on an ongoing basis by licensed institutions: - fit-and-proper character of all appropriate parties; - “four-eyes principle;” - the presence of non-executive directors; - criteria for business to be conducted in a prudent manner (prudential safety and soundness standards); - consolidated supervision; - integrity and skill in the way operations are conducted; and - minimum net assets. - Section 14 (2) of the BDCA: the Second Schedule defines the minimum criteria for licensing. - Section 14 (3) of the BDCA: the Minister of Finance (MOF), acting on the advice of the BMA, may by order amend the Second Schedule by adding new criteria or by amending or deleting existing criteria. - Section 9 (1) of the BDCA: the BMA has published a Statement of Principles in accordance with which it is acting or proposing to act in interpreting the criteria specified in the Second Schedule. - Licensing application requirements and process: - Comprehensive questionnaires for senior executives, controllers, and directors must be addressed to the BMA. - Applications must include full details of ownership and related parties, detailed business plans, and financial projections for at least three years, details of internal organization and control systems. - Applications are analyzed initially by the Banking & Trust Department, which prepares a detailed assessment for the BMA’s Assessment & Licensing Committee (ALC); the ALC makes a recommendation to the Superintendent. - Minimum net asset requirements explicitly preserved: - minimum net assets of $10 million in the case of a bank; - minimum net assets of $1 million in the case of a deposit company. - The Statement of Principles and specific policy papers detail additional requirements on capital adequacy, liquidity, auditors, reporting accountants, internal control requirements, and consolidated supervision. - The Statement of Principles acknowledges the importance of non-executive directors and the need for audit committees. - The MOF must advise the BMA that he is satisfied that granting a license would be in accordance with the economic and financial policy of the government. - Even if criteria are met, the BMA retains a residual discretion not to grant a license, for example if it doubts ongoing compliance or perceives significant threats to depositors’ interests. ### Permissible activities and use of the word “bank” - Section 14 (5) of the BDCA: the BMA may grant bank licenses and deposit company licenses. - A banking license requires the institution to provide a number of minimum services to the public in Bermuda: - demand deposits in Bermuda dollars; - payment and collection of cheques, drafts and orders; - savings or other similar accounts; - overdrafts and other loan facilities in Bermuda dollars; - loans secured by mortgage of real property in Bermuda; - foreign exchange services; and - credit or debit card facilities. - A licensed deposit company is not authorized to accept deposits on current accounts or on terms that require repayment on demand; a deposit company must provide minimum services in Bermuda including: - saving deposits in Bermuda dollars on terms which require repayment on notice; and - loans in Bermuda dollars secured on the mortgage of real property not less than 60 percent of the balance sheet [Section 3 of “The Banks and Deposit Companies (Prescribed Minimum Percentage) Order 1999”]. - Section 58 of the BDCA: no person carrying on business in Bermuda shall use any name which indicates that he is a bank or banker or is carrying on deposit-taking business authorized under a banking license unless it is a licensed institution. - In practice, the BMA liaises closely with the Registrar of Companies where concerns arise over company names or incorporation proposals. - Assessment: Compliant. ### Market structure and cross-border licensing practice - Bermuda licensing framework provides for two types of licenses—full banks and deposit companies. - Deposit companies are specialized local mortgage lenders, not permitted to offer current accounts, and do not operate outside of Bermuda. - Current counts reported: four licensed banks and one deposit company. - Bermuda has not so far licensed any banks belonging to foreign banking groups. - The BMA liaises closely with overseas supervisors where ownership connections exist, and would not contemplate licensing a subsidiary or affiliate of an overseas bank without prior consent from the home supervisor having been obtained. ### Confidentiality, information sharing, and legal protection for supervisors - Section 52 of the BDCA prohibits the disclosure of information received under or for the purposes of the BDCA. - Sections 53 and 54 identify the “gateways” through which protected information can be passed on, including to assist an overseas supervisory authority; Section 54 (3) requires the BMA to be satisfied that the receiving authority is subject to restrictions on further disclosure at least equivalent to those in Sections 52 and 53. - Section 55 confirms that the Section 52 disclosure prohibition also applies to information supplied to the BMA by a relevant overseas authority. - Section 8(4) of the BDCA provides legal protection for the BMA, its officers, and servants against damages for acts or omissions in discharge or purported discharge of regulatory functions, unless bad faith can be shown. - Section 4B of the BMA Act provides a corresponding immunity from action, suit, or other proceeding. - The BMA’s budget provides for means to protect its staff against the costs of defending their actions while discharging their duties. - Assessment: Compliant. *Source: BDCA and BMA materials as described in the content unit.* ### Section 18 (d) of the BDCA authorizes the BMA to revoke the license if it has been provided ### Section 18 (d) of the BDCA authorizes the BMA to revoke the license if it has been provided ### License revocation for inaccurate information - Section 18 (d) of the BDCA authorizes the Bermuda Monetary Authority (BMA) to revoke a license if it has been provided with false, misleading or inaccurate information in connection with an application for a license. - The simple provision of inaccurate information renders the power exercisable. - The Statement of Principles (4.6) indicates the BMA would not consider exercising the power unless: - the inaccuracy was material, or - the inaccuracy was symptomatic of wider prudential concerns. - Assessment: Compliant ### Principle 4 — Ownership: controls over bank ownership transfers - Sections 25 through 29 of the BDCA provide controls over ownership. - Anyone seeking to obtain an ownership interest of 10 percent or more of a licensed institution must serve written notice on the BMA. - The BMA has three months to decide whether to object to the proposed acquisition. - The BMA can: - object to an existing shareholder controller; - place restrictions on shares (e.g., to prevent the exercise of voting rights) to address an unsatisfactory controller; - apply to the Courts for a sale of specified shares to be ordered. - Review process: - Banking & Trust Department reviews proposed new controller cases, with assistance from Authorization & Compliance Department as appropriate. - Cases are brought to the Assessment and Licensing Committee, except where no effective change in ultimate beneficial ownership occurs (e.g., purely technical internal group restructuring). - The Statement of Principles published pursuant to Section 9 describes detailed handling of shareholder controller issues. - Assessment: Compliant ### Principle 5 — Investment Criteria: approvals for acquisitions, branches, and subsidiaries - The BMA (Financial Institutions) (Control) Regulations 1994, Regulation 3 requires BMA’s prior written consent for proposals to establish new branches or subsidiaries or to open representative offices. - Banks are expected to keep the BMA closely informed of developments likely to have a material impact on their business, including new acquisitions. - All material proposed changes in business are reviewed for: - appropriateness; - capital impact; - capacity of the institution to manage and control the operation effectively. - BMA intends to study the process for requiring formal written notice and approvals to amend the current overly administrative approach. - Assessment: Compliant ### Principle 6 — Capital Adequacy: requirements and framework - Section 14 (2) and the Second Schedule require licensed banks and deposit companies to maintain capital commensurate with the nature and scale of operations and sufficient to safeguard depositors, having regard to: - the risks inherent to those operations; - the risks inherent in any operations of related entities capable of affecting the institutions; - any other factors the BMA deems relevant. - The Statement of Principles and the BMA policy paper “The Measurement of Capital” specify the approach and framework. - Reporting and oversight: - Quarterly prudential returns report on implementation of the capital requirement. - Under Section 39, external auditors have been asked to report on these prudential returns. - Capital definitions and ratios: - Definition of capital is consistent with the Basel Capital Accord. - Risk weightings are assigned to on-balance sheet and off-balance sheet accounts. - Banks are required to maintain a minimum ratio of 10 percent on a consolidated basis. - At the solo level, the standard 8 percent Basel ratio applies. - Market risk treatment: - When the new capital requirement was introduced in November 1999, BMA did not develop a specific market risk calculation due to limited own account trading activity. - Instead, increased individual risk asset weightings act as proxies for market risk, specifically 10 percent and 20 percent weightings attached to holdings of Zone A and Zone B government securities denominated and funded in local currencies. - Trigger and target ratios: - BMA expects institutions to maintain capital ratios at a margin above the minimum “trigger ratios”; the higher ratio is the “target ratio.” - Non-compliance with the trigger ratio constitutes an infringement of minimum licensing criteria and must be met on a permanent basis. - Practical situation: - In practice all international banks are operating at capital adequacy levels well in excess of the required 10 percent; no target ratios have been fixed to date. - Capital structure is composed almost entirely of Tier 1 components. - Future plans: - BMA intends to move to a more differentiated approach reflecting individual institutions’ risk profiles and management capacity, but given the small sector size (four banks and one deposit taking institution) and high capital levels, this has not been a priority. - Assessment: Largely compliant - Comment: The absence of a specific market risk related capital charge is also noted under CP 12. ### Principle 7 — Credit Policies: assessment and on-site evaluations - Legal authority derived from Section 9 of the BDCA; Statement of Principles interprets prudential standards in the Second Schedule. - Under the Second Schedule, banks must conduct business in a “prudent manner”; credit risk management policy is among the criteria considered. - BMA activities: - Periodic on-site evaluations of credit-risk management began in 2000. - Evaluations include appraisals of policy framework, loan approval and administration procedures, borrower analysis, and internal credit risk grading systems. - Evaluation cycles determined by size, complexity, and soundness of each institution’s credit portfolio and policies. - External auditors are expected to notify BMA of material deficiencies, though such assessments are not auditors’ primary function. - BMA holds semi-annual meetings with senior management to discuss weaknesses and corrective measures. - Assessment: Compliant - Comment: Aggregate bank loans and advances were $3.992 million for the quarter ending September 30, 2002, approximately 23 percent of total banking assets; majority of assets held for liquidity (deposits with banks and marketable securities). Credit risk assessment program and source information are sound. ### Principle 8 — Loan Evaluation and Loan-Loss Provisioning - Second Schedule requires banks to maintain adequate provision for diminution in asset values, including bad and doubtful debts, recognized in accordance with generally accepted accounting principles; provisions must account for off-balance sheet exposures. - Monitoring and review: - BMA collects quarterly information on loan classifications and reserves, including on- and off-balance sheet exposures, with reconciliation of loan loss reserves and loan distribution by classification. - Classification and provisioning reviewed with senior management at semi-annual prudential meetings. - External auditors review provisioning policies and levels as part of year-end audits; some testing of internal asset classifications is performed. - Cyclical on-site credit reviews sample credits for adherence to policy and completeness of credit files. - On-site review frequency: - Annually for smaller institutions; - Every three to five years for larger banks; - More frequent if credit quality deteriorates. - Assessment: Largely compliant - Comments: - BMA relies heavily on external auditors to determine level and adequacy of loan loss reserves. - Reserves accounted for in accordance with generally accepted accounting principles. - Recommendation: BMA should consider reviewing the adequacy of a bank’s internal loan rating system as part of evaluations to better assess underwriting quality, policy adherence, and monitoring capabilities. ### Principle 9 — Large Exposure Limits - Section 38 requires banks to report each credit risk exposure that represents 10 percent or more of its capital, and to seek prior consent from BMA if proposing to raise exposure above 25 percent. - Reporting requirements cover direct, indirect, and off-balance sheet credit risk exposures; restrictions apply to groups of connected borrowers. - Implementation: - BMA issued a policy notice on reporting and control of large exposures, reminding banks to manage concentrations by industry, sector, or country and to have internal systems to monitor and control these risks. - Large exposures are reported quarterly as part of prudential returns. - Under Section 39, Large Exposure Reports are subject to random audit by external auditors at BMA’s request; auditors would determine accuracy of returns from banks’ management information systems. - Footnote: Subsequent to the mission a large exposure report has been subject to auditor certification. - Each bank must submit a Board-approved policy addressing approach and appetite for large credit risk exposures; adherence is reviewed during on-site credit examinations. - Assessment: Compliant ### Principle 10 — Connected Lending - Paragraph 2.5 of the Statement of Principles interprets “prudent manner” to include lending activities; BMA has broad powers under Section 9. - Controls: - Policy on Reporting and Control of Large Exposures directs lending institutions to negotiate connected lending on an arm’s-length basis. - BMA has deducted certain types of connected lending (principally capital investment credit) from Tier 1 capital for capital adequacy purposes. - External auditors review connected lending relationships. - Effectiveness and gaps: - These supervisory tools have apparently been successful in controlling abusive insider lending. - Assessment: Largely compliant - Comment: On-site credit risk examinations did not review connected lending relationships to ensure arm’s-length terms; such lending should receive special attention during on-site examinations. BMA should consider expanding policy statements and prudential requirements to require more detailed reporting of connected lending. ### Principle 11 — Country Risk - BMA’s policy framework has virtually no specific reference to country risk, reflecting low levels of country risk in Bermuda’s banks (most exposure to the United States; low exposure to Western Europe and elsewhere). - There is no formal reporting methodology to BMA for country risk and it has not been subject to systematic review during on-site examinations; one off-site review has occurred. - A bank’s country risk approach is inferred from Board-approved Large Exposures policies submitted to BMA; BMA knows banks’ country risk exposures. - Assessment: Largely compliant - Comment: BMA is studying ways to categorize country risk and does not plan to require reporting until analysis is completed. Footnote: Subsequent to the mission the authorities reported they are developing an additional element of the bank’s standard reporting package to routinely capture country risk. ### Principle 12 — Market Risks - BMA’s minimum licensing criteria require business to be conducted in a “prudent manner,” considering management, governance, strategy, planning, accounting, lending and interest rate matching policies. - BMA’s Auditors and Reporting Accountants policy (Annex C) requires banks’ control systems to identify, measure, monitor and control liquidity risk, foreign exchange risk and other market risks, and to provide relevant and timely management information. - Reviews: - BMA reviews market risks and systems to monitor/control them in regular assessments of banks’ systems and internal control environment. - Capital treatment: - BMA has not amended capital adequacy rules to include a specific market risk charge (apart from open foreign exchange positions, which are risk-weighted within the credit risk framework). - Historical rationale: Bermudian banks have had limited trading activity, so limited market risk. - As an interim measure, BMA applied additional weightings within the credit risk framework as proxies for market risk (see CP 6). - Assessment: Largely compliant - Comments and recommendations: - One bank has designated a material portion of its marketable portfolio as a trading portfolio; the proxy system must be replaced by a more appropriate capital charge for market risk. - BMA is advised to continue monitoring market risk and prepare for changes required by the introduction of the Basel II Accord. - Possible significant developments in market risk should prompt BMA to consider alternative approaches for capital treatment. *Source: IMF assessment of Bermuda’s regulatory and supervisory framework under the BDCA (selected sections).* ### introduction of an arbitrary extra capital requirement; the limitation of the volume of trading ### introduction of an arbitrary extra capital requirement; the limitation of the volume of trading ### Principle 13. Other Risks — Description - The Second Schedule under BDCA requires banks to maintain adequate liquidity, measuring their liquid assets against actual and contingent liabilities. - The Statement of Principles outlines factors to be considered in maintaining adequate liquidity, including: - quality of management, - adequacy of internal control systems, - market position, - diversity of funding sources, - matching policies, - the institution’s borrowing capacity. - BMA has issued a policy statement on prudential liquidity. - Banks are expected to place assets and liabilities in time bands by remaining time to maturity; a maturity mismatch approach is adopted: - banks’ excess liabilities over assets in specified time bands are measured as a percentage of total deposit liabilities, - mismatches are monitored for all currencies, - no common standard or limit is applied to all institutions, - individual mismatch guidelines have been set for each institution. - Banks must monitor liquidity daily and submit a liquidity return to BMA on a quarterly basis. - As a memorandum item, details of banks’ net-open positions in foreign currencies are reported on the liquidity return. - Under Section 39 of BDCA, external auditors can verify the accuracy of the liquidity report at BMA’s discretion, or review processes for managing other types of risk. - Audited financial statements contain tables providing: - interest rate sensitivity gap analysis, - foreign exchange and interest rate contracts and currency exposure, - other information on derivative financial instruments. - BMA examiners: - review bank policy statements on risks inherent in these activities, - discuss management of these risks at prudential meetings, - perform on-site examination work principally of internal control processes. - During on-site examinations, BMA examiners review and assess the adequacy of internal controls and operational risk in targeted aspects of a bank’s operations. - BMA relies on the work of internal and external auditors and its prudential meetings with senior management. - BMA has authority, in accordance with the Second Schedule, to require a bank to hold capital against any risks. - The Statement of Principles indicates BMA will measure capital against: - foreign exchange risk, - interest rate and position risk, - liquidity risk. - Business practice: some capital markets activities outsource operational and back office work to third party service providers; BMA has given non-objection on a case-by-case basis to outsourcing. - Subsequent to the mission the authorities developed a policy on outsourcing and report that the policy has been implemented. ### Principle 13. Other Risks — Assessment and Comments - Assessment: Largely compliant - Comments: - Banks in Bermuda are primarily deposit gatherers with relatively low positions in foreign exchange and low levels of interest rate risk, though these risks exist. - BMA reviews bank limits and internal control processes during on-site examinations but should consider augmenting on-site examination techniques and practices pertaining to interest rate and market risks. - Examination processes should confirm existence and application of an effective and comprehensive risk management process for interest rate risk and financial derivative instruments. - Example recommendation: review banks’ stress testing capabilities and techniques to provide BMA with a more robust understanding of banks’ management of these activities. - BMA should consider issuing a policy covering standards banks should consider in outsourcing operations and reiterate that BMA may conduct on-site examinations of the service provider in areas pertaining to servicing of BMA’s constituent financial institutions. ### Principle 14. Internal Control and Audit — Description - The Second Schedule under BDCA stipulates: “an institution shall not be regarded as conducting its business in a prudent manner unless it makes or, as the case may be, will maintain adequate accounting and other records of its business and adequate systems of control of its business and records.” - Paragraph 4(7) and 4(8) of the Statement of Principles require records and systems enabling the institution to fulfill prudent conduct criteria and identify threats to depositors’ interests. - BMA issued a policy statement on the Relationship with Auditors and Reporting Accountants of Banks and Deposit Companies that stipulates BMA’s requirements for adequate accounting, records, and internal control systems covering: - accounting and other records, - management information, - internal control systems, - the control environment and corporate governance. - Expected features of control systems include: - organizational structure, - monitoring procedures, - segregation of duties, - authorization and approval, - completeness and accuracy, - safeguarding of assets. - BMA reviews internal control systems as part of on-site examinations: - examiners test efficacy and adherence to policy and procedure. - External auditors, in their annual audit and certification, form an opinion on whether the internal control system is adequate for the nature and scale of the bank’s business. - External auditors issue management letters describing weaknesses to be corrected; BMA receives a copy and discusses issues at trilateral meetings. - Internal audit: - reviewed for adequacy and efficiency, including unfettered access to bank information and independence and reporting lines, - BMA seeks to ensure issues raised by internal auditors are resolved by bank management. - BMA has emphasized strengthening internal audit capability over the past two years using moral suasion and requiring enhanced corporate governance via Board of Director Audit Committees: - Committees must be comprised solely of non-executive directors, - have formal terms of reference, - meet frequently with the internal auditor and, at least annually, with the external auditor, - have explicit authority to investigate matters within terms of reference and have access to information. - The supervisory review process includes trilateral meetings with bank management and external auditors to review audit issues and management initiatives to resolve them. ### Principle 14. Internal Control and Audit — Assessment - Assessment: Compliant ### Principle 15. Money Laundering — Description - Bermuda’s anti-money laundering framework comprises: - Proceeds of Crime Act 1997 (PCA), - Proceeds of Crime (Money Laundering) Regulations 1998 (PCMLR). - Under Section 49 (1)(b) of the PCA, the National Anti-Money Laundering Committee (NAMLC) has issued Guidance Notes (GN) on the Prevention of Money Laundering. - The GN are based on similar GN issued by other jurisdictions. - The GN are not mandatory but represent good practice. - The trial court may take account of any relevant guidance issued by the NAMLC. - BMA acknowledges that primary consequences of significant failure to meet these GN will be legal but informs NAMLC that BMA is entitled to take, and will take, such failure into consideration in the exercise of its supervision, regulation, and inspection of financial institutions. *Source: cr0599 — introduction of an arbitrary extra capital requirement; the limitation of the volume of trading (IMF).* ### Part II of the GN is addressed to regulated institutions generally, whereas Part III sets out ### cr0599 - Part II of the GN is addressed to regulated institutions generally, whereas Part III sets out ### Anti‑Money‑Laundering Vigilance and Procedures - Regulated institutions must perform a duty of vigilance for the purpose of money laundering by having in place procedures covering: - verification; - recognition and reporting of suspicious transactions; - keeping of records; and - training. - For the past 2 years, banks’ adherence to the requirements under the PCMLR (and the related detailed GN) has been specifically reviewed by BMA in each on‑site inspection visit. - Prior to on‑site examinations, each bank must complete and submit to BMA Form POC (Proceeds of Crime) and attach a copy of its anti‑money laundering procedures for BMA review. - BMA tests compliance through interviews with relevant staff and sample testing of client files. - Sections 44 (3) and 46 (1) of the POC provide a safe harbor from any duty of confidentiality for bona fide disclosures of information. - Assessment recorded in the content: Compliant. ### On‑Site Supervision (Principle 16) - Legal basis: Sections 39, 40, and 41 of BDCA permit collection of supervisory information, consolidated information from parent/subsidiary/related companies, and right of entry for on‑site examinations. - BMA conducts risk‑focused on‑site examinations with pre‑examination planning based on prudential returns, meetings with senior management, and internal/external audits. - On‑site examinations are used to: - check compliance with law; - verify risk management and internal control systems; - determine reliability of information provided to management; - evaluate condition and prospects of a bank. - Examinations have focused on credit and treasury functions, anti‑money laundering policies, and internal control systems; perceived high‑risk areas are examined more frequently; ad hoc on‑site examinations may occur. - External auditors assist to determine reliability of prudential and statistical data; BMA expects external auditors to review internal control systems as part of annual audits. - Assessment recorded in the content: Largely compliant. - Comments and identified weaknesses: - Resource deficit: existing BMA staff complement may limit ability to devote time to some risk areas. - Areas needing greater on‑site attention: interest‑rate risk, derivative instruments and hedging activities, and information technology. - Credit risk management in the larger institutions is examined once every three to five years for the two larger institutions. - Recommendations: bring in outside expertise in specialized areas; develop a comprehensive manual covering on‑site supervision policy and examination procedure; adopt a more standardized regimen to document examination conclusions and working papers; exploit prudential returns data more fully (trend analysis, peer comparisons). ### Regular Contact with Bank Management (Principle 17) - Legal basis: Sections 39, 40, and 41 of BDCA enable meetings with management at all organizational levels. - BMA holds semi‑annual prudential meetings with senior bank management for all four licensed banks and an annual meeting to review strategic plans and budgets. - Meetings also occur at the conclusion of on‑site examinations; trilateral meetings with bank management and external auditors are held annually. - Senior management must inform BMA of significant business changes, changes in senior management and Board composition, and material adverse developments. - Assessment recorded in the content: Compliant. ### Off‑Site Supervision (Principle 18) - Prudential returns require on‑ and off‑balance sheet data on assets and liabilities, profitability, capital adequacy, liquidity, large exposures, loan loss provisioning, foreign currency positions, loan classifications, and industry segmentation. - Returns must be submitted to BMA within 20 working days of each quarter end and signed by a sufficiently senior person. - Capital adequacy and large exposures are reported both consolidated and unconsolidated; liquidity and foreign exchange exposure returns are reported unconsolidated. - BMA relies on local supervisors for liquidity reporting at overseas offices and exchanges information with those authorities. - Quarterly returns are verified on a sample basis by external auditors at BMA direction; during 2002 external auditors were directed to review the Capital Adequacy Return for accuracy. - Inaccurate returns must be re‑submitted if errors are significant; materially inaccurate returns or failure to submit on time could lead to money penalties by a court of law. - Assessment recorded in the content: Largely compliant. - Comments and recommended improvements: - BMA does not fully exploit data collected for analytical purposes; limited ratio and trend analysis currently performed. - Inadequate in‑house information technology capabilities and limited resources impede a comprehensive, integrated off‑site supervision function. - BMA could create a peer group for its two larger banks and develop a rudimentary early warning system and internal ratings to inform on‑site targeting. ### Validation of Supervisory Information (Principle 19) - Legal authority: Sections 39, 40, and 41 of BDCA provide BMA unrestricted access to bank information. - Validation methods: combination of targeted on‑site examinations and work of external and internal auditors. - External audit work for supervisory purposes is performed on special request of BMA and generally limited to verification of prudential returns or special investigations; only international audit firms with Bermuda‑skilled workforces may audit banks. - External auditors are obligated under Section 49 of BDCA to report matters of significant supervisory importance to BMA. - Assessment recorded in the content: Largely compliant. - Recommendation: employ Section 39 more widely to request external auditors broaden the scope of their work to supplement BMA examiners; alternatively retain outside experts on an ad hoc basis. ### Consolidated and Globally Consolidated Supervision (Principles 20 and 23) - Second Schedule, Paragraph 5, of BDCA requires BMA to ensure group structures do not obstruct effective consolidated supervision; BMA conducts prudential supervision on both solo and consolidated bases. - BMA issued a policy statement on consolidated supervision and evaluates group strength quantitatively and qualitatively. - Overseas branches and subsidiaries are targeted for on‑site examinations leveraging work of external/internal auditors and host country supervisors. - Banks must produce annual audited consolidated financial statements; prudential returns for capital adequacy, financial statements, and large exposures are reported consolidated; BMA measures capital on a consolidated basis. - BMA maintains ongoing dialogue and information exchange with host country supervisors and meets annually with officers in charge of material overseas operations. - Under licensing, establishment/acquisition of branch or subsidiary must be approved by BMA prior to commencing business. - Assessment recorded in the content: Compliant. ### Accounting Standards (Principle 21) - Companies Act of 1981 requires banks to be audited in accordance with generally accepted accounting principles. - Sections 46, 47, and 48 of BDCA set standards for appointment of auditors, duty to audit, and submission of audit reports. - Audited financial results must be reported to BMA within four months after the end of each financial year. - MOF recognizes the Institute of Chartered Accountants in Bermuda; member firms apply GAAP accepted in the United States and Canada. - BMA published a policy statement requiring timely, orderly capture and recording of transactions and maintenance of financial/business information to enable risk identification, measurement, monitoring, and control. - Banks must appoint approved auditors (approved by MOF); BMA can decline approval and may commission additional audit‑related work at the bank’s expense. - Quarterly prudential returns must be verified by external auditors for correct extraction and compilation per BMA instructions. - Assessment recorded in the content: Compliant. ### Remedial Measures and Crisis Intervention (Principle 22) - BMA powers under BDCA Sections 17 and 18 allow restriction of bank activity, imposition of conditions, limitation of deposit acceptance, prohibition of transactions, removal of directors/controllers/senior executives, and specification of requirements to protect depositors. - BMA may revoke an institution’s license if Second Schedule criteria (adequate capital, liquidity, provisions, accounting systems, records, and internal controls) are not met. - BMA has powers under Sections 25, 26, and 27 to object to potential or existing controllers/shareholders. - In practice, BMA seeks remedial action primarily through moral suasion, prudential meetings, and examination results; BDCA allows courts to impose money penalties for non‑compliance. - Assessment recorded in the content: Largely compliant. - Identified legal gap and recommendations: - Current law is silent on actions for impending bank failure or intervention to preserve financial stability; revocation of license alone is insufficient. - Recommendation: amend legislation to provide BMA with direct intervention tools to facilitate survival as a going concern or a more advantageous realization of assets than liquidation; enact provisions preventing creditors or others from forcing liquidation or legal proceedings during intervention. - BMA should consider addressing on‑site examination results and enforcement efforts directly to each bank’s Board of Directors or Audit Committee and require responses; exam reports should be addressed to the Board/Audit Committee and Boards must be informed promptly of material cumulative supervisory issues. ### Host Country and Supervision Over Foreign Establishments (Principles 24 and 25) - Bermuda banks operate in Western Europe, North America, the Caribbean, and the Far East; BMA has developed working relationships with host supervisors. - Bilateral meetings with host supervisors are held regularly; BMA has two Memoranda of Understanding in operation and conducts other relationships informally when appropriate. - BMA meets with host supervisors during on‑site examinations in host jurisdictions and participates in multilateral committees to exchange supervisory information. - BMA permits banks to operate only in countries where it can exchange supervisory information. - At the time of the mission there were no banks licensed in Bermuda that were part of foreign banking groups; BDCA does not preclude licensing subsidiaries of foreign banks but requires compliance with local servicing and licensing requirements. - Assessment recorded in the content for host country and foreign establishments: Compliant for Principle 24; Not applicable for Principle 25 in the factual context described. *Source: Assessments, descriptions, findings, and recommendations as presented by BMA and under BDCA/POC provisions in the provided content.* ### 1. Objectives, Autonomy, Powers, and Resources ### 1. Objectives, Autonomy, Powers, and Resources ### Assessment framework and compliance indicators - The assessment used the Basel Core Principles as the reference framework. - Principles listed in the assessment (with an "X" marking coverage in the content unit) include: 1.1 Objectives; 1.2 Independence; 1.3 Legal framework; 1.4 Enforcement powers; 1.5 Legal protection; 1.6 Information sharing; 2 Permissible Activities; 3 Licensing Criteria; 4 Ownership; 5 Investment Criteria; 6 Capital Adequacy; 7 Credit Policies; 8 Loan Evaluation and Loan-Loss Provisioning; 9 Large Exposure Limits; 10 Connected Lending; 11 Country Risk; 12 Market Risks; 13 Other Risks; 14 Internal Control and Audit; 15 Money Laundering; 16 On-Site and Off-Site Supervision; 17 Bank Management Contact; 18 Off-Site Supervision; 19 Validation of Supervisory Information; 20 Consolidated Supervision; 21 Accounting Standards; 22 Remedial Measures; 23 Globally Consolidated Supervision; 24 Host Country Supervision; 25 Supervision Over Foreign Banks’ Establishments. - Compliance legend used in the assessment: - 1/ C: Compliant. - 2/ LC: Largely compliant. - 3/ MNC: Materially non-compliant. - 4/ NC: Non-compliant. - 5/ NA: Not applicable. ### Key recommended actions (Recommended Action Plan to Improve Compliance of the Basel Core Principles) - 1.2 Independence - Review the law to address concerns that the Ministry of Finance’s powers to give directions to the Bermuda Monetary Authority (BMA) and the budgetary approval procedure could intrude on BMA operational independence. - Conduct an in-depth analysis of resources required to fulfill supervisory objectives and produce an action plan describing implementation of the objectives. - 6 Capital adequacy and 12 Market risk - Envisage replacement of the present proxy system for trading risk with a more appropriate capital requirement system. - 8 Loan Evaluation and Loan Loss Provisioning - Reduce principal reliance on external auditors for asset quality evaluation and provisioning by reviewing a bank’s internal rating system as part of loan portfolio and credit risk management examinations. - Improve prudential reporting of connected lending and enhance corporate governance in this area. - 10 Connected Lending - Enhance policy addressing connected lending so banks monitor and control these exposures satisfactorily. - Ensure BMA examiners routinely review connected relationships as part of on-site examinations. - 11 Country Risk - Establish a formal reporting methodology to facilitate monitoring of country risk exposure by banks. - 13 Other Risks - Augment on-site examination techniques for interest rate risk, financial derivative instruments, and information technology systems. - Consider issuance of a policy on outsourcing of bank operations. - 16 On-site and Off-site Supervision - Address staffing issues: consider increasing number of professionals and breadth of expertise, or utilize outside professional experts. - Develop a comprehensive examination manual reflecting bank supervision policy and examination procedure. - Adopt a more formalized system of working papers to document examination conclusions and preserve continuity as staffing changes. - 18 Off-site Supervision - Enhance off-site supervision by analyzing prudential returns data more vigorously to compare bank performance, analyze trends, and create an early warning system. - 19 Validation of Supervisory Information - Employ provisions of Section 39 of BDCA more widely to increase synergies with external auditors. - Consider using external auditors for complementary work in capital markets activities, information technology, or other predetermined areas. - 22 Remedial Measures - Amend current legislation to provide BMA with more direct intervention tools in the event of an impending bank failure. - Communicate examination results and enforcement efforts to each bank’s Board of Directors or its Audit Committee. ### Authorities’ response to the assessment - The Bermuda Monetary Authority (BMA) welcomed assessors’ recognition of the quality of Bermuda’s banking legislation and the effectiveness of the supervisory framework, noting a resulting high degree of compliance with relevant international standards. - The BMA reported ongoing review of aspects of the current approach in preparation for implementing the Basel II capital accord framework. - The BMA agreed the present supervisory framework offers a strong foundation to be adapted and developed for future enhancements and will advance specific proposals addressing the assessors’ recommendations. - The authorities reported adoption, subsequent to the mission, of the practice of communicating exam findings and compliance actions to members of banks’ boards of directors. ### Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) — assessment methodology and legal framework - Assessment team composition and methodology - A detailed AML/CFT assessment of Bermuda was prepared by a team including IMF staff, an expert under IMF supervision, and an expert not under IMF supervision. - IMF staff and the IMF-supervised expert reviewed AML/CFT laws, regulations, and supervisory/regulatory systems for prudentially regulated financial institutions. The expert not under IMF supervision reviewed criminal law enforcement capacity and implementation. - The team included Messrs. Ian Carrington (MFD), Cheong-Ann Png (Legal Consultant) working under IMF supervision, and Assistant Superintendent Erwin Boyce of the Barbados Police Force (IAE). - Discussions were held with representatives of: the Ministry of Finance; the Bermuda Monetary Authority (BMA); the National Anti-Money Laundering Committee (NAMLC); the Attorney General’s Chambers; the Office of Director of Public Prosecutions; the Bermuda Police Service; the Financial Investigation Unit (FIU); and the Collector of Customs. - Primary legal instruments and guidance reviewed - Proceeds of Crime Act 1997 (PCA). - Proceed of Crime (Money Laundering) Regulations 1998 (PCMLR). - Guidance Notes on the Prevention of Money Laundering (1998) and Guidance Notes on the Prevention of Money Laundering (Fiscal Offences) (2001) (together “NAMLC Guidance Notes”). - Revenue Act 1898 (RA). - Criminal Justice (International Cooperation) (Bermuda) Act 1994 (CJICBA). - Terrorism (United Nations Measures) (Overseas Territories) Order 2001 (“Terrorism Order”). - Bermuda Monetary Authority Act 1969 (BMAA). - Banks and Deposit Companies Act 1999 (BDCA). - Insurance Act 1978 (IA) and Insurance Amendment Act 2001 (IAA). - Investment Business Act 1998 (IBA). - Trusts (Regulation of Trust Business) Act 2001 (TRTBA). - Credit Unions Act 1982 (CUA). - Companies Act 1981 (CA). - Definition of financial institutions (FIs) for assessment purposes - FIs include: any deposit-taking institution as defined in BDCA; any insurer as defined in IA; any investment services provider as defined in IBA (and collective investment schemes); any trust service provider as defined in TRTBA; the BIU Members’ Credit Union Co-Op Society; company service providers; and bureau de change businesses. - Overview of legal and institutional measures - Bermuda’s constitutional and international context: - Bermuda established in 1612; comprises seven main islands and coral islands about 650 miles east of Cape Hatteras, North Carolina. - An Overseas Territory of the United Kingdom; Bermuda Constitution Order 1968 establishes current parliamentary system. - Defense, internal security, and international affairs are reserved matters with the United Kingdom. - International commitments and memberships: - United Kingdom extended to Bermuda its ratification of the UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1998) (“Vienna Convention”). - United Kingdom extended United Nations Security Council Resolution 1373 (2001) (“UN Resolution 1373”) to Bermuda. - Bermuda is a member of the Caribbean Financial Action Task Force (“CFATF”). - Bermuda’s Financial Investigation Unit is a member of the Egmont Group of Financial Intelligence Units. - National AML/CFT framework: - Principal legislation: PCA, PCMLR, PCAA, NAMLC Guidance Notes, RA, CJICBA, and the Terrorism Order. - PCA criminalizes money laundering and sets out enforcement measures; scope of predicate offenses under the PCA as amended includes any indictable offense in Bermuda other than a drug trafficking offense and any act or omission which, had it occurred in Bermuda, would have constituted an indictable offense other than a drug-trafficking offense. - PCMLR and the 1998 Guidance Notes impose requirements for customer due diligence, record keeping and suspicious transaction reporting. - 2001 Guidance Notes provide guidance where the predicate offense involves tax evasion. - CJICBA provides for mutual legal assistance between Bermuda and other jurisdictions. - Terrorism financing legislation: - Terrorism Order (2001) extends UN Resolution 1373 measures to Overseas Territories, including Bermuda; applicable in Bermuda without incorporation under local law. - Terrorism Order Sections 3, 4, 5, and 6 prohibit collection/provision of funds, making available funds or financial services, holding of funds for terrorism, and facilitation of those acts. - At the time of the mission, terrorism per se was not criminalized in Bermuda under penal legislation and therefore was not a predicate offense under AML legislation. Work was underway to determine whether specific terrorism offenses were needed (cf NAMLC, Amendments to Proceeds of Crime Legislation and Guidance Consultation Paper, December 2001). - Subsequent to the mission, a draft bill “the Anti-Terrorism (Financial and other Measures) Act 2004,” addressing a number of concerns, was laid in Parliament in July 2004. - Scope and applicability of PCMLR and NAMLC Guidance Notes - PCMLR applies to regulated institutions defined in Regulation 2(2): licensed deposit-taking institutions; registered insurers carrying on long-term insurance (but not reinsurance, life insurance or disability insurance) within the meaning of IA; investment providers licensed under IBA; trading members of the Bermuda Stock Exchange resident or with a place of business in Bermuda; trading members of the Bermuda Commodities Exchange or members of the BCECH resident or with a place of business in Bermuda; persons processing subscriptions or redemptions related to collective investment schemes; licensed trust service providers; the Credit Union; persons authorized by the BMA to offer currency exchange services; and persons approved as Voluntary Regulated Institutions. - PCMLR exclusions and exemptions: - PCMLR is not applicable to long-term insurers providing reinsurance, life insurance and disability insurance, and general business insurers (collectively “Exempt Insurers”). - Exempt Investment Service Providers as defined in the Investment Business (Exemption) Order 1999 (e.g., High-End Investors, bodies corporate or trusts with minimum net assets of $5 million, certain collective investment schemes). - Company Service Providers (service providers for companies, partnerships and limited partnerships) and certain professionals (see discussion under Criterion 44). - NAMLC Guidance Notes: - Applicable to the same categories as PCMLR (regulated institutions). - Issued by NAMLC under Section 49(1)(b) of the PCA as guidance reflecting the standard expected of regulated institutions; not considered “law” in the formal sense and do not carry the force of law for assessment of the legal and institutional framework under the AML/CFT Methodology, although relevant for implementation. *Source: IMF assessment "1. Objectives, Autonomy, Powers, and Resources" and accompanying Recommended Action Plan and AML/CFT assessment material.* ### 27. Whilst the requirements under the NAMLC Guidance Notes are not mandatory, the ### cr0599 - 27. ### NAMLC Guidance Notes and judicial weight - Whilst the requirements under the NAMLC Guidance Notes are not mandatory, courts in determining whether a regulated institution has complied with the PCMLR would take into account the NAMLC Guidance Notes and any other relevant guidance issued by the NAMLC (PCMLR, Regulation 8(2)). - Non-compliance with the NAMLC Guidance Notes would weigh against a regulated institution in any alleged non-compliance with the PCMLR. - Non-compliance should be regarded as evidence of non-compliance with the PCMLR and be allocated relevant weight against the regulated institution depending on the circumstances in issue, but not non-compliance per se. ### Foreign Regulated Institutions (1998 Guidance Notes) - The 1998 Guidance Notes provide, for the purpose of “Foreign Regulated Institutions,” a list of jurisdictions whose AML regulation is at least equivalent to the PCMLR (1998 Guidance Notes, Appendix A). - The jurisdictions listed are: Australia, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Guernsey, Hong Kong, Iceland, Ireland, Isle of Man, Italy, Japan, Jersey, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States of America. ### Institutional framework in Bermuda - The Government of Bermuda set up the National Anti-Money Laundering Committee (“NAMLC”) in 1997 to direct government AML policy and provide guidance with compliance with the AML regime and coordination amongst the relevant government authorities and agencies. - NAMLC membership includes: the Financial Secretary (chairman); the Attorney General; the Permanent Secretary of the Ministry of Labour, Home Affairs and Public Safety; the Chairman and CEO of the BMA; the Commissioner of Police; and such person appointed by the MOF. - The Bermuda Monetary Authority (BMA): - Established under BMAA. - Responsible for regulation and supervision of: any licensed deposit-taking institution; any licensed insurer; any collective investment scheme; any licensed investment services provider; the BSX; any licensed trust service provider; and the Credit Union. - Exempt Insurers, Exempt Investment Service Providers, Exempt Trust Service Providers and Company Services Providers are not regulated nor supervised by the BMA. - There is currently no licensing requirement for bureaux de change although they are subject to some degree of oversight by the BMA. - Professionals such as accountants and lawyers are regulated under their professional associations. - The BMA scrutinizes beneficial owners of entities to be registered in Bermuda and, for licensed institutions, scrutinizes directors and senior executives; the BMA must be satisfied such persons are fit and proper before registration is recommended. A similar procedure applies on transfer of beneficial ownership in Bermudian entities. - The Financial Intelligence Unit (FIU): - Set up in 1998 as part of the Commercial Crime Department of the Bermuda Police Services (“Police”). - The Commercial Crime Department also includes the Fraud Squad. - Prior to the FIU, the Commercial Crime Department received and investigated suspicious activity reports (“SARs”). - Under the RA, HM Customs monitors cross-border movements of currency and goods; customs offenses or suspicious cross-border movements are forwarded to the Passenger Analysis Unit (“PAU”), a multidisciplinary agency comprising the Police, HM Customs and U.S. Customs. - The PAU controls collecting, collating and dissemination of revenue and drug intelligence to relevant authorities. - The Office of the Director of Public Prosecutions is responsible for prosecution of offenses and related matters under the PCA and the Terrorism Order. - The Attorney-General’s Chambers deal with the non-criminal aspects of the AML/CFT regime. - There has not been any prosecution for ML or FT pursuant to the PCA and the Terrorism Order to date. ### Detailed assessment: Criminalization of ML and FT (Criteria 1-6) - The following points summarize the assessment findings and legal descriptions: Findings and legal provisions - 1. The United Kingdom extended to Bermuda its ratification of the Vienna Convention and the UN Resolution 1373. The provisions of the Vienna Convention were incorporated under the PCA and the CJICBA, whilst the provisions of the UN Resolution 1373 were extended to Bermuda by way of the Terrorism Order 2001. The UN International Convention for the Suppression of Terrorism (1999) and the UN Convention Against Transnational Organized Crime (2002) have not been extended to Bermuda. - 2. ML is an offense under Sections 43, 44 and 45 of the PCA. - Section 43(1): offense of concealing or transferring one’s proceeds of criminal conduct (conceal or disguise property which represents proceeds; or convert or transfer that property or remove it from Bermuda for the purpose of avoiding prosecution for a drug trafficking offense or relevant offense or the making or enforcement of a confiscation order). - Section 43(2): offense of concealing or transferring the proceeds of criminal conduct of another person if knowing or having reasonable grounds to suspect that property represents another person’s proceeds of criminal conduct and conceals/disguises or converts/transfers or removes it for the purpose of assisting any person to avoid prosecution etc. - Section 44(1): offense of assisting another to retain proceeds of criminal conduct where one enters into or is concerned in an arrangement facilitating retention/control or use to place funds at that person’s disposal or benefit, knowing or suspecting that person is engaged in or benefited from criminal conduct. - Section 45(1): offense of acquiring, possessing or using the proceeds of criminal conduct of another person if knowing that property represents another person’s proceeds of criminal conduct. - Scope of predicate offenses (“criminal conduct”) includes (i) a drug trafficking offense; and (ii) a “relevant offence”, which includes any indictable offense in Bermuda other than a drug trafficking offense or any act or omission which had it occurred in Bermuda would have constituted an indictable offense other than a drug trafficking offense (PCA, Section 3 as amended). - 3. The Terrorism Order: - Makes it an offense to invite another to provide funds, receive funds, provide funds, or make funds/financial services available directly or indirectly to or for the benefit of a person who commits, attempts to commit, facilitates or participates in acts of terrorism (or persons controlled by or acting on behalf of such person), unless in accordance with a specific license issued by the Governor (Terrorism Order, Articles 3 and 4). - Defines “terrorism” (Terrorism Order, Article 2) as action involving serious violence, serious damage to property, endangering life, creating serious risk to public health/safety, designed to influence government or intimidate the public, and for advancing a political, religious or ideological cause; such action is to include action outside Bermuda. - 4. Mens rea: - PCA: mens rea for Sections 43(1) and 45(1) are “intention or knowledge” and “knowledge” respectively; Section 43(2) requires known or reasonable grounds to suspect; Section 44(1) requires known or suspected. - Terrorism Order: FT offenses require proof of either knowledge or intent. - Offenses under the PCA and the Terrorism Order can be committed by body corporates (PCA, Section 56; Terrorism Order, Article 1). - 5. Penalties: - ML (PCA Sections 43(1), 43(2), 44(1), 44(2)): on summary conviction maximum imprisonment of 5 years or a maximum fine of $50,000 or both; on conviction on indictment maximum imprisonment of 20 years or an unlimited fine or both. - FT (Terrorism Order, Articles 3 and 4): on summary conviction maximum imprisonment of 6 months or a maximum fine of $5,000 or both; on conviction on indictment maximum imprisonment of 7 years or a fine or both (Terrorism Order, Article 11). - 6. Resources: legal means are adequate but resources have been inadequate to enable a fully effective implementation of the money laundering and financing of terrorism laws. Human resources at the intelligence / investigative level are inadequate; the Bermuda Police Service provides the human resource component but manpower constraints have limited timely response. Analysis of effectiveness - 1. The PCA, the CJIBA and the Terrorism Order are principal legislation for the Vienna Convention and UN Resolution 1373; the UN International Convention for the Suppression of Terrorism (1999) and the UN Convention Against Transnational Organized Crime (2002) have not been extended to Bermuda. - 2. The PCA criminalizes ML, extends scope of predicate offenses to relevant indictable offenses and drug trafficking offenses, and applies ML offenses to persons who have committed ML and those who have committed both ML and predicate offenses. - 3. The Terrorism Order prosecutes collection, receipt and provision of funds for terrorism but does not criminalize terrorist acts nor provide for terrorist organizations; financing of terrorism can be committed by bodies corporate; the Terrorism Order provides for prosecution when terrorist acts occur outside Bermuda. Terrorist acts are not predicate offenses for the AML legislation. - 4. Mens rea for PCA offenses varies among “intention”, “knowledge”, “suspicion” and “reasonable grounds to suspect”, with “knowledge” common across the four ML offenses; tests are largely subjective and courts’ future approach is untested due to absence of prosecutions to date. - 5. Criminal sanctions under the PCA are dissuasive though imprisonment terms may be rigorous relative to some predicate offenses; the maximum fine for summary conviction under the Terrorism Order is rather low. - 6. Bermuda Police Service clear-up rate within the last five years averaged 50 percent for general crime, but the unit responsible for ML and FT investigations has been inundated by the number of SARs, limiting thorough investigations and prosecutions. Recommendations and comments (numbered as in source) - 3. Authorities should expedite current initiatives to introduce provisions for terrorist offenses per se and related matters. - 4. The authorities may wish to consider whether to incorporate an objective test to the mens rea requirement for the offenses under Sections 43(1) and 45(1), and indeed for the Section 44(1) offense. - 5. The authorities may wish to consider whether civil sanctions for ML and FT are suitable for the jurisdiction. - 6. There is the need to assign adequate resources to the intelligence / investigative units and there must be clearly defined roles; that is, a team for specific data entry and basic information gathering and a team of investigators for the sole purpose of investigating matters and enabling prosecutions. Implications for FATF Recommendations (excerpt) - 1. Bermuda is compliant with Recommendation 1. Bermuda is materially non-compliant with Special Recommendation I to the extent that the UN International Convention for the Suppression of Terrorism (1999) has not been extended to Bermuda, although the Terrorism Order has been extended to Bermuda; extension of such conventions depends on the approach of the United Kingdom Government. - 2. Bermuda is compliant with Recommendation 4. - 3. Bermuda is materially non-compliant with Special Recommendation II, although work is underway for legislation that provides for terrorist offenses per se and related matters. - 4. Bermuda is largely compliant with Recommendation 5 to the extent that whilst the proof of “knowledge” is a common requirement of the ML offenses under the PCA, the approach to the test for knowledge is subjective. Authorities may wish to consider whether to incorporate an objective test to the mens rea requirement of the offenses under Sections 43(1) and 45(1), and indeed for the Section 44(1) offense. ### Confiscation of proceeds and related measures (Criteria 7-16) - 7. Confiscation under the PCA: - Court may grant a confiscation order where (i) a defendant to be sentenced for one or more drug trafficking offense is deemed by the court to have benefited from drug trafficking; and (ii) where a defendant to be sentenced for one or more relevant offenses has benefited from the relevant offense (or any other relevant offense from which the defendant had benefited) (PCA, Sections 9 and 10). - Amount to be recovered under a confiscation order shall be the amount the court assesses to be the value of the defendant’s proceeds of drug trafficking or benefit from relevant offenses (subject to provisions for realizable amount) (PCA, Sections 15(1) and (3)). - Where proceedings have been instituted but not concluded and there is reasonable cause to believe the person had benefited from drug trafficking or a relevant offense, the court may grant: - (i) a restraint order to prohibit any person from dealing with any realizable property whether or not the property is described in the order; or - (ii) a charging order on any such realizable property for securing payment to the Crown either an amount not exceeding the amount payable under a confiscation order if it has been issued or an amount equivalent to the value of the charged property (PCA, Sections 27(1), 28(1) and (2), and 29(1)). - Applications for restraint or charging orders may only be made by the Attorney-General and on an ex parte basis to a judge in chambers (PCA, Sections 28(4) and 29(3)). - “Realizable property” is defined as any property held by the defendant other than property in respect of which there is in force a forfeiture order under the Misuse of Drugs Act 1972 and any property held by a person to whom the defendant has directly or indirectly made a gift (PCA, Section 3). - There is currently no provision for civil forfeiture (confiscation without conviction) for ML. - Application to FT/Terrorism Order: - The PCA provisions would appear to apply to offenses under the Terrorism Order where those offenses are triable on indictment and therefore “relevant offences” for purposes of the PCA. - The Terrorism Order also provides that where the Governor has reasonable grounds for suspecting that the person for or on behalf of whom any funds are held is or may be a person who commits, attempts to commit, facilitates or participates in acts of terrorism (or related persons), the Governor may by notice direct that those funds are not to be made to any person except with the authority of a license granted by the Governor (Terrorism Order, Article 5(1)). *Source: Detailed assessment conducted using the October 11, 2002 version of the Methodology for assessing compliance with the AML/CFT international standard (FATF 40+8), as presented in cr0599 - 27.* ### 8. For the purpose of an investigation into a drug trafficking offense, whether any person has benefited from ### 8. For the purpose of an investigation into a drug trafficking offense, whether any person has benefited from ### Production orders, confiscation, and asset management - The PCA permits a police officer to apply to the Supreme Court for a production order in relation to particular material or material of a particular description (PCA, Section 37(1)). - Criteria for granting a production order (PCA, Section 37(4)): - (i) reasonable grounds for suspecting that a specified person has carried on drug trafficking or has benefited from criminal conduct; - (ii) reasonable grounds for suspecting that the material to which the application relates is likely to be of substantial value to the investigation and does not include items subject to legal privilege; - (iii) belief that it is in the public interest having regard to the benefit likely to accrue to the investigation if the material is so obtained and to the circumstances under which the person in possession of the material holds it, that the material should be produced or that access to it should be given. - Where an application is made for a confiscation order under the PCA, a person asserting an interest in realizable property may apply before the confiscation order is made for an order declaring the nature, extent and value of his interest on the basis that he was not involved in the defendant’s criminal conduct and that he acquired the interest for sufficient consideration and without knowing or having reasonable grounds to suspect that the property was involved in or the proceeds of criminal conduct (PCA, Sections 16(1) and (2)). - The PCAA establishes the Consolidated Assets Fund (“CAF”) to receive: - (i) proceeds of criminal conduct recovered under a confiscation order under the PCA; - (ii) cash forfeited under the PCA; - (iii) money forfeited under the Misuse of Drugs Act 1972; - (iv) money paid to the Government by a foreign jurisdiction in respect of confiscated assets (PCA Section 55A, as introduced by PCAA, Section 5(1)). - Payments from the CAF may be authorized by the MOF, after consulting with the NAMLC, for purposes including: - (i) law enforcement, including the investigation of suspected cases of drug trafficking and money laundering; - (ii) treatment and rehabilitation of drug addicts and public education of drug abuse; - (iii) satisfy an obligation of the Government to a foreign jurisdiction in respect of confiscated assets; - (iv) meet the expenses of the NAMLC; - (v) cover costs associated with the administration of the CAF. - Payments from the CAF may be made to satisfy an obligation of the Government to a foreign jurisdiction whether pursuant to a treaty or arrangement providing for mutual assistance in criminal matters or otherwise. ### Terrorism-related restraint and statistics - The Terrorism Order (Article 5(1)) allows the Governor, where there are reasonable grounds for suspecting that the person for or on behalf of whom funds are held is or may be: - (i) a person who commits, attempts to commit, facilitates or participates in the commission of acts of terrorism; or - (ii) a person controlled or owned directly or indirectly by, or acting on behalf of or under the direction of, such person, - to direct that those funds are not to be made to any person except with the authority of a license granted by the Governor. - The FIU of the Bermuda Police Service maintains provisions for keeping statistics on actions such as freezing of property; as of the assessment there had been no freezing of property in respect of FT. ### FIU role, SARs, information access, and staffing - The Commercial Crime Department comprises the Fraud Squad and the FIU; the FIU, established in 1998, receives and investigates suspicious transaction reports (“SARs”) and disseminates financial information and intelligence for FT and ML purposes. The FIU is a member of the Egmont Group. - Under the PCMLR, reporting officers (“MLROs”) of regulated institutions must file SARs to a police officer (PCMLR, Regulations 6(1)(d)); 1998 Guidance Notes provide for filing and communication with the FIU and supply a pro forma SAR form. - There is no requirement for reporting of currency transactions that exceed certain values. - The FIU can obtain additional information from regulated institutions by production orders and monitoring orders under the PCA (PCA, Sections 37 and 41). - The FIU has access to: - financial information from Regulated Institutions via production orders and monitoring orders (PCA, Sections 37 and 41); - information relating to a person who has at any time held a realizable property from a Government department via disclosure orders (PCA, Sections 40); - the Customs Department database because police officers have powers equivalent to customs officers for enforcement of the RA. - Sanctions for non-compliance with PCMLR reporting requirements: - summary conviction fine of $10,000; - indictment fine of $50,000; - second or subsequent indictment fine of $100,000 (PCMLR, Regulation 8(1)). - The FIU’s dissemination powers: - empowered to disseminate financial information and intelligence to domestic authorities for investigation or action, though that authority is not expressly provided under the PCA or the PCMLR; - authorized to share financial information and intelligence with foreign counterparts through Egmont Group membership; obliged not to disclose any financial information or intelligence save for carrying out its functions or when required by law or the courts (PCA, Section 58(1)). - FIU activity and capacity: - statistics maintained include number of SARs received, investigations carried out and cases realized; - since creation the unit has received in excess of ten thousand SARs and has developed nine money laundering matters; - the FIU is understaffed with four full-time officers; Cabinet has endorsed a business plan proposing an increase in police and civilian resources including a trained analyst; - administratively the FIU is under the Crime Support Division, shares office space with the Fraud unit, and security is limited to staff and invitation; recommendations made for purpose-designed, more secure office space in the new Hamilton Police Station complex; - some FIU activities are published in the Annual Police Report and the FIU conducts speaking engagements with financial institutions and other entities. ### Analysis of effectiveness (key observations) - Civil forfeiture: - No provision currently exists for civil forfeiture for ML offenses. - Scope for application of Section 39(1) of the PCA should extend to investigation of relevant offenses as defined under the PCA and not be limited to drug trafficking offenses. - Unclear whether the public interest limb in the production order criteria (benefit to the investigation and circumstances of possession) might unduly impede production order applications in practice. - Third-party protection: - Sections 16(1) and (2) of the PCA provide protection of third parties asserting an interest in realizable property. - Contracts and recovery: - No current provision for rendering contracts void or unenforceable on the basis that parties knew or should have known that authorities would be prejudiced in recovering financial claims under the AML/CFT regime. - Statistics and databases: - Present system allows tracing of reports, and of property frozen, seized and confiscated; system is considered adequate. - Need to limit access to the database to FIU personnel only. - Training and resources: - General understanding of requirements across levels, but need for refresher training for FIU staff, awareness programs for prosecutors and the judiciary, relevant investigator accreditation, specific training plans and dedicated training budgets. - Terrorism financing (TF): - The Terrorism Order lacks provisions dealing with seizure and confiscation of property that is proceeds of or are to be used for terrorism, terrorist acts or by terrorist organizations, although Article 5(1) provides for restraint of funds and property. - FIU mandate and legal clarity: - The law does not expressly set out the role of the FIU in receiving, analyzing and disseminating information and intelligence relating to ML and FT; consideration should be given to formalizing the FIU as the competent authority in legislation, particularly if civilian staff are recruited. - It is preferable for FIU powers to obtain production and monitoring orders, and to disseminate financial intelligence domestically, to be provided expressly under AML/CFT legislation rather than inferred from the PCA or PCMLR. - Operational effectiveness: - FIU work is often reactive rather than proactive due to staff shortage; much work involves data entry and the unit’s effectiveness is currently limited. - The FIU and the BMA do not have powers to impose sanctions or penalties under the AML/CFT regime. - Efficient statistical maintenance is reported, and many SARs relate to small-scale money transmission activity; the FIU can account for, trace, and show the status of all reports received. ### Recommendations and comments - Civil forfeiture and production orders: - Consider introducing provisions for civil forfeiture. - Consider extending the scope for application of Section 39(1) of the PCA to investigations of relevant offenses as defined under the PCA and not merely drug trafficking offenses, whether a person has benefited from criminal conduct and the whereabouts of any proceeds of criminal conduct. - Contracts and recovery: - Consider incorporating provisions to render contracts void or unenforceable where parties knew or should have known that authorities would be prejudiced in recovering financial claims under the AML/CFT regime. - FIU database and publication: - Limit access to the database to FIU personnel only. - FIU should endeavor to publish information relating to trends and typologies. - Training and staffing: - Provide refresher training for FIU staff; consider awareness-raising programs for prosecutors and the judiciary. - Ensure investigators have relevant accreditation; include specific training plans in the overall training program with appropriate budgetary provision. - Legal and institutional clarity: - Consider amending the PCA or related legislation to establish the FIU formally and to state more explicitly the FIU’s powers, including dissemination of financial intelligence domestically. - Accommodation and operational capacity: - Allocate separate, properly secured offices for the FIU in an accessible location to the commercial centre; efforts are under way to find appropriate accommodation. ### Implications for FATF compliance - Recommendations implicated: FATF Recommendations 7, 38, SR III (noted under earlier sections). - Assessment conclusions: - Bermuda is largely compliant with Recommendation 7 on the basis that there is currently no provision for rendering contracts void or unenforceable on the basis that parties to the contracts knew or should have known that authorities would be prejudiced in their ability to recover financial claims under the AML/CFT regime. - Bermuda is materially non-compliant for Special Recommendation III although work is underway for legislation providing for terrorist offenses per se and related matters. - Bermuda is compliant with FATF Recommendations 14 and 28. - Bermuda is largely compliant with Recommendation 32 on the basis that safeguards for confidentiality of FIU information could be enhanced by (i) setting out in the law the FIU as the competent authority for receiving SARs; and (ii) ensuring access to the FIU database is restricted only to FIU staff. *Source: IMF country assessment (cr0599).* ### 32. While all of the officers have had the basic training, there is still need for refresher training. As already ### cr0599 - 32. While all of the officers have had the basic training, there is still need for refresher training. As already ### Training and human resources - "While all of the officers have had the basic training, there is still need for refresher training. As already mentioned, training must be ongoing and must be budgeted for." - Recommendation: "Separate provisions must be made in the budget for training." (Recommendation 29) - Recommendation: "There is need to intensify the Police’s awareness of the FIU in order to facilitate further exchange of information." (Recommendation 31) - Recommendation: "The FIU needs to enhance its intelligence cell and continued to work with other units. It also needs to build and utilize informants more. The increase in staffing levels should assist in this regard." (Recommendation 26.1) ### FIU access to court orders and investigative impediments - The FIU "appears to be experience [experiencing] difficulties with the process for obtaining relevant court orders." - Uncertainty exists "to what extent non-criminal orders such as restraint orders or monitoring orders should be dealt with by the Office of the Public Prosecution or by the Attorney-General’s Chambers; a matter that is currently being addressed in a proceeding." - Ramification: "undue delays in the application of such orders, which in turn hampers the efficacy of investigations." - Recommendation: "There is need for clarification in respect of the role the offices of the DPP and the Attorney General in relation to confiscation restraining and monitoring orders." (Recommendation 33) ### Analysis of effectiveness (investigative powers and international cooperation) - "The general powers of the Police provide for the use of relevant investigative techniques." (Analysis 26) - "The relevant powers under the PCA allow law enforcement authorities to obtain information by way of the relevant orders." (Analysis 27) - Mutual legal assistance and evidence gathering: - Sections 5(1) and 6(1) of the CJICBA provide for obtaining evidence for use in Bermuda and overseas, but "they do not provide for powers of search and seizure." (Analysis 34) - "The CJICBA provides for direct request for mutual legal assistance between Bermuda and another country or territory." (Analysis 36) - "The law enforcement authorities exchange information with their international counterparts on an agency-to agency basis." (Description 37) - "The CJICBA does not specifically provide for co-operation in investigations, however there is nothing that prevents the law enforcement authorities from cooperating on an agency-to-agency basis." (Description 38) - Confiscated Assets Fund: - Section 55A of the Proceeds of Crime Act 1997 establishes a Confiscated Assets Fund which can receive or disburse shared funds. (Description 39) - A confiscation order was granted by the crown in 2001 but "the funds have not been collected. Consequently, the Confiscated Assets Fund has not yet received or disbursed any shared funds and so an analysis of effectiveness cannot be undertaken." (Description 39) - "No assets were shared in recent times." (Description 39) - Extradition: - Extradition law: Extradition Act 1877 and extensions of Extradition Act 1870 and Extradition Act 1989 apply. (Description 40) - "Extradition crimes" are defined in Extradition Act 1989; in Bermuda context means offenses punishable in Bermuda for a term of 12 months or any greater punishment. (Description 40) - "Extradition of the principal offenses under the PCA and the Terrorism Order would be permissible under the Extradition Act 1989 to such countries that have extradition arrangements with the U.K. Government, although they have not expressly recognized as extraditable offenses." (Analysis 40) - "There have been no extradition proceedings." (Description 41) - Mutual assistance practice: - "The Attorney General deals with the requests for mutual assistance. There have been very few of those requests. They were all successful." (Description 42) ### Recommendations on international cooperation and legal gaps - "The authorities should incorporate more specific provisions for mutual legal assistance in enforcement matters, such as powers of search and seizure." (Recommendation 34) - "The authorities should consider introducing provisions for extradition of persons charged ML or FT offenses." (Recommendation 40) ### Implications for FATF compliance (selected Recommendations and Special Recommendations) - Bermuda is materially non-compliant in Recommendation 37 "on the basis that there is no provision for search and seizure under the CJICBA." - Compliance summary excerpts: - "Bermuda is compliant in Recommendations 3, 32, 34, and 40." - "It is materially non-compliant with Recommendation 37 on the basis that there is no provision for search and seizure under the CJICBA; Recommendation 38 on the basis that there is no provision to take expeditious action for mutual legal assistance and there is no provision for seizure under the CJICBA; Special Recommendation I on the basis that the UN International Convention for the Suppression of Terrorism (1999) has not been extended to Bermuda although the Terrorism Order has been extended to Bermuda and the extent to which these conventions and treaties of these order are extended to Bermuda is dependent on the approach of the U.K. Government; and Special Recommendation V on the basis that terrorism per se is not a criminal offense in Bermuda." (Implications section) - Reiterated specific conformity statements: 34.1, 34.2, 36, 37, 38, 40 (detailed compliance assignments appear in the text). ### Assessing preventive measures for financial institutions — General Framework - Confidentiality and secrecy: - "There is no general secrecy law. Confidentiality of customer information is provided under the common law where FIs are deemed to have an implied contractual duty not to disclose affairs of their customers." (Description 43) - Common law duty is "qualified, inter alia, to the extent that information may be disclosed pursuant to public interest, such as for the purpose of preventing fraud or criminal conduct." (Description 43) - Institutional roles: - "The NAMLC is tasked with developing Bermuda’s AML policy and the various member authorities in the NAMLC, such as the BMA and the Police, play essential roles in the enforcement of the AML regime." (Description 44) - "There is currently no equivalent body for the CFT regime although the relevant authorities would perform their respective roles in the enforcement of the CFT regime." (Description 44) - The BMA conducts due diligence on beneficial owners of companies seeking to incorporate in Bermuda or to obtain a permit to conduct business there; for regulated financial institutions due diligence extends to all directors and senior executives and routinely includes police checks. (Description 44) - Supervision and on-site surveillance: - "On-site surveillance (which started two years ago in respect of AML/CFT) has been undertaken in respect of banks and investment firms." - Institutions submit Form POC (Proceeds of Crime) to the BMA prior to on-site examinations; "Each institution has to attach a copy of its anti-money laundering procedures for review by the BMA." (Description 44) - "During on-site visits the BMA reviews the policies and practices adopted by licensees. This involves a review of procedures manual and an examination of records to assess compliance with the relevant legislation and regulation." (Description 44) - Gaps and recommendations: - "Whilst Bermuda has an extensive AML/CFT regime, there remains room for ensuring that the requirements under the FATF 40+8 Recommendations are fully incorporated into the AML/CFT legislation." (Analysis 44) - Recommendation: consider extending the scope of the PCMLR and the NAMLC Guidance Notes to cover company service providers and professionals, such as accountants and lawyers. (Recommendations and Comments under 44) - Recommendation: "The authorities should in put place suitable monitoring arrangements to ensure adequate monitoring of AML/CFT systems employed by these entities." (Recommendations and Comments under 44) - Recommendation: revise the reference to insurers under Regulations 2(2)(a)(iv) of the PCMLR to clarify the category of insurers treated as regulated institutions. (Recommendations and Comments under 44) - Recommendation: "The PCMLR should be reviewed to ensure that all persons conducting investment business who act as intermediaries or deal in client assets are captured by the legislation. Such persons should also be covered by the BMA’s supervision in respect of AML/CFT." (Recommendations and Comments under 44) - Recommendation: "The BMA should provide specific directions to auditors of insurance entities indicating AML/CFT issues to be examined during on-site examinations." (Recommendations and Comments under 44) - Implication: "Bermuda is compliant with Recommendation 2." (Implications for compliance with FATF Recommendation 2) ### Customer identification (criteria 45-48) - Regulation and thresholds: - Regulated institutions must establish identification procedures for applicants wishing to: - "form a business relationship;" - "conduct a one-off transaction where payment of a minimum of $10,000 is to be made by or to the applicant;" - "conduct two or more one-off transactions where the transactions appeared to be linked and that the total amount payable by or to the applicant is for a minimum of $10,000." (PCMLR, Regulation 4(1)) - Regulation 4 (2) (b) defines a small one-off transaction as "one is which the payment made by or to an applicant is less than $10,000." (Paragraph 40 / Regulation 4(2)(b)) - Guidance Notes specifics: - Paragraph 27: verification of all relevant verification subjects; verifies identity of all subjects to a joint application normally. - Paragraph 53: "the best form of identity is one that is difficult to replicate or obtain unlawfully." - Paragraph 59: "the best documents for establishing identity are passports and drivers licenses that bear a photograph." - Paragraph 60: documents "easily obtained such as birth certificates and identity cards issued by an employer should not be used." - Paragraph 54: "file copies of documents should be maintained whenever possible." - Paragraph 68: documents required for corporate entities include "a certificate in incorporation, a memorandum and articles of association, copies of powers of attorney, and other authorities given by directors in relation to the company and a certificate of incumbency and valid account opening authority including the full names of all directors and their specimen signature." - Paragraph 40: "verification is not required for small one-off transactions which are not linked with other transactions." - Paragraph 7 (b) of Appendix E: "there may be legitimate reasons for a customer to use a numbered account. There is however no provision for exemption from the verification of identity." - Noted uncertainty: "At the time of the mission no specific guidance was provided in relation to reverification." and "The wording in paragraphs 58 and 68 of the Notes 'The relevance and usefulness of the following ... information should be considered' does not clearly indicate the standard expected of licensees." *Assessment report (cr0599) — International Monetary Fund* ### 47. Regulated Institutions are required to establish and maintain identification procedures that require reasonable ### 47. Regulated Institutions are required to establish and maintain identification procedures that require reasonable measures to be taken for establishing the identity of the person on whose behalf an applicant for business is acting, in circumstances where the applicant appears to be acting otherwise than a principal (PCMLR, Regulation 4(4)) ### Identification of underlying principals and beneficial owners - Findings: - Regulation 4(4) of the PCMLR requires reasonable measures to establish the identity of underlying principals. - Paragraph 28 of the Guidance Notes: where there are underlying principals, the true nature of the relationship between principals and account signatories must be established and appropriate enquiries performed, especially if signatories are accustomed to act on their instruction. - Paragraph 37: where a regulated institution suspects an undisclosed principal, it should monitor customer activity to ascertain if the customer is merely an intermediary; if a principal is found, further enquiry should be made and that principal treated as a verification subject. - Paragraph 33: the beneficial owner includes any person on whose instructions the signatories of an account or any intermediaries instructing such signatories are accustomed to act. - Appendix E (9): in the insurance sector, transfer of the benefit of a product to an apparently unrelated third party is an example of a suspicious transaction that would normally give rise to verification of the third party’s identity. - For companies not quoted on a recognized stock exchange, the Guidance Notes (paragraphs 32–33) require steps to identify underlying beneficial owners of everyone with an interest of 5 percent or more. - The Notes define principals to include settlors and beneficiaries of trusts; such persons are subject to identity verification. Trustees are required to be subject to verification unless the trustee is a regulated institution or its identity was previously verified. - Under the existing introduced business framework, reliance on a trustee/manager’s assurance of knowledge of underlying principals is permitted (paragraph 28 Notes). In practice banks normally receive copies of verification documents, but introducers sometimes retain documents—a potential weakness. - The eligible introducer certificate at Appendix B previously offered an option (B1) allowing introducers not to assert that identity verification documents are held; the sample certificate was amended subsequent to the mission to correct this problem. - Analysis of effectiveness: - Regulation 4(1) requires regulated institutions to obtain customer identification by establishing and maintaining identification procedures, but there is no explicit legal requirement that such procedures be followed. - The legal framework does not explicitly require customer identification renewal with existing customers; draft revised guidance notes (issued for consultation but not yet effective) address this issue. Customer identification requirements are listed in the 1998 Guidance Notes. - Recommendations: - Amend the PCMLR to explicitly require that customer identification procedures be followed. - Require financial institutions to: - identify customers on the basis of official or other identifying document; - record 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 in the course of the business relationship. - Amend wording in paragraphs 58 and 68 of the Notes to more clearly indicate the practices licensees are expected to follow. - Consider amending the framework for introduced business to require that documentation pertaining to customer identity be submitted without delay by the introducer to the regulated institution. - Amend the Notes to provide guidance in relation to reverification, Politically Exposed Persons (PEPS), and correspondent banking relationships. - Implications for FATF compliance: - Full compliance with FATF Recommendations 10, 11, SR VII would be assured when institutions are required to take adequate steps to satisfy themselves that necessary documentation will be made available without delay. ### Introduced business, introducers, and document retention - Findings: - Introduced business arrangements permit reliance on introducers/trustees; instances where introducers retain verification documents represent a potential weakness. - The eligible introducer certificate was amended after the mission to remove an option that allowed introducers not to assert they held identity verification documents. - Recommendations: - Consider amendment to require that documentation pertaining to customer identity be submitted without delay by the introducer to the regulated institution. ### Wire transfers and originator information - Findings: - There is presently no legislation requiring recording originator information with respect to wire transfers by financial institutions. - Paragraph 98 of the Notes: for electronic transfers, regulated institutions should retain records of payments with sufficient detail to enable establishment of the remitting customer's identity and, as far as possible, the ultimate recipient — this presupposes identity information was obtained initially but does not require that identity information remain with the transfer through the payment chain. - The BMA is awaiting international developments related to resolving technical difficulties regarding originator information retention. - Bermuda has not yet introduced specific guidance regarding wire transfers that do not contain complete originator information; draft revised guidance notes (issued for consultation but not yet effective) address this issue. - Analysis of effectiveness: - Existing arrangements for monitoring originator information will need enhancement when FATF requirements for wire transfers become effective. - Recommendations: - The BMA should impose a requirement that: - originator information remain with transfers or related messages through the payment chain within the deadline established by the FATF; and - enhanced scrutiny be applied to wire transfers that do not contain complete originator information within the deadline established by the FATF. - Implications for FATF compliance: - Relates to FATF Recommendations 10, 11, SR VII; see recommendation linking to criterion 48. ### Ongoing monitoring of accounts and transactions - Findings: - Requirements for ongoing monitoring are not provided under the PCA or PCMLR; they are listed in the 1998 Guidance Notes. - Paragraph 74: regulated institutions must know enough about a customer’s business to recognize unusual transactions. - Paragraph 75: institutions should be alert to implications of financial flows and transaction patterns, especially significant unexpected and unexplained changes in account behavior. - Paragraph 76: suspicious transactions include: - any unusual activity of a customer in the context of his usual activities; - unusual transactions or series of linked transactions; - unusual employment of an intermediary, or method of settlement; - unusual or disadvantageous early redemption of an investment product. - Appendix E provides sector examples of unusual transactions indicating potential money laundering. - Paragraph 91: procedures should require maintenance of a register of all reports made to the FIU. Paragraph 84: a Reporting Officer who decides in good faith that information does not substantiate a suspicion is not obliged to make a report but should record reasons for not reporting. - Appendix A permits acceptance of “reliable introductions” from regulated institutions in certain jurisdictions (list primarily FATF members; excludes some FATF members considered less robust). - Most institutions use mechanisms to monitor account activity (generally manual; two banks plan migration to automated systems). Non-bank institutions are less aggressive in retroactive identification. - Analysis of effectiveness: - Guidance on monitoring originator information for wire transfers needs enhancement to meet FATF requirements when they take effect. - Recommendations: - Authorities should require financial institutions to: - pay special attention to all complex, unusual large transactions, or unusual patterns of transactions that have no apparent economic or lawful purpose; - examine as far as possible the background and purpose of such transactions; - set forth findings in writing; and - keep such findings available for competent authorities. - See recommendation for criterion 48 regarding wire transfers. - Implications for FATF compliance: - Recommendations relevant to FATF Recommendations 14, 21, 28, SR VII. - Text states: Compliant with FATF 14 ,21 28. ### Record keeping - Findings: - Regulation 5(1) PCMLR: regulated institutions are required to keep evidence of client identification by way of a copy of that evidence or a record indicating the nature of that evidence and providing such information as would enable a copy to be obtained, for a minimum retention period. - Minimum retention period: 5 years from the closing of an account or from the date on which the transaction recorded took place; if informed by the Police that particular records may be relevant to an investigation, retain pending outcome (PCMLR, Regulation 5(4)). - Regulation 5(2): PCMLR does not require account files and business correspondences to be maintained in this manner, save for records necessary to assist an investigation into suspected ML activities. - Paragraph 5 of the Regulations: customer identity documents must be retained for at least 5 years from termination of an account or business relationship. - Paragraph 94 of the Notes: entry records including verification documents should be maintained for at least five years. - Paragraph 94: ledger records and supporting records should be maintained for at least five years following the date the relevant transaction was completed. - Paragraph 4(c) of the Regulations: where a police officer notifies a regulated institution in writing that particular records may be relevant to an investigation, records shall be retained pending the outcome. - Paragraph 97 of the Guidance Notes lists transaction record elements generally comprising names and addresses of customer, beneficial owner, counterparty; details of securities and investments including nature, valuations, prices; memoranda of purchase and sale; source(s) and volume of funds and bearer securities; destination(s) of funds and bearer securities; memoranda of instructions and authorities; book entries; custody of title documentation; nature and date of transaction; form of funds (e.g., cash, cheque). - For insurance business paragraph 145: insurers should have access to client financial assessment, needs analysis, details of payment method, illustration of benefits, post-sale records, and details of maturity processing and/or claim settlement. - The Guidance Notes contain no detailed guidance in relation to transaction records (other than those necessary to identify the customer) that should be maintained by deposit taking institutions. - Regulated institutions must keep customer identification records retrievable in legible form within a reasonable period (PCMLR, Regulation 5(3)). Law enforcement may access records by production or monitoring orders under the PCA (Sections 37 and 41). - Analysis of effectiveness: - Regulation 5 of the PCMLR provides for record-keeping and BMAA Section 22 provides BMA power to require information. - Guidance Notes lack detailed guidance on transaction records for deposit-taking institutions. - Recommendations: - Consider revisions to Regulation 5(2) PCMLR to ensure “business records” is understood to mean all necessary records on transactions for the purpose of FATF Recommendation 12. - Amend the Guidance Notes to provide guidance on transaction records (other than those necessary to identify the customer) that should be maintained by deposit-taking institutions. - Implications for FATF compliance: - Bermuda is compliant with FATF Recommendation 12. ### Suspicious transaction reporting (STR) - Findings: - PCA Section 46(2): a person is guilty of an offense if he knows or suspects another is engaged in money laundering (relating to proceeds of drug trafficking), the knowledge or suspicion arose during trade/profession/business/employment, and he did not disclose to a police officer as soon as reasonably practicable. - PCA Section 48(2): it is an offense to fail to report to a police officer a suspicion in relation to any form of criminal activity. Legal provisions do not yet extend specifically to terrorist-related financing. - Institutions are asked to report to the FIU using a standard form prescribed in the Guidance Notes. - PCMLR Regulation 6 requires internal reporting procedures including: - identifying a MLRO to whom employees report any information or matter giving rise to knowledge or suspicion that another is engaged in money laundering; - requiring the MLRO to consider reports in light of all relevant information to determine whether the information gives rise to knowledge or suspicion; - allowing the MLRO access to any information assisting consideration; - requiring the MLRO to file an STR where he knows or suspects a person is engaged in ML. - Paragraph 6 of the Proceeds of Crime Regulations requires regulated persons to have clear reporting procedures communicated to relevant personnel. - Paragraphs 81–84 indicate relevant employees should report suspicions; upon receipt the reporting officer should determine whether to make a report to the FIU and, if so, make it promptly. - Paragraph 80: institutions should ensure relevant employees know to whom suspicious reports should be made and that there is a clear procedure for making reports without delay. - Analysis of effectiveness: - Internal reporting and MLRO obligations are established in PCMLR Regulation 6 and Guidance Notes. - Recommendations: - Maintain clear procedures communicated to relevant personnel and ensure MLROs have access to necessary information to evaluate reports and file STRs promptly when required. *International Monetary Fund (assessment excerpt, cr0599).* ### Appendix F contains a suggested format for reports. ### cr0599 - Appendix F contains a suggested format for reports. ### Suspicious transaction reporting and legal protections (Sections 55–57; Analysis and Recommendations) - 55.2: NAMLC issued the 1998 Guidance Notes and the 2001 Guidance Notes providing guidance on suspicious transactions generally and suspicious transaction reporting in the context of fiscal offenses; the Notes contain guidance as to the requirements and as to compliance with them, including providing examples of ML techniques and methods. FT is not covered. - Paragraphs 7–25 of the Notes describe money laundering and explain the “duty of vigilance” and consequences of failure to be vigilant in the context of the relevant AML legislation. - 56: The PCA provides that any disclosure to a police officer by a person made in good faith with respect to his suspicion or belief that another person is engaged in ML or any information or matter on which that suspicion or belief is based, shall not be treated as a breach of any restriction upon the disclosure of information and shall not give rise to any civil liability (PCA, Section 46(1)). - 57: The PCA provides that a person is guilty of an offense if he knows or suspects that a police officer is acting or is proposing to act in connection with an investigation which is being or is about to be conducted on ML, and he discloses to any person information or other matter which is likely to prejudice that investigation or proposed investigation (PCA, Section 47). - Observations: - Discussions with FIs and the FIU suggest directors and staff of FIs generally have a close working relationship with the FIU and follow any instructions issued. - All institutions visited had procedures in place for the reporting of suspicious transactions; the FIU appears to maintain close contact with institutions periodically speaking at training sessions organized by individual FIs. - There is generally a high level of reporting among banks; however, one institution visited had never filed an SAR. - Analysis: - Section 46(2) of the PCA refers to money laundering in the context of drug trafficking and not the other predicate offenses, which also excludes FT; it also does not designate the FIU and/or another competent authority to which the SARs should be sent. Similarly, the PCMLR and the NAMLC Guidance Notes do not refer to FT. - The PCA and PCMLR only refer to reporting to a police officer and not the FIU, although the NAMLC Guidance Notes are more specific in prescribing filing of SARs to the FIU. - The protection under Section 46(1) of the PCA applies only to ML and not FT, and does not specifically require the disclosure to be made to the FIU. - Recommendations and Comments: - 55, 55.1, and 55.2: The authorities should incorporate provisions pertaining to FT at appropriate aspects of the PCA, the PCMLR, related laws and regulations and the NAMLC Guidance Notes. The Authorities should indicate that the FIU is the appropriate body for receiving SARs and dealing with financial information and intelligence in relation to ML and FT (as discussed under Criterion 17). - 56: The authorities should extend the scope of Section 46(1) of the PCA to include FT and specify the disclosure to be made to the FIU. - 57: The authorities should consider extending the scope of Section 47 of the PCA to include FT. - Implications for FATF compliance: - Compliant with FATF 15,16,17 and 28. ### Internal controls, compliance and audit (Sections 58–61; Analysis and Recommendations) - 58: The PCMLR imposes requirements for customer identification, record keeping, internal reporting, suspicious transaction reporting and employee training for AML purposes (PCMLR, Regulations 4, 5, 6, and 7). There is however no requirement for regulated institutions to audit their compliance processes. - 58.1: The PCMLR provides that regulated institutions should from time to time (i) take appropriate measures for making all relevant employees aware of the PCA and related legislation for AML purposes, and of the procedures maintained by the regulated institutions in compliance with their obligations under the PCA and related legislation; and (ii) provide all relevant employees appropriate training in the recognition and handling of transactions of persons who are or appear to be engaged in ML (PCMLR, Regulations 7(1) and (2)). - Guidance Notes provisions cited: - Paragraph 2: Notes represent good practice and suggest those subject to the Proceeds of Crime Act 1997 and Proceeds of Crime (Money Laundering) Regulations 1998 should adopt internal procedures of equivalent standard. - Paragraph 12: Banks should have procedures to determine true identity of customers, recognize and report suspicious transactions, keep records for prescribed time, train employees, liaise closely with FIU, ensure internal auditing and compliance regularly monitors vigilance procedures. - Paragraph 7 (Regulations): Regulated institutions shall take appropriate measures to make employees aware of relevant legislation and provide appropriate training, including to new relevant employees as soon as practicable after appointment. - Paragraph 105: Training should be provided to new employees, cashiers, account opening staff, supervisors, managers, and reporting officers; indicates regular updates of training. - Paragraphs 7–25: Describe money laundering and the “duty of vigilance”. - 59: The PCMLR provides for the designation of a MLRO (PCMLR, Regulations 6(1)). Regulated persons are required under paragraph 6 of the Regulations to designate a reporting officer. Paragraph 16 of the Guidance Notes states that the reporting officer should be of sufficient authority to ensure compliance by the regulated institution with the Regulations. - 60: There is currently no requirement for adequate screening procedures, although the BMA vets the persons who are to be appointed as directors or managers of Bermudian entities. There is currently no formal legal requirement in relation to the screening of new employees. The BMA undertakes full checks on the fitness and propriety of senior personnel within licensed institutions. The BMA requires licensees to submit completed personal information questionnaires in respect of new senior staff. The authority undertakes full due diligence on such persons. The BMA uses databases such as Lexis Nexis, World Check, etc., and also makes enquiries with other regulatory authorities and other official sources. - Paragraph 4 of the Guidance Notes: where a regulated institution has a branch subsidiary or representative office in another country, it should ensure that the office observes the Guidance Notes or adheres to local standards provided that those standards are at least equivalent. - 61: Requirements for branches/subsidiaries to observe standards are set out in the 1998 Guidance Notes rather than PCA or PCMLR. - Paragraph 5: Where a regulated institution operates branches or controls subsidiaries or has representative offices in another jurisdiction, it should ensure that such entities observe the Guidance Notes or adhere to local standards if those are at least equivalent; keep all such entities informed as to current group policy; ensure each such entity informs itself as to its own local reporting point equivalent to the FIU in Bermuda, and that it is conversant with procedures for disclosure to the FIU equivalent to Appendix G of the Guidance Notes. - Where the BMA acts as consolidated supervisor, it expects standards at least equivalent to the minimum Bermuda requirements to be applied uniformly throughout a consolidated group. - No documented requirement for licensees to inform the BMA of instances where it is not possible to implement standards equivalent to those required in Bermuda. - Observations from onsite visits: - Institutions generally had internal systems meeting legal and regulatory requirements. Training is generally provided on entry with periodic follow-up; more intense training for front line and compliance staff. One institution had no requirement for periodic refresher training. - Institutions indicated they required branches and subsidiaries to apply at a minimum Bermuda legal and regulatory requirements. - Analysis of Effectiveness: - 58: The requirements under the PCMLR should be applicable for both AML and CFT purposes and regulated institutions should be required to audit their compliance processes. - 59: Regulation 6(1) of the PCMLR provides for the designation of a MLRO. - 60: The PCA and the PCMLR do not provide for financial institutions to put in place screening procedures. - 61: The PCA and the PCMLR do not provide for financial institutions to require their foreign branches and subsidiaries to observe AML standards consistent with home jurisdiction requirements; that requirement is set out in the Guidance Notes. - Recommendations and Comments: - 58: Authorities may wish to consider incorporating provisions for FT at appropriate instances and for requiring regulated institutions to audit their compliance processes. - 60: Authorities may wish to consider incorporating provisions for the screening of employees under the PCA or the PCMLR. - 61: The revised Guidance Notes should provide more detailed guidance on the function of the MLRO. - Implications for FATF compliance: - Compliant with FATF 19 and 20. ### Integrity standards (Sections 62–63; Analysis and Recommendations) - 62: The requirements are not provided under the PCA or the PCMLR. - BMA and related vetting: - The BMA, on behalf of MOF, undertakes due diligence on the beneficial owners of all companies seeking to incorporate in Bermuda or to obtain a permit to conduct business there. The Registrar will register a new company only when he has received approval from the BMA /MOF. Internet data-base searches are conducted for all applicants. - For regulated entities the process is much more intense and includes due diligence on all the directors and senior executives and routinely includes police checks. A record of criminal activities or adverse regulatory judgments provides grounds to reject an application. Such vetting is also undertaken in all instances where there is a change in beneficial ownership. - Directors, controllers and senior personnel of licensed financial institutions are required to be fit and proper persons; requirement includes a review of matters listed in legislation and provisions involving regulatory consent to all changes of controller. - Paragraph 2 of the second schedule of the Bank and Deposit Companies Act: in determining whether a person is fit and proper, regard shall be had to probity, competence and soundness of judgment, and diligence in fulfilling responsibilities. - Paragraph 3: regard may be had to evidence of offenses involving fraud or other dishonesty or violence; contraventions of enactments designed to protect the public against financial loss due to dishonesty, incompetence, or malpractice; deceitful or oppressive business practices. - Paragraph 1.1 (9) of the Guidance Notes under Section 28 (3) of the IBA indicate that fit and proper includes a conviction or finding of guilt in respect of any criminal offense other than a minor road traffic offense by any court of competent jurisdiction. - 63: Beneficial ownership of Bermudian entities is subject to vetting by the BMA. The Charities Commissioners conduct due diligence on applications for charities and review the annual accounts of charities (which are also subject to public inspection). - Charities Commissioners conduct due diligence on applications for registration of charities and review accounts filed annually by every registered charity. - No specific guidance was seen in relation to charities and shell corporations and not-for profit organizations. - Analysis of Effectiveness: - 62: The PCA and the PCMLR do not prohibit criminals holding or controlling a significant investment, or holding a senior position, in a financial institution. - Absence of guidance in the current guidance notes in respect of charities, shell corporations and not-for profit organizations is a weakness. - 63: Beneficial owners of entities and charities are vetted by the BMA and the Charities Commissioners respectively. - Note: Draft revised guidance notes devised subsequent to the mission address the charities and NPO issue; they have been issued for consultation but are not yet effective. - Recommendations and Comments: - 62: Authorities should consider incorporating provisions for prohibiting criminals from holding or controlling a significant investment, or holding a senior position, in a financial institution under the PCA or the PCMLR. - The revised Notes should provide guidance in relation to charities and shell corporations, charities and not-for profit organizations. - Authorities should consider incorporating the concept of fit and proper in the IA to reinforce the vetting procedure currently in place and for consistency with the BDCA and the IBA. - Implications for FATF compliance: - Bermuda is compliant with Recommendation 29. ### Enforcement powers and sanctions (Section 64; Analysis and Recommendations) - Description: - As regulator for deposit-taking institutions, insurers, investment service providers and trust service providers, the BMA has power under respective legislation to revoke or cancel the license or registration (BDCA, Section 18; IA, Section 41; IBA, Section 13; and TRTBA, Section 16). - Where an offense has been committed by a body corporate and committed with the consent or connivance of, or attributable to neglect on the part of, any officer of the financial institution, such officer as well as the financial institution shall be guilty of the offense (BDCA, Section 56; IA Section 55; IBA Section 27; and TRTBA, Section 53). - Analysis of Effectiveness: - 64: The powers under the BDCA, the IA, the IBA and the TRTBA do not apply to all financial institutions, such as company service providers, which are not regulated by the BMA. - While the BMA has the power of ultimately terminating licenses or registrations for regulated entities, it may not have the necessary power of enforcement and sanction under the PCA, the Terrorism Order and related legislation. - Recommendations and Comments: - 64: Authorities may wish to consider empowering the BMA and the FIU with appropriate powers for enforcement and sanction, recognizing the NAMLC approach where BMA is principally concerned with customer due diligence and record-keeping and the FIU principally concerned with SARs and investigation and dissemination of financial information and intelligence. - Apart from withdrawal of a license, the BMA has powers to restrict bank activity or a license, including the power to: - require the institution to take certain steps or to refrain from adopting or pursuing a particular course of action or to restrict the scope of its business in a particular way; - impose limitations on the acceptance of deposits, the granting of credit, or the making of investments; - prohibit the institution from entering into any other transactions or class of transactions; - require the removal of any director, controller, or senior executive; and - specify requirements to be fulfilled otherwise than by action taken by the institution. - BMA powers of intervention for insurers include ordering a company to take or refrain from taking certain actions if there is a significant risk of insolvency or violation of the Insurance Act or license conditions; powers to order provision of written particulars relating to financial circumstances, to cease writing certain contracts of insurance, to refrain from specified investments, to direct transfer of specified assets for deposit in a banking institution determined by the BMA (Section 32(3) and (4)). *Source: IMF country report cr0599.* ### Section 18-A (5), both of which apply only to Class 3 and Class 4 companies, the BMA must wait for the reports ### cr0599 - Section 18-A (5), both of which apply only to Class 3 and Class 4 companies, the BMA must wait for the reports ### Supervisory powers and enforcement by the BMA - The Bermuda Monetary Authority (BMA) has the right to withdraw or suspend a license under the IBA and authority to classify a collective investment scheme or withdraw the classification under the CIS Regulations. - The BMA can levy fines under the IBA. - The BMA can refer violations of the law to the public prosecutor for prosecution through the courts. - The BMA has powers to: - direct investment firms to take specific actions; and - appoint a custodian manager to oversee the operations of an investment firm if necessary. - Section 18-A (5) applies only to Class 3 and Class 4 companies; the BMA must wait for the reports before taking action on the assets. ### Cooperation between supervisors and other competent authorities (Criteria 65–67; sector criteria) - The BMA is a full member of, and active participant in, the NAMLAC, and is fully involved in AML/CFT policy and practice. - BMA staff: - are trained domestically and internationally in AML/CFT areas; - participate in initiatives organized by the Compliance Officers Association; and - have attended training programs put on by CFATF and the Caribbean Anti-Money Laundering Program. - Surveillance activity incorporates AML/CFT risk alongside other risks; on-site surveillance has been undertaken for banks and investment firms. - For insurance companies: - external auditors prepare reports, but to date none have focused on AML/CFT issues; - the only on-site surveillance is carried out by auditors; and - the BMA gives no direction to such auditors regarding AML/CFT issues to be covered during on-site visits — making insurance the only sector where on-site visits do not cover AML/CFT issues. - The BMA liaises closely with domestic agencies, notably with the FIU, and can provide assistance in investigations/prosecutions. - The BMA has statutory gateways to exchange information with supervisors internationally (see BMAA, Section 30A, and individual regulatory statutes) and can exchange necessary information for regulatory purposes. - Most practical exchanges of information on individual money laundering suspicions occur between police or judicial authorities rather than through regulatory gateways. - The BMA can share information with equivalent overseas regulators, conditional on the overseas regulator being subject to equivalent safeguards on disclosure of protected information. - The BMA does not require an MOU to cooperate with an overseas regulator, though it has MOUs with Jersey and the Isle of Man. - The IBA provides necessary powers for the BMA to obtain information, but the prior Act failed to override a general restriction in the Bermuda Monetary Authority Act 1969 on provision of customer-specific information; Section 54(2) of the BDCA and related sector-specific provisions indicate restrictions do not preclude disclosure for enabling or assisting an authority outside Bermuda to exercise corresponding functions. - The deficiency in information-sharing was addressed by the IBA enacted subsequent to the mission. ### Analysis of effectiveness - Bermuda has a generally effective framework for cooperation between supervisors and competent authorities. - Weakness identified: absence of specific guidance on AML/CFT issues to auditors undertaking on-site visits to insurance entities on behalf of the BMA. ### Recommendations and policy actions - The BMA’s initiative to review its resources should ensure resources are adequate to provide for sustained on-site surveillance in respect of AML/CFT as well as all other areas of risk. - The BMA should provide specific directions to auditors of insurance entities indicating AML/CFT issues to be examined during on-site examinations. - The initiative to amend the IBA to provide for the exchange of information between the BMA and foreign regulatory authorities for the purposes of discharging the BMA’s regulatory function should be expedited. - Note: The new IBA came into effect in January 2004. ### Implications for FATF Recommendation 26 - Bermuda is compliant with Recommendation 26. ### Controls and monitoring of cash and cross-border transactions - Bermuda Customs can find and seize cash and negotiable instruments it regards as suspicious under Section 50 of the Proceeds of Crime Act and Section 96 of the Revenue Act 1898. - Bermuda Customs liaises closely with the Bermuda Police Service and with U.S. and U.K. Customs; a number of seizures have been made under the cited provisions. - Section 92 of the Revenue Act requires an accounting of bullion or coins imported into Bermuda to be delivered to Customs within ten days of their arrival in Bermuda; failure results in a financial penalty. - Routine reporting of all financial transactions above a threshold was considered but not adopted; suspicion-based reporting to the authorities is the chosen approach. - The NAMLC Consultative Paper proposes adding a currency declaration to the Immigration / Customs form, likely with a reporting threshold of $10,000 (or foreign currency equivalent). ### Summary ratings and effectiveness highlights (selected items) - Selected FATF Recommendation ratings (as presented): - Recommendation 1 — Compliant - Recommendation 2 — Compliant - Recommendation 3 — Compliant - Recommendation 4 — Compliant - Recommendation 5 — Largely Compliant - Recommendation 7 — Largely Compliant - Recommendation 8 — Largely Compliant - Recommendation 10 — Largely Compliant - Recommendation 11 — Largely Compliant - Recommendation 12 — Compliant - Recommendation 14 — Compliant - Recommendation 15 — Compliant - Recommendation 16 — Compliant - Recommendation 17 — Compliant - Recommendation 18 — Compliant - Recommendation 19 — Compliant - Recommendation 20 — Compliant - Recommendation 21 — Compliant - Recommendation 26 — Compliant - Recommendation 28 — Compliant - Recommendation 29 — Compliant - Recommendation 32 — Largely Compliant - Recommendation 33 — Compliant - Recommendation 34 — Compliant - Recommendation 37 — Materially Non-Compliant - Recommendation 38 — Materially Non-Compliant - Recommendation 40 — Compliant - SR I — Materially Non-Compliant - SR II — Materially Non-Compliant - SR III — Materially Non-Compliant - SR IV — Materially Non-compliant - SR V — Materially Non-compliant - SR VI — Not Rated - SR VII — Not Rated ### Effectiveness assessment — Criminal justice measures and international cooperation (high-level points) - The PCA, the CJIBA and the Terrorism Order are principal legislation for the Vienna Convention and UN Resolution 1373; the UN International Convention for the Suppression of Terrorism (1999) and the UN Convention Against Transnational Organized Crime (2002) have not been extended to Bermuda. - The PCA provides for criminalization of ML, extension of predicate offenses to relevant indictable offenses as well as drug trafficking offenses, and applicability of ML offenses to persons who committed ML and those who committed both ML and predicate offenses. - The Terrorism Order prosecutes collection, receipt and provision of funds for terrorism but does not criminalize terrorist acts nor provide for terrorist organizations; terrorist acts are not predicate offenses for AML legislation. - Mens rea for ML offenses under PCA ranges from “intention”, “knowledge”, “suspicion” and “reasonable grounds to suspect”, with “knowledge” being common; courts’ approach remains untested due to no ML prosecutions to date. - Criminal sanctions under the PCA are dissuasive; terms of imprisonment may be rigorous relative to some predicate offenses; maximum fine for summary conviction under the Terrorism Order is rather low. - No provision currently for civil forfeiture for ML offenses; scope of Section 39(1) of the PCA should extend beyond drug trafficking offenses. - Sections 16(1) and (2) of the PCA provide protection for third parties in confiscation/forfeiture contexts. *Source: cr0599 (IMF).* ### 10. There is currently no provision for rendering ### 10. There is currently no provision for rendering contracts void or unenforceable on the basis that parties to the contracts knew or should have known that authorities would, as a result of the contracts, be prejudiced in their ability to recover financial claims under the AML/CFT regime. ### Confiscation, asset forfeiture, and related provisions - 13. The Terrorism Order does not have provisions that deal with seizure and confiscation of property that is the proceeds of or are to be used for terrorism, terrorist acts or by terrorist organizations. - 13.1 / 14 Article 5(1) of the Terrorism Order provides for the restraint of funds and property in this regard. - 15. Section 55A of the PCA provides for the establishment of such an asset forfeiture fund (the CAF). - 16. The asset forfeiture fund (the CAF) established under Section 55A of the PCA provides for such asset-sharing mechanism. - Recommended Action (II—Confiscation of proceeds of crime or property used to finance terrorism): - 7 and 8. The authorities may wish to consider whether to introduce provisions for civil forfeiture. - The scope for the application of Section 39(1) of the PCA should extend to investigation of relevant offenses as defined under the PCA and not merely with regard to drug trafficking offenses, whether a person has benefited from criminal conduct and the whereabouts of any proceeds of criminal conduct. - 10. The authorities may wish to consider incorporating relevant provisions for rendering contracts void or unenforceable on the basis that parties to the contracts knew or should have known that authorities would, as a result of the contracts, be prejudiced in their ability to recover financial claims under the AML/CFT regime. - 11. There is a need to limit access to the data base to FIU personnel only. - 12. There is the need for refresher training for the staff of the FIU. Consideration should also be given to awareness raising programs for prosecutors and the judiciary. There is the need for investigators to have relevant accreditation. Specific training plans ought to be included in the overall training program and accordingly budgeted for. ### The FIU and processes for receiving, analyzing, and disseminating financial information and other intelligence - 17. Whilst the 1998 Guidance Notes have provided for the FIU to deal with the SARs and the PCMLR provides at the domestic and international levels for SARs to be made to police officers, the law does not expressly set out the role of the FIU in receiving, analyzing and disseminating information and intelligence relating to ML and FT activities (for instance, police officers are to include officers from the Customs Department for the purpose of the PCA (PCA, Section 57(1))). - 17 (continued). Given that the FIU is deemed to be the competent authority for the purpose of carrying out the function of a financial intelligence unit and has been established as such, the authorities may wish to consider stating this more clearly in the legislation. - Rationale: civilians may eventually be recruited to bring additional expertise to the FIU and civilians are not subject to the same obligations as police officers (such as that relating to disclosure of information, which is integral to the work of the FIU), and to mitigate challenges against the FIU on its authority to carry out its functions as a financial intelligence unit. - 18. It is important for the FIU to be able to obtain the production orders and the monitoring orders efficiently in order for its work to be effective in practice, especially given the question that is currently being considered in court of whether orders which involve the non-criminal aspects of the PCA should be properly brought by the Attorney-General’s Chambers (which deals with the non-criminal aspects of the AML/CFT regime) or the Office of the Director of Prosecutions. - 19. See analysis for Criterion 18. - 20. The FIU and the BMA do not have express powers to impose sanctions or penalties under the AML/CFT regime. - 21. Whilst the FIU has been empowered to disseminate financial information and intelligence to domestic authorities for investigation or action, the authority is not expressly provided under the PCA or the PCMLR and it is preferable for the authority to be provided under the AML/CFT legislation. - 22. The FIU has the power to share financial information and intelligence with its foreign counterparts provided that it does not to disclose any financial information or intelligence save for the purpose of carrying out its functions. - Recommended Action (III—The FIU and processes for receiving, analyzing, and disseminating financial information and other intelligence): - 17. The authorities may wish to consider amending the PCA or related legislation to establish the FIU formally (i.e., there should be a legal requirement for the FIU to receive SARs directly from FIs). - 20, 21, and 22. The authorities may wish to consider stating more explicitly the powers of the FIU. - 24. It is recommended that the FIU be allocated separate offices properly secured and in an accessible location to the commercial centre. Authorities indicated that efforts are on-going to find appropriate accommodation. - While careful dissemination of information is vital, the FIU should endeavor to publish information relating to trends and typologies. - 26.1 The FIU needs to enhance its intelligence cell and continued to work with other units. It also needs to build and utilize informants more. The increase in staffing levels should assist in this regard. - 29. Separate provisions must be made in the budget for training. - 31. There is the need to intensify the Police’s awareness of the FIU in order to facilitate further exchange of information. - 33. There is need for clarification in respect of the role the offices of the DPP and the Attorney General in relation to confiscation, restraining and monitoring orders. ### Law enforcement, prosecution authorities, powers, and duties - 26. The general powers of the Police provide for the use of relevant investigative techniques. - 27. The relevant powers under the PCA allow law enforcement authorities to obtain information by way of the relevant orders. - Recommended Action (IV—Law enforcement and prosecution authorities, powers and duties): - 26.1 The FIU needs to enhance its intelligence cell and continued to work with other units. It also needs to build and utilize informants more. - 29. Separate provisions must be made in the budget for training. - 31. There is the need to intensify the Police’s awareness of the FIU in order to facilitate further exchange of information. - 33. There is need for clarification in respect of the role the offices of the DPP and the Attorney General in relation to confiscation, restraining and monitoring orders. ### International cooperation - 34. The provisions under Sections 5(1) and 6(1) of the CJICBA provide for the obtaining of evidence for use in Bermuda and overseas, although they do not provide for powers of search and seizure. The provisions of the CJICBA would seem to apply for the purposes of ML and FT. - 36. Bermuda has the benefit of international conventions or treaties extended to it by the U.K. Government but is unable to enter into these international conventions or treaties. However, the CJICBA provides for direct request for mutual legal assistance between Bermuda and another country or territory. - 37. There have not been many instances of mutual legal assistance to date although the avenues, by way of the CJICBA, are broadly in place should there be a need to make or to respond to a request. - 38. The agency-to-agency cooperation between law enforcement agencies appears to be in place for cooperation in investigation. - 40. Extradition for the principal offenses under the PCA and the Terrorism Order would be permissible under the Extradition Act 1989 to such countries that have extradition arrangements with the U.K. Government, although they have not been expressly recognized as extraditable offenses. - Recommended Action (V—International cooperation): - 34. The authorities should incorporate more specific provisions for mutual legal assistance in enforcement matters, such as powers of search and seizure. - 40. The authorities should consider introducing express provisions for ML and FT offenses as extraditable offenses. ### Legal and institutional framework for all financial institutions — key findings I — General framework - 43. There is no general secrecy law and the common law on customer confidentiality does not limit the disclosure of information where relevant, such as pursuant to public interest (such as for the purpose of preventing fraud or criminal conduct). - 44. Whilst Bermuda has an extensive AML/CFT regime, there remains room for ensuring that the requirements under the FATF 40+8 Recommendations are fully incorporated into the AML/CFT legislation. In addition, it is important for the scope of regulated institutions covered under the PCMLR and the NAMLC Guidance Notes to be extended. For instance, consideration could be given to extending the scope to professionals such as lawyers and accountants. - The reference in Regulation 2(2)(a)(iv) of the PCMLR to such insurers that are part of regulated institutions as “a company or society registered under the IA to the extent that it is carrying out long term insurance (but not reinsurance) under the IA, other than life insurance and disability insurance” is unclear as to the category of insurers that is treated as regulated institutions and therefore subject to the PCMLR (and the Guidance Notes). - The PCMLR does not cover persons captured by the Investment Business (Exemption) Order. While this is acceptable in respect of persons who do not act as intermediaries or deal directly with client assets it is not clear that that all exempt persons fall into this category. II — Customer identification - 45. Whilst Regulation 4(1) of the PCMLR provides a requirement for regulated institutions to obtain customer identification by way of establishing and maintaining identification procedures, there is no explicit legal requirement that such procedures be followed. - 46, 46.1, and 46.2. The legal requirements under the PCA and the PCMLR do not provide for customer identification requirements and for renewing identification with existing customers although the Consultation Paper is considering the possible introduction of such requirements. - Draft revised guidance notes which were devised subsequent to the mission address this issue. The notes have been issued for consultation but are not yet effective. Customer identification requirements are currently listed in the 1998 Guidance Notes. - 47. Regulation 4(4) of the PCMLR provides for reasonable measures to be taken for establishing the identity of underlying principals. - 48. There is presently no legislation in place with respect to recording originator information by financial institutions. III — Ongoing monitoring of accounts and transactions - 51. The existing arrangements in respect of guidance re. the monitoring of originator information on wire transfers will need to be enhanced when the FATF requirements for wire transfers becomes effective. IV — Record keeping - 52. Regulation 5 of the PCMLR provides for record-keeping and Section 22 of the BMAA provides for the general power of the BMA to require financial institutions to furnish information. - 53. The Guidance Notes contain no detailed guidance in relation to transaction records (other than those necessary to identify the customer ) that should be maintained by deposit taking institutions. - 54. Regulation 5 of the PCMLR provides for record-keeping and Sections 37 and 41 of the PCA allows law enforcement authorities to have access to records by way of production or monitoring orders. V — Suspicious transactions reporting - 55. Section 46(2) of the PCA refers to money laundering in the context of drug trafficking and not the other predicate offenses, which also excludes FT. It also does not designate the FIU and/or another competent authority to which the SARs should be sent. Similarly, the PCMLR and the NAMLC Guidance Notes do not refer to FT. - 55.1 and 55.2 The PCA and PCMLR only refer to reporting to a police officer and not the FIU. The NAMLC Guidance Notes are more specific in prescribing filing of SARs to the FIU. - 56. The protection under Section 46(1) of the PCA applies only to ML and not FT, and does not specifically require for the disclosure to be made to the FIU. VI — Internal controls, compliance and audit - 58. The requirements under the PCMLR should be applicable for both AML and CFT purposes and that regulated institutions should be required to audit their compliance processes. - 59. Regulation 6(1) of the PCMLR provides for the designation of a MLRO. - 60. The legal requirements under the PCA and the PCMLR do not provide for financial institutions to put in place screening procedures. - 61. The legal requirements under the PCA and the PCMLR do not provide for financial institutions to require their foreign branches and subsidiaries to observe AML standards that are consistent with their home jurisdiction requirements. The requirement is set out in the Guidance Notes. VII — Integrity standards - 62. The legal requirements under the PCA and the PCMLR do not prohibit criminals holding or controlling a significant investment, or holding a senior position, in a financial institution. - The absence of guidance in respect of charities, shell corporations, and not-for profit organizations is a weakness. - 63. Beneficial owners of entities and charities are vetted by the BMA and the Charities Commissioners, respectively. VIII — Enforcement powers and sanctions - 64. The powers under the BDCA, the IA, the IBA and the TRTBA do not apply to all institutions, such as company service providers, which are not regulated by the BMA. - Whilst the BMA has the power of ultimately terminating the licenses or registration of deposit-taking institutions, insurers, investment service providers and trust service providers, it does not mean that the BMA has the necessary power of enforcement and sanction under the PCA, the Terrorism Order and related legislation. IX — Co-operation between supervisors and other competent authorities - Bermuda has a generally effective framework for cooperation between supervisors and competent authorities. - The absence of specific guidance on AML/CFT issues to auditors that undertake on-site visits to insurance entities on behalf on the BMA is a weakness. - Recommended Action (Legal and Institutional Framework for Financial Institutions): - I—General framework (44). The limitation to the scope of the PCMLR and the NAMLC Guidance Notes has been recognized in the Consultation Paper; the authorities may wish to consider extending the scope of the PCMLR and the NAMLC Guidance Notes beyond the range of financial institutions that are currently regulated to cover company service providers and professionals, such as accountants and lawyers. - The authorities should put in place suitable monitoring arrangements to ensure adequate monitoring of AML/CFT systems employed by these entities. - The authorities may also wish to revise the reference to insurers under Regulations 2(2)(a)(iv) of the PCMLR to clarify the category of insurers that is treated as regulated institutions and therefore subject to the PCMLR (and the Guidance Notes). - The PCMLR should be reviewed to ensure that all persons conducting investment business who act as intermediaries or deal in client assets are captured by the legislation. Such persons should also be covered by the BMA’s supervision 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. - II—Customer identification (45). The PCMLR should be amended to explicitly require that customer identification procedures be followed by the regulated institutions. - The authorities should require financial institutions to: - (i) identify their customers on the basis of official or other identifying document; - (ii) record their customers’ identity when establishing business relations; - (iii) identify and record the identity of their occasional customers when performing transactions over a specified threshold; and - (iv) renew identification when doubts appear as to their identity in the course of the business relationship. - Wording in paragraphs 58 and 68 of the Notes “The relevance and usefulness of the following ... information should be considered” should be amended to more clearly indicate the practices that licensees are expected to follow. - Consideration should be given to amending the framework for introduced business to require that documentation pertaining to customer identity be submitted without delay by the introducer to the FI. - The Notes should be amended to provide guidance in relation to reverification, PEPS, non face-to-face customers and correspondent banking relationships. - The BMA should impose a requirement for: - (i) originator information to remain with transfers or related messages through the payment chain within the deadline established by the FATF; and - (ii) introduce a requirement to give enhanced scrutiny to wire transfers that do not contain complete originator information within the deadline established by the FATF. - III—Ongoing monitoring of accounts and transactions (49). The authorities should require financial institutions to: - (i) pay special attention to all complex, unusual large transactions, or unusual patterns of transactions, that have no apparent or visible economic or lawful purpose; - (ii) examine as far as possible the background and purpose of such transactions; - (iii) set forth their findings in writing; and - (iv) to keep such findings available for competent authorities. - IV—Record keeping (53). The authorities could consider revisions to Regulation 5 (2) of the PCMLR to ensure that “business records” as specified in the Regulation is understood to mean all necessary records on transactions for the purpose of FATF Recommendation 12. - 53.1 The Guidance Notes should be amended to provide guidance in respect of transaction records (other than those necessary to identify the customer) that should be maintained by deposit taking institutions. - V—Suspicious transactions reporting (55, 55.1, 55.2). The authorities should incorporate provisions pertaining to FT at appropriate aspects of the PCA, the PCMLR related laws and regulations and the NAMLC Guidance Notes. - The Authorities should indicate that the FIU is the appropriate body for receiving SARs and dealing with financial information and intelligence in relation to ML and FT (as discussed under Criterion 17). - 56. The authorities should extend the scope of Section 46(1) of the PCA to include FT and specifying the disclosure to be made to the FIU. - 57. The authorities should extend the scope of Section 47 of the PCA to include FT. - VI—Internal controls, compliance and audit (58). The authorities may wish to consider incorporating provisions for FT at appropriate instances and for requiring Regulated Institutions to audit their compliance processes. *International Monetary Fund assessment and recommended action plan as reflected in the cited chapter.* ### 60. The authorities may wish to consider ### 60. The authorities may wish to consider ### Integrity standards - Consider incorporating provisions for 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 IA to reinforce the vetting procedure that is currently in place and for consistency with the BDCA and the IBA. - The revised Guidance Notes should provide guidance in relation to: - charities, - shell corporations, - not-for profit organizations. ### Internal controls, compliance and audit - The revised Guidance Notes should provide more detailed guidance on the function of the MLRO. - The BMA should provide specific directions to auditors of insurance entities indicating AML/CFT issues to be examined during on-site examinations. ### Enforcement powers and sanctions - While responsibilities under the NAMLC are allocated (BMA principally concerned with customer due diligence and record-keeping; FIU principally concerned with SARs and investigation and dissemination of financial information and intelligence), the authorities may wish to consider empowering the BMA and the FIU with the appropriate powers for enforcement and sanction. ### Co-operation between supervisors and other competent authorities - The initiative to amend the IBA to provide for the exchange of information between the BMA and foreign regulatory authorities for the purposes of discharging the BMA’s regulatory function should be expedited. - There should be a provision in the IBA to allow the Authority to share information with other regulatory authorities. ### Sector-specific guidance and record-keeping - Banking sector: The Guidance Notes should be amended to provide guidance in respect of transaction records (other than those necessary to identify the customer) that should be maintained by deposit taking institutions. - Insurance sector: The Guidance Notes should be amended and the BMA should provide specific directions to auditors indicating AML/CFT issues to be examined during on-site examinations of insurance companies. - Securities sector: There should be a provision in the IBA to allow the Authority to share information with other regulatory authorities. ### Assessment context and key insurance-sector statistics - The Insurance Sector assessment was part of an OFC assessment for Bermuda, aimed at determining observance with the IAIS Principles and suggesting areas for development. - Bermudian regulation reviewed includes: Bermuda Monetary Authority Act 1969 (amended in 1993, 1997, 1998, 1999, 2000, and 2001); Bermuda Monetary Authority (Financial Institutions) (Control) Regulations of 1994; Insurance Act of 1978 (amended in 1995, 1998, 2001 and 2002) and the 2002 Statement of Principles; Insurance Accounts Regulations 1980, as amended; Insurance Returns and Solvency Regulations 1980, as amended; Government Fees Amendment (n°2) Regulations 2002; Life Insurance Act 1978, as amended; Companies Act, as amended; Exchange Control Act of 1972. - The mission met with senior officials and staff of the Ministry of Finance, the Bermuda Monetary Authority, insurance supervision division, and industry representatives including insurers (XL, IPC Re, Renaissance Re, Allied World Assurance Company), captive managers (Aon, Liberty International, International Advisory Services), actuaries (Swiss Re, AIG, Partner Re) and auditors (PriceWaterhouseCoopers, KPMG, Ernst & Young). - Market-scale statistics and structural features: - Bermuda insurance industry includes 1,600 insurance (and reinsurance) companies. - Actively writing companies had $172 billion in assets and wrote over $48 billion in annual gross premiums in 2001. - Bermuda is the largest captive domicile in the world with approximately 940 active captives (1,200 registered), with total gross premiums of $32.5 billion at end-2002. - Gross premiums for professional insurers and reinsurers totaled $10.2 billion in 2001. - For 2001, data showed less than 60 percent of net premiums distinguished between direct and assumed business. - Bermudian companies ceded 16 percent of gross premiums on average in 2001. - Cession by class (where determinable for general business): - Class 3 companies ceded 21 percent of gross premiums, - Class 2 ceded 25 percent, - Class 1 ceded 28 percent, - Class 4 reinsurers writing exclusively general business ceded nearly 40 percent of their premiums. - Capitalization ratios (net premiums to ‘capital and surplus’ ratio, 2001): - Exclusively long-term business companies: 170 percent, - Composite companies: 89 percent, - Exclusive general business companies: 32 percent. - Among four licensing classes (1995 amendment to the Insurance Act): - Class 3 accounts for 59 percent of the net premiums underwritten by the four classes and had a ratio of 73 percent, - Class 2 and Class 4 ratios: 50 percent and 48 percent respectively, - Class 1 ratio: 31 percent. - Companies licensed exclusively in long-term business represented 9 percent of the number of companies and 8 percent of the gross premiums in 2001. - Supervisory and institutional arrangements: - On January 1, 2002, the BMA assumed responsibility as regulator and supervisor for all financial services, including insurance supervision transferred from the Ministry of Finance. - The BMA Board expanded to 11 persons, three of whom are executive directors—the Chairman and Chief Executive Officer, the Supervisor of Insurance and the Superintendent of Banking, Trust and Investment. - The supervisor relies on key approved players for alerting potential solvency problems: the principal representative, the independent auditor, the loss reserve specialist (annual for Classes 3 and 4, triennial for Class 2), and the actuary (for long-term business). - Reporting requirements are met by filing of statutory returns generally audited by the Big 4 accounting firms; potential for conflicts of interest exists. - Human capital and infrastructure: - A Bermuda Insurance College exists and scholarships/foundation programs support Bermudians entering the industry. - To meet market infrastructure needs in accounting, actuarial and management sectors, many professionals must be recruited abroad on work permits; significant rotation occurs in first five years but many remain long term. - Four banks and the presence of the Big 4 auditing firms support the industry infrastructure. *Detailed Assessment Report on Observance of the Insurance Core Principles of Insurance Regulation (Insurance Sector assessment for Bermuda), IMF* ### 52. Bermuda is a country with a population of 60,000, whose main source of revenue is ### 52. Bermuda is a country with a population of 60,000, whose main source of revenue is international business, followed by tourism. ### Background and insurance sector scale - Population: 60,000. - Main sources of revenue: international business, followed by tourism. - Number of insurance companies: 1,600. - Gross insurance premiums of actively writing companies: amounting to 12 times the GDP in 2001. - Insurance supervisory staff: 17 persons in March 2003 (3 administrative); increased to 25 in May 2004 (4 administrative). - Bermuda pursued a system based on co-supervision and outsourcing; staff was increased subsequent to the mission. ### Outsourcing, verification, and in-house capacity - Outsourcing inspections can provide necessary supervisory skills but must ensure the supervisor receives adequate and independent information. - Suggested mechanisms for robust outsourcing: - Give explicit instructions to an independent reviewer, in addition to existing legal and professional standards and expectations. - Require the reviewer to produce a report detailing each commissioned assessment point. - Maintain a minimum in-house actuarial capacity at the BMA to verify reviewer reports. - Outsource an independent examination capability to verify data submitted to the authority, or alternatively develop this capability in-house. ### Post-mission developments reported in 2004 (not evaluated by the assessment team) - Principle 4, Corporate Governance: - Prepared draft guidance note addressed to the Board of Directors and Senior management on corporate governance. - Introduction in 2005 of more extensive program of regular on-site visits. - Principle 5, Internal Controls: - Prepared a draft guidance note on risk management and internal controls. - Principle 7, Liabilities: - In 2004 prepared a draft guidance note for the loss reserve specialist. - Principle 8, Capital adequacy and solvency: - Drafted a series of guidance notes on investments, insurance underwriting, role and qualifications of the loss reserve specialist and actuary, internal controls and risk management. - Principle 9, Derivatives and “Off-balance sheet” items: - Drafted guidance notes on investments, and risk management and internal controls. - Principle 11, Market conduct: - Drafted guidance note on market conduct for domestic insurers and intermediaries. - Principle 12, Financial Reporting: - Insurance Amendment Act, 2004, requires insurers to file their financial statements simultaneously with their annual Statutory Financial Return. - Principle 13, On-site inspections: - Developing a more comprehensive risk-based approach to be introduced in 2005. - Principle 16, Coordination and Cooperation: - Memorandum of Understanding (MOU) with the Financial Services Authority of the United Kingdom. ### Principle 1 — Organization of an Insurance Supervisor: key findings and legal/operational features - Primary objective: maintain efficient, fair, safe, and stable insurance markets for the benefit and protection of policyholders, consistent with the Insurance Core Principles. - Organizational and legal framework: - Supervision history: Bermuda started to regulate insurance in 1981 by adopting the Insurance Act (1978). Supervision was located with the Registrar of Companies in the Ministry of Finance until 2001. - Since the Insurance Amendment (n°2) Act of 2001, supervision of insurance became a responsibility of the Bermuda Monetary Authority (BMA). - BMA Board composition under the 2001 amendment: 11 persons, 3 executive directors (the Chairman, the Supervisor of Insurance and the Superintendent of Banking, Trust and Investment) and 8 non-executive (appointed by the MOF from among the Insurance Advisory Committee (4 persons) and persons with experience of the financial services industry (4 persons)). - Appointment: The Supervisor of Insurance is appointed by the BMA, with the approval of the Minister. - BMA organizational divisions: two main regulatory divisions (headed by the Superintendent of Banking, Trust and Investment and the Supervisor of Insurance) and two support divisions (Legal Counsel Unit and Administration Unit). - BMA Act 1969 objectives (Section 3) include “to supervise, regulate and inspect any financial institution which operates in or from within Bermuda; to promote the financial stability and soundness of financial institutions.” - Insurance Act preamble objective: regulate the carrying on of insurance business in or from Bermuda; provide for registration of insurers and other persons engaged in that business; and provide for matters connected with, or incidental to, those matters. - Ministerial directions: Pursuant to Section 21(2) of the BMA Act “the Minister may give to the Authority in writing such general directions as appear to the Minister to be necessary in the public interest.” - Powers conferred on the Authority: - Licensing powers: Section 4. - Power to obtain information and documents, and perform on-site inspections: Sections 29A and 29B (recently enacted in 2002). - Power to appoint an inspector to investigate affairs of an insurer: Section 30. - Powers of intervention: Section 32. - Power to petition for winding up of a company: Section 35. - Section 56 permits the Authority to modify, on a case by case basis, existing regulations (e.g., minimum capital and surplus or statutory financial statements), with measures possibly retroactive. - Limitations noted: BMA cannot impose intermediate recovery measures such as requiring submission of a written recovery plan within a relatively short time or take temporary control over management to rectify an insurer’s hazardous condition without initiating court proceedings. - Employment, staffing, and human resources: - Insurance Division staff composition (prior to May 2004): 16 persons (3 assistant directors, 8 senior analysts, 2 junior analysts and 3 administrative staff). - October 2002 reorganization into 3 groups: Daily team (head + 7 analysts), Regulatory Authorization team, Compliance team (head + 3 senior analysts), Policy & Administrative team (head + 3 administrative staff). - By May 2004, staffing increased to 25 directly involved in supervision, with recruitment including a consulting actuary and a regulatory consultant. - Budget process: BMA submits its budget to the MOF for approval (Section 26 of the BMA Act); budget funded by supervisory fees and seignorage from issuance of Bermuda currency. - Legal protection for staff: insurance supervisory staff has adequate legal protection from suit and other proceedings when acting bona fide in pursuance of its functions (Section 4B, as amended in 2001, of the BMA Act). - Human resource developments in 2002: training needs assessment of all posts; updated performance-based appraisal system introduced; training on appraisal interviews; introduction of performance-related pay. - Staff experience development: two senior staff have auditing background; four staff members temporarily joined auditing firms as trainees for periods of 3 to 6 months. - Information systems and records: - IT status: a status report followed by a strategy report under revision by the BMA board; a strategic plan to be adopted before May 2003. - Insurance database: contains all data filed in statutory returns since 1996 (data prior to 1996 available in historical database). - Outsourcing and confidentiality: - Outsourcing of the inspection process permitted (Sections 18A (5), 29A, and 30). - Confidentiality obligations: staff required to maintain confidentiality ensured by Section 31 of the Bermuda Monetary Act (as amended in 1999) and Section 52 of the Insurance Act, with criminal penalties for unauthorized disclosure. - Detailed policy on personal dealings, gifts, and hospitality: transactions and ownership of shares in financial institutions severely restricted; all gifts must be declared; only gifts of value less than $100 may be kept; substantial hospitality must be approved by the Authority. - Reporting and transparency: - The BMA reports quarterly and annually on its activities. - Assessment outcome and comments: - Assessment for Principle 1: Largely observed. - Comment on independence: The Minister’s power under Section 21(2) to give general directions may create the impression that independence is not fully established, even if it has not been used; recommendation that legislation be amended to remove this power. - Use of powers under Section 29A is intended to be “infrequent and exceptional if the Authority is able to rely on the information voluntarily provided by the institution” (Statement of Principles introduced by the Insurance Amendment Act 2002). - Actions under Section 29B can be taken if the BMA “reasonably” requires it for performance of its functions; Section 30 allows appointment of an inspector where it is “required in the interest of policyholders.” *Source: IMF assessment of Bermuda insurance supervision.* ### Section 56 could be understood to allow for tightening as well as easing regulatory constraints. In ### cr0599 - Section 56 could be understood to allow for tightening as well as easing regulatory constraints. In ### Section 56, supervisory powers, IT and staffing - Section 56 has been used in practice only to ease regulatory constraints (examples: exempting new companies from filing date deadline; allowing certain assets to be included in “relevant” assets for the liquidity ratio; exempting a company from filing a loss reserve specialist opinion in exceptional cases; relieving companies from keeping two sets of accounts; allowing insurance contracts with no significant transfer of risk to be considered non-insurance contracts). - The BMA should be able to impose recovery measures (require a recovery plan, change management without the delay of a court proceeding). - Current IT system deficiencies: BMA was unable to give the number of approved intermediaries; insurance supervision division is aware and will act once strategic directions are set. - Staffing: - Authority plans to increase staff to 30 people. - Supervisory challenges cited when a staff of 17 has to ensure on-going supervision of 1,600 companies and lacks a well-developed IT system. ### Principle 2 — Licensing: procedures, types and statistics - Licensing procedure consists of incorporation and registration handled simultaneously; can be extremely rapid (www.bermuda-insurance.org claims under two weeks for a captive). - No legal distinction between direct insurance and reinsurance — rules apply to both. - Types of licensed companies: - domestic companies (local ownership and locally incorporated): 10 companies currently; - exempted companies (incorporated in Bermuda but exempted from the 60 percent Bermudian ownership rule); - permit companies (incorporated in another jurisdiction with a Ministerial permit to operate in Bermuda); - Non Resident Insurance Undertakings (NRIU), a subgroup of permit companies allowed to operate on the domestic market: 22 companies of which 8 are no longer active. - Licenses by business type: nine different types; companies may be licensed for general business only, long-term business only, or as composite (both). - Company counts and composition (as of end-2001): - 1,602 companies incorporated (up 109 from previous year). - 1,536 companies registered (licensed) at the same date (discrepancy noted). - Of these: 835 are captives (Class 1 and 2); 31 are Class 4; 148 are exclusively long-term business (life); 522 are Class 3. - Business mix: 84 percent do exclusively general business (approximately 1,350 companies); 9 percent licensed to do long-term business only (148 companies); 6 percent composite (104 companies). - Licensing application requirements include legal form, type of business, projected income statement (in practice often five years), reinsurance/retrocession program, names of principal representative, insurance manager, approved auditor, and where required, loss reserve specialist and approved actuary. Authority considers fitness and properness and adequacy of premises (Section 5). - Insurance Advisory Committee (IAC) and IAC Admissions Committee: - IAC composed of at least 5 persons appointed by The MOF; currently 19 members. - IAC Admissions Committee has 12 members; usual attendance ranges from four to seven; meets every Friday. - Submission deadline: Authority must receive submissions by 17:00 on the Monday immediately preceding the Friday meeting. - 2002 activity: IAC Admissions met 44 times to study 141 applications (32 for intermediaries and 109 for insurance companies). Outcome: all but 13 applications approved (3 concerning intermediaries and 10 concerning insurers — 5 declined, 5 considered insufficient for review, and 3 withdrawn or outstanding). - Observations/recommendations: - Definition of long-term business is broad and vague; IAC Regulatory subcommittee to address. - Business plan requirements not precisely characterized; regulations should explicitly require a five-year financial plan, including balance sheets, and more detailed income statement per defined lines of business. - “Fit” and “proper” terms are undefined in regulations; IAC Regulatory subcommittee tasked to define criteria. - Consider increasing quorum requirements of IAC Admissions Committee and precisely defining business plan characteristics. - License of a captive manager has never been canceled (revoked). ### Principle 3 — Changes in control - All changes affecting private companies must be notified to the BMA (Authorization & Compliance unit) and approval obtained per Exchange Control Regulations 1973 (Sections 12 and 13). - Authority assesses suitability of owners and management and reviews new business plans if initial plan will change. - Public companies can obtain exemption from prior notification if traded on a recognized exchange; all public companies have obtained this exemption. - Authority receives approximately 7 applications a week; proposed changes sometimes deferred until company in sound financial condition. - Significant changes in ownership in public companies may be formally notified to the BMA but not always. ### Principle 4 — Corporate governance - BMA does not have responsibility for setting corporate governance requirements but has authority to do so; Companies Act and common law regulate governance; these are not replicated in the Insurance Act. - Existing dispositions set duties for directors and companies but lack general guidelines for boards (strategic objectives, appointment procedures, separation of responsibilities). - Many insurers are subsidiaries of large U.S. corporations subject to parent corporate governance policies and Sarbanes-Oxley where applicable. - BMA actions: - On-site visit program (from 2002) started with Class 4 companies and will extend to some Class 3 companies; supervisor requires auditor’s management letter and may gather information on corporate governance during visits. - BMA does not require boards to have clear complaints procedures communicated to customers. - Assessment: principle not applicable to BMA responsibility, but recommendations: - BMA should be able to depend on companies having detailed internal procedures, accountabilities, and board/management role clarity. - BMA should require companies that sell insurance products on the domestic market to have clear complaints procedures for individual policyholders. ### Principle 5 — Internal controls - BMA authority to review internal controls through approved auditor’s annual statutory audit; auditor applies Generally Accepted Audit Principles and must qualify report if “deficiencies” found (Section 7 of insurance returns and solvency regulations 1980). - All annual statutory financial statements must be audited; auditors’ reports filed with Authority for all companies, regardless of class (Class 1 auditor’s opinion not required with SFR but must be maintained at principal office). - Principal representative duties: must, within 30 days of becoming aware, report likelihood of insurer becoming insolvent or failure to comply with regulatory imposition (Section 8A). - BMA does not require internal controls to address organizational structure, accounting procedures, reconciliations, control lists, and management information explicitly. - BMA can access internal audit reports if it can “reasonably” require it (Sections 29A and 29B). - If “significant risk” of insolvency or regulatory breach, BMA can require insurer not to make investments of a specified class or keep assets in custody of a specified bank (Section 32). - BMA can cancel registration if insurer not carrying on business in accordance with sound insurance principles (Section 41(1)(vii)). - Assessment: materially non-observed. - Recommendations: - Internal controls should be mentioned explicitly as a regulatory imposition. - Wording in auditor instructions should be explicit; flow of information from auditor to BMA should be more explicit and more frequent. - Auditor should systematically communicate in writing to the BMA the details and results of the review carried out on BMA instruction. - The option of canceling a license is too severe to be practical; consider intermediate remedial measures. ### Principle 6 — Assets: valuation, liquidity and relevant assets - Insurance Accounts Regulations 1980 and Insurance Returns and Solvency Regulations 1980 are concise; where Bermuda accounting standards silent, BMA allows choice of accounting standard; most choose U.S. or Canadian GAAP. - Asset valuation options: quoted value for quoted investments, fair value determined in good faith for unquoted investments, or amortized cost; equities cannot exceed fair value; investments in affiliates valued by cost or equity method (equity method if lower of two, but if fair value even lower, it must be used); uncollectibles must be deducted. - Asset categories listed (cash and time deposits, quoted investments, unquoted investments, investments in and advances to affiliates, investment in mortgage loans on real estate, collateral loans, investment income due and accrued, accounts and premiums receivable, reinsurance balances receivable, funds held by ceding reinsurers, sundry assets, letters of credit and guarantees). - Long-term business insurers must segregate long-term business accounts (Section 24); insurers with non-insurance activities must keep separate accounts for insurance business (Section 19). - Liquidity ratio requirement for general business insurers (Section 11 Insurance Returns and solvency regulations 1980): - Value of relevant assets must be no less than 75 percent of the amount of relevant liabilities. - Relevant assets include: cash and time deposits, quoted investments, unquoted bonds and debentures, investments in mortgage loans on real estate with first liens, investment income due and accrued, accounts and premiums receivables, reinsurance balances receivable and funds held by ceding reinsurer. - Excluded from relevant assets: unquoted equities, investment in and advances to affiliates, real estate and collateral loans. - BMA can use Section 56 to allow non-admitted assets to classify as relevant assets (examples: hedge funds, deferred acquisition costs in long-term business company, receivables from a parent company). Authorizations usually given case-by-case for one year. - During on-site visits, Authority asks insurers to explain policy on derivatives and off-balance sheet items. - Assessment: materially non-observed. - Comments and recommendations: - BMA does not establish diversification provisions nor limits by asset type nor require appropriate matching of assets and liabilities; relies on close industry contacts for ad hoc direction. - Unquoted bonds valued at market value are included in liquidity ratio; volatility suggests they should be excluded. - Supervisor could give auditor or other qualified professional detailed terms of reference and require a detailed report on asset findings. ### Principle 7 — Liabilities and technical provisions - Insurance Accounts Regulations 1980 defines reserves: - General business: provisions for unearned premiums, loss and loss expenses provisions and “other”. - Long-term business: seven types including reserves for reported claims, reserves for unreported claims, policy reserves in life, policy reserves in accident and health, policyholders’ funds on deposit, liability for future policyholders’ dividends, and other reserves. - Reserves indicated net of all recoverables unless amount considered uncollectible; no requirement to disclose gross and net figures separately. - Discounting of general business reserves allowed under conditions (payment dates reasonably ascertainable or if discounted before December 31, 1988). - Insurance Act does not set standards for reserve calculation; methods must be described in notes; supervisor does not have authority to prescribe technical provision standards (MOF may, acting on advice of Authority, make regulations). - Auditor required to qualify report if disagreeing with any valuation in statutory financial statements (Insurance returns and solvency regulations 1980). - For Class 4 companies, Schedule C (introduced by Insurance Amendment Act 1995) requires detailed reinsurance recoverables information (reinsurer name, rating, jurisdiction, ceded premium, reinsurance recoverable, balances payable, net reinsurance recoverable broken down by whether due for more or less than 180 days). - Annual returns of a general business insurer must include opinion of a loss reserve specialist: - Annually for Classes 3 and 4 and for any company writing professional liability > 30% of gross premiums. - Every third year for Class 2 companies. - If company has not met general business solvency margin on an undiscounted basis. - Annual returns must include actuary opinion on long-term business liabilities (Section 27). - Life Act does not set provisions on life reserve calculation nor choice of interest rates or mortality tables. - Assessment: materially non-observed. - Recommendations: - Expand information on reserves: gross and net per line of business, specific recoverables, loss expense reserves, liquidation of prior years’ reserves. - Provide precise guidelines to auditor, actuary and loss reserve specialist and require a detailed report addressing reserve sufficiency and related checks. - Consider explicit allowance for premium insufficiency reserves. - Consider setting general rule limiting reinsurance recoverables (excluding unrated or below-investment-grade reinsurers). - Set rules for calculation of life reserves (domestic life insurance represented $54 million in 2001). ### Principle 8 — Capital adequacy and solvency - Minimum paid-up share capital requirements detailed in Insurance Act Section 7(1); minimum capital and surplus requirements in Section 6 and regulations 10 (general business) and 12 (long-term), and Schedule 1 Insurance Returns and Solvency regulations. Risk-based by Class. - Minimum share capital: - $120,000 for Class 1, 2, and 3 companies; - $1 million for Class 4; - $250,000 for long-term business insurer; - Composite companies add long-term and general business requirements. - Minimum solvency margin for long-term business companies: long-term business assets exceed value of share capital liabilities by $250,000. - For the 4 classes of general business companies, general business assets must exceed general business liabilities by the greatest of figures A, B and C: - Type of license: class 1 / Class 2 / Class 3 / Class 4 - A: min capital and surplus: $120,000 / $250,000 / $1 million / $100 million - B: Premium test: - Class 1: 20% of 1st 6 M$ NPW + 10% of excess of $6M NPW - Class 2: 20% of 1st 6 M$ NPW + 10% of excess of $6M NPW - Class 3: 20% of 1st 6 M$ NPW + 10% of excess of $6M NPW - Class 4: 50% of NPW + 15% of GPW (limit deduction to 25% of GPW) - C: Loss reserve Test: 10% of net reserves / 10% of net reserves / 15% of net reserves / 15% of net reserves - NPW = Net Premiums Written - GPW = Gross Premiums Written - For Class 4 insurers, deduction of premiums ceded for reinsurance cannot exceed 25 percent of gross premiums written in respect of general business of the Class 4 reinsurer. - Solvency ratio must be maintained at all times throughout the year. - Assessment: largely observed. - Comments: - Solvency margin is stringent, especially for reinsurers, and is not just an end-of-year requirement; however, adequacy depends on asset and liability measurement (issues in Principles 6 and 7). - Actual capital and surplus of Class 4 companies often much higher than $100 million minimum; new companies post-September 11, 2001 have more than $500 million; some have over $1 billion. - Net-basis solvency margin implies reinsurance recoverables are effectively assumed collectible; this may understate risk if reinsurers fail. - Legal provisions do not address adequacy of technical provisions being covered by reasonably secure assets. ### Principle 9 — Derivatives and off-balance sheet items - No explicit requirements restricting use of derivatives or off-balance sheet items; no mandatory disclosure requirements. - Insurance Accounts Regulations 1980, Schedule II, Part I, note n°13 requires disclosure of “any other information which in the opinion of directors is required to be disclosed if the statutory financial statements are not to be misleading.” In practice auditors usually encourage disclosure of off-balance sheet elements and derivative use. - BMA does not require insurers to have an appropriate policy or an investment risk management system to measure derivative risk. - On-site visits inquire about insurer’s policy on derivatives (Class 4 visits started 2003, plans to extend to some Class 3). - Reliance on limited scope for captives and professional behavior for Class 4; many Class 4 insurers are listed and subject to SEC or similar requirements. - Assessment: materially non-observed. - Recommendations: - Supervisor could require disclosure of off-balance sheet items, especially derivatives, for all insurers. - Supervisor could require auditors to verify that insurers have strict internal controls to prevent operations contrary to company policy on off-balance sheet items. ### Principle 10 — Reinsurance - No distinction between primary insurers and reinsurers; reinsurer underwriting direct business subject to same supervision. - Assessment of ultimate collectibility of reinsurance recoverables is management responsibility; regulations state directors’ opinion of uncollectible amounts shall be deducted. - BMA reviews general lines of reinsurance program during licensing; for Classes 1 and 2 captives business plans generally adequate; Classes 3 and 4 plans can be vague. - On-going supervision relies on auditor due diligence to review security of reinsurers. - Class 4 annual returns include informative statement of ceded reinsurance with reinsurer names, ratings and amounts. Captives doing unrelated business usually required by ceding companies to post collateral. - On-site visits may review reinsurance arrangements. - Assessment: materially non-observed. - Comments and recommendations: - Supervisor reviews initial reinsurance program but on-going review lacks concrete data checking. - Auditor’s due diligence may not sufficiently assess adequacy of reinsurance program relative to insurer capital and risk profile. - Annual statutory filings contain limited information on nature of risks underwritten; Class 4 reinsurance schedule lacks information as to risks covered. - Require auditors to review both security of reinsurers and adequacy of reinsurance program for capital and risk profile; improve disclosure of risks underwritten. ### Principle 11 — Market conduct - Authority must approve insurance managers, brokers, agents, and salesmen; strict fit and proper checks (Sections 9 to 12). Approximately 300 intermediaries per BMA. - Bermuda Association of Insurance and Financial Advisors has a code of ethics for members. - BMA has not focused on customer-related market conduct due to wholesale international market orientation (domestic direct represents 0.3 percent). - Consumer Affairs Bureau (part of Ministry of Community Affairs and Sport) mission extended in 2001 to include insurance business; very few complaints (less than 3). - No provisions in Life Insurance Act imposing disclosure requirements or conventional consumer protection. - Assessment: non-observed for domestic companies; not applicable for international reinsurance. - Recommendations: - Differentiate treatment of domestic insurance to address individual and small corporate policyholders’ needs—timely meaningful information and equitable complaints handling. - Mention Consumer Affairs Bureau in insurance policies to increase policyholder awareness. ### Principle 12 — Financial reporting - All insurers required to file annual audited Statutory Financial Return (SFR); contents depend on class. - SFR for classes 2, 3, 4 and long-term insurers includes audited statutory financial statements. - Class 1 insurers not required to file auditor’s opinion with SFR but must maintain statements for five years at principal office (Section 17). - SFR components: cover sheet, auditor’s report, declaration of statutory ratios (signed by principal representative and two directors), general business solvency certificate, opinion of loss reserve specialist (as applicable), long-term business solvency certificate, actuary’s certificate (long-term liabilities), and for Class 4, detailed schedule of ceded reinsurance. - Three statutory ratios (Schedule II): - premiums to statutory capital and surplus ratio (net premiums written divided by statutory capital and surplus less, given the case, minimum solvency margin for long-term business); - five-year operating ratio (sum of net loss ratio and expense ratio less investment income ratio over a five-year period); - change in statutory capital and surplus ratio (variation in statutory capital and surplus over the year). - Compliance team: - Deputy Director heads Compliance team; initially 3 senior analysts; after assessment expanded—in July 2004 comprised Assistant Director (head), two Principals of Compliance, and 4 senior analysts; consultant actuary assigned pivotal role. - Supervisor relies exclusively on auditor for testing validity of detailed data; actuary checks figures given by management, auditor tests accuracy, consistency, completeness. - Assessment: materially non-observed. - Comments and recommendations: - Authority enforces strict filing delays. - Financial reporting should be more detailed: distinguish direct and assumed insurance, lines of business, reinsurance contract types (proportional, non-proportional, facultatives). - Information on losses limited; no information on liquidation of reserves. - Options for BMA to check loss/liquidation information: - Commission approved actuary or loss reserve specialist to include comment on liquidation of provisions. - Hire or outsource actuary to analyze data (requires modifying financial returns to collect data). - Consider requiring quarterly accounts for Classes 3 and 4. - Require Class 1 companies to file financial statements with Authority to enable proactive supervision if shareholder/insured has financial troubles. ### Principle 13 — On-site inspection - BMA powers for on-site inspections via Sections 29A, 29B or Section 30; BMA distinguishes prudential visits (29A) from sanction inspections (30), though legal text does not warrant this distinction. - Insurance Amendment Act 2002 inserted Sections 29A–29F; Sections 29A and 29B provide powers to obtain information, reports and require production of documents; Section 29F refers to statement of principles published giving conditions for use of Sections 29A and 29B. - Statement of principles severely restrains use of Sections 29A and 29B, stating use will be infrequent and exceptional if Authority can rely on voluntarily provided information. - Section 29B allows BMA to ask for any information it “reasonably” requires that is material to BMA functions. - On-site visit program (initiated January 2003): annual program focusing on Class 4 and selected Class 3 companies; involves three BMA staff making a half-day visit to management. - Pre-visit requests: organizational chart, biographies of key employees, copy of information given to other regulators and rating agencies, auditor’s management letter (if applicable). - Visit agenda: business underwritten, future evolution, capital adequacy. - Comments: - On-site visits provide wide-ranging discussion but are not conceived to include very concrete data checking. - BMA’s statement of principles may limit proactive use of statutory powers to require information. *Source: IMF assessment of Bermuda’s insurance regulatory and supervisory framework (text provided).* ### Section 30 allows the Authority to appoint an inspector only if it is “required in the interest of ### cr0599 - Section 30 allows the Authority to appoint an inspector only if it is “required in the interest of ### Inspections and inspectors (Section 30) - Section 30 allows the Authority to appoint an inspector only if it is “required in the interest of policyholders.” - Policyholders are deemed by the BMA to extend to all contracts for insurance, reinsurance and retrocession (individuals, companies whatever the size and the business, including insurance). - Every year, one company is inspected on average. - The supervisor appoints as inspector a firm of auditors, of actuaries or of lawyers, according to what is needed, to review the insurance company. - Inspectors must be from a different firm than that of either the independent auditor and/or independent actuary of that company to prevent conflicts of interest. - International firms perform international conflict checks going back over a three-year period (example: if the firm’s U.K. company has audited the account of a parent company of the Bermudian insurer, the assignment can’t be accepted). - In total, including liquidations, the BMA gives approximately 15 assignments annually to the independent reviewers. - Subsequent to the mission the BMA prepared draft Guidance Notes that seek to provide additional clarity in relation to the role played by persons who perform important functions in the insurance regulatory framework, including inspectors. ### Domestic audit market and staffing (conflict-avoidance and capacity) - Six major firms of auditors in Bermuda, by order of decreasing size, with approximate staff counts: - (A) 200 staff of which 130 are full time auditors; - (B) 170 staff of which 100 auditors; - (C) 160 staff of which 90 auditors; - (D) 140 of which 70 auditors; - (E) 40 of which 25 auditors; - (F) 20 of which 10 auditors. - Another 18 small firms (some with only one auditor) are also approved and audit the accounts of at least one insurance company (usually a captive). - Inspections (Section 30), generally conducted by one of the “Big Four” audit firms, are too infrequent according to the assessment. ### Access to information, working papers, and supervisory knowledge - Inspectors should be required to allow the BMA to have access to the working papers done in response to its explicit demand, which implies the BMA has the necessary expertise to study them. - The supervisor needs to perform independent checks, directly or indirectly, on the information given by the company. - The inspectors would have to give detailed reports detailing each of the points they were commissioned to assess. - These inspections could be supplemented by requiring the auditors to systematically write a management letter as part of the annual process (on the model of the banking sector in Bermuda). - The on-site visit is described as more in the form of an informal discussion than an inspection but is a useful additional tool contributing to the establishment of a complete supervisory system. ### Sanctions, remedial powers, and limits (Principle 14) - The BMA may refuse to register an insurer under Section 4 or a manager, agent, broker, or salesman under Section 10 of the Insurance Act if it deems it not in the public interest to do so (Section 12). - The BMA may impose fines for failure to file required statements or returns (Section 18A). - The BMA has the power to take remedial action where it has reasonable grounds to believe that a material violation of the Insurance Act has occurred (Section 29). - Powers available upon notice in writing to the insurer include: - the power to obtain information and reports (29A); - the power to require the production of documents (29B); - the power to appoint an inspector to investigate the affairs of a company (Sections 18A-(5) and 30). - Dividend restrictions and response timelines: - A Class 3 or Class 4 company is prohibited from declaring dividends if it fails in meeting its general business solvency margins and must notify the BMA within 30 days after becoming aware of such failure (Section 31-A). - A class 4 insurer whose statutory capital and surplus falls below $75,000,000 has 45 days to respond to the BMA with further information including an unaudited interim statutory financial statement, an opinion of a loss reserve specialist and a general solvency certificate. - Intervention powers (Section 32 and Section 32(3)): - Order insurer to provide written particulars relating to its financial circumstances; - Cease writing certain or all contracts for insurance; - Refrain from making investments of a specified class; - Direct an insurer threatened with insolvency to transfer specified assets for deposit in a banking institution determined by the BMA. - License cancellation (Section 41) grounds include: - (a) False, misleading, or inaccurate information supplied by or on behalf of the insurer in contravention of the Insurance Act; - (b) The insurer has failed to commence business or ceased to do business; - (c) The insurer has refused to pay fees; - (d) The insurer has not complied with a condition attached to its registration or other requirement imposed by law; - (e) The BMA finds that the insurer has not been carrying on business in accordance with sound insurance principles. - The BMA may cancel registration of managers, brokers, agents, or salesmen on similar grounds or upon conviction of an offense against the Insurance Act or a crime involving fraud or dishonesty (Section 42). - Winding up: The BMA can petition the Court for winding up where the insurer is unable to pay its debts within the meaning of Sections 161 and 162 of the Companies Act 1981, or has failed to satisfy obligations under the Insurance Act (Section 35). - Criminal and penalty provisions: - Section 29B-5: fine of $10,000 or imprisonment for up to 6 months or both for failure to comply, without reasonable excuse, with BMA’s power to require information or documents. - Section 55: summary conviction punishment may consist of imprisonment for 12 months or fine of $5,000 or both; conviction by indictment punishment may consist of imprisonment for 3 years or fine of $15,000 or both. - Where offense attributable to director, manager, secretary or similar officer, that person is liable along with the company and can be proceeded against and punished separately. - Financial penalties for late filings range from up to $500 per week to up to up to $5,000 per week depending on the class of insurer involved. - Where a class 4 insurer is over three months late in meeting its filing requirements an inspector would be appointed (Section 18A). - Section 51D (1): failure to cooperate with Section 51B punishable by a fine of $5,000 or imprisonment for six months or both. - Section 51D (2): person who gives false or misleading information to the BMA under Section 51B is subject to a fine of $25,000 or to imprisonment for two years or both. - Limitations noted: - Although the BMA can appoint an inspector, short of petitioning the Court for winding up, the inspector has no authority under Section 30 to assert immediate control and exercise management functions on a temporary basis to stabilize or rehabilitate the insurer or preserve information and records—such action would require a petition to the court. - The BMA has no legal authority to require changes in the composition of the board or senior management; it proceeds against the company as a legal person. ### Cross-border business operations (Principle 15) - Part II Section 3 requires no person shall carry on insurance business in or from within Bermuda unless registered by the BMA. - Maintenance of a principal office in Bermuda and a Principal Representative is required (Section 8). - Registration of insurance managers, brokers, salesmen and agents is required (Section 9). - The Insurance Act does not distinguish insurers from re-insurers. - Section 20 requires non-resident insurance undertakings maintain approved assets of a value fixed and ordered by the Minister. - Assistance to foreign authorities set out in Sections 51A, 51B, and 51C with preconditions (e.g., requesting authority exercises functions corresponding to those of the home regulator; requesting authority bears appropriate costs; statements not used in evidence against the maker). - Section 51B permits BMA, if satisfied of appropriateness under 51A, to compel information from any person registered under the Insurance Act after serving written notice; assistance may include producing documents, appearing before the BMA, and providing further assistance as reasonably able. - Section 51B does not require waiver of legal privilege (51B (1) (d), and 51B (3)) or that statements be entered into evidence against the person (51B (4)). - Section 51C authorizes the BMA to delegate 51B powers to a competent person to exercise on behalf of the BMA. - Section 52C extends confidentiality protections and exclusions of Section 52 to information received from relevant overseas supervisory authorities, but allows BMA use for duties under the Insurance Act or institution of criminal proceedings. - Assessment and comments: - The BMA has the essentials of the regime for effective supervision of cross border operations in place. - Powers to assist foreign authorities are broad but potentially limited by conditions attaching to their use and discretion granted to the BMA, complicated by interplay with confidentiality requirements and stringent penalties for their violation. - The BMA states that a foreign incorporated entity would only be allowed an insurance license in Bermuda if it were satisfied that the home jurisdiction exercises effective continuing supervision over the company as a whole including its branch operations in foreign jurisdictions; no explicit provision exists in Part II permitting the BMA to formally consider this factor. - The BMA may refuse to license or place conditions on a license where it has material concern about continuing effective supervision in the home jurisdiction, but lacks specific authority and written criteria to make this part of the review procedure. - The BMA lacks authority to prevent a Bermuda insurer from writing other business in foreign jurisdictions, though it can cancel an insurer’s license under Section 41 (b) (vii) if business not conducted prudently. - Reporting arrangements between foreign branches/subsidiaries and Bermuda will form part of BMA internal control procedures during on-site compliance visits; a schedule of on-site visits for Class 4 companies is being initiated and on-site visits for some Class 3 insurers planned for next year. - Statutes as presently written appear to make information sharing more difficult and complex than necessary, though information sharing has not, in practice, been reported as hindered by the statutory provisions. ### Coordination and cooperation (Principle 16) - The Insurance Act provides mechanisms for information sharing under Sections 51, 51A, 51B, and 51C, which interplay with confidentiality provisions in Sections 52B and 52C. - No explicit section in the Insurance Act enables the BMA to enter into specific information sharing protocols. - Provisions in the Bermuda Monetary Authority Act correspond with Sections 51, 51A, 51B and provide no independent basis for information sharing (Bermuda Monetary Authority Act, as amended in 2001 Section 30A). - The Authority regularly coordinates and cooperates with foreign authorities on an ad hoc basis through membership in the International Association of Insurance Supervisors (IAIS) and attendance at National Association of Insurance Commissioners (NAIC) conferences and other forums. - The BMA has no formal information sharing agreements presently in effect. - The BMA states it would not object to an on-site visitation of branches of foreign insurers doing business in Bermuda, observing protocols involving prior notice to the BMA of commencement and conclusion of an examination and communication on the initiative of either party; information gathered by the home supervisor would be treated as confidential and used solely for supervisory purposes. *Source: Bermuda Monetary Authority (BMA) and the Insurance Act, as assessed in the mission material.* ### Section 51A (3) precludes the BMA from sharing information with other regulators unless it is ### Section 51A (3) precludes the BMA from sharing information with other regulators unless it is ### Legal constraints and statutory framework - Section 51A (3) requires the BMA to be first satisfied that the assistance requested by the foreign regulatory authority is for the purposes of discharging its regulatory duties before sharing information. - Subsequent discretion to share information is governed by considerations set out in Section 51A(5). - The sharing of information under Sections 51A, 51B and 51C is subject to strict confidentiality provisions in Sections 52B and 52C and parallel provisions in the Bermuda Monetary Act. - Statutory provisions exist to allow for cooperation and coordination between supervisory authorities in different jurisdictions, but the statutory scheme for information sharing places a burdensome requirement on the Authority to weigh numerous legal factors and exercise subjective judgment. - Sections 51A (6), 51A (7), and 51B (3) impose conditions relating to the payment of costs for producing information and the rights of the parties from whom the information is sought. ### Discretionary considerations under Section 51A(5) - The BMA may exercise its discretion to share information based on the following considerations in particular (Section 51A(5)): 1) whether corresponding assistance would be given in that country or territory to the BMA; 2) whether the request relates to a breach of the law or other requirement that has no close parallel in Bermuda or involves the assertion of a jurisdictional basis not recognized by Bermuda; 3) the nature and seriousness of the matter to which the inquiries relate, the importance to the inquiries of the information sought in Bermuda and whether the assistance could be obtained by other means; and 4) whether it is otherwise appropriate and in the public interest to give the assistance sought. ### Operational practices, cooperation, and information exchange - The BMA indicates willingness to enter into formal information-sharing agreements, although no formal agreements yet exist. - The BMA reports a close working relationship with the FIU and other police authorities and would be informed of relevant concerns. - The BMA would carefully consider the need to alert a host supervisor to any emerging concerns. - Where information is received from a supervisor, the Authority will undertake to consult where possible with the supervisor if they propose to take action based upon the information supplied. - The BMA states it has not had occasion to inform host supervisors of material changes in supervision of the parent by the Authority which may have a significant bearing on the operation of such insurers; at present the Authority relies on certificates of compliance. - The BMA states that should it take action against a permit company it would notify the company’s parent of the impending action and inform the home supervisor if it was deemed appropriate to do so. - The BMA is able to obtain information on behalf of an insurance supervisor in another jurisdiction pursuant to Sections 51A, 51B, and 51C, and pursuant to Sections 52B and 52C and parallel provisions in the Bermuda Monetary Act. ### Confidentiality regime, exemptions, and penalties - Principle 17 (Confidentiality): All insurance supervisors should be subject to professional secrecy constraints in respect of information obtained in the course of their activities, including during the conduct of on-site inspections. - The insurance supervisor is required to hold confidential any information received from other insurance supervisors, except where constrained by law or where the providing supervisor authorizes release. - The Insurance Act (Section 52) and the Bermuda Monetary Act (Section 31 as amended in 1999) provide parallel criminal penalties for unauthorized disclosure: - A person summarily convicted of the improper disclosure of information is subject to a fine of $50,000 or imprisonment for two years or both. - A person convicted by indictment of the improper disclosure of information is subject to a fine of $100,000 or imprisonment for five years or both. - Neither section applies to information already in the public domain or if it is in collated form (so that information concerning a particular person cannot be ascertained) or if prior consent is obtained to release the information from the person to whom it relates and (if different) the person from whom it was received. - Section 52A allows disclosure of otherwise protected information where such disclosure will enable or assist the BMA to discharge its duties under the Insurance Act; it specifically provides for disclosure to the auditor of a registered person where such disclosure will enable or assist the BMA to discharge its duties under the Insurance Act or protect policyholders. - Section 52B provides exemptions to Section 52 where disclosure is made to the Finance Minister or other authority to assist them to discharge regulatory functions, to foreign authorities under specified circumstances to enable such authorities to discharge their regulatory functions, to an inspector appointed under Section 30 of the Insurance Act, to certain high ranking police officials, or to the public prosecutor; the use of information disclosed under that provision is limited to purposes permitted in the section. ### Assessment and practical implications - Assessment: Observed - Comments: - The BMA is able to keep abreast of developments and emerging trends in insurance supervision through its participation in IAIS and attendance at the NAIC and other insurance conferences. - The existing statutory scheme for information sharing can be seen to place an undue burden on the Authority to weigh and consider numerous legal factors and exercise subjective judgment before deciding to cooperate and coordinate with officials in other jurisdictions. - The complex confidentiality requirements in the Insurance Act and Bermuda Monetary Authority Act can be seen to weigh against a robust regime of relevant information sharing among supervisors even though in practice that may not be the case. *International Monetary Fund* ### Section 52C extends the confidentiality protections and exclusions of Section 52 to information ### Section 52C extends the confidentiality protections and exclusions of Section 52 to information ### Summary of the provision - Section 52C extends the confidentiality protections and exclusions of Section 52 to information received from relevant overseas supervisory authorities. - The Bermuda Monetary Authority (BMA) may use information received for purposes related to the discharge of its duties under the Insurance Act or the institution of criminal proceedings under the Insurance Act or under Bermuda law generally. - The confidentiality provisions in Sections 52B and 52C interact with Sections 51A, 51B, and 51C, which set forth powers to assist foreign authorities. ### Assessment and comments - Assessment: Observed - Comments: - Appropriate confidentiality provisions exist together with reasonable exclusions for legitimate public purposes. - Sections 52B and 52C are complex and procedurally cumbersome to comprehend and comply with in their present form. - Confidentiality provisions can constrain effective information sharing because eight different sections or subsections of the Insurance Act must be consulted to determine whether an appropriate “gateway” exists for sharing information. - Recommendation: The statute should be modified for the purposes of style and clarity. ### Observance of IAIS Insurance Core Principles (Table 11 summary) - Observed: 6 — CP 2, 3, 14, 15, 16, 17 - Largely observed: 2 — CP 1, 8 - Materially non-observed: 7 — CP 5, 6, 7, 9, 10, 12, 13 - Non-observed: 1 — CP 11 (domestic) - Not applicable: 1 - 2 — CP 4, 11 (international) ### Recommended Action Plan — key recommended actions (selected by Principle groups) - Organization of an Insurance Supervisor (CP 1) - The Minister should not have the possibility to give directions to the BMA. - The conditions in which the BMA can exercise its powers should be more clearly defined so as not to be able to be readily challenged. - The BMA should continue to improve its IT system and to recruit staff; knowledge of actuarial techniques should be developed in the staff. - Licensing and Changes in Control (CPs 2–3) - Companies wishing to underwrite insurance in the domestic insurance market should be licensed. - The insurance supervisor should review changes in the control of licensed companies and establish clear requirements when a change in control occurs. - Consider increasing the quorum requirements of the IAC Admissions Committee, completing fit and proper licensing criteria, and defining in detail the requirements of the business plan. - The definition of long-term business should be more precise. - Significant changes in ownership of public companies should be formally notified to the BMA. - Corporate Governance and Internal Controls (CPs 4–5) - Establish jurisdictional standards dealing with corporate governance. - The insurance supervisor should be able to review and require strengthening of internal controls and require suitable prudential oversight from boards of directors. - Internal controls should be mentioned explicitly as a regulatory imposition. - Increase frequency and detail of information flow between the BMA and auditors; explicitly require auditors to perform specific checks (including review of internal controls) and to systematically write their comments. - Prudential Rules (CPs 6–10) - Establish standards with respect to assets and liabilities of licensed companies. - Capital adequacy requirements should be clearly defined and reflect size, complexity, and business risks. - The BMA should consider limiting investment in certain assets and adopt a stricter definition of relevant assets. - Regulation should require that admissible assets cover 100 percent of the insurance liabilities. - Define admissible assets of secure value in a prudent manner (for example, excluding assets such as unquoted bonds and hedge funds). - Annual statutory filings should provide more detail concerning lines of business and reserves (gross and net reserves per line of business as well as specific information on recoveries, loss expenses reserves and liquidation of reserves). - The accounting standard used by the company should be explicitly stated in statutory filings. - Set a general rule limiting reinsurance recoverables (excluding not rated or below investment grade reinsurers, for example). - Regulation should explicitly allow for a premium insufficiency reserve. - The BMA should clarify the auditor’s responsibilities and require a final auditor report indicating precisely the checks made on general data and actuarial data. - The actuary’s report should include detailed indications on the method used for reserving and the verifications conducted. - Require compulsory disclosure of off-balance sheet items. - Check appropriateness of reinsurance programs either by the supervisor or by outsourcing to the auditor. - Auditors should systematically write management letters. - Market Conduct (CP 11) - Address market conduct customer-related issues for individual or small corporate Bermudian policyholders to ensure timely, meaningful, and understandable information and equitable treatment of complaints. - Consider mentioning the existence of the Consumer Affairs Bureau in new insurance policies to increase policyholder awareness. - Monitoring, Inspection and Sanctions (CPs 12–14) - Ensure supervisors get necessary information via financial/statistical reports, special information requests, on-site inspections, and communication with actuaries and external auditors. - The supervisor should be able to carry out on-site inspections, inspect books/records/accounts, and request any information from licensed companies. - Supervisors must have a range of remedial actions and sanctions. - Expand detail in financial reporting to distinguish direct and assumed insurance, lines of business, reinsurance contract types, and expand loss information (including liquidation of provisions). - Require actuary and/or loss reserve specialists to give explicit written comments on reserving adequacy. - Regularly update financial returns; require consolidated information and quarterly accounts at least for Classes 3 and 4 companies; Class 1 companies should file financial statements with the Supervisor. - Independent reviewers mandated by the BMA should give the BMA access to their working papers. - Increase the number of inspector appointments (Section 30) to conduct on-site inspections. - Strengthen authority to impose sanctions: 1. Give the BMA explicit powers to intervene to require changes in board or senior management composition if an insurer is in a hazardous condition, or vest temporary control and management powers in an inspector or other person. 2. Consider legislation to allow the Authority express legal authority to require a written recovery plan within a relatively short time. 3. Consider an expanded range of civil penalties where legal requirements are not met but do not rise to criminal conduct. - Cross-Border Operations, Supervisory Coordination and Cooperation, and Confidentiality (CPs 15–17) - Strengthen BMA’s ability to regulate cross-border business by amending statutory provisions relating to disclosure of information. - Consider “Fast track provisions” to facilitate timely exchange of information between cooperating authorities, conditioned on pre-existing memoranda of understanding. - Given the importance of protecting confidentiality, consider a technical revision of sections of the Insurance Act and relevant parallel BMA Act for clarity and organization (Bermuda Monetary Authority Act, as amended in 2001 Section 30A). ### Authorities’ response — summary - Authorities note recognition of the strength and quality of the business-to-business market for insurance and reinsurance in Bermuda and the effectiveness of Bermuda’s regulatory framework for reinsurance. - The Authorities acknowledge complexity in applying IAIS Principles to a market organized around captives, insurance of corporate accounts and reinsurance, and note many captives self-insure group risks. - Since the IMF on-site visit, IAIS Principles have been overhauled, with development of standards geared to reinsurers; Bermuda participated actively. - Bermuda has moved to develop and enhance regulatory aspects consistent with new international standards; changes expected to be implemented during the first part of 2005. - Certain amendments to the Insurance Act 1978 have been enacted to underpin the BMA’s ability to clarify regulatory requirements through guidance. - The BMA has increased qualified technical staff, developed a more sophisticated risk-based supervisory model, and enhanced on-site regulatory elements. - The BMA’s Board reviewed IMF recommendations and identified appropriate amendments to the Insurance Act and regulatory framework; actions already taken include increases in staff, issuance of detailed guidance notes, and enhancement of the risk-based supervisory model. ### Implementation note - An assessment of the IOSCO Objectives and Principles of Securities Regulation (2002) was undertaken in Bermuda as part of the Offshore Financial Centre assessment mission in March 2003. The assessment was conducted by Jennifer Elliott and was based on review of Bermuda legislation, BMA guidance and interpretation, Bermuda Stock Exchange rules and regulations, and interviews with BMA staff, Ministry of Finance staff, market participants and the BSX. *International Monetary Fund Offshore Financial Centre assessment mission (March 2003).* ### 57. The assessment used as its methodology the Bank/Fund Staff Guidance Note for the ### The assessment used as its methodology the Bank/Fund Staff Guidance Note for the Assessment of the IOSCO Principles, September 2002 ### Institutional and macroprudential setting, market structure - Bermuda is described as a small jurisdiction with: - a stock exchange (BSX), - a number of full service brokerage firms, - a large and active investment fund and investment funds services sector, - functioning as a hub or offshore conduit for multinational financial services organizations. - Client base: - serves a relatively affluent resident population and institutional clients from onshore and offshore jurisdictions. - Bermuda is home to a large number of hedge funds, investment managers, portfolio managers, and internationally active fund administrators. - Market participants and scale: - 54 firms licensed to carry on business under the IBA. - As of end December, 2002 there were 1426 classified collective investments schemes in Bermuda with $68 billion assets under management. - 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. - The BSX hosts an after hours crossing market (bulk of trading volume) and a pre-public offering mezzanine market with 13 companies currently traded on that market. - 16 trading members on the BSX—some are remote access, non-Bermudian residents and are not licensed by the BMA. - Market characteristics and challenges: - Trading volume in domestic securities is thin. - Cross-listing of the Bank of Bermuda on Nasdaq in 2001 reduced liquidity. - Investment funds and insurance companies dominate the domestic market. - The BSX faces liquidity competition from large exchanges in Europe and North America. ### Description of regulatory structure and practices - Legal and institutional framework: - The Bermuda Monetary Authority Act (BMA Act) establishes the BMA and charges it with responsibility for regulation of financial institutions including investment firms, collective investment schemes and the BSX. - Under the IBA, the BMA has authority for licensing and supervision of market intermediaries. - The Bermuda Monetary Authority (Collective Investment Scheme Classification) Regulations (CIS Regulations) give the BMA authority for classification and supervision of collective investment schemes. - Companies are registered by the Registrar of Companies in the Ministry of Finance; the BMA vets registration filings. - The 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. - Legislative evolution and reform: - CIS Regulations adopted in February 1998 with a one-year transition period. - The IBA first came into effect January 2000 (investment businesses given six months to apply or file an exemption). - A new IBA took effect in January 2004. - A new draft CIS Act and revised CIS Regulations are being prepared to grant the BMA greater licensing and inspection authority, including proposed direct regulation of mutual fund administrators. - Regulatory coverage and exemptions: - Firms relying on exemptions under the IBA must file an exemption notice with the BMA. - Many exempt investment businesses exist (portfolio managers and investment advisers); exemptions available to advisors dealing only with institutions and sophisticated investors. - A number of investment funds are exempt from regulation. - Many service providers for funds are not currently subject to direct regulation. ### General preconditions for effective securities regulation - IOSCO preconditions noted as present in Bermuda: - No unreasonable barriers to entry and exit from markets and products. - Adequate development of regulatory policy and attention to economic impact of regulation. - Appropriateness of legal, tax and accounting frameworks and effectiveness of procedures for resolution of securities market problems. - Soundness of macroeconomic policies affecting securities market operations. - Observations: - Bermuda’s economic planning and registration process restricts corporate activity but does not appear to create unreasonable barriers; competition exists. - The BMA and the Ministry of Finance have a comprehensive program of policy development. - Legal and accounting systems are adequate and supported by professional skills. ### Principle-by-principle assessment — overall methodology and findings - Assessment definitions: - "Implemented": all assessment criteria generally met without material deficiencies. - "Broadly implemented": only minor shortcomings that do not raise major concerns and corrective actions are realistically achievable within a short period. - "Partly implemented": significant shortcomings and one or more assessment criteria not implemented. - "Non-implemented": major and material shortcomings. - "Not applicable": does not apply given structural and institutional conditions. - Key institutional findings and deficiencies: - Regulator independence and accountability: - The 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 changes to the Minister’s ability to give direction and by greater budgetary autonomy. - Reference: Part IV of IBA/03 establishes a framework for regulation of recognized investment exchanges and clearing houses by the BMA. - Staffing and technical capacity: - BMA can attract high quality staff but has difficulty retaining staff due to industry pay differentials, limiting depth of in‑house technical skills—especially challenging given the sophisticated sector. - Cooperation and information sharing: - BMA relies on authority under the BMA Act to obtain and share information. - In practice, BMA shares information with counterparts in Canada, the United Kingdom, the United States; formal agreements with Jersey and the Isle of Man. - Issuers: - Regulation split: listed companies regulated by BSX (subject to prospectus and continuous disclosure) and unlisted companies subject to prospectus and some continuous disclosure but not regulatory oversight. - Recommendation: BMA should be given authority to regulate all public companies, including greater oversight of the BSX listing function. - New rules on insider reporting, public disclosure of these reports, takeover bid/change of control/related party transaction requirements would improve shareholder protection; BSX and BMA should coordinate. - Collective investment schemes: - BMA has a comprehensive classification (licensing) system for mutual funds and unit trusts but requires additional inspection authority. - Classification could be supplemented with guidance notes and interpretation to provide greater transparency and develop additional rules on conflicts of interest, NAV calculation and publication, segregation of client assets, and securities lending. - BMA should have authority to override a suspension of redemptions. - Market intermediaries: - Licensing requirements and process comprehensive; guidance notes and codes of conduct helpful. - BMA has a full inspection program but needs enhanced depth of technical skill among inspection staff. - Additional legal authority required to inspect market intermediaries and approve changes in ownership (reference: Section 47 of IBA/03; Section 28 of the IBA/03). - Capital requirements exist and are monitored by intermediaries or auditors with quarterly and annual reporting to the BMA. - No independent on-site monitoring by the BMA; consideration should be given to staff inspections of intermediaries' financial conditions. - BMA should develop a contingency plan for potential failure of an intermediary. - Secondary markets: - BMA responsible for oversight of BSX as trading system and clearing and settlement system. - Proposed IBA amendments will create a full licensing regime for trading systems and clearing and settlement systems and give BMA broader powers over BSX; currently BSX is not subject to a licensing regime or inspections though it is subject to prudential requirements. - Supervision of the BSX could be strengthened and staff skills developed for this area. - Insider trading and market manipulation rules should be developed for general application; government is considering related criminal code provisions (authorities reported that subsequent to the mission amendments to the criminal code have addressed these deficiencies). - Assessment example: Principle 1 (Regulator responsibilities) - Description: three major statutes set out BMA’s responsibilities (BMA Act, IBA, CIS Regulations); gaps exist in authority to regulate trading systems or public issuers per se; BSX constituted by private act combining exchange, clearing/settlement and depository; no direct BMA authority over listed companies; Ministry of Finance reviews prospectus offerings under Companies Act. - Assessment: Broadly implemented. - Comments: IOSCO Principles require all areas of regulation be covered by at least one statutory regulator—this condition is not fully met. Responsibility for all issuers should be clearly set out in legislation; preferable for regulatory authority over all public issuers to reside in the BMA. Regulatory authority over trading systems should be set out by statute; proposed new law would define a regulatory regime for trading systems generally. ### Comments and policy recommendations (selected) - Legislative and authority enhancements: - Address legislative issues to provide BMA with additional required authority (some addressed in new IBA; others to be addressed in upcoming CIS legislation). - Clarify statutory authority over issuers and trading systems; consider vesting authority for all public issuers in the BMA. - Grant BMA authority to override suspension of redemptions for collective investment schemes. - Provide BMA additional legal authority to inspect market intermediaries and approve changes in ownership. - Regulatory practice and capacity: - Supplement classification and licensing processes with guidance notes and interpretation to increase transparency on handling of conflicts of interest, NAV calculation/publication, segregation of client assets, and securities lending. - Develop insider reporting requirements, public disclosure, takeover bid/change of control/related party transaction requirements, and general insider trading and market manipulation rules. - Enhance BMA in‑house technical expertise and retention strategies, particularly for trading system oversight and inspections. - Consider expanding BMA’s on‑site monitoring with staff inspections of investment firms’ financial conditions and develop contingency plans for intermediary failure. - Supervision of BSX: - Strengthen supervision of the BSX as trading, clearing and settlement system; implement licensing and inspection framework as proposed in IBA amendments. - Coordinate BSX and BMA efforts on issuer oversight and listing functions. *Source: International Monetary Fund assessment.* ### Part IV of IBA/03 establishes a framework for the regulation of recognized investment exchanges and ### Part IV of IBA/03 establishes a framework for the regulation of recognized investment exchanges and ### Overview - Part IV of IBA/03 establishes a framework for the regulation of recognized investment exchanges and clearing houses by the BMA. - Assessment: Broadly implemented ### Independence and ministerial direction - Findings: - "The right of the Minister to give direction to the BMA is a limitation on the BMA’s independence, albeit one that has not been a concern or practice."47 - "The BMA’s budget process, whereby it must be approved by the Minister and excess revenue is shared with the government, may also cause concern with respect to the BMA’s ability to operate independently." - Policy recommendation: - "The right should be removed from legislation to remove any perception of interference in the BMA’s regulatory role." - "The proposed IBA would have additional language limiting the Minister’s ability to issue a direction to policy issues and require that direction be consistent with the IBA." - Assessment: Broadly implemented ### Powers, resources and capacity (Principle 3) - Principle statement: - "The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers." - Description of current authorities and gaps: - "The BMA has clear licensing and supervision authority over investment businesses under the IBA; it has clear supervisory authority over the BSX under the BMA Act and clear classification and supervisory authority over collective investment schemes under the CIS Regulations." - "It does not, however, have adequate inspection authority with respect to investment businesses, collective investment schemes or the BSX which may impede its ability to carry out inspections and investigations." - "There is no clear and direct authority over issuers or over trading systems." - "The BMA has the ability to adopt guidance notes in specific areas under the IBA and CIS Regulations but otherwise does not have rule-making power." - "In practice this does not appear to have caused undue delay in its ability to respond to changes in the market." - Staffing and resource observations: - "The BMA has sufficient resources to carry out its current tasks." - "There are currently eight staff dedicated to securities related regulation plus two executive officers responsible in this area." - "Increased responsibility for issuers may require additional resources." - "The BMA has successfully attracted qualified staff." - "However a number of market participants expressed concern that high turnover at the authority meant that sufficient in-depth knowledge of the industry was not always available at the authority." - "The BMA acknowledges this problem. Experienced staff have been hired away by industry where salaries are higher." - Comments and recommendations: - "The BMA requires additional authority to inspect, on demand, investment businesses, collective investment schemes and the BSX."48 - "Such authority over investment firms is contained in the new IBA." - "Provisions granting authority over exchanges will come into force September 2004." - "Although full ability to adopt new rules under overriding legislation is not required by the Principle, such authority would allow the BMA to respond more flexibly to changing needs." - Assessment: Broadly implemented ### Regulatory processes (Principle 4) - Principle statement: - "The regulator should adopt clear and consistent regulatory processes." - Finding: - "There are two separate appeal processes for collective investment schemes and investment businesses—the BMA should consider a consistent approach and establish an appeal process for collective schemes that mirrors that for investment businesses." *Source: IMF assessment (cr0599).* ### Part IV of IBA/03 establishes a framework for the regulation of recognized investment exchanges and ### cr0599 - Part IV of IBA/03 establishes a framework for the regulation of recognized investment exchanges and ### Regulatory framework and transparency - The Bermuda Monetary Authority (BMA) operates transparently and is subject to the general provision of administrative law in Bermuda. - The BMA has posted all applicable legislation and developed informational documents, guidance notes and codes clarifying licensing and compliance expectations. - Internal procedure manuals and an inspection manual exist to ensure consistent processes. - The BMA is obliged to publish new rules, new licenses and decisions to withdraw licenses in the local press. - The BMA consults with industry in developing new rules and policies and maintains a close relationship with the Bermuda Stock Exchange (BSX). - The BMA must provide written reasons for withdrawal or suspension of a license or imposition of other sanctions; affected parties have the right to make representations prior to a final decision under the IBA. - The BMA is not required by law to provide written reasons for refusal of a licensing application but does so in practice. - Assessment: Implemented. - Comments: Consider posting proposed rules or amendments for public comment via the website or other public medium; publish proposed BSX rules for public comment; give CIS operators the right to make representations prior to a final decision. ### Professional standards and internal controls - The BMA Act establishes an obligation to maintain confidentiality of information. - BMA staff are subject to Personal Dealing Rules and Procedures requiring prior approval before purchasing or selling shares in regulated entities or entities for which the BMA may have sensitive information, and for material changes to personal financial dealings; reporting is made directly to the Chairman. - Staff are subject to confidentiality rules. - Assessment: Implemented. - Comments: The BMA should consider establishing a separate internal function responsible for reporting under the code. ### Principles of self-regulation and the BSX - The BSX acts as a Self-Regulatory Organization (SRO) responsible for regulation of trading members, listed issuers (including setting and enforcing original and ongoing listing requirements and continuous disclosure obligations). - Assessment of Principle 6: Implemented. - Assessment of Principle 7: Partly implemented. - BSX operates under the Bermuda Stock Exchange Act (a private act of parliament); the BMA has supervisory authority by virtue of the BMA Act and the BSX Act. - The BSX is not currently subject to a full licensing regime; the BMA cannot presently impose conditions on the BSX’s license. - The BSX must file all rules and rule amendments with the BMA for approval and provides a daily report of trading activity; the BMA has access to real time trading information and authority to halt trading in any security. - The BMA holds quarterly prudential meetings with BSX management; in practice the organizations have a close working relationship with no instances of failure to provide necessary information. - The BSX conducts annual inspections of members, maintains market surveillance, investigates trading infractions, monitors listed companies, and may publish non-compliance notices or delist companies. - Comments: The BSX should be subject to a full licensing regime and inspections rights should be established in law; these issues will be addressed in IBA provisions which come into force September 2004. ### Inspection, investigation and surveillance powers - Section 20 of the IBA grants the BMA authority to request information from licensed investment firms and their employees, past and present. - Section 19 gives the BMA authority to conduct an investigation of a licensed entity, but drafting is weak and may not clearly grant unfettered access to premises and documents; Section 19(3) compels testimony of licensed firms or their officers and directors. - The CIS Regulations grant limited inspection and investigation rights over investment funds: s.10 allows requests for information and s.11 allows inspections if information is not provided, but authority for unfettered access without notice is unclear. - The BMA has no authority to inspect or investigate the BSX; it can halt trading on the BSX but not inspect the BSX or public companies. - Assessment: Broadly implemented. - Comments: The BMA requires additional inspection and investigation powers over the BSX and collective investment schemes; provisions of the IBA (in force September 2004) and proposed new CIS Regulations and new CIS Act should address these issues. - The BMA established an inspection program for licensed investment businesses beginning 2001; intends to inspect each licensed firm at least once over a period of three years. - Inspections focus heavily on client account documentation and anti-money laundering concerns; investigations have resulted in suspension of licenses. - The BMA relies on external auditors for on-site prudential examinations but may raise prudential issues during inspections. - Market surveillance is carried out by the BSX via a fully automated surveillance program; there are no full time surveillance personnel due to a thinly traded market; summary of surveillance alerts and resolutions is provided to the BMA in the daily report. - Assessment (inspection program): Implemented. - Comments: Consider establishing a financial review program for investment firms that handle customer cash and securities to provide a check on quality of compliance. ### Enforcement powers - Under the IBA, the BMA can withdraw or suspend a license; under the CIS Regulations it can classify a collective investment scheme or withdraw classification. - The BMA can levy fines under the IBA and can refer violations to the public prosecutor for court prosecution (this has never happened). - The BMA can direct investment firms to take specific actions and appoint a custodian manager to oversee operations if necessary. - The BMA does not have enforcement authority over the BSX (to be in place September 2004) or over public issuers. - The BSX can delist an issuer for breach of securities law; the Ministry of Finance can withdraw registration of an issuer; an act of Parliament is required to withdraw BSX permission to operate in the jurisdiction. - Assessment: Broadly implemented. - Comments: The BMA requires enforcement authority over the BSX and issuers. ### Cooperation and information sharing - As a unified regulator, the BMA routinely shares information with the Ministry of Finance. - There are no specific information sharing provisions under the IBA or CIS Regulation; the BMA relies on general provisions under the BMA Act. - Section 31 of the BMA Act requires confidentiality but allows sharing of public information or information shared for regulatory purposes. - Section 31(1)(c) restricts sharing of client identity information; s.30A (added by amendment) sets a framework for obtaining and providing information, including individual client information, to foreign counterparts subject to vetting of merit and intended use and restricts sharing to regulatory purposes. - Section 30B allows the BMA to obtain and share a broad range of information with foreign counterparts; in practice s.30B has been used to share client information. - Recent changes to the IBA clarified authority to share information, modeled on existing powers in the Banking Act. - Assessment (Principle 11, 12, 13): Implemented. - Comments: The BMA has effective mechanisms for vetting and approving requests; it has entered into information sharing agreements with Jersey and the Isle of Man; formal agreements are not required for regulatory information sharing. ### Issuers, disclosure and minority shareholder protection - All public issuers in Bermuda must register with the Registrar of Companies (Ministry of Finance); the Companies Act requires issuance of a prospectus when offering shares to the public. - Prospectuses must include: names, descriptions and addresses of promoters, officers or proposed officers; the business or proposed business; the minimum subscription; rights or restrictions on shares; commissions payable and net amount receivable; name and address of any person owning five percent or more of shares; financial statements; auditor’s report; dates of opening and closing subscription lists; and use of capital raised. Directors must sign and are liable for prospectus contents. - The BSX has three tiers: domestic listed companies, international listed companies, and mezzanine (unlisted) market; the mezzanine market has no listing rules. - The BSX conducts prospectus reviews and has full listing requirements; the Companies Act requires continuous offering companies to file annual reports with shareholders and requires immediate disclosure of material events to shareholders. - BSX requires listed companies to notify the exchange of material events and issues press releases; BSX-listed companies and trading members are subject to insider trading and market manipulation rules. - Assessment (Principle 14): Partly implemented. - The Companies Act requires equal treatment of shareholders and contains shareholder notice and voting requirements; all shares of the same class must have same voting rights; prospectus must disclose voting rights and major shareholdings. - The Companies Act defines insiders as officers, directors and shareholders with 5 percent or more ownership; acquisition of 5 percent is a material event requiring disclosure. - The BSX requires a minimum of 25 percent freely traded shares for listed companies. - There are no rules regarding takeover bids, mergers, changes of control or related party transactions in Bermuda; no requirement to report insider transactions or an insider reporting mechanism; no prohibition on insider trading for unlisted companies (BSX prohibits insider trading for listed companies); proposed criminal code changes will criminalize insider trading for all issuers. - Assessment (Principle 15): Partly implemented. - Comments: Minority shareholder protection requires significant enhancement; development should include rules on takeover bids, mergers, changes of control, related party transactions, and consider an insider reporting regime. ### Accounting and auditing standards - Bermuda defines accounting standards as those of Canada (Canadian GAAP); companies may also use U.S. GAAP or IAS. - The Canadian Institute of Chartered Accountants sets accounting and auditing standards. - Accountants and auditors in Bermuda must be qualified in Canada, the United Kingdom or the United States and certified by industry bodies in those jurisdictions. - The audit profession’s quality and independence are considered very high. - The BMA does not set additional accounting or audit requirements. - BSX Listing Regulations recognize Canadian GAAP, U.S. GAAP, IAS or equivalent. - Assessment (Principle 16): Implemented. ### Collective Investment Schemes (CIS) - CIS Regulations classify funds into three categories: standard schemes (primarily retail), recognized schemes (eligible for sale in the United Kingdom and Bermuda) and institutional schemes; the BMA may grant exemptions. - There are currently no recognized schemes. - The BMA’s classification process requires disclosure and approval of all service provider relationships (custodian, administrator, auditor etc.); tasks and responsibilities are defined but no defined statutory standards governing service providers exist. - Custodians are normally banks; for standard funds either the administrator or custodian must be located in Bermuda. - Custodians and administrators are not directly licensed as such in Bermuda (many are licensed as banks or investment businesses); proposed CIS Act would create a licensing regime for fund administrators and the new IBA defines custody of assets as an investment service. - The BMA can approve connected custodians and administrators with adequate independence measures; no specific conflicts of interest rules or rules governing related party transactions currently exist. - Funds may delegate and sub-delegate investment management; delegation terms must be disclosed in the application and prospectus. - Applications must include investment policy, fund rules on fees, NAV calculation, subscriptions and redemptions; operators are subject to fit and proper assessments. - Classification decisions may be appealed to the Ministry of Finance. - Schemes must file annual audited financial statements and an annual statement of compliance; schemes must submit a monthly report to the BMA including net asset valuation calculations, net redemptions and subscriptions, errors and omissions. - Collective investment schemes are not subject to routine inspections by BMA staff; inspections have been conducted of banks carrying out fund administration and in other jurisdictions. - BMA inspection power under the CIS Regulations is limited: s.11 allows inspection upon complaint but not broad power to inspect without notice. - Assessment (Principle 17): Broadly implemented. - Comments: Use s.5 of the CIS Regulations to create guidance notes and codes of conduct to set specific requirements for eligibility, service providers, internal controls and handling conflicts of interest. - On legal form and asset protection: CIS can be unit trusts or mutual funds; mutual funds defined in the Companies Act, unit trusts in the Stamp Duties Act; both are defined as collective investment schemes in the BMA Act. - Fund assets are separate from operator assets and protected from general bankruptcy proceedings against the operator; closed-end funds are not regulated. - No specific requirement under CIS Regulations that client assets be segregated, though segregation is required in practice; custodians have specific responsibility for safeguarding client assets; no rules on securities lending (except for recognized funds). - Assessment (Principle 18): Broadly implemented. - Comments: The BMA should develop rules governing securities lending and establish a legal obligation to segregate client assets. - Disclosure and valuation: Standard and institutional funds are subject to Companies Act and CIS prospectus requirements including disclosure of investment policies, subscription/redemption rights, audited financial statements, fees, NAV valuation rules, conflicts and service provider details. - Assessment (Principle 19): Implemented. - The BMA has not established specific rules governing calculation of NAV; funds must disclose NAV methodology in licensing application and prospectus; staff review NAV policy for reasonableness; schemes must be audited under Canadian, U.S. GAAP or IAS. - There is no requirement that funds publish NAV calculations or frequency of calculation; CIS Regulations require price be available to investors upon request; monthly reports to the BMA must include NAV calculations. - No prescribed rules for subscription and redemption policies; these must be approved at classification and disclosed; the BMA lacks authority to act if a fund suspends redemptions. - Assessment (Principle 20): Broadly implemented. - Comments: Provide additional guidance on NAV calculation (particularly for illiquid assets), require timing and publication standards, provide guidance on redemptions, and grant authority to issue directions to schemes in the event of unreasonable suspension of redemptions (addressed in proposed CIS Act). ### Market intermediaries - Section 7 of the IBA grants the BMA authority to license firms engaging in investment business; s.7(3) sets out licensing criteria. - Licensing applications must include business plans, internal control and bookkeeping processes, capital and insurance, service providers and management details; the BMA has issued guidance notes on licensing. - Directors and managers are subject to fit and proper assessments and must demonstrate skill and ability; there is no statutory requirement that owners be vetted in the licensing process nor that change in ownership be approved (the BMA has requested such authority in the new IBA). - Investment firms may be corporations, partnerships or sole proprietorships; there are currently 54 licensed firms in Bermuda. - For capital and reporting purposes, firms are categorized as principal, agent-only, or purely advisory. - The IBA contains exemptions from licensing for firms dealing only with institutions or sophisticated clients; firms relying on exemptions must file a notice of exemption with the BMA—there are a large number of such filings. - The BMA can impose terms and conditions on licenses and can vary, suspend or cancel a license; licensed firms must advertise licensing status and the BMA website lists all licensed firms with contact details. - Ongoing supervision involves the inspection program, annual financial statements and annual prudential meetings. - Assessment (Principle 21): Broadly implemented. - Comments: The licensing process is comprehensive and on-going oversight credible; proposed new IBA gives additional inspection powers and formal authority to approve changes of ownership. ### Prudential requirements and supervision (Principle 22 preview) - The document outlines that there should be initial and ongoing capital and prudential requirements reflecting intermediaries’ risks; detailed content for Principle 22 continues beyond the supplied excerpt. *Source: cr0599 — IMF assessment of Bermuda (Part IV of IBA/03).* ### Section 47 of IBA/03 gives the Authority the power to enter an institution to obtain information and ### Section 47 of IBA/03 and regulatory framework for investment business ### Powers of the Authority and statutory controls - Section 47 of IBA/03 gives the Authority the power to enter an institution to obtain information and documents. - Section 28 of the IBA/03 gives the Authority some power to control the acquisition of shareholding or control of an investment provider. - The BMA has general authority to direct a failing firm to take particular action and authority to appoint a custodian manager to manage customer assets, but does not have a contingency plan in place for insolvency events. ### Capital, liquidity and reporting requirements for licensed investment firms - Capital categories and minima: - Firms that may act as principal (have an inventory of securities): minimum capital of $250,000. - Firms that act only as agent: minimum capital of $100,000. - Investment advisors (do not handle customer cash or securities): minimum capital of $12,000. - Financial reporting: - Firms that handle client monies must submit annual audited financial statements (unaudited if they do not handle client monies). - All firms must file quarterly unaudited statements. - Investment advisors must submit an annual unaudited financial report to the BMA. - Auditors must be approved by the BMA. - Eligible capital and supervisory powers: - Eligible capital is defined in the BMA’s notice on Measurement of Capital developed under the Banking Act, based on Basel Accord concepts of core and supplementary capital. - The BMA may require additional capital if it deems it necessary given the investment firm’s activities. - Liquidity requirements: - Brokerage firms are required to have 3 months expenses in liquid assets. - Other firms are required to have 1 month’s expenses in liquid assets. - Prudential oversight: - The BMA holds annual prudential meetings with senior management. - Management and auditors are obliged to report to the BMA if the firm’s capital falls below the minimum. - Assessment: Implemented - Comment: The BMA should consider supplementing its supervision program with some inspections focusing on the financial condition of investment firms; staff audits could enhance compliance and provide additional insight into firms’ activities and risks. ### Internal organization, client protection and compliance (Principle 23) - Regulatory requirements: - Regulations set out books and records, audit trail and client account documentation requirements; supplemented by BMA Guidance Note. - Detailed client account documentation rules include a semi-annual account statement and a confirmation of trade requirement. - Full know-your-client requirements; firms responsible for acting in the best interest of clients. - BMA “General Business Conduct and Practice: Code of Conduct” requires disclosure of potential conflicts of interest, confidentiality of client information, sufficient disclosure of risks and information, and prohibitions on front running. - Firms must establish policies and procedures for legal/regulatory compliance, information integrity/security/availability/reliability, identification and segregation of client assets, and proper accounting/records. - Firms must establish appropriate systems of supervision and segregation of duties. - Supervision and compliance function: - BMA inspection program includes review of compliance with these requirements. - No statutory requirement for a separate compliance function, though in practice BMA staff would require this in licensing for firms handling customer assets and carrying out brokerage. - Senior management must file a statement of compliance annually. - Assessment: Implemented - Comment: The BMA should formalize a requirement for a separate compliance function. ### Failure management for market intermediaries (Principle 24) - Monitoring and powers: - BMA monitors financial condition through annual reporting and quarterly filings; BSX has similar reporting requirements. - BMA holds annual prudential meetings. - BMA can direct a failing firm to take particular action and appoint a custodian manager. - Shortcomings: - No contingency plan in place to deal with an insolvency. - Assessment: Partly implemented - Comment: Greater clarity on how and when BMA powers should be used would be helpful for staff and industry planning; develop a contingency plan for intermediary failure. ### Secondary market oversight, trading transparency and market abuse (Principles 25–28) - Licensing and supervision of exchanges (Principle 25–26): - The BSX is authorized to operate an exchange pursuant to the Bermuda Stock Exchange Act. - Section IV of the new IBA incorporates a licensing regime for exchanges, extending to alternative trading systems; these provisions come into force September 2004. - BMA supervises the BSX through daily reporting, rule review and approval, and periodic meetings, but lacks in-depth supervision of the listing function and has limited issuer/trading-systems expertise at staff level. - Assessments: Broadly implemented (Principles 25 and 26). - Transparency (Principle 27): - BSX trading provides real-time price and volume transparency of bids, offers and executed transactions; disseminated electronically to all market participants simultaneously. - No transparency requirements for trading of unlisted securities. - Assessment: Implemented - Market abuse and enforcement (Principle 28): - BSX rules prohibit insider trading and market manipulation; exchange uses surveillance and investigation powers to enforce. - No insider reporting system. - Issuers must disclose to the exchange and investors when one shareholder acquires a 5 percent interest. - Insider trading and market manipulation are not prohibited for trading outside of the exchange; exchange cannot enforce compliance against investors outside its jurisdiction. - BMA’s role in market abuse regulation is limited to supervision of the BSX; lacks direct authority over issuers and pursuit of criminal law breaches. - Assessment: Partly implemented - Comment: Insider trading and market manipulation should be laws of general application applying to all trading in Bermuda; additions to the criminal law are recommended. ### Large exposures, market disruption and clearing & settlement systems (Principles 29–30) - Large exposures and default risk (Principle 29): - No definition of ‘large exposure’ on the BSX system and no monitoring of large positions per se. - Default risk managed by requirement that participants maintain a cash settlement account and not exceed that amount; collateral requirement makes large exposure concept less relevant for BSX trading. - Unclear whether BSX can call on collateral in the cash account to settle a trade without interference from general bankruptcy law. - BSX and BMA can halt trading and take prompt corrective action in market disruption. - All trading and member position information is available in real time to BMA and BSX. - Domestic market has very low volumes and trading can be very thin; market disruption and default are not major risk factors. - Assessment: Partly implemented - Comment: BMA should take a more active role in monitoring clearing and settlement; address legal status of collateral and guarantees in the cash account. - Clearing, settlement and depositary arrangements (Principle 30): - BSD operated by BSX as clearing and settlement system and share depositary; operates on a T+3 basis. - Securities not held by BSD must be delivered to BSD at T+1. Cash must be delivered T+3. - Trades do not settle on a delivery-versus-payment basis; cash settlement system is not connected to the BSX system. - Firms required to pay in at T+3; payment guaranteed by requirement to maintain payment accounts. - Payment account is reconciled on a rolling basis; automatic trading system refuses trades that would exceed firm’s account amount. - Accounts include pledged collateral and bank guarantees; legal status of guarantees and collateral in the cash account in event of participant insolvency is unclear. - BSX is seeking to address legal-status concerns through insurance. - Short selling and lending of securities within the BSX system are not permitted. - Securities can be held in BSD in nominee accounts or in client name. - International listings settle on on-shore systems including DTCC in the United States. - BSD is in process of dematerializing securities; dematerialization is challenging because Bermudian law allows paper securities and many shares are held long term by residents. - Foreign ownership restrictions require trades to be marked as foreign or Bermudian and reconciled against company records; BSX system enforces this reconciliation. - BMA’s supervisory responsibility for BSX under the BMA Act includes clearing, settlement and depositary functions, but BMA lacks direct authority to license and supervise clearing and settlement systems and has limited ability to inspect BSD/BSX or to direct BSX actions. - No required reporting of settlement failures, no inspection program for clearing/settlement system, and no specific requirements or performance standards for the system. - Assessment: Partly implemented - Comments and recommended changes: - Strengthen supervision of clearing and settlement systems. - Grant BMA licensing authority over clearing and settlement systems and develop standards for clearing and settlement, particularly with respect to risk management. - Consider an inspection program and reporting requirements to assist monitoring. - Resolve risk created by uncertainty of legal status of the cash account. ### Implementation summary and recommended actions - Summary implementation counts (Table 14): - Implemented: 12 (Principles P 4,5,6,10,11,12,13,16,19,22,23,27) - Broadly Implemented: 11 (Principles P 1,2,3,8,9,17,18,20,21,25,26) - Partly Implemented: 7 (Principles P 7,14,15,24,28,29,30) - Key recommended actions (condensed): - Regulator principles (P 1–5): remove BMAA authority given to the MOF; grant BMA budgetary autonomy; create a separate internal process for reporting under the employee code of conduct. - Enforcement (P 8–10): improve authority to inspect collective investment schemes; create authority to sanction issuers and trading systems. - Issuers (P 14–16): grant BMA authority/responsibility for all public issuers including prospectus review and continuous disclosure monitoring; develop insider trade reporting requirements; develop rules for take-over bids, mergers, changes of control and related-party transactions. - Collective investment schemes (P 17–20): further develop staff inspection skills; develop additional guidance on licensing/conduct, securities lending, segregation of assets, NAV calculation/publication, and redemptions. - Market intermediaries (P 21–24): grant BMA clearer inspection rights; develop staff technical skills for inspections; develop a contingency plan for intermediary failure; consider on-site prudential inspections of firms handling client assets. - Secondary market (P 25–30): increase oversight of clearing and settlement systems; develop staff skills for clearing/settlement and trading systems; fully dematerialize securities; develop performance and risk management standards for clearing and settlement systems; criminalize insider trading and market manipulation; resolve cash account risk. ### Authorities’ response - The BMA reported substantial efforts to introduce appropriate regulation for the investment services sector and to ensure effective implementation and policing. - Since the IMF on-site review, Bermuda enacted the new Investment Business Act 2003 replacing 1998 legislation, intended to ensure a very high level of compliance with the IOSCO Principles for investment businesses. - Government is expected to introduce a new Collective Investment Schemes Act into Parliament shortly to address weaknesses in mutual fund regulation and to introduce a specific licensing regime for fund administration business in Bermuda. - The BMA will consider with the Ministry of Finance the Report’s recommendations regarding additional regulation of issuers. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr0599.pdf_