## IMF assessment update of Bermuda’s financial regulation and supervision — Executive Summary

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### Overview and context
- The IMF assessment reports that Bermuda is the third largest reinsurance center after London and New York, and the second largest captive insurance domicile after the U.S.
- The assessment update was carried out in May–June 2007, with consultations continuing between September 2007 and May 2008.
- The assessment:
  - Describes developments in the financial system and regulatory and supervisory arrangements since 2003.
  - Updates implementation of 2003 recommendations.
  - Provides detailed assessments of commercial insurance supervision (IAIS Insurance Core Principles) and the AML/CFT regime (2004 methodology, updated June 2006). ROSCs for insurance supervision and AML/CFT are annexed.
  - Factually updates the 2003 banking supervision assessment taking into account the revised Basel Core Principles (BCP).

### Political and economic background
- Institutional and legal characteristics:
  - Bermuda is a self-governing British Overseas Territory with a legislature of an 11-member appointed upper house and a 36-member house of assembly elected for a 5-year term; the last elections were held in 2003.
  - Bermuda’s legal system is based on English common law, doctrines of equity, and Bermuda statute law dating from 1612; a commercial court was established in 2006 and supreme court rules were updated.
- Macroeconomic facts:
  - Per capita GDP was over US$ 75,000 in nominal terms in 2005.
  - The international financial center contributed over half of real GDP and almost 30 percent of employment in 2006.
  - Population was projected to be 64,200 in 2008.
  - Bermuda issues its own currency at par with the U.S. dollar.
  - Taxation: consumption-based system with a payroll tax of up to 12.5 percent (on employment income), inheritance tax, and various stamp duties; no taxes on unearned income or capital gains.
  - Growth and inflation:
    - Real growth accelerated to 5.4 percent in 2006 from an average of 3.9 percent in the previous three years.
    - Sectoral growth in 2006: financial intermediation 19 percent; business activities 4 percent; international business activities 19 percent.
    - Output from hotels and restaurants grew by 10 percent in 2006.
    - Inflation as measured by the consumer price index was 3.8 percent in 2007.

### Financial system structure and key statistics
- Structural overview:
  - Major international financial center driven by international insurance and reinsurance, and to a lesser extent collective investment schemes. Banking sector is small and focused on international business. Bermuda Stock Exchange lists domestic companies and mutual funds and cross-lists international companies; trading volume is very thin.
- Banking sector concentration and foreign exposure:
  - Four licensed banks: Bank of N.T. Butterfield and Son, Ltd.; Capital G. Bank Ltd.; Bank of Bermuda (purchased by HSBC in 2004); Bermuda Commercial Bank (controlled by a Curaçao bank).
  - Consolidated total assets of banks and the single deposit company averaged $22 billion during 2003–2006, or four times the country’s GDP.
  - At end-2007, foreign assets accounted for 80 percent ($19.4 billion) of the total combined balance sheet of Bermuda banks and deposit companies.
- Selected financial sector figures (million Bermudian dollars unless noted):
  - Banks and Deposit Companies
    - Total Assets: 2003: 22,404; 2004: 20,487; 2005: 22,371; 2006: 23,100; 2007: 24,168
    - Of which: Foreign Currency: 2003: 19,504; 2004: 17,221; 2005: 18,570; 2006: 18,831; 2007: 19,412
    - Deposit Liabilities: 2003: 20,116; 2004: 18,276; 2005: 19,586; 2006: 19,906; 2007: 20,807
    - Loans and Advances: 2003: 4,845; 2004: 5,497; 2005: 5,890; 2006: 6,806; 2007: 7,351
    - Loan/Deposit ratio (percent): 2003: 24.09; 2004: 30.08; 2005: 30.07; 2006: 34.19; 2007: 35
    - Other assets (deposits and investments): 2003: 16,784; 2004: 13,955; 2005: 14,877; 2006: 15,082; 2007: 15,575
  - Investment Funds
    - Mutual funds (number): 2003: 1,321; 2004: 1,637; 2005: 1,609; 2006: 1,715; 2007: 1,679
    - Unit trusts (number): 2003: 221; 2004: 374; 2005: 434; 2006: 475; 2007: 483
    - Total Funds Net Asset Value ($ billion): 2003: 116; 2004: 158; 2005: 188; 2006: 212; 2007: 249
  - Bermuda Stock Exchange
    - Market capitalization: 2003: 114; 2004: 100; 2005: 325; 2006: 350; 2007: 350
    - Number of securities listed: 2003: 383; 2004: 385; 2005: 363; 2006: 430; 2007: 543
  - Insurance Companies (includes companies holding both general and composite business licenses)
    - Gross premiums: 2003: 94.7; 2004: 95.3; 2005: 100.7; 2006: 115.8
    - Net premiums: 2003: 84.1; 2004: 82.9; 2005: 86.3; 2006: 100.4
    - Total assets: 2003: 236.0; 2004: 290.2; 2005: 329.8; 2006: 440.4
    - Capital and surplus: 2003: 87; 2004: 107; 2005: 110; 2006: 158
    - Number of companies: 2003: 1,267; 2004: 1,300; 2005: 1,312; 2006: 1,305
- Note: Since insurance companies have different financial years, comparable aggregate data was not yet available for 2007 in the assessment.

### Insurance supervision: progress and remaining actions
- Overall assessment:
  - Insurance supervision for commercial insurers and reinsurers has a high level of observance of the IAIS Core Principles.
  - The BMA has significantly enhanced its risk-based approach aligned with the diversified range of insurance entities domiciled in Bermuda.
- Risk-based framework and implementation status:
  - Decision to restructure supervision on a risk-based framework enhanced the system beyond 2003 recommendations.
  - The framework ranks insurers by risk likelihood and impact; riskier categorizations attract increased supervisory attention.
  - The risk-based framework is largely established, implementation is in train, and is in place for Class 4 companies (the most systemically important market segment).
  - Full rollout to all market segments is required for comprehensive oversight.
  - Effective implementation requires continuous review of regulatory resources, preservation of regulatory independence, high levels of disclosure, and granular risk-rating and supervision of Class 3 companies.
- Recent and planned measures:
  - Class 4 companies filed results of the risk-based capital model and enhanced disclosures at end-2007.
  - Legislation subdividing the Class 3 group was passed in July 2008 to facilitate their coverage by the risk-based framework and capital model.
  - The BMA’s 2008–09 Business Plan signals plans to introduce insurance group supervision by 2011.
  - Transparency measures include legislation requiring Class 4 to publish their GAAP accounts; other measures under review.
- Supervisory recommendations:
  - Formulate a pragmatic approach and start closer cooperation with other authorities to implement group supervision.
  - Enhance transparency of companies, including through implementation of the IAIS standard on disclosure.
  - Secure specialized resources to validate risk-management models and communicate effectively with companies.

### Banking supervision: developments and vulnerabilities
- Progress and reforms:
  - Banking department restructured to support a formal risk-based supervisory system.
  - Supervisory programs are tailored to entities with the highest risk scores identified through standardized analysis.
  - Regulatory framework substantially improved; on- and off-site supervision strengthened.
  - BMA intends to implement the new Basel II capital adequacy framework in 2009.
- Capital and liquidity indicators:
  - Capital to risk-weighted assets ratio: 17.1 percent at end-2007; 16.8 percent at March 2008.
  - BMA minimum required capital ratio: 10 percent.
  - Capital ratio trend: up from around 15 percent at end-2005 to 17.1 percent at end-2007.
  - Liquidity (loan-deposit ratio): 35 percent at end-2007; 24 percent at end-2004.
- Exposures related to structured products:
  - Two Bermudian banks hold higher rated tranches of asset-backed credits representing 10 to 15 percent of their investment portfolios; these are held-to-maturity investments.
  - Banks and auditors consider there has not been permanent value impairment; BMA reviewing portfolios monthly and meeting management to monitor portfolio management.
  - BMA stepped up scrutiny of these positions.
- Recommended legislative action:
  - Enact legislation to provide the BMA with more direct intervention tools in the case of a troubled bank.

### Securities markets and collective investment schemes
- Collective Investment Schemes (CIS):
  - Number of schemes: 1,303 in 2007; 912 in 2002.
  - Net asset value: $249 billion in 2007; $68 billion in 2002.
  - Structure: schemes manage 2,162 portfolios for 1,679 funds and 483 trusts.
  - Legal term for CIS in Bermuda is “investment fund.”
- Bermuda Stock Exchange (BSX):
  - Fully electronic offshore securities market; domestic market for local companies and domestic CIS; venue for recording trades in internationally-listed companies.
  - 543 securities listed at end-2007, including 361 CIS and 37 international companies cross-listed on onshore exchanges.
  - Total market capitalization: $350 billion at end–2007; $391.3 billion at March 2008; $150 billion in 2002.
  - Domestic market share: less than one percent of market capitalization in 2007.
  - Annual trading volume in domestic equity securities: $121 million in 2006; $165 million in 2007.
  - Number of trading members: 11 in 2007 (declined from 16 in 2002).
  - BSX operates a clearing and settlement system and a depository; all systems fully automated.

### Insurance sector — scale, composition, concentration, and trends
- Market scale and activity:
  - More than 1,400 registered (re)insurers; total registered insurers: 1,480 at end-2007.
  - In 2006, Bermuda accounted for 12 of the top 40 global reinsurers rated by Standard and Poor’s, and 15 of the top 35 reinsurers rated by AM Best in 2004.
  - About 92 percent or 1,312 of the 1,421 registered insurers in 2005 were actively conducting business.
  - Breakdown in 2005: 1,135 general insurers; 100 composite insurers; 77 long-term insurers; 19 insurers that write domestic business.
- Regulatory classes:
  - Class 1: single-parent captives insuring only the risks of its owners or affiliates of the owners, or pure captives.
  - Class 2: multi-owner pure captives and captive insurers deriving up to 20 percent of their net premiums from unrelated parties.
  - Class 3: insurers not included in Classes 1, 2, or 4, including “captives” with more than 20 percent of their net premiums from unrelated parties.
  - Class 4: insurers with minimum capital and surplus of $100 million underwriting direct excess liability and/or property catastrophe reinsurance risk.
- Growth and market shares:
  - GWP more than doubled from 2001 to 2006.
  - 82 new insurers established in Bermuda in 2006.
  - Ownership of 589 active commercial insurers at end-2005: U.S. companies owned 60 percent; Bermudian-owned 18 percent; European-owned 14 percent.
  - Around one in three commercial insurers were publicly-listed companies, of which two-thirds were listed in U.S. exchanges.
  - Insurance sector accounted for 7.6 percent of total employment of 38,947 in Bermuda.
  - Insurance density in the domestic market: $6,072 (premiums per head).
- Concentration metrics (2006):
  - Total GWP: 115,784 ($ million).
  - GWP of Top 10 All Cos: 83,996 ($ million), share 73 percent.
  - Top ten commercial insurers in each of Classes 3, 4, and long-term together had a share of two-thirds of total market GWP.
  - Top 10 of the Class 4 companies had 70 percent of GWP in their class.
  - Top 10 of the long-term companies had 98 percent of GWP in their class.
- Table 3 (selected figures, $ billion except where noted) — 2006:
  - Classes 1/2: Gross premiums 13.8; Net premiums 11.7; Total assets 55.1; Capital and surplus 23.9; Number of companies 696.
  - Class 3: Gross premiums 42.3; Net premiums 32.6; Total assets 194.5; Capital and surplus 66.8; Number of companies 490.
  - Class 4: Gross premiums 32.2; Net premiums 28.6; Total assets 135.2; Capital and surplus 57; Number of companies 38.
  - Long-term insurers: Gross premiums 27.5; Net premiums 27.5; Total assets 55.6; Capital and surplus 10.0; Number of companies 81.

### Insurance business mix, retention, capital and investment profile
- Business mix and retention (survey covering two-thirds of industry, 2005):
  - Long-term insurers: 34 percent of GWP.
  - “Mixed” insurers: 26 percent of GWP.
  - Reinsurers: 16 percent of GWP.
  - Retention rates: Long-term insurers almost 95 percent; Mixed insurers nearly 90 percent; Direct insurers about 88 percent; Reinsurers about 80 percent.
  - Geographic sourcing of GWP: North America declined from 62 percent in 2003/4 to 57 percent in 2005; Europe rose from 6.7 percent (2003) to 19.4 percent (2005); Global business 20.4 percent of industry GWP in 2005.
- Capital and loss experience:
  - Industry strengthened its capital base in 2006.
  - Bermudian reinsurers’ profitability hit by combined 30 percent share of insured losses from hurricanes Katrina, Rita, and Wilma (KRW).
  - Collectively, insurers settled $17 billion of claims arising from the 2005 hurricane season.
  - Class 4 insurers accounted for 36 percent of total capital and surplus at end-2006 and supply 40 percent of the property catastrophe reinsurance capacity to the U.S. market.
- Investment composition:
  - End-2005: 52 percent of total assets in quoted bonds and equities; 9.3 percent in cash and deposits.
  - Investment and advances to affiliates represented 53 percent and 14 percent of the assets of direct insurers and composite insurers, respectively.
  - Reinsurers and long-term insurers held 5 percent and 2.6 percent respectively in intra-group balances.
  - 2006 (commercial insurers): Quoted investments 50 percent of assets; Investment in affiliates 23 percent; Cash and time deposits 8 percent.
- Strategic concerns and risk factors:
  - Tradeoff between gaining/retaining market share by lowering rates and reduced profitability as property/casualty insurance rates have fallen in the absence of major claims since 2005.
  - Competitive pressures and potential over-capacity, partly due to state-funded capacity for catastrophe risks in the U.S.
  - Some sidecars funded by highly leveraged investors have disappeared.
  - Standard and Poor’s observed weaker depth and breadth of senior management among the class of 2006 start-ups relative to prior cohorts.
  - Concentration of start-ups focusing on property and other catastrophe-exposed lines could pose challenges if volatility risk continues to increase.

### Regulatory framework, oversight, and market integrity
- Single regulator and legislation:
  - Bermuda Monetary Authority (BMA) supervises insurance, banks, trust and investment businesses, collective investment schemes, the BSX, and the credit union; it also issues the Bermudian dollar.
  - Key legislation: Bermuda Monetary Authority Act, 1969 (last amended 2006); Banks and Deposit Companies Act, 1999; Insurance Act, 1978 (last amended 2006); Investment Business Act, 2003; Trusts (Regulation of Trust Business) Act, 2001; Investment Funds Act, 2006.
- Governance and staffing:
  - BMA board: 12 members; 3 executive members appointed by the BMA subject to approval by the Minister of Finance; minister appoints non-executive members.
  - ID staff: 50 persons at time of assessment (up from about 17 in 2003); professional staff reached 45 by end-2007.
  - Insurance Advisory Committee (IAC) advises the minister on insurance matters.
- Supervisory organization:
  - Insurance supervision carried out by the Insurance Department (ID) of the BMA, headed by the Supervisor of Insurance; supervisory units report to the Deputy CEO (post created in 2007–08).
  - Banking, Trust and Investment Department (BTI) responsible for banking supervision and securities regulation; department restructured in 2006.
  - Investment Funds Act of 2006 effective March 2007: defines Standard, Institutional, and Administered Funds; private funds (open to a maximum of 20 investors) excluded.

### AML/CFT regime: findings, ratings, and recommendations
- Summary finding:
  - AML/CFT regime requires significant updating to keep pace with FATF recommendations, to implement the recommendations of the 2003 assessment, and to implement a risk-sensitive approach to preventative measures for financial institutions.
- Assessment timing and methodology:
  - ROSC for the FATF 40+9 prepared based on mission from May 7–23, 2007 using the 2004 Assessment Methodology; Detailed Assessment Report (DAR) adopted by the CFATF on November 23, 2007.
- Key deficiencies and ratings (selected):
  - Criminalization of Money Laundering (R.1): LC
  - Criminalization of Terrorist Financing (SR.II): PC
  - Confiscation, freezing, and seizing of proceeds of crime (R.3): PC
  - Freezing of funds used for terrorist financing (SR.III): PC
  - The Financial Intelligence Unit and its functions (R.26): LC
  - Cross Border Declaration or disclosure (SR IX): NC
  - Preventive measures for financial institutions: many Recommendations rated NC or PC (e.g., R.5 NC; R.6 NC; R.7 NC; R.8 NC; R.9 NC; R.10 LC)
- Specific recommendations (selected):
  - Update legislation and regulations and amend procedure and implementation as detailed in the AML/CFT ROSC.
  - Establish the new Financial Intelligence Agency (FIA) and make it operational with sufficient staff.
  - Extend AML/CFT requirements to key sectors including life insurance and expand coverage in the investments (mutual funds) sector.
  - Reduce the CDD threshold for wire transfers to US/BD$1,000 and require retention of full originator information.
  - Introduce a cross-border currency declaration system covering both incoming and outgoing transfers.
  - Increase focused risk-based on-site inspections and take enforcement action where necessary; consider civil money penalties and conservatorship powers for the BMA.

### Stress testing, model validation, and supervisory priorities
- Stress test findings (sample of ten of 41 Class 4 and long-term insurers using internal models):
  - Scenarios: three natural catastrophe events, two pandemic events, and firm-specified worst-case scenarios.
  - Catastrophic events had high negative effects on companies’ capital; worst-case scenarios produced the most severe impacts.
  - No companies in the sample fell below regulatory requirements, demonstrating strong balance sheets in the sample.
- Observations and recommended enhancements:
  - Broaden stress testing to include financial market effects and asset stresses, and use economic valuation rather than accounting data.
  - Examine combined extreme events (e.g., economic recession plus catastrophe).
  - Devote BMA resources to understanding companies’ models to learn strengths and weaknesses of risk analyses and validate internal models.

### Cross-border cooperation and information exchange
- Legal and practical arrangements:
  - BMA can share confidential information with foreign supervisory authorities under “gateway” provisions in regulatory laws and can compel production of information from licensed persons to assist third-country supervisors.
  - BMA does not require a formal agreement or MOU to provide assistance but will enter bilateral MOUs where preferred by other authorities.
  - Section 52B(2) of the IA provides for assistance without requiring strict reciprocity; two MOUs specifically covering insurance exist.
  - BMA has applied to be a signatory of the IAIS’s multilateral MOU and signed IOSCO’s Multilateral MOU in 2007.
- Mission recommendations for enhanced cooperation:
  - Implement routine arrangements to alert host supervisors of material developments.
  - Formalize exchanges with state insurance supervisors in the U.S. and the U.K. FSA.
  - Consider joint inspections and supervisory colleges for largest insurance companies.

### Supervision resourcing and institutional recommendations
- Staffing and capabilities:
  - Authorities implementing most recommendations; staff resources increasing in quantity and depth.
  - BMA staffing improvements include larger supervisory teams for all sectors, a separate risk and policy unit, an actuarial unit, a dedicated insurance run-off team, and a program of specialist training.
  - Multi-tier learning program and sponsored study and accreditation under way.
- Key recommended actions (selected highlights mapped to IAIS ICPs):
  - Continue to attract and retain a range of skilled staff.
  - Periodically review relationship with industry to preserve regulatory independence.
  - Proceed with full rollout of the new supervisory framework and improve granular supervision of Class 3 companies.
  - Formulate and implement pragmatic group supervision by 2011 and host supervisory colleges in the interim.
  - Enhance public disclosures by insurers consistent with IAIS standards; require Class 4 insurers to publish GAAP accounts and consider extending to largest Class 3 companies.
  - Enact legislation to provide the BMA with more direct intervention tools for troubled banks.
  - Update AML/CFT legislation, regulations, guidance, and supervisory procedures as detailed in the AML/CFT ROSC.

### Authorities’ response and follow-up initiatives
- BMA and Government actions and commitments:
  - BMA welcomed the IMF assessment recognition of progress since 2003.
  - Enacted legislation in summer 2007: Proceeds of Crime (Amendment) Act 2007; Financial Intelligence Agency Act 2007; Criminal Justice International Cooperation (Bermuda) (Amendment) Act 2007.
  - Post-assessment enhancements include significant increases in qualified technical staff; expanded supervisory teams; creation of independent risk and policy unit; in-house actuarial unit; dedicated insurance run-off team.
  - BMA Business Plan and legislative actions:
    - Required Class 4 insurers to file the Bermuda Capital Solvency Requirement for 2007 year-end with prescribed stress and scenario tests and enhanced disclosures.
    - Introduced a requirement for Class 4 insurance companies to publish their GAAP accounts.
    - Passage of more comprehensive risk-based solvency legislation in July 2008, including approval of internal models for Class 4 insurers upon satisfying criteria.
    - Legislation subdividing Class 3 into three classes to enhance the risk-based approach.
    - Intention to publish a discussion paper on insurance group supervision in first quarter of 2009 and implement group supervision by 2011.

*Source: IMF assessment update of Bermuda’s financial regulation and supervision (Executive Summary) and related ROSC annexes as summarized in the IMF staff report content unit cr08336.*

### Executive Summary ......................................................................................................

### Executive Summary

### Overview and context
- The IMF assessment reports that Bermuda is the third largest reinsurance center after London and New York, and the second largest captive insurance domicile after the U.S.
- The assessment update was carried out in May–June 2007, with consultations continuing between September 2007 and May 2008. The assessment:
  - Describes developments in the financial system and regulatory and supervisory arrangements since 2003.
  - Updates implementation of 2003 recommendations.
  - Provides detailed assessments of commercial insurance supervision (IAIS Insurance Core Principles) and the AML/CFT regime (2004 methodology, updated June 2006). ROSCs for insurance supervision and AML/CFT are annexed.
  - Factually updates the 2003 banking supervision assessment taking into account the revised Basel Core Principles (BCP).

### Political and economic background
- The report states:
  - Bermuda is a self-governing British Overseas Territory with a legislature of an 11-member appointed upper house and a 36-member house of assembly elected for a 5-year term; the last elections were held in 2003.
  - Bermuda’s legal system is based on English common law, doctrines of equity, and Bermuda statute law dating from 1612; a commercial court was established in 2006 and supreme court rules were updated.
  - Per capita GDP was over US$ 75,000 in nominal terms in 2005.
  - The international financial center contributed over half of real GDP and almost 30 percent of employment in 2006.
  - Population was projected to be 64,200 in 2008.
  - Bermuda issues its own currency at par with the U.S. dollar and has a consumption-based taxation system with a payroll tax of up to 12.5 percent (on employment income), inheritance tax, and various stamp duties, but no taxes on unearned income or capital gains.
  - In 2006, real growth accelerated to 5.4 percent from an average of 3.9 percent in the previous three years, with growth of 19, 4, and 19 percent respectively in the financial intermediation, business activities, and international business activities industries.
  - Output from hotels and restaurants grew by 10 percent in 2006.
  - Inflation as measured by the consumer price index was 3.8 percent in 2007.

### Financial system structure and key statistics
- The report highlights Bermuda as a major international financial center driven by international insurance and reinsurance, and to a lesser extent collective investment schemes. The banking sector is small and focused on international business. The Bermuda Stock Exchange lists domestic companies and mutual funds and cross-lists international companies; trading volume is very thin.
- Banking sector concentration and foreign exposure:
  - There are four licensed banks in Bermuda: Bank of N.T. Butterfield and Son, Ltd.; Capital G. Bank Ltd.; Bank of Bermuda (purchased by HSBC in 2004); and Bermuda Commercial Bank (controlled by a Curaçao bank).
  - Consolidated total assets of banks and the single deposit company amounted on average to $22 billion during 2003–2006, or four times the country’s GDP.
  - At end-2007, foreign assets accounted for 80 percent ($19.4 billion) of the total combined balance sheet of Bermuda banks and deposit companies.
- Selected financial sector figures (reported in million Bermudian dollars, except where noted):
  - Banks and Deposit Companies
    - Total Assets: 2003: 22,404; 2004: 20,487; 2005: 22,371; 2006: 23,100; 2007: 24,168
    - Of which: Foreign Currency: 2003: 19,504; 2004: 17,221; 2005: 18,570; 2006: 18,831; 2007: 19,412
    - Deposit Liabilities: 2003: 20,116; 2004: 18,276; 2005: 19,586; 2006: 19,906; 2007: 20,807
    - Loans and Advances: 2003: 4,845; 2004: 5,497; 2005: 5,890; 2006: 6,806; 2007: 7,351
    - Loan/Deposit ratio (percent): 2003: 24.09; 2004: 30.08; 2005: 30.07; 2006: 34.19; 2007: 35
    - Other assets (deposits and investments): 2003: 16,784; 2004: 13,955; 2005: 14,877; 2006: 15,082; 2007: 15,575
  - Investment Funds
    - Mutual funds (number): 2003: 1,321; 2004: 1,637; 2005: 1,609; 2006: 1,715; 2007: 1,679
    - Unit trusts (number): 2003: 221; 2004: 374; 2005: 434; 2006: 475; 2007: 483
    - Total Funds Net Asset Value ($ billion): 2003: 116; 2004: 158; 2005: 188; 2006: 212; 2007: 249
  - Bermuda Stock Exchange
    - Market capitalization: 2003: 114; 2004: 100; 2005: 325; 2006: 350; 2007: 350
    - Number of securities listed: 2003: 383; 2004: 385; 2005: 363; 2006: 430; 2007: 543
  - Insurance Companies (includes companies holding both general and composite business licenses)
    - Gross premiums: 2003: 94.7; 2004: 95.3; 2005: 100.7; 2006: 115.8
    - Net premiums: 2003: 84.1; 2004: 82.9; 2005: 86.3; 2006: 100.4
    - Total assets: 2003: 236.0; 2004: 290.2; 2005: 329.8; 2006: 440.4
    - Capital and surplus: 2003: 87; 2004: 107; 2005: 110; 2006: 158
    - Number of companies: 2003: 1,267; 2004: 1,300; 2005: 1,312; 2006: 1,305
  - Source of figures: Bermuda Monetary Authority (BMA) and BMA Annual Reports, 2003 to 2006.
  - Note: Since insurance companies have different financial years, comparable aggregate data was not yet available for 2007 in the report.

### Insurance supervision: progress and remaining actions
- The assessment finds that insurance supervision for commercial insurers and reinsurers has a high level of observance of the IAIS Core Principles.
- Key supervisory changes and status:
  - The decision to restructure supervision on a risk-based framework enhanced the system beyond the 2003 recommendations that had aimed to improve a largely self-supervised system.
  - The new framework ranks insurers by risk likelihood and impact, with riskier categorizations attracting increased supervisory attention.
  - The risk-based framework is largely established, implementation is in train, and is in place for Class 4 companies (the most systemically important market segment).
  - Full rollout of the risk-based regulatory system to all market segments is required for comprehensive oversight.
  - Effective implementation requires continuous review of regulatory resources, preservation of regulatory independence, high levels of disclosure, and granular risk-rating and supervision of Class 3 companies.
- Recent and planned measures:
  - Class 4 companies filed results of the risk-based capital model and enhanced disclosures at end-2007.
  - In July 2008, legislation subdividing the Class 3 group was passed to facilitate their coverage by the risk-based framework and capital model.
  - The BMA’s 2008–09 Business Plan signals plans to introduce insurance group supervision by 2011.
  - Transparency measures include legislation requiring Class 4 to publish their GAAP accounts; other measures are under review.
- The assessment underscores that given the global systemic nature of companies headquartered in Bermuda, the Insurance Department should formulate a pragmatic approach and start closer cooperation with other authorities to implement group supervision.
- The BMA is advised to enhance transparency of companies, including through implementation of the IAIS standard on disclosure, and to secure specialized resources to validate risk-management models and communicate effectively with companies.

### Banking supervision: developments and vulnerabilities
- The assessment reports progress in banking supervision both organizationally and in supervisory practices:
  - The banking department was restructured to support a formal risk-based supervisory system.
  - Supervisory programs are tailored to entities with the highest risk scores identified through standardized analysis.
  - The regulatory framework has been substantially improved.
- The report notes that both banking and insurance supervisors are monitoring firms affected by sub-prime exposures; some insurance companies have been adversely impacted, but the authorities have taken a proactive stance in assessing risks and companies’ risk management, and such exposure is not anticipated to be a systemic threat.
- The report recommends that legislation should be enacted to provide the BMA with more direct intervention tools in the case of a troubled bank.

### Securities markets and other sectors
- Securities regulation has been updated in line with the 2003 recommendations:
  - A new Investment Funds Act (IFA) providing additional rules for collective investment schemes was passed in 2006 and a dedicated inspection team was formed.
  - The BMA has been given statutory oversight of clearing and settlement systems.

### AML/CFT regime
- The assessment finds that the AML/CFT regime requires significant updating to keep pace with Financial Action Task Force (FATF) recommendations, to implement the recommendations of the 2003 assessment, and to implement a risk-sensitive approach to preventative measures for financial institutions.
- Updated AML/CFT legislation was enacted in 2007 and additional primary and secondary legislation is in process.
- The report recommends updating legislation and regulations, and amending procedure and implementation as detailed in the AML/CFT Report on Observance of Standards and Codes (ROSC).

### Supervision resourcing and institutional recommendations
- The report emphasizes sustaining momentum in implementation by building BMA staff resources and expertise:
  - The authorities are implementing most recommendations; staff resources are increasing in both quantity and depth.
  - BMA staffing improvements include larger supervisory teams for all sectors, a separate risk and policy unit, an actuarial unit, a dedicated insurance run-off team, and a program of specialist training.
  - In response to the insurance assessment recommendation that it keep its relationship with industry under review, the BMA is publishing a statement of policy on its approach to consultation with industry.
- Key recommendations summarized in Table 1 of the report (excerpt):
  - Bermuda Monetary Authority
    - Continue to attract and retain a range of skilled staff to meet the standard of becoming a leading regulator.
  - Insurance
    - Periodically review the relationship with industry to preserve regulatory independence.
    - Proceed with full rollout of the new supervisory framework.
    - Formulate a pragmatic approach and start closer cooperation with other authorities to implement group supervision.
    - Enhance transparency of companies, including through implementation of the IAIS standard on disclosure.
    - Secure specialized resources to validate risk-management models and communicate effectively with companies.
  - Banking
    - Enact legislation to provide the BMA with more direct intervention tools in the case of a troubled bank.
  - AML/CFT
    - Update legislation and regulations, and amend procedure and implementation as detailed in the AML/CFT ROSC.

*Source: IMF assessment update of Bermuda’s financial regulation and supervision (Executive Summary).*

### 11.      Certain indicators suggest low risk in the banking sector. Capital adequacy in the

### 11.      Certain indicators suggest low risk in the banking sector. Capital adequacy in the

### Banking sector indicators
- Capital to risk-weighted assets ratio: 17.1 percent at end-2007; 16.8 percent at March 2008.
- BMA minimum required capital ratio: 10 percent.
- Capital ratio trend: up from around 15 percent at end-2005 to 17.1 percent at end-2007.
- Liquidity (loan-deposit ratio): 35 percent at end-2007; 24 percent at end-2004.
- Rating agencies’ assessment: liquidity position of the banks is still considered comfortable.
- Context note: In the absence of deposit insurance and a lender of last resort, banks traditionally maintain high liquidity.

### Securities markets — Collective Investment Schemes (CIS)
- CIS sector size and growth:
  - Number of schemes: 1,303 in 2007; 912 in 2002.
  - Net asset value: $249 billion in 2007; $68 billion in 2002.
- Structure:
  - Schemes manage 2,162 portfolios for 1,679 funds (mutual funds, umbrella funds, sub-funds, segregated accounts, and segregated account companies) and 483 trusts (unit trusts, umbrella trusts, and sub-trusts).
- Regulatory note: The legal term for CIS in Bermuda is “investment fund.”

### Securities markets — Stock Exchange (BSX)
- BSX characteristics:
  - Fully electronic offshore securities market; domestic market for local companies and domestic CIS; venue for recording trades in internationally-listed companies.
- Listings and market capitalization:
  - 543 securities listed at end-2007, including 361 CIS and 37 international companies cross-listed on onshore exchanges.
  - Total market capitalization: $350 billion at end–2007; $391.3 billion at March 2008; $150 billion in 2002.
- Trading composition and volumes:
  - Domestic market share: less than one percent of market capitalization in 2007.
  - Annual trading volume in domestic equity securities: $121 million in 2006 (up two-thirds compared with 2005); $165 million in 2007 (up one-third from 2006).
  - Number of trading members: declined to 11 in 2007 from 16 in 2002.
- Operations: All trading members must be Bermuda-domiciled companies; BSX operates a clearing and settlement system and a depository; all systems are fully automated.

### Insurance sector — scale, composition, and trends
- Market scale:
  - More than 1,400 registered (re)insurers; total number of registered insurers: 1,480 at end-2007.
  - In 2006, Bermuda accounted for 12 of the top 40 global reinsurers rated by Standard and Poor’s, and 15 of the top 35 reinsurers rated by AM Best in 2004.
- Active insurers:
  - About 92 percent or 1,312 of the 1,421 registered insurers in 2005 were actively conducting business.
  - Breakdown in 2005: 1,135 general insurers; 100 composite insurers; 77 long-term insurers; 19 insurers that write domestic business.
- Regulatory classes (legislative categorization):
  - Class 1: single-parent captives insuring only the risks of its owners or affiliates of the owners, or pure captives.
  - Class 2: multi-owner pure captives and captive insurers deriving up to 20 percent of their net premiums from unrelated parties.
  - Class 3: insurers not included in Classes 1, 2, or 4, including “captives” with more than 20 percent of their net premiums from unrelated parties.
  - Class 4: insurers with minimum capital and surplus of $100 million underwriting direct excess liability and/or property catastrophe reinsurance risk.
- Growth and new entrants:
  - GWP more than doubled from 2001 to 2006.
  - 82 new insurers established in Bermuda in 2006 (a three-year high).
- Ownership and employment:
  - Ownership of 589 active commercial insurers at end-2005: U.S. companies owned 60 percent; Bermudian-owned 18 percent; European-owned 14 percent.
  - Around one in three commercial insurers were publicly-listed companies, of which two-thirds were listed in U.S. exchanges.
  - Insurance sector accounted for 7.6 percent of total employment of 38,947 in Bermuda.
  - Insurance density (premiums per head) in the domestic market: $6,072.

### Insurance sector concentration and market shares
- Gross written premiums (GWP) in 2006: $115.8 billion total.
- Market composition by insurer type: almost 90 percent of GWP was written by commercial insurers.
- Concentration:
  - Top ten of the commercial insurers in each of Classes 3, 4, and long-term together had a share of two-thirds of total market GWP.
  - Top 10 of the Class 4 companies had 70 percent of GWP in their class.
  - Top 10 of the long-term companies had 98 percent of GWP in their class.
- Table 3 (selected figures, $ billion except where noted):
  - Classes 1/2 (2006): Gross premiums 13.8; Net premiums 11.7; Total assets 55.1; Capital and surplus 23.9; Number of companies 696.
  - Class 3 (2006): Gross premiums 42.3; Net premiums 32.6; Total assets 194.5; Capital and surplus 66.8; Number of companies 490.
  - Class 4 (2006): Gross premiums 32.2; Net premiums 28.6; Total assets 135.2; Capital and surplus 57; Number of companies 38.
  - Long-term insurers (2006): Gross premiums 27.5; Net premiums 27.5; Total assets 55.6; Capital and surplus 10.0; Number of companies 81.
- Table 4 (analysis of GWP in 2006, aggregated figures):
  - Total GWP: 115,784 ($ million).
  - GWP of Top 10 All Cos: 83,996 ($ million), share 73 percent.

### Insurance business mix, retention, and capital
- GWP by line (survey covering two-thirds of industry, 2005):
  - Long-term insurers: 34 percent of GWP.
  - “Mixed” insurers: 26 percent of GWP.
  - Reinsurers: 16 percent of GWP.
- Retention rates:
  - Long-term insurers: almost 95 percent.
  - Mixed insurers: nearly 90 percent.
  - Direct insurers: about 88 percent.
  - Reinsurers: about 80 percent.
- Geographic sourcing of GWP:
  - North America: declined from 62 percent in 2003/4 to 57 percent in 2005.
  - Europe: rose from 6.7 percent (2003) to 19.4 percent (2005).
  - Global business: 20.4 percent of industry GWP in 2005.
- Capital and profitability:
  - Industry strengthened its capital base in 2006.
  - Bermudian reinsurers’ profitability hit by combined 30 percent share of insured losses from hurricanes Katrina, Rita, and Wilma (KRW).
  - Hedge funds invested in reinsurance via sidecars to replenish capacity after 2005 hurricane losses.
  - Class 4 insurers accounted for 36 percent of total capital and surplus at end-2006 and supply 40 percent of the property catastrophe reinsurance capacity to the U.S. market.
  - Collectively, insurers settled $17 billion of claims arising from the 2005 hurricane season.

### Investment profile and strategic concerns
- Investment composition (end-2005):
  - 52 percent of total assets in quoted bonds and equities.
  - 9.3 percent in cash and deposits.
  - Investment and advances to affiliates represented 53 percent and 14 percent of the assets of direct insurers and composite insurers, respectively.
  - Reinsurers and long-term insurers held 5 percent and 2.6 percent respectively in intra-group balances.
- Investment composition (2006, commercial insurers):
  - Quoted investments: 50 percent of assets.
  - Investment in affiliates: 23 percent.
  - Cash and time deposits: 8 percent.
- Strategic concern: tradeoff between gaining/retaining market share by lowering rates and reduced profitability as property/casualty insurance rates have fallen in the absence of major claims since 2005.
- Risk factors:
  - Competitive pressures and potential over-capacity, partly due to state-funded capacity for catastrophe risks in the U.S.
  - Some sidecars funded by highly leveraged investors have disappeared.
  - Standard and Poor’s observation: depth and breadth of senior management of the class of 2006 start-ups are noticeably weaker than previous cohorts.
  - Concentration of start-ups focusing on property and other catastrophe-exposed lines could pose challenges if volatility risk continues to increase.

### Regulatory framework, oversight, and market integrity
- Single regulator: Bermuda Monetary Authority (BMA) supervises insurance, banks, trust and investment businesses, collective investment schemes, the BSX, and the credit union; it also issues the Bermudian dollar.
- Key legislation:
  - Bermuda Monetary Authority Act, 1969, last amended in 2006.
  - Banks and Deposit Companies Act, 1999.
  - Insurance Act, 1978, last amended 2006.
  - Investment Business Act, 2003.
  - Trusts (Regulation of Trust Business) Act, 2001.
  - Investment Funds Act, 2006.
- BMA governance and reforms:
  - BMA board: 12 members; 3 executive members appointed by the BMA subject to approval by the Minister of Finance; minister appoints non-executive members.
  - Board terms: three to five years; removal only for legislated reasons.
  - Non-executive chairman chairs the Non-Executive Directors’ (NED) Committee.
  - 2006 reforms: restructured audit committee to an audit and risk management committee; instituted a board code of conduct and conflict of interest policy.
- Supervisory organization and staffing:
  - Insurance supervision carried out by Insurance Department (ID) of the BMA, headed by the Supervisor of Insurance.
  - Supervisory units report to the Deputy CEO (post created in 2007–08).
  - ID staff: 50 persons at time of assessment (up from about 17 in 2003); professional staff reached 45 by end-2007.
  - Insurance Advisory Committee (IAC) advises the minister on insurance matters.
- Banking and securities supervision:
  - Banking, Trust and Investment Department (BTI) responsible for banking supervision and securities regulation; department restructured in 2006.
  - Investment Funds Act of 2006 (IFA) effective March 2007: aligns regulation of CIS with investor sophistication; defines three fund types: Standard, Institutional, and Administered Funds; private funds (open to a maximum of 20 investors) excluded.
- AML/CFT framework:
  - Main legislation: Proceeds of Crime Act 1997 (POCA), Proceeds of Crime (Money Laundering) Regulations 1998, Anti-Terrorism (Financial and Other Measures) Act 2004 (ATFA).
  - Important amendments enacted in July 2007: POCA, Criminal Justice International Cooperation (Bermuda Act), Financial Intelligence Agency Act (FIA Act).
  - FIA Act (still to be put into effect in January 2008 in the assessment): establishes a new administrative agency (FIA) to take on responsibilities of the current FIU (part of Bermuda police).
  - National Anti-Money Laundering Committee (NAMLC) brings together key ministries and departments and fills, in practice, the AML/CFT policy formulation function; NAMLC’s main legal mandate is to advise the MOF and to issue industry guidance on AML issues.

### Findings of earlier assessments and supervisory progress
- 2003 assessment findings:
  - Regulatory and supervisory framework well-developed in banking, key areas of securities regulation, and for AML/CFT (based on the then-standard and methodology).
  - Deficiencies noted in insurance supervision: ample powers of the BMA had not been fully realized.
- Follow-up:
  - Annex III (referenced) describes actions taken in response to 2003 assessments of banking and insurance supervision, and securities regulation.
  - Since 2003, the BMA has made extensive reforms to all areas of supervision, with the exception of the AML/CFT regime, with particularly radical improvement in insurance supervision.

*Source: Bermuda Monetary Authority (BMA) and BMA, Annual Reports, 2003 to 2006.*

### 33.      The BMA has addressed most of the recommended actions in the 2003 report. In

### 33.      The BMA has addressed most of the recommended actions in the 2003 report. In

### Banking supervision and capital framework
- In 2006, a major restructuring of the BTI was undertaken to support the introduction of a more formal risk-based supervisory framework and the required expertise was hired.
- Higher-risk institutions are identified through a standardized analysis and receive greater supervisory attention.
- An appropriate system has been introduced to define a capital charge where there is material market risk.19
- The BMA intends to implement the new Basel II capital adequacy framework in 2009.
- Credit evaluation and policy strengthened via a policy paper setting out enhanced responses for large exposure, connected lending, and other risks; policy papers also address operational and other risks.
- On- and off-site supervision have been strengthened.
- Mission recommendations (paragraph 34):
  - reviewing the scope and frequency of on-site examinations;
  - enhanced country exposure reporting;
  - more direct intervention tools in the event of impending bank failure.

### Bank exposures to sub-prime-related assets
- Two Bermudian banks hold higher rated tranches of asset-backed credits representing 10 to 15 percent of their investment portfolios; these are held-to-maturity investments.
- Banks and their auditors consider there has not been permanent value impairment; the BMA is reviewing portfolio details monthly and meeting management to monitor portfolio management.
- The BMA has stepped up scrutiny of these positions.

### Insurance supervision and risk-focused framework
- The BMA has instituted a strongly risk-focused supervisory approach aligned with the diversified range of insurers in Bermuda.
- Supervisory scope and intensity are determined by assessment of likely scale of impact and likelihood of risks.
- There is a high level of observance of the IAIS core principles.
- The IA has been amended several times since 2003; the 2006 Amendment Act introduced more detailed licensing criteria, required the BMA to publish a Statement of Principles and introduce a code of conduct, and introduced a detailed regime for oversight of insurance controllers.
- Implementation steps under way:
  - assignment of risk factors to firms and ranking insurers by risk likelihood and impact;
  - increased supervisory focus, including on-site inspection, for higher-risk categorizations;
  - development of a risk-based solvency regime;
  - revamped licensing with strengthened criteria;
  - enhanced regulatory reporting to be introduced.
- Oversight of Classes 1 and 2 (predominantly captives) is supported through licensed insurance managers integrated into the supervisory process.20
- Conditions for effective implementation of the risk-based regulatory system (paragraph 40):
  - continuous review of regulatory resources;
  - preservation of regulatory independence;
  - high transparency and disclosure to enhance recognition and support supervision;
  - risk rating Class 3 companies to allow granular tailoring of supervisory stance currently available for Class 4.

### Sub-prime impact channels and supervisory response for insurers
- Principal channels through which sub-prime-related exposures affect Bermudian companies (paragraph 41):
  - investment in structured products;
  - financial guarantee portfolios;
  - liquidity positions;
  - potential claims on professional and executive liability insurance.
- Many Bermuda-based insurers have conservative investments that have limited direct exposure.21
- Fitch notes Bermudian insurers place a higher proportion of invested assets in MBS and ABS than U.S. insurers, but the credit quality of their MBS and ABS remained high despite recent pressure.22
- Exposure has been greatest for shareholders in financial guarantors; the financial guarantee industry is under considerable stress (for example, XL has been downgraded in part because of its exposure to a bond insurer).
- Exposures to executive and professional liability are reported to be reserved; the full extent is not yet known.23
- BMA actions on sub-prime (paragraph 42):
  - conducted two surveys in August and November 2007 to assess investment and underwriting exposure to sub-prime risk and to evaluate insurers’ risk management programs;
  - studies analyzed the four main areas of potential exposure and conducted stress tests, concluding there is no systemic stress to the Bermuda market;
  - a few companies were identified for enhanced supervision and monitoring;
  - results shared with home/host supervisors and discussed at IAIS meetings;
  - a guidance note on reserving practices for financial guarantee insurers issued for consultation.

### Securities regulation
- The BMA has improved oversight of CIS via new legislation providing full powers of information-gathering and inspection, as well as fund and prospectus rules.
- A dedicated investment funds team with additional experienced staff has been established and Fund administrator licensing has begun.
- Upgrades also cover market intermediation and clearing and settlement.
- BMA staff technical skills upgraded through recruitment and training; clearer rules and guidance for inspection of investment providers implemented.
- Under the Investment Business Act, 2003, the BMA can license clearance and settlement systems (currently only provided by the BSX).
- Offences of market manipulation and insider dealing were introduced by 2004 legislation.

### Anti-money Laundering and Combating the Financing of Terrorism (AML/CFT)
- The AML/CFT regime has not changed much since the AML legislation of 1998 and the 2003 IMF assessment.
- Apart from the 2004 ATFA Act and some changes to the POCA, revisions to guidance notes from the 2003 assessment remained in draft at the time of assessment.
- Bermuda had not kept pace with the FATF Recommendations and had not introduced risk-sensitive approaches permitted under the FATF 40+9.24
- The regulatory framework did not address CFT issues; customer due-diligence requirements were narrowly focused on customer identification.
- Enhanced capacity and resources are required to strengthen AML/CFT supervision in key industries.
- New laws (POCA, the Bermuda Act, and the FIA Act) address a number of weaknesses identified by the mission.
- Annex II provides the ROSC for the assessment of the implementation of the FATF Recommendations for AML/CFT.

### Stress test results for Class 4 and long-term insurers
- Sample: Ten of the 41 Class 4 and long-term insurers used their internal models to calculate impacts of shocks.
- Reported metrics: change in capital and surplus, minimum regulatory premium ratio, and minimum regulatory loss reserves ratio.
- Scenarios included three natural catastrophe events, two pandemic events, and firm-specified worst-case scenarios.
- Catastrophic events had a high negative effect on companies’ capital; the most severe impact resulted from worst-case scenarios.
- Only two worst-case scenarios included economic (in addition to natural catastrophe) events.
- No companies in the sample fell below regulatory requirements, demonstrating strong balance sheets.
- Observations and recommendations:
  - stress tests covered only a subset of necessary risk factors due to time constraints;
  - broader stress testing, including financial market effects and asset stresses, and use of economic valuation rather than accounting data, would provide a more comprehensive risk profile;
  - the single company combining economic recession and catastrophic events had a worse outturn, suggesting value in examining combined extreme events in future stress testing;
  - the BMA should devote resources to understanding companies’ models to learn strengths and weaknesses of their risk analyses.

### Cross-border cooperation and information exchange
- The BMA does not require a formal agreement or MOU to provide assistance to other supervisors but will enter into bilateral MOUs where preferred by other authorities.
- The BMA can share confidential information with foreign supervisory authorities under “gateway” provisions in its regulatory laws and has specific powers to compel production of information from licensed persons to assist a third country supervisor.
- The BMAA, 1969 (Sections 30A to 30C) provides powers for assisting foreign regulatory authorities; the BMA must consider factors prior to providing requested information, including likelihood of reciprocity, whether the requesting authority has confidentiality protections similar to Bermuda law, public interest, nature and seriousness of the issue, and whether requesting authorities will meet costs if required.
- Sectoral provisions and MOUs:
  - Section 52B(2) of the IA provides for assistance to requesting authorities exercising similar regulatory functions without requiring strict reciprocity;
  - two MOUs specifically covering insurance exist;
  - the BMA has applied to be a signatory of the IAIS’s multilateral MOU;
  - the 2003 IOSCO assessment found the BMA had fully implemented the IOSCO standard on cooperation;
  - in 2007 the BMA signed IOSCO’s Multilateral MOU.
- Guidance on consolidated supervision in the banking sector revised in line with the 2006 BCP.
- Mission recommendations for enhanced cooperation (paragraph 51):
  - implement routine arrangements to alert host supervisors of material developments;
  - formalize exchanges with state insurance supervisors in the U.S. and the U.K. FSA;
  - consider joint inspections.
- Bermuda has a comprehensive legal and institutional framework for international cooperation largely consistent with international standards for AML/CFT purposes, but needs stronger cooperation mechanisms among governmental institutions for AML/CFT.

### Annex I — ROSC for the IAIS Insurance Core Principles (summary)
- Regulatory initiatives, expanded supervision, and increased staffing have strengthened Bermuda’s insurance supervisory regime since 2003.
- Authorities introduced a phased program to update legislation and supervisory practices in response to 2003 OFC assessment recommendations.
- The BMA has significantly enhanced its risk-based approach aligned with the diversified range of insurance entities domiciled in Bermuda.
- The updated framework has a high level of observance of the IAIS core principles, but implementation of the reforms is in transition.
- The BMA’s vision is to become a regulatory leader before 2010; strong industry commitment to sound regulation contributes to this vision but must be balanced with preserving regulatory independence and effectiveness.

*Source: IMF staff report content unit cr08336.*

### Executive Summary

### Executive Summary

### Assessment scope and methodology
- The assessment was conducted from June 11–22, 2007.
- The assessment benchmarks Bermuda’s regulatory regime against the IAIS core principles based on the 2003 IAIS methodology.
- This ROSC covers commercial direct insurers and reinsurers classified as Classes 3, 4, and long-term under the Bermudian regime (commercial insurers). Comments on Class 3 insurers apply to long-term insurers unless stated otherwise.
- Captive insurers holding Class 1 and 2 licenses are covered in a separate factual update.
- Assessments are based solely on the laws, regulations, and supervisory requirements and practices in place at the time of assessment.
- The assessment was facilitated by meetings with industry bodies and insurers coordinated by the BMA, and by technical discussions with, and briefings by, the authority.

### Institutional and market structure—overview
- The BMA has had authority for regulating, supervising, and inspecting virtually all of Bermuda’s regulated financial sector, including insurance, since 2002 under the BMA Act, 1969.
- An Insurance Advisory Committee (IAC) established under the IA advises the MOF on insurance matters.
- A Non-Executive Directors Committee, chaired by the non-executive chairman, provides an independent check on board and BMA performance.
- Market size and composition (end-2005 and related):
  - Over 1,400 registered (re)insurance companies.
  - 92 percent (1,312) were active at end-2005.
  - Composition: 1,135 general, 100 composite, 77 long-term insurers, and 19 domestic insurers.
  - Classification of general insurers:
    - Class 1—pure captives;
    - Class 2—multi-owner pure captives and those deriving up to 20 percent of net premiums from unrelated parties;
    - Class 3—insurers not included in Classes 1, 2, or 4;
    - Class 4—insurers with minimum capital of B$100 million underwriting direct excess liability insurance and/or property catastrophe.
- Market financials and capital:
  - Gross written premiums in 2005 totaled B$100.7 billion, of which 87 percent were written by commercial insurers.
  - Average net risk retention rates were 94 and 87 percent of GWP for long-term and “mixed” insurers respectively.
  - Direct insurers and reinsurers retained about 88 and 90 percent of GWP respectively.
  - Investment liquidity at end-2005: 52 percent of total assets in quoted bonds and equities; 9.3 percent in cash and deposits.
  - The Bermuda insurance market strengthened its capital base in 2006, with a net capital inflow following hurricanes Katrina, Rita, and Wilma.

### Main findings (observance of IAIS standards)
- Overall conclusion: The insurance regulatory and supervisory regime demonstrates a high level of observance of the IAIS standards.
- Conditions for effective insurance supervision (ICP1)
  - Bermuda’s financial sector policy is supported by efficient market infrastructure, specialized skills, and easy access to U.S. financial markets.
- Supervisory system (ICPs 2–5)
  - The BMA is a fully empowered regulator with extensive operational and financial autonomy and is recruiting to implement an enhanced supervisory framework.
  - The BMA has started implementing a risk-focused supervisory framework with Class 4 insurers; the framework assigns company ratings based on impact and probability of risky events.
  - Enhanced regulatory reporting will complement the risk-focused approach.
  - Licensing categories are broadly risk-based; Class 3s are heterogeneous and classification could be reviewed.
  - Cooperation and information sharing are satisfactory; the BMA is encouraged to make routine and formalize some arrangements.
- Supervised entities (ICPs 6–10)
  - Licensing is systematic and efficient; recent arrangements ensure home-host consultation for cross-border establishments.
  - BMA has clear criteria for vetting owners and key management and for approving changes in control, but should acquire power to approve portfolio transfers.
  - Corporate framework supported by a formalized on-site inspection program.
- Ongoing supervision (ICPs 11–17)
  - Significant progress in strengthening regulatory reporting and off-site monitoring.
  - Early formulation and implementation of a regime for group supervision of Bermuda-based insurance groups would reduce regulatory risks.
  - Formal on-site inspections program introduced in 2006; active market analysis will be strengthened by enhanced reporting and increased resources.
  - Intervention powers and sanctions are well-defined.
  - Winding up and exits have been administered without disruption, but the BMA should clarify priority of policyholders’ claims in composite insurers and insurers with non-insurer business in the same legal entity, and clarify conditions under which insurers may encumber assets held for benefit of policyholders.
- Prudential requirements (ICPs 18–22)
  - Current solvency regime sets minimum capital and surplus based on class of licence, with floors based on net written premiums or net reserves.
  - Class 4 insurers must hold a minimum of B$100 million.
  - At assessment time the regime did not address double or multiple gearing of capital; the BMA is consulting Class 4 insurers on a risk-based solvency regime.
  - BMA has provided guidance on expectations for insurers’ risk management systems; practical assessment facilitated by inspections.
  - Disclosure requirements should be established for derivatives and similar commitments; BMA advised to issue guidance on basis and adequacy of technical provisions.
- Markets and consumers (ICPs 24–27)
  - Regulatory requirements for intermediaries are appropriate for the small domestic market.
  - Insurance fraud is effectively covered under the Criminal Code and Proceeds of Crime Regulations.
  - BMA should plan to implement the IAIS supervisory standard on public disclosures to facilitate market discipline.
- AML/CFT (ICP28)
  - Not assessed.

### Key statistics and precise figures
- Assessment dates: June 11–22, 2007.
- Registered (re)insurance companies: over 1,400.
- Active at end-2005: 92 percent (1,312).
- Insurer counts: 1,135 general; 100 composite; 77 long-term; 19 domestic.
- Gross written premiums in 2005: B$100.7 billion.
- Share of GWP written by commercial insurers: 87 percent.
- Average net risk retention rates: 94 percent (long-term insurers), 87 percent (“mixed” insurers).
- Direct insurers retained about 88 percent of GWP; reinsurers retained about 90 percent of GWP.
- Asset composition at end-2005: 52 percent in quoted bonds and equities; 9.3 percent in cash and deposits.
- Class 4 minimum capital: B$100 million.
- Legislation passed: more comprehensive risk-based solvency legislation passed in July 2008.
- BMA Business Plan horizons and milestones referenced:
  - 2008–09 Business Plan;
  - 2008–2009 Business Plan (group supervision discussion paper intended in the first quarter of 2009 and implementation by 2011).
- Regulatory filings required post-assessment:
  - Class 4 insurers required to file Bermuda Capital Solvency Requirement for 2007 year-end, accompanied by risk and forward-looking disclosures and prescribed stress and scenario tests.
  - Requirement introduced for Class 4 insurance companies to publish their GAAP accounts; consultation planned on extending to largest Class 3 companies.

### Recommended action plan (selected highlights)
- ICP3—Supervisory Authority
  - Consider public disclosure about problem or failed insurers (without compromising confidentiality) and strengthen measures to minimize conflicts of interest where supervisory functions are outsourced.
- ICP4—Supervisory process
  - Review relevance of Class 3 category after gaining experience with the risk-based supervisory framework.
- ICP5—Supervisory cooperation and information sharing
  - Implement routine arrangements to alert host supervisors of material supervisory developments in Bermuda; formalize informal exchanges with U.S. state insurance regulators; consider joint inspections with foreign regulators.
- ICP8—Changes in control and portfolio transfers
  - Require insurers to notify portfolio transfers and subject such transfers to the BMA’s veto power.
- ICP9—Corporate governance
  - Provide formal guidance on remuneration policy expectations for directors and senior management.
- ICP10—Internal controls
  - Require loss reserve specialists to have a direct reporting relationship to the board of directors.
- ICP12—Reporting to supervisors and off-site monitoring
  - Consider: a) introducing quarterly reporting focusing on key indicators (unaudited); b) requiring solo and group-wide financial condition and performance reporting; c) clarifying that all insurers must maintain proper books of accounts in Bermuda.
- ICP16—Winding-up or exit from the market
  - Clarify priority of policyholders’ claims for grandfathered composite insurers and insurers undertaking non-insurance business in the same legal entity; formulate policy on insurers’ credit facilities and encumbrance/pledging of policyholder-benefit assets.
- ICP17—Group-wide supervision
  - Formulate and implement a pragmatic and effective regime for group supervision.
- ICP18—Risk assessment and management
  - Consider regulatory stance on outsourced functions, including powers to inspect third-party service providers.
- ICP19—Insurance activity
  - Provide clearer guidance on adequacy of reinsurance arrangements and treatment of reinsurance recoverables.
- ICP20—Liabilities
  - Work with professional associations to issue guidance on basis and adequacy of technical provisions and clarify valuation of amounts recoverable under reinsurance.
- ICP21—Investments
  - Establish guidance on asset-liability management, concentration risks, and asset valuation as part of risk-based capital framework.
- ICP22—Derivatives and similar commitments
  - Establish disclosure requirements for derivatives and similar commitments.
- ICP26—Information, disclosure and transparency towards markets
  - Formulate plans to implement IAIS supervisory standards on public disclosures to facilitate market discipline.

### Authorities’ response and subsequent initiatives
- The Authority welcomed the IMF assessment recognition of the regulatory framework and progress since 2003.
- In anticipation of new international standards (e.g., Solvency II), Bermuda moved to further develop and enhance regulatory aspects; numerous changes introduced and others expected to be implemented during the first part of 2009.
- Amendments to the Insurance Act 1978 have been enacted to underpin Authority ability to clarify regulatory requirements and standards through codes of conduct to the industry.
- Post-assessment enhancements undertaken by the Authority include:
  - Significant increases in qualified technical staff and targeted further increases in supervisory and other resources for the remainder of 2008.
  - Expanded insurance and banking, trust and investment supervisory teams; creation of independent risk and policy unit; dedicated insurance run-off team; in-house actuarial unit.
  - Investment in staff learning & development with a multi-tier program of core, intermediate, and specialist training, and sponsored study and accreditation.
  - Publication of a statement of policy on consultation with industry planned to set a transparent framework for stakeholder engagement.
  - Roll-out of supervisory program including further on-site assessment, enhanced solvency standards, and specialist risk reviews as set out in the 2008–09 Business Plan.
  - Intention to publish a discussion paper on insurance group supervision in the first quarter of 2009 and to implement a group supervision framework by 2011; hosting supervisory colleges for largest insurance companies in the interim.
  - Introduction of a requirement for Class 4 insurance companies to publish their GAAP accounts; consultation planned on extending to largest Class 3 companies and on further disclosures.
  - Required Class 4 insurers to file the new risk-based capital model (Bermuda Capital Solvency Requirement) for the 2007 year-end, with substantial risk and forward looking disclosures, and prescribed stress and scenario tests.
  - Designed an in-house system independent of the Bermuda Capital Solvency Requirement to evaluate capital models and insurers’ ability to sustain catastrophic losses at varying levels.
  - Passage of more comprehensive legislation with respect to the risk-based solvency regime in July 2008, including provision for approval of internal models of Class 4 insurers upon satisfying certain criteria.
  - Legislation subdividing the heterogeneous Class 3 sector into three separate classes (captives, small commercial and large commercial) to enhance the risk-based approach to the insurance register.

*Source: IMF assessment (ROSC) of Bermuda’s insurance regulatory regime and BMA responses as summarized in the Executive Summary.*

### ANNEX II: ROSC for the FATF’s Recommendations for AML/CFT

### ANNEX II: ROSC for the FATF’s Recommendations for AML/CFT

### Introduction
- The report is a Report on the Observance of Standards and Codes (ROSC) for the FATF 40 Recommendations for Anti-Money Laundering (AML) and 9 Special Recommendations for Combating the Financing of Terrorism (CFT).
- The assessment was prepared by the International Monetary Fund (IMF) based on information available at the time of the mission from May 7–23, 2007, and was conducted using the 2004 Assessment Methodology.
- The Detailed Assessment Report (DAR) on which this ROSC is based was adopted by the Caribbean Financial Action Task Force (CFATF) on November 23, 2007.
- The mission team comprised Manuel Vazquez, Antonio Hyman Bouchereau (both IMF), Ross Delston, and John Abboth (both consultants).
- The views expressed are those of the IMF mission team and do not necessarily reflect the views of the Government of Bermuda or the Executive Board of the IMF.

### Key Findings
- The AML/CFT regime in Bermuda has had limited change since AML legislation and guidance notes (GNs) came into force in 1998 and since the last IMF assessment in 2003.
- Apart from a few changes to POCA and the GNs and enactment of the Anti-Terrorism (Financial and Other Measures) Act 2004 (ATFA), no significant new legislation had been implemented prior to the mission.
- New draft GNs prepared soon after the last IMF assessment were still to be finalized and implemented at the time of the mission.
- The regime has not kept pace with changes in the FATF Recommendations; authorities were slow in implementing a number of key recommendations from the last IMF assessment, particularly for the financial and non-financial sectors.
- Several pieces of new legislation were under consideration by parliament to address identified weaknesses.
- The limited reforms have constrained Bermuda’s ability to apply risk-sensitive approaches permitted under the FATF Recommendations, notably in the insurance sector and other financial and non-financial activities.
- AML Regulations and GNs contain exemptions or simplified customer due diligence (CDD) provisions; lower risk has not been proven in all cases and some exemptions are inappropriate.
- Implementation of recently passed legislation (post-mission), proposed regulations, and GNs should address some weaknesses and support a more risk-based approach.

### Legal Systems and Related Institutional Measures
- Criminalization of money laundering (ML) and financing of terrorism (FT) is generally comprehensive, covering natural and legal persons and requisite predicate offenses.
- Effectiveness is difficult to assess because there has been only one prosecution for ML in the last five years and limited ML investigations.
- No criminal investigations relating to terrorist activities, their financing, or provision of support were referred to the courts in Bermuda, and no FT-related suspicious activity reports (SARs) were filed.
- Current law provides protections from civil liability, but not explicitly from criminal liability, for those who file ML-related SARs; regulated institutions filing FT-related SARs are not explicitly protected from civil or criminal liability.
- The tipping-off offense is narrowly focused on investigations rather than explicitly prohibiting disclosures about filing a SAR or its contents.
- The legal framework for investigation and prosecution of ML is well-developed; law enforcement and prosecutorial staff are professional and motivated.
- Staffing constraints in the office of the Director of Public Prosecutions (DPP) and the Financial Intelligence Unit (FIU) may have contributed to few ML investigations; only a small number of SARs that are analyzed are fully investigated.
- Parliament enacted the Financial Intelligence Agency Act 2007 (FIA Act) to establish a new administrative agency (the FIA) to assume FIU responsibilities; the FIA Act remained to be put into effect at the time of the report.
- Recommendations regarding the FIU/FIA transitional arrangements:
  - The Bermuda Monetary Authority (BMA) should provide a suitable transition period during which the existing FIU remains tasked with financial intelligence functions until the FIA is fully operational.
  - The FIU should be sufficiently staffed and provided with additional technical resources, including expertise in forensic accounting, during the transitional period to avoid operational gaps and to manage the transfer of intelligence-related tasks efficiently.
- Three important draft laws were under consideration and were enacted in June 2007: amendments to POCA, the Criminal Justice International Cooperation (Bermuda Act), and the FIA Act; once implemented, these laws will address a number of identified weaknesses.

### Preventive Measures — Financial Institutions
- The AML regulatory framework does not address CFT issues fully and does not cover key areas of the financial sector, including life insurance business and certain elements of the investment/mutual funds sector.
- The lack of coverage is an important deficiency given Bermuda’s role in the international financial system.
- POCA Regulations and GNs remained practically unchanged since the 2003 IMF assessment despite the 2003 upgrade of international AML/CFT standards and continued financial sector growth.
- At the time of the mission, the BMA had prepared draft new regulations and was contemplating amending the GNs, pending passage of proposed new legislation post-mission.
- The regulatory framework lacks basic CDD requirements; risk-based approaches to compliance and supervision are underdeveloped.
- CDD requirements are narrowly focused on customer identification and do not include provisions for complying with key CFT recommendations such as those for wire transfers.
- GNs (non-enforceable) do not provide sufficient guidance for implementing broad-based CDD and contain customer identification provisions that could be detrimental to compliance.
- Key supervisory and operational challenges:
  - Difficulty for Bermuda-headquartered FIs to implement and monitor global operations.
  - Need for increased attention to cross-border ML and FT risks, including business relationships introduced through local and foreign intermediaries.
  - Recordkeeping compliance can be strengthened, including for beneficiary clients and business relationships established before 1998 when the AML/CFT legislation was introduced.
- Strengths and supervisory capacity issues:
  - The BMA’s integrated financial sector supervision and professional staff are key strengths.
  - AML/CFT supervision is still developing, particularly for on-site inspections.
  - Enhanced capacity, skills, and resources are required to strengthen AML/CFT supervision, especially on-site inspections in the insurance and investment services sectors.
  - The BMA faces constraints in conducting consolidated AML/CFT supervision, notably in insurance and on a cross-border basis; greater collaboration with external auditors and overseas regulators is needed.
  - Sector-specific ML and FT risk assessments should be considered to manage the supervisory process and allocate resources efficiently.
- Enforcement and sanctions:
  - Good cooperation exists between the BMA and financial sectors, but absence of specific sanctions for AML/CFT breaches limits effectiveness.
  - The BMA has a wide array of formal sanctioning powers but has never imposed them against a financial institution for AML/CFT deficiencies or violations.
  - The BMA’s practice has been moral suasion and use of warning letters in a few cases.
  - Recommendations include conducting more focused risk-based AML/CFT inspections and taking enforcement action where necessary; expedite broad-based on-site supervisory programs across all sectors; and enhance on-site procedures to review compliance with CDD requirements for beneficial customers, including more rigorous enforcement for pre-1998 accounts.

### Preventive Measures — Designated Non-Financial Businesses and Professions (DNFBP)
- A comprehensive AML/CFT framework for DNFBPs was only beginning to be put in place at the time of the mission.
- Only trust service providers were subject to AML/CFT preventive measures and monitoring of compliance; other DNFBPs were subject only to a general requirement to report suspicious activities.
- In the absence of effective preventive measures and compliance oversight, DNFBP reporting obligations were not being effectively implemented; filings of SARs by DNFBPs other than trust services businesses were rare.
- ML and FT vulnerabilities in activities of lawyers, accountants, trust service providers, and company service providers had not been closely analyzed, although these sectors are key gateways to Bermuda’s internationally active financial sector.
- The professions generally perceived ML and FT risks through these sectors to be low, but little analysis supported that perception.
- Regulation and supervision of the trust service business (TSB) mitigate risks in trust operations; strict company incorporation requirements reduce potential misuse of companies.
- Common ML typologies observed:
  - Local drug traffickers use proceeds to facilitate further shipments and to acquire assets.
  - Investigations often find investments in local property (lower to middle market) through nominees and car purchases as common uses of proceeds.
  - Access by nonresidents to the Bermuda property market is tightly restricted, which may limit attractiveness for international money launderers.
- Plans and shortcomings:
  - Plans were well-advanced to bring lawyers and accountants in public practice and corporate service providers within the preventive regime, but supervisory arrangements were not yet agreed.
  - Amendments to POCA (enacted subsequent to the mission) and draft amendments to POCA Regulations would include lawyers and accountants under the preventive regime.
  - The provisions being adopted fall short of FATF standards in several respects, particularly the narrower-than-required scope of activities of lawyers and accountants subject to AML/CFT requirements.

### Legal Persons and Arrangements & Non-Profit Organizations (NPOs)
- Bermuda is not a significant jurisdiction for company incorporation and has controls to mitigate misuse of legal entities and trust arrangements for illicit purposes.
- Company incorporation requires ultimate beneficial ownership (UBO) to be established twice before registration is accepted: once by the party submitting the application (normally a lawyer) and again independently by the authorities.
- Companies are required to maintain a register of shareholders accessible to the public.
- Persons offering trust services as a business must be licensed and supervised by the BMA as financial institutions; TSBs are required to establish identities of trust parties including settlors and ultimate beneficiaries.
- Law enforcement can gain full access to CDD information and can share it with foreign authorities.
- Charities oversight:
  - Ongoing oversight of charities is light but compliance with legal requirements appears to be good.
  - Charities must register if they are to raise money from the public.
  - Most funds raised are applied in Bermuda and the sector’s vulnerability to ML and FT appears to be low.
  - No risk assessment has been undertaken and AML/CFT is not a focus in charities oversight.

### National and International Co-operation
- Bermuda has a comprehensive legal and institutional framework for international cooperation largely consistent with international standards.
- There is a lack of conventional national cooperation mechanisms among governmental institutions on AML/CFT.
- The National Anti-Money Laundering Committee (NAMLC) brings together key ministries and departments and fills in practice the AML/CFT policy formulation role in Bermuda.
- NAMLC’s main legal mandate is to advise the Ministry of Finance (MOF) and to issue industry guidance on AML issues, not to coordinate formulation and implementation of AML/CFT policy.
- This limited coordinating mandate may have contributed to the slow pace of legal and institutional reforms since the 2003 IMF assessment.

### Other Issues
- The Suppression of the Financing of Terrorism (SFT) and Palermo Conventions have not been extended to Bermuda by the U.K.; remedying this situation should be pursued without delay.
- Bermuda lacks a declaration or disclosure system for physical cross-border transportation of cash and bearer instruments.
- Authorities plan to implement such a system; it should provide for declaration of both incoming and outgoing transfers.

### Summary Table of Observance and Key Recommendations (selected)
- Criminalization of Money Laundering (R.1): LC
  - Increase investigations and prosecutions to maintain an effective AML/CFT framework, particularly given only one prosecution of ML in the last five years and limited ML investigations.
  - Fines under POCA for summary convictions and certain convictions on indictment should be substantially increased.
- Criminalization of Terrorist Financing (SR.II): PC
  - Amend ATFA’s definition of terrorism to include: (i) acts covered by the nine conventions referred to in the SFT Convention; (ii) acts taken against international organizations; (iii) a reference to the financing of terrorist organizations; and (iv) extra-territorial acts relating to terrorist organizations.
- Confiscation, freezing, and seizing of proceeds of crime (R.3): PC
  - Explicitly provide that proceeds that are the basis of the offense may include any payments received by the defendant at any time in connection with the ML offense carried out by him or by another person.
  - Provide authorities with means to prevent actions that hinder recovery of property subject to confiscation.
- Freezing of funds used for terrorist financing (SR.III): PC
  - Issue guidance to the financial services community concerning affirmative obligations to freeze assets of persons listed by the UNSCR 1267 Committee and the EU.
  - Develop and publish procedures for delisting requests and the unfreezing of funds associated with FT.
- The Financial Intelligence Unit and its functions (R.26): LC
  - Establish the new FIA and make it operational with sufficient staff to enable an increased number of ML/FT-related investigations.
  - Maintain the level of experience and skills in the financial investigations unit of the Commercial Crime Department.
- Law enforcement, prosecution and other competent authorities (R.27: LC; R.28: C)
  - Make investigating and prosecuting ML/FT cases a higher priority with sufficient resources allocated to reflect that priority.
- Cross Border Declaration or disclosure (SR IX): NC
  - Implement the currency declaration system under consideration to include both outgoing and incoming transportation of currency.
  - Substantially increase civil money fines and criminal penalties for customs violations.
  - Ensure sufficient information-sharing between Customs and other law enforcement authorities.
  - Consider granting Customs explicit legal authority to seize, detain, and confiscate currency in the event of a false declaration and develop procedures to notify other customs agencies of search and detention reports relating to precious metals and stones other than gold.

*Source: IMF mission assessment and Detailed Assessment Report (DAR) adopted by the Caribbean Financial Action Task Force (CFATF) on November 23, 2007; mission conducted May 7–23, 2007.*

### 2. Preventive Measures: Financial Institutions

### 2. Preventive Measures: Financial Institutions

### Risk of money laundering or terrorist financing
- Conduct a systemic review of ML and FT risks, particularly in the financial and DNFBP sectors, including in the life, annuity/investment, and captive components of the insurance sector.

### Customer due diligence, including enhanced or reduced measures (R.5, R.6, R.7, R.8)
- Ratings noted in the assessment: R.5 NC; R.6 NC; R.7 NC; R.8 NC.
- Extend the AML/CFT requirements to key sectors of the economy including life insurance business and expand its coverage in the investments (mutual funds) sector.
- Extend the CDD requirements beyond customer identification, explicitly cover CFT issues, and reduce the CDD threshold for wire transfers to US/BD$1,000.
- Require FIs to conduct enhanced CDD and monitoring for higher risk business (including for politically exposed persons and respondent banks) and require regular updating of CDD information.
- Require FIs to address risks associated with non-face-to-face business relationships or transactions, and to implement measures to prevent misuse of technological developments that could facilitate ML/FT.

### Third parties and introduced business (R.9)
- Rating noted in the assessment: R.9 NC.
- Enhance CDD and documentation requirements for FIs when relying on third parties, particularly when they are based in other countries.

### Financial institution secrecy or confidentiality (R.4)
- Rating noted in the assessment: R.4 NC.
- Consider amending the five regulatory acts and the BMA Act to provide gateways for disclosures to the FIA.

### Record keeping and wire transfer rules (R.10; SR.VII)
- Ratings noted in the assessment: R.10 LC; SR.VII NC.
- Explicitly include AML/CFT recordkeeping requirements in the regulatory laws and require in the Guidance Notes the need to retain transaction records beyond details of securities and investments transactions.
- Reduce the minimum recordkeeping threshold for wire transfers to the equivalent of US$1,000, and require that full originator information be obtained and retained for the minimum period in accordance with SR VII.
- Include lack of complete originator information as a basis for determining whether a suspicious activity report is filed with the FIU.

### Monitoring of transactions and relationships (R.11; R.21)
- Ratings noted in the assessment: R.11 NC; R.21 NC.
- Require FIs to monitor and record information on complex, unusually large, or unusual patterns of transactions that have no apparent economic or lawful purpose.
- Require FIs to pay special attention to relationships/transactions with persons from countries that which do not sufficiently apply the FATF Recommendations.

### Suspicious transaction reports and other reporting (R.13, R.14, R.19, R.25)
- Ratings noted in the assessment: R.13 PC; R.14 PC; R.19 C; R.25 PC.
- Extend explicit protection against criminal liability for filing SARs.
- Extend the “tipping-off” offense to explicitly cover any information about a SAR filing and the contents, and limit the scope of the exemption granted to lawyers.
- Develop guidance for FIs and DNFBP relating to latest industry-specific typologies and additional preventive measures.

### Internal controls, compliance, audit and foreign branches (SR.IV; R.15; R.22)
- Ratings noted in the assessment: SR.IV PC; R.15 PC; R.22 NC.
- Explicitly require FIs to implement comprehensive AML/CFT policies, procedures, and controls, including for the full range CDD and recordkeeping requirements (See R.5 and R.10).
- Expand the role of the AML/CFT compliance function beyond suspicious activity reporting and require internal audit to cover AML/CFT issues.
- Expand the scope of the staff training requirements and include employee screening requirements for AML/CFT purposes.
- Require implementation of AML/CFT measures in overseas branches and subsidiaries, including the need to inform the Bermudian authorities when their overseas operations cannot observe appropriate AML/CFT measures in the host countries.

### Shell banks (R.18)
- Rating noted in the assessment: R.18 LC.
- Introduce an explicit prohibition on the licensing of shell banks and explicitly require banking entities to maintain a significant presence in Bermuda.

### Supervisory and oversight system – competent authorities and SROs (R.17, R.23, R.25)
- Ratings noted in the assessment: R.17 PC; R.23 NC; R.25 PC.
- Enact legislation for civil money penalties and conservatorship powers to be applied by the BMA, and increase fines with respect to summary convictions and certain convictions on indictment.
- Review the effectiveness of enforcement and sanctioning practice for AML/CFT.
- Implement comprehensive risk-based AML/CFT off-site and on-site supervision processes, including on a consolidated basis across all sectors.
- Enhance the on-site review of the sufficiency and quality of SAR reporting systems, and consider expanding the role of external auditors for AML/CFT purposes.
- Expedite the licensing/registration process for money services firm(s) and review regulatory provisions for agents/subagents of remittance firms.
- Conduct a systemic review to ascertain the existence of financial activities covered by the FATF Recommendations not subject to the current AML/CFT regime, e.g. leasing operations.
- Update the Guidance Notes for relevance to the FATF Recommendations and the current needs of industry.
- Establish an explicit mandate for the BMA to monitor, enforce and sanction for compliance with the AML/CFT legal obligations.

### Money value transfer services (SR.VI)
- Rating noted in the assessment: SR.VI PC.
- Require money transfer services, when licensed, to maintain a list of their agents.

*Key Assessor Recommendations (as summarized above).*

### 6. Other Issues

### 6. Other Issues

### AML/CFT capacity building and institutional resources
- Increase training for all agencies and at all levels, including typologies, analysis and international standards, as well as in fundamentals such as investigating and prosecuting white collar crime cases, managing complex cases, and criminal procedure.
- Establish the FIA with adequate funding, staff and technical resources, particularly in terms of analytical expertise such as forensic accounting/auditing.
- Enhance training for BMA staff to facilitate the identification of deficiencies relating to AML/CFT requirements for FIs, including, but not limited to internal controls, CDD, SARs filings, recordkeeping, MLRO qualifications, and operations.

### FATF 40+9 Recommendations — Key assessor recommendations and ratings
- Increased specialization and focus on AML/CFT supervision in the insurance and mutual fund sectors should be given priority.
- The BMA should enhance its staff capacity to undertake more comprehensive AML/CFT supervision, including for the conduct of effective consolidated supervision whether as home or host supervisor.
- Integrate use of available statistics and information in reviewing the effectiveness of AML/CFT systems on a regular basis.
- Explanation of assessment ratings:
  - Compliant (C): the Recommendation is fully observed with respect to all essential criteria.
  - Largely compliant (LC): there are only minor shortcomings, with a large majority of the essential criteria being fully met.
  - Partially compliant (PC): the country has taken some substantive action and complies with some of the essential criteria.
  - Non-compliant (NC): there are major shortcomings, with a large majority of the essential criteria not being met.
  - Not applicable (NA): a requirement or part of a requirement does not apply, due to the structural, legal or institutional features of a country.

### Authorities’ response and planned reforms (Bermuda, actions noted in 2007)
- Government commitment: The Government of Bermuda is committed to completing the process of updating Bermuda’s AML/CFT regime to reflect the most recent developments in financial crime and the revised international standards from the FATF.
- Legislative and institutional actions highlighted for 2007:
  - (1) Three laws approved in June 2007: amendments to the POCA, the Criminal Justice International Cooperation Act, and a new FIA Act to establish an autonomous administrative body to function as a clearing house for SARs.
  - (2) Revised regulations under the POCA were at an advanced stage of development at the time of the assessment; these regulations are being further enhanced to implement aspects of the revised FATF Recommendations for FIs and DNFBPs.
  - (3) Authorities approved establishment of a National AML/CFT Coordinator to supplement the NAMLC to improve liaison among agencies.
  - (4) Government developed a detailed plan of action to address outstanding AML/CFT issues; some reforms were already in place, many at an advanced stage, and others under consultation.
- Purpose: The recommendations will provide a roadmap for enhancements to the AML/CFT regime in both the public and private sectors.

### Annex III — Actions in response to the 2003 assessments (selected supervisory frameworks and actions as of 2007)

IAIS Insurance Core Principles (2000)
- Organization of an Insurance Supervisor (ICP 1)
  - Recommendation: The minister should not have the possibility to give directions to the BMA. The BMA should continue to improve its IT system and to recruit staff. Knowledge of actuarial techniques should be developed in the staff.
  - Actions as of 2007:
    - Authorities found no need to change legislation; the IA does not empower ministerial intervention in insurance supervision.
    - BMA carried forward significant IT development projects; new relational databases under construction to enhance statistical and prudential information collation.
    - Staffing in the ID increased from some 25 by May 2004 to in excess of 50 persons by July 2007.
    - In-house actuarial resources available since 2004; augmented in July 2007 with two full-time in-house actuaries.
    - An Insurance Sector Analysis Unit formed in 2007 tasked with: (a) providing actuarial and other support services; (b) assisting staff in financial analysis expertise; (c) designing tools for data review and interpretation; (d) identifying international best practice and developing policies; and (e) monitoring industry trends and regulatory implications.
- Licensing and Changes in Control (ICPs 2–3)
  - Recommendation: Consider increasing IAC Admissions Committee quorum, complete fit-and-proper licensing criteria, define business plan requirements, refine long-term business definition, require notification of significant ownership changes.
  - Actions as of 2007:
    - Assessment & Licensing Committee established to review licensing applications.
    - IA amended in 2006 to introduce a schedule of minimum licensing criteria, including fit and proper requirements.
    - Statement of Principles published and adopted by the BMA Board in June 2007; detailed licensing check-list developed.
    - IA amended to require notification and approval of ownership changes and enable action against unfit controllers.
- Corporate Governance and Internal Controls (ICPs 4–5)
  - Recommendation: Explicit regulatory imposition of internal controls and more frequent, detailed flow of information with auditors.
  - Actions as of 2007:
    - Minimum licensing criteria include requirement for adequate systems of control; expanded in Statement of Principles and Guidance Note on Risk Management and Internal Controls (issued early 2005, reissued March 2008).
    - BMA increased in-house on-site inspection resources and does not intend to rely routinely on additional work by external auditors.
- Prudential Rules (ICPs 6–10)
  - Recommendation: Consider defining asset diversification, require secure assets cover reserves, more detailed annual statutory filings, limit reinsurance recoverables, allow premium insufficiency reserve, clarify auditor and actuary responsibilities, disclose off-balance sheet items.
  - Actions as of 2007:
    - BMA did not stipulate specific diversification limits; placed onus on boards to set asset allocation limits appropriate to business.
    - New risk-based capital provisions under development; apply first to Class 4 companies then to appropriate Class 3 companies (consultative paper July 2007).
    - March 2006 Guidance Note 14 on appointment of a loss reserve specialist approved by BMA.
    - More detailed statutory filings planned as part of risk-based capital implementation.
- Market Conduct (ICP 11)
  - Recommendation: Address customer-related market conduct issues for individual or small corporate Bermudian policyholders and increase awareness of Consumer Affairs Bureau.
  - Actions as of 2007:
    - BMA issued detailed guidance note on market conduct for domestic business in early 2005; reissued July 2007 as part of consultative draft of the Code of Conduct (Section 9).
- Monitoring, Inspection, and Sanctions (ICPs 12–14)
  - Recommendation: More detailed financial reporting, require actuary/loss reserve specialist written comments, more frequent updates, consolidated/quarterly accounts for Classes 3 and 4, increase on-site inspection resources, strengthen intervention and remedial powers.
  - Actions as of 2007:
    - Class 1 insurers now required to file financial statements.
    - BMA increased in-house inspection resources; four separate on-site inspection teams deployed; start-up reviews within first 12 months after licensing; reviews of insurance managers.
    - Amended IA includes ongoing minimum licensing criteria on fitness and properness and requirement for prudent business conduct.
    - BMA’s intervention powers under section 32 include provision to give directions to remove a controller or officer.

Basel Core Principles for Effective Banking Supervision (1999)
- CP 1.2 Independence
  - Recommendation: Review law to address concern that MOF’s policy direction and budgetary approval powers may intrude on BMA operational independence; perform in-depth resource analysis and action plan.
  - Actions as of 2007:
    - Authorities reviewed matter and saw no need to change legislation; ministerial directions have not been issued; BMA proposed budgets have never been refused or restricted by MOF.
- CP 6 Capital adequacy and CP 12 Market risk
  - Recommendation: Replace present proxy system for trading risk with a more appropriate capital requirement system.
  - Actions as of 2007:
    - BMA developed and implemented a full market risk framework consistent with Basel requirements where institutions take on material levels of traded market exposure.
- CP 8 Loan evaluation and loan loss provisioning
  - Recommendation: BMA should consider undertaking its own evaluation of banks’ internal rating systems.
  - Actions as of 2007:
    - BMA on-site reviews now include fuller evaluation of internal classification systems for credits.
- CP 10 Connected lending
  - Recommendation: Enhance policy on connected lending and routinely review connected relationships on-site.
  - Actions as of 2007:
    - Revised policy paper issued: “The Management and Control of Credit Risks and the Implementation of the Statutory Provisions for Large Exposures”; connected lending reviewed as part of on-site examinations.
- CP 11 Country risk
  - Recommendation: Establish formal reporting methodology for country risk exposure.
  - Actions as of 2007:
    - BMA has revised policy papers on interest rate risk, liquidity measurement and monitoring, outsourcing, and issued “The Management of Operational Risk”; on-site examination processes and inspection manual augmented accordingly.
- CP 16 On-site and Off-site supervision; CP 18 Off-site supervision; CP 19 Validation of supervisory information; CP 22 Remedial measures
  - Recommendations: Increase staff resources and expertise; develop comprehensive examination manual and standardized working papers; enhance off-site data analysis and validation; consider wider use of section 39 BDCA to engage reporting accountants; consider new direct intervention tools in legislation.
  - Actions as of 2007:
    - BTI restructured to support a risk-based approach; department headcount increased from 23 to 28 with presently 4 vacant positions.
    - A comprehensive examination manual was created; Risk Analysis Unit established to enhance data analysis; prudential returns and other data reviewed quarterly.
    - Discussions initiated with the Institute of Chartered Accountants in Bermuda regarding section 39 power extension; ongoing.
    - Authorities reviewing options for enhancing direct intervention tools; BMA preparing a consultative paper to propose new mechanisms in the BDCA.
    - Inspection reports now formally addressed to each bank’s board of directors.

IOSCO Objectives and Principles of Securities Regulation
- Principles Relating to the Regulator (P 1–5)
  - Recommendation: Remove BMA authority given to the MOF to direct the BMA; grant BMA budgetary autonomy; create separate internal reporting for employee code of conduct.
  - Actions as of 2007:
    - Authorities saw no need to change legislation; section 21(2) read in context does not empower minister to direct investment supervision; BMA amended Personal Dealing Rules and Procedures in January 2006 with reports submitted to Director, Legal Services and Enforcement.
- Principles for the Enforcement of Securities Regulation (P 8–10)
  - Recommendation: Improve authority to inspect collective investment schemes; create authority to sanction issuers and trading systems.
  - Actions as of 2007:
    - New primary fund legislation introduced providing full powers of information gathering and inspection consistent with IBA 2003.
- Principles for Issuers (P 14–16)
  - Recommendation: Grant BMA authority to regulate all public issuers, develop insider trade reporting and takeover-related rules.
  - Actions as of 2007:
    - Issues of non-listed securities are rare; BSX role under IBA framework; insider reporting regime not yet implemented by BSX; authorities reviewing medium-term approach.
- Principles for Collective Investment Schemes (P 17–20)
  - Recommendation: Further develop inspection skills and guidance for funds (licensing, conduct, securities lending, segregation of assets, NAV calculation).
  - Actions as of 2007:
    - Dedicated Investment Funds Team established; first Fund Administration licence issued in June 2007; new licences expected during a window ending in March 2008; start-up on-site reviews planned within 12 months of licensing; initial fund and prospectus rules introduced.
- Principles for Market Intermediaries (P 21–24)
  - Recommendation: Grant clearer inspection rights, develop inspection skills, and contingency plans for intermediary failure; consider on-site prudential inspections for firms handling client assets.
  - Actions as of 2007:
    - Clearer inspection rights granted via IBA 2003; revised inspection program provides clearer guidance; recruitment and training increased technical securities expertise (BTI recruited two CFA charterholders and supporting another staff member pursuing designation).
    - BMA monitors management information on investment providers’ financial condition regularly.
- Principles for the Secondary Market (P 25–30)
  - Recommendation: Increase oversight of clearing and settlement systems, develop staff skills, fully dematerialize securities, set performance and risk standards for clearing/settlement, criminalize insider trading and market manipulation.
  - Actions as of 2007:
    - IBA 2003 granted BMA authority to license and supervise clearing and settlement systems; only BSX provides such a system in Bermuda.
    - Principal heading BSX/BSD supervision is a CFA holder with a decade of trading and securities experience; BTI staff have visited BSX.
    - Since IMF team’s first visit to BSX, all domestic securities made depository eligible; over 34 percent of all shares issued and outstanding for domestic listed issuers are de-materialized and lodged within the Bermuda Securities Depository.
    - No required reporting of settlement failures and no inspection program for the clearing and settlement system at that time; no specific performance standards set.
    - Criminal Code Amendment Act 2004 introduced offences of market manipulation and insider dealing.
    - BSX position: maintenance of payment accounts and insurance coverage at individual firm level, and segregation of client cash and securities, mitigate systemic settlement failures; BMA working with BSX to strengthen oversight and review legal issues over collateral and guarantees.

*Source: International Monetary Fund — cr08336 (6. Other Issues).*

### Annex IV. Authorities’ Responses to Key Recommendations

### Annex IV. Authorities’ Responses to Key Recommendations

### Bermuda Monetary Authority — staffing and capacity
- The Authority has increased staffing resources and targeted further increases in supervisory and other resources for the remainder of 2008.
- Staffing expansions and organizational changes completed or underway:
  - Increased size of insurance and banking, trust and investment supervisory teams.
  - Developed an independent risk and policy unit.
  - Set up a dedicated insurance run-off team.
  - Created an in-house actuarial unit.
- Learning and development initiatives:
  - Multi-tier program of core, intermediate, and specialist training.
  - Sponsored study and accreditation programs.
- Ongoing objective: continue to attract and retain a range of skilled staff to meet the Authority’s standard of becoming a leading regulator.

### Insurance — supervisory framework, transparency, and group supervision
- Relationship with industry and regulatory independence:
  - Authority values strong working relationships with external stakeholders across insurance segments.
  - Will publish a statement of policy on its approach to consultation with industry to set out a transparent framework for engaging on legislative and regulatory change.
  - Implemented measures to enhance transparency around independence, including overhauling the licensing process, restructuring to a dedicated Licensing and Assessment Team, and related governance structures with an advisory role for industry subordinate to decision-making by Authority staff.
- Rollout of the new supervisory framework:
  - Further progress since the IMF assessment: additional on-site assessment, enhanced solvency standards, and specialist risk reviews.
  - The 2008–09 Business Plan sets out the BMA’s road-map to implement remaining elements of the framework.
  - Draft legislation expected to be tabled in the Legislature in June 2008 to subdivide the heterogeneous Class 3 sector to facilitate the new supervisory framework across the commercial market.
- Group supervision and cooperation with other authorities:
  - Existing risk-based framework assesses group governance, controls and risk management arrangements as part of solo supervisory monitoring.
  - 2008–2009 Business Plan intends to publish a discussion paper on insurance group supervision in the first quarter of 2009.
  - Intends to implement a group supervision framework by 2011.
  - In the interim, the Authority is hosting supervisory colleges to facilitate supervisory cooperation on the largest insurance companies.
- Transparency about companies and disclosure:
  - Introduced a requirement for Class 4 insurance companies to publish their GAAP accounts.
  - Will consult on extending this requirement to the largest Class 3 companies and on further types of disclosure.
  - Reviewing and considering the appropriateness of other risk disclosures to enhance transparency.
- Specialized resources for model validation and industry engagement:
  - Formed an in-house actuarial team and a separate risk and policy unit to improve specialist risk management resources.
  - Will continue to build capability through additional recruitment, outsourcing, and training of existing staff.

### Banking — intervention powers
- The Authority currently has a wide range of intervention powers for banks.
- The Authority will review the detailed recommendations to assess whether further enhancements to intervention tools are required.

### AML/CFT — legislative updates and implementation
- Legislation enacted in the summer of 2007:
  - Proceeds of Crime (Amendment) Act 2007.
  - Financial Intelligence Agency Act 2007.
  - Criminal Justice International Cooperation (Bermuda) (Amendment) Act 2007.
- Continued enhancements and planned legislative measures:
  - Prepared additional primary and secondary legislation further amending the Proceeds of Crime Act 1997 and the Anti-Terrorism (Financial and Other Measures) Act 2004.
  - Proposed new regulations to replace the Proceeds of Crime (Money Laundering) Regulations 1998.
  - Two bills (Proceeds of Crime (Amendment) Bill 2008 and the Anti-Terrorism (Financial and Other Measures) (Amendment) Bill 2008) expected to be tabled in the House in July and enacted before the end of that month.
  - Authority involved in market consultation with respect to a third bill expected to be tabled in the November 2008 Parliamentary session.
  - In anticipation of that bill, the Authority has issued draft guidance notes for consultation.
  - The third bill is expected to broaden the scope of entities falling within the new AML/ATF Regulations and expand the mandate of the Authority in its supervision and monitoring of financial institutions for compliance with AML/CFT requirements.

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_Source: https://www.imf.org/-/media/files/publications/ofca/english/cr08336.pdf_