## Status of IMF Second-Phase Offshore Financial Center Assessments

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### I. Introduction and purpose
- Purpose:
  - Provide an update and overview of the Offshore Financial Center (OFC) program and propose integration of the OFC program with the Financial Sector Assessment Program (FSAP).
- Arguments for integration:
  - (i) Facilitate a more uniform and risk-based approach to financial sector surveillance and improve coordination of Fund analysis across jurisdictions.
  - (ii) Allow for a better allocation of Fund resources, focusing on the small number of OFCs that account for the overwhelming volume of offshore activity and could be expected to pose any major financial system risks.
  - (iii) Eliminate the need to maintain a potentially discriminatory OFC list.
- Caveat: Care would still be needed to give anti-money laundering/combating the financing of terrorism (AML/CFT) vulnerabilities adequate attention.

### II. Second-phase program design, scope, and status
- Second-phase elements set by Executive Board (2003):
  - (i) Regular monitoring of OFCs’ activities and compliance with supervisory standards.
  - (ii) Improved transparency of OFC supervisory systems and activities.
  - (iii) Technical assistance (TA) in collaboration with bilateral and multilateral donors.
  - (iv) Collaboration with standard-setters and onshore and offshore supervisors to strengthen standards and the exchange of information.
- Second-phase assessment cycle: assessments every four to five years (compared with 5–10 year cycle then foreseen under the FSAP).
- Status and scope (Table 1 summary):
  - Total jurisdictions assessed: 16
    - FSAP assessments: 7
    - Module 2 assessments: 9
  - Completed reports: 13
    - FSAP completed: Uruguay; Ireland; Switzerland; UAE (Dubai); Mauritius; Botswana
    - Module 2 completed: Cyprus; Panama; Vanuatu; Samoa; Gibraltar; Andorra; Liechtenstein
  - Reports in progress: 3
    - FSAP in progress: Barbados; Bermuda
    - Module 2 in progress: Monaco
  - Published reports: 9
    - Published FSAP/FSSA/AFSSR and Module 2: Uruguay; Ireland; Switzerland; UAE (Dubai); Cyprus; Panama; Samoa; Gibraltar; Andorra
- Notes:
  - Jurisdictions taken into account include both the 46 jurisdictions considered in the first phase and additional jurisdictions where staff is aware of significant international and offshore financial activity.
  - Only 13 of the 16 assessed were included in the first phase of the OFC program.
  - Publication of FSSAs and AFSSRs is voluntary; publication of other FSAP and Module 2 documents is also voluntary but IMF management consent must first be obtained.

### III. Findings on compliance trends (first vs. second phase)
- General patterns:
  - Second-phase assessments began in 2005; pace affected by bunching of first-phase assessments in 2002 (22 assessments) and the agreed four–five year cycle, leading to many assessments due in 2008–09.
  - Second-phase assessments have been more focused and targeted on: (i) progress in addressing weaknesses identified in previous assessments; (ii) issues of cross-border cooperation; and (iii) relevant areas not covered in previous assessments.
  - A full assessment against the FATF 40+9 Recommendations is, under Fund AML/CFT policies, always undertaken by the Fund, the Bank, the FATF, or FATF Style Regional Bodies (FSRBs).
- Prudential standards — banking, insurance, securities:
  - Banking standards:
    - Compliance improved in the six jurisdictions that had detailed reassessments against the 1997 BCP.
    - There was 100 percent (full or large) compliance among high-income jurisdictions except in BCP 25, where one jurisdiction needed to reach formal agreements with home supervisors.
    - In the larger sample of 11 jurisdictions (reassessments and updates), remedial powers and risk monitoring remained areas requiring work.
    - Note: A seventh jurisdiction was assessed under the revised BCP of 2006.
  - Insurance standards:
    - Only six jurisdictions had an IAIS assessment or partial assessment; compared with the earlier phase, there were substantial improvements in observance.
    - The four high-income jurisdictions had higher observance than the 11 non-OFC jurisdictions in 19 of the 28 IAIS principles.
    - Appendix II shows significant improvements in organization of the supervisor, prudential rules and inspection.
  - Securities standards:
    - Three OFCs had IOSCO assessments for the first time, and one had a partial reassessment; sample too small for meaningful cross-jurisdiction comparison.
    - Where earlier IOSCO assessments were updated, implementation of recommendations produced improvements in regulators’ mandate, better staffing and inspection, and improved cooperation.
- Cross-border cooperation and information exchange:
  - Overall finding: Offshore jurisdictions have made progress on prudential cross-border cooperation and information exchange issues.
  - Selected Table 2 profile entries (by standard and income group):
    - Basel Core Principles (1997, 2006):
      - Number of jurisdictions in which standard assessed: High-Income OFCs 7/7; Upper and Lower Middle Income OFCs 3/4
      - Number of jurisdictions in which update for sector: High-Income OFCs 4; Upper and Lower Middle Income OFCs 4
      - Proportion of jurisdictions in which progress made: High-Income OFCs 3; Upper and Lower Middle Income OFCs 0
    - IAIS Core Principles (2003):
      - Number of jurisdictions in which standard assessed: High-Income OFCs 7/8; Upper and Lower Middle Income OFCs 1/2
      - Number of jurisdictions in which update for sector: High-Income OFCs 4; Upper and Lower Middle Income OFCs 2
      - Proportion of jurisdictions in which progress made: High-Income OFCs 4; Upper and Lower Middle Income OFCs 0
    - IOSCO Objectives and Principles:
      - Number of jurisdictions in which standard assessed: High-Income OFCs 3/4; Upper and Lower Middle Income OFCs 0/1
      - Number of jurisdictions in which update for sector: High-Income OFCs 1; Upper and Lower Middle Income OFCs 1
      - Proportion of jurisdictions in which progress made: High-Income OFCs 3; Upper and Lower Middle Income OFCs 0
  - Interpretation: Results suggest success in improving cooperation in prudential areas, though for upper and lower middle-income OFCs more progress is necessary.

### IV. AML/CFT findings, transparency, data, and TA
- AML/CFT compliance findings:
  - OFC compliance measured against the 2003 FATF 40+9 Recommendations.
  - Twenty one OFCs have been assessed for AML/CFT under the current FATF methodology; eight of these assessments have been conducted by the Fund.
  - Overall compliance in assessed OFCs is generally comparable to non-OFC jurisdictions, but OFCs show relatively low compliance in key FATF areas:
    - customer identification;
    - monitoring of transactions;
    - international cooperation (FATF Recommendations 35-40).
  - International cooperation compliance: the proportion of assessed OFCs found compliant or largely compliant with Recommendations 35-40 is 68 and 48 percent for high income and middle income jurisdictions, respectively; this compares to 86 and 65 percent for non-OFCs.
  - Vulnerabilities in these areas create potential ML/FT (money-laundering/financing of terrorism) risks for the OFCs and for other jurisdictions with which they interact.
- Transparency and publication:
  - Of the 13 jurisdictions that have completed second phase OFC reports, nine have published their main report (four FSSAs and five AFSSRs); of the five jurisdictions that published their AFSSR, four also published their detailed assessment reports.
  - Publication policy mirrors the FSAP: publication is voluntary for the main reports and jurisdictions can publish detailed assessments with management’s consent.
  - All but one of the OFCs assessed under the current FATF methodology have published or indicated agreement to publish their detailed AML/CFT assessments.
- Information Framework and data collection:
  - Information Framework initiated in 2004 to provide a common statistical template.
  - Participation and submissions (of 46 jurisdictions invited):
    - 28 jurisdictions have submitted some data (up from 16 reported in the February 2006 Board paper).
    - 7 jurisdictions have committed or indicated intent to participate but not yet submitted data.
    - 3 jurisdictions have yet to confirm participation.
    - 8 jurisdictions refused participation for reasons including unwillingness to be associated with the term “offshore,” already publishing such data, participating in other Fund initiatives, or no longer having OFC activity.
  - Data complement CPIS data and include aggregate structural and activity indicators for banking, insurance, and securities sectors.
- Technical assistance (TA):
  - TA related to enhancing financial sector supervision and AML/CFT has been provided to 37 jurisdictions (mainly middle-income).
  - Regional focus: Asian-Pacific region and Caribbean countries have received the bulk of TA.
  - Primary TA areas: bank supervision; AML/CFT (regional workshops and training); governance of supervisory bodies; insurance supervision.
  - Delivery channels: regional centers (Pacific Financial Technical Assistance Centre and Caribbean Regional Technical Assistance Centre); coordination with donor governments and agencies, such as the JSA.
  - Participation of OFCs in the CPIS exercise rose to 25 jurisdictions compared with 22 in 2001.
  - TA data are reported to 31 October 2007; TA categories used are not mutually exclusive and only a proportion of regional workshop field-time is attributed to OFC work.
- Cooperation and outreach:
  - Annual Roundtable fosters collaboration among OFCs, home supervisors, and standard-setters (2006 Roundtable hosted by Cayman Islands Monetary Authority; early 2008 Roundtable hosted by the BIS).
  - Staff participated in FSF’s Offshore Review Group; September 2007 report acknowledged progress but noted remaining concerns.
  - IOSCO confidential process assessing jurisdictions’ ability to sign multilateral MOU has made substantial progress.
  - Coordination with FATF and FSRBs on AML/CFT assessment programs and TA to strengthen FSRB assessment capacity.

### V. Case for integration of OFC program with FSAP — rationale and operational implications
- Rationale for integration:
  - Improved consideration of systemic and other risks: FSAP covers broader financial stability and surveillance issues including cross-border issues; integration would ensure broader systemic issues are routinely considered.
  - Difficulty maintaining a distinct OFC category: absence of agreed objective criteria; FSF no longer maintains a list of OFCs; globalization has blurred distinctions.
  - Concern about discriminatory treatment: unified approach would reduce perceptions of undue targeting while underscoring expectations to meet international standards.
  - More effective prioritization and resource use: integration would allow use of broader FSAP criteria for prioritization and better timetabling.
- Definition issues and empirical approaches:
  - Descriptive criteria: orientation toward nonresidents; favorable regulatory environment; low or zero tax rate; offshore banking as an entrepôt business.
  - IMF Statistics Department (2002) characterization: “a jurisdiction in which international investment position assets, including as resident all entities that have legal domicile in that jurisdiction, are close to or more than 50 percent of GDP and in absolute terms more than $1 billion.”
  - Zoromé (2007) indicator: ratio of net financial services exports to GDP; empirical complications due to data limitations; Zoromé examines 104 jurisdictions and identifies 16 of 40 high-income countries, and 6 of the 64 middle/low-income jurisdictions, as having significantly higher levels of net financial services exports than peers; sample included 23 of the 46 OFCs covered by the IMF’s OFC Program; the filter captured 19 of these jurisdictions and identified three additional jurisdictions.
- Staff recommendation:
  - On balance, staff recommends integration of the two programs (paragraph 26).
  - Stand-alone activities to continue outside formal FSAP: AML/CFT assessments, technical assistance (TA), the Information Framework Initiative, and collaboration with other agencies (paragraph 26).

### VI. Coverage, prioritization, scheduling, and tailoring under integration
- Coverage and prioritization:
  - FSAP coverage extended to encompass all OFCs, including the four nonmembers assessed under the OFC program.
    - The four nonmembers are Andorra, Liechtenstein, Monaco, and Nauru; Nauru no longer has financial arrangements catering to nonresidents (footnote 26).
  - Uniform criteria applied to prioritize assessments across all jurisdictions, with less frequent assessments likely for smaller, less systemically important jurisdictions.
  - Current status and prioritization:
    - Of the 46 jurisdictions identified in the first phase as OFCs, 15 have already opted for FSAP assessments.
    - Of the remaining 27 jurisdictions, 8-9 account for the overwhelming volume of activity and would be considered priorities for assessment every 5-7 years under the FSAP.
    - The remaining 18–19 OFCs are small and would be assessed less frequently under the integrated OFC-FSAP program.
    - Priority jurisdictions would be Bermuda, Cayman Islands, Jersey, Guernsey and the Isle of Man, Panama, Labuan (Malaysia), and The Bahamas. The British Virgin Islands may also be included (footnote 28).
  - Monitoring and flexibility:
    - Smaller OFCs would continue to be monitored with scope to reconsider priority; FSAP prioritization occurs every six months.
    - Some smaller jurisdictions are subject to Article IV consultations; nonmembers and member territories not receiving Article IV consultations would be monitored offsite as part of the information framework initiative.
    - All smaller jurisdictions save one would be subject to AML/CFT assessments about every five years as part of global arrangements (footnote 35 reference).
- Scope and tailoring:
  - Integration facilitates coverage of a broader range of issues; Module 2 OFC assessments typically include only standards assessments, whereas FSAP includes a broader vulnerability analysis and more standards.
  - Systemically important OFCs would undergo vulnerability analyses and reviews of contingency mechanisms targeted to underlying risks.
  - Vulnerability analysis tailored to risk profile: OFC institutions hold much larger cross-border positions and often are branches or subsidiaries of internationally active banks; the share of GDP accounted for by financial services is generally considerably higher in OFCs, heightening exposure to operational and reputation risks (e.g., money laundering).
- Implications for the World Bank:
  - The Bank would be expected to have a limited role in OFC assessments in an integrated program; large and systemically relevant OFCs are mainly high income jurisdictions where the Bank typically would not be involved.
  - For middle income member OFCs, joint assessments would be undertaken in line with current FSAP policy.
  - Three of the four nonmember OFCs are high-income countries.
- Transparency and publication:
  - No material change in publication or reporting under an integrated program; progress on OFC assessments would be covered in the periodic FSAP review that is typically published.
  - The Board receives an annual report to inform them of FSAP participation; country reports are published on a voluntary basis and this would continue.
  - Ongoing efforts to improve transparency and information exchange would continue, including the Information Framework Initiative and collaboration with the BIS to avoid duplication.
- Technical assistance and collaboration:
  - Integration not expected to affect provision of TA to OFCs, though the volume of TA (targeted principally to small and middle-income jurisdictions) would need consideration in the context of the Fund’s downsizing and refocusing.
  - Staff will continue to work closely with the FSF and standard setters; Fund-sponsored Roundtables for offshore and onshore supervisors and standard setters have provided outreach, though annual frequency may need reconsideration in light of resource constraints.

### VII. AML/CFT policy, modalities, and special attention under integration
- AML/CFT continuity:
  - AML/CFT vulnerabilities posed by OFCs would continue to be given particular attention under integration.
  - OFCs would continue to be subject to assessments against the FATF 40+9 Recommendations; integration would not change existing Fund policies on AML/CFT assessments.
- Modalities and frequency:
  - A full AML/CFT assessment is expected for all jurisdictions approximately every five years (Executive Board modalities established 2006).
  - For OFCs undergoing an FSAP every 5–7 years, AML/CFT assessments would continue to take place within a reasonable period (i.e., 18 months) of the FSAP mission.
  - Other OFCs would continue to receive full AML/CFT assessments approximately every five years (where necessary, on a stand-alone basis) in line with existing Board guidance.
  - AML/CFT assessments would continue to be conducted by the Fund, the Bank, the FATF or an FSRB under existing burden-sharing arrangements and procedures.
- Special attention:
  - Fund staff would pay particular attention to jurisdictions not members of FATF or an FSRB and therefore not subject to assessment from any other body, and jurisdictions that are members of an FSRB whose assessment capacity is believed to be particularly weak.
  - With the exception of Gibraltar, all smaller OFCs are members of either FATF or an FSRB; Gibraltar is a member of the Offshore Group of Banking Supervisors (OGBS) which are observer members of the FATF. The assessment of four jurisdictions would likely need to be carried out by Fund staff.
- Technical assistance:
  - TA would continue to address major AML/CFT risks identified in assessment reports and emphasize elements that strengthen cross-border ML and FT risk management and international cooperation.
  - Such TA could be financed through the Fund’s internal budget (limited resources reserved) or through external financing.

### VIII. Transition arrangements, Board matters, and questions for Directors
- Transition arrangements proposed (paragraph 40):
  - OFC assessment missions currently planned for FY2009 would be scoped as Module 2s where planning with authorities is relatively advanced, or as FSAPs, taking into account relevant risks facing the jurisdiction.
  - From FY2010, all assessment missions to OFCs would be included in the FSAP.
  - FSAP standards assessments of OFCs in the integrated program would be treated as FSAP Updates if the jurisdiction had already received an assessment under the OFC program; the update would follow up on implementation of the initial assessment as part of the standards and codes work.
- Board discussion and non-member assessments:
  - OFC assessments of non-members have been submitted to the Board for information but not discussed; some directors suggested inviting OFC representatives to Board discussions.
  - Under an integrated program, FSSAs prepared for non-member jurisdictions would continue to be submitted to the Board for information, with Board members having the option to request a discussion and invite OFC representatives to participate.
- Questions for Executive Directors (summary):
  - Agreement to integrate OFC assessments into the FSAP (paragraphs 26, and 27–36)?
  - Agreement that the four nonmember jurisdictions, Andorra, Liechtenstein, Monaco and Nauru can be considered for the FSAP, AML/CFT assessments and technical assistance (paragraphs 27–36)?
  - Agreement with the approach proposed for AML/CFT issues described in paragraphs 37–39?
  - Concurrence with the transition and other proposals described in paragraphs 40 and 41?

### IX. Budgetary implications and illustrative scenario (Table 4 summary)
- Annual Cost of OFC Assessments (In millions of U.S. dollars) — person years and cost breakdowns as presented:
  - Module 2 assessments (Planned 5-year assessment cycle):
    - In Person Years: 3.9
    - Excluding Travel: 0.8
    - Including Travel: 1.1
  - Module 2 assessments (Assuming 5-and 7-year assessment cycles):
    - In Person Years: 3.2
    - Excluding Travel: 0.6
    - Including Travel: 0.9
  - Integrated FSAP Updates (6- and 12-year cycles):
    - In Person Years: 2.9
    - Excluding Travel: 0.6
    - Including Travel: 0.8
  - AML/CFT assessments:
    - In Person Years: 4.5
    - Excluding Travel: 0.8
    - Including Travel: 1.0
- Key assumptions and notes:
  - Cost estimates comprise field and headquarters time for staff and experts plus overhead costs (estimated at 30 percent of staff time). Excludes cost of work by other departments and of AML/CFT assessments (assessment type does not affect AML/CFT cost).
  - Costs excluding travel are based on standard cost per person for FY08 of $213,800 for staff and $193,200 for short-term experts. Costs including travel are based on standard travel costs of $10,000 per person per mission.
  - AML/CFT assessment costs assume the Fund undertakes three assessments per year and are estimated using actual time and cost of past assessments; these costs are invariant to assessment program.
  - Planned 5-year assessment cycle assumes total of 9 larger and 18 smaller jurisdictions assessed every five years (an average of 5.4 assessments per year). Cost of assessments in person years is based on average cost of Module 2 assessments undertaken in FY2005–07.
  - The 5-and 7-year assessment cycle assumes 9 larger jurisdictions assessed every 5 years and 18 smaller jurisdictions assessed every 7 years (an average of 4.4 assessments per year). Cost in person years based on average cost of Module 2 assessments undertaken in FY2005–07.
  - Integrated FSAP Updates assumes 9 larger jurisdictions assessed every 6 years and 18 smaller jurisdictions assessed every 12 years (an average of 3 assessments per year). The cost of an assessment under an integrated FSAP program is assumed to be the average of the average actual costs of an FSAP update and a Module 2 assessment, estimated on the basis of FSAP updates conducted in FY2006–07 and Module 2 assessments undertaken in FY2005–07.
  - FSAP updates are projected to cost less in terms of person years, but these savings do not feed through to the dollar budget because of the higher ratio of more expensive staff working on FSAPs.
- Illustrative scenario outcomes:
  - In this scenario: 19 of the 46 jurisdictions presently covered by the OFC Program are already assessed under the FSAP.
  - Of the remaining 27 jurisdictions, roughly 8–9 jurisdictions would be considered large and systemically important enough to warrant FSAP-style assessments roughly every six years.
  - Given standard costs for FSAP and OFC assessments and the assumed budget constraint, the remaining 18–19 would be assessed on average every 12 years.
  - With a tighter budget envelope in FY2009 and beyond, resources available for stability assessments will likely be constrained; preference would be to maintain quality by adopting stricter, risk-based criteria for scope and frequency of assessments.
  - Staff concludes integration is preferable as it ensures a common platform for prioritization while maintaining Fund monitoring of OFCs.

### X. Appendix I–III: Compliance profiles, measures taken, and comparison with FSAP
- Appendix I: Principle-level compliance profiles (selected highlights):
  - Basel Core Principles (1997) — selected CP entries reported as proportions and counts (original table entries preserved as presented for CP1–CP25 and other CPs).
  - IAIS Insurance Core Principles (2000) — selected C1–C17 entries with reported proportions and counts.
  - IOSCO Objectives and Principles (2003) — selected Q01–Q30 entries with reported proportions and counts.
  - FATF Recommendations (2003) — selected R1–R37 and Special Recommendations entries with reported proportions and counts.
  - Key cross-cutting observation: detailed principle-level compliance/observance proportions show materially different proportions across jurisdiction groups; source tables contain the full numeric detail.
- Appendix II: Summary of measures taken to implement first phase recommendations (by prudential standard) — selected outcomes:
  - General: New legislation and reformed supervision requiring a physical presence was put in place in all cases reported.
  - Basel Core Principles: Expanded powers; budgetary independence; increased staff and training; improved access to customer information and formalized information exchange; strengthened capital, credit policy, connected lending rules, onsite/offsite supervision, and group-wide supervision; enhanced corrective measures and cross-border cooperation efforts.
  - IAIS (Insurance): New acts or amendments; improved IT systems and actuarial techniques; fit and proper criteria; corporate governance and internal controls guidance; more detailed reporting and stronger supervision of risk management; structured onsite programs and AML checklists.
  - IOSCO (Securities): Expanded supervisory mandates and licensing authority; enhanced SRO oversight; improved enforcement and inspection regimes; MoUs and information sharing arrangements; new rules on insider trading, reporting, takeover rules, collective investment schemes, and intermediaries oversight.
- Appendix III: Comparison of OFC and FSAP programs and integration implications:
  - Jurisdictions assessed: staff maintains a list based on initial FSF list; currently 51 jurisdictions are monitored, including four nonmembers.
  - Participation: voluntary in both programs; pros and cons of integration highlighted (uniform treatment, resource targeting, reduced frequency for smaller OFCs).
  - Content of assessments: FSAP includes broader vulnerability analysis and financial sector risks; integration yields better tailoring and data emphasis.
  - Standards assessed: OFC: BCP, IAIS, IOSCO, FATF 40+9; FSAP includes these plus additional codes and standards (e.g., IMF Code of Good Practices, CPSS).
  - Focus on data and analysis: FSAP emphasizes data, stress testing and FSIs; integration would raise data requirements for OFCs.
  - Assessment reports and publication: publication voluntary; AFSSRs go to the Board for information; FSSAs circulated as background for Article IVs; FSAP approach would be applied to all jurisdictions.
  - Participating institutions: OFC assessments led by IMF staff with experts; FSAP teams include IMF and World Bank staff for middle and low-income countries.

*Source: IMF paper "Status of IMF Second-Phase Offshore Financial Center Assessments" (sections I–III and Tables/Figures as provided).*

### 1. Status of IMF Second-Phase Offshore Financial Center Assessments..................................8

### 1. Status of IMF Second-Phase Offshore Financial Center Assessments

### I. Introduction and purpose
- The paper provides an update and overview of the Offshore Financial Center (OFC) program and proposes the integration of the OFC program with the Financial Sector Assessment Program (FSAP).
- Arguments for pursuing integration:
  - (i) Facilitate a more uniform and risk-based approach to financial sector surveillance and improve coordination of Fund analysis across jurisdictions.
  - (ii) Allow for a better allocation of Fund resources, focusing on the small number of OFCs that account for the overwhelming volume of offshore activity and could be expected to pose any major financial system risks.
  - (iii) Eliminate the need to maintain a potentially discriminatory OFC list.
- Care would still be needed to give anti-money laundering/combating the financing of terrorism (AML/CFT) vulnerabilities adequate attention.

### II. Background: Program design and first phase results
- OFC program components (initial design):
  - Module 1: Self-assessments, assisted by outside experts.
  - Module 2: Stand-alone assessments by the Fund of relevant standards: Basel Core Principles for Effective Banking Supervision (BCP), IAIS Insurance Core Principles (ICP), IOSCO Objectives and Principles, and FATF 40+9 Recommendations.
  - Module 3: Comprehensive assessments of risks and vulnerabilities akin to the FSAP.
- First phase (completed in 2005):
  - Focused on the 44 jurisdictions initially contacted (42 assessed).
  - All but one OFC agreed to have their assessments published.
  - Adherence to all four international standards among OFCs was broadly comparable or better, on average, than other countries assessed in the FSAP.
  - Compliance weaker in the securities and insurance sectors than in the banking sector; deficiencies often related to inadequate resources or skills.

### III. The OFC program—Second-phase update (areas of focus)
- The Executive Board in 2003 set four broad elements for the second phase:
  - (i) Regular monitoring of OFCs’ activities and compliance with supervisory standards.
  - (ii) Improved transparency of OFC supervisory systems and activities.
  - (iii) Technical assistance (TA) in collaboration with bilateral and multilateral donors.
  - (iv) Collaboration with standard-setters and onshore and offshore supervisors to strengthen standards and the exchange of information.
- Second-phase assessment cycle: assessments are to be conducted every four to five years (as compared with 5–10 year cycle then foreseen under the FSAP).

### IV. Status and scope of second-phase assessments (Table 1 summary)
- Total jurisdictions assessed: 16
  - FSAP assessments: 7
  - Module 2 assessments: 9
- Completed reports: 13
  - FSAP completed: Uruguay; Ireland; Switzerland; UAE (Dubai); Mauritius; Botswana
  - Module 2 completed: Cyprus; Panama; Vanuatu; Samoa; Gibraltar; Andorra; Liechtenstein
- Reports in progress: 3
  - FSAP in progress: Barbados; Bermuda
  - Module 2 in progress: Monaco
- Published reports: 9
  - Published FSAP/FSSA/AFSSR and Module 2: Uruguay; Ireland; Switzerland; UAE (Dubai); Cyprus; Panama; Samoa; Gibraltar; Andorra
- Notes:
  - The jurisdictions taken into account include both the 46 jurisdictions considered in the first phase and additional jurisdictions where staff is aware of significant international and offshore financial activity.
  - Only 13 of the 16 assessed were included in the first phase of the OFC program.
  - Publication of Financial System Stability Assessments (FSSAs) and Assessments of Financial Sector Supervision and Regulation (AFSSRs) is voluntary; publication of other FSAP and Module 2 documents is also voluntary but IMF management consent must first be obtained.

### V. Findings on compliance trends (first vs. second phase)
- General:
  - Second-phase assessments began in 2005; pace affected by bunching of first-phase assessments in 2002 (22 assessments) and the agreed four–five year cycle, leading to many assessments due in 2008–09.
  - Second-phase assessments have been more focused and targeted on: (i) progress in addressing weaknesses identified in previous assessments; (ii) issues of cross-border cooperation; and (iii) relevant areas not covered in previous assessments.
  - A full assessment against the FATF 40+9 Recommendations is, under Fund AML/CFT policies, always undertaken by the Fund, the Bank, the FATF, or FATF Style Regional Bodies (FSRBs).
- Prudential standards (summary of observed progress):
  - Banking standards:
    - Compliance improved in the six jurisdictions that had detailed reassessments against the 1997 BCP.
    - There was 100 percent (full or large) compliance among high-income jurisdictions except in BCP 25, where one jurisdiction needed to reach formal agreements with home supervisors.
    - In the larger sample of 11 jurisdictions (reassessments and updates), remedial powers and risk monitoring remained areas requiring work.
    - Note: A seventh jurisdiction was assessed under the revised BCP of 2006.
  - Insurance standards:
    - Only six jurisdictions had an IAIS assessment or partial assessment; compared with the earlier phase, there were substantial improvements in observance.
    - The four high-income jurisdictions had higher observance than the 11 non-OFC jurisdictions in 19 of the 28 IAIS principles.
    - Appendix II shows significant improvements in organization of the supervisor, prudential rules and inspection.
  - Securities standards:
    - Three OFCs had IOSCO assessments for the first time, and one had a partial reassessment; sample too small for meaningful cross-jurisdiction comparison.
    - Where earlier IOSCO assessments were updated, implementation of recommendations produced improvements in regulators’ mandate, better staffing and inspection, and improved cooperation.
- FATF/AML:
  - A discussion of progress between phase I and phase II cannot include the FATF standard because the current FATF Recommendations and Methodology are substantially different than the version used in phase I. Most AML/CFT assessments in the first phase were conducted using the 2002 FATF methodology; this was replaced in 2004 and earlier results are not representative of requirements under the new standard.

### VI. Cross-border cooperation and information exchange (findings and Table 2 summary)
- Overall finding: Offshore jurisdictions have made progress on prudential cross-border cooperation and information exchange issues.
- Table 2: Profiles of improvement in compliance with principles related to cooperation and information exchange (by standard and income group)
  - Basel Core Principles (1997, 2006)
    - Number of jurisdictions in which standard assessed: High-Income OFCs 7/7; Upper and Lower Middle Income OFCs 3/4
    - Number of jurisdictions in which update for sector: High-Income OFCs 4; Upper and Lower Middle Income OFCs 4
    - Proportion of jurisdictions in which progress made: High-Income OFCs 3; Upper and Lower Middle Income OFCs 0
  - IAIS Core Principles (2003)
    - Number of jurisdictions in which standard assessed: High-Income OFCs 7/8; Upper and Lower Middle Income OFCs 1/2
    - Number of jurisdictions in which update for sector: High-Income OFCs 4; Upper and Lower Middle Income OFCs 2
    - Proportion of jurisdictions in which progress made: High-Income OFCs 4; Upper and Lower Middle Income OFCs 0
  - IOSCO Objectives and Principles
    - Number of jurisdictions in which standard assessed: High-Income OFCs 3/4; Upper and Lower Middle Income OFCs 0/1
    - Number of jurisdictions in which update for sector: High-Income OFCs 1; Upper and Lower Middle Income OFCs 1
    - Proportion of jurisdictions in which progress made: High-Income OFCs 3; Upper and Lower Middle Income OFCs 0
- Interpretation:
  - Results suggest success in improving cooperation in prudential areas, though for upper and lower middle-income OFCs more progress is necessary.
  - Second-phase assessments typically involved consultations with supervisors in home jurisdictions of the assessed center and with main standard-setters; these consultations facilitated staff’s ability to gain a “third-party” view of OFCs’ information exchange and have not uncovered significant issues or concerns.

### VII. Implementation and remedial areas identified
- Common areas still requiring work:
  - Remedial powers in banking supervision.
  - Risk monitoring in banking supervision.
  - For upper and lower middle-income OFCs, more progress needed on cooperation- and information-exchange-related principles across the prudential standards.
- Progress indicators:
  - Implementation of earlier recommendations has produced measurable improvements in organization of supervisors, prudential rules, inspection, regulators’ mandate, staffing, and cooperation in jurisdictions where reassessments or updates were conducted.

*Source: IMF paper "Status of IMF Second-Phase Offshore Financial Center Assessments" (sections I–III and Tables/Figures as provided).*

### 13.      Anti-money laundering and counter terrorism regimes: One area where concerns

### 13.      Anti-money laundering and counter terrorism regimes: One area where concerns remain is AML/CFT

### AML/CFT compliance findings
- OFC compliance is measured against the 2003 FATF 40+9 Recommendations.
- Twenty one OFCs have been assessed for AML/CFT under the current FATF methodology; eight of these assessments have been conducted by the Fund.
- Overall compliance in assessed OFCs is generally comparable to non-OFC jurisdictions, but OFCs show relatively low compliance in key FATF areas:
  - customer identification;
  - monitoring of transactions;
  - international cooperation (FATF Recommendations 35-40).
- International cooperation compliance: the proportion of assessed OFCs found compliant or largely compliant with Recommendations 35-40 is 68 and 48 percent for high income and middle income jurisdictions, respectively; this compares to 86 and 65 percent for non-OFCs.
- Vulnerabilities in these areas create potential ML/FT (money-laundering/financing of terrorism) risks for the OFCs and for other jurisdictions with which they interact.

### Enhancing transparency and publication practices
- Most jurisdictions have published their assessment reports.
- Of the 13 jurisdictions that have completed second phase OFC reports, nine have published their main report (four FSSAs and five AFSSRs); of the five jurisdictions that published their AFSSR, four also published their detailed assessment reports.
- Publication policy mirrors the FSAP: publication is voluntary for the main reports and jurisdictions can publish detailed assessments with management’s consent.
- All but one of the OFCs assessed under the current FATF methodology have published or indicated agreement to publish their detailed AML/CFT assessments.

### Information Framework and data collection
- The Information Framework initiative for OFCs was initiated in 2004 to provide a common statistical template to help jurisdictions disseminate data and to assist the Fund in monitoring financial developments.
- Participation and submissions (of 46 jurisdictions invited):
  - 28 jurisdictions have submitted some data (up from 16 reported in the February 2006 Board paper).
  - 7 jurisdictions have committed or indicated intent to participate but not yet submitted data.
  - 3 jurisdictions have yet to confirm participation.
  - 8 jurisdictions refused participation for reasons including unwillingness to be associated with the term “offshore,” already publishing such data, participating in other Fund initiatives, or no longer having OFC activity.
- The data collected complement CPIS data and include aggregate structural and activity indicators for banking, insurance, and securities sectors, enabling cross-country comparisons, helping prioritize second phase assessments, and monitoring developments.
- To avoid duplication, jurisdictions that provide data to the BIS authorize the BIS to transmit relevant locational banking statistics to the Fund.

### Technical assistance (TA)
- TA related to enhancing financial sector supervision and AML/CFT has been provided to 37 jurisdictions (mainly middle-income).
- Regional focus: Asian-Pacific region and Caribbean countries have received the bulk of TA.
- Primary TA areas:
  - bank supervision;
  - AML/CFT (generally via regional workshops and training seminars);
  - governance of supervisory bodies;
  - insurance supervision.
- Delivery channels:
  - regional centers (Pacific Financial Technical Assistance Centre and Caribbean Regional Technical Assistance Centre);
  - coordination with donor governments and agencies, such as the JSA.
- TA has also been provided to improve monetary and financial statistics and balance of payment data.
- Participation of OFCs in the CPIS exercise rose to 25 jurisdictions compared with 22 in 2001.
- TA data are reported to 31 October 2007; TA categories used are not mutually exclusive and only a proportion of regional workshop field-time is attributed to OFC work.

### Cooperation with international bodies and outreach
- The Fund organizes an annual Roundtable to foster collaboration among OFCs, home supervisors, and standard-setters:
  - 2006 Roundtable (hosted by the Cayman Islands Monetary Authority) focused on risks in global financial markets and OFCs, including misuse of corporate vehicles, lack of transparency in risk transfer, and institution failure.
  - Early 2008 Roundtable (hosted by the BIS) focused on transparency issues.
- Staff participation:
  - Participated in the FSF’s Offshore Review Group (formed 2005) which reviews OFCs’ progress; its September 2007 report acknowledged progress but noted remaining concerns.
  - Following the Review Group’s advice, the FSF decided the Group need not meet prior to each FSF meeting but would be available to address material concerns.
  - Following IOSCO initiative to remove obstacles to cooperation and information exchange; the confidential process assesses jurisdictions’ ability to sign IOSCO’s multilateral memorandum of understanding and has made substantial progress in improving cooperation with targeted jurisdictions.
  - Coordinated with FATF and FSRBs on AML/CFT assessment programs and provided TA to strengthen the assessment capacity of FSRBs.

### Case for integration of the OFC program with the FSAP
- Background:
  - Long-standing discussion on whether a separate OFC program is needed.
  - At the November 2003 review, the Executive Board asked that the next review reevaluate the need for a separate program.
  - Participants at the December 2006 Fourth Annual IMF Roundtable and the FSF’s Offshore Review Group (July 2007) suggested consideration of integration.
- Factors favoring integration:
  - Improved consideration of systemic and other risks:
    - OFC assessments have mainly centered on supervisory and regulatory practices; FSAP assessments cover a broader range of financial stability and surveillance issues, including cross-border issues (capital flows, contagion, supervisory cooperation).
    - Integration would help ensure broader systemic issues are routinely considered, especially for larger jurisdictions with significant cross-border financial flows.
  - Difficulty maintaining a distinct OFC category:
    - Absence of agreed objective criteria for defining an OFC complicates credible distinctions; the FSF no longer maintains a list of OFCs.
    - Globalization and active promotion of offshore business have blurred lines between OFCs and other financially active jurisdictions.
  - Concern about discriminatory treatment:
    - Some OFC officials express concern about stigma from the OFC label and that the Fund’s OFC program singles out OFCs; a unified approach would reduce perceptions of undue targeting while underscoring expectations that OFCs meet international standards.
  - More effective prioritization and resource use:
    - Both FSAP and OFC assessments are intended to occur roughly on a five-year cycle, but resource constraints prevent observing this timing in practice.
    - FSAPs are prioritized by systemic importance and vulnerability; OFC prioritization has been more mechanical (size and past performance).
    - Integration would allow use of broader FSAP criteria for all jurisdictions, permit more judicious timetabling, and improve resource allocation across jurisdictions.

### Box: Definition issues and empirical approaches to defining OFCs
- Commonly used descriptive criteria for OFCs include:
  - orientation of business primarily toward nonresidents;
  - favorable regulatory environment;
  - low or zero tax rate;
  - offshore banking as an entrepôt business.
- IMF Statistics Department (2002) proposed an objective characterization: “a jurisdiction in which international investment position assets, including as resident all entities that have legal domicile in that jurisdiction, are close to or more than 50 percent of GDP and in absolute terms more than $1 billion.”
- Zoromé (2007) proposes a data-based indicator: the ratio of net financial services exports to GDP.
  - Practical complications arise because many jurisdictions do not prepare sufficiently detailed balance of payments data; in some cases net financial services had to be inferred from CPIS and International Investment Position data.
  - Zoromé examines 104 jurisdictions and identifies 16 of 40 high-income countries, and 6 of the 64 middle/low-income jurisdictions, as having significantly higher levels of net financial services exports than their peers.
  - The sample of 104 countries included 23 of the 46 OFCs covered by the IMF’s OFC Program; the filter used captured 19 of these jurisdictions and identified three additional jurisdictions.

*Source: _050808 - 13.      Anti-money laundering and counter terrorism regimes: One area where concerns remain is AML/CFT* (IMF).

### 25.      At the same time, care would be needed to avoid the impression of a

### _050808 - 25.      At the same time, care would be needed to avoid the impression of a

### Recommendation to integrate OFC and FSAP programs
- On balance, staff recommends integration of the two programs (paragraph 26).
- Formally, the Fund’s assessments of OFCs would be integrated into the FSAP program (paragraph 26).
- Stand-alone activities to continue outside formal FSAP: AML/CFT assessments, technical assistance (TA), the Information Framework Initiative, and collaboration with other agencies (paragraph 26).

### Coverage, prioritization, and scheduling (Operational considerations)
- The coverage of the FSAP would be extended to encompass all OFCs, including the four nonmembers assessed under the OFC program (paragraph 27).
  - The four nonmembers are Andorra, Liechtenstein, Monaco, and Nauru; Nauru no longer has financial arrangements catering to nonresidents (footnote 26).
- Uniform criteria would be applied to prioritize assessments across all jurisdictions, with less frequent assessments likely for smaller, less systemically important jurisdictions (paragraph 28).
- Current status and prioritization:
  - Of the 46 jurisdictions identified in the first phase as OFCs, 15 have already opted for FSAP assessments (paragraph 28).
  - Of the remaining 27 jurisdictions, 8-9 account for the overwhelming volume of activity and would be considered priorities for assessment every 5-7 years under the FSAP (paragraph 28).
  - The remaining 18–19 OFCs are small and would be assessed less frequently under the integrated OFC-FSAP program (paragraph 28).
  - Priority jurisdictions would be Bermuda, Cayman Islands, Jersey, Guernsey and the Isle of Man, Panama, Labuan (Malaysia), and The Bahamas. The British Virgin Islands may also be included (footnote 28).
- Monitoring and flexibility:
  - Smaller OFCs would continue to be monitored with scope to reconsider priority if circumstances warranted; FSAP prioritization occurs every six months (paragraph 29).
  - Some smaller jurisdictions are subject to Article IV consultations; nonmembers and member territories not receiving Article IV consultations would be monitored offsite as part of the information framework initiative (paragraph 29).
  - All smaller jurisdictions save one would be subject to AML/CFT assessments about every five years as part of global arrangements (paragraph 29; footnote 35 reference).

### Scope and tailoring of OFC assessments
- Integration would facilitate coverage of a broader range of issues in OFCs; Module 2 OFC assessments typically include only standards assessments, whereas FSAP includes a broader vulnerability analysis and a potentially larger set of standards and codes (paragraph 30; footnote 29).
- Systemically important OFCs would undergo vulnerability analyses and reviews of contingency mechanisms targeted to underlying risks (paragraph 30).
- Vulnerability analysis would be tailored to the jurisdiction’s risk profile:
  - OFC institutions hold much larger cross-border positions and are often branches or subsidiaries of internationally active banks, increasing the importance of evaluating cooperation and cross-border information sharing (paragraph 31).
  - The share of GDP accounted for by financial services is generally considerably higher in OFCs, heightening exposure to operational and reputation risks, e.g., money laundering (paragraph 31).

### Implications for the World Bank
- The Bank would be expected to have a limited role in OFC assessments in an integrated program; large and systemically relevant OFCs are mainly high income jurisdictions where the Bank typically would not be involved (paragraph 32).
- For middle income member OFCs, joint assessments would be undertaken in line with current FSAP policy (paragraph 32).
- Three of the four nonmember OFCs are high-income countries (paragraph 32).

### Transparency, publication, and information initiatives
- No material change in publication or reporting under an integrated program; progress on OFC assessments would be covered in the periodic FSAP review that is typically published (paragraph 33).
- The Board receives an annual report to inform them of FSAP participation; country reports are published on a voluntary basis and this would continue under an integrated program (paragraph 33; footnote 30).
- Ongoing efforts to improve transparency of OFC activities and information exchange among supervisors would continue, including the Information Framework Initiative and collaboration with the BIS to avoid duplication (paragraph 34).

### Technical assistance and collaboration with other agencies
- Integration is not expected to affect the provision of TA to OFCs, though the volume of TA (targeted principally to small and middle-income jurisdictions) would need to be considered in the context of the Fund’s downsizing and refocusing (paragraph 35).
- Staff will continue to work closely with the FSF and standard setters; Fund-sponsored Roundtables for offshore and onshore supervisors and standard setters have provided outreach, though annual frequency may need reconsideration in light of resource constraints (paragraph 36).

### AML/CFT policy, assessments, and TA
- AML/CFT vulnerabilities posed by OFCs would continue to be given particular attention under integration (paragraph 37).
- OFCs would continue to be subject to assessments against the FATF 40+9 Recommendations; integration would not change existing Fund policies on AML/CFT assessments (paragraph 38).
- Modalities and frequency:
  - In accordance with modalities established by the Executive Board in 2006, a full AML/CFT assessment is expected for all jurisdictions approximately every five years (paragraph 38).
  - For OFCs undergoing an FSAP every 5–7 years, AML/CFT assessments would continue to take place within a reasonable period (i.e., 18 months) of the FSAP mission (paragraph 38).
  - Other OFCs would continue to receive full AML/CFT assessments approximately every five years (where necessary, on a stand-alone basis) in line with existing Board guidance (paragraph 38).
  - AML/CFT assessments would continue to be conducted by the Fund, the Bank, the FATF or an FSRB under existing burden-sharing arrangements and procedures (paragraph 38; footnote 31).
- Special attention to jurisdictions:
  - Fund staff would pay particular attention to jurisdictions not members of FATF or an FSRB and therefore not subject to assessment from any other body, and jurisdictions that are members of an FSRB whose assessment capacity is believed to be particularly weak (paragraph 38; footnote 32).
  - With the exception of Gibraltar, all smaller OFCs are members of either FATF or an FSRB; Gibraltar is a member of the Offshore Group of Banking Supervisors (OGBS) which are observer members of the FATF. The assessment of four jurisdictions would likely need to be carried out by Fund staff (footnote 32).
- Technical assistance:
  - TA would continue to address major AML/CFT risks identified in assessment reports and emphasize elements that strengthen cross-border ML and FT risk management and international cooperation (paragraph 39).
  - Such TA could be financed through the Fund’s internal budget (limited resources reserved) or through external financing (paragraph 39).

### Transition arrangements if Executive Board decides to integrate
- Staff proposes the following transition arrangements (paragraph 40):
  - OFC assessment missions currently planned for FY2009 would be scoped as Module 2s where planning with authorities is relatively advanced, or as FSAPs, taking into account relevant risks facing the jurisdiction (paragraph 40).
  - From FY2010, all assessment missions to OFCs would be included in the FSAP (paragraph 40).
  - FSAP standards assessments of OFCs in the integrated program would be treated as FSAP Updates if the jurisdiction had already received an assessment under the OFC program; the update would follow up on implementation of the initial assessment as part of the standards and codes work (paragraph 40).
  - This approach avoids presuming completely new standards assessments while allowing an opportunity to refresh the initial assessment, albeit with possible differences in scope (paragraph 40; footnote 34).

### Board discussion and non-member assessments
- OFC assessments of non-members have been submitted to the Board for information but not discussed; some directors suggested inviting OFC representatives to Board discussions (paragraph 41).
- Under an integrated program, Financial Sector Stability Assessments (FSSAs) prepared for non-member jurisdictions would continue to be submitted to the Board for information, with Board members having the option to request a discussion and invite OFC representatives to participate (paragraph 41).

### Budgetary implications and illustrative scenario
- An illustrative scenario based on the FY2008 budget envelope was prepared to show implications of integration for frequency and intensity of assessments (paragraph 42).
  - The higher cost of FSAP-style assessments is offset by a reduced frequency of assessments of smaller jurisdictions (paragraph 42).
  - In this scenario: 19 of the 46 jurisdictions presently covered by the OFC Program are already assessed under the FSAP (paragraph 42).
  - Of the remaining 27 jurisdictions, roughly 8–9 jurisdictions would be considered large and systemically important enough to warrant FSAP-style assessments roughly every six years (paragraph 42).
  - Given standard costs for FSAP and OFC assessments and the assumed budget constraint, the remaining 18–19 would be assessed on average every 12 years (paragraph 42).
- With a tighter budget envelope in FY2009 and beyond, resources available for stability assessments will likely be constrained; preference would be to maintain quality by adopting stricter, risk-based criteria for scope and frequency of assessments (paragraph 43).
- Staff concludes integration is preferable as it ensures a common platform for prioritization while maintaining Fund monitoring of OFCs (paragraph 43).

### Issues for Executive Directors (Questions for discussion)
- Are Directors in agreement with staff’s proposal to integrate OFC assessments into the FSAP (paragraphs 26, and 27–36)?
- Do Directors agree that the four nonmember jurisdictions, Andorra, Liechtenstein, Monaco and Nauru can be considered for the FSAP, AML/CFT assessments and technical assistance, as implied by paragraphs 27–36?
- Do Directors agree with the approach proposed for AML/CFT issues described in paragraphs 37–39?
- Do Directors concur with the transition and other proposals described in paragraphs 40 and 41? (paragraph 44)

### Key quantitative estimates and scenarios (Table 4 summary)
- Annual Cost of OFC Assessments (In millions of U.S. dollars)
  - Module 2 assessments (Planned 5-year assessment cycle):
    - In Person Years: 3.9
    - Excluding Travel: 0.8
    - Including Travel: 1.1
  - Module 2 assessments (Assuming 5-and 7-year assessment cycles):
    - In Person Years: 3.2
    - Excluding Travel: 0.6
    - Including Travel: 0.9
  - Integrated FSAP Updates (6- and 12-year cycles):
    - In Person Years: 2.9
    - Excluding Travel: 0.6
    - Including Travel: 0.8
  - AML/CFT assessments:
    - In Person Years: 4.5
    - Excluding Travel: 0.8
    - Including Travel: 1.0
- Notes and assumptions (from Table 4 footnotes):
  - Cost estimates comprise field and headquarters time for staff and experts plus overhead costs (estimated at 30 percent of staff time). Excludes cost of work by other departments and of AML/CFT assessments (assessment type does not affect AML/CFT cost) (footnote 1).
  - Costs excluding travel are based on standard cost per person for FY08 of $213,800 for staff and $193,200 for short-term experts. Costs including travel are based on standard travel costs of $10,000 per person per mission (footnote 1).
  - AML/CFT assessment costs assume the Fund undertakes three assessments per year and are estimated using actual time and cost of past assessments; these costs are invariant to assessment program (footnote 5).
  - Planned 5-year assessment cycle assumes total of 9 larger and 18 smaller jurisdictions assessed every five years (an average of 5.4 assessments per year). Cost of assessments in person years is based on average cost of Module 2 assessments undertaken in FY2005–07 (footnote 2).
  - The 5-and 7-year assessment cycle assumes 9 larger jurisdictions assessed every 5 years and 18 smaller jurisdictions assessed every 7 years (an average of 4.4 assessments per year). Cost in person years based on average cost of Module 2 assessments undertaken in FY2005–07 (footnote 3).
  - Integrated FSAP Updates assumes 9 larger jurisdictions assessed every 6 years and 18 smaller jurisdictions assessed every 12 years (an average of 3 assessments per year). The cost of an assessment under an integrated FSAP program is assumed to be the average of the average actual costs of an FSAP update and a Module 2 assessment, estimated on the basis of FSAP updates conducted in FY2006–07 and Module 2 assessments undertaken in FY2005–07 (footnote 4).
  - FSAP updates are projected to cost less in terms of person years, but these savings do not feed through to the dollar budget because of the higher ratio of more expensive staff working on FSAPs (footnote 35).

*Source: IMF staff paper (content unit: _050808 - 25.      At the same time, care would be needed to avoid the impression of a).*

### Appendix I. IMF Offshore Financial Sector Program: Compliance with Standards and Codes

### Appendix I. IMF Offshore Financial Sector Program: Compliance with Standards and Codes

### Basel Core Principles (1997) — Profiles of Compliance (First Phase)
- Tables report "Proportion of Jurisdictions Found Compliant or Largely Compliant 1/" and "Number of Jurisdictions in which Principle Assessed".
- Selected principle-level compliance entries as reported in the source tables:
  - CP1: Objectives, Autonomy, Powers and Resources
    - CP1(1): Objectives — 95 73 100 87 22 15 19 62
    - CP1(2): Independence — 82 40 95 50 22 15 19 62
    - CP1(3): Legal Framework — 100 60 100 87 22 15 19 62
    - CP1(4): Enforcement Powers — 100679575   22151961
    - CP1(5): Legal Protection — 95878952   22151962
    - CP1(6): Information Sharing — 91677460   22151962
  - Prudential and supervisory principles (selected)
    - CP2: Permissible Activities — 95 93 100 95 22 15 19 62
    - CP3: Licensing Criteria — 100739571   22151962
    - CP6: Capital Adequacy — 86 40 89 55 22 15 19 62
    - CP10: Connected Lending — 86338456   22151962
    - CP14: Internal Control and Audit — 91409558   22151962
    - CP15: Money Laundering — 91 47 84 36 22 15 19 58
    - CP20: Consolidated Supervision — 95 13 89 22 20 8 19 55
    - CP23: Globally Consolidated Supervision — 100 38 94 48 17 8 18 46
    - CP25: Supervision Over Foreign Banks' Establishments — 95 75 95 70 21 12 19 61
- Sources: FSAPs and Module 2 detailed assessment reports. (Table captions provide jurisdiction groupings and notes.)

### IAIS Insurance Core Principles (2000) — Profiles of Compliance (First Phase)
- Tables report "Proportion of Jurisdictions Found Observant or Largely Observant 1/" and "Number of Jurisdictions in which Principle Assessed".
- Selected principle-level entries as reported:
  - C1: Organisation of an Insurance Supervisor — 76 0
  - C2: Licensing — 100 50
  - C3: Changes in Control — 94 50
  - C4: Corporate Governance — 67 0
  - C5: Internal Controls — 76 0
  - C6: Assets Standards — 822 8
  - C7: Liabilities — 88 25
  - C8: Capital Adequacy and Solvency — 88 25
  - C9: Derivatives — 69 50
  - C10: Reinsurance — 88 0
  - C11: Market Conduct — 802 6
  - C12: Financial Reporting — 94 0
  - C13: On-site Inspection — 59 0
  - C14: Sanctions — 100 50
  - C15: Cross-border Business — 100 0
  - C16: Coordination and Cooperation — 94 25
  - C17: Confidentiality — 100 75
- Sources: FSAPs and Module 2 detailed assessment reports.

### IOSCO Objectives and Principles of Securities Regulation (2003) — Profiles of Implementation (First Phase)
- Tables report "Proportion of Jurisdictions Found to Have Implemented or Broadly Implemented 1/" and "Number of Jurisdictions in which Principle Assessed".
- Selected principle-level entries as reported:
  - Q01: Clear Responsibilities — 82941717
  - Q02: Operational Independence — 53711717
  - Q03: Adequate Powers — 47711717
  - Q04: Clear Regulatory Processes — 88881717
  - Q05: Professional Standards — 94881717
  - Q06: Self-Regulatory Organizations (SROs) — 100861014
  - Q07: SRO Oversight — 50771013
  - Q08: Inspection and Investigation — 71941716
  - Q09: Comprehensive Enforcement Powers — 76751716
  - Q10: Effective Compliance Program — 76761717
  - Q11: Information Sharing — 76711717
  - Q12: Information Sharing Mechanism — 71811716
  - Q13: Assistance to Foreign Regulators — 82691716
  - Q16: Accounting and Auditing Standards — 88821717
  - Q22: Capital and Other Prudential Requirements — 88591617
  - Q25: Regulatory Authorization of Trading Systems — 90881017
  - Q27: Transparency of Trading — 91881117
  - Q30: Clearing and Settlement of Securities Oversight — 6773911
- Sources: FSAPs and Module 2 detailed assessment reports.

### FATF Recommendations (2003) — OFC Profiles of Compliance (First Phase)
- Tables report "Proportion of Jurisdictions Found Observant or Largely Observant 1/" and "Number of Jurisdictions in which Principle Assessed".
- Selected recommendation-level entries as reported:
  - R1: ML offence — 5729683014 7 1930
  - R2: ML offence–mental element and liability — 935779631471930
  - R3: Confiscation and provisional measures — 715784501471930
  - R4: Secrecy laws — 937189871471930
  - R5: Customer due diligence — 71421101471930
  - R6: Politically exposed persons — 431416101471930
  - R7: Correspondent banking — 291432271471930
  - R8: Non face-to-face business etc — 361453271471930
  - R9: Third parties and introducers — 36033261461523
  - R10: Record keeping — 865779501471930
  - R12: DNFBP–R.5, 6, 8-11 — 7003   1471930
  - R26: The FIU — 7929634314 7 1930
  - R27: Law enforcement authorities — 794389571471930
  - R28: Powers of competent authorities — 9357100871471930
  - R37: Dual criminality — 865789801471930
  - SRI: UN instruments — 432947131471930
  - SRII: Criminalize terrorist financing — 711474131471930
  - SRVII: Wire transfers — 211432171471930
  - SRIX: Cash Couriers — 14033211471829
- Sources: IMF, World Bank, FATF and FSRB detailed assessment reports.

### Key cross-cutting observations from the compliance profiles
- The assessment tables present detailed principle-level compliance/observance proportions for multiple standards bodies (Basel, IAIS, IOSCO, FATF) and for jurisdiction groupings (OFCs vs Non-OFCs; High-Income vs Low-and Middle-Income as defined in table notes).
- Many supervisory and regulatory principles show materially different proportions across jurisdiction groups; the source tables contain the full numeric detail for each principle and jurisdiction subgroup.

### Appendix II — Summary of Measures Taken to Implement First Phase Recommendations (by Prudential Standard)
- General recommendations implemented:
  - Introduce new legislation for the supervision of the offshore sector that would, inter alia, require a physical presence.
  - Outcome: In all cases, new legislation and reformed supervision requiring a physical presence was put in place.
- Basel Core Principles — measures taken (selected)
  - BCP 1 (Objectives, autonomy, powers and resources):
    - Expanded powers to regulate and supervise; provided full budgetary independence for the supervisor in many jurisdictions; increased staff, training and supervisory resources; removed ministerial approval requirements in many cases; improved access to customer information and formalized information exchange.
    - Reported outcomes: New laws expanded supervisor powers, provided budgetary independence, full licensing and remedial authorization, security of tenure plus transparent removal rules; staff, training and resources increased; legislation clarified supervisory access and gateways; need for budgetary independence not universally accepted.
  - BCPs 2–5 (Licensing and ownership structure):
    - Disallow nonbank deposit taking; require physical presence for license; increase investigations and clarify license requirements; require police clearance and robust criteria.
    - Reported outcomes: New law requiring physical presence; limits imposed and increased analysis.
  - BCPs 6–15 (Prudential regulations and requirements):
    - Improve capital requirement systems; strengthen credit policy supervision; reform loan classification; enhance connected lending policy; strengthen onsite/offsite supervision; formalize reporting on country risk; introduce corporate governance standards.
    - Reported outcomes: Risk frameworks put in place; improved onsite inspection focus on credit policy; guidelines for classification and credit analysis; revised rules on connected lending; enhanced prudential reporting and monitoring; corporate governance standard introduced.
  - BCPs 16–20 (Ongoing supervision):
    - Improve onsite capacity and frequency; mandate material adverse change reporting and early warning; expand auditors' complementary work; implement group-wide supervision.
    - Reported outcomes: Dedicated onsite units, increased staff and training; regular meetings with senior management; increased risk analysis capacity; law reforms and formation of financial crisis committees; supervisory inclusion of insurance where relevant.
  - BCP 22 (Corrective measures):
    - Increase authority to take remedial measures; publish decisions; require physical presence to permit remedial actions.
    - Reported outcomes: Laws amended; guidelines under consideration; bills providing for enforcement, including right to publish; physical presence required; formal sharing of supervisory reports underway.
  - BCPs 23–25 (Cross-border banking):
    - Apply same supervisory standards for offshore and onshore banks; formalize information sharing; strengthen cooperation with foreign supervisors and attempt MOUs.
    - Reported outcomes: New banking laws and arrangements; enhanced cooperation and capacity; attempts to enter MOUs.
- IAIS (Insurance) — measures taken (selected)
  - ICP 1 (Organization): New acts or amendments introduced; improved IT systems and actuarial techniques; staff sharply increased; new IT systems and databases.
  - ICPs 2–3 (Licensing and changes in control): Fit and proper criteria, checklists, stress and scenario testing, exposure analysis introduced.
  - ICPs 4–5 (Corporate governance and internal controls): Requirements and guidance on internal controls; corporate governance proposals under review.
  - ICPs 6–10 (Prudential rules): More detailed industry reporting and stronger supervision of risk management.
  - ICP 11 (Market conduct): Introduced code of conduct; considering ombudsman.
  - ICPs 12–14 (Monitoring, inspection and sanctions): Structured onsite program with AML checklist; staff increases and expanded reporting requirements.
  - ICPs 15–17 (Cross-border business, cooperation, confidentiality): Regular meetings with FIU; MOUs not always necessary; considering further actions.
- IOSCO (Securities) — measures taken (selected)
  - SCPs 1–5 (Regulator principles): Expanded supervisory mandates in law; authority for licensing; improved appointment criteria; transparency increased (laws, guidelines available on website); staff and budgetary autonomy increased.
  - SCPs 6–7 (SROs): More proactive SRO oversight; rules and codes for self-regulation adopted.
  - SCPs 8–10 (Enforcement): Enhanced inspection of collective investment schemes; trustees prohibited from asset management without license; expanded sanctions regime and enforcement powers.
  - SCPs 11–13 (Cooperation): New legislation for information sharing; MoUs signed with other supervisors; ongoing discussions on information sharing agreements.
  - SCPs 14–16 (Issuers): New regulations on insider trading, reporting requirements, and takeover rules introduced.
  - SCPs 17–20 (Collective investment schemes): New teams and skills; NAV rules amended; new laws/regulations for CIS.
  - SCPs 21–24 (Intermediaries): New acts to improve inspection rights and oversight of asset managers; onsite program introduced.
  - SCPs 25–29 (Secondary markets): Staff training and regulation revision under way.
  - SCP 30 (Settlement): Increased oversight of clearing and settlement systems; staff training increased.

*Source: Appendix I and Appendix II of the IMF Offshore Financial Sector Program (First Phase) — compliance tables and summary of measures taken as presented in the source content.*

### Appendix III. Comparison of the Offshore Financial Center and

### Appendix III. Comparison of the Offshore Financial Center and the Financial Sector Assessment Programs and Integration Implications

### Jurisdictions assessed
- List of jurisdictions under the program maintained by staff based on an initial FSF list of 42 jurisdictions. Currently 51 jurisdictions are monitored, including four nonmembers.
- All members and member territories or dependencies.
- Pro: Uniform treatment across participating jurisdictions based on a risk-focused approach.
- Pro: Enhance the targeting of Fund resources to stability concerns.
- Con: Reduced frequency of assessments of smaller OFC jurisdictions.

### Participation
- Participation voluntary, staff adopts a pro-active stance in encouraging non participants to volunteer, supported by efforts to name nonparticipants that are on the FSF list of OFCs.
- Participation voluntary, members write a letter to request assessment; where countries are on the FSAP surveillance priority list, staff also take a proactive stance vis-à-vis the authorities.
- Pro: Eliminate need to maintain separate and difficult to define list of OFC list.
- Pro: Consistent prioritization would help ensure resources allocated toward systemically important and/or vulnerable cases.
- Con: Lessened pressure to participate, especially among smaller jurisdictions.

### Content of assessments
- Discussion of compliance with standards assessed and overall supervisory conditions.
- Evaluation of overall cooperation and information exchange.
- Assessment of macro and financial linkages and financial sector risks and vulnerabilities, including potential spillovers, effectiveness of financial sector infrastructure, and safety nets and crisis management arrangements.
- For FSAP Updates, progress report on FSAP recommendations; more focused risk analysis based on financial sector developments and its infrastructure.
- Pro: Integrated financial surveillance framework allows to better tailoring vulnerability analysis.
- Pro: Better use of resources, taking into account Fund resource constraints.
- Pro: Specific assessment of financial sector risks and vulnerabilities.

### Standards assessed
- OFC: BCP, IAIS and IOSCO core principles; FATF 40+9; recent OFC assessments include updates for less significant sectors.
- FSAP: These four plus IMF Code of Good Practices on Transparency in Monetary and Financial Policies; Core Principles for Systemically Important Payment Systems (CPSS), Recommendations for Securities Settlements Systems. World Bank involvement includes attention to accounting and corporate governance standards in some FSAPs.
- For FSAP Updates: mainly factual updates on the standards, unless major reforms have taken place since FSAP, in which case full assessment of selected standards possible. AML/CFT treatment same as under initial FSAPs.
- Pro: Greater flexibility in choice of standards and codes based on underlying risks and vulnerabilities.
- Con: Greater use of factual updates, which do not include ratings, could reduce objective measures of gauging compliance.

### Focus on data and analysis
- Focus on codes and standards assessments has not required an emphasis on collecting data and indicators of financial sector performance.
- Attention to risk and vulnerabilities involves priority to data analysis of financial systems, including stress testing.
- FSAP Updates build on financial data and indicators generated during FSAP (FSIs, stress tests, etc.).
- Pro: Uniform treatment with more transparency and data requirements for OFCs consistent with other jurisdictions.

### Assessment reports and publication
- AFSSRs go to the Board only for information and are not discussed.
- FSSAs are circulated to the Board as background information for Article IV reports.
- Publication, including of detailed assessments, is voluntary but recommended by staff and monitored by the FSF. (All but one of the AFSSRs has been published.)
- Fund policy of voluntary publication prevails, with only implicit encouragement to publish (FSSA publication rates are 70-75 percent).
- Pro: The FSAP approach would be applied to all jurisdictions.
- Pro: FSAP participants may be under greater pressure to publish their detailed assessments, in line with current practice under the OFC program.
- Con: OFCs may align themselves to current FSAP practices.

### Participating institutions
- OFC: IMF staff with experts drawn from participating supervisory authorities. AML/CFT assessments conducted by FATF/FSRBs are accepted.
- FSAP: IMF in all member countries and teams including both World Bank and IMF staff in middle and low-income countries. AML/CFT treatment is similar.
- Pro: Some jurisdictions would be eligible for World Bank involvement.

*Source: Appendix III. Comparison of the Offshore Financial Center and the Financial Sector Assessment Programs and Integration Implications*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2008/_050808.pdf_