## Detailed Assessment of Compliance of the Basel Core Principles and Related Financial Sector Assessments (content unit: _cr04310) ## Source details **Canonical URL:** [Detailed Assessment of Compliance of the Basel Core Principles and Related Financial Sector Assessments (content unit: _cr04310)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04310.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04310.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04310.pdf.json) --- ### Institutional and macroprudential setting — overview - Banking sector: - Banking accounted for over 60 percent of total financial assets, equivalent to around four times GDP (as at the end of 2002). - Around 35 percent of banks’ assets are generated from non-domestic sources. - Around 45 percent of the banking system’s income is generated internationally. - Banks’ total income is equivalent to 5.5 percent of GDP. - Banking employees account for 2.3 percent of the active workforce. - There are 97 domestic banks registered in the Netherlands and 28 foreign branches. - Three banks—ABN AMRO, ING, and Rabobank—account for 80 percent of total bank assets and rank in the 30 largest banks worldwide; they are considered Large Complex Financial Institutions (LCFIs). - LCFIs account for about 90 percent of banking, 80 percent of securities, and 70 percent of insurance (measured in market shares). - Economic developments (selected): - Real GDP fell by ¼ percent in 2002. - Real GDP is projected to increase by only ½ percent this year and to pick up by a further 1½ percent in 2004. - Retail prices increased by about 2 percent on an annual basis. - Amsterdam stock market index nearly tripled in value during 1996–2000, but since 2001 almost all of these gains have been reversed. - House prices rose sharply until early 2002 but have remained at a constant level since then. ### Supervisory framework, recent reforms, and institutional responsibilities - Structural reform: - Second half of 2002: new cross-sector structure replaced sector-oriented regime; two pillars organized around objectives: financial stability and conduct of business. - Macroprudential oversight: De Nederlandsche Bank (DNB). - Microprudential supervision: DNB (banks, investment funds, securities firms); PVK (Pensioen-& Verzekeringskamer) for insurance and pension funds. - AFM (Authority for the Financial Markets) responsible for conduct-of-business supervision across securities, banks, investment funds, and insurance. - DNB and PVK cooperation via cross board appointments, joint teams; planned full merger of activities in course of 2004. - Replacement of sectoral legislation by new legislation expected to be completed by January 2005 (to underpin functional supervisory model). ### Legal basis, powers, and coordination mechanisms - Key statutes and manuals: - Bank Act 1998 and Act on the Supervision of the Credit System 1992 (ASCS). - Credit System Supervision Manual (CSSM) publishes ASCS and regulations, sets licensing and ongoing supervision standards. - DNB powers under ASCS: - Withdrawal of authorization (Section 15). - Other measures against non-compliant or distressed institutions (Sections 28, 35, 42). - Emergency regulations for winding down credit institutions (Sections 70–80). - Unlimited access to requested information (Section 54); institutions required to provide information (Section 62(1)); periodic financial reporting (Section 55). - Coordination: - Covenant formalizes coordination and information-exchange among DNB, AFM, and PVK (included in CSSM part 3214) and further elaborated in a policy rule. - Accountability: - Annual reports to Minister of Finance (Section 88 ASCS), DNB Annual Report and Quarterly Bulletins, Business Plan discussed with DNB’s Supervisory Board. - Review underway to publish separate annual budget and annual report regarding supervisory activities as of 2004. ### Principle 1 — Objectives, autonomy, powers, and resources (assessment highlights) - Overall assessment for Principle 1: Largely compliant. - Descriptive findings: - ASCS/CSSM provide licensing standards and ongoing supervisory guidance; updates occur for domestic and international developments, including replacement of existing laws and implementation of the new Capital Accord. - Potential overlap and lack of clarity exist between DNB and AFM responsibilities; coordination mechanisms exist but industry concerns remain. - Remedial guidance (selected): - Clarify responsibilities between regulatory agencies in theory and practice. - Publish each body’s objectives and how they complement one another under new financial supervision law expected 2005. - New law when implemented should provide solid legal basis; when fully implemented this Core Principle will probably be complied with. ### Governance, independence, staffing and resources (selected operational findings) - Governance and appointment: - DNB established as a public limited company whose shares are owned by the State; members of Governing Board appointed by the Crown for renewable seven-year terms (section 12 Bank Act). - Appointment process: joint meeting of Governing and Supervisory Boards draws up list of three nominees. - Industry consultation: - DNB discusses draft regulations with industry (ASCS sections 20(2), 21(2), 22(2)); periodic meetings with Netherlands Bankers’ Association. - Staff training and budgets: - Supervision Directorate spent EUR 733,000 on external training in 2002. - Supervision staff spent, on average, 14 days per person in training in 2002. - ASCS Section 86 allows DNB to recover supervision costs from institutions, but not invoked to date; banks expected to be charged for licensing and ongoing supervision from 2004 onwards. - DNB independent in setting budgets for each activity; limited power of review by Minister of Finance of DNB’s budget for supervisory activities to be introduced near future. - Supervision Directorate’s budget permits desired intensity of banking supervision; external experts rarely required. ### Authorization, fitness-and-proper, ownership and investment controls (Principles 3–5) - Licensing and fit-and-proper: - ASCS sets objective and subjective criteria (Sections 8, 9, 11, 15, 22); application must include business plan with at least three fiscal years’ projections. - Section 24 requires declaration of no-objection (‘DonO’) for qualifying holdings; DonO assessment includes financial soundness and ability to provide support. - Assessment for Principle 3: Compliant; recommendation to expand fitness and propriety assessment to other key senior management functions beyond executive boards. - Ownership and change-of-control: - Qualifying holding defined as more than 5 percent (ASCS Section 1(1) under m). - Section 24(1): no-one may hold/acquire or increase qualifying holding without declaration of no-objection from Ministry of Finance on advice of DNB. - Assessment Principle 4: Largely compliant — actual legal power rests with Ministry of Finance though DNB has decisive influence and has never been overruled; authorities considering streamlining. - Investment criteria (Section 23): - Prior DonO required for holdings ≥10 percent in another enterprise/institution; for participations in banks this percentage is 5. - DNB may impose conditions on declarations; assessment: Compliant. ### Capital adequacy (Principle 6) - Legal and supervisory framework: - Section 20 ASCS empowers DNB to impose regulations on minimum own funds proportional to risks. - Solvency Directives (CSSM, chapter 40) implement Basel Capital Accord via EU directives; solvency ratio calculated on consolidated business. - DNB expects banks to hold higher capital ratio than regulatory 8 percent minimum: expects minimum of 10 percent in large banks and higher for others depending on risk profile. - Example: for universal banks, minimum own funds amount to five million Euro (Decision on Minimum Own Funds, CSSM section 3106). - Implementation and Basel II: - Preparations for new Capital Accord (target late 2006) include overhaul of CSSM, automated reporting systems, staff training, and communicating DNB interpretations. - DNB will consider extending prudential reporting requirements on a solo basis to parent banks during Basel II implementation; full compliance expected after introducing solo supervision for parent banks. - Assessment: Largely compliant. ### Risk management, credit policies, loan provisioning, large exposures, connected lending (Principles 7–12) - ROC requirements (organization and control): - Credit risk, market risk, liquidity, operational risk, IT, outsourcing, integrity, client rights covered in ROC subsections 2.1–2.8 with procedural, MIS and segregation duties (multiple ROC sections cited). - Loan evaluation and provisioning: - ROC requires adequate information systems, classification and provisioning policies; Book 2, Title 9 Civil Code and Decree on Asset Valuation set accounting valuation; annual reporting guidance from Council on Annual Reporting (Chapter 600). - Reporting: Statement/form 8032 (provisions) annually; large internationally active banks provide quarterly reports on asset quality/provisioning. - Assessment: Compliant (loan evaluation and provisioning); DNB may instruct institutions to increase provisions when needed. - Large exposure and connected lending: - Large-Exposure Rule in CSSM section 4081; large exposures reported monthly on consolidated basis; limits expressed in percentages of actual own funds. - Connected lending covered by ROC sections 35–36; no hard limits on intra-group connected lending at solo level; recommendation to apply connected lending limits to solo entities. - Assessments: Compliant. ### Market, country and comprehensive risk management (Principles 11–13) - Country risk: - Country risk directives (CSSM 4091) require banks to prepare half-yearly prudential returns and quarterly returns for BIS; DNB formulates explicit capital and provisioning requirements for major countries. - Assessment: Compliant. - Market risk: - ROC sections 39–43 require market risk control policies, MIS and simulations; internal VaR models allowed under CSSM section 4041 with permission and model controls/back-testing. - Assessment: Compliant. - Other risks and comprehensive risk management: - ROC 1.2.x provisions require organizational measures, information and communication, examination and rectification; management board and supervisory board responsibilities spelled out (ROC sections 24–33). - Assessment: Compliant. ### Internal control and audit; AML; on-site and off-site supervision (Principles 14–16) - Internal control and audit: - ROC requires permanent internal audit reporting directly to most senior management; Audit Committee recommended for larger banks; supervisor has unlimited access to internal audit files. - Assessment: Compliant; recommendation to strengthen requirement for audit committees across institutions. - Anti–money‑laundering (Principle 15): - ROC chapter on Integrity Risk; DUTA, Identification Financial Services Act and Disclosure of Unusual Transactions Act apply. - DNB distributed Basel CDD paper; Recommendations to be turned into binding rules based on Section 22a of ASCS by end of 2003. - Assessment: Largely compliant; recommendation that DNB require a designated "money laundering reporting officer" with senior status. - On-site and off-site supervision: - Legal bases: ASCS Sections 54–62a; DNB risk analysis system (open ended); Work Programs Manual and Quality Manual in place; external auditor role specified (ASCS Section 55). - Off-site periodic returns: consolidated monthly, solo quarterly; largest banks provide internal MIS data periodically; returns electronically submitted and validated. - Assessment: Compliant; recommendation for more structured risk assessment communication to banks. ### Consolidated supervision and solo reporting (Principle 20 and related) - Consolidated supervision: - EU 1992 Banking Consolidation Directive implemented; Section 20(1) ASCS enables solo or consolidated directives. - Consolidated prudential returns, capital adequacy calculations predominantly consolidated; minimal solo information currently received. - Participation limits: maximum qualifying holding 15 percent of bank’s own funds; total of all qualifying holdings may not exceed 60 percent. - Assessment: Compliant; comment that minimal solo information may omit intra-group risks. ### Remedial measures (Principle 22) - Instruments available under ASCS: - Notifications to act; appointment of silent receiver; impose fines or cease and desist orders (ASCS Section 90 subsections (b)–(m)); withdrawal of authorization (Section 15); emergency regulation (Sections 70–80). - Emergency Regulation implies suspension of payments; only DNB can submit petition for this Regulation; court decides publicly. - Assessment: Largely compliant; comment that formal measures are rarely used in practice—moral suasion common; question whether penalties can be applied to management rather than only members of Supervisory and Executive boards. ### Cross-border supervision and host-country arrangements (Principles 23–25) - Global consolidated supervision: - DNB required to undertake consolidated supervision (EU Directive); separate department for internationally active banks. - On-site inspections of foreign subsidiaries/branches conducted; prior permission required for foreign participations; DNB can limit activities. - Assessment: Compliant. - Host-country supervision and supervision of foreign establishments: - ASCS permits information exchange with foreign supervisory agencies subject to confidentiality; MOUs in place with EU and several third countries. - Branches of EU licensed banks exempted from solo capital adequacy supervision by DNB (home country principle); DNB liquidity requirements must be met by EU branches in the Netherlands. - For non-EU banks DNB prefers subsidiaries and seeks home supervisor agreement before authorization. - Assessment: Compliant. --- ### Securities markets, exchanges, SROs and market conduct supervision (selected) - Twin-pillar structure and roles: - Since September 2002: prudential supervision (DNB) and conduct-of-business (AFM); PVK supervises prudential insurance/pensions. - Euronext Amsterdam currently supervises trading/listing rules; AFM to assume listing responsibility (timing noted up to January 2005 or later). - SRO (Euronext) oversight and recommendations: - Minister recognizes exchanges; AFM supervises Euronext and receives rule-change notifications; tensions noted over role clarity and approvals. - Recommendations include: publish criteria for recognition, consider delegating recognition power to regulator, clarify AFM/Euronext roles in rule changes, finalize Contribution Model for Euronext supervision. - Issuers, prospectuses and disclosure: - Prospectus and ongoing disclosure regime described; prospectus exemptions and “restricted circle” exemption noted; recommendation to review “restricted circle” to limit offers without prospectus. - Market abuse, surveillance and enforcement: - Market manipulation and insider trading prohibited (Penal Code Article 334; Act 1995 Article 46; Further Regulations Article 32). - Monitoring: Euronext “Stockwatch”; AFM market monitoring and intelligence; statistics on suspicious reports and investigations provided. - Assessment: Fully implemented for market abuse detection and enforcement; various recommendations to enhance transparency and enforcement tools. ### Market intermediaries, CISs, custodians, contagion and contingency planning (selected) - Licensing and entry standards for intermediaries: - Requirements in 1995 Act and Decree include fitness and properness, capital, management, head office, information to public, internal control assurances. - Assessment: Broadly implemented; recommendation to make names of senior management publicly available and to broaden notification requirements for material licensing matters. - Collective Investment Schemes (CIS): - Authorization required except for restricted circle or institutional-only funds; depositary/custodian requirements, segregation and disclosure obligations set out in Decree and Annex. - Assessments: Fully implemented for many CIS principles; recommendations to extend regulatory requirements to function-providers and to improve record-keeping specificity. - Contingency planning for intermediary failure: - No formal contingency plan established by regulators to deal with failure of a market intermediary; AFM incident procedure exists but does not include DNB; regulators drawing up plan. - Assessment: Not implemented; recommendation to establish clear plan including roles of DNB and AFM and procedures for market disclosure. --- ### Securities settlement systems and CPSS/IOSCO RSSS assessment (selected) - Market infrastructure, participants and volumes: - Euronext Amsterdam: 182 members in cash trading, 27 clearing members; total turnover cash market 2002: 522 billion Euro. - Clearnet (CCP): 27 clearing members in cash market; Euronext N.V. holds 80 percent of Clearnet equity; Euroclear Bank holds 20 percent. - Euroclear Netherlands (ENL): custody totals € 675 billion (€ 369 billion shares; € 263 billion bonds); 70 participants. - NIEC custody totals: bonds € 4.7 billion and shares € 1 billion. - Legal basis and finality (Recommendation 1): - Laws, regulations and rules public and generally clear; ENL and NIEC designated under Settlement Finality Directive; Clearnet designated under French implementation of SFD. - Assessment: Observed. - Trade confirmation, settlement cycles and fails (Recommendations 2–3): - Exchange-traded: transactions confirmed same day; settlement T+3 (equities, debt), derivatives T+1. - Fail rates (exchange-traded): average daily percentage of fails about 6 percent before securities lending and 4 percent after securities lending; past daily maxima averaged 10 percent to 15 percent; 40 percent–50 percent of non-settlements lasted one day only. - Assessment: Observed. - Delivery versus Payment (Recommendation 7): - DVP in place for many exchange-traded and OTC transactions but part of transactions remain FOP; available statistics estimate DVP-settled transactions accounted for about 72 percent of total value of settled transactions in 2002 (with caveats). - Assessment: Partly observed. - CCP risk controls and resources (Recommendation 4 and related): - Clearnet margin system (SPAN), Clearing Fund (Clearing Fund up to maximum € 280 million; Clearing Fund about € 300 million as of October 2003), insurance € 150 million, Clearnet own capital € 287 million (as of December 31, 2002), on-demand guarantee from Euronext N.V.; margins total about € 5.5 billion (October 2003) of which Dutch members about € 1.5 billion. - Order of loss absorption: margin, surplus collateral and clearing fund (defaulter pays); remainder and possible replenishment (survivors pay); insurance; Clearnet own funds; parental guarantee. - Assessment: Observed for available resources and loss allocation. - Operational, custody and governance (Recommendations 11–13, 15–17): - ENL/NIEC and Clearnet have contingency plans, alternative production sites, audited procedures, frequent contingency testing; service level incidents documented (June 2003 settlement delay). - Custody protections via Securities Giro Act; segregation required at AI level; ENL/NIEC use SWIFT; disclosure frameworks published (ENL CPSS-IOSCO Disclosure Framework published). - Assessment: Observed for most operational and custody recommendations; Recommendation 14 (admission criteria) partly observed due to restrictive non-EEA participation rules and exclusion of investment firms (ENL proposing change). - Regulation and oversight (Recommendation 18): - DNB oversight based on Bank Act and implicit legal basis for securities SSS oversight; AFM formal supervisor under Securities Giro Act for ENL; Clearnet prudential supervisor is French authority with DNB/AFM oversight via exchange recognition conditions. - Indirect legal basis for oversight via exchange licensing noted; recommendation for MoF to finalize Financial Supervision Act to provide direct supervision to operators of clearing and settlement systems (implementation planned by end of 2005). - Assessment: Broadly observed. --- ### Anti–Money‑Laundering / Combating Financing of Terrorism (AML/CFT) — detailed findings and recommendations (selected) - Assessment scope and team: - Mission: December 1–14, 2003; team included IMF and legal/operational AML/CFT experts. - Regulated entities covered: banks, securities firms, insurance companies, money remittance firms, casinos. - Legal framework and international instruments: - Netherlands is FATF member; adopted separate criminal ML offense; ratified UN ICSFT (2002); Palermo Convention signed December 2000 (ratification expected by mid-2004). - DUTA (1994) created reporting obligation and MOT (FIU). - Preventive measures and reporting thresholds: - Identification required on business relationship initiation and for occasional transactions ≥ EUR 10,000. - Life insurance identification thresholds: premium > EUR 1,000 per year or EUR 2,500 one-time payment; proceeds payments > EUR 2,500. - MOT UTR volumes: 2000 almost 48,000 UTRs; 2002 over 137,000 UTRs; 2003 projected more than 170,000 UTRs. STRs: 2000 ~11,000; 2002 ~24,000; 2003 projected >35,000. Percentage of UTRs designated STRs: about 20 to 25 percent. - FIU (MOT), analysis and dissemination: - MOT (26 staff at time) analyzes UTRs; cannot itself freeze transactions—refers to BLOM/police; MOT part of Egmont Group; MOT received 1,365 foreign inquiries in 2003 and sent 76 inquiries abroad. - Recommendation: consider empowering MOT to secure assets subject to prosecutorial oversight if delays persist; improve tracking of MOT data use in investigations and convictions. - Criminalization, confiscation and investigative powers: - ML offenses: Articles 420bis/420ter/420quarter; penalties for knowing ML up to 4 years and EUR 45,000 fine; habitual up to 6 years; Article 420quarter (reasonable suspicion) maximum 1 year and EUR 45,000 fine; corporate fines up to EUR 450,000. - Confiscation regime in place (Articles 33–36e etc.); most confiscation requires conviction; provisional seizure powers Article 94a Code of Criminal Procedure. - Recommendations include ratify Palermo, clarify foreign-predicate coverage in statute, evaluate ML case outcomes under new provisions, consider increasing ML penalties, enact Acts of Terrorism Act, enact bulk currency smuggling and border cash reporting (subject to EU harmonization), consider forfeiture fund and mandatory forfeiture for large proceeds. - Supervisory and enforcement arrangements: - DNB most developed AML/CFT regime; PVK and AFM developing approaches; merger of DNB and PVK expected to harmonize approaches. - Interagency cooperation: Financial Expertise Centre (FEC), BC-MOT, MBA-unit (MOT+BLOM) used for coordination. - Law enforcement: BLOM, FIOD-ECD, Nationale Recherche and regional FER units; structural fragmentation noted with recommendations to consolidate and provide national prosecutorial control for ML/FT. - Not-for-profit organizations: - Foundations and associations often not registered with tax authorities; limited oversight; three cases identified where non-profits implicated in terrorist financing. - Recommendation: improve transparency, registration and supervisory guidance for non-profits. - FATF conformity summary (selected): - Many FATF Recommendations rated Compliant or Largely Compliant; SR VII not rated (FATF implementation period). --- ### Key cross-cutting recommendations and follow-up intentions (authorities’ responses) - Legislative and structural: - Enact Financial Supervision Act to clarify responsibilities, oversight, and consolidate sectoral laws (implementation target dates noted; draft and timetable provided in source). - Consider transferring certain Ministry of Finance powers (e.g., final approval over qualifying holdings) to supervisory authorities to increase clarity and independence. - Supervisory tools and governance: - Extend prudential reporting to solo as well as consolidated level during Basel II implementation; authorities will review solo reporting regime in light of Basel II and CAD 3. - Expand fitness and propriety assessments to key senior management beyond executive boards. - Strengthen audit committee requirements and internal audit expectations across institutions. - Require designated money laundering reporting officer at senior level. - AML/CFT specific: - Merge, clarify or harmonize DUTA and ISA; improve MOT sharing powers with supervisors; introduce administrative sanctions for non-reporting; improve recordkeeping standards and guidance; implement border cash reporting in line with EU where feasible. - Enhance training, staffing and tracking of MOT outputs and law enforcement case outcomes; consider establishing a forfeiture fund. - Market infrastructure and SSS oversight: - Approve ENL proposal to admit investment firms as participants; review admission regulations to remove unfair treatment of non-EEA credit institutions. - Support Euroclear Single Settlement Engine and cross-border DVP-link initiatives (projected 2005–2008) to increase DVP settlement. - MoF to finalize Financial Supervision Act (expected implementation by end-2005) to provide direct legal oversight of clearing and settlement operators. *Italic: Source: Excerpt and synthesis from the IMF staff report content unit _cr04310 (FSAP assessment of the Netherlands; mission conducted October 27 to November 7, 2003; AML/CFT mission December 1–14, 2003).* ### 1. Detailed Assessment of Compliance of the Basel Core Principles........................................8 ### 1. Detailed Assessment of Compliance of the Basel Core Principles ### Institutional and macroprudential setting — overview - Banking accounted for over 60 percent of total financial assets, equivalent to around four times GDP (as at the end of 2002). - Around 35 percent of banks’ assets are generated from non-domestic sources. - Around 45 percent of the banking system’s income is generated internationally. - Banks’ total income is equivalent to 5.5 percent of GDP. - Banking employees account for 2.3 percent of the active workforce. - There are 97 domestic banks registered in the Netherlands and 28 foreign branches. - Three banks—ABN AMRO, ING, and Rabobank—account for 80 percent of total bank assets and rank in the 30 largest banks worldwide; they are considered Large Complex Financial Institutions (LCFIs). - LCFIs account for about 90 percent of banking, 80 percent of securities, and 70 percent of insurance (measured in market shares). - Economic developments: - Real GDP fell by ¼ percent in 2002. - Real GDP is projected to increase by only ½ percent this year and to pick up by a further 1½ percent in 2004. - Retail prices increased by about 2 percent on an annual basis. - Amsterdam stock market index nearly tripled in value during 1996–2000, but since 2001 almost all of these gains have been reversed. - House prices rose sharply until early 2002 but have remained at a constant level since then. ### Supervisory framework, recent reforms, and institutional responsibilities - During the second half of 2002 a new cross-sector structure for financial supervision replaced a predominantly sector-oriented regime to address cross-sector market integration. - The reformed structure has two pillars organized around the objectives of supervision: financial stability and conduct of business. - Macroprudential oversight remains the responsibility of De Nederlandsche Bank (DNB). - Prudential supervision of individual financial institutions (microprudential) is the sole responsibility of: - DNB (banks, investment funds, securities firms), - PVK (Pensioen-& Verzekeringskamer) for insurance companies and pension funds. - DNB and PVK cooperate via cross board appointments, joint teams, and practices for prudential supervision of financial conglomerates; this cooperation was to lead to a full merger of activities in the course of 2004. - The former sectoral securities supervisor evolved into the Authority for the Financial Markets (AFM), responsible for conduct-of-business supervision across securities, banks, investment funds, and insurance. - To underpin the functional supervisory model, all existing sectoral legislation will be replaced by new legislation expected to be completed by January 2005. ### Legal basis, powers, and coordination mechanisms - DNB’s duties and powers are set down in the Bank Act 1998 and the Act on the Supervision of the Credit System 1992 (ASCS). - Section 4(1) Bank Act: DNB tasked with exercising supervision of financial institutions in accordance with applicable legislation. - Section 2 ASCS: DNB supervises credit institutions established in the Netherlands in the interest of their solvency and liquidity. - Section 3(2) Bank Act: DNB contributes to the smooth conduct of policies relating to prudential supervision and financial system stability within the European System of Central Banks. - The ASCS and its regulations are published in the Credit System Supervision Manual (CSSM), which sets licensing and ongoing supervision standards. - Under the ASCS, DNB has powers including withdrawal of authorization (Section 15) and other measures against non-compliant or financially distressed institutions (Sections 28, 35, 42); emergency regulations exist in ASCS Sections 70–80 for winding down credit institutions. - Some credit institutions also fall under the Act on the Supervision of the Securities Trade (ASST); supervision under ASST has been delegated to the AFM. - Coordination and information-exchange among DNB, AFM, and PVK are formalized in a Covenant (included in the CSSM as part 3214) and further elaborated in a policy rule. - The objectives of DNB are not explicitly published but are implicit in statutory powers; accountability is exercised via: - Annual reports to the Minister of Finance (Section 88 ASCS), - DNB Annual Report and Quarterly Bulletins, - Business Plan discussed with DNB’s Supervisory Board. - A review of DNB accountability mechanisms was underway and expected to result in publication of a separate annual budget and annual report regarding supervisory activities as of 2004. ### Principle 1 assessment — Objectives, autonomy, powers, and resources - Overall assessment for Principle 1: Largely compliant. - Key descriptive findings: - The ASCS/CSSM provide licensing standards and ongoing supervisory guidance; updates occur as needed for domestic and international developments, including replacement of existing laws and implementation of the new Capital Accord. - Potential for overlap and lack of clarity exists between DNB and AFM responsibilities; coordination mechanisms (regular meetings, Covenant) are in place but industry concerns about role clarity remain. - Comments and remedial guidance: - Further clarity of responsibilities between the respective regulatory agencies—both in theory and in practice—would be beneficial. - More explicit publication of each body’s objectives and how they complement one another under the new financial supervision law would be helpful. - The new law, expected to be enacted in 2005, should provide a solid legal basis; when fully implemented this Core Principle will probably be complied with. ### Operational independence, governance, and resources (Principle 1(2)) - Governance and appointment: - DNB is established as a public limited company whose shares are owned by the State and is accountable to the Minister of Finance and, through him, to Parliament. - Members of DNB’s Governing Board are appointed by the Crown for renewable seven-year terms (section 12 Bank Act). - Before appointment, a joint meeting of DNB’s Governing and Supervisory Boards draws up a list of three nominees. - Industry engagement and consultation: - DNB has long-standing practice (and ASCS requirements: sections 20(2), 21(2), 22(2)) of discussing draft regulations with the industry. - Periodic meetings are held between DNB’s Governing Board and the Netherlands Bankers’ Association. - The industry is not involved in appointments or in planning/execution of DNB’s operational activities. - Staff standards and training: - Supervision Directorate staff professional training and experience requirements are codified in the Organization Manual and Quality Manual. - In 2002, the Supervision Directorate spent EUR 733,000 on external training courses. - Supervision staff spent, on average, 14 days per person in training (external and internal courses) in 2002. - Staff are subject to insider regulations and professional secrecy requirements. - Funding and budgetary arrangements: - As a central bank, DNB has its own sources of funding. - ASCS Section 86 allows DNB to recover supervision costs from institutions, but this provision had not been invoked to date. - Following the 2002 reform, banks were expected to be charged for licensing and ongoing supervision from 2004 onwards (insurance companies and securities firms were already being charged). - DNB is independent in setting budgets for each activity; a limited power of review by the Minister of Finance of DNB’s budget for supervisory activities was to be introduced in the near future. - The Supervision Directorate’s budget permits the desired intensity of banking supervision; external experts are rarely required for operational supervisory activities but are used occasionally for research and internal projects. *Source: 1. Detailed Assessment of Compliance of the Basel Core Principles (FSAP assessment of the Netherlands, assessment conducted October 27 to November 7, 2003).* ### Section 12 (3) of the Bank Act 1998 states that the President and the Executive Directors of DNB may ### _cr04310 - Section 12 (3) of the Bank Act 1998 states that the President and the Executive Directors of DNB may ### Governance and removal of DNB Board members - Section 12 (3) of the Bank Act 1998: the President and the Executive Directors of DNB may be suspended or relieved from office only if they no longer fulfill the conditions required for the performance of their duties or if they have been found guilty of serious misconduct. - Removal or suspension of Board members, who are appointed by the Crown through a Royal Decree, also requires a Royal Decree. - A dishonorable removal or suspension without specified grounds in the Royal Decree would in any case become public through Parliamentary debate. - Assessment: Compliant. ### Ministry of Finance role and planned changes - The legal framework grants powers of authorization and non-objection to shareholders to the Ministry of Finance; originally intended to permit intervention to prevent anti-competitive activity. - Anti-competitive powers have been devolved to the Ministry of Economic Affairs; the Ministry of Finance requirement is described as somewhat redundant. - Operationally DNB remains reliant on the Ministry of Finance to give technical ‘non-objection’ when a change of shareholder control is required; DNB states this is always done on their advice which has never been overruled. - Plans exist to streamline the process and give operational responsibility for such legal decisions to DNB; this change is expected to improve transparency. - From January 1, 2004, final approval from the Minister of Finance will be delegated except if one of the major banks or insurers takes a participation in another. Ministerial approval is retained in such cases because of the potentially large political and budgetary consequences of a crisis affecting such an entity. ### DNB staffing, resources and organizational changes - DNB staff is assessed as being of a very high quality; supervisory teams comprise a balanced mix of skills. - DNB appears to have an adequate level of resources both in aggregate and at the individual team level. - Potential resource constraints may arise if large banks expand their more complex operations to the global markets. - The amalgamation of the DNB and PVK will lead to a reconsideration of the balance of resources for the combined entity; unless resources rise, resource allocation must be managed carefully. ### Legal framework for banking supervision — authorization and prudential rules (Principle 1(3) & 1(4)) - The ASCS assigns DNB the authority to grant and withdraw authorization to pursue the business of a credit institution in the Netherlands (Sections 6 and 15). - Sections 20, 21 and 22 of the ASCS authorize DNB to give credit institutions directives within the scope of prudential supervision (solvency, liquidity and administrative organization). Different directives may apply to different groups; DNB may waive compliance in individual cases. - DNB must consult the banking industry before imposing new rules but does not need the industry’s consent; a collegiate approach usually leads to consensus. - Section 54 authorizes DNB to request any information it considers necessary; Section 62(1) requires institutions to provide the information within a specified period. Section 55 obliges institutions to furnish financial information on a regular basis; contents and format are determined by DNB. - Assessment: Compliant. - Comment: Section 22’s interpretation of ‘administrative organization’ includes governance issues, internal controls, risk management and integrity. An amendment to provide an explicit legal basis for setting prudential rules with respect to integrity will come into force December 1, 2003. ### Supervisory powers, sanctions and corrective measures (Principle 1(4)) - Under the ASCS, DNB has extensive discretionary powers and practically unrestricted access to any information in the possession of an institution (or a third party) deemed necessary for supervision. - Violations may lead to punitive or corrective actions. Formal instruments available to DNB include: - giving notification on the course of action to be pursued as of a set date, the appointment of a silent receiver, or other measures pursuant to Section 28 of the ASCS; - the imposition of a fine or a cease and desist order under penalty (ASCS Section 90, subsections (b) to (m)); - withdrawal of the authorization pursuant to Section 15 of the ASCS; - a report to the public prosecutor or to other authorities responsible for enforcement of legal standards (e.g., the Economic Investigation Agency or the Disclosures Office). - Section 28 empowers DNB to impose far-reaching measures if a situation compromises or may compromise liquidity or solvency; DNB may act on its own qualitative assessment. - Institutions have a right of appeal to the court against formal decisions and measures taken by DNB. - Assessment: Compliant. - Comment: The legal framework gives DNB a strong basis to ensure compliance; however, practice has tended toward mutual cooperation rather than firm disciplinary action. ### Legal protection for supervisors (Principle 1(5)) - Neither the ASCS nor any other law explicitly protects DNB or its employees against third-party legal actions for damages arising from supervisory activities; such explicit provisions are deemed unnecessary because the Dutch legal system provides sufficient protection. - Under Section 6:170 of the Civil Code, an employer is liable for the actions of his employees; consequently, employees of DNB’s Supervision Directorate enjoy adequate legal protection against liability suits, provided actions are carried out in good faith. - DNB has sufficient financial resources to cover the costs of defending itself against legal actions concerning its supervisory tasks. - Assessment: Compliant. - Comment: Reliance is placed on the Civil Code and court precedents confirming employer liability protects supervisors acting in good faith. ### Information sharing and confidentiality (Principle 1(6)) - The ASCS classifies information supplied by supervised institutions as secret and usable only for performance of duties under the ASCS; the Act details conditions under which secrecy may be breached. - Section 64: data and information obtained from individual corporations and institutions may not be published and are to remain secret in principle. - Sections 65 ff.: list conditions for exchanging data with domestic or foreign authorities responsible for supervision; conditions include DNB’s confidence that the recipient will use information exclusively for supervision and will safeguard secrecy. - Exchange of supervisory information is frequently arranged by formal bilateral agreements; DNB has concluded such agreements with other domestic financial sector supervisors and a large number of foreign supervisors (including a domestic Covenant and various international Memoranda of Understanding). - Assessment: Compliant. - Comment: Information sharing procedures are in place and appear to function in practice. ### Permissible activities and use of the word “bank” (Principle 2) - The ASCS targets corporations or institutions pursuing the business of a credit institution; Section 1(1) defines the concept of a credit institution. - Dutch law embraces the concept of the ‘universal bank’; Section 7 states an authorized credit institution is allowed to carry out at least the activities listed in the annex to the Second Coordination Directive of the European Union, unless DNB’s authorization states otherwise. - Through licensing, DNB controls the full scope of activities of a credit institution; activities not listed in the annex (e.g., securities clearing, insurance, non-financial activities) are covered by DNB’s consolidated supervision when relevant licenses are obtained. - The ASCS prohibits deposit-taking unless authorized by DNB (Section 6(1) in conjunction with Section 1(1)). - All authorized credit institutions are entered into a public Register under Section 52; restrictions on permitted activities are listed in the Register entry. - Section 83 prohibits use of the word ‘bank’ and derived forms/translations unless authorized; Section 82(1) reserves receiving repayable-on-demand funds to authorized credit institutions. - Sanctions for violations include administrative fines, cease and desist orders by DNB, or prosecution under the Economic Offences Act. - Assessment: Compliant. ### Licensing criteria and process (Principle 3) - The ASCS lists objective and subjective criteria that must be met before authorization is granted; subjective criteria give DNB extensive freedom in assessment. - DNB is both licensing and supervisory authority, but licensing powers are communicated via a recommendation to the Ministry of Finance. - Section 9: DNB will grant authorization unless any conditions listed in subsection 1 under (a) to (h) apply or grounds for refusal in subsections (2) to (5) exist. - Section 8: an application must include the information described by subsection (2); an application is not considered until all necessary information is received. - Authorized institutions must continue to satisfy admission criteria; failure may lead to withdrawal under Section 15. - Shareholder and group transparency provisions: - Section 9(1)(f): shareholders may not exert influence counter to sound banking policy (e.g., weak financial position or nontransparent origin of funds). - Section 9(3): refusal allowed if the prospective institution is part of a group with nontransparent control structure preventing adequate supervision. - Section 24: anyone with a qualifying holding must receive a ‘declaration of no-objection’ (‘DonO’) issued by the Minister of Finance or, in specific cases, by DNB on behalf of the Minister; without a DonO holding a qualifying holding is not allowed. DonO assessment includes the applicant’s financial soundness and ability to provide additional support if needed. - Capital requirement: a credit institution must hold a minimum amount of capital or ‘own funds’ (see Section 11 of the ASCS and the Decree issued by DNB pursuant to this Section included as section 3106 in the CSSM). - Fitness and propriety: at authorization and while authorized, members of management and supervisory boards must meet requirements of fitness and propriety. - Assessment: Compliant. *Source: Excerpt from the IMF staff report content unit _cr04310.* ### Section 9(1) under (b)–(e) of the ASCS, while Sections 14 and 15 of the ASCS provide for measures ### Section 9(1) under (b)–(e) of the ASCS, while Sections 14 and 15 of the ASCS provide for measures which DNB may take if these requirements are no longer met. The requirements with regard to expertise are detailed in the Regulation on Organization and Control (ROC) (a binding regulation issued by DNB on the basis of Section 22(1) of the ASCS – see CSSM section 4201) while integrity requirements are elaborated in the Policy Rule on Integrity Testing (CSSM section 3212). The assessment of prospective members of a management or supervisory board involves interviews and questionnaires, and the persons named as referees are asked to give their judgment. ### Authorization, fit-and-proper assessment, and ongoing supervision - Requirements: - As part of an application for authorization, a program of operations (business plan) must be presented detailing the kind and size of activities planned with a projection of the resulting financial developments covering at least three fiscal years. - Business plan must provide insight into formal and actual control structure and prospective administrative organization, including financial administration and internal control. - Relevant legal provisions: Sections 8, 9 and 22 of the ASCS; detailed corporate governance and organization/control requirements in the ROC. - If authorization concerns a subsidiary or branch of a foreign bank, application should include a written statement by the relevant foreign supervisor approving establishment in the Netherlands (ASCS, Section 8(2) under (j)). - An authorization may be withdrawn if information provided was incorrect or incomplete to such an extent that the decision would have been different (ASCS Section 15(1) under (j)); historically this has never occurred in practice. - Supervision is continuous and includes assessment of ability to realize stated objectives and compliance with restrictions attached to authorization. - Supervision assumes collective responsibility of a bank’s management board for implementation of organizational and risk control measures (ROC, section 24). - DNB recommends constituting management boards so the board as a whole understands risks and controls; regular supervision assesses the quality of management on an ongoing basis. - Assessment: - Largely compliant. - Comment: DNB assesses fitness and propriety of Supervisory and executive board members at licensing and on an ongoing basis. Essential criterion seven requires evaluation of proposed directors and senior management for expertise and integrity. Recommendation: expand fitness and propriety assessment to cover other key senior management functions (persons in senior management positions but not on the executive board), particularly relevant for larger institutions and banking groups. ### Ownership (Principle 4) - Legal framework and powers: - Under Section 24(1) of the ASCS, no-one may hold, acquire or increase a qualifying holding in a credit institution or exercise control attaching to a qualifying holding without a declaration of no-objection from the Ministry of Finance on the advice and recommendation of DNB. - Qualifying holding defined (ASCS Section 1(1) under m) as direct or indirect holding of more than 5 per cent of issued share capital, or ability to exercise more than 5 per cent of voting rights, or comparable degree of control. - DNB has decisive influence in the decision-making procedure; a declaration of no-objection is granted unless, in DNB’s opinion, the holding would: - would or could lead to an influence conflicting with sound banking policy; - would or could lead to a group with insufficient transparency in formal or actual control structure, impeding adequate supervision; - would or could lead to an undesirable development of the credit system. - Reporting: pursuant to Section 27 of the ASCS, institutions must inform DNB every year in July of identity of every natural person or legal entity holding a qualifying holding to the extent known; changes causing holding to exceed or fall below 5, 20, 33, or 50 percent or causing subsidiary status must be reported as soon as aware. - Assessment: - Largely compliant. - Comment: Actual legal power to accept or reject transfers rests with the Ministry of Finance, but DNB has decisive vote in practice and has never been overruled. Essential criterion three requires the supervisor to have authority to reject any proposal for change in significant ownership or controlling interest; due to ministerial role DNB cannot be fully compliant. Dutch authorities are considering streamlining authorization to transfer some or all decision making to DNB; full transfer would be expected to achieve compliance. ### Investment criteria (Principle 5) - Legal framework and powers: - Section 23 of the ASCS requires prior declarations of no-objection from DNB for several acts, including: - holding, acquiring or increasing a qualifying holding in another enterprise or institution if such holding is 10 percent or more; - taking over all, or a considerable part of, the assets and liabilities of another enterprise or institution; - merging with another enterprise or institution. - If such acts are performed without prior declaration, the act must be annulled within a period specified by or on behalf of the Minister of Finance, unless a declaration of no-objection is issued retroactively. - Declaration of no-objection will be issued unless DNB is of the opinion that the intended act: - would or could conflict with the applicable provisions of the solvency directive or the large-exposure rule; - would or could conflict with sound banking policy in any other way; - would or could lead to an undesirable development of the credit system. - DNB may impose conditions on declarations; criteria for assessment detailed in section 3203 of the CSSM. Credit institutions required to inform DNB annually of participating interests (CSSM, Statement/form 8036). - Assessment: - Compliant. - Comment: ASCS participations provisions were under revision at time of writing to simplify rules and reduce administrative burden. Some roles still carried out by Ministry of Finance; planned revisions expected to improve transparency. ### Capital adequacy (Principle 6) - Legal framework and practices: - Section 20 of the ASCS empowers DNB to impose regulations on minimum own funds proportional to risks. - Solvency Directives (CSSM, chapter 40) provide definitions and calculation methods for ‘actual own funds’ and risks (credit and market risks including off-balance-sheet risks). - Solvency ratio calculated on consolidated business of a credit institution. Netherlands, as EU Member State, has implemented EU solvency directives which incorporate the current Basel Capital Accord; directives apply to all banks. - Where Basel or EU requirements lack specificity, DNB has framed policies within EU Directives and Capital Accord (examples: innovative capital instruments CSSM, section 4003b1; credit derivatives CSSM, section 4011b1). - DNB has set separate capital requirements for country risk in certain circumstances (see Core Principle 11). - If solvency (or liquidity) is compromised, DNB may take measures under Section 28 of the ASCS, including directions or appointment of a silent receiver. - Periodic reporting: under Section 55 of the ASCS banks must file prudential reports monthly or quarterly; capital ratios and components reported monthly. Reporting requirements included in chapters 7 and 8 of the CSSM. - ROC includes guidelines for risk and solvency assessment and control; requires adequate solvency control systems. On-site exams determine implementation. - DNB expects banks to maintain a higher capital ratio than regulatory 8 percent minimum: expects minimum of 10 percent in large banks and for other banks a somewhat higher level depending on risk profile. - For banking subsidiaries fully and irrevocably guaranteed by parent bank as set out in Article 403 of the Civil Code, capital adequacy ratio is calculated and reported only on a consolidated basis. Subsidiaries not covered by this guarantee must calculate and report individual capital ratio. - Section 11 of the ASCS requires a credit institution to hold a minimum amount of own funds set by DNB; minimums specified in Decision on Minimum Own Funds (CSSM, section 3106). Example: for universal banks, minimum own funds amount to five million Euro. - Assessment: - Largely compliant. - Comments: - DNB and commercial banks preparing for implementation of the new Capital Accord (target late 2006). Preparations include overhaul of CSSM (reflecting new Financial Supervision Act due in 2005), automated reporting systems, staff training, and communicating DNB interpretations. - During Basel II implementation, DNB will consider extending prudential reporting requirements on a solo basis to parent banks; positive step supported by assessment. Principle five calls for capital ratios on both consolidated and solo basis for banking entities; for subsidiaries fully covered by parental guarantee (Article 403 Civil Code) the criterion purpose has been met. - DNB will be fully compliant after introducing solo supervision for parent banks, but Dutch authorities will await decisions on new capital requirements tables in Basel (Basel II) and in Brussels (Capital Adequacy Directive 3) before taking action. ### Credit policies (Principle 7) - Requirements: - ROC (CSSM section 4201) requires each authorized bank to have clearly formulated policies aimed at risk control and sound business practices (ROC subsection 1.2.2.). Credit risk concerns specified in ROC section 2, particularly subsection 2.1. - Credit risk control policy must provide for authorization procedures, setting and monitoring of limits, procedures and measures for emergency situations (ROC section 34). - Policies must be translated into clear procedures and measures integrated into day-to-day activities of relevant personnel (ROC sections 10 and 36). - Information systems: sections 11 and 38 of ROC require an information system adequate for systematic measurement, monitoring and documentation of all credit risks; timely reporting in accordance with reporting lines; system for collecting, processing and providing internal and external information to enable effective control by management (ROC section 17). - Banks must systematically monitor compliance with organizational and administrative procedures for controlling credit risks (ROC section 37) and update control mechanisms regularly (ROC sections 5 and 6). - ROC section 15 requires segregation of duties; sections 27 and 32 address management and supervisory board positions regarding conflict of interest avoidance. - DNB’s on-site inspections periodically review formulation, implementation and compliance with credit risk control procedures and measures; references to Risk Assessment Guidelines in Risk Analysis Handbook and on-site inspection work programs (Handboek Werkprogramma’s). - Section 54 of the ASCS gives DNB unlimited access to all information it considers necessary. - DNB recommends larger and more complex banks establish a credit risk committee supervising control of credit risks (ROC section 37). - Assessment: - Compliant. - Comment: Guidelines are comprehensive and sufficiently detailed. ### Loan evaluation and loan loss provisioning (Principle 8) - Requirements and practices: - ROC section 38: each bank must have an adequate information system for systematic measurement, monitoring and documentation of all credits; information must provide picture of overall credit exposure per borrower/group, taking into account collateral value. Regular credit risk reports must include statement on any (impending) troubled loans. Provisions for credit risks and underlying assumptions must be clearly documented. - ROC section 36: banks required to have procedures and systems for identifying and monitoring troubled loans. Recommendation to classify credits (on- and off-balance sheet) in risk categories, usable for provisioning. - Valuation and accounting: - Book 2, Title 9 of the Civil Code prescribes valuation of balance sheet items in annual accounts; elaborated in Decree on Asset Valuation. - Guidelines on Annual Reporting by the Council on Annual Reporting (Chapter 600) contain banking-specific recommendations and firm rules for valuation, profit and loss calculation and presentation. DNB requires banks to apply these guidelines in drafting periodic reports to DNB. - Implication: loans valued at nominal sum minus any write-downs deemed necessary; write-downs on individual claims must reflect perceived inherent risks; assessment margin in write-downs must not be used to build hidden reserves. - Institutions should develop loan classification and provisioning policies suited to their conduct of business within prudent behavior limits. - DNB regards loan evaluation and loan-loss provisioning as important in ongoing supervision; references to Credit Risk Guideline in Risk Analysis Manual (page 401) and Work programs Manual (Werkprogramma particuliere en zakelijke kredietverlening page 2003). - Assessment: - (Assessment status not explicitly repeated in provided excerpt; detailed requirements and supervisory focus described above.) *Source: IMF staff summary of Dutch supervisory framework as presented in the provided PDF excerpt.* ### conclusion that banks are expected to have in place adequate policies, practices and procedures with ### _cr04310 - conclusion that banks are expected to have in place adequate policies, practices and procedures with ### Asset quality and loan loss provisioning - Banks are expected to have in place adequate policies, practices and procedures with respect to the evaluation of asset quality (including off-balance-sheet exposures) and of the adequacy of loan loss provisioning and reserves. - Reporting requirements: - At least once a year, institutions must report the size of their provisions to the supervisor by means of Statement/form 8032 of the CSSM. - Large internationally active Dutch banks provide DNB with quarterly reports on asset quality and loan loss provisioning directly based on their internal management information system. - Dedicated supervisory teams analyze these reports as soon as they come in. - Biannually a comparative analysis of large banks’ reports is made to identify trends in credit portfolios and risk profiles. - Supervisory assessment and actions: - DNB’s Supervision Directorate makes periodical assessments of banks’ organizational framework and policies for provisioning, including assessment of portfolio quality and the size of provisions. - External auditors assess the size of provisions; this assessment figures importantly in periodic contacts between the Supervision Directorate and the external auditor. - If DNB concludes that provisions are too small, it may instruct an institution to increase its provisions. - Assessment: Compliant - Comments: - No formal or prescriptive loan loss requirements are set out by the Central Bank as the provisioning system is principle rather than rules based. - The system is in line with certain other EU regulators and seems to work well in practice. - DNB may overrule provisioning levels recommended by the external auditor; differences tend to focus on the level of general provisioning rather than specific loans. ### Principle 9 — Large exposure limits - Requirement: supervisors must be satisfied that banks have management information systems enabling identification of concentrations and supervisors must set prudential limits to restrict exposures to single borrowers or groups of related borrowers. - Legal and regulatory framework: - Under Section 20(3) (a5) of the ASCS, DNB may give specific regulations regarding large exposures within the solvency directives. - The Large-Exposure Rule is in CSSM section 4081 and defines ‘exposure’ (CSSM section 4081-03.1) and ‘group of connected clients’ (CSSM section 4081-03.2). - Elements include exposure limits (in percentages of the actual own funds) and risk reporting requirements (CSSM section 4081-02.1). - Large exposures as a percentage of capital as required by EU directives is measured on a consolidated basis rather than on a solo basis. - Reporting and systems: - Banks must have management information systems enabling timely identification and reporting of concentrations and monitoring of compliance with large-exposure regulations. - Large exposures are reported each month to DNB on a consolidated basis. - Concentration and correlation of risks are addressed in individual bank credit risk analysis and periodical on-site inspections; Section 35 of the ROC requires systematic analyses of credit risks, taking into account sectoral and geographical concentrations and correlation. - Assessment: Compliant - Comments: The DNB considers the large exposure limits to among the most important prudential measures and ensures that the EU directive on large exposure is fulfilled. ### Principle 10 — Connected lending - Requirement: supervisors must have measures to ensure lending to related parties is on an arm’s-length basis, effectively monitored, and risks mitigated. - Regulatory coverage: - Section 35 of the ROC requires banks to consider contractual agreements with connected parties in credit risk analyses. - Section 36 of the ROC requires banks to have procedures and measures regarding lending to connected parties. - No hard limits are set on connected lending to other parts of a consolidated group. - Because large exposures are only measured at the consolidated level, the 25 percent limit on large exposures will not apply to intra-group lending. - Risk Assessment Guidelines reference concentration and correlation and lending to affiliated parties in multiple guidelines (Credit risk guideline 401/3; Legal & integrity risk guideline 409/3; Control assessment guidelines 500/3; Organization guideline 502/1 and 502/4). - Specific regulation: - DNB issued the ‘Regulation on credit facilities to individual directors and their families’ which: - Aims to prevent disproportionately advantageous lending to directors, second-level managers, supervisory board members, group directors and certain relatives. - Limits the size of such loans and requires usual collateral. - Requires internal reporting and monitoring involving the external auditor. - Assessment: Compliant - Comments: It is recommended that connected lending limits also be applied to the solo entity. ### Principle 11 — Country risk - Requirement: supervisors must be satisfied that banks have adequate policies and procedures for identifying, monitoring and controlling country risk and transfer risk and for maintaining appropriate reserves. - Framework and principles (country risk directives in CSSM under 4091): - a) Country risk management is primarily the responsibility of the management of each bank; - b) DNB formulates explicit capital and provisioning requirements for country risk in respect of major countries; - c) Country risk policy addresses both backward-looking situations (actual or imminent payment arrears) and forward-looking situations (increasing probability of payment arrears). - Reporting: - Section 11 of the directives requires banks to prepare timely reports on their country risk position by means of two returns: a half-yearly return for prudential purposes and a quarterly return for the BIS (reference to section 7023 of the CSSM). - Bank policies and supervision: - ROC requires banks to have clearly formulated policies covering country risks and transfer risks, translated into organizational and administrative procedures (Sections 34 and 35 of the ROC). - DNB monitors compliance through on-site and off-site inspections; Transfer risk is an evaluation topic under ‘default probability’ (page 401–2 of the Risk Analysis Handbook). - Country risk and transfer risks are points of attention in the Work Programs Manual. - DNB has regular (approximately six monthly) meetings with the industry to discuss future developments and risks on a global basis. - Assessment: Compliant - Comments: The DNB has a comprehensive system for country risk, incorporating guidelines for loan loss provisioning and additional capital requirements. ### Principle 12 — Market risks - Requirement: supervisors must be satisfied that banks have systems to accurately measure, monitor, and control market risks; supervisors should have powers to impose limits and/or specific capital charges. - ROC requirements: - ROC subsection 1.2.2 and section 2 (particularly subsection 2.2) require banks to have market risk control policies providing authorization procedures, setting and monitoring of limits, and procedures for emergency situations (ROC section 39). - Market risk includes price risk (securities, commodities and derivatives), interest rate risk and foreign exchange risk, both within and outside the trading book. - Banks must have procedures integrated into day-to-day activities (ROC sections 10 and 41). - Banks must have information systems adequate for systematic measurement, monitoring and documentation of all market risks (sections 11 and 43 of the ROC). - Banks are obliged to perform systematic analyses of market risks, including simulations of earnings and capital, concentration of risks in the trading book and correlations (section 40 of the ROC). - Compliance with procedures for controlling market risks must be systematically monitored (ROC section 42). - Supervisory tools and capital framework: - Market risk exposures are addressed within DNB’s solvency directives (CSSM section 4001-01) requiring banks to maintain at all times a minimum level of capital, including capital requirements for foreign exchange risk, gold price risk, commodities positions and market risk on financial instruments in the trading book. - Non-compliance with solvency directives can lead to corrective measures (additional capital charges and/or limitations to risky activities) under Section 28 of the ASCS. - Banks may use internal value-at-risk models as an alternative to standardized methods (CSSM section 4041); permission is required and conditional on model specifications, back-testing, risk control organization and adequacy of internal risk management (CSSM section 4041-02, 4041-03, 4041-05). - Assessment of models is normally conducted by DNB’s capital markets specialists, who are involved in day-to-day supervision and kept current through frequent in-house courses. - Assessment: Compliant - Comments: DNB uses a comprehensive range of tools, including capital market specialists, to ensure banks can measure, monitor and control market risk. Policies on imposing capital charges take account of the evolving nature of financial markets. ### Principle 13 — Other risks (comprehensive risk management) - Requirement: supervisors must be satisfied banks have a comprehensive risk management process (including board and senior management oversight) to identify, measure, monitor, and control all other material risks and, where appropriate, hold capital against these risks. - ROC responsibilities and structure: - Pursuant to the ROC each authorized bank is responsible for organizing and controlling its business so it is conducted in a (risk) controlled and sound manner (ROC section 1). - Organizational arrangements and control mechanisms must identify, measure, monitor and control risks related to the size and nature of each institution and be adjusted periodically. - Relevant ROC provisions: 1.2.1 (Principal objectives), 1.2.2 (Risk control), 1.2.3 (Organizational measures), 1.2.4 (Information and communication), 1.2.5 (Examination, evaluation and rectification). - The management board is responsible for systematic monitoring of the effectiveness of arrangements and controls (ROC section 25). - The supervisory board is required to assess in outline the organizational arrangements and control mechanisms established by the institution (ROC section 29). - Sections 10 and 12 of the ROC require translation/implementation of risk control policy into organizational and administrative procedures communicated to all relevant personnel with clear allocation of duties, responsibilities and authority. *Source: _cr04310 - conclusion that banks are expected to have in place adequate policies, practices and procedures with (PDF).* ### Section 20 of the ROC requires banks to have in place external communication channels which allow ### Section 20 of the ROC requires banks to have in place external communication channels which allow ### ROC directives and defined risk areas - The ROC contains specific directives for the organization and control of the following risk areas: - Credit risk (subsection 2.1) - Market Risk, including price risk, interest rate risk and foreign exchange risk (subsection 2.2) - Liquidity risk (subsection 2.3) - Operational risk (subsection 2.4) - Information technology (subsection 2.5) - Outsourcing (subsection 2.6) - Integrity risk (subsection 2.7) - Rights and obligations of clients (subsection 2.8) - Directives require banks to have clearly formulated policies for controlling these risks, documented and communicated to relevant personnel, addressing identification, measuring, monitoring and control. ### Solvency and liquidity directives; reporting and supervisory information - Apart from ROC directives, DNB has issued solvency and liquidity directives (based on sections 20 and 21 of the ASCS). - The solvency directives require banks to hold capital against interest-rate risk (in the trading book) (CSSM section 4025). - The liquidity directives (see the Memorandum on the revision of the liquidity test in CSSM section 6101) seek to ensure that banks are in a position to cope with any acute short-term liquidity deficit. - Solvency and liquidity directives contain (quantitative) standards which must be met on an ongoing basis. - Banks must file monthly reports on their financial positions (see CSSM section 7000 for more details about the prudential returns regime). - Reporting requirements enable DNB to obtain detailed insight into the various activities of each bank, including foreign currency liquidity transformation. ### Assessment (ROC and prudential reporting) - Assessment: Compliant - Comments: - DNB has comprehensive guidelines to ensure that banks can mitigate risks. - DNB receives timely prudential information and uses on-site investigations to ensure compliance. - The proposed new code of corporate governance will further strengthen banks' risk management processes. ### Principle 14 — Internal control and audit: legal and supervisory framework - Principle summary: Banking supervisors must determine that banks have internal controls adequate for their nature and scale, including delegation arrangements, segregation of functions, reconciliations, asset safeguards, and independent internal or external audit and compliance functions. - Legal basis and requirements: - Civil Code of the Netherlands (CC) provisions cited: CC Section 2:7; CC Section 2:138. - ASCS requirements regarding expertise of management board members; management board must consist of at least two persons; supervisory board should consist of at least three persons. - Under section 22 of the ASCS, DNB may issue recommendations or general directives regarding administrative organization, financial accounting systems and internal control. - DNB has issued the Regulation on Organization and Control (ROC; CSSM part 4201). - ROC structure and obligations: - ROC focuses on risk control, organizational measures, information and communication, and evaluation and rectification. - Institutions are responsible for organizing and controlling business processes in a controlled and sound manner. - Organizational arrangements and control mechanisms must be documented systematically and accessibly. - For each risk area the ROC contains minimum standards. - Sections 24–28: responsibilities of the management board for oversight of organizational arrangement and control mechanism. - Sections 29–33: role and duties of the supervisory board in relation to the management board, organization and the audit function. - Section 15: banks should allocate duties, responsibilities and authority so activities are carried out in a controlled and sound manner; delegated duties must be clearly defined; segregation of duties is essential. - Internal audit expectations: - The ROC stipulates a permanent internal audit function reporting directly to the most senior management. - Internal audit is defined as “the function that is responsible for examining and evaluating the organizational arrangement and the control mechanism”. - Under the two-tier system internal audit reports to the management board; the Audit Committee is a committee of the supervisory board. - ROC recommends that, depending on size and complexity, credit institutions should have an Audit Committee. - In practice the supervisory boards of larger banks have an Audit Committee. - On-site examinations: - Quality of management and control structure are key elements during on-site examinations. - Examinations review organizational arrangement and control mechanisms, risk control by management board and senior management, and the internal audit function (independence, reporting lines, resources, audit methodology). - Supervisor has unlimited access to internal audit files; reports from internal audit are important supervisory information. ### Assessment and supervisory recommendations for internal control - Assessment: Compliant - Comments: - DNB has comprehensive policies requiring sound internal controls and acceptable corporate governance procedures. - The requirement for non-executive group functions could be strengthened, as it appears only to be a recommendation for large banks. - Additional criteria two calls for the supervisor to require the internal audit function to report to an Audit Committee. - The DNB should consider strengthening this recommendation and applying it to all institutions. ### Principle 15 — Money laundering: framework and supervisory measures - Principle summary: Banking supervisors must determine that banks have adequate policies, practices and procedures, including strict “know-your-customer” rules, to prevent use by criminal elements. - Legal and regulatory instruments: - Rules and regulations on money laundering can be issued under Section 22 of the ASCS. - ROC includes a chapter on Integrity Risk that covers a wider range of issues than money laundering alone. - Section 65: management board must establish a policy plan covering standards for dealing with clients and external parties, private investment transactions and recruitment with required expertise and integrity. - Relevant ROC requirements and regulations listed: - Insider regulation directive (Credit System Supervision Manual section 3205). - Regulation on credit facilities to individual directors or other senior officers (Credit System Supervision Manual 3206). - Regulation on protected accounts (Credit System Supervision Manual section 3211). - Relevant legislation: - The Disclosure of Unusual Transactions (Financial Services) Act. - The Identification Financial Services Act 1993. - International standards and guidance: - DNB distributed the Basel Committee on Customer Due Diligence document for review and implementation among Dutch banks. - In consultation with the Netherlands’ Bankers Association, it was decided not to issue specific regulations based on the Basel document but to base customer due diligence policy on the ROC with due observance of the Basel standards. - In 2003 the report was complemented with an Explanatory memorandum regarding Customer Due Diligence for banks (in co-operation with the Netherlands’ Bankers Association). - Compliance function and supervisory tools: - Section 69 of the ROC requires an independent compliance function to monitor compliance with internal standards and realization of rectification of detected deficiencies and control failures. - In January 2002 DNB, PVK and AFM issued the Recommendations to Dutch financial institutions with regard to incidents and integrity-sensitive functions (CSSM part 4201b1). - These Recommendations are expected to be turned into binding rules based on a new Section 22a of the ASCS by the end of 2003. - Assessment, inspection approaches and enforcement powers: - Integrity aspects and anti-money-laundering measures are assessed via on-site inspections (regular or special), meetings with staff and management, and review of internal auditors’, external auditors’ and compliance officers’ reports. - Supervision Directorate has a separate Integrity Unit for in-depth investigations; an “Integrity tool” provides standardized working schedules for day-to-day assessments. - DNB is responsible for monitoring compliance by credit institutions with the Disclosure of Unusual Transactions Act and the Identification Financial Services Act; non-compliance is a criminal offence and can be prosecuted. - Banks and staff are protected against prosecution if reporting of unusual transactions has been done in good faith. - Law prohibits banks and their staff from informing clients on reported transactions. - If it becomes apparent that a bank has not met legal reporting requirements, DNB has the right to correct the omission. *Content unit: _cr04310 - Section 20 of the ROC requires banks to have in place external communication channels which allow* ### Section 65 of the ASCS empowers DNB to exchange, under certain conditions, supervisory ### Section 65 of the ASCS empowers DNB to exchange, under certain conditions, supervisory ### Section 65 — Information exchange - Description: - Section 65 of the ASCS empowers DNB to exchange, under certain conditions, supervisory information with other supervisors in the Netherlands and abroad. - Within the Netherlands information may be exchanged with the legal authorities on matters relating to criminal offences which may affect the financial system. - If a foreign supervisor asks for information, which DNB has obtained from the Dutch legal authorities, section 65 of the ASCS requires prior approval by the Minister of Justice. - Related confidentiality and disclosure: - Information on individual institutions gathered by DNB in the course of its examinations must be kept strictly confidential (ASCS Section 64). - Information may be exchanged with other supervisors, provided they are held to equivalent confidentiality requirements (ASCS Section 65). - DNB may, under certain conditions, disclose information on a failed bank in the context of civil proceedings (ASCS Section 65a). *Assessment: Largely compliant (see comments under AML function and external auditor role).* --- ### Anti–money‑laundering organization and external auditor role - Description: - As part of his annual audit, the external auditor will also form an opinion on whether the bank has an adequate organization in place to meet the (legal) requirements on money laundering. - On the basis of the ROC he will judge the adequacy of the compliance function in this respect. - Assessment: Largely compliant - Comments / Recommendation: - Essential criterion four requires that the supervisors determine that banks appoint a senior officer with "explicit responsibility for ensuring that the banks polices and procedures are at a minimum and in accordance with local statutory and regulatory anti money laundering requirements". - To become fully compliant with this principle the DNB will need to make require banks to have a designated "money laundering reporting officer" who has senior status within them organization. This could be a compliance officer. --- ### Principle 16 — On-site and off-site supervision - Description: - DNB has the authority to obtain any information from banks, which it deems necessary for the fulfillment of its supervisory duties (ASCS Section 54). - Under Section 55 DNB may ask to be sent periodic reports and under Section 56a, bank managers are obliged to supply all information requested by DNB. - Management of a bank is obliged to allow DNB to verify the information supplied and to assist DNB in doing so (Section 62) — legal basis for on-site inspections. - Banks are obliged to inform DNB immediately of any full or partial non-compliance with the requirements for administrative organization and internal control (ASCS Section 56). - Off-site examinations: primarily performed on the basis of standardized periodic returns of quantitative prudential data; external auditor certifies standardized returns once every year; management letters are made available to DNB. - DNB possesses a risk analysis system, supported by a software tool, which it uses to identify areas meriting attention during on-site inspections. The risk analysis system is "open ended" in design. - On-site inspections: frequency determined by systemic risk (size) and risk analysis results; also determined by availability of resources. Work programs support examining officers and have been combined in a Work Programs Manual (Handboek Werkprogramma’s – available in Dutch only). - Quality assurance: on-site and off-site examinations and other supervisory processes are described in the Quality Manual (Handboek Kwaliteit – in Dutch only); processes are periodically assessed by internal audits within the Supervision Directorate based on section 9.6 of the Quality Manual. - Examination findings: discussed with the bank, recorded in a letter detailing improvements; progress monitored via a progress monitoring system; internal evaluation after each examination based on a fixed set of criteria. - On-site examinations contribute to assessment of the external auditor; findings are discussed during the annual meeting between DNB and the external auditor (bank management usually present). - Assessment: Compliant - Comments / Recommendations: - The use of onsite and offsite tools seems balanced and appropriate; covers all banks and is proportionate to DNB’s measure of impact. - It is recommended that strategic issues and those of corporate governance are considered before other more detailed aspects are included in the work plan. - It is recommended that at some point the risk assessment of an institution is "finalized" and communicated back to the bank. This may include subsequent action required from an institution or further DNB examinations. --- ### Principle 17 — Bank management contact - Description: - Regular contacts with bank management complement on-site inspections and off-site analyses to obtain a thorough understanding of an institution’s operations and developments. - Intensity, type and topics of contacts vary by institution size, activities and risk areas; in larger organizations contacts occur at management board and heads of divisions level. - The Banking Supervision Quality Manual prescribes quality standards for conduct, reporting and follow-up of meetings with banks’ management. - Types of meetings and purposes: - Meetings with management: - Periodic meetings with the management board or a member of that board, the bank’s controller and the head of Internal Audit; held several times per year according to a schedule. - Periodic and/or unscheduled meetings with heads of management units and/or functional activities; frequency depends on examination results, developments or specific events. - Policy meetings (held on DNB premises): - General policy meetings: held once every two to three years to discuss strategic plans, policy issues and developments; attendees include members of the bank’s management board and DNB executive director and/or deputy directors and the bank examiner in charge. - Specific policy meetings: unscheduled; discuss specific developments or examination findings; DNB formulates follow-up actions and, if necessary, announces measures. - Annual meeting with the external auditor in the presence of bank management: purpose includes discussing external auditor findings, attuning supervisory and auditor information, judging auditor quality, and discussing the management letter and audit report. - Informal meetings before, during and after on-site inspections to clarify matters and discuss findings; draft on-site report initially communicated by formal, written invitation to comment; final report sent with a formal accompanying letter. - Assessment: Compliant - Comments: - Contact with bank management seems comprehensive with communication at all levels. --- ### Principle 18 — Off-site supervision - Description: - DNB has authority to require banks to file periodic returns (ASCS Section 55). - Data submission frequency: consolidated basis (all assets and liabilities; monthly) and on a solo basis (domestic assets and liabilities; quarterly). - Periodic returns cover: balance sheet, profit and loss, solvency, liquidity, credit risk, market risk, large exposures, loan classification and provisioning. - Forms and explanatory notes published in the Credit System Supervision Manual (CSSM), distributed to banks and made available on the internet (www.dnb.nl). - Principles and norms regarding consolidation, valuation of assets and accounting techniques follow the Civil Code (Title 9, section 1 to 13) and specific articles for banks (Civil Code, Title 9, section 14). - DNB may request any information deemed necessary for supervisory tasks (ASCS section 53). The five largest banks provide data periodically from their internal management information systems. - Non-compliance with reporting may result in penalties (ASCS Sections 90b, 90c). - Returns require a statement signed by two persons (at least one director) that the return conforms with DNB requirements. - External auditor examination requirements: - one of the twelve balance sheets for prudential supervision purposes and appurtenant returns on a consolidated basis. - one of the four balance sheets for prudential supervision purposes and appurtenant returns on a solo basis (domestic activities). - other prudential returns. - External auditor examination results in an opinion covering correct application of rules, valuation principles in annual accounts and whether the bank’s organization is adequate for correct and consistent interpretation of DNB’s directives and instructions (CSSM section 3201). - Prudential returns are sent electronically; data entry programs contain validity checks; DNB performs additional automated and visual validity and plausibility checks; data stored in a database for retrieval and processing. - Monthly analysis: a standard set of ratios and key data is produced for each bank and a report prepared highlighting main developments; DNB uses an analytical framework with judgmental aspects and bank-specific characteristics. - Returns include prudential and some macroeconomic purpose information; prudential returns used to aggregate data at banking system level. - DNB authority to ask for information extends to enterprises affiliated with a bank, independent of their nature (ASCS Section 57). - Financial conglomerates report to both DNB and PVK on group capital and intra-group loans (Protocol returns). Different categories of banks may be asked to supply different returns (ASCS Section 55(2)). - Assessment: Compliant - Comments / Recommendation: - Though some information is provided on a solo basis, the majority is computed on a consolidated basis only. - It is recommended that the reporting requirements be reviewed with the introduction of the new capital accord. --- ### Principle 19 — Validation of supervisory information - Description: - DNB can obtain all information deemed necessary for supervisory tasks; prudential returns may be verified via on-site inspections, but the primary source of verification is the external auditor as part of the annual examination of the returns (see CP 18). - On-site examinations are an important tool to judge the quality of the external auditors’ work and are done on the basis of an annual planning driven by each bank’s risk profile; visits to foreign establishments for which DNB is the home supervisor are included. - Policies, procedures and a quality control system are in place to ensure examinations are thorough and consistent (sections 1.2.1 and 2.2.1 of the Quality Manual). - DNB has the authority to contract external experts for specific aspects of banks’ operations (ASCS...). - Assessment: Compliant - Comments: - On-site inspections and external auditor reviews together provide means of independent validation of supervisory information; quality controls and planning are risk-based and include foreign establishments where DNB is home supervisor. *Italic: Content based on the IMF mission report section provided.* ### section 54), but DNB’s own bank inspectors normally carry out on-site inspections. Only in rare cases ### _cr04310 - section 54), but DNB’s own bank inspectors normally carry out on-site inspections. Only in rare cases ### On-site inspections, external auditors, and information access - DNB’s own bank inspectors normally carry out on-site inspections. Only in rare cases will DNB contract external auditors for on-site examinations; in those situations DNB will always define and coordinate the examination and be in charge of the quality control of the work. - Banks must allow DNB to carry out on-site inspections and to co-operate as much as possible. Consequently DNB has full access in a bank, including the board, senior management and staff, when required. - DNB also uses the work of a bank’s external auditor. - Pursuant to section 55(5) of the ASCS, the external auditor should certify once a year the monthly balance sheets for supervisory purposes. The auditor verifies: - whether DNB’s valuation principles and other directives and instructions have been applied and whether this was done in a constructive manner; - whether the valuation principles are equal to those applied in the annual accounts to the extent that these valuation principles have not been provided for in the directives and instructions by DNB; and - whether an adequate organization is in place for the correct and consistent interpretation of the directives and instructions by DNB. - After the audit of the annual accounts, the external auditor’s management letter is made available to DNB. The external auditor is required to inform DNB of serious adverse developments at a bank. - A bank must ask its external auditor to examine and evaluate the adequacy of the organizational arrangement and the control mechanism, in conformity with all regulations based on Section 22 of the ASCS. - DNB may declare an external auditor to be unqualified to deliver the auditor’s reports in respect of a credit institution if, in DNB’s opinion, the auditor involved does not, or no longer, offer the necessary safeguards that he will properly perform the duty assigned to him. - DNB conducts annual interviews with the external auditor of every individual bank to ascertain whether the picture of a bank as presented by supervisory examinations matches the views of the external auditor and to form an opinion on the quality of the auditor’s functioning. - Assessment: Compliant - Comments: The review of prudential returns seems extremely comprehensive and thorough. Furthermore, the DNB holds regular meeting with the external auditors on a bilateral basis to discuss issues of common interest relating to bank operations. ### Consolidated supervision (Principle 20) - DNB is required by the European Union’s 1992 Banking Consolidation Directive (now included in the Codification Directive of 2000) to undertake banking supervision on a consolidated basis. - Section 20 (1) of the ASCS enables DNB to give banks directives, whether on a solo or (also) a consolidated basis, for the conduct of their business in the interest of their solvency. - Supervisory activities are predominantly performed on a consolidated basis, including monthly returns provided by the banks and capital adequacy calculations. - Structural regime and declarations of no-objection: - Declarations of no-objection are required before a bank may acquire a qualifying holding in the capital of another financial or non-financial institution. - For participations of a credit institution in another enterprise this is the case if the holding is 10 percent or more of the share capital. For participations in banks this percentage is 5. - Participating interests information must be submitted to DNB; declarations of no-objection are granted by DNB or by the Minister of Finance on DNB’s advice (ASCS sections 24–27). - Quantitative limits for participations in non-financial activities (CSSM part 3203; EU Codification Directive Section 51): - maximum qualifying holding (participation) is 15 percent of a bank’s own funds; - the total of all qualifying holdings may not exceed 60 percent. - Sections 54–57 of the ASCS provide DNB authority to require a bank and any enterprise within that bank’s scope of consolidation to furnish any and all relevant prudential information. - DNB can require frequent financial and non-financial information from banking and non-banking subsidiaries as a condition attached to declarations of no-objection. - DNB has the power to limit or circumscribe activities of the banking group and may apply special measures under Section 28 of the ASCS when solvency and/or liquidity are endangered. - Corporate ownership is allowed; shareholders and parent companies are reviewed against fit and proper standards, integrity, safety and financial soundness. DNB may refuse or withdraw declarations of no-objection. - Assessment: Compliant - Comments: Though DNB undertakes consolidated supervision it currently receives minimal information at the solo level. This may lead to intra-group risks being omitted. ### Accounting standard (Principle 21) - Company law and the ASCS require reliable financial record-keeping systems and timely submission of monthly prudential financial returns enforced by Section 55 of the ASCS. - Annual accounts, including the management report, must include a signed external auditor’s report. - Emphasis on the responsibility of a bank’s executive management for administrative organization, internal control measures, internal reporting, reporting to the supervisor and publication of annual accounts and semiannual statements. - Supervisory returns must be signed by two persons, at least one being a board member. Procedures are periodically analyzed and checked through on-site inspections. - External auditor scope is based on annual accounting requirements in the Civil Code and DNB’s Section 22 ASCS requirements (Regulation on Organization and Control, CSSM part 4201). - Communication between DNB and external auditors is maintained; bilateral policy discussions are held annually and DNB may decide under Section 14a of the ASCS that a particular external auditor is not qualified to deliver reports. - Reporting framework is based on the European Directives (Fourth and Seventh Directive on Annual Accounts); Credit System Supervision Manual (chapters 5 and 7) provides detailed instructions. - Current values are used for valuation of the trading portfolio. - Confidentiality: Section 64 of the ASCS stipulates that data and information about individual enterprises must not be published and shall remain secret. DNB stimulates public disclosure but cannot require additional disclosures. - External auditor must inform DNB as soon as possible of circumstances contrary to license requirements, contrary to ASCS obligations, threatening continuity, or leading to refusal to deliver the report. - NIVRA has recommended tripartite agreements among the institution, external auditor and DNB to supply DNB with necessary supervisory information. Audit standards set by NIVRA are based on the International Standards on Auditing. - Assessment: Compliant - Comments: In line with other EU countries the Netherlands will move to International Accounting Standards as from 1.1.2005. This will be required for all publicly quoted firms but will also apply to all banks. Furthermore DNB plans to change its own reporting requirements to ensure they remain consistent. ### Remedial measures (Principle 22) - DNB has a range of supervisory instruments in addition to oral and written communications. Generally applicable sanctions are fines and penalties, which can only be imposed on banks (not on individual persons). - If DNB perceives signs that solvency or liquidity is endangered, ASCS 1992 provides instruments: - DNB may give a notification to act in a certain manner; the bank is obliged to comply within the stated time limit. - DNB may appoint one or more persons to take over competencies of the bank’s management (silent receivership). The appointment will not be published. - DNB may publish the notification to act in certain circumstances. - DNB may consult with the Netherlands Bankers’ Association chairman about the future of the troubled bank and act as an honest broker in merger or takeover discussions but cannot force a takeover. - Emergency Regulation (Sections 70 to 80 of the ASCS) implies suspension of payments; only DNB can submit a petition to invoke this Regulation, upon which a Court of Justice decides publicly. - If Emergency Regulation fails, DNB may petition the Court to declare bankruptcy. - Under Section 15 of the ASCS, DNB may withdraw the authorization of a bank failing supervisory requirements. - DNB can force a member of management or supervisory board to resign (notification based on article 28 of the ASCS). Section 14 of the ASCS offers authority to issue notifications in particular circumstances. - Other instruments: - Forced restriction of a bank’s activities by the silent receiver and withdrawal/refusal to grant declarations of no-objection for subsidiaries and participations. - Requirement to obtain declarations of no-objection regarding payments to shareholders (other than normal dividend payments), share repurchases and financial reorganizations. - Replacement of, or restriction of the powers of, executive and supervisory directors, and controlling owners by the person(s) appointed by DNB. - Assessment: Largely Compliant - Comments: Legal powers are wide-ranging and appear to cover almost all eventualities, but formalized measures are rarely used in practice—moral suasion and confidential measures (including the silent receiver) are commonly used and appear to work effectively. It may be worthwhile for DNB to ensure powers used when appointing a ‘Silent Receiver’ are consistent with relevant stock exchange disclosure requirements when the bank is publicly quoted. Question remains whether ‘penalties’ can be applied to management rather than just members of Supervisory and Executive boards, as essential criterion four suggests the supervisor should be able to apply penalties and sanctions to management when necessary. ### Globally consolidated and host-country supervision (Principles 23–25) - Principle 23 — Global consolidated supervision: - Global consolidated approach is the basic principle in the Netherlands; all reporting requirements are on a consolidated basis. - Consolidated supervision of internationally active banks is organized in a separate department of DNB’s Supervision Directorate. - Officials carry out on-site inspections of foreign subsidiaries, joint ventures and branches according to annual plans considering size and risk profile; special inspections for exceptional developments. - DNB monitors governance by the Netherlands head office and whether top-level management is adequately informed about foreign establishments. - DNB studies reports on foreign establishments by internal and external auditors and may use host supervisor examinations after assessing host supervisor quality. - Prior permission by DNB is required for acquisition of foreign participating interests and for establishing foreign branches or subsidiaries. DNB can force closure or restrict activities of foreign establishments. - Assessment: Compliant - Comments: DNB undertakes global consolidated supervision effectively; teams dealing with larger global groups have appropriate resources; consolidated prudential returns are received regularly and the risk model is flexible for group and single entity assessments. Supervisory staff visits overseas parts regularly and places reliance on overseas regulators where appropriate. - Principle 24 — Host country supervision: - ASCS allows exchange of information with foreign public supervisory agencies, subject to purpose, use and secrecy safeguards. - Memoranda of Understanding (MOUs) established with all EU member countries and a number of relevant third countries; new MOUs in preparation. MOUs cover exchange of qualitative and quantitative information. - DNB can prohibit establishment of foreign subsidiaries or joint ventures in a country if supervisory information flow is likely to be insufficient; declarations of no-objection would be refused. - As home supervisor DNB will furnish relevant supervisory information to foreign supervisors provided confidentiality is met. DNB also exchanges information in international supervisory committees (Basel Committee, ESCB’s Banking Supervision Committee, EU’s Banking Advisory Committee and Groupe de Contact). - If adverse developments arise, DNB will liaise with the host supervisor regardless of MOU status. - Assessment: Compliant - Comments: DNB has an open and cooperative approach to sharing information with overseas supervisors and maintains a regular dialogue with banks on international entities. - Principle 25 — Supervision over foreign banks’ establishments: - Local branches and subsidiaries of foreign banks are subject to the same legal and supervisory regime as domestic banks under the ASCS. - Under mutual recognition, branches of EU licensed banks are exempted from solo capital adequacy supervision by DNB (home country control principle). DNB liquidity requirements must be met by EU branches in the Netherlands. - For non-EU banks applying for a license, DNB assesses whether home-country supervision is adequate and consolidated; if not, DNB will take full responsibility for supervising the subsidiary. - Branching from countries with below-standard supervision is discouraged; DNB prefers subsidiaries for non-EEA banks and ensures home supervisor agreement before authorization. - Written approval by the home supervisor is required for establishment; ASCS authorizes DNB to share supervisory information with foreign supervisors. Home supervisors have on-site access after prior consultations with DNB and DNB discusses findings with them. DNB informs the home supervisor timely on adverse developments requiring remedial action. - Assessment: Compliant - Comments: Supervision applied equally to foreign and domestic banks. DNB prefers subsidiaries over branches for non-EEA banks and seeks home supervisor agreement. Communication and MOUs with home supervisors are generally well established. DNB may wish to strengthen its methodology for assessing overseas regulators and the reliance placed on them. *Source: Excerpt from _cr04310 (IMF country report content provided in the source PDF).* ### 1. Objectives, Autonomy, Powers, and Resources ### _cr04310 - 1. Objectives, Autonomy, Powers, and Resources ### Basel Core Principles — Key Findings and Recommended Actions - Overall judgment: banking supervision in the Netherlands "complies to a very high degree with the Basel Core Principles," with many recommendations to be addressed in the bill on financial supervision due to come into effect in 2005. - Specific assessments and recommendations: - CP 1 (Objectives) - Finding: Legislation supporting banking supervision under revision; revisions should be sufficient to enable compliance. - Recommended action: New Banking law to set out clearly the responsibilities of the various supervisory authorities, to require that objectives are explicit and indicate how accountability will be measured. (CP 1(1)) - Recommended action: New banking law to improve the transparency of the system and improve the independence and transparency of the supervisory authorities. (CP 1(2)) - Recommended action: Revisions to the ACSC to ensure that explicit legal powers exist to set prudential rules in respect of integrity. (CP 1(3)) - CP 3 (Licensing criteria) - Finding: Supervisory process would benefit from expanding the fitness and propriety criteria and assessment process to cover the "senior management" of the banks as stipulated in the Methodology. - Recommended action: A review of the adequacy of the fitness and propriety requirements to be undertaken to ensure they capture all personnel in key senior management positions. This should be extended to the powers needed to take remedial action. (CP 3; CP 22) - CP 4 (Ownership) - Finding: Transfer of ownership for banks rested with the Ministry of Finance rather than the DNB (supervisor). - Recommended action: New banking law to ensure transparency about the authorizing (licensing) body and to give the supervisory body exclusive powers to approve or reject the transfer of significant ownership. (CP 4; CP 5) - CP 6 (Capital adequacy) - Finding: Authorities intend to review prudential reporting requirements during implementation of the new Basel Capital Accord; this is seen as positive to become compliant. - Recommended action: Prudential reporting to be extended to capture institutions at the solo as well as the consolidated level. All prudential ratios (such as connected lending and lending to closely related counterparties) to be monitored at the solo level for entities within a banking group that are not fully guaranteed. (CP 6; CP 10; CP 18) - CP 14 (Internal control and audit) - Recommended action: The requirements for an audit committee to be both strengthened and wider to cover all but the smallest institutions. - CP 15 (Money laundering) - Finding: DNB should require banks to have a designated senior officer with explicit responsibility for ensuring AML policies and procedures meet local statutory and regulatory requirements. - Recommended action: The DNB to require banks to have a designated "money laundering reporting officer" who has senior status within the organization. (CP 15) - CP 16 (On-site and off-site supervision) - Recommended action: DNB’s risk assessment process would benefit from a slightly more structured approach; undertake an assessment of high level controls and group risks as part of the risk process and communicate the overall assessment back to the bank. - CP 22 (Remedial measures) - Finding: No technical legal penalties appear available to impose on bank "management" to ensure timely corrective action when prudential requirements are unmet or regulations violated. - Recommended action: Address remedial powers in future legislation. - CP 25 (Supervision of foreign banks) - Recommended action: DNB to consider formalizing its approach to peer assessment of overseas supervisors for both foreign banks established in the Netherlands and domestic banks operating abroad. - Mission classifications referenced (legend): - C: Compliant. - LC: Largely compliant. - MNC: Materially non-compliant. - NC: Non-compliant. - NA: Not applicable. ### Authorities' Responses and Follow-Up Intentions - Authorities agree with main findings and consider them fair and comprehensive. - Planned or under-consideration responses: - Extending prudential reporting to solo as well as consolidated level: - Authorities note that requiring this for guaranteed subsidiaries could increase supervisory burden without materially improving quality. - In light of Basel II and Capital Adequacy Directive 3, the Dutch Authorities will review the solo prudential reporting regime. - Reviewing fitness and propriety requirements and remedial powers: - Supervisory board members and boards of directors are already tested for fitness and propriety. - Authorities will investigate which second-tier management positions should be tested and where remedial actions could be useful, balancing benefits against administrative burdens. - Strengthening and widening audit committee requirements: - Although rated "compliant," authorities will review the current recommendation that only larger banks need an audit committee, considering the new Dutch code on corporate governance. - Requiring a designated money laundering reporting officer: - Authorities intend to introduce an explicit requirement, attributing the role to the person responsible for the compliance function. - Communicating supervisor’s overall risk assessment back to banks: - Authorities will review benefits and drawbacks and decide accordingly. - Formalizing peer assessment of foreign supervisors: - Authorities intend to investigate other supervisors' approaches and use the outcome to review their own approach. ### IAIS Insurance Core Principles — Institutional Setting and Assessment Summary - Mission timing and scope: - Assessment conducted during a mission to the Netherlands from October 27–November 7, 2003. - Based on IAIS Insurance core principles (ICP) dated October 2003. - Assessment focused primarily on the PVK (Pensioen- & Verzekeringskamer) responsibilities; AFM (Autoriteit Financiële Markten) has limited market conduct responsibilities and will acquire additional responsibilities in 2004. - Insurance sector size and structure (2001 data and related facts): - Total assets of insurance companies amount to 67 percent of GDP in 2001 (60 percent life insurers and 7 percent non-life insurers). - Gross domestic premium income: 9.8 percent of GDP in 2001 (5.8 percent life and 4.0 percent non-life). - Insurers employ approximately 47,500 people. - Licensed entities in 2001: - 95 licensed life insurance companies. - 247 licensed non-life insurance companies. - Some very small funeral insurance-in-kind and mutual non-life insurers are partially or wholly exempted; 170 companies are registered with the supervisor. - Market concentration and group statistics: - Life insurance concentration: the largest company and the largest five companies account for 25 percent and 55 percent of the sector’s total insurance liabilities, respectively; the next five largest companies account for 20 percent. - The largest three groups of companies generate 80 percent of their income. - Asset mixes: - Life insurance sector: 23 percent equities, 70 percent fixed-income products, and 8 percent real estate. - Non-life insurance sector: 30 percent equities, 65 percent fixed income instruments, balance in other investments. - Non-life market: ten largest companies account for 40 percent of the premiums. - Product notes: health and disability insurance are written by non-life insurers; mortgage-linked products have grown rapidly. - Supervisory framework and recent developments: - Primary supervisor: PVK supervises insurers on a "solo plus" basis in line with EU practices; banks are supervised on a consolidated basis by the DNB. - PVK and DNB have a cooperation protocol since 1990 for conglomerate supervision; PVK and DNB are in the process of merging to create an integrated prudential supervisor, with AFM handling market conduct. - PVK initiatives and supervisory changes: - Implemented a risk-based supervisory methodology (MARS) in 2003. - Proposal for a more forward-looking approach to solvency assessment (FTK) under discussion. - Resources employed by the PVK have increased significantly. - Assessment outcomes and areas for improvement: - Most IAIS principles assessed as observed or largely observed; some assessed as partly observed; principle 24 (Intermediaries) assessed as not observed. - Recommended improvements include: - Issue more complete and explicit supervisory guidance (governance, risk management, internal controls). - Increase transparency by the supervisor (internal policies/procedures, risk assessments, stages of intervention). - Narrow the range of acceptable actuarial and accounting practices; increase disclosure and reporting frequency. - Shorter-term measures suggested: require quarterly reporting on supervisory returns, publish more information from supervisory returns, and establish and communicate a solvency control level. - PVK is participating in international standard-setting and expects FTK project to contribute materially; legislation currently being drafted to strengthen supervision of intermediaries. *Source: _cr04310 - 1. Objectives, Autonomy, Powers, and Resources (excerpts of Basel Core Principles assessment and IAIS Insurance Core Principles assessment).* ### 44. A principle is considered to be ‘not applicable’ when the essential criteria are ### _cr04310 - 44. A principle is considered to be ‘not applicable’ when the essential criteria are ### Principle applicability and 'not applicable' designation - 44. A principle is considered to be ‘not applicable’ when the essential criteria are considered to be ‘not applicable’. - 44. A criterion would be considered ‘not applicable’ whenever the criterion does not apply given the structural, legal and institutional features of a jurisdiction. ### Compliance ratings and definitions - 45. For a principle to be considered ‘largely observed’, it is necessary that only minor shortcomings exist which do not raise any concerns about the authority’s ability to achieve full observance with the principle. - 45. A principle will be considered ‘partly observed’ whenever, despite progress, the shortcomings are sufficient to raise doubts about the authority’s ability to achieve observance. - 45. A principle will be considered ‘not observed’ whenever no substantive progress toward observance has been achieved. *Source: IMF content unit _cr04310 - 44–45* ### 46. While it is generally expected that full observance of a principle is achieved through ### _cr04310 - 46. While it is generally expected that full observance of a principle is achieved through ### Executive findings and overall assessment - The PVK (supervisory authority) and the Netherlands legal, accounting and actuarial framework are broadly aligned with international standards and EU Directives. - Implementation of a new risk-based supervision system (MARS) began in March 2003; PVK intends to publish the manual on its website after experience and modification. - The PVK has substantive enforcement powers (administrative orders, silent administrators, fines, conditional penalties, withdrawal of license) and a broad legal framework for winding-up (including the “Noodregeling” and court-appointed receivers). - Observance ratings (Table 5 summary): - Observed: 12 (CP 1, 3, 7, 8, 12, 13, 14, 15, 16, 18, 22, 27) - Largely observed: 9 (CP 2, 4, 9, 10, 19, 21, 23, 26, 28) - Partly observed: 6 (CP 5, 6, 11, 17, 20, 25) - Not observed: 1 (CP 24) - Not applicable: 0 ### Key strengths identified - Legal and judicial framework consistent with western democracies; EU law precedence is clear. - Accounting and auditing standards in line with international standards; auditing standards have legal status. - PVK independence is established in WTV Art. 3; PVK founded 1923, privatized as a foundation in 1992. - PVK powers and procedures: - Authority to issue and enforce rules; can require solvency restoration plans, issue administrative orders, appoint silent administrators, impose fines and conditional penalties, and withdraw licenses. - Confidentiality protections exist in legislation; PVK has directors’ and officers’ liability insurance and government indemnification for liabilities in excess of insurance. - Supervisory process modernization: - MARS risk-based supervision introduced March 2003. - Off-site monitoring supported by extensive audited supervisory returns (annual returns due prior to May 1). - Winding-up and insolvency: - Emergency arrangement (“Noodregeling”) replaces normal bankruptcy rules for insurers. - High legal priority is given to the rights of policyholders. ### Principal weaknesses and gaps (by thematic area) - Supervisory objectives and transparency: - Principle 2: objectives not explicitly defined in present legislation — Assessment: Largely observed. - Principle 4: definitions of intervention stages and criteria not published; insurers not explicitly informed of their assigned stage — Assessment: Largely observed. - Supervisory resources and implementation capacity: - PVK staff complement has almost doubled to 230; supervisory mapping under MARS suggests potential staff shortfalls for full implementation, particularly with approximately 60 staff supervising 376 insurers (41 large; 84 medium; 251 small) — Assessment implications noted under Principle 13. - Cross-border and group-wide supervision: - Limited arrangements for cooperation with non-EU/EEA supervisors; PVK has no comparable arrangements with supervisors in non-EU/EEA countries — Assessment: Partly observed (CP 5) and Partly observed (CP 17). - Licensing and registration gaps: - Reinsurers with offices in the Netherlands or insurers with offices outside the Netherlands conducting reinsurance through a branch are not subject to WTV supervision; some very small insurers may operate without registration or licensing — Assessment: Partly observed (CP 6). - Actuarial and accounting practice variability: - Actuarial Society has not published formal standards of practice; wide range of actuarial valuation methods in use (both net premium and gross premium valuations acceptable) complicates assessment of technical provisions — Assessment: Partly observed (CP 20). - Intermediaries and consumer protection: - Current supervision of intermediaries under SER (WABB) is inadequate; AFM and WFD (effective 2004) expected to remedy this — Assessment: Not observed (CP 24). - Consumer protection lacks explicit requirements for disclosure of potential conflicts of interest and “treating customers fairly” policies until WFD implementation — Assessment: Partly observed (CP 25). - AML/CFT and fraud: - AML/CFT framework meets FATF criteria applicable to insurance sector; new legislation (effective December 1, 2003) will strengthen PVK sanction powers and require customer due diligence, recordkeeping and suspicious transaction reporting — Assessment: Largely observed (CP 28). - Insurers already use a fraud-exchange database (“Fish-system”); PVK to require management information regarding fraud after Dec 1, 2003 — Assessment: Observed (CP 27). ### Detailed policy recommendations (extracted and preserved from source text) - Principle 2: - It is recommended that the principal objectives of insurance supervision be explicitly defined in new financial legislation that is being prepared. - Further clarification of responsibilities between PVK (prudential supervision) and AFM (market conduct) is recommended. - Principle 3 and 4: - Continue publication of policy rules, procedures, and MARS manual; publish the manual on the website after modifications. - Document, publish and observe the usual consultation process with market participants where feasible. - Publish more information on stages of intervention (definitions, statistics and informing individual insurers), interpretations, and risk assessment criteria. - Principle 5 and 17: - Take steps to exchange information with relevant supervisors outside of the EU/EEA; seek additional information on group operations and contacts with supervisors outside the EU/EEA. - Principle 6 (Licensing): - Require that reinsurers, other than those supervised elsewhere in the EU/EEA, be licensed by the PVK. - Require the PVK to contact the home supervisor of any non-EU/EEA insurer applying for a license as a regular part of the assessment process. - Enact legislation requiring that all insurers operating in the Netherlands, regardless of size and nature, be registered with or licensed by the PVK. - Publish lists of registered and licensed insurers on the PVK website, with explanations of differences in supervision applicable to each category. - Principle 7 (Suitability): - Establish specific criteria to assess the fitness and propriety of auditors and actuaries, including qualifications, professional proficiency, practical experience, updated knowledge and professional body membership; rely upon NIVRA and the Actuarial Society where appropriate. - Principle 9 and 10 (Governance, Internal controls): - Provide more explicit guidance on governance practices expected of insurers and require documentation of significant policies, procedures and responsibilities. - Legislation should provide for direct access to the board by the actuary. - Complete codification of PVK requirements and expectations regarding internal controls as a high priority. - Provide legal protection for actuaries who provide confidential information to the PVK (similar to that provided to auditors). - Principle 11 and 12 (Market analysis, Reporting): - Assign an individual or department responsibility for ongoing market data gathering and analysis, and communicating results internally. - Consider requiring all insurers (except possibly small insurers with strong solvency positions) to file basic supervisory returns quarterly. - Publish on the PVK website key financial information from supervisory returns that are already open to public inspection at the PVK office. - Principle 13 (On-site inspection): - Reassess staff resources required to implement MARS and seek additional resources as necessary. - Principle 19, 21, 22 (Underwriting, Investments, Derivatives): - Issue more detailed regulations on risk control, governance and internal organization; require insurers to develop strategic underwriting, pricing and reinsurance policies subject to board approval and regular review. - Provide further guidance on key elements to be addressed by insurers’ investment policies and expectations regarding investment risk management systems, controls and contingency plans. - Periodically review derivatives guidance to reflect evolving best practices; provide more explicit guidance on model vetting and independent price verification. - Principle 20 and 23 (Liabilities, Solvency): - Finalize and implement the Financial Assessment Framework (FTK) according to the PVK timetable (draft consultation paper issued 2003; finalize in 2004; implementation in 2006). - Link FTK valuation basis to IFRS where feasible; if IFRS for insurance contracts is delayed, reduce the range of actuarial and accounting practices and ensure complex actuarial issues (e.g., embedded options) are adequately addressed. - Consider establishing and communicating a solvency control level in excess of the minimum solvency margin, particularly if FTK implementation is delayed. - Principle 24 and 25 (Intermediaries, Consumer protection): - Enact legislation to provide a stronger and comprehensive basis for supervision of insurance intermediaries (WFD/AFM expected to address this in 2004). - Require consumer disclosures about potential conflicts of interest, policies on treating consumers fairly, and information gathering to assess insurance needs. - Principle 28 (AML/CFT): - Provide additional guidance emphasizing the need for foreign branches and subsidiaries of Dutch insurers to observe AML/CFT measures consistent with Netherlands requirements. ### Implementation priorities and timelines (as stated in source) - MARS: applied since March 2003; PVK intends to publish the manual after revisions. - Financial Assessment Framework (FTK): - Draft consultation paper issued in 2003. - PVK will seek to finalize the FTK in 2004. - Target implementation in 2006. - New legislation and measures expected to take effect December 1, 2003: - Implementation of Solvency I (legislation implementing Solvency I effective December 2003). - New AML/CFT powers and sanctions; requirements for customer due diligence and suspicious transaction reporting. - PVK regulation effective December 1, 2003 to require notification of circumstances relevant to fitness and propriety of key functionaries. ### Quantitative and structural points to note (numeric fidelity preserved) - PVK staff: current complement of 230. - Supervisory classification of insurers: 41 large; 84 medium; 251 small. - Supervisory staffing for insurers: supervised by a total of approximately 60 staff (for on-site/off-site supervision cited under Principle 13). - Fit and proper definition: a qualified participation is defined as a direct or indirect interest or direct or indirect control of at least ten percent of the issued share capital. - Fit and proper appointment minima: legislation stipulates at least two people who determine day-to-day policy and three supervisory directors must be appointed. - Timeframes and deadlines: - Annual audited supervisory returns: submitted annually, prior to May 1. - Solvency restoration plan submission period: eight weeks after PVK request. - PVK budget change: beginning in 2004, 11 percent of the budget – representing the costs of enforcement – will be financed by the government. - Professional counts: approximately 13,000 registered accountants and 1,250 members of the Actuarial Society (750 actuaries and 500 affiliates). - Portability/consumer rights on transfers: - Policyholders of a non-life insurer may give written notice of cancellation within three months. - Policyholders of a life insurer: if policyholders accounting for 25 per cent or more of the insured amount object to a portfolio transfer, the transfer may not proceed. *Source: Detailed assessment excerpt from Table 4 and Table 5 of the IAIS Insurance Core Principles assessment for the Netherlands (content unit: _cr04310 - 46.), as provided in the supplied source content.* ### 47. The recommendations of actions which will improve observance of IAIS Insurance ### 47. The recommendations of actions which will improve observance of IAIS Insurance Core Principles ### Summary of recommended actions by IAIS Insurance Core Principle (CP) - Conditions for effective insurance supervision (i.e., CP 1) - (No specific recommended action text provided in this section of the source.) - Supervisory objectives (i.e., CP 2) - It is recommended that the principal objectives of insurance supervision be explicitly defined in new financial legislation that is being prepared. - While the broad separation of responsibilities between the PVK (prudential supervision) and the AFM (market conduct supervision) has been defined, further clarification of the responsibility of each for various tasks is recommended. - Supervisory authority (i.e., CP 3) - (No specific recommended action text provided in this section of the source.) - Supervisory process (i.e., CP 4) - It is recommended initiatives to publish more information about policies and procedures continue and be expanded to provide more information on stages of intervention (definitions, statistics and informing individual insurers), interpretations, and risk assessment criteria. - While the PVK actively consults with industry in the development of policies, it is recommended that the usual consultation process be documented, published and observed to the extent possible. - Supervisory cooperation and information sharing (i.e., CP 5) - Considering the broad international scope of several insurance and financial groups of which insurers licensed in the Netherlands are members, steps should be taken by the PVK to exchange information with relevant supervisors outside of the EU/EEA. - Licensing (i.e., CP 6) - Since the ICP apply to the supervision of both insurers and reinsurers, the Netherlands should take steps to require that reinsurers, other than those supervised elsewhere in the EU/EEA, be licensed by the PVK. - It is recommended that the PVK contact the home supervisor of any non-EU/EEA insurer applying for a license, as a regular part of the assessment process. - It is recommended that legislation be enacted requiring that all insurers operating in the Netherlands, regardless of their size and nature, be registered with or licensed by the PVK. - It is further recommended that the PVK publish lists of registered and licensed insurers on its website, along with an explanation of the significant differences in the nature of supervision applicable to each category. - Suitability of persons (i.e., CP 7) - It is recommended that the PVK establish specific criteria to assess the fitness and propriety of auditors and actuaries, including qualifications, professional proficiency, appropriate practical experience, updated knowledge on developments within their profession and membership in professional bodies. - It is recommended that, in establishing such criteria, the PVK rely upon NIVRA and the Actuarial Society, to the extent their membership requirements address such criteria. - Changes in control and portfolio transfers (i.e., CP 8) - (No specific recommended action text provided in this section of the source.) - Corporate governance (i.e., CP 9) - It is recommended that the PVK provide more explicit guidance on the governance practices it expects of insurers, and require that they document significant policies, procedures and responsibilities. - It is also recommended that legislation provide for direct access to the board by the actuary. - Internal control (i.e., CP 10) - It is recommended that work currently underway by the PVK to more completely codify its requirements and expectations regarding internal controls be completed with high priority. - It is recommended that new legislation provide for the possibility of the PVK obtaining information from either of the actuary or the external auditor on a confidential basis, and provide strong legal protection against their potential liability from taking such action. - Market analysis (i.e., CP 11) - It is recommended that the PVK assign an individual or department the ongoing responsibility of gathering quantitative and qualitative market information from both internal and external sources, analyzing this information, and communicating the results of the analyses to others within the PVK. - Reporting to supervisors and off-site monitoring (i.e., CP 12) - It is recommended that the PVK consider requiring all insurers (with the possible exception of small insurers with strong solvency positions) to file basic supervisory returns quarterly. - It is also recommended that the PVK publish on its website key financial information contained in those portions of the supervisory returns that are already open to public inspection at its office. (Note that limited information is currently available on the PVK website for some insurers.) - On-site inspection (i.e., CP 13) - It is recommended that the PVK reassess the staff resources that will be required to successfully implement the MARS supervision methodology and seek additional resources, as necessary. - Preventive and corrective measures (i.e., CP 14) - (No specific recommended action text provided in this section of the source.) - Enforcement or sanctions (i.e., CP 15) - (No specific recommended action text provided in this section of the source.) - Winding-up and exit from the market (i.e., CP 16) - (No specific recommended action text provided in this section of the source.) - Group-wide supervision (i.e., CP 17) - It is recommended that the PVK seek additional information on the operations of groups through contacts with the relevant supervisors outside of the EU/EEA. - Risk assessment and management (i.e., CP 18) - (No specific recommended action text provided in this section of the source.) - Insurance activity (i.e., CP 19) - The PVK is in the process of issuing more detailed regulations on risk control, governance and internal organization, which should result in the enhancement of risk assessment and management by insurers. - It is recommended that these regulations include the requirement that insurers develop strategic underwriting, pricing and reinsurance policies, which should be subject to approval and regular review by their boards. - Liabilities (i.e., CP 20) - The PVK will attempt to link the valuation basis under the FTK to International Financial Reporting Standards (IFRS), in the interests of transparency and comparability. - Should the development of IFRS for insurance contracts be further delayed, it is recommended that the PVK take steps to reduce the range of actuarial and accounting practices in the Netherlands and to ensure that complex actuarial issues, such as the valuation of embedded options, are being dealt with adequately. - Investments (i.e., CP 21) - The PVK is in the process of issuing more detailed regulations on risk control, governance and internal organization, which should result in the enhancement of risk assessment and management by insurers. - It is recommended that these regulations provide further guidance regarding the main elements to be addressed by an insurer’s investment policy and the PVK’s expectations regarding investment risk management systems, controls and contingency plans. - Derivatives and similar commitments (i.e., CP 22) - It is recommended that the PVK periodically review its guidance to ensure that it reflects evolving best practices for assessing and managing the risks of derivatives and similar commitments, and provide more explicit guidance in such areas as the vetting of models and the independent verification of prices. - Capital adequacy and solvency (i.e., CP 23) - It is recommended that the design of the FTK be finalized and implemented in accordance with the PVK’s current timetable. - It is recommended that the PVK consider establishing and communicating a solvency control level in excess of the minimum solvency margin, particularly if it appears the implementation of the FTK may be delayed. - Intermediaries (i.e., CP 24) - It is recommended that legislation be enacted which will provide a stronger and more comprehensive basis for the supervision of insurance intermediaries. - Consumer protection (i.e., CP 25) - It is recommended that legislation or regulations be enacted which will require that consumers be provided information about potential conflicts of interest, that policies be in place on how to treat consumers fairly, and that information be sought in order to assess insurance needs. - Information, disclosure & transparency toward the market (i.e., CP 26) - It is recommended that guidance be developed to improve the disclosure of risk exposures (both qualitatively and quantitatively), risk management practices, and management and corporate governance issues. - Fraud (i.e., CP 27) - (No specific recommended action text provided in this section of the source.) - Anti-money laundering (i.e., CP 28) - Legislation which is expected to take effect on December 1, 2003 should provide the basis for observance of this principle. - It is recommended that additional guidance be provided to emphasize the need for foreign branches and subsidiaries of Dutch insurers to observe AML/CFT measures consistent with the requirements in the Netherlands. ### Authorities’ response to the assessment (sections 48–50) - Overall view - The Netherlands authorities agree with the main findings of the assessment, which they consider to be fair and comprehensive. - The authorities concur with the overall judgment that insurance supervision in the Netherlands is ‘largely compliant’ with the revised Insurance core principles of the IAIS, dated October 2003. - Actions underway and legislative timing - Many suggestions for improvement are already being addressed. - Some points are being included in the bill on financial supervision that is due to come into effect in 2005 (ICP 2), in other legislation (ICP 24 and 25), or are being addressed on EU level (ICP 6, 20). - The authorities note that some recommendations are being addressed via steps to increase transparency of policy making, elaboration of policy rules in a number of areas, market analysis and solvency assessment (ICP 4, 7, 9, 10, 11, 19, 20, and 23). - Specific observations by ICP - ICP 5, ICP 6, ICP 17: Authorities recognize need for close international cooperation and information sharing, support international policy work, and intend to intensify contacts with non-EU supervisory authorities (e.g., on cross-Atlantic groups). - ICP 6 (Licensing): The recommendation to supervise all insurance companies, whatever their size or range of business activities, will be evaluated considering benefits and (direct and indirect) costs. The IMF suggestion to publish lists of registered and licensed insurers, together with an explanation of the applicable supervisory regime will be taken forward. Lists of licensed insurers are already being published. - ICP 12 (Reporting to supervisors and off-site monitoring): The IMF recommendation that all insurers file basic supervisory returns quarterly will prompt reconsideration of the optimal mix and frequency of standard and company specific information in conjunction with the introduction of the new Financial Assessment Framework. Benefits of additional standard filing requirements will be balanced against the (direct and indirect) costs for insurers. - ICP 13 (On-site inspection): The authorities will evaluate the introduction of the MARS system in the near future and will take the IMF’s observation on staff resources fully into account. - ICP 26 (Information, disclosure & transparency toward the market): The authorities will consider this in conjunction with implementation of the IFRS and the introduction of the Financial Assessment Framework. *Source: IMF staff report — “The recommendations of actions which will improve observance of IAIS Insurance Core Principles” (sections 47–50).* ### 62. The result is that this methodology will lead to a larger number of “not implemented” and ### _cr04310 - 62. The result is that this methodology will lead to a larger number of “not implemented” and ### Principles relating to the regulator — overview - Netherlands supervision moved from sectoral split to a twin pillars approach since September 2002: prudential supervision + systemic stability (Nederlandsche Bank, DNB) and conduct of business (Authority for Financial Markets, AFM). Pensioen- en Verzekeringskamer (PVK) supervises prudential insurance and pensions. - AFM covers securities markets and conduct of business for banks, investment funds, insurance companies, securities firms; DNB covers prudential regulation (capital adequacy) for banks, investment funds and securities firms. - Twin pillars not yet fully reflected in primary legislation (sectoral primary legislation remains); new legislation expected to be implemented by 2005. - Euronext Amsterdam currently supervises trading/listing rules; AFM supervises Euronext and will assume listing responsibility in due course (noted retention of listing responsibility until at least January 2005 and perhaps longer). ### Principle 1 — Responsibilities of the regulator should be clear and objectively stated Assessment: Fully Implemented. Key findings: - Division of responsibilities documented via Decree of Delegation (Wet Toezicht Effectenverkeer 1995), Decree of Delegation Wtb; Minister of Finance delegates supervision powers by Royal Decree. - AFM and DNB have exchanged information where necessary; accounting/auditing currently supervised by NIVRA but to be supervised by AFM in near future. - Market concentration: four large banks dominate most areas; DNB licenses main securities participants in practice. - Overlap concerns: industry perceives significant potential overlap in areas such as “know your customer”, anti-money laundering, management organization, internal controls, IT systems. Covenants and joint teams exist to manage overlap but perception remains that overlap is a problem. - Transparency: Act (1995 Act) sets broad powers; Decrees, Further Regulations and Policy Documents amplify detail. Further Regulations can be deemed breaches of Act or Decree; Policy Documents provide guidance only. - Timing: An Act takes at least 18 months and more probably over two years from conception to implementation; a Decree normally takes a year; Further Regulations and Policy Documents can be introduced more quickly. Recommendations (AFM and DNB): - conclude rapidly discussions on final remaining areas where split of responsibilities is not yet clear; - respond publicly to industry concerns about overlap and state how they will deal with those concerns; - publish a comprehensive assessment of the practical division of responsibilities and conduct presentations to the industry to enhance awareness and confidence. Recommendations (authorities / Euronext transition): - finalize outstanding issues concerning transfer of responsibility (including whether Euronext will continue to determine who may trade securities after losing prospectus-monitoring responsibility); - develop an explicit plan and timetable for takeover of listing responsibilities so AFM/DNB and Euronext understand roles during transition. Recommendation (Ministerial exemptions): - consider publishing criteria for when the Minister of Finance would grant exemptions from regulatory requirements under the law. ### Principle 2 — Operational independence and accountability Assessment: Broadly Implemented. Key findings on independence: - Delegation by Minister of Finance is understood as transfer of powers; Minister can place conditions and can withdraw/amend delegation via secondary legislation. - Minister limited in giving instructions only in specific cases set out by law (e.g., enforcing EU Directives or investigating adequacy/effectiveness). - Appointment: Minister appoints, suspends, dismisses directors of DNB and AFM; appointments renewable for a four-year period; statutory limits on termination stated in AFM Articles of Association but not explicitly in legislation. - No immunity for actions taken in good faith by the regulatory body (individual staff protected); litigation risk could undermine independence (insurance and Ministry guarantee exist but not immunity). Regulatory policy and process concerns: - Minister includes regulators within a published target requiring a reduction of 25 percent in the burden of regulatory requirements within three years. - Much regulatory policy contained in Decree (Minister responsibility); AFM asserts that in practice publishing Further Regulations without Minister consent is inconceivable—consultation process informal and not transparent. Budgetary arrangements: - AFM funded by levy on industry; DNB funded by taxpayer with phased transfer to levy on regulated community; Government will fund 20 percent of DNB budget to support enforcement as a public good. - Proceeds of sanctions accrue to the supervisor. - Budget must be discussed by a market panel (industry representatives only) and then approved by the Minister; no right to build up reserve funds. Accountability: - AFM and DNB present annual reports to Minister; Minister ensures report is made public (article 40 sub 5 of Act). - No direct accountability to Parliament; parliamentary investigation would proceed via the Minister. Legal/process safeguards: - Administrative decisions require written motivation (article 3:46 General Administrative Law Act); Court of Rotterdam hears appeals (article 44 Act 1995); full review for administrative fines (article 6 ECHR principles). Main concerns leading to “partly implemented” element: - Absence of legal immunity for actions in good faith by the regulator; - Informal and non-transparent consultation practice between regulator and Ministry on rule publication; - No review of the consultation process; - Annual budget approval and inability to build reserves could be used to constrain the supervisor. Recommendations to reinforce independence: - Review balance between matters placed in Acts, Decrees and Regulations; - Provide for budget approval over a longer period (e.g., 3, or preferably 5 years); - Permit regulatory bodies to build up reserves for contingencies; - Make consultation processes with Ministry of Finance open and transparent (publish proposals and ministerial comments); - Introduce legal immunity for actions taken by regulators in good faith; - Require any general direction made by Minister to be made in public; - Allow investor representatives opportunity to comment on regulator budgets along with industry market panel. ### Principle 3 — Adequate powers, proper resources and capacity Assessment: Fully Implemented. Regulatory powers and limits: - AFM and DNB have powers to license, supervise, inspect, investigate and enforce; exchanges require recognition (power reserved to Minister of Finance, to be transferred to AFM under new law). - Both may obtain any information reasonably necessary for fulfilment of responsibilities (power to inspect, supervise, investigate); may set Further Regulations (some judicial challenges pending). - Enforcement powers include license withdrawal, dispensation withdrawal, penalty-orders, administrative fines, and public announcements (AFM may make public announcements; DNB may not). Gaps: - Regulators have no power to enforce restitution of investors harmed by inadequate conduct-of-business adherence; investors must pursue civil claims. Capacity and resources: - AFM staff growth: from 30 staff in 1997 to about 300 now. Budget for 2004 under consultation suggests a further growth of 60 percent in expenditure. - Funding model: DNB budget being transferred to levy; Government will fund 20 percent to support enforcement as public good. - Rapid growth poses recruitment, training and absorption challenges; industry concerns that quality of supervision suffered due to many new staff unfamiliar with industry. Recommendations: - Consider giving AFM the right to seek restitution in court or direct powers to order restitution (subject to procedures and appeal). - Address funding arrangements noted under Principle 2. - Manage recruitment and training to maintain supervisory quality. ### Principle 4 — Clear and consistent regulatory processes Assessment: Fully Implemented. Key points: - Rules and regulations must be made known to public (article 3:42 General Administrative Law Act). - General criteria for granting/denying/revoking a license are public. - AFM and DNB consult public and industry before implementing new rules (no statutory requirement but practice exists; proposed rules published on internet). Smaller industry participants feel consultation favors largest participants; DNB perceived as more consultative than AFM. - Transparency in decisions: decisions affecting rights require written motivation (article 3:46 GA Law Act); right to hearing (article 4:7 GA Law Act); Court of Rotterdam competent for appeals. - Industry education: AFM publishes interpretations, electronic newspaper, “De Inzicht”; DNB publishes “DNB Magazine”; both obliged to publicly disclose changes and reasons (title 3:4 GA Law Act). Recommendation: - Address smaller participants’ anxieties about consultation process with targeted engagement. ### Principle 5 — Staff professional standards and confidentiality Assessment: Fully Implemented. Conflicts of interest and confidentiality safeguards: - Internal rules: insider trading reporting and prohibited list; confidentiality declaration for all staff; gifts above 25 Euro from supervised entities to be notified to compliance officer; rules on e-mail and internet use. - Legal requirement (1995 Act, article 1) prohibits use of data/information beyond duties. - Breaches may lead to criminal, civil, administrative or employment law actions. Professional standards and training: - AFM training budget: over €3000 per staff member (excluding management development programme). - AFM focuses on staff development and professional qualifications; competences under development for appraisal. Comment: - Rapid growth of AFM poses challenges to training and assimilation; continued commitment to training recommended. ### Principles of self-regulation (SROs) — Euronext and oversight Principle 6 — Appropriate use of SROs Assessment: Fully Implemented. Findings: - Only SRO: Euronext Amsterdam B.V., dominant national exchange; integrated with Euronext group across five countries. - Minister of Finance granted recognized status; AFM delegated oversight of Euronext operation. Principle 7 — SROs subject to regulator oversight; fairness and confidentiality Assessment: Fully Implemented. Key findings on recognition and oversight: - Minister grants recognition if operator established in Netherlands and rules/monitoring meet standards necessary for “proper operation of the securities markets” and investor protection (article 22, 1995 Act). - Minister may impose restrictions/conditions on recognition and withdraw status (article 26). - AFM supervises Euronext, receives notifications of rule changes (article 23), may issue instructions or reprimands (article 24), and visits regularly. - Euronext rulebook: two parts (international across five countries; Netherlands-specific). International rule changes handled by a five-regulator working group (MoU). Points of friction: - Euronext believes AFM approval is required for rule changes; AFM states it may object or comment but non-comment is not approval — in practice no rule changes occur without AFM consent. - AFM lacks power to take over Euronext responsibilities or to insist on non-rule-covered matters (e.g., IT infrastructure) if Euronext refuses voluntary compliance. Recommendations: - Authorities should develop and publish criteria the Minister would adopt for recognition decisions (standards against which Euronext is assessed). - Consider delegating power to recognize SROs to the regulator with oversight. - AFM and Euronext should reach explicit agreement on AFM’s role in approving/commenting on rule changes. Notes: - Euronext scheduled to cease being competent authority for listing when new Act implemented (currently scheduled for January 2005 but perhaps up to a year later); AFM taking increasing role in listing decisions in interim. ### Principles for the Enforcement of Securities Regulation Principle 8 — Comprehensive inspection, investigation and surveillance powers Assessment: Fully implemented. Key findings: - AFM/DNB may obtain information reasonably necessary for responsibilities under Act 1995 (Article 29); limited to a specified list of institutions rather than open-ended persons. - Access and requests may be routine or exceptional, without notice or judicial action; demand under General Administrative Law Act 5:17. - Non-compliance with information requests is a criminal offence (Article 5:20 GA Law Act); no explicit statutory requirement that information provided be accurate. - Detailed record-keeping requirements set out in Further Regulations (Annex 4); Articles 27 and 28 require client identity, financial experience, position and investment objectives, and order records. - Anti-Money Laundering: separate legislation; DNB responsible for oversight; intention to match Basel and FATF standards. Recommendations: - Expand list of institutions from which information can be obtained to include anyone AFM/DNB reasonably believes has required information. - Consider explicit requirement that no regulated entity supplies false information to AFM/DNB and ensure accuracy obligations. Principle 9 — Comprehensive enforcement powers Assessment: Fully Implemented. Powers and sanctions: - AFM, DNB and Openbaar Ministerie (Public Prosecutor) relevant for enforcement; Euronext has enforcement powers too. - AFM/DNB may refuse/withdraw licenses/dispensations; give written notices; impose penalty-orders; impose administrative fines; public announcements (AFM may do so). - Silent receiver may be appointed to oversee management, but limitations exist (only overseen where effective management exists; limits across securities operations of credit institutions). - For criminal matters (e.g., insider dealing) AFM/DNB may refer to public prosecutor. 2003 enforcement statistics (AFM): - 67 investigations into specific incidents; - 255 regular inspections (intermediaries and CISs together); - administrative fines imposed on 10 occasions; - 1 penalty order imposed. Gaps and recommendations: - Legislation should be explicit that regulators may require persons to make statements as part of investigations. - Consider expanding range of sanctions to include public statements even where no other sanction imposed. - Consider explicit provision to allow regulators to apply to court to appoint replacement management where justified. Principle 10 — Effective and credible use of inspection, investigation, surveillance and compliance Assessment: Fully implemented. AFM “Contribution model”: - Detailed questionnaire (>80 pages) for regulated securities firms to self-assess contribution to regulatory objectives; self-ratings on four-point scale (4 above minimum, 3 compliant, lower scores for non-compliance). No required self-assessment of significance of breaches (regulated entity may comment voluntarily). - AFM checks assessments, discusses with firms, builds risk profile; inspection programme based on risk assessment. Intention: visit main securities firms annually, smaller players every three years. New regime introduced September 2001 — full cycle not yet completed. DNB approach: - Similar risk-based approach but no self-assessment; DNB and AFM coordinate inspections (joint or separate). Market surveillance: - Euronext monitors market for insider trading/market manipulation; significant cases passed to AFM and then usually to public prosecutor. Notifications: - Article 39 requires securities firms to notify breaches or potential breaches; Article 39 does not apply to credit institutions (they notify DNB). DNB requires notification if financial resource requirements fall below 110 percent of required minimum. Recommendations: - AFM consider inviting regulated entities to assess significance of any compliance weaknesses identified in the Contribution model. ### Principles for Cooperation in Regulation Principle 11 — Authority to share public and non-public information Assessment: Fully Implemented. Key points: - AFM/DNB/Euronext may supply data obtained in performance of duties to Dutch government agencies or designated Dutch agencies (article 33 Act 1995) unless: - purpose insufficiently defined; - intended use outside scope of supervision; - contrary to Dutch law or public order; - confidentiality not sufficiently guaranteed; - provision conflicts with interests 1995 Act aims to protect; - insufficient safeguards against misuse (article 33). - Similar rules apply for foreign regulators (article 33); information not subject to dual illegality rules nor approval of another authority; information can be disclosed unsolicited or in response to requests. - Netherlands received 44 requests for assistance in 2003; accepted all but 3 (declined because requesting authority not designated). Comments: - Cooperation powers meet principle criteria. Principle 12 — Information sharing mechanisms and agreements Assessment: Fully Implemented. Practical arrangements and agreements (examples listed in source): - AFM and DNB enter into formal covenants and MoUs domestically and with foreign regulators, including bilateral agreements and participation in CESR Multilateral MoU. - Netherlands received 44 requests for assistance in 2003. - Netherlands currently cannot sign IOSCO multilateral MoU because it cannot use investigatory powers on behalf of a foreign regulator without a domestic interest; Ministry of Finance working on legislative amendment to allow this. Principle 13 — Assistance to foreign regulators (cross-border inquiries) Assessment: Partly Implemented. Legal framework: - AFM/DNB may request information or institute investigations for benefit of agencies that are party to the same convention or bound by the same binding decision of an international organization (article 36 1995 Act); may permit foreign officials to participate in investigations (article 37); may verify information in other Member States with permission (article 38). Key limitation: - Gathering information for foreign supervisors is possible only where there is a domestic supervisory interest; no information can be gathered if there is no supervisory interest. Status and remedy: - Ministry of Finance working on legislative proposal to solve discrepancy; change expected by 2005. Recommendation: - Introduce legislation to allow AFM and DNB to exercise investigative powers on behalf of a foreign regulator even where there is no domestic interest. ### Principles for Issuers Principle 14 — Full, accurate and timely disclosure by issuers Assessment: Fully Implemented. Disclosure regime and requirements: - Prospectus obligation for offers to the public, with exemptions (shares distributed for free, shares to professionals, shares issued to foreigners, euro securities, shares with par value > €40,000, offers to a “restricted circle” — term undefined). - Ongoing disclosure: audited annual report; non-audited semi-annual report; disclosure of every relevant new fact which may have significant influence on price. - Prospectus content minimums include: persons responsible; accountant statements; general information; capital and activities; subsidiaries of significance; financial position and results; board/management/supervision; recent developments and prospects; information on various instrument types (shares, debt, options, futures). - IPO publicity constraints and required warning text; prospectus must give true and fair view as at last balance sheet date and include significant post-balance-sheet events. Statistics (prospectuses and exemptions): - Non-regulated market (by year): - 1998 Number of issues 254; Number of prospectuses issued 51; Number of exemptions 203 - 1999 Number of issues 491; Number of prospectuses issued 94; Number of exemptions 397 - 2000 Number of issues 518; Number of prospectuses issued 177; Number of exemptions 341 - 2001 Number of issues 579; Number of prospectuses issued 456; Number of exemptions 123 - 2002 Number of issues 859; Number of prospectuses issued 198; Number of exemptions 661 - Regulated markets (Euronext Amsterdam): - 2001 Programs 33; Pricing supplements 145; prospectus 185 - 2002 Programs 22; Pricing supplements 60; prospectus 82 - 2003 (until 31/8) Programs 23; Pricing supplements 81; prospectus 103 Cross-border: - Netherlands arrangements comply with IOSCO disclosure standards for Cross Border Offerings and Initial Listings by foreign issuers. Concerns and recommendation: - “Restricted circle” exemption could allow offers without prospectus to a very large number of people; authorities recommended to review provision to limit such use. Note: new EU Prospectus Directive will impose a maximum number of offerees. Principle 15 — Fair and equitable treatment of holders of securities Findings on shareholder rights and control: - Dutch Company Law grants shareholders rights to approve major corporate changes (amend articles, declare dividends, appoint auditor, approve annual accounts, statutory mergers/divisions, dissolution, conversion), but articles may transfer some powers to supervisory board. - About 30 percent of listed companies issue shares separating economic benefits from voting power (depositary receipts held by trust offices), often resulting in trustees (closely tied to management) exercising voting rights; proposed legislation would entitle holders of depositary receipts to receive a proxy to vote. - Bearer shares permitted; no requirement owner of bearer shares register ownership with Company Registry. - Takeover protections: public offer must be addressed to all holders of securities of type; best price rule applies; disclosure obligations for change of control events and public offer preparations. - Takeover timelines: friendly offer minimum 20 days notice; hostile offer 30 days; general process takes about two to three months. - Disclosure of Major Holdings in Listed Companies Act 1996 distinguishes three kinds of notifications (details in source beyond excerpt). Recommendations (implicit in findings): - Proposed legislation on depositary receipt voting rights to address separation of economic and voting power. - Ensure disclosure and takeover rules operate to protect fair pricing and equitable treatment. *Source: Excerpt from IMF assessment document (text provided).* ### 1. Any person who, at the time at which the shares in the capital of a public limited company ### _cr04310 - 1. Any person who, at the time at which the shares in the capital of a public limited company ### Shareholder notification and disclosure requirements - Any person who, at the time at which the shares in the capital of a public limited company incorporated under Dutch law are admitted to the official listing of a stock exchange situated and operating in a member state of the European Union, has at his disposal 5 percent or more of the shares in the capital of that company or 5 percent or more of the votes that can be exercised on the issued capital of that company, must give notification of this within 4 weeks of admission to the official listing at the same time to the company and to the AFM. - The words “at his disposal” include two or more persons acting in concert. - Any person who acquires or disposes of shares in the capital of a company or of votes that can be cast on the issued capital of a company, which he knows or should know causes the percentage of the shares or votes to fall within a different bandwidth to the percentages at his disposal immediately prior to this, must report this situation to the company and to the AFM forthwith. - Directors and supervisors should notify, under the 1996 Act, any change in the number of shares and votes (or rights to acquire shares / votes) they hold in the NV that is under their direction casu quo supervision. They should notify to both the company and to the AFM, forthwith. - In addition in case of a public offering of securities, the issuer must state the position of its main shareholders in the offering prospectus. ### Bandwidths for disclosure and proposed amendments - The bandwidths mentioned under 2. above are as follows: for companies as described in 15–2.5: 0 to 5, 5 to 10, 10 to 25, 25 to 50, 50 to 66 2/3 and 66 2/3 percent or more. - With the understanding that the following bandwidths are applicable to a company as referred to in article 76 a of Book 2 of the Civil Code (Investment Companies with Variable Capital): 0 to 25, 25 to 50, 50 to 66 2/3 and 66 2/3 percent or more. - The government proposes to amend the 1996 Act. The new bandwidths for companies as described in 15–2.5 will be: 0 to 5, 5 to 10, 10 to 15, 15 to 20 and 20-25. - Once the interest is above 25 percent, one will have to report every change. - The special bandwidths for Investment Companies with Variable Capital will not be relevant anymore, because these companies will no longer be covered by the new Disclosure Act. ### Sanctions and enforcement for non-compliance - Failure to comply with these notification requirements is a criminal offence. - Other sanctions can also be applied, including the suspension of voting rights. - Other shareholders can take civil action. - On foreign issuers, see the response to Principle 14. - Assessment: Fully Implemented. - Comments: There are no further comments. ### Principle 16 — Accounting and auditing standards: requirements for published accounts - All companies should publish financial statements. The level of detail of the information contained therein is dependent on the size of the company. - Medium sized and large companies are also obliged to have these financial statements audited by an external, independent public auditor, who has to certify the accounts. - The size limits of companies are based on net revenues, total assets and number of personnel (two out of three). - In the prospectus there have to be audited financial statements for the period of the last three years. - The Conceptual framework (“Het Stramien”) prefaces the Guidelines for Financial Reporting (“Richtlijnen voor de Jaarverslaggeving”). This conceptual framework is identical to the Conceptual Framework of the IASB. - Under current arrangements, these guidelines are not legally binding. - Financial statements for listed companies must include: - balance sheet, - statement of the results of operations, - cash flow statement (not necessary for non listed companies), - statement of change in ownership equity where this is material to the price of securities. - The Civil Code (section 9) requires the accounts to be clear and consistent and comparable from one period to another. ### Accounting standards, auditing practice, and oversight - Dutch accounting standards for limited liability companies are based on the Civil Code, which is in accordance with the EU Directives. - More detailed guidance is given by the Council for Annual Financial Reporting (“Raad voor de Jaarverslaggeving”), a private body; its standards are first published in draft and finalized after a consultation process. - Note that the major part of the rules for Dutch GAAP is not legally binding. Companies can, strictly speaking, ignore the guidelines of the council, though few do so; deviations should be thoroughly substantiated and may be taken to the special company court by a shareholder. - The council is working to include as many IAS/IFRS in Dutch GAAP as possible. - Accounting standards will become the responsibility of the AFM under the new law. - The requirement for accounting standards applies equally whether or not the accounts are audited or (as in the case of some semi annual accounts) they are not. - The Dutch profession applies a slightly modified version of the International Standards on Auditing of the IFAC. Adherence to these standards is not mandatory but is common practice; an auditor must be able to support any deviations in court. - The main difference between the ISA and the Dutch standards is that in the Netherlands it is forbidden for an auditor to accept any limitations in the scope or the approach of the audit by the audit-client; in such a case the auditor must end the engagement. - The Code of Conduct (Gedrags en Beroepsregels) requires auditors to be independent of the company they audit. For Public Interest Entities the Dutch organizations of auditors (NIVRA and NovAA) have adopted the recent guidelines of the European Community on independence fully. - Articles 7, 8, and 9 of the Decree make clear that the periodic reports should contain information that is sufficient to make an informed judgment; the information must be clear and consistent. - Euronext rules would require good standards. The Act requires that periodic information must adhere to good accounting standards. The AFM has the powers to enforce this; it could use administrative sanctions but has never done so. AFM is reviewing its enforcement practice and propose to take a more proactive stance when the new law is in place. - Assessment: Broadly Implemented. - Comments: At present, there is no formal oversight of the body responsible for the independent organization that is responsible for auditing standards (NIVRA and NovAA), although this will be remedied under the new law. This is an important matter of which the authorities are aware and about which they are taking appropriate action. ### Principles for Collective Investment Schemes — Principle 17: eligibility and regulation - There are some 461 CISs in the Netherlands. The top ten providers are responsible for just under 200 of these. - There are a total of 83 regulated institutions responsible for CISs, of which 60 are responsible for 6 or fewer funds. ### Entry criteria, governance and cross-border provisions for CISs - Only authorized CISs are allowed to solicit or obtain moneys or other goods, beyond a restricted circle, in exchange for units. Whether or not a circle is restricted is assessed using various criteria (but could include a large number of people). - The CIS must show that it meets a number of requirements relating to expertise and trustworthiness, financial resources, management and the supply of information to potential investors. - CISs that solely attract funds from institutional investors are exempted from the authorization requirement. - The Act requires that a CIS and the allied depositary or custodian meet certain requirements as laid down in the Act itself and in the decree. These requirements include the honesty and integrity of the managers of the fund, and financial capacity. - The DNB is responsible for the prudential issues and the AFM for conduct of business. - Section 15 of the Decree covers competence and internal management: The administrative organization of the collective investment scheme and, for a unit trust (insofar as the assets deposited for safekeeping are concerned) of the depositary shall incorporate such safeguards that the assets and liabilities of the collective investment scheme and the changes therein are accounted for truly and fairly. - Controllers who invite a third party to conduct the investment management function would regard that person as a director of the CIS and subject them to authorization criteria in the same way as other directors. - For other functions, such as administration or marketing of the fund, there is no requirement for those conducting such functions to be regulated, although the Directors of the CIS retain responsibility for proper operation and compliance. - The system of approval takes into account cross border co-operation: - Where the issuer is in the EU, the passport provisions of the UCITS Directive apply. - Where the issuer is in a third country, or in a member state where the CIS is non UCITS, the AFM may enter into co-operation agreements to permit the offering of such CISs and to provide for exchange of information as necessary. - Unlicensed operation of a CIS is a criminal offence (see Section 39 of the Act). Furthermore, a cease and desist order under penalty and/or an administrative fine may be imposed by the Authority. *Source: _cr04310 - 1. Any person who, at the time at which the shares in the capital of a public limited company* ### Section 33b and 33c of the Act. Such sanctions have rarely been applied in practice. ### _cr04310 - Section 33b and 33c of the Act. Such sanctions have rarely been applied in practice. ### Sanctions and enforcement - Statutory sanctions available (sections referenced exactly as in the Act): - issue a direction, that the CIS must observe (Section 21 of the Act); - appoint a silent receiver (Section 27 of the Act); - withdraw the authorization (Section 15 of the Act); - impose a cease and desist order under penalty (Section 33); - impose an administrative fine (Section 33). - In some cases a breach is also a criminal offence (Section 39); the authority can then report the breach to the public prosecutor. - Sanctions have been deployed against non registered illegal CISs and have included fines, silent receiver and cease and desist order; these are applied in a handful of cases arising from complaints, competitors’ tip offs and applications for authorization that demonstrated that the offer had already been made. - For registered schemes there have been a handful of cases where a silent receiver has been appointed; directions have been issued to remove directors where an operator had infringed the rules. ### Supervision and ongoing monitoring - Ongoing monitoring of CIS conduct in the Netherlands is undertaken by the AFM and DNB throughout the life of the CIS, including continuing compliance with licensing requirements. - Monitoring methods in use: - regular inspections by the Authority (NAV inspections); - yearly meetings with the directors of the CIS; - yearly inspections with the depositary if there is a unit trust; - discussions with the external auditor, and the external auditor is required to report irregularities. - Reliance on internal auditors is rare. - Investigative powers: - The AFM and DNB may request information from or investigate or order an investigation on its behalf to ascertain whether requirements under the Act are observed; the person or entity which is the object of investigation must give all possible assistance (Section 19 of the Act). - Reporting requirements: - The Decree (Article 17) provides for periodic reports from the CIS to the AFM and DNB setting out matters such as the balance sheet and net worth of the CIS. - The AFM and DNB will review the annual and semi-annual report; these have demonstrated a lack of transparency of costs. - On-site inspections: - The AFM conducts between 100 and 150 on site visits a year. - In the past two years, they have not met their targets (which were for higher figures). - From 2003 onward, the visits will be planned on a risk-weighted basis in the light of the contribution model. - Notification obligations: - Changes in management, and in the persons who may (in)directly appoint or dismiss the management, must be reported to the AFM and DNB (applies to the CIS as well as the depository). See sections 11 and 13 of the Decree. - Section 14 provides for an obligation to notify changes in the terms and conditions. - Record keeping: - There are no special requirements in respect of record keeping; CISs are subject to the Civil Code and must keep books and records of sufficient quality to comply with Section 15 of the Decree and the circular letter ‘Policy rules relating to the administrative organization of collective investment schemes’ of 12 December 1996. ### Conflicts of interest and outsourcing - Circular issued in December 2001 sets out recommendations and policy rules on disclosure of costs and close links. - The circular provides guidelines for inclusion of information about costs and close links in both the prospectus and the accounts. - Foreseeable entanglement of interests arising out of close links should be indicated in the prospectus; terms and conditions of such transactions should be stated. - General recommendation: all dealings with related parties must be effected on market terms (or terms that are more favorable to the investors). Dealings include: - execution of investment transactions, safe-keeping of securities, investment of liquid assets, lending and borrowing of securities, loans and mortgages, buying and selling of investment instruments on a regulated market, market making, execution of transactions that generate acquisition commission and the outsourcing of activities. - Enforcement and evidence: - AFM reviews during inspections whether market terms exist and if there are any conflicts of interest. - In notes to annual accounts it suffices to include applicable transaction types and state that they were carried out on market terms. - Management should retain documentary evidence (e.g., quotations for comparable transactions) to demonstrate market terms; external auditor may use this evidence. - CIS operators are required always to act in the best interest of the investors; breaches may lead to questioning fitness and integrity of managers and possible dismissal. - Outsourcing rules: - CIS may outsource functions according to an AFM circular letter which prevents outsourcing of all essential functions, requires proper monitoring, requires the CIS to have capacity to withdraw delegation where necessary. - Delegate must sign a written agreement accepting obligation to comply with regulatory requirements. - CIS retains responsibility for entire operations and conduct; outsourcing must be disclosed. - Conflicts between delegate and investors would be dealt with by CIS retaining responsibility for regulatory compliance including appropriate resolution of conflicts of interests. ### Assessment, comments, and recommendations (Conflicts, record keeping, registration of function-providers) - Assessment: Fully implemented (for the aspects assessed). - Comments and issues identified: - AFM and DNB do not themselves have regulatory authority over those entities that perform all the functions of a CIS (e.g., no direct regulation of the administrator of a CIS). - If functions are delegated to a professional administrator, that administrator may not need to be regulated; reliance on regulation of the administrator via other activities is not satisfactory and produces uneven treatment. - The fact that a CIS remains responsible for outsourced functions meets the criteria, but authorities should consider extending registration requirement to all who carry out CIS functions. - Recommendations: - The authorities are recommended to consider extending the regulatory requirements to cover all those providing functions for CISs. - The authorities are recommended to ensure that the new legislation provides for powers to make specific rules on conflicts of interest and record-keeping that are adequately enforceable. - The authorities have indicated they will introduce more specific measures on conflicts of interests and record keeping by means of the Further Regulations under the new law and the revised Decree on Investment schemes. ### Legal form, segregation, and protection of client assets (Principle 18) - Legal forms permitted: - The CIS may be a unit trust, a limited liability company or a limited partnership. - Disclosure and investor rights: - Disclosure requirements and the rights of investors as to pricing mechanism, sale and redemption rights, and changes in the terms of the CIS are set out in the Annex to the Decree on CISs. - Annex to the Decree demands prior notification of changes to terms and conditions with a requirement that investors be able to sell their investments; where the rights of investors are diminished, they will be able to sell their investments if they choose within three months. - Changes to terms and conditions must be notified to the AFM and not implemented without its approval (Article 14 of the Decree). - Separation and safekeeping of assets (applicant for authorization for a unit trust must show): - assets will be deposited for safekeeping with an independent depositary, and - assets will be segregated from assets and liabilities of depository itself and other persons or entities; Section 5 (2) under b and c, Act. - Depositary safeguards (Decree, Annex A, 3.1 to 3.4): - the depositary shall act solely in the interest of the unit holders; - control over documents of value in safekeeping should be held solely by CIS and depositary together; - surrendering of documents of value by the depositary must only occur against the receipt of declaration from CIS that surrendering is required for the performance of the regular management function; and - there is liability for depositary for losses resulting from culpable non or defective performance. - Independence requirement: - The depositary must be an independent legal entity: no personal or financial ties or mutually held directorships must exist between the boards of the depositary and CIS (Explanatory Memorandum). - Non-compliance should be reported to the Authority, as it may affect authorization or lead to supervisory measures. - Books, records, and auditing: - No special requirements for keeping books and records specifically for CIS assets and transactions; keeping of books and records must be of sufficient quality to comply with Section 15 of the Decree and related guidance. - Specific requirements for maintenance of books and records are to be included in the revised Decree on Investments Schemes to be introduced in 2004. - No specific internal or external auditing requirements for CIS assets beyond obligation to comply with section 1.5 of Annex A of the Decree (method of valuation of the assets) and publishing a certified annual account (Sections 19 and further of the Decree). - Assets of a limited liability company: - Regulations do not require assets of a CIS to be held by an independent third party when the CIS is a limited liability company. - AFM view: requirement that a fund company be totally separate and conduct no other activity meets requirement for alternative safeguards. - Authorities may wish to consider whether to introduce an independent third party custodian requirement for limited liability companies or alternative safeguards. - Assessment: Fully Implemented. - Recommendation: - The authorities are recommended to introduce specific requirements that provide for the maintenance of books and records in relation to transactions involving CIS assets and all transactions in CIS shares or units or interest. ### Disclosure and advertising (Principle 19) - Information requirements: - The prospectus shall contain all information necessary to enable an informed judgment to be made on the value of the CIS product and the price to be paid for investments. - Annual and semi annual accounts shall be published. - Monthly statements with key information, such as total value of investments of CIS and a survey of composition of investments should be available (Sections 6 and 19 to 23 Decree). - Each CIS shall have a key features document (KFD). - Observations: - Ongoing requirement to publish annual and semi annual accounts contains no general requirement to disclose all material matters relating to the value of the investments in the CIS; however, the Act contains an overriding requirement that the AFM must be satisfied as to the information furnished to investors. - Decree and annexes require information on: - the date of the issue of the offering document; - information concerning the legal constitution of the CIS; - the rights of investors in the CIS; - information on the operator and its principals; - methodology on asset valuation; - procedures for purchase, redemption, and pricing of units; - relevant financial information concerning the CIS; - information on the custodian; - the investment policy of the CIS, indicating the markets and instruments in which investments are made; - information on the risks involved in achieving the investment objectives; - the appointment of any external administrators or investment managers or advisers who have a significant and independent role in relation to the CIS; and - fees and charges in relation to the CIS. - AFM powers: - If the AFM is not satisfied with the information in the prospectus, it may withhold authorization and thereby prevent the offer. - Advertising rules (Directive for advertising by collective investment schemes): - advertisement shall make clear to the public that a CIS is concerned; - the advertisement shall include the name of the CIS; - the advertisement shall be substantively truthful and shall not be misleading; - insight from an advertisement should not differ in any material respect from that gained from compulsory information; - advertisements stating expectations about the future or referring to past performance shall include the sentence: ‘The value of your investments may fluctuate. Past performance provides no guarantee for the future.’ - the advertisement shall state the places where the prospectus can be obtained by the public; - presentation of actual returns shall comply with requirements concerning definition, consistency, reference period and benchmark; and - simulations and forecasts have to be certified by an expert. *Source: _cr04310 - Section 33b and 33c of the Act. Such sanctions have rarely been applied in practice.* ### Section 18 of the Decree requires that a CIS should update the essential information in the ### _cr04310 - Section 18 of the Decree requires that a CIS should update the essential information in the ### Section 18; periodic reports and accounting standards - Section 18 of the Decree requires that a CIS should update the essential information in the prospectus as soon as it is reasonable to do so. - Requirements for periodic reports are set out in the Civil Code and in the Decree. - Accounting standards are also subject to the Civil Code. - Assessment: Fully implemented - Comments: There are no further comments on this principle. ### Principle 20 — Asset valuation; pricing and redemption of units in a CIS Description — Asset Valuation - Requirements for valuation of CIS assets are set out in the Dutch Civil Code (Book 2) and in the rules on external reports as set by the Dutch council on external reporting. - Such requirements are not tailored to CISs. - Timing of valuation depends on the nature of the assets: most liquid financial instruments valued most frequently; illiquid non financial assets such as real estate valued much less frequently. - There are no regulations prescribing valuation frequency but the frequency must be set out in the prospectus. - Accounting standards are required by the Civil Code but not by any regulation specific to CISs. - The prospectus should state that the pricing should be at fair value. There are no regulatory requirements to this effect. - There are no requirements that valuations are fair and reliable other than the general requirement that the CIS be run by fit and proper management. - It is necessary to have independent auditors of CIS assets. Description — Pricing and Redemption Issues - The NAV of those CISs that are freely repurchased must be recalculated daily. - Other CISs may be calculated much less frequently depending on the nature of the CIS. - The frequency must be disclosed in the prospectus. - Requirements as regards pricing and redemptions are required to be disclosed in the prospectus. - There are no specific rules set by the regulatory authority for pricing controls to identify and rectify errors, omissions or misplacement of assets. - Regulatory authority AFM expects and sees to it that CIS operators have internal guidelines and procedures for identifying and rectifying errors and omissions; this expectation has been made public. - Scheme documentation would set down conditions for the suspension of redemption rights. There is no regulatory oversight of this matter. There are no requirements that the regulator be informed and no right to intervene. - Assessment: Fully implemented - Comments: Rating given on the basis that the arrangements appear to work satisfactorily; absence of major public scandal not sufficient reason to assume regime will always work well; suggested review of rule specificity in context of new laws. ### Principles for Market Intermediaries — Principle 21: Minimum entry standards and authorization Authorization and licensing framework - Persons not possessing a license are prohibited from offering or performing services as a securities broker or portfolio manager in or from the Netherlands (section 7, Act). - DNB and AFM grant licenses to market intermediaries. DNB grants licenses to credit institutions; Securities Institutions are granted a license by AFM. - Institutions applying for a license must prove they meet requirements as laid down in the Act. The Act states, in general: - that managing directors should be fit and proper; - that a firm should meet certain capital and other financial requirements; - which information should be distributed to the public; and - measures that should be taken in order to ensure proper compliance with the Act (in the field of, for example, internal control systems and procedures for order flows). - Excerpt of Section 7, sub 4, Act on the supervision of the securities trade 1995 (“1995 Act”): - “-4. Our Minister shall, upon request, grant a license as referred to in subsection (1) if the applicant satisfies rules to be laid down by or pursuant to an order in council in respect of: (a) fitness and properness; (b) financial guarantees, on a consolidated basis or otherwise; (c) management and establishment of the head office; (d) information to be supplied to the public; and (e) assurances about proper supervision of compliance with the rules laid down by or pursuant to this Act.” Operationalization and scope - Requirements in section 7 are worked out in more detail in the Decree, Further Regulations and policy rules. - Licensing procedure subject to the General Administration Law Act. - The requirement for fitness and properness applies directly only to those who represent the intermediary or determine day-to-day policy. - No requirement on AFM / DNB to assess fitness and properness of all who materially influence the applicant; intermediary responsible for appropriateness of other staff under Annex 4.24 of the Further Regulation. - Annex 4.24 requires keeping records about suitability of staff; no specific requirements as to qualifications for key personnel. - Credit institutions subject to an equivalent provision under Article 12 of the Further Regulations on prudential supervision. DNB as effective licensing authority for large securities players - DNB can grant a license for the securities activities of a credit institution. - Given dominance of four large financial institutions (credit institutions highly active in securities), DNB is effectively licensing authority for the largest players in securities business. - Many securities firms hold banking licenses; for them DNB is licensing authority even if primary activity is securities business. Authority of the regulator and ongoing requirements - DNB and AFM may refuse to license or withdraw a license; decisions can be appealed to court. - Both regulators can give and withdraw approval for employment of key personnel. - A securities institution shall notify the supervisory authority before every planned alteration to: - the number and identity of the directors of the institution (section 10 Decree 1995); - the structure of the institution (referred to in section 15(1) Decree 1995); - the measures referred to in section 16(1) Decree 1995 (segregation of assets); - the accounting system and related internal controls, recording system and other systems (referred to in section 17(1) Decree 1995); - the name and address of the head office of the securities institution and, if it is not established in the Netherlands, the address of the branch office, together with, where applicable, the place in which it is established; and - the composition and the formal and actual control structure of the group to which the securities institution belongs. - Notification must be accompanied by explanatory documents and, if requested, other information the authority reasonably deems necessary. - An alteration may not be implemented if the regulatory authority rejects the proposal within six weeks of receiving the notification, or if further information is requested. - Alterations to antecedents of directors or to programme of activities must be notified immediately. Limitations and transparency - Licensed entity that is not a credit institution must notify AFM of any breaches of the regulations (Article 39 of the Further Regulations) unless it is a credit institution. - A credit institution should inform the DNB who have undertaken to inform the AFM in respect of securities business. - Article 24 of the Further Regulations requires a licensed entity to notify the regulator if proposing changes in accounting system or internal controls. - No general requirement to notify AFM / DNB of any material change in circumstances that might affect the licensing decision. - No explicit requirement to notify Dutch regulators of investigations or disciplinary action taken by foreign regulators, nor of potential litigation against the securities firm. - AFM/DNB publish a register of all licensed intermediaries that includes scope of permitted activities but not any condition on a license nor the identity of senior management. Investment advisers and conflicts - Investment firms that deal on behalf of customers or have custody of client assets must be licensed and are subject to appropriate financial resource requirements and detailed record keeping in the Further Regulations. - They are not required to disclose educational qualifications, experience, or disciplinary history. - Article 33 of the Further Regulations requires disclosure of potential conflicts of interest. - Subject to rules governing misleading statements, required to safeguard client assets and avoid conflicts of interest. Assessment and recommendation (Principle 21) - Assessment: Broadly Implemented - Reason: No requirement to make public the names of the senior management of a regulated entity. - Recommendation: Amend requirements so that names of the senior management of a regulated entity are available to the public. - Observations on licensing regime: - Single license permits carrying out any financial services, despite differing competence, financial, risk management requirements for securities business versus banking. - An entity could carry out securities business on basis of a banking license; potentially inconsistent with IOSCO principle that it should be necessary to be licensed to operate a securities business. - Covenant between regulators provides for DNB/AFM consultation; advice from AFM not binding on DNB. - Recommendations to address division of licensing responsibility: - Ensure licensing decisions for each area of activity are taken with explicit consent of regulator with primary responsibility for supervising that activity. - Withdraw permission for each area of activity if the primary supervisor advises it is necessary. - Amend covenant so primary licensing authority is bound to take action to limit activity where the other regulator advises this is necessary. Notification scope recommendations - Authorities recommended to introduce a broadly based notification requirement that any matter material to a licensing decision be notified to the relevant authority (DNB or AFM). - Add to list of specific matters: litigation against the company, significant investigations or disciplinary action by any regulator against the entity or its key personnel in other jurisdictions, changes in indemnity insurance where relevant, and any decision by a foreign regulatory authority to refuse a license. - Withdraw exemption for credit institutions from requirement to notify AFM of breaches in conduct of business regulations. Personnel checks recommendation - Authorities recommended to consider widening definition of personnel subject to checks by AFM and DNB to include any person who is in a position to control or materially influence the applicant for a license. ### Principle 22 — Capital and prudential requirements Capital requirements - Securities firms are subject to ongoing capital requirements based on the EU Investment Services Directive. - Minimum ongoing requirements: - A minimum level of equity capital; and - A minimum level of actual own funds (these must be a minimum of the sum of the capital adequacy requirements to cover position risk with regard to the trading book; settlement, delivery and counter party risk with regard to the trading book, large exposures with regard to the trading book, foreign exchange risk regarding the entire business, other risks). - Without prejudice to the level of actual own funds, an institution must have actual own funds of at least 25 percent of the fixed costs of the institution during the preceding financial year. - Calculation of own funds requirements includes both on balance sheet items and off balance sheet transactions. - Authorities state intermediary is not explicitly required to have capital related to legal or reputational risks, but DNB has discretion to instruct increased capital where existing capital insufficient to meet current risks. - Capital requirements can be increased in light of changes in market conditions or changes in activities of the intermediary. - Investor compensation scheme exists in addition to capital standards. - Assessment: Fully implemented - Comments: DNB applies capital standards in line with the EU Directive; criteria for this principle are met. Record keeping and reporting - Reports must be submitted monthly (quarterly for portfolio managers) to the DNB. - No explicit requirement on intermediary to maintain records such that capital levels can be readily determined at any time (implicit requirement exists through reporting obligation if own funds fall below 120 percent of required level). - Standardized periodic report designed to reveal significant deterioration in capital requirements. - Financial position subject to independent audit. - If DNB considers insufficient capital, actions escalate: telephone contact → formal letter → formal actions such as instructions, fines and ultimately withdrawal of license (in co-operation with AFM). - On an average month a handful of letters is sent to regulated firms. ### Principle 23 — Internal organization and operational conduct; client protection Management and supervision requirements - Licensed market intermediary required to have, according to judgment of DNB or AFM: - Adequate accounting system and internal controls. - A good accounting system and effective related internal controls and a reliable recording system for services performed, together with systems for effective monitoring and control of risks relating to operations as a whole and systems for determining financial position accurately at any time (Section 17 Decree 1995). - Directors responsible for set-up, existence and operation of accounting system and related internal controls; must organize, describe and regularly update these systems. - A proper accounting system requires management board be informed about performance and have adequate supervision and effective response to signals. - Article 24 of the Further Regulations: accounting system and related internal controls shall be systemically described, regularly evaluated and, if necessary, updated. - Each significant change in accounting system and related internal control should be reported to the AFM beforehand. - No explicit requirement that evaluation be conducted by an independent person, nor that any weaknesses be reported to AFM or DNB; auditors required to report material breaches in regulatory requirements to the regulator. Consumer protection and client asset safeguards - Annex 4 of the Further Regulations requires an adequate procedure for handling complaints (Annex 4.14). - Strict segregation of assets must be implemented: arrangements such that AFM judges rights of clients sufficiently protected and to prevent securities and, except for credit institutions, monies being used by the securities institution for its own account (article 12 FR 2002). - Client assets must be held on accounts under the name of this client. A client must authorize an institution before it may handle any assets (article 13 and 14 FR 2002). - Intermediary not permitted to pool client assets into a single client account, even if it could thereby obtain better returns for customers. - Investment institution must take note of clients’ financial position, experience and investment objectives insofar as reasonably relevant (“know-your-customer rule”, section 24 Decree 1995). - Before signing an agreement with a client, client must have identified himself; copies of identification-papers must be kept in files (article 4.12 sub d Annex 4 FR 2002). - A client agreement must be concluded with each client; contents set out in the Further Regulations Article 33. - A securities institution must provide clients with necessary information and documents for an assessment of services and securities. *Source: _cr04310 - Section 18 of the Decree requires that a CIS should update the essential information in the (PDF).* ### 1. At least once every three months an institution must provide each client with a statement that ### 1. At least once every three months an institution must provide each client with a statement that ### Client statements: required content - Frequency requirement: at least once every three months. - Purpose: provide true, fair and complete information about the composition of the portfolio managed for that client. - Required information (must include at least the following): - details of the market value and the composition of the portfolio, including a breakdown by the type of financial instrument and by individual financial instruments; - an analysis of the changes in the asset components and a calculation of the realized and unrealized losses/gains at the time; - the method of valuation used; and - the various management and other costs charged or to be charged to the client (article 25 FR 2002) ### Internal controls: legal and supervisory expectations - Monitoring and compliance: - An intermediary should have procedures in place to ensure monitoring of compliance with certain but not all legal and regulatory requirements under Article 40 of the Further Regulations. - There is no explicit requirement to have a person or group of persons with this responsibility. - A securities firm can be subject to the control of two independent people, even if it is handling client assets. - Recordkeeping and supervisory access: - Client records must be kept according to Annex 4 of the Further Regulations. - The AFM/DNB have the right to obtain such information as they need for the fulfillment of the supervisory duties. - Section 24 Decree 1995 requirements (a securities institution shall, during the performance of its activities, comply with rules to be laid down by the supervisory authority to ensure that the securities institution): - acts in the interests of its clients and the proper operation of the securities markets; - takes note, in the interests of its clients, of their financial position, experience and investment objectives, in so far as these may reasonably be deemed to be relevant to the performance of its services; - provides its clients with the information and documents necessary for an assessment of the services offered by it and the securities to which the said services relate; - endeavors to avoid conflicts of interest and, if these are unavoidable, ensures that its clients are treated fairly; - does not use the powers that it has been granted for the services to be performed by it for purposes other than those for which the powers were granted; and - has a good internal organization and effective control mechanisms in order to ensure compliance with the rules referred to in the opening lines and to promote the continuity of its operations. - Section 17 Decree 1995 general requirement to have sufficient internal controls relating to the risks of the operation as a whole, encompassing the need to have: - measures to preserve the integrity of the firms dealing practices; - safeguards against the unauthorized use of its own or its clients assets; - appropriate segregation of key duties and functions; - proper accounting records; and - compliance with regulatory requirements. - Assessment: Fully Implemented - Comments: - The requirements to have high standards of integrity (including with respect to dealing practices) and to comply with legal and regulatory requirements is implicit in a range of requirements set out in the regulations. - It would be helpful to make such standards explicit. - Recommendation: introduce a legal requirement to the effect that the legal and regulatory obligations should be met and that the intermediary should act with honesty and integrity and observe high standards. ### Contingency plan for intermediary failure — current status and recommendations - Principle 24 summary: There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk. - Description: Contingency Plan - There is no contingency plan established by the regulators for dealing with the failure of a market intermediary. Measures would be decided on an ad hoc basis in co-operation with other regulators. - The DNB has the power to limit or prevent actions by the intermediary through written notice. - A silent receiver may be appointed, according to Section 28 of the Act. - The AFM has an incident procedure that would be brought into play in the event of the failure of an institution; however, the procedure does not include the DNB, who would be brought into the plan as necessary, according to the terms of the covenant between AFM and DNB. - The regulators are drawing up such a plan and this is to be commended. - An investor compensation scheme exists. - The intermediary is required to give warning to DNB if own funds fall below 120 percent of the required level. - Regulatory Action available to DNB: - Restrict actions under the intermediary (section 28 of the Act). - Require the intermediary to take specific action (Section 28 Act). - Put in a silent receiver (Section 28 Act). - Investor compensation scheme (“BCR”): - Operates where an intermediary cannot meet its liabilities in respect of investor claims. - Not all kinds of investor claims are compensated by the BCR, but claims due to failure of the segregation of assets are compensated. - Limitations and communications: - There is no provision for requiring public disclosure of the firm’s trading status to the market. - Foreign supervisors would be informed by either AFM or DNB as soon as possible. - Assessment: Not implemented - Comments and recommendations: - Rating follows from the fact that there is not any clear plan for dealing with a firm’s failure. - While the AFM has an incident procedure, it is not designed to deal with a failure as such and it does not include the role of the DNB, which would be critical in the event of a failure of an intermediary. - Recommendation: The DNB and AFM are recommended to establish a clear plan for dealing with the eventuality of a firm’s failure, that includes both their roles. - Recommendation: The authorities should also introduce into such a plan procedures for the appropriate disclosure to the market. ### Principles for the Secondary Market — Exchanges and trading systems - Principle 25: The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight. - Article 22 of the Act: - Gives the Minister of Finance the power to recognize exchanges. - It is prohibited to operate an exchange without recognition unless enjoying an exemption (offered only to foreign exchanges operating under a passport according to the ISD) or a dispensation (applies to non EEA exchanges and exchanges trading products not covered by the ISD – such as commodity derivatives). - Recognized status shall be granted provided that the operator of the securities exchange shows that it is established in the Netherlands and that the operation of the securities exchange, the rules that are to be applied by the said securities exchange, their application, and the monitoring of compliance with the said rules, meet the standards necessary for ensuring the proper operation of the securities markets or protecting the position of investors in the said markets. - Minimum aspects verified: - the expertise of the persons who determine the day-to-day policy of the operator; - the integrity of the persons who determine or help to determine the policy of the operator; - the financial guarantees; - the settlement system; and - the application of the current rules of the securities exchange, to Issuers and to securities institutions that will be admitted to the said securities exchange and to subsidiaries thereof. - Recognition conditions and standards: - Restrictions and conditions may be imposed in the interests of the proper operation of the securities markets or the position of investors (the Act, article 22). - The AFM also applies the standards laid down by FESCO (now CESR) on the requirements for regulated markets. - These criteria are very high level and would give little guidance as to what was actually required for an exchange established in the Netherlands market. - Requirements placed on the Exchange as a condition of recognition are included in the letter granting recognition; however, there are no clear criteria or principles against which the performance of Euronext can be judged other than at a very high level of generality. - AFM does in practice examine matters such as the arrangements for managing the risk of non performance of contracts. ### Supervision of recognized exchanges - AFM responsibilities: - The AFM has the responsibility to satisfy itself that a recognized exchange adequately monitors and enforces its rules. - The operator of a securities exchange recognized pursuant to section 22 must notify the AFM in advance of any change in the rules referred to in section 22(2) or in the compliance procedures in respect of the said rules. - The AFM does not formally approve new rules or amended rules; the AFM will assess any change in the rules by evaluating whether these new rules will contribute to the regulatory goals of the Act. - Article 24 of the Act gives the Minister of Finance the power (delegated to the AFM) to issue instructions with regard to the rules applied to the Exchanges. The same applies to proposed changes in exchange regulation. - This arrangement does not give the AFM any formal powers with respect to weaknesses in the governance of the Exchange that does not relate to rules. - AFM supervisory goals and internal guidelines (high-level): 1. To promote access to the market. The AFM promotes access to the financial markets for market players (both consumers and offerors from the Netherlands and abroad). Access requirements apply to all market players. The AFM ensures that access to the market is not unnecessarily hampered as a result of these requirements. 2. To promote the efficient, fair and orderly operation of the market. No single party may feel disadvantaged compared to other parties. The AFM therefore ensures that there are recognizable standards on the financial markets. These standards, together with their enforcement, contribute to a level playing field for all parties. *Italic: IMF staff assessment excerpt from _cr04310.* ### 3. To guarantee confidence in the market. The AFM encourages market players (both individually ### 3. To guarantee confidence in the market. The AFM encourages market players (both individually and jointly) to take responsibility for the proper operation of the market. ### Role and powers of the AFM; market-player responsibility - Market players are expected to take ongoing responsibility for proper market operation; the AFM intervenes only where and when necessary and sets and maintains standards to limit incidents and ensure fair and honest transactions. - Current rules do not explicitly require the regulator to assess dispute resolution and appeals procedures, technical systems, record keeping or mechanisms to identify disorderly trading conditions; the AFM nonetheless has the power to examine these matters and to take action where weaknesses relate to the rules. - The Exchange (Euronext) is a monopoly; some participants have noted that fees are at a high level. This is outside the regulator’s competence and could be examined by the Dutch competition authority. - Assessment statement in text: Fully Implemented (comment: absence of clear recognition criteria means no clear performance criteria for Euronext; AFM’s powers to issue instructions to Euronext apply only in respect of their rules). ### Securities and market participants; rule-change approvals - No statutory requirement exists for the regulator to be informed of types of securities to be traded on an Exchange, though monitoring meetings may cover such matters in practice. - Euronext believes AFM has the power to approve rule changes; AFM considers it has the right to comment if it chooses. - Product design and trading conditions are for Euronext to consider when admitting a product for trading. - AFM has oversight power to satisfy itself that the Exchange has rules designed to ensure fair access to the market. ### Fairness of order execution procedures - Euronext trading rules require clear disclosure of order routing procedures and clear rules for order precedence. - AFM, not Euronext, is responsible for monitoring possible abuse of customer orders. - Order execution rules are disclosed to AFM; AFM has oversight responsibility for ensuring adequate enforcement and will examine trade matching and execution algorithms. - Execution rules are published to the market. ### Operational information, transparency and record-keeping - AFM is responsible for ensuring market rules operate to ensure equal access, transparency, record keeping, disclosure and confidentiality. - The market arrangements include an open order book and rules on pre- and post-trade transparency; records allow investigations into market misconduct and there are safeguards for disclosure and confidentiality. - Assessment: Fully Implemented. - Comment/recommendation: Increase transparency of the recognition and supervision process by establishing clear recognition criteria and deploying those criteria as ongoing performance standards; empower AFM to issue instructions to Euronext when necessary to meet published performance standards. ### Ongoing regulatory supervision of exchanges and trading systems (Principle 26) - AFM has developed a Supervisory Strategy for Euronext based on a Contribution Model: a self-assessment by the exchange indicating its contribution to AFM objectives. - Contribution Model will ask specific questions on activities characteristic of an exchange: a) access; b) operations; and c) supervision by the exchange of access and operations. - General organization-wide questions will also be asked. - The Contribution Model has not yet been finally developed. - Current ongoing supervision is based on a monthly report including: - amendments in the articles of association; - decisions of the Management; - new listings; - Euronext Announcements; - trading- and listing measures; - disruptions; - violations of the rules; - disciplinary sanctions, decisions of the disciplinary tribunal; - complaints; - verdicts of the complaints committee; - proceedings of Compliance department; and - minutes of advisory committees. - The report is evaluated monthly by AFM and discussed with Euronext; Supervisory Strategy and Contribution Model will replace the monthly report when finalized. - AFM has access to all market information and receives reports of off-regulated trades except those reported to a foreign regulator. - If AFM is not satisfied that Euronext is adequately operating the market according to the rules, it can issue instructions relating to the rules and, in extremis, advise the Minister of Finance to withdraw recognition (Sections 24 and 26 of the Act). Other sanctions include penalty orders and reprimands. - Clearing members are not currently formally subject to regulation (though subject to Euronext oversight); new legislation is intended to bring clearing members into regulation. - Cross-border integration of Euronext complicates national supervision; AFM has signed a Memorandum of Understanding (MoU) with other regulators of Euronext to cover harmonized matters. - Five regulators meet once a month in working parties; recommendations pass to a Steering Group overseen by a Committee of Chairmen. - Even within MoU, rule-change approval can take time; Euronext views this as a competitive disadvantage. - Euronext seeks faster resolution, wider scope of MoU, joint supervision, and application of the Contribution Model by all regulators; wishes regulators to reach common views on market-structure fundamentals. - Euronext is relinquishing responsibility for listing review of Prospectuses but may retain responsibility for determining which companies may be traded on the exchange. - Assessment: Fully Implemented. - Comments/recommendations: - Finalize the Contribution Model as rapidly as possible. - Ensure the Contribution Model is prepared consistent with Euronext’s position as a pan-European exchange. - Seek to expand the MoU among the five regulators to encompass all harmonized matters. ### Pre- and post-trade transparency (Principle 27) - Pre-trade: posting of bids and offers on the electronic order book. For less liquid stocks, issuers can contract with a securities firm to guarantee liquidity by posting bids and offers within specified spread and volume for a specified time. - Post-trade: immediate publication of volume, price, and time of execution of all order book trades. Agency block trades published immediately; publication of principal block trades can be delayed. - Derogations: trades outside certain price and volume limits (outside a specified percentage of the last order book price) become off-regulated market trades; these can be reported to AFM or Euronext but are not published. AFM takes no action with respect to such trades and the market does not have information. - Approximately 15 percent of trades by value (1 percent by volume) are not published to the market. - Assessment: Fully Implemented. - Recommendation: AFM and Euronext should review the rule relating to block trades to enhance market transparency and account for forthcoming revised ISD requirements. ### Market abuse detection and enforcement (Principle 28) - Market manipulation prohibited under Article 334 of the Penal Code and Article 32 of the Further Regulation to the Act. - Insider trading prohibited under Article 46 of the Act 1995 regarding Insider Trading: prohibited to enter a security transaction while in possession of inside information in securities listed at a recognized exchange in or from The Netherlands. - Article 32 of the Further Regulations requires securities institutions to refrain from misleading acts, including supplying misleading information regarding: - the price or value of the securities concerned; - expectations about changes in the value of securities; - the issuing institution in respect of the securities; and - the liabilities that may result for the client as a result of entering into transactions in those financial instruments; - and from carrying out one or more transactions in the financial instruments concerned. - Discussion exists about establishing market manipulation as an offence in the Act rather than Further Regulations; new Act is expected to encompass market manipulation in more detail. - Monitoring: - Euronext uses “Stockwatch” and reports findings to AFM. - AFM obtains information via intelligence and its own market monitoring function; AFM can investigate, impose a fine, or report an offence to the Public Prosecutions Department. - Monitoring activity data (listed as presented in the source): - Suspicious Reports 2000 2001 2002 - Euronext reports 28 25 52 - AFM reports 29 38 21 - Public complaints Na 25 16 - Investigations 45 39 26 - To Public prosecutor 10 12 12 - Requirements for information sharing and assistance are covered under CESR Memorandum of Understanding, agreements with the SEC and CFTC (US-States), MoUs with Polish and Chinese regulators, and an Exchange of Letters with the Swiss Federal Banking Commission. - Assessment: Fully Implemented. ### Monitoring of large positions, default risk and market disruption (Principle 29) - AFM and/or DNB do not directly monitor or supervise ‘large exposures’ generally; under the Capital Adequacy Directive (CAD) DNB supervises financial positions of Investment Firms and Banks, including insight into “large exposures” relevant for capital adequacy. - Banks and Investment Firms must submit financial reports to DNB. - Clearnet, a clearing house under supervision of AFM and DNB and its home supervisor the Commission Bancaire, does monitor large exposures of its Clearing Members. - Monitoring of large positions is not covered in the MoU on clearing and settlement; there are no arrangements for trigger levels or other mechanisms to identify large exposures. - AFM and/or DNB have no direct access to size and beneficial ownership of positions held by direct customers of market intermediaries (Clearing Members are supervised by DNB). - Under the Act on Disclosure of Major Shareholdings (WMZ) information on large positions in listed companies must be disclosed by listed companies. - Clearnet can require clearing members to report clients’ open positions daily and monitors positions; DNB has access to information about size of clients’ positions. - Clearnet powers (CRB references): - Can refuse to register additional transactions if position limits are exceeded (CRB article 1.5.3.6). - Can impose additional margin and has a general right to require that positions are reduced (CRB 1.5.3.7). - Decisions can affect Clearing Member, Trading Member or client; Clearnet can impose additional margin on an individual basis. - If a market member refuses to provide information on large positions, Clearnet can: - impose limitations on future trading; - require liquidation of positions; - increase margin requirements; - revoke trading privileges; and - increase capital of carrying firm. - Euronext can suspend clearing members from trading. - Clearnet shares information about large positions with AFM and DNB at monthly meetings; Euronext Amsterdam shares its information with Clearing Members. - Clearnet has a sufficient default procedure available to Clearing Members and a more detailed default procedure available to regulators. - On Clearing member default: all collaterals, margins and/or payments to the default fund belong to Clearnet, exercisable without waiting for bankruptcy proceedings. Dutch law provides segregation between clients’ funds and the Investment Firm. - Assessment: Fully Implemented (rating based on assumption that Clearnet is to be regarded as a market authority because it has required information and powers). ### Clearing and settlement (Principle 30) - No separate assessment of clearing and settlement in this section; covered under the IOSCO/CPSS assessment. - Assessment and comments sections left blank in source. ### Recommended plan of actions (summary of key recommendations extracted from the source) - Enhance confidence in division of responsibilities: - Conclude discussions on final areas where split of responsibilities between AFM and DNB is unclear. - Respond publicly to industry concerns about overlap and state how those concerns will be addressed. - Publish a comprehensive assessment of practical division of responsibilities and present to industry to enhance awareness and confidence. - Finalize transfer of responsibilities and provide explicit plan/timetable for transition of listing responsibilities (clarify whether Euronext continues to determine who may trade securities after Prospectus monitoring transfer). - Consider publishing criteria for Minister of Finance exemptions from regulatory requirements where power is reserved to the Minister. - Review balance between detail in the Act, Decrees and Further Regulation; consider whether current level of detail in Further Regulations and Policy Documents is necessary. - Introduce requirement for Minister to consult regulatory bodies before exercising retained powers relating to financial service regulation. - Reinforce regulator independence by: - Reviewing balance of matters placed in Acts, Decrees and Regulations; - Providing for budget approval over a longer period (such as 3, or preferably 5 years); - Allowing regulatory bodies to build up reserves for contingencies; - Making consultation between Ministry of Finance and regulatory bodies on legislation and Further Regulations open and transparent; - Introducing legal immunity for actions taken by regulators in good faith; - Requiring any general direction by the Minister to be made in public; and - Giving investor representatives opportunity to comment on regulatory authority budget. - Consider giving AFM right to seek restitution in court or direct powers to order restitution subject to proper procedures and appeal. - Address anxieties of smaller market participants about the consultation process. - Self-regulation and recognition: - Develop and publish detailed recognition criteria for SRO recognition decisions. - Give the power to recognize SROs to the regulator with oversight. - AFM and Euronext should reach an explicit understanding on AFM’s role in approving or commenting on rule changes. - Enforcement and information powers: - Expand list of institutions from which information can be obtained and ensure accuracy of information passed to regulators. - Ensure legislation explicitly permits regulators to require statements as part of information gathering. - Consider expanding range of sanctions to include public statements. - Mount a public awareness campaign to explain international standards requiring effective enforcement powers and safeguards built into AFM processes. - Review regulatory powers to ensure no gaps and consider provision to apply to court to appoint a manager of a regulated person where justified. - AFM to consider inviting regulated entities to assess significance of compliance weaknesses they identify in the model. - Cooperation in regulation: - Introduce legislation to allow AFM and DNB to exercise investigative powers on behalf of a foreign regulator even where there is no domestic interest. - Issuers and CISs: - Review Prospectus-related provisions to limit extent an offer without a Prospectus could be made to a large number of people. - Consider extending regulatory requirements to cover all those providing functions for CISs. - Ensure new legislation provides powers to make enforceable rules on conflicts of interest and record-keeping for CISs and require maintenance of books and records for CIS asset transactions. - Market intermediaries: - Amend requirements so names of senior management of a regulated entity are available to the public. - Ensure licensing decisions are taken with explicit consent of the regulator with primary supervisory responsibility; permit withdrawal of permissions when advised by that regulator. - Introduce a broadly based notification requirement for matters material to licensing decisions, including litigation, significant investigations, disciplinary action by foreign regulators, changes in indemnity insurance, foreign license refusals; withdraw exemption for credit institutions from notifying AFM of breaches in conduct of business regulations. - Consider widening definition of personnel subject to checks to include any person who can control or materially influence the license applicant. - Introduce a legal requirement that intermediaries act with honesty and integrity and observe high standards. - DNB and AFM to establish a clear plan for dealing with firm failure including both roles and procedures for appropriate disclosure to the market. - Secondary market (Principles 25–30) — reiteration of earlier recommendations: - Increase transparency of recognition and supervision by establishing clear recognition criteria and deploying them as ongoing performance standards; empower AFM to issue instructions to Euronext to meet published performance standards. - Finalize the Contribution Model for Euronext and ensure consistency with Euronext’s pan-European status. - Seek to expand the MoU among the five regulators to encompass all harmonized matters. - AFM and Euronext recommended to review block trade rules to enhance transparency. *Source: IMF country report section titled “3. To guarantee confidence in the market. The AFM encourages market players (both individually and jointly) to take responsibility for the proper operation of the market.” (content unit _cr04310).* ### 63. The Netherlands authorities are pleased with the positive assessment of the Netherlands’ ### The Netherlands authorities are pleased with the positive assessment of the Netherlands’ ### Principles 1–5 - IMF expressed concern that AFM is not fully independent of the Ministry of Finance due to: - the annual approval of the budget by the Ministry, and - a lack of immunity from civil action against actions taken in good faith. - Authorities’ response on budget and independence: - Primary responsibility for approval of the annual budget formally lies with the Supervisory Boards of the supervisory authorities. - Ministry approval is based on the considerations of the Supervisory Board, the advice of the market panel, and a limited procedural and overall-costs check. - Approval can be denied if the proposed budget would predominantly be contrary to public interest. - Annual approval occurs within a multi-year agreement on the stabilization of the inflation-adjusted costs of existing supervisory tasks. - AFM is able to build up reserves. - AFM can be sued if a court finds a decision wrong or disproportionate (this applies only to AFM as a whole; individual staff cannot be sued). - Through professional liability insurance and a financial guarantee of the Ministry, AFM is at no point liable when acting in good faith. - Authorities conclude the chance that AFM would not be able to operate or set its policy independently is, in practice, very slim. - Authorities acknowledge IMF’s conclusion that Further Regulations on the Act on the Securities Trade are detailed while existing regulations regarding investment funds are not, and are: - setting up Further Regulations on the Act on Investment Funds which meet IMF recommendations, - moving toward a policy of less detailed regulations. - AFM and DNB are evaluating co-operation and will review the Covenant between DNB and AFM to clarify supervisory responsibilities. ### Principles 6–7 - Authorities noted IMF’s observation that recognition of exchanges should lie with the supervisor rather than with the Ministry of Finance. - This issue will be discussed in the context of the Bill on financial supervision. ### Principles 8–10 - Authorities emphasize that the financial sector must adjust to AFM’s conduct-of-business supervision style. - AFM will use publications and meetings with market participants to enhance understanding of conduct-of-business supervision. ### Principles 17–20 - Authorities recognize there is no independent check on the CIS (e.g., ensuring asset disposals align with CIS terms). - As a result of a broad investigation of investment funds, in the next 6 months AFM and the industry will discuss modernizing the CIS-branch, including the extent of independent supervision of the depository. ### Principles 21–24 - Licensing decisions permitting entities to conduct securities business are not subject to explicit AFM consent but are subject to AFM advice to DNB which is binding per the Covenant between DNB and AFM; authorities consider this meets IMF’s recommendation. - AFM agrees on the need for a clear plan for dealing with intermediary failure that includes actions by all regulatory authorities; AFM has begun developing such a plan. ### Principles 25–29 - Recommendations on supervision of Euronext are being considered by authorities. - Supervisory powers of AFM with regard to exchanges will be evaluated in the context of the bill on financial supervision. ### IV. CPSS/IOSCO RECOMMENDATIONS FOR SECURITIES SETTLEMENT SYSTEMS (RSSS) — Introduction and scope - FSAP mission visited the Netherlands in October/November 2003; one objective was assessment of observance of the Recommendations for Securities Settlements Systems. - Securities covered by the assessment: - government bonds, corporate bonds, stocks and derivatives traded on markets organized by Euronext Amsterdam N.V. and its subsidiaries; - securities cleared through Clearnet and settled through Euroclear Netherlands or Euroclear NIEC; - scope extended to OTC transactions settled by Euroclear Netherlands or Euroclear NIEC. ### Institutional and market structure — key facts and figures - Euronext Amsterdam N.V. is the exchange for securities and derivatives in the Netherlands and a wholly-owned subsidiary of Euronext N.V. - Euronext group history and composition: - merger of national exchanges in Netherlands, Belgium and France in 2000; - national clearing houses merged into Clearnet in February 2001; - LIFFE and the Portuguese securities exchange joined in 2002. - Euronext Amsterdam membership and turnover: - 182 members in cash trading, of which 27 are clearing members. - Total turnover for the Euronext Amsterdam cash market in 2002 was 522 billion Euro, about 1/3 of total turnover on Euronext markets. - Euronext Amsterdam derivatives market in 2002: 78 million contracts, generating an option premium turnover of € 31 billion, counting for about 21 percent of the total volume of contracts and 40 percent of the option premium turnover on Euronext.liffe (adjusted for contract size). - Clearnet: - formally Banque Centrale de Compensation, a French licensed bank with a branch in Amsterdam; acts as the central counterparty (CCP) for Euronext Amsterdam transactions. - took over CCP function for the commodities market in Amsterdam from Euronext Amsterdam Commodity Clearing N.V. (EACC). - acts as clearer for OTC bond and repo transaction (not in the Dutch market). - currently 27 clearing members in the Euronext Amsterdam cash market, of which 18 are General Clearing members. - 26 members in the Euronext Amsterdam derivatives market. - Euronext N.V. holds 80 percent of equity capital of Clearnet; Euroclear Bank S.A./N.V. holds 20 percent. - Ongoing discussion with London Clearing House about potential merger; if realized, Euronext Group’s holding would be reduced to less than 50 percent of capital and less than 25 percent of votes. - Euroclear Netherlands (ENL, formally Necigef): - Dutch CSD for book-entry transferred securities; wholly owned subsidiary of Euroclear Bank S.A./N.V. - Custody totals: € 675 billion, of which € 369 billion is in shares and € 263 billion in bonds. - ENL has 70 participants; top 4 participants (four large Dutch banks) account for half of ENL’s revenues. - Euroclear NIEC (NIEC): - custody totals: bonds € 4.7 billion and shares € 1 billion. - NIEC has 37 participants. - Market concentration: - Dutch securities settlement market dominated by five banks – ABN AMRO, ING, Rabobank, Fortis and KAS Bank. ### Description of regulatory structure and practices — key elements - DNB (De Nederlandsche Bank): - oversight tasks for payment and settlement systems based on the Bank Act 1998 (Bank wet). - prudential supervisor for credit institutions under the Act on Supervision of Credit Institutions 1992 (Wet toezicht kredietwesen - Wtk). - since an August 2002 Decree, tasked with prudential supervision for securities institutions under the Act on Supervision of the Securities Trade 1995 (Wte). - AFM (Stichting Autoriteit Financiële Markten, previously STE): - supervisory role laid out in the Securities Giro Act 1977 (Wge) (article 2 sections 1 and 4). - following the August 2002 Decree, tasked with supervisor of market conduct including both credit institutions and securities institutions. - Cooperation frameworks: - AFM, DNB and PVK signed a convenant in 2002 setting out cooperation in supervision. - AFM and DNB earlier (2001) signed a covenant on coordination of supervision. - AFM and DNB developed Supervisory Framework AEX Clearing and Depository (Toezichtskader ACD) in 1997, replaced by Supervisory Framework Clearing and Settlement Euronext (Toezichtskader CSE) in 2000. - Minister of Finance has authority under section 22 subsection 3 of the Securities Trade Act to impose restrictions/conditions on granting recognized status of a securities exchange. - Euronext was licensed by the Minister of Finance on September 22, 2000; license conditions require clearing and settlement systems used on Dutch securities exchanges adhere to Supervisory Framework CSE. - Clearnet supervision: - licensed as a French credit institution; supervised by French authorities (Comité des Établissements de Crédit et des Entreprises d’Investissement, Commission Bancaire, Conseil des Marchés Financiers, Banque de France). - overseen by DNB to avoid systemic risk and by AFM as market conduct supervisor for clearing in Amsterdam. - Amsterdam Branch of Clearnet subject to host country control of DNB as bank supervisor. - MoU Clearning signed among relevant authorities in France, Belgium and the Netherlands; an Addendum by Portuguese authorities in September 2003. - Coordination Committee Clearing (CCC) established to discuss rule changes and structural changes of the clearing process. - ENL and NIEC supervision: - ENL established under Dutch law; securities transactions settled by ENL are subject to Dutch law and Securities Trade Act and Securities Giro Act. - ENL subject to AFM supervision on behalf of the Minister of Finance and oversight by DNB and AFM pursuant to Supervisory Framework CSE. - Transfer of Necigef to Euroclear Bank S.A./N.V. in February and April 2002 prompted a Memorandum of Understanding (MoU Settlement) in July 2002 among relevant authorities to ensure efficient supervision and oversight of Euroclear Bank’s activities. - NIEC subject to shared supervision of DNB and AFM pursuant to exchange recognition granted to Euronext N.V. and Euronext Amsterdam N.V. ### Information and methodology used for assessment - Assessment benefited from a comprehensive self-assessment prepared by DNB and AFM and other background material. - Sources included various Dutch laws and regulations, oversight/supervisory agreements and frameworks, rules/guidelines from relevant systems (Necigef Rules, ENL Guidelines, NIEC Rules, Clearnet Clearing Rule Book, Financial Structure and Risk Management Clearnet, Euronext Rule Book). - Information gathered from presentations and meetings with DNB Payments Systems Policy Department, AFM departments, MoF, Euronext, Clearnet, Euroclear Netherlands, banks, securities firms and industry associations. - Assessment follows the methodology set out in the Assessment methodology for “Recommendations for Securities Settlement Systems” (Committee on Payment and Settlement Systems and The Technical Committee of IOSCO, November 1992). ### Assessment of Observance — Executive summary and Legal risk (Recommendation 1) - Principal conclusions summarized for major topics. - Legal risk: - All laws and regulations relevant for securities clearing and settlement are publicly available; most important are the Bankruptcy Act and the Securities Giro Act. - Given clearing is done under French law, French legislation is also relevant. - Rules of Clearnet, ENL and NIEC are publicly available and generally clear. - Laws, regulations and rules support enforcement of transactions, protection of customer assets, immobilization and dematerialization, netting, securities lending and delivery versus payment. - Adequate rules exist for addressing participant default, including effective use of collateral, and these rules can legally be enforced. *Source: IMF staff report content provided in the supplied document excerpt.* ### 100. Securities transactions are electronically confirmed between direct market ### _cr04310 - 100. Securities transactions are electronically confirmed between direct market ### Settlement cycle and clearing - Securities transactions are electronically confirmed between direct market participants on the trading day. - Settlement takes place within a three day cycle. - For exchange-traded securities timely settlement is guaranteed through the use of a central counterparty, Clearnet. - Clearnet risk controls include initial margin and daily settlement of variation margin. - Clearing members contribute to a clearing fund. - Margin and clearing fund are sufficient to cover for a default by the clearing member with the largest exposure. - Additional financial resources are available. - Securities lending is available in the market and has the necessary legal foundation. ### Settlement risk (Recommendations 6 to 10) - Securities are mainly kept in book-entry form, even that only a minor part is dematerialized. - The beneficial owners ha a co-ownership in securities held in book-entry form. - There is no registration of securities transfers outside the CSD. - OTC-transactions are settled gross, with the delivering party’s securities being reserved while cash settlement takes place, i.e., DVP model 1. - Settlement of exchange-traded securities will settle net, i.e., DVP model 3. - However, only about 70 percent of the transactions are settled DVP, partly due to settlement over FOP cross-border links. Hence Recommendation 7 is not fully observed. - Settlement of OTC-transaction takes place every thirty minutes (the cash leg) during day-time and once during the evening. Hence final settlement can be achieved intraday for OTC-traded securities. - Exchange-traded securities that are cleared through Clearnet are settled net once a day. - The CSD does not provide credit in any form. - There is net settlement within the CCP, but the risk controls are sufficient. - 95 percent of all cash settlement takes place in central bank money. - The remainder, settlement in foreign currency is settled in KAS Bank, a supervised bank. ### Operational risk (Recommendation 11) - Both ENL/NIEC and Clearnet has adequate security and contingency planning for their systems. - The ENL/NIEC systems are operated by Euroclear Bank, Brussels under a Service Level Agreement. - Euroclear Bank has an alternative production site available with mirrored information. - ENL/NIEC has an alternative business site available in Amsterdam. - Clearing21 used by Clearnet is operated out of Paris by an affiliate to the Euronext Group; an alternative production site is available for this operation. - Both institutions regularly tests their contingency plans. - The settlement at ENL was delayed in June 2003, due to a mistake made by the serviced provider. Appropriate measures to prevent for a similar incident have been taken. ### Custody risk (Recommendations 12 and 13) - Book-entry securities held in custody in accordance of the Securities Giro Act are protected by the law. - For other securities the supervisory laws has extensive regulation for separation of assets and requires that customer securities are kept with a separate specialized custodian. ### Other issues (Recommendations 14 to 19) - In some cases all types of entities are not treated equal in the access rules of ENL. - Credit institutions (banks etc.) from outside the EEA (the European Union, Iceland, Liechtenstein and Norway) are not allowed participation. - Participation is also not possible for investment firms (securities firms), whether Dutch or foreign. - There are some examples where the access rules are not completely clear. - Hence Recommendation 14 is not fully observed. - Both ENL and Clearnet are regarded as effective by the users. - They both monitor and benchmark its cost level. - The CSD uses SWIFT communication standards. - Generally ENL and Clearnet are transparent with regard to risks, rules and procedures, though in some minor details the information is not clear or correct. - Both ENL and Clearnet have close cooperation with its users through Market Advisory Committees and other user forums. - Both institutions have also close cooperation with DNB and the AFM, through which the public interest is channeled. - DNB and the AFM oversee ENL, NIEC and Clearnet in an efficient way. - DNB and the AFM have developed an supervisory framework for clearing and settlement. - The prudential supervisor for Clearnet is however the relevant French authority. - DNB has as one of its tasks to promote the smooth functioning of the payment system, with an implicit legal basis for oversight of securities clearing and settlement systems (Bank Act section 4.2). - The AFM is formally the supervisor of ENL being a book-entry system. - Since there is no direct formal legal foundation for supervision of securities clearing and settlement, but an explicit legal basis for the market conduct supervision by the AFM and oversight by DNB, an indirect approach have been used for being able to supervise and oversee these activities. This was achieved by making oversight and supervision of clearing and settlement a condition for granting Euronext license as an exchange. Hence, recommendation 18 is not fully observed. - The CSD has a number of links, but none of these links support settlement with delivery versus payment. The links as such does not impose risks to the users. ### Ongoing and proposed actions in the Netherlands - The Euroclear Group is conducting a project for implementing the Single Settlement Engine for the Group. The completed implementation, planned between 2005 and 2008, would allow for the introduction of a number of cross-border DVP-links, enabling Euroclear Netherlands to be one of the first CSDs to provide cross-border DVP-links in central bank money. That would result in a reduction of non-DVP settlement. The degree of reduction will determine if a higher assessment category for Recommendation 7 will be achieved. - ENL is in the process of proposing a change in their Admission Regulation to the AFM and DNB allowing investment firms participation. Since there are other unfair admission rules, only this change to the Admission Regulation is however not enough to achieve a higher assessment category for Recommendation 14. - The MoF is in the process of drafting a Financial Supervision Act, with a plan to implement the Act in second half of 2005. The implementation should make it possible to observe Recommendation 18. *Source: _cr04310 - 100. Securities transactions are electronically confirmed between direct market* ### 112. The following actions are proposed in order to achieve full compliance with the ### _cr04310 - 112. The following actions are proposed in order to achieve full compliance with the ### Proposed actions to achieve full compliance - The AMF and DNB should, in co-operation with other national central banks and relevant authorities, promote the ongoing work by the ENL to establish cross-border DVP-links, and also by other means support the use of DVP settlement for cross-border and OTC-transactions. - As stated earlier, the degree of reduction of settlement FOP will determine if a higher assessment category for Recommendation 7 will be achieved. - The MoF should fulfill its plans for a Financial Supervision Act, which should make it possible to observe Recommendation 18. - The AFM and DNB should approve a proposal from ENL to allow investment firms as participants. - However in order to observe Recommendation 14, the AFM and DNB should also suggest to ENL, and when applicable NIEC, to further review their Admission Regulations in order to remove unfair treatment of non-EEA credit institutions, and make the Regulations more clear and open. ### Summary observance of the CPSS/IOSCO Recommendations for Securities Settlement Systems - Assessment category — Recommendations - Observed — Recommendations 1 to 6, 8 to 13, 15 to 17 and 19 - Broadly observed — Recommendation 18 - Partly observed — Recommendations 7 and 14 - Non-observed — .. - Not applicable — .. ### Recommendation 1 — Legal basis for securities settlement systems (key findings) - Accessibility of laws and rules - Clearnet’s rules and procedures and contractual arrangements for its participants are clearly stated, coherent and available to the system participants. - Each participant of ENL receives a copy of the relevant rules and procedures, as laid down in the Securities Giro Act, and copies of ENL’s Articles of Association, the Necigef admission regulation and the Rules for book-entry deposits, when joining the system. Participants are kept informed of any amendments. - Laws, regulations, rules and procedures, and contractual provisions are public and readily accessible through the web-sites of the Netherlands authorities and/or of Euroclear Bank S.A./N.V. - Each participant of NIEC receives a copy of the relevant rules and procedures, as laid down in NIEC’s Articles of Association, and the NIEC admission regulation, at time of first joining. Participants are kept informed of any amendments. NIEC rules are public and readily accessible through the web-site of Euroclear Bank S.A./N.V. - Assurance of legal basis and enforceability - Dutch general laws governing property rights and insolvency apply; certainty is enhanced by a layered ‘principal-to-principal’ structure for exchange-traded clearing where executed trades are novated between clearing members and Clearnet. - Clearnet is designated by the French authorities as a system under the European Settlement Finality Directive (98/26/EC - SFD) and operates in real time. - ENL and NIEC are designated by the Dutch Minister of Finance as systems under the Settlement Finality Directive; transfer orders from participants are legally enforceable under all Member States’ jurisdictions and binding on third parties. - Protection of customers’ assets and segregation - Under the Securities Giro Act, a customer who deposits a security with a participant (Admitted Institution, AI) of ENL becomes co-owner of the collective deposit (verzameldepot) from acceptance by the AI; ENL holds these securities in custody forming part of the book-entry account (girodepot). - AIs hold securities in custody in the name of the owner/final beneficiary (a ‘two-tier system’); securities held by the AI itself are kept in the same book-entry account. - Segregation of account holdings between the AI and the customers is required at the AI level under the Further Regulation (article 16). - AIs of NIEC must use separate custodian subsidiaries holding customer assets; securities held in custody of Euroclear NIEC are not included in the scope of the Securities Giro Act. - Immobilization and dematerialization - The Securities Giro Act legally recognized immobilization and dematerialization of securities, enabling Euroclear Netherlands. - Netting - For Euronext trading, Clearnet acts as CCP and provides for netting; executed trades are novated in real time. Netting legal basis: Clearing Rule Book (article 1.3.5.6). - Since Clearnet is a French institution, French law applies; netting recognized through French implementation of the SFD (Code Monetaire et Financier, article L.431-7). The Dutch Authorities received a legal opinion confirming this. - Netting arrangements are not applicable for relationships among the AIs of ENL and NIEC. - Securities lending and repo legal context - Securities lending and borrowing market is supported by Dutch law and international standard agreements applied to Dutch law. - An exception to fiducia-verbod was created in 1998 to facilitate euro monetary operations. - Finality of settlement - Timing of final transfer follows from Volume 6 of the Dutch Civil Code (article 114): payment deemed made when creditor’s account is credited; securities transfers final when receiving AI’s book-entry account is credited. - Dutch implementation of the SFD introduces exception to the “zero-hour rule” via Act on Supervision of Credit Institutions (section 71) and the Bankruptcy Law (section 212 b); a court decision cannot be invoked against transfer orders and netting in a designated system if transfer order was issued prior to the court decision, or entered after the court decision provided the system operator had no knowledge of it. ENL and NIEC are designated systems where these rules apply. - Clearnet is designated by French authorities where the SFD applies (Code Monétaire et Financier, articles L.330-1 and L.330-2). - ENL Guidelines (section 5.2.5): time when a transaction can be revoked is when a balance is reserved; for a DVP transaction this is immediately prior to request for settlement of the cash leg. - Delivery versus payment (DVP) - ENL Guidelines (section 5.2.4): for OTC-transactions securities to be delivered against payment will be reserved on the account of the delivering AI prior to confirmation from DNB (KAS Bank N.V. for non-euro settlement) of settlement of the cash leg. Hence neither delivering AI nor receiving AI will control both securities and cash. - Cash settlement of euro uses TOP operated by DNB, a system designated under the SFD. - DVP provision ensures timing of finality of securities transfer is after the cash transfer becomes final. - NIEC offers participants DVP in a similar way. - Courts and insolvency relevance - No Dutch court has failed to uphold the legal basis for clearing and settlement. - Clearnet, ENL and NIEC are designated systems under the SFD so insolvency proceedings do not affect transfers or netting orders issued prior to court decision. - Standard 2 of the Supervisory Framework CSE requires attention to implications from participants in foreign jurisdictions; the Minister of Finance checks adequacy for bankruptcy situations and will approve links only if comparable guarantees as the Dutch Securities Giro Act exist (Securities Giro Act, article 35). - For approval of sale of Necigef to Euroclear Bank S.A./N.V., AFM and DNB requested a legal opinion on enforceability of the relationship documentation. - Assessment: Observed - Comment: The legal basis for regulation and supervision could be slightly more formal and direct; this has not affected the assessment of this Recommendation but affected the assessment of Recommendation 18. ### Recommendation 2 — Trade confirmation (key findings) - Exchange-traded transactions - Confirmed by real-time messages after execution to all trading and clearing members involved. - OTC trades - No exact figures available, but most deals between direct market participants are confirmed on the trade date, albeit not always through an automated trade confirmation system. Problems are communicated the same day or the day after. - Settlement instruction matching - With scheduled settlement instructions, pre-matching takes place while the instruction can be reversed; transaction becomes binding when required securities are committed for delivery on the specified settlement date. - For DVP settlements, matching of settlement instructions is required by the CSD; non-matches inform parties in real-time and communication is repeated at end of every working day as long as the transaction remains valid. - FOP settlement instructions are executed by order of the counterparty responsible for delivery. - Indirect participants - Conditions depend on client agreements between direct and indirect participants. Securities Trade Decree (section 28) requires a contract note to be provided to the client; content is in the Further Regulations (article 34) but no regulation for timing of sending contract notes. - Assessment: Observed ### Recommendation 3 — Settlement cycle and fails (key findings and statistics) - Standard cycles - Government debt instruments, private debt instruments and equities traded on the exchange are settled on T+3. - Exchange-traded derivatives are settled on T+1. - Central bank operations are settled on T+1. - For OTC transactions, settlement can take place on T up to T+100. - Fail rates (exchange-traded) - Average daily percentage of fails relative to the total net clearing amount open for delivery: - about 6 percent before securities lending - 4 percent after securities lending - Past daily maxima averaged 10 percent to 15 percent. - 40 percent to 50 percent of non-settlements lasted one day only. - Operational timing issues - Securities open for delivery need to be deposited on T+2 at 22:00 hrs with Euroclear Netherlands; this was deemed too early by large US investors. - Average duration of fails is difficult to calculate due to continuous net settlement. - Remedies and penalties - Clearnet Amsterdam imposed penalties for non-settlements since February 2001, amounting to a maximum of €1,500 per clearing member per day. - Non-settlements are marked to market and margined by Clearnet Amsterdam. Clearnet runs the CNS system to net fails against traded but not yet settled transactions. - Clearnet Amsterdam has a formal requirement that fails will be closed out on T+14 when the buy-in procedure will be started. - Review conclusions - Clearnet Amsterdam Branch evaluated the settlement cycle in a memo dated 12 November 2001 and concluded the existing settlement cycle should be maintained, noting the settlement cycle is in fact T+2 instead of T+3 in practice. - A revised penalty system has not been implemented pending expected developments and harmonization (ESES project). - Assessment: Observed ### Recommendation 4 — Central counterparty (CCP) assessment and risk control (key findings) - Use of CCP - All transactions on the Euronext exchanges are to be cleared (Euronext Rule Book, article 4601); Euronext offers CCP services through Clearnet. - Market participants may choose Clearnet as CCP for OTC bond and repo transactions, though this is not used in the Dutch market. - Netting and novation - Novation of original transactions takes place in real-time when a transaction is registered with Clearnet (Clearing Rule Book article 1.3.5.3). - Gross open positions are aggregated into net positions at end of each clearing day (Clearing Rule Book 1.3.5.6). - Netting arrangement does not lead to novation; netting is enforceable against clearing members in insolvency since Clearnet operates a system designated under the SFD. - Member requirements (financial and operational) - Minimum own capital for General Clearing Members – € 25 million, increasing up to a maximum of € 37.5 million if clearing for more than nine trading members; - Minimum own capital for Individual Clearing Members - € 10 million; - Operational requirements include sufficient expertise in clearing activities, operationally reliable technical systems and organizational structure, adequate risk management policy, and imposing same margin requirements on clients as Clearnet imposes on the member. - Credit risk and resources - Market risk mitigated by layered structure of financial resources. - Margin: SPAN system; initial margin covers one-day movement during last 125 trading days with a confidence interval of 99.7 percent; margin parameters reviewed monthly; margin deposits and releases daily. - Clearing Fund: total amount depends on the largest exposure of an individual clearing member during the most recent period of two months; exposure calculated daily at a stress level equal to the worst 2-day price movement for 25 years, less the margin delivered by the member; clearing fund should cover the largest two month average plus two standard deviations; contributions pro rata; deposits/releases monthly. - Collateral: initial margins and Clearing Fund contributions can be paid in cash or by delivering securities; variation margin to be paid in cash; stocks haircut 40 percent. - Alternative collateralization: guarantee in favor of Clearnet issued by a central bank, secured by a pledge of eligible securities; virtually all Dutch clearing members prefer the latter. - Liquidity risk and safeguards - Clearnet calculates each day the maximum liquidity need of its clearing members at day of settlement; amounts to be covered by margin, clearing fund, Clearnet’s own funds and funds entrusted by third parties; intra-day additional margin can be called. - Clearnet Amsterdam monitors that the largest amount to be paid by a Dutch member less the guarantee from DNB for this member is covered by the € 200 million that Clearnet Amsterdam has deposited from its Treasury. If that deposit is not enough Clearnet Amsterdam will require additional deposits. - Stand-by facility offered by DNB for € 68 million, which is secured by the receivable securities. - Clearnet is bound to strict investment guidelines and is allowed to enter into repo transactions to create extra liquidity. - Multiple defaults and monitoring - Clearnet has the right to require members replenish the Clearing Fund in the event of default and regularly tests coverage of largest exposure on a group within an amount equal to two times the Clearing Fund. - Clearnet monitors monthly the financial standing of its clearing members and uses a questionnaire and audits to evaluate organization quality; members must inform Clearnet of fundamental changes. - Default history and use of resources - The French predecessor of Clearnet handled one default in a non-comparable situation; Dutch predecessors have not experienced default of a clearing member. - The available resources will be used in the following way: (text continues in source). - Assessment: (assessment text begins "The available resources will be used in the following way:" in source) *Italic: Extracted from _cr04310 - 112. The following actions are proposed in order to achieve full compliance with the (source PDF).* ### 1. Margin posted by the defaulting member (as of October 2003 the total margins ### 1. Margin posted by the defaulting member (as of October 2003 the total margins amounted to about € 5.5 billion, of which from the Dutch members about 1.5 billion.) ### Financial resources, sizing and availability - Margin posted by the defaulting member: total margins amounted to about € 5.5 billion (as of October 2003), of which from the Dutch members about 1.5 billion. - Clearing Fund contribution by the defaulting member. - Clearing Fund up to a maximum of € 280 million. - Insurance for € 150 million. - Remainder of Clearing Fund: as of October 2003 the Clearing Fund amounted to about € 300 million – in 2002, with a Clearing Fund of € 280 million, the Dutch clearing members accounted for 1/3 of the total contribution. - Clearnet’s own capital: as of December 31, 2002, that capital was 287 million. - On-demand guarantee from Euronext N.V., the major shareholder in Clearnet. - Note: the financial resources described under 4, 6 and 7 also cover Clearnet’s other activities as clearing house for OTC transactions. - Insured amount: aimed at a multiple default and the pay-out under the policy has a term of 10 days. - Composition/availability: the clearing fund contains securities deposited in the name of Clearnet or central bank guarantees in favor of Clearnet. - Transparency of loss allocation: defined in the Clearing Rule Book (sections 1.7.2 and 1.7.3 and further in Instruction I.7-1); order of use: margin, surplus collateral and clearing fund (‘defaulter pays’), the remainder and possible replenishment of the clearing fund (‘survivors pay’), the insurance, and finally Clearnet’s own funds and the parental guarantee. - Assessment: Observed. ### Recommendation 5 — Securities lending and borrowing to expedite settlement - Recommendation: Securities lending and borrowing (or repurchase agreements and other economically equivalent transactions) should be encouraged as a method for expediting the settlement of securities transactions. Barriers that inhibit the practice of lending securities for this purpose should be removed. - Regulatory framework: supported by Dutch law and by the international standard agreements for securities lending, applied to Dutch law. Repo transactions previously conflicted with the fiducia-verbod; an exception was created in 1998. At present, there are no barriers remaining that inhibit lending, repo and similar transactions. - Facilities: ENL and NIEC do not offer securities lending facilities in connection with the settlement process. - Clearnet Amsterdam Branch: organized an automatic arrangement for securities lending (onverplicht-leverencircuit or leencarroussel) to expedite settlement in case delivery fails. Two Dutch banks, ING Bank and Dexia Securities Services, render lending services to Clearnet for Dutch exchange-traded securities. Arrangement covers the most liquid securities traded at markets organized by Euronext Amsterdam. - Supervisory review: DNB reviews how banks deal with credit exposures from securities lending. AFM issued regulation regarding collateralization requirements for investors in the Further Regulations (article 28, explanatory note). - Assessment: Observed. ### Recommendation 6 — Immobilization/dematerialization and book-entry transfer - Recommendation: Securities should be immobilized or dematerialized and transferred by book entry in CSDs to the greatest extent possible. - Holdings in custody with ENL (which counts for 99.2 of the combined value at ENL and NIEC): - 37 percent dematerialized by market value (60 percent if calculated by number of issues); the largest part of dematerialized securities are Dutch Government bonds. - 33 percent immobilized by means of a global note. - 28 percent held in physical form on book-entry accounts with ENL. - 2 percent kept with another CSDs. - Shares: only 11 percent dematerialized. - Trend: percentage dematerialized or immobilized is steadily increasing. New physical securities discouraged. - Typical transfer: by book entry; physical handling for certificates brought into or out of system (about 10,000 deposits and 8,000 withdrawals). - Legal basis: modification of the Dutch Securities Giro Act in 2000 provided legal basis for securities in the name of ENL, facilitating global notes and registration of security interests by book entry. Corporate bonds may still be issued as physical certificates (CF securities). All domestically issued and exchange-traded securities are either immobilized or dematerialized in ENL and fall under legal protection offered by the Securities Giro Act. - NIEC: both physical and dematerialized securities eligible for deposit; depending on issue conditions, physical certificates either immobilized (global notes) or allowed to move freely (bearer certificates). - Registration: ENL appears in issuer registers when securities are registered by the issuer; transfer becomes final when registered by ENL. - Assessment: Observed — virtually all securities are held in book-entry form, though a substantial portion is not yet dematerialized or immobilized in form of a global note. ### Recommendation 7 — Eliminate principal risk via DVP - Recommendation: Securities settlement systems should eliminate principal risk by linking securities transfers to funds transfers to achieve delivery versus payment. - ENL features: - DVP principle allowed. - OTC Trade-for-Trade facility: settlement concluded on a real-time gross basis, corresponding to DVP model 1 (gross, simultaneous settlement of securities and fund transfers). Securities reserved on delivering AI’s account; cash transfer request sent to DNB for euro or KAS Bank N.V. for other major currencies. After confirmation of cash transfer, ENL transfers securities. If no confirmation by cash transfer deadline, reservation reversed. - OTC transactions may also be settled free-of-payment (FOP) with cash settlement in commercial bank money. - Exchange-traded transactions (Euronext): cleared through Clearnet and effectively settled DVP per Clearnet Clearing Rule Book (article 1.3.5.7 and Instruction 1.3-1). Instructions submitted on T+2. - Technical flow: delivery to Clearnet on T+2 by provisional transfer (not reusable prior to becoming final), followed on T+3 by payment and immediate delivery to paying AIs. Cash settlement is multilateral net settlement — DVP model 3 (simultaneous net settlement of securities and funds transfers). - Cash settlement agent: DNB in euro or KAS Bank N.V. in other major currencies. - 2002 statistics: - Net settlement of exchange-traded securities amounted to 44 million, with an underlying gross value of € 507 billion (excluding derivatives). This amount is settled DVP. - DVP-settled OTC-transactions amounted to € 682 billion. - The underlying value for FOP-settled OTC-transactions is not known, but by volume it equaled 2/3 of the volume for DVP-settled OTC transaction. - Assuming same average value for OTC-transactions, the DVP-settled transactions counted for about 72 percent of the total value of settled transactions. - Caveats: FOP-settled transactions include transfers of collateral and cross-border settlement through links not possible to settle DVP (cf. Recommendation 19). Considering these, comparable settlement DVP is higher. - Assessment: Partly observed. A substantial part of transactions at ENL and NIEC are not settled DVP. Available statistics do not allow determination whether 90 percent of comparable transactions are settled DVP; if so, category could be raised to “Broadly observed”. - Comments: DVP not achieved in cross-border links due to legal complications. Implementation of the Single Settlement Engine within Euroclear group (expected between 2005 and 2008) will enable DVP for some links and may affect the rating. ### Recommendation 8 — Final settlement timing and intra-day finality - Recommendation: Final settlement on a DVP basis should occur no later than the end of the settlement day. Intra-day or real-time finality should be provided where necessary to reduce risks. - Definition of settlement finality: - Cash and securities transfers become final at moment payment is made. Under Volume 6 of the Dutch Civil Code (article 114), cash payment deemed made when creditor’s account (held in country where payment must/may be made) is credited. - Transfer of securities becomes final when ENL enters the securities by book-entry to the securities book-entry account of the party taking delivery in accordance with the Securities Giro Act (article 17). Parties informed in real time by ENL. - ENL is a designated system for which the SFD applies; transactions will not be revoked upon opening of insolvency proceedings against a party. - Same timing applies to NIEC as a designated system. - Exception: transfers within the collective deposit of an AI (different accounts in the books of an AI) are subject to the normal “zero-hour rule” in Dutch bankruptcy legislation; finality not guaranteed until end of transaction day. - Securities transactions via links to another CSD can only be effected via delivery free of payment. - Timing of settlement (processing windows): - Evening processing (on S-1): 20.00 to 22.30 hours. - Daytime processing (on S): 07.00-17.00 hours. - Deliveries against payment processed during the evening (from 20.00-22.00 hours) with cash leg settlement once; and between 08.00 and 15.00 hours during the day with cash leg settled every 30 minutes. - Same-day value processing possible for DVP transactions submitted before 15.00 hours; FOP submissions up to 17.00 hours. - Deliveries to Clearnet (net settlement) made by ENL/NIEC following request by Clearnet at 22.30 hours on S-1. Deliveries from Clearnet made around 09.00 hours on S, following confirmation from Clearnet that cash settlement has taken place. - Finality achieved throughout the day following settlement by ENL or NIEC. - Intra-day finality needs: - OTC transactions: a need for intra-day finality identified; Trade-for-Trade facility fulfils this need. - CCP: CCP (Clearnet) can provide intra-day finality via novation and netting. - Central bank usage: ENL securities settlement system is used by central banks in monetary policy operations and for collateralization (intra-day credit, standing facilities and guarantees for margin and Clearing Fund contributions). - Links: Transactions settled by CSD through available and approved links are final; extension needed especially for cross-border DVP settlement (to be developed by Euroclear Bank). - Revocation of transfer instructions: ENL prohibits unilateral revocation of unsettled transfer instructions once securities balance is reserved. For OTC DVP: reservation when transaction matched and cash settlement process for settlement date starts (20.00 on S-1 and from 07.00 on S). For FOP: reserved when settlement process starts (20.00 on S-1). ENL does not receive provisional transfers from other CSDs. - Assessment: Observed. ### Recommendation 9 — Risk controls in deferred net settlement systems - Recommendation: Deferred net settlement systems should institute risk controls to ensure timely settlement if participant with largest obligation cannot settle. Where CSD extends credit or arranges securities loans, exposures should be fully collateralized. - Provision of credit to participants: - ENL and NIEC do not provide credit to members by netted settlement; all settlement is gross except for transactions cleared by Clearnet (netting in Clearnet books). - ENL and NIEC do not provide other forms of credit, do not act as CCP, and do not guarantee settlement. - Clearnet, as CCP, guarantees timely settlement of transactions to which it has become a party through novation. - Effect of participant inability to settle: - ENL/NIEC inform both parties via error message stating reasons for non-settlement; parties must agree their arrangement. ENL and NIEC do not guarantee settlement and have no access to credit lines or letters of credit. - Clearnet has measures to ensure timely settlement of exchange-traded transactions (see Recommendation 4). - Securities balances: Participants are not allowed to have a debit balance on accounts with ENL and NIEC. - Risk for multiple failures: ENL and NIEC will only undertake settlement where account balance (securities and funds) sufficient to effect transaction. - Assessment: Observed. Recommendation not applicable to the CSD in its role (gross settlement); netted transactions are settled at CSD level but risk controls apply at Clearnet level. Risk controls in Clearnet ensure, at minimum, timely settlement if the participant with largest obligation cannot settle. ### Recommendation 10 — Use of central bank money for cash leg settlement - Recommendation: Assets used to settle cash leg should carry little or no credit risk. If central bank money is not used, protect CSD members from losses/liquidity pressures from failure of a settlement bank. - Settlement agents: - DNB is the cash settlement agent for exchange-traded transactions and OTC transactions settled DVP through ENL/NIEC to the extent settled in euro. - For foreign currencies, participants hold cash accounts at KAS Bank N.V., a commercial bank. - Over 95 percent of settlement volumes are conducted in euro. - ENL and NIEC do not provide cash accounts or funds transfers; participants only hold securities accounts. ENL and NIEC do not engage in other commercial activities. - Settlement bank risks: - Over 95 percent of settlement volumes conducted in euro and therefore through the central bank. - KAS Bank (for other currencies) is subject to prudential supervision of DNB; its financial condition is monitored. - Choice of settlement banks for exchange-traded transactions subject to nihil obstat from Dutch joint overseer; criteria in Supervisory Framework CSE. In practice, DNB and KAS Bank used; payment flows concentrated into one daily moment of settlement. - Over 95 percent of settlement volume is settled on accounts with DNB. - Liquidity risks: From the moment funds are credited to participant cash account, they can be used for further activity. - System for interbank transfer: Settlement at DNB for euro transactions takes place in the Dutch Large Value Payment System, TOP, owned and operated by DNB. TOP was assessed by DNB against CPSS Core Principles and outcome (2002) was that TOP generally satisfies the Core Principles. - Assessment: Observed — 95 percent (by value) of cash settlement takes place in central bank money; the remainder settles in a commercial bank subject to prudential supervision. ### Recommendation 11 — Operational risk management, systems and contingency - Recommendation: Identify and minimize operational risk through appropriate systems, controls, and procedures; ensure reliability, security, capacity; establish contingency plans and back-up facilities for timely recovery. - Staffing and controls: ENL, NIEC and Clearnet are adequately staffed. Procedures exist for managing operational risk. Operations are regularly audited internally and externally. - Outsourcing and service arrangements: - SEF system of ENL/NIEC (System Effecten) is operated by Euroclear Bank S.A./N.V., Brussels (parent of ENL and NIEC) under a Service Level Agreement. - Operation of ENL/NIEC vault outsourced to a subsidiary of Euronext Amsterdam. - Clearing system of Clearnet operated by ATOS-Euronext, Paris (an affiliate to the Euronext Group) under a Service Level Agreement. - CNS system linking the clearing system to the Dutch depository and cash systems is operated out of Amsterdam. - Contingency plans: ENL and NIEC have contingency plan and emergency procedures for automated data processing, including alternative site operations. Procedures are tested at least four times a year. - Assessment: (Text ends mid-sentence regarding participants generally do not take...) Assessment: Observed (from surrounding context for operational controls earlier). *Source: IMF staff report content unit _cr04310 - 1. Margin posted by the defaulting member (as of October 2003 the total margins amounted to about € 5.5 billion, of which from the Dutch members about 1.5 billion.)* ### part in these tests, but this is possible on their request. These contingency plans ### _cr04310 - part in these tests, but this is possible on their request. These contingency plans ### Disaster recovery, message integrity, and operational controls - Daily back-up of data; data preserved internally and externally at the back-up site. - Message integrity: network security processor (SWIFT) renders messages secure and monitors whether transactions have been entered properly into the system (on the basis of electronic signature using keys and DES algorithms). - Control routines incorporated within automated systems to ensure integrity of balances (proof reports). - Systems logs actively signal possible aberrations; audit trail made during entire transaction processing and stored. - Clearnet has an overall disaster recovery plan and contingency plans for the failure of its key systems; plans are tested and reviewed twice a year with participation of the clearing members. - An alternate site is installed at a distant location; back-up facilities are available and running. - Restoring data has been tested; Clearnet guarantees the preservation of all transaction data at the time of the disruption, even if both the trading system and the clearing system fail simultaneously. - Recovery timeframe: depending on the situation, it may take a couple of hours to recover operations through back-up systems. - General controls implemented to check integrity of messages in the real-time clearing system and to reconcile transactions with the output of the trading system. ### Reviews and audits - Results of each audit at ENL and NIEC are submitted to the Board of Directors and to the supervisory authorities. - EDP audit on the Necicom systems is conducted once every three years; interim EDP audits may be conducted by the audit department of Euroclear Bank S.A./N.V. if necessary. - Internal Control department conducts audits on a daily basis. - External auditor: PriceWaterhouseCoopers assesses internal control procedures, reports on such controls, conducts random samples, and reviews internal audit department’s dossiers to ascertain correct and timely implementation of rules and procedures. - Audits and examination reports are not available for review by participants; may be made available to the external auditor of the institution concerned, if circumstances require. - Internal Audit Department of Euronext audits operations and IT each year and presents the report to the Board of Directors; EDP auditors of supervisory authorities review the conducted audits. - Operational reliability assessed by Dutch and French regulators, especially in context of recent clearing system migrations. ### Incidents and capacity assessments - One major operational problem at ENL/NIEC in June 2003: Euroclear Bank, Brussels made a mistake causing settlement delay. - Service level agreement (SLA) outcome: operator covered the compensation ENL/NIEC had to make; service provider liability for this type of risks is € 17 million. - Measures taken to prevent recurrence. - Capacity evaluation outcome for the SSS: capacity percentage approximately 99 percent (99,8 percent for the central processing unit and 98,2 percent for the network). - Capacity calculation basis: maximum load of two times the daily production; for data communication a maximum load of the data line of 30 percent. - In the Netherlands, Clearnet clearing system has not failed during the last year; Clearnet increased capacity after the cash clearing migration in Amsterdam. ### Recommendation 12 — Protection of customers’ securities and related arrangements - Legal basis: Dutch Securities Giro Act — ultimate investor is the beneficiary owner and not the custodian; segregation of account holdings at the level of Admitted Institutions (AIs). - AIs must sign a declaration that they are insured against theft and loss of securities. - All AIs are credit institutions or separate depository institutions belonging to a credit institution group and subject to prudential supervision by DNB. - NIEC: customer protection follows from the Further Regulation — AIs obliged to segregate their own securities from customers’ securities; AIs are credit institutions and subject to prudential supervision by DNB. ### Reconciliation practices - Frequency of reconciliation determined by AIs; all AIs receive an electronic statement on positions at the end of the day. - Further Regulations (Annex 4.9) requires that the stock balance is reconciled monthly. - Reconciliation procedures assessed by supervisors (DNB and the AFM) in their assessment of internal control. ### Regulation of custodians and depository institutions - Securities Trade Decree (section 16) and Further Regulations (sections 12-16): credit institutions and investment firms required to ensure adequate segregation of securities (via use of an AI under the Securities Giro Act or a separate depository institution). - Depository institution (formerly Vabef) requirements: no other activity than holding securities in custody, minimum capital of € 125,000, guarantee from a credit institution for compliance of its obligations; direct shares held by an administrative trust office. - In practice, nearly all entities holding securities are credit institutions or belong to a credit institution group and are subject to regulation by DNB; DNB reviews procedures and internal controls, including safekeeping procedures. ### Recommendation 13 — Governance arrangements for CSDs and CCPs - Board of ENL and NIEC responsible toward the Board of Euroclear Bank S.A./N.V., the parent company. - Euroclear has Market Advisory Committees (MACs) for informing market participants about system changes and receiving opinions; Dutch MAC representation resembles Netherlands Banking Association (NVB); chairman of Dutch MAC present at ENL Board meetings. - ENL has a user council (Gebruikersraad) for technical issues. - Clearnet is an 80 percent subsidiary of the Euronext group; management responsible to CEO of Euronext N.V. and to Euroclear. - Clearing members involved via International User Committee, MACs, and Local User Committees; General Member Meetings organized for projects. - Contact with regulators organized via monthly Policy Meetings in the Amsterdam Branch and via Co-ordination Committee on Clearing Euronext (monthly technical level, quarterly high level) with all Euronext securities regulators and overseers represented. ### Public interest, user needs, management, and board accountability - ENL regularly presents project plans and objectives to participants and regulatory authorities via circulars and Euroclear Group consultation papers; objectives (e.g., to reduce risk, to increase efficiency) found in annual report and website. - Securities Giro Act: Minister of Finance authorized to rescind ENL decisions that conflict with law or articles of association. - Clearnet communicates Clearnet Clearing Model via website; decision-making can be influenced by International and Local User Committees; major decisions announced at General Member Meetings and to owners via internal communication with Euronext and Euroclear; important risk/legal decisions published in Rule Book, Instructions and Notices. - Management screened by regulators (“fit and proper test”) before appointment; incentives include remuneration schemes. - ENL board assessed by Dutch regulator before appointment approval. ### Recommendation 14 — Participation criteria, admission, and exit rules - Admission rules publicly disclosed in ENL Disclosure Framework and NIEC Rules; Admission Rules published in Official Bulletin (Staatscourant) at the time. - Securities Giro Act allows applicants to lodge an appeal against membership decisions with the Minister of Finance. - Clearnet admission rules in Clearing Rule Book under Chapter 4 Membership; rules are objective and public. Admission specifics (ENL) - Admitted participants (Necigef Admission Regulation, article 2): Credit institutions (Dutch or within the EEA) in custody/management/administration of securities on behalf of a third party; The Dutch State; DNB; Foreign CSDs; Some specific Dutch clearing and nominee institutions. - Securities intermediaries (investment firms) that are not credit institutions can be a participant only for Money Market Papers and Medium Term Notes for their own account. - ENL Disclosure Framework 2003 contains an additional requirement on foreign CSDs that they must be supervised (not clearly in Admission rules). - Admission and withdrawal subject to prior approval from the AFM according to a Decree 2000 under the Securities Giro Act (requirement not found in English translation in the ENL Disclosure Framework). Admission specifics (NIEC) - Admitted participants (NIEC Rules, article 1): Participants in ENL; Credit institutions (Dutch or within the EEA) in custody/management/administration of securities for a third party; Other institutions in custody/management/administration fulfilling special requirements; DNB; Foreign CSDs; A specific Dutch clearing institution. - Special requirements for “other institutions”: sole business custody only; Dutch credit institution guarantee for losses; credit institution guarantee that the other institution complies with obligations; independence from the credit institution. - In practice, admission subject to prior approval from the AFM though not specified in NIEC Rules. Admission specifics (Clearnet) - Clearing Member eligibility (Clearing Rule Book, article 1.4.1.2): French credit institutions; French investment firms; French institutions whose principal activity is clearing; Foreign institutions of these three types subject to approval by the relevant French Authority (Conseil des Marchés Financiers). Fair treatment and exit rules - ENL and NIEC admission criteria require participants to be credit institutions or separate depositories subject to prudential supervision; non-EEA credit institutions which are not CSDs are not accepted as participants. - Clearnet imposes financial and operational requirements on members; access to CCP function in the Netherlands requires membership as an admitted institution of Euronext Amsterdam (condition related to vertical oversight; likely to be abolished with upcoming change in Dutch legislation). - Exit possibilities for ENL: participant-initiated termination (effective as of the 1st of January of any given year) or ENL withdrawal in cases: (i) participant no longer meets participation requirements under article 2; (ii) bankruptcy/suspension of payments/dissolution; (iii) failure to observe Securities Giro Act provisions; (iv) failure to observe necessary requirements for proper conduct of giro-based securities transactions. - Under Securities Giro Act (article 5): right to lodge appeal to Minister of Finance against withdrawal or refusal of admission. - Exit requires prior approval of the AFM. - NIEC entitled to terminate participation with immediate effect for circumstances in (i), (ii), (iv) above or if participant (natural person) dies or loses ability to dispose of assets/income; in practice exit requires prior approval by the AFM (not specified in NIEC Rules). - Clearnet clearing members may terminate memberships at all times; termination effective once all financial obligations vis-à-vis Clearnet related to open positions are fulfilled. - If clearing member does not fulfill financial obligations or no longer meets financial requirements, Clearnet may: suspend membership; terminate membership; refuse to register transactions; impose specific conditions (Clearing Rule Book, article 1.4.4.1). Assessment and comments on access - Assessment: Partly observed. - ENL and NIEC do not admit non-EEA institutions other than CSDs as participants; restriction based on location not regarded as risk-motivated. - ENL and NIEC do not accept investment firms as participants. - ENL in process of proposing to authorities that investment firms can be admitted as participants; removal of unfair treatment of non-EEA credit institutions required for higher assessment category. ### Recommendation 15 — Cost-effectiveness - ENL is a for-profit organization; fees determined after approval of the Minister of Finance. - ENL implemented procedures to investigate profitability of each service; project group ‘Profitability’ will build a model to assess profitability and create sustainable pricing structure to balance costs and charges. - Clearnet benchmarks fees against direct competitors and receives user feedback on cost versus service level. - Operational consolidation and systems migrations mainly driven by cost and efficiency considerations. - Users review service levels via Market Advisory Committees; Clearnet surveys users through account managers and internal/external discussions. Assessment: Observed. ### Recommendation 16 — Use of international communication procedures and standards - ENL and NIEC make use of the SWIFT Network, which uses electronic mailboxes and remote connections and is internationally accepted. Assessment: Observed. ### Recommendation 17 — Disclosure of risks and costs - ENL (Necigef) admission regulation and application form, Rules for book-entry deposits, NIEC Rules, Disclosure Framework 2003 and Association of Global Custodians Questionnaire 2002–03 are public and accessible via the Euroclear website. - ENL Guidelines for achieving DVP not published publicly but available to participants. - Clearnet publishes Clearing Rule Book, Admission Agreement, Instructions, Notices, Risk Management & Financial Framework and Risk Access Guide on the Clearnet website. - CPSS-IOSCO Disclosure Framework (January 2003) completed and disclosed on website by ENL; Dutch authorities approved disclosure framework under condition of regular updates. - NIEC has not completed the CPSS-IOSCO Disclosure Framework and does not intend to, citing comparable risk management and operations to ENL. - ENL/NIEC information available in Dutch and English on Euroclear website. - Dutch authorities (AFM and DNB) have not published answers to key CPSS/IOSCO implementation questions due to supervisory secrecy concerns; authorities publish summary assessments (e.g., DNB Quarterly Bulletin). - Clearnet publishes relevant information in English and French. - Responsibility for updating Clearnet disclosures is held by the Legal department. Assessment: Observed. - Commented disclosure issues: ENL Disclosure Framework contains imprecisions (treatment of foreign participants in section III.C.1; requirement for “European passport” discussed in section III.C.2 rather than III.C.1; DVP procedure description in V.E.2.e not totally exact; prior approval by AFM for admission not mentioned in section III; role of share register could be clearer). - Clearnet DVP description could be more precise and comprehensive. - Dutch authorities could consider publishing answers to key questions to increase transparency, though not required given published Disclosure Framework. ### Recommendation 18 — Regulation and oversight (beginning) - One of the tasks of DNB is to promote the smooth operation of the payment system (Bank Act, section 4.2) and to make a contribution within the European System of Central Banks to promote the smooth functioning of the payment system (Bank Act, ...). _Italic: Source — _cr04310 - part in these tests, but this is possible on their request. These contingency plans_ (PDF)._ ### section 3.1.e). This is an explicit legal basis for oversight of payment systems and an ### _cr04310 - section 3.1.e). This is an explicit legal basis for oversight of payment systems and an ### Legal basis and scope of oversight - Section 3.1.e) provides an explicit legal basis for oversight of payment systems and an implicit legal basis for oversight of securities clearing and settlement systems by DNB. - For oversight of securities clearing and settlement systems, DNB currently has no legal instruments. - Securities settlement systems are not directly subject to supervision under relevant acts; the formal legal basis for oversight and supervision of securities clearing (and settlement) systems is formed by the Securities Trade Act (section 22.2), under which the Minister of Finance shall verify the settlement system when recognizing (licensing) a securities exchange. - The supervisory and oversight activities on Clearnet and Euroclear are established indirectly via the license agreement of the stock exchange granted by the Minister of Finance; the Act (section 22.3) gives the Minister authority to impose restrictions and conditions for licensing an exchange. - A central institute operating a book-entry system within the framework of the Securities Giro Act is subject to supervision by the AFM on behalf of the Minister of Finance under the Securities Giro Act (article 2, sections 1 and 4) and a ministerial decree of April 17,, 2000. - A clearing organization such as a central counterparty is not itself subject to supervision according to relevant acts, although clearing might be interpreted as part of settlement under the Securities Trade Act. ### Implementation for Euronext, Clearnet, ENL, NIEC - When Euronext was licensed in September 2000, a condition was imposed that clearing and settlement systems used on the exchanges adhere to the rules in the Supervisory Framework CSE. - DNB and the AFM, as joint overseers, have responsibility and authority to assess any significant system change with respect to clearing and settlement and need to give prior approval. - For major developments such as change of ownership and/or further consolidation, the Dutch overseer advises the MoF, which must express a nihil obstat. Findings on specific institutions: - ENL: - Falls under direct supervision of two supervisors: - As a central institute within the Securities Giro Act: supervised by the AFM on behalf of the Minister of Finance. - As operator of a securities settlement system for Euronext-traded securities: subject to oversight by DNB and the AFM pursuant to exchange recognition under the Securities Trade Act. - Clearnet: - Is a French credit institution, CCP and securities settlement system governed by French law (Monetary & Financial Code). - By operating the clearing organization for Euronext-traded securities, is subject to oversight of DNB and the AFM pursuant to exchange recognition under the Securities Trade Act. - In other jurisdictions where Clearnet performs clearing, local law and regulation apply. - DNB and the AFM have recently assessed system changes including the cash clearing migration in Amsterdam and centralization of collateral management and derivatives settlement. - NIEC: - Linked to oversight arrangements as described for ENL and Euronext (see links section below). ### Roles, responsibilities, transparency and instruments - Euronext (the licensed exchange) has responsibility for oversight/supervision of clearing and settlement mainly focused on clearing: - Euronext monitors clearing members’ organization via questionnaire; assessment leads to supervisory activity plans including on-site inspection. - Prudential supervision is left to Clearnet; Clearnet monitors monthly the financial standing of its clearing members. - Responsibilities of regulatory authorities are laid down in the Supervisory Framework CSE and the Covenant on Cooperation (May 1998) between DNB and STE/AFM: - Policy-making duties: responsibility of both authorities. - Checking compliance and approving management of relevant institutions: tasks of the AFM. - Coordination of policy-related activities organized through a joint Committee. - For ENL, a separate Cooperation Covenant (April 2000) allocates: - Joint tasks: changes of rules, amendments to articles of association, changes of admission rules, relations with foreign CSDs. - AFM tasks: appointment and dismissal of management, admission and rescinding of participants, admission of new types of securities, changes in fees. - Supervisory framework and covenants are not published; major policies of AFM and DNB are publicly disclosed through annual reports and quarterly bulletins. DNB has published a brochure describing the institutional framework for oversight and assessment criteria. - Instruments available to joint overseers in Supervisory Framework CSE when system operators’ activities damage safety/integrity: - (i) instruct that the activities are discontinued; - (ii) indicate what measures need to be taken to improve the situation. - Sanction of revocation of the exchange license is reserved to the Minister. The Minister can annul decisions by ENL, and ENL decisions can be appealed to the Minister. - DNB and AFM consult the MoF prior to decisions on major structural changes. ### Oversight organization, resources and meetings - DNB Oversight section: - Located within Payments Systems Policy Department. - Staff of 8 with legal, IT and risk competence. - Oversees securities settlement systems, fund transfer systems and payment instruments. - AFM oversight resources: - Staff of 3 for oversight and regulation of clearing and settlement systems, with relevant market competence. - Additional AFM resources (legal and EDP expertise) used as needed. - Funding: - AFM oversight/supervision funded through Government budget; AFM charges Euronext a fee for oversight of clearing and settlement systems. - DNB oversight activity funded through the budget of DNB. - Interaction: - Regular exchange of information and views; joint meetings with Clearnet and ENL/NIEC each month. ### International cooperation and coordination arrangements - Memorandums of Understanding (MoU) agreed with relevant authorities to perform oversight in an international context. - All relevant national authorities involved in regulation, supervision and oversight of Clearnet are joined in the Co-ordination Committee on Clearing Euronext (CCC) on basis of MoU Clearing. - Goal: exercise adequate and efficient supervision and oversight on Clearnet via a coherent framework based on best practices and legal responsibilities and international standards (CPSS-IOSCO Recommendations for securities settlement systems; European Association of Clearing Houses standards). - Joint guidelines forwarded to Clearnet in July 2002; first version being updated by CCC members. - CCC meets monthly (supervisory/oversight level) and quarterly (board level). - To ensure efficient supervision and oversight of Euroclear Bank’s cross-border activities, Belgian, French and Dutch authorities signed the MoU Settlement. ### Links, DVP status, and extension of credit - ENL links with foreign CSDs: - Bilateral links: Euroclear France, SegaIntersettle (Switzerland), CIK (Belgium), OKB (Austria), Clearstream Frankfurt (Germany), Monte Titoli (Italy), CADE (Spain), SCLV (Spain), APK (Finland). - Unilateral outgoing: CREST (England) and DTCC (USA). - Unilateral incoming: Euroclear Bank and Clearstream Luxembourg. - All links are direct links. - Links established by ENL with other CSDs are subject to formal approval by the Dutch Minister of Finance (Securities Giro Act, article 35). - Assessment includes examination of financial and operational integrity of linked CSD and comparability of foreign legal regime regarding ownership guarantees. - NIEC: - Only linked to Euroclear Bank through a unilateral incoming link. - DVP-links: - These securities transactions can only be effected through delivery free of payment. - Assessment: DVP-links are not in place; this is common across Europe and cannot be solved by a single country alone. - Euroclear Single Settlement Engine implementation (expected between 2005 and 2008) will enable DVP-links in central bank money for some links; Euroclear Netherlands will then be able to provide DVP-links in central bank money. - Extension of credit: - ENL and NIEC are not allowed to extend credit in any way. ### Assessment summary and transparency issues - Assessment: Broadly observed. - The AFM and DNB are currently supervising and overseeing securities clearing and settlement systems in the Netherlands (Clearnet, ENL and NIEC) efficiently and cooperating well. - Only ENL is subject to direct supervision by relevant Acts; Clearnet and NIEC are supervised indirectly via licensing requirements for Euronext—this indirect approach may limit effectiveness. - Supervisory framework is not published to the general public; DNB has published other information providing public insight into oversight processes. - Transparency findings did not affect the assessment category. ### Recommended actions to improve observance (selected) - Recommendation 7: - AFM and DNB should generally promote the use of DVP for settlement and support changes that enhance possibility of achieving DVP. - For cross-border links, DNB and AFM should consider recommended actions for Recommendation 19. - Recommendation 14: - AFM and DNB should approve ENL proposal to admit investment firms as participants. - AFM and DNB should suggest ENL (and when applicable NIEC) review Admission Regulation to become open and fair, consider allowing supervised non-EEA credit institutions to participate, ensure Admission Regulation consistent with practice, and require foreign CSDs to be supervised in the Regulation. - Recommendation 18: - MoF should finalize the Financial Supervision Act as soon as possible to ensure operators of clearing and settlement systems are subject to direct supervision, clarify roles of AFM and DNB and avoid unnecessary overlapping. - DNB should be able to fulfill overseer responsibilities consistent with international standards (e.g., Core Principles for Systemically Important Payment Systems). - AFM and DNB should consider publishing Supervisory Framework and covenants to enhance transparency. - Recommendation 19: - AFM and DNB should support Euroclear initiatives to develop cross-border DVP links and promote system participants’ use of such links to reduce risk; cross-border solutions require participation by other countries’ authorities. Implementation timetables and legislative developments: - MoF drafting a Financial Supervision Act; infrastructure part will state supervisory requirements for payment and securities settlement systems and split responsibilities between AFM and DNB; current timetable indicates implementation by the end of 2005. - MoF establishing an Act for supervision of clearing members planned for implementation during the second half of 2004; this legislation will not apply to clearing organizations themselves. - Euroclear Single Settlement Engine expected implementation between 2005 and 2008 to enable DVP-links in central bank money for some links. ### Authorities’ responses - Authorities broadly agree with the assessment of securities clearing and settlement systems and general overview of payment systems. - Part of recommendations will be addressed with enactment of the Financial Supervision bill, which will give explicit legal oversight powers to DNB and AFM (recommendation 18). - Admission rules of Euroclear Netherlands are under review to broaden access to include non-EEA credit institutions (recommendation 14). - Authorities endorse supporting Euroclear initiatives for cross-border DVP-links but note barriers are European rather than national and cannot be resolved unilaterally. *Source: _cr04310 - section 3.1.e). This is an explicit legal basis for oversight of payment systems and an* ### 117. A detailed assessment of the anti-money laundering (AML) and combating the ### _cr04310 - 117. A detailed assessment of the anti-money laundering (AML) and combating the ### Assessment team and methodology - Team composition: - Ian Carrington (IMF, MFD) - Margaret Cotter (IMF, LEG) - Jack de Kluiver, United States Department of Justice (Independent AML/CFT Expert (IAE) for law enforcement issues) - Assessment scope and approach: - IMF staff reviewed AML/CFT laws and regulations, and supervisory and regulatory systems for prudentially regulated financial institutions. - The IAE reviewed capacity and implementation of criminal law enforcement systems. - The team visited the Netherlands from December 1–14, 2003, and held discussions with national authorities, regulators, law enforcement bodies, and private-sector representatives. - Authorities and bodies consulted (as listed in the source): - Ministry of Finance, Ministry of Justice, De Nederlandsche Bank (DNB), Financial Markets Authority (AFM), Pension and Insurance Chamber (PVK), National Public Prosecutor’s Office (OM), Netherlands Bankers Association (NVB), Financial Expertise Center (FEC), MOT (Netherlands FIU), BLOM, FIOD-ECD, KLPD Nationale Recherche, UTBT, and representatives of banks, insurance companies, investment service providers, and money service offices. ### Scope of regulated entities covered - Regulated financial institutions included within the scope of the assessment: - banks - securities firms - insurance companies - money remittance firms - casinos ### General situation of money laundering (ML) and financing of terrorism (FT) - Structural and geographic vulnerabilities: - The Dutch financial system is described as highly developed and very sophisticated. - Densely populated urban centres provide attractive targets for “placement” and “layering” money laundering. - The Netherlands is a major entry point for heroin and cocaine into Western Europe, a significant transit point for heroin, cocaine, hash and cannabis destined for North America, and a foremost manufacturer and exporter of synthetic drugs such as amphetamines and MDMA (Ecstasy). - The Netherlands has one of the busiest international airports and the largest seaport in the world, generating large quantities of freight usable as cover for illegitimate activities. - Increase in activity by Eastern European organized criminal organizations involved in human trafficking, sophisticated VAT avoidance schemes, narcotics trafficking. - The Netherlands’ openness and immigrant links may be misused by criminals to set up illegal businesses affecting other jurisdictions. - Terrorist financing potential: - The Netherlands has a sizeable immigrant and “guest worker” population reportedly better integrated than many Western European counterparts, but remittances to countries with suspected terrorist cells could make detection of terrorist financing difficult. - The immigrant segment could, in theory, provide cover for terrorist financing. ### Legal framework and international instruments - FATF status and historical evaluation: - The Netherlands is a Financial Action Task Force (FATF) member and was last evaluated in 1997. - The 1997 evaluation noted strengths and areas for consideration, including that money laundering was not then a separate offense, unclear coverage of foreign predicate offenses, a judicially recognized exception for criminal assets transferred to legal entities, no discretionary authority to grant mutual legal assistance absent a treaty, emphasis on cash ML, lack of reports in securities and insurance sectors, and absence of reliable statistics to judge effectiveness. Many points have been addressed by the authorities. - Key legislative milestones and instruments: - Identification of Services Act (late 1980s) created customer identification and record keeping obligations. - DUTA (1994) created a reporting obligation and established MOT (FIU) within the Ministry of Justice. - Adoption of a separate criminal money laundering offense (applicable to all serious crimes which include all offenses penalized with a maximum sentence of six months or more). - Amendments to the Criminal Procedure Code in 2001 improved the confiscation regime and addressed secreting of assets through legal entities occurring under judicial precedent. - The Netherlands is a party to the 1988 UN Drug Convention and the Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds from Crime. - Signed the UN Convention against Transnational Organized Crime in 2000; expects to ratify the Convention by mid-2004. - Ratified the UN International Convention for the Suppression of the Financing of Terrorism (ICSFT) in 2002. - MOT is a member of the Egmont Group. The Netherlands participates in Moneyval and CFATF. - Particular legal points: - While not explicit that foreign crimes may serve as predicate offenses, authorities believe there is a legal basis for such crimes serving as predicate offenses in the legislative explanation for the previous ML (fencing) provision. - No provisions permitting a grant of mutual assistance involving coercive measures on a discretionary basis absent a treaty. - The Netherlands is not a bank secrecy jurisdiction; bank records and other forms of assistance are available through mutual legal assistance channels. - Financing of terrorism is addressed through criminal provisions for preparation and participation in a criminal organization rather than as a separate offense; terrorism financing is subject to domestic jurisdiction and punishment regardless of where the act occurs. - The Code of Criminal Procedure and the Sanctions Act provide broad authority to prosecutors and the police to identify, freeze and seize criminal proceeds and terrorist assets. - Authorities have circulated the UN SCR consolidated lists to all financial institutions; several accounts have been frozen. ### Preventive measures, reporting, and thresholds - Coverage of preventive measures: - Identification of Services Act requires identification of all customers when entering a business relationship (e.g., opening a checking account, a savings account, a securities deposit account, renting a safe deposit box). - Customer identification is also required for a transaction or series of related transactions in excess of EUR 10,000 which takes place on an occasional basis. - Banks and other financial institutions are required to keep records on customers and account owners and are protected with respect to their cooperation with MOT and law enforcement agencies. - Requirements for reporting based upon thresholds exist for dealers in high value goods and for insurance matters. - A broad range of unusual transactions as well as suspicious transactions must be reported. - Extensions and coverage increases since 1998 FATF report: - DUTA extended to cover money remittance services; money remittance and exchange placed under supervision. - Money laundering controls introduced for dealers in high-value goods and for persons in professional capacities (lawyers, notaries, estate agents, tax consultants, chartered accountants, company managers), making identification, record keeping, and reporting obligations applicable. - DUTA created MOT (FIU) in 1994 (Unit within the Ministry of Justice). ### Supervisory and regulatory framework - Regulators with AML/CFT oversight responsibilities: - De Nederlandsche Bank (DNB) - Financial Markets Authority (AFM) - Pension and Insurance Chamber (PVK) - Regulatory guidance and actions: - In June 2002, the DNB, in conjunction with the bankers association, issued the Basle Committee CDD paper to credit institutions recommending observance of those standards. - In May 2003 the DNB issued an explanatory memorandum on the CDD paper. - PVK and AFM have not issued specific formal AML/CFT guidance notes. - Supervisory tools and practices: - Regulators have developed risk analysis tools covering management of AML/CFT risk; these tools inform supervisory programs and on-site visits. - DNB enforces Netherlands AML/CFT standards in overseas branches and subsidiaries of Netherlands’ banks with routine visits to overseas offices. - Imminent merger of DNB and PVK expected to extend the general approach used for banks to insurance entities where applicable. - Fitness and propriety assessments: - Regulators assess fitness and propriety of supervisory and executive board members for financial institutions. - These assessments involve the National Public Prosecutor responsible for AML/CFT who conducts reviews of law enforcement aspects. ### Operational cooperation and private sector engagement - Inter-agency and public-private collaboration: - Strong collaboration between regulators and the financial services sector. - Bankers association issued the CDD paper jointly with DNB and has provided personnel to MOT to assist in training. - Regulators consult regularly with industry on planned developments. - Border and customs reporting: - Transportation of cash and bearer monetary instruments across Netherlands borders is not subject to control; authorities await EU consideration. - No cross-border reporting requirements or declaration requirement at the border for amounts of currency entering or leaving the Netherlands. - Customs and Immigration authorities must report to MOT matters where, in the exercise of their usual duties, unusual amounts of money are detected. ### Key developments, strengths, and outstanding issues identified - Key developments and enhancements: - Adoption of a separate criminal money laundering offense. - Expansion of DUTA coverage to additional sectors and gatekeepers. - Improvements to the confiscation regime via 2001 amendments to the Criminal Procedure Code. - DNB leadership in issuing the Basle Committee CDD paper (June 2002) and explanatory memorandum (May 2003). - Strengths: - Highly developed and sophisticated financial system with comprehensive preventive laws and supervisory architecture. - Active supervisory engagement including fitness and propriety checks and overseas supervision. - Strong collaboration between regulators and industry. - Outstanding issues or historical concerns (noted in FATF 1997 evaluation and discussed in the assessment): - Earlier lack of separate ML offense (now addressed). - Ambiguity about explicit statutory coverage of foreign predicate offenses (authorities cite legislative explanation as a legal basis). - Judicial precedent had permitted secreting of assets through legal entities (addressed by 2001 amendments). - No discretionary authority to grant mutual legal assistance involving coercive measures absent a treaty. - Emphasis on cash ML and prior lack of reporting in securities and insurance sectors (coverage has since been extended). - Absence of cross-border cash declaration/reporting requirements for the public. *Source: _cr04310 - 117. A detailed assessment of the anti-money laundering (AML) and combating the financing of terrorism (CFT) regime of the Netherlands.* ### 136. The following detailed assessment was conducted using the October 11, 2002 version ### _cr04310 - 136. The following detailed assessment was conducted using the October 11, 2002 version ### I — Criminalization of ML and FT (conformity with criteria 1–6) - Conventions and implementation - Party to: United Nations Convention on Illicit Drugs and Psychotropic Substances (Vienna Convention, entered into force 1990); Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime (Strasbourg Convention) (ratification October 10, 1993); UN International Convention for the Suppression of the Financing of Terrorism (ratification December 2001, entry into force January, 2002). - Not yet ratified: Palermo Convention (signed December 2000). Ratification expected before June 2004. - UN SCRs 1267, 1269, 1333, 1373, and 1390 implemented mainly through EU legislation: Council Regulation (EC) 2580/2001 (27 December 2001) and Council Regulation (EC) No 881/2002 (27 May 2002). Netherlands amended its Sanctions Act in 2002 to enable administrative freezing on international/organizational basis. - Money laundering (ML) criminalization (Articles 420bis, 420ter, 420quarter) - Offenses under Article 420bis (knowing funds proceeded from a crime): hide/ conceal true nature/origin/location/alienation/relocation; hide/ conceal party entitled; possess goods; acquire/possess/transfer/convert/make use of goods. - Article 420quarter: same actions when a person should reasonably suspect proceeds are from crime. - Article 420ter: punishment for habitual money laundering. - Predicate offenses: all offenses (including fiscal) with maximum possible sentence of six months imprisonment or more (and some offenses penalized with less than six months). Sources: Criminal Code, Book 2 "Offenses", Economic Offenses Act, and other acts. - Penalties: - Article 420bis (knowing): imprisonment not exceeding four years and a fine of up to EUR 45,000. - Article 420ter (habitual): up to six years and a fine of up to EUR 45,000. - Article 420quarter (reasonable suspicion standard): maximum term of one year and a fine of up to EUR 45,000. - Corporations: fines of up to EUR 450,000. - Revocation of professional licenses possible (Article 420quinquies). - Article 420bis–420quinquies comply with EU Council framework decision of June 26, 2001 (minimum maximum term not less than four years). - Conviction for ML does not require a conviction for a specific predicate; prosecution must establish that the source of funds was criminal activity. - Coverage: property defined under Civil Code, Book 3, Articles 1, 3, and 6 — extends to any type of property (means and rights in property, physical or intellectual, and legal claims). - Extraterritorial predicate basis: authorities indicate foreign conduct may constitute predicate if underlying conduct also criminal in the Netherlands; legislative explanation under previous fencing provision supports this but not explicit in Codes. - Criminalization of Terrorist Financing (FT) - Reliance on existing Criminal Code provisions amended where necessary, notably: - Article 46 (preparation for a criminal offense) - Article 140 (participation in a criminal organization) - Articles 45, 46a, 47, 48 (attempts, participation, accessory) - Key statutory features: - Article 45: attempt punishable when intention manifested in first act. - Article 46: preparation for crimes carrying a term of at least 8 years punishable; financing falls within preparation; participation punished at one half the penalty. - Article 46a: attempt to induce by offering opportunity/means; intentionally procuring commission by donation/pledge/resources is prosecutable. - Article 47/48: perpetrators and assistants defined and criminalized. - Article 140: participation in an organization whose purpose is to commit crimes punishable up to six years and a fine; includes terrorist organizations. - Acts of Terrorism Act (under consideration in Parliament) will: - Implement EU Framework Decision 2002/475/JHA. - Increase penalties when crime qualifies as terrorist act (applicable maximum increased by half; e.g., 12 years → 18 years). - Create new Article 140a and Article 140(4) to criminalize participation where object is terrorism; define participation to include monetary/material support and funding members; participation punished with 15 years imprisonment; leadership with a life sentence. - Sanctions Act 1977 violations (implementation of UN/EU freeze lists) are criminal offences punishable by up to six years' imprisonment under the Economic Offences Act. - Scienter and liability - Offences apply to those who knowingly engage in ML or FT. ML also covers reasonable suspicion standard (Article 420quarter). FT preparation offense includes an “apparently” intended concept (less strict than knowing). - Legal entities have criminal liability (Article 51, Criminal Code). - Adequacy of legal means and resources (criterion 6) - Substantive ML laws widely defined, covering “misdrijf” (criminal offences in Third Book of Wetboek van Strafrecht). - Comprehensive AML reporting: reporting obligations include traditional financial institutions, foreign exchange operators, money remitters, casinos, dealers in high value goods, lawyers, accountants, realtors. - Dutch reporting system: reports of “unusual transactions” (UTRs) based on objective and subjective indicators; MOT (FIU) performs analysis and designates STRs; MOT operates with BLOM in MBA-unit. - Funding increases post-9/11: - EUR 10.9 million pledged (report of 15 November 2001) for AML/CFT financial sector integrity. - Reoccurring EUR 90 million appropriation added; EUR 10.6 million annually assigned to AML/CFT enforcement in addition to EUR 10.9 million. - Analysis of effectiveness — key findings - Ratified and implemented relevant conventions except Palermo (expected). - ML provisions cover self-laundering and legal persons; mens rea minimum is knowing, some offences reasonable suspicion. - Some prosecutors report courts applying stricter standards for proof under new ML provisions than under previous fencing doctrine — potential disincentive. - Lack of explicit statutory provision that foreign crimes are predicate is a weakness; reliance on legislative explanation is less conclusive. - Approach to FT via preparation/participation offences can meet ICSFT requirements; Acts of Terrorism Act will strengthen clarity. - Major gap: no in personam bulk currency smuggling offence nor border currency reporting requirements outside formal Customs declarations and Military Police declarations — only significant legal lacuna. - Under-utilization of forfeiture provisions at local police and prosecutors; backlog of Article 36 forfeiture proceedings pending with public prosecutor’s office. - ML penalties comparatively low; maximum for habitual launderer is six years. - Concerns about evidentiary standards: need clarity that circumstantial evidence suffices to show proceeds of predicate offence; focus of higher scrutiny should be on “knowledge” prong. - Recommendations (selected) - Ratify the Palermo Convention as soon as possible; consider explicit statutory provision that foreign crimes may serve as predicate offences. - Undertake an evaluation of case outcomes and developing law under the new criminal ML provision within the year and amend as necessary. - Consider increasing maximum penalties for ML. - Enact Acts of Terrorism Act to make explicit that provision of monetary support to terrorist organization is criminal participation. - Enact bulk currency smuggling offences and border currency reporting requirements (aim for common EU standards if possible). - Consider lifting Parliamentary ban on long-term criminal-civil infiltrators for ML investigations under prosecutorial control and guidelines. - Create a forfeiture fund to train law enforcement, support stalled forfeiture efforts, and remit funds to victims without civil suits. - Allow Board of Attorney Generaal to set national forfeiture guidelines/prosecutorial standards. - Make consideration of forfeiture mandatory for offences generating more than EUR 10,000 or other threshold. - Clarify ML burden of proof; raise ML sentences by 3, 2, and 1 years respectively (for 6, 4, 1 year tiers) and consider mandatory minimums for serious/repeat offenders. - FATF implications (as assessed) - Recommendation 1: Compliant - Recommendation 4: Compliant - Recommendation 5: Compliant - SR I: Compliant - SR II: Compliant --- ### II — Confiscation and forfeiture (criteria 7–16) - Legal framework and scope - Confiscation available for laundered property, proceeds from offences (including ML and FT), and instrumentalities (Articles 33–35 and Articles 36a–36f, Criminal Code). - Confiscation/forfeiture applies to: - property obtained in whole or part by means of an offence or from proceeds; - property in relation to which the offence was committed; - property used to commit or prepare the offence; - property intended for commission of an offence. - Both value- and property-based provisions exist; courts may order payment equivalent to illegal profits (Article 36e). - Confiscation usually in separate proceeding after criminal conviction; proceedings can be commenced within two years following conviction. - BOOM (Bureau Ontnemingswetgeving Openbaar Ministerie) assists prosecutors with confiscation; confiscation is discretionary and requires conviction. - Provisional measures and tracing powers - Article 94a(Code of Criminal Procedure) provides provisional seizure powers covering goods subject to confiscation, goods aiding disclosure of truth, and ensuring payment of fines or value-based orders. - Article 96(a) Code of Criminal Procedure authorizes seizures and requires financial institutions to turn over records; usable even if formal investigation not open. - Special financial criminal investigations (Articles 126–126f) require examining magistrate authorization and permit orders to any person to provide documents and state held assets. - Rights of bona fide third parties and voiding contracts - Articles 552a–552g Code of Criminal Procedure protect innocent third parties; claim and lifting of seizure procedures available. - Contracts intended to frustrate seizure/confiscation are unenforceable; Article 3-40 Civil Code (public order) and Article 94d(2) Code of Criminal Procedure allow nullifying fraudulent conveyances in year preceding investigation. - Statistics and training - BOOM keeps statistics on Article 36 forfeitures but not by offence type; does not track Article 33 or “transactie” Article 74 forfeitures centrally. - Training in forfeiture available but not mandatory; BOOM publishes newsletters, annual reports, has hotline and website; SSR offers courses. Limited comprehensive mandatory training identified. - Freezing for FT - Obligation to freeze funds or property belonging to terrorists listed by UN SCRs, implemented via EU Regulation No. 881/2002 and national Sanctions Act measures for “internal terrorists”. - Reporting decree under Sanctions Act requires financial institutions to report requests for services involving listed persons/entities to MOT. - FIOD-ECD and financial supervisors oversee compliance; Customs also designated supervisor. - Violations punishable by up to six years’ imprisonment. - Asset Forfeiture Fund and asset sharing - No asset forfeiture fund; confiscated assets go into general public funds. - Asset sharing possible under Strasbourg Convention and bilateral treaties with the US and UK; Articles 13–13f Act on Execution of Foreign Judgments (Transfer) Act provide basis; upcoming EU Framework Decision on mutual recognition of confiscation orders expected to facilitate sharing. - Analysis of effectiveness — key findings - Confiscation regime covers proceeds, instrumentalities, laundered property and value; requires criminal conviction but covers proceeds beyond offence of conviction. - Seizure powers under Article 94 can act quickly; authorities claim asset freezes can be effected within hours when needed. - Financial Data Requisition Act (bill before Parliament) expected to refine powers to identify and trace and secure customer identification orders. - Lack of centralized tracking by offence type prevents assessment of ML/FT contribution to forfeiture program; BOOM could alter tracking but practical difficulties exist. - Training provision is limited and not mandatory; lack of mandatory training undermines effective use of AF/ML/FT tools. - Absence of a forfeiture fund limits resources to support investigations and training; jurisdictions with forfeiture funds see increased successful forfeitures. - Recommendations (selected) - Consider empowering MOT to order freezing of accounts subject to subsequent prosecutorial control if current system does not secure assets quickly enough. - Enhance powers to identify and trace and secure customer identification orders (Financial Data Requisition Act). - Ensure asset sharing can occur in domestic matters where there has been foreign assistance. - Make confiscation of criminal proceeds in ML and FT matters mandatory. - BOOM tracking should include whether ML or FT offences form basis of seizure/forfeiture. - Develop method to capture non-Article 36 forfeiture activity (Article 33, “transactie” under Article 7, fiscal penalties). - Require mandatory forfeiture, ML and FT training for all prosecutors and police handling Article 36 offences. - FATF implications (as assessed) - Recommendation 7: Largely Compliant (confiscation not mandatory) - Recommendation 38: Largely Compliant - SR III: Compliant --- ### III — FIU (MOT) and processes for receiving, analyzing, and disseminating financial information (criteria 17–24) - Institutional setup - MOT (Meldpunt Ongebruikelijke Transacties) established 1994; Egmont Group member; administrative body within Ministry of Justice. - MOT receives and analyses all UTRs except military police border cash finds (reported to BLOM). - MOT headed by official appointed by Minister of Justice with cooperation of Minister of Finance. - Reporting framework and analysis - Article 9 of DUTA obliges disclosure of all unusual transactions to MOT; Articles 8 and 15 mandate Ministers to establish indicators. - Indicators: industry specific, objective (including thresholds) and subjective; include FT indicator to report transactions involving persons on freeze lists. - UTRs analyzed by MOT; UTRs deemed suspicious become STRs and forwarded to all police forces including BLOM; STRs placed on Intranet Suspicious Transactions. - MOT uses software and scores to prioritize UTRs; MOT and BLOM jointly operate MBA-unit for mutual analysis; MBA-unit can dispatch suspicions in real-time to police. - Operational powers and limitations - MOT may request additional information from reporting party and provider (Article 10, DUTA). - MOT not empowered to take temporary preliminary measures to prevent completion of transactions; must report to BLOM who seeks prosecutor order to immobilize funds. - MOT participates in FIU-NET; provides technical assistance internationally. - Access to databases - MOT access includes HKS, National Interpol, Chamber of Commerce, GBA, VIS, FIOD, BOOM, VROS, Lexis-Nexis, RDW, Dunn and Bradstreet, Egmont Secure Web. - BLOM access includes HKS, MRO-VROS, NCIEs, IPS, LFS, National Firearms register, VIS, NCIS-LIST, WINSTON, Interpol Netherlands, FIOD, SIOD, AID, Koninklijke Marechaussee database, RDW, MOT-register (case by case), and foreign liaison information. - Sanctions and supervision - MOT cannot directly sanction non-reporting; non-reporting referred to National Public Prosecutor and supervisors. Penalties: maximum imprisonment two years and maximum fine EUR 11,250 (Section 1, 6, Economic Offences Act). Supervisors perform compliance oversight (DNB, AFM, PVK, BFT, Tax authorities and FIOD-ECD). - Dissemination and international cooperation - DOMESTIC: MOT forwards STRs to police units; not currently authorized to share specific information with supervisors (expected legislative change in early 2004). - INTERNATIONAL: MOT may freely share with other FIUs under Article 3g DUTA and Data Protection (Police Files) Decree Article 13; MOUs not necessary but used where required; active within Egmont, Interpol, Europol, FIU-NET. - Statistics and workload - MOT statistics: breakdown by sector, indicator type, geographical region, total and average value, currency types, reporting times, UTRs vs STRs, domestic requests. Tracks domestic requests: almost 700 in 2003 (to date); foreign inquiries received in 2003: 1,365; MOT inquiries to others: 76. - UTR volume growth: - 2000: almost 48,000 UTRs - 2002: over 137,000 UTRs - 2003 (projected): more than 170,000 UTRs - STRs: 2000: 11,000; 2002: about 24,000; 2003 (projected): more than 35,000 - Percentage of UTRs designated STRs: about 20 to 25 percent. - MOT staff: 26 employees (excluding PHARE project personnel), with 15 in investigatory units and small IT team (two systems analysts, one data entry person). - MOT automation: 85% of UTRs submitted electronically. - Analysis of effectiveness — key findings - MOT is member of Egmont Group and meets associated criteria. - MOT has access to numerous databases and can mandate follow-up information from reporters and service providers. - MOT cannot itself freeze transactions; must rely on BLOM and public prosecutor for immobilization orders; in urgent cases, MOT refers to BLOM and police quickly. - Lack of formal statistics linking UTRs/STRs to investigations, prosecutions, and convictions prevents evaluation of operational utility. - Dramatic increase in UTR filings (up to 300% over three years) without commensurate staffing increases (approximate staff increase ~25%) — potential strain on MOT effectiveness. - Planned move to risk-based reporting and changes in reporting rules for gatekeepers/high value dealers to reduce volume and improve quality. - Recommendations (selected) - Introduce administrative sanctions for violations of DUTA (as planned). - Consider empowering MOT to secure assets (see confiscation section) if current system inadequate. - Improve tracking of UTR/STR usage in investigations, prosecutions, convictions; require users of STR database to indicate intended use at logon. - Require post-mortem reporting on use of MOT leads in convictions (degree of contribution). - Consider assigning more investigators to MOT and BLOM. - FATF implications (as assessed) - Recommendation 14: Compliant - Recommendation 28: Compliant - Recommendation 32: Compliant --- ### IV — Law enforcement and prosecution authorities, powers and duties (criteria 25–33) - Designated national units and prosecutorial structure - BLOM: specialized investigative police unit supporting MOT; about 23 employees (18 financial investigators), expansion planned to 32. - FIOD-ECD: criminal investigation service of Tax and Customs Administration; 600 to 700 investigators in 60 teams across 12 regional offices. Contains Money Laundering Knowledge Group (MLKG) with 11 investigators and 3 tax/customs agents — MLKG goals for 2004: initiate ≥25 ML or fiscal offense cases (≥5 major ML), identify trends, facilitate UTR filings from Customs/Tax, focus on asset forfeiture. - Nationale Recherche (NR): ~700 investigators; DRO branch primary vehicle for ML investigations; five DRO units total ~70 investigators. - UTBT: DRO unit for anti-terrorism and special tasks. - Regional Financieel Economische Recherche (FER) units exist in large regions (e.g., Amsterdam/Amstelland). - National Public Prosecutor for AML/CFT in Functioneel Parket (FP) coordinates AML/CFT prosecutions; attorney-general for AML/CFT chairs BC-MOT. - Investigative powers and techniques - Special Powers of Investigation Act (reflected in Articles 126g–126u and 126ij Code of Criminal Procedure) authorizes undercover operations, controlled delivery, searches, telecommunications interception, provider data requests, systematic observation, tracking/listening devices/cameras. - Investigative measures authorized by public prosecutor or warrant; AIVD (Secret Service) has additional powers under Act on the Intelligence Service with Ministerial authorization. - Parliamentary ban: use of long-term undercover criminal-civil infiltrators for ML (non-TF) matters prohibited — impediment to infiltration. - Access to financial records and co-operation - Article 96a Code of Criminal Procedure permits compelling production of bank account records including customer ID once criminal investigation commenced (investigation threshold: offences with maximum penalty of 4 years or more and pre-trial detention eligibility). - MOT can require follow-up reports; BLOM must seek prosecutorial order for additional information (National Public Prosecutor for AML/CFT may issue such order). - Interagency cooperation mechanisms - Financial Expertise Centre (FEC): plenary meetings every six to eight weeks; participants include AFM, DNB, PVK, Taxation, FIOD-ECD, KLPD, MOT, FP, AIVD, regional police Amsterdam; FEC has staff of 8; Information Platform (typologies studies) and Selection Platform (case discussions). - MBA-unit (MOT + BLOM) for joint UTR/STR analysis. - BC-MOT and WG IND involve reporting institutions, MOT, BLOM, Ministries, supervisors for indicators development. - Resourcing and structural issues - AML/CFT appropriations: EUR 10.9 million annually (2002) plus EUR 90 million reoccurring appropriation for terrorism with EUR 10.6 million annually assigned to AML/CFT. - Structural fragmentation: many national and regional units with AML/CFT roles; lack of clear national command structure; national units lack power to compel regional police/prosecutors to act; duplication and inefficiency due to “polder” system. - Prosecutorial capacity: national FP has limited direct prosecutorial resources for ML/FT; regional offices hold more prosecutorial manpower but national experts lack control. - Statistics and operational outcomes (selected) - ML prosecution statistics (fiscal year 2002): - BLOM used 5,888 STRs to create 237 new investigations (mostly ML charges). - Out of 237 investigations, 95 cases brought before courts. - FP served summons for ML offences in 73 cases: of these, as of 1 May 2003: - 28 ML convictions (5 of 28 resulted in conviction for something other than ML), - 5 acquittals, - 2 cases on appeal, - 8 cases pending. - 27 cases resulted in jail sentence; 4 in financial penalties; 7 in community service. - Ancillary forfeiture pending/dealt with in 19 of 95 cases brought before courts. - 2003 (through end April 2003): 44 ML cases brought before courts; 43 had summons based on ML violations; 4 dealt with as of mid-2003 — 2 convictions, 2 acquittals; remainder pending. - BLOM translates thousands of STRs into 200–300 potential cases annually for presentation to police units. - Analysis of effectiveness — key findings - Adequate statutory powers and investigative techniques exist and have been used successfully. - Practical limitations: fragmentation of responsibilities; BLOM cannot force investigations; regional police may decline BLOM leads as “small players”; penalties and evidentiary hurdles reduce prosecutorial appetite for ML charges. - HARM program (real-time UTR→STR→hot lead operations) effective in seizures and arrests but rarely yields ML convictions or forfeitures. - Lack of centralized tracking for investigatory/prosecutorial outcomes; no clear national AML/CFT investigative/prosecutorial policy mechanism. - Inability to use criminal-civilian infiltrators hinders investigations of underground banking/Hawala and similar structures. - Recommendations (selected) - Consolidate resources within police and prosecutorial units at national level. - Introduce non-conviction based forfeiture procedures to deal with assets seized in HARM and other cases not resulting in conviction. - Centralize ML/FT investigation and prosecution policy. - Assign dedicated regional investigators/prosecutors for ML/FT under national oversight. - Authorize criminal-civilian infiltrators for serious ML and all FT cases under strict prosecutorial oversight. - Require reporting of all ML/FT investigations and use of STR data to BLOM; record results in COMPAS public prosecution information system. - FATF implication - Recommendation 37: Compliant --- ### V — International Cooperation (criteria 34–42) - Mutual Legal Assistance (MLA) and extradition - MLA provided on treaty basis; domestic law may allow certain non-coercive measures absent treaty. - Party to European Convention on Mutual Assistance in Criminal Matters (1959) and Additional Protocol; bilateral MLATs with Australia, Canada, United States, Surinam; EU Framework Decisions implemented. - Non-treaty assistance limited; coercive measures require treaty. Code of Criminal Procedure Articles 552h–552p govern procedures; Ministry of Justice Central Authority: Bureau Internationale Rechtshulp in Strafzaken. - Dual criminality generally implemented via similar conduct test rather than same-element test. - LURIS (National Uniform Registry System of International Legal Assistance) records requests; in 2002 Netherlands had 176 requests involving ML with 101 disposed by mid-2003. - Average time between request and execution: 40 days (other than seizure-of-goods cases where it can be up to 2 years). - Extradition - Extradition only pursuant to treaty; party to European Convention on Extradition (1957) and Schengen Treaty; numerous bilateral extradition treaties listed. - Extraditable offences: crimes punishable by minimum penalty more than one year (European Convention) or more than 6 months (Schengen partners); ML and FT qualify. - Extradition of Dutch nationals conditional on possibility of serving sentence in Netherlands; transfer of prosecution invited if extradition denied. - Law enforcement cooperation and asset sharing - International Centres of Judicial Assistance (10 regional + 1 national) staffed by police and prosecutors expedite MLA. - Cooperative investigations (e.g., controlled delivery) permitted with public prosecutor authorization; telephone interception possible for treaty and non-treaty requests under conditions. - Asset sharing agreements exist with USA and UK; letter of understanding with Luxemburg; sharing possible without treaty though treaty facilitates sharing. Upcoming EU Framework Decision on mutual recognition of confiscation orders expected to aid sharing. - No terrorist safe-harbor - Immigration law (Vreemdelingenwet 2000) provides denial, withdrawal of residence, expulsion (Article 3, Articles 18 and 22, Article 67). - Analysis of effectiveness — key findings - Comprehensive set of bilateral and multilateral treaties. In absence of treaty, coercive measures not available — legal gap for discretionary assistance absent treaty. - LURIS tracking adequate but historically not differentiating ML vs predicate vs FT; plans to capture more data exist. - Netherlands reports average response time to foreign requests of 40 days — considered good. - Practical effectiveness of assistance in confiscation/forfeiture matters remains largely untested; only one case in three years of shared proceeds reported. - Legal uncertainty about enforcing non-conviction-based foreign forfeiture judgments (civil forfeiture) — BOOM developing approach but untested. - Recommendations (selected) - Consider permitting MLA in absence of a treaty on a discretionary basis with reciprocity assurance. - Monitor effectiveness of current MLA and confiscation laws in recognition of foreign forfeiture orders. - Improve MLA efforts in confiscation matters, particularly for non-conviction based confiscation efforts by other nations. - FATF implications (as assessed) - Recommendation 3: Compliant - Recommendation 32: Compliant - Recommendation 33: Compliant - Recommendation 34: Compliant - Recommendation 37: Compliant - Recommendation 38: Largely Compliant (for 35.2, 39) - Recommendation 40: Compliant - SR I: Compliant - SR V: Compliant --- ### VI — Preventive measures for financial institutions — General Framework (criteria 43–44) and Customer Identification (criteria 45–48) - Legal and institutional framework - Sector-specific supervision legislation in place; planned consolidation into single Financial Supervision Act (expected by July 2005). - Principal AML/CFT legislation: Identification of Services Act (ISA) and DUTA (reporting duty and MOT creation). Consideration of consolidating ISA and DUTA. - DUTA and ISA scope: banks, life insurers, credit card companies, securities institutions, currency exchange organisations, money transfer institutions, casinos, DNB, gatekeepers (dealers in expensive goods), professionals (lawyers, notaries, estate agents, tax consultants, accountants, company managers). Customs reports unusual movements to MOT; Royal Military Police reports border cash finds to BOOM. - Informal banking networks (Hawala, Hindi, Chit) prohibited unless registered under Act on Money Services and supervised by DNB. - Regulators/supervisors: - DNB: credit institutions, cash transaction offices, money transfer institutions, credit card companies, company service providers, casinos. - AFM: securities and asset management. - PVK: life insurance. - BFT: accountants, lawyers, tax advisors, notaries. - FIOD-ECD: real estate agents, dealers in high value goods. - Failure to comply with DUTA/ISA is criminal offence under Economic Offences Act — maximum prison 4 years. - Secrecy protection and information sharing - No bank secrecy regime blocking law enforcement; information reported to MOT protected under Police Registers’ Act and Data Protection (Police Files) Decree. - Supervisory information protected by sector laws but gateways exist for sharing with law enforcement and internationally. - MOT currently restricted from sharing specific information with supervisors; planned change in early 2004. - Implementation and guidance - DNB and bankers issued Basle Committee customer due diligence (CDD) paper June 2002; DNB issued explanatory memorandum May 2003. - Gap analyses conducted by many banks; DNB expected to issue minimum requirements and risk profiles; Decree on Integrity and supervisory regulations issued (post-mission: Decree on Integrity effective December 1, 2003; regulations effective January 1, 2004). - No sector-specific guidance then for AFM and PVK but post-mission regulations to address CDD issued January 1, 2004. - Special supervisory arrangements: cooperative bank central organization supervises 350 member banks under Art. 4 ASCS with DNB oversight — potential inconsistency with risk-based supervision. - Customer identification (ISA) — scope and thresholds - Identification required when: - opening accounts, renting safe deposit boxes, taking custody of securities/notes/precious metals; - occasional customers: amount EUR 10,000 or more; - series of related transactions over EUR 10,000; - money remittance and exchange: all transactions regardless of amount; - payment in cash of EUR 15,000 or more for high value goods; - life insurance: premium > EUR 1,000 per year or EUR 2,500 one-time payment; payment of proceeds > EUR 2,500; - if transaction is reportable as unusual and identification not yet occurred. - Exceptions: - Identification not required for banks/financial institutions listed by Ministerial Decree and registered per EU directive; Ministerial list references FATF members (some omissions noted: Russia, South Africa, GCC members not on list pending ISA/DUTA overhaul). - Persons acting on behalf of another must be verified and identity of third parties established (Article 5 ISA); if institution knows or should reasonably suspect person not acting on own name, must take all reasonable measures. - Legal entities: verify legal existence/structure and identify persons acting on behalf (Articles 3(2)-(3), 5 ISA). - Evidence of identification: official documents (passport, ID card, driver’s license); record keeping required (Article 2(2)-(4), 6 ISA). - Consequence of lack of identification: service may not be provided unless identification derived from existing identified account (Articles 2, 3 ISA). - Retroactivity: identification requirements in place since 1988; change in ISA 2002 requires identification for transfers > EUR 10,000 into/out of pre-1989 accounts. - Anonymous accounts prohibited by ISA requirements. - Numbered accounts permitted if proper identification occurs; DNB Regulation on Protected Accounts (1 July 1999) sets restrictive policies, central register, annual external audit. - Derived identification permitted for non face-to-face accounts only when initial deposit from an account where individual identified at permitted institutions (Article 4 ISA). - Introduced business: reliance on introducer permitted if introducer has established identity per ISA and is registered/supervised entity or EU lawyer/notary (Section 5(5) ISA). - Renewal of identity: no specific statutory renewal intervals but institutions expected to renew when doubts appear; supervisors plan to issue regulations. - Wire transfers: no legally binding requirement yet to include detailed originator/beneficiary information; common banking practice includes some originator info; European Regulation expected; DNB considering national regulation effective before February 2005. Domestic clearing uses account number with name and address auto-generated by Interpay; international transactions often include name and address and sometimes account number. - Analysis of effectiveness — key findings - Designated authorities responsible; consolidation into single supervisory law must clarify lines of responsibility. - MOT sharing restrictions with supervisors remain a concern (expected legislative remedy). - DNB and other supervisors use risk-based approaches and gap analyses; CDD guidance and Decree on Integrity issued post-mission. - Weakness: supervisory arrangement for cooperative bank central organization should be reviewed for DNB objectives and independence. - Need for comprehensive AML/CFT Guidance Notes across financial sectors. - Recommendations (selected) - Ensure clear lines of responsibility for AML/CFT supervision under Financial Supervision Law and communicate to industry. - Ensure MOT can share specific information with supervisors as planned. - Adopt legislation to explicitly permit supervisors to share information in support of law enforcement. - AFM to benchmark securities firms against CDD paper; DNB to do likewise for insurance post-merger with PVK. - Review central organization supervision arrangement for cooperative banks under Financial Supervision Act. - Develop comprehensive AML/CFT Guidance Notes for all financial sectors. - Consider merging DUTA and ISA. - FATF implication - Recommendation 2: Largely Compliant (issues with MOT disclosure to supervisors) Italic: Source: IMF detailed assessment based on October 11, 2002 Methodology; status as of December 12, 2003 — _cr04310 (PDF chapter). ### 45. Financial institutions appear generally to have established systems to ensure that clients are identified in ### _cr04310 - 45. Financial institutions appear generally to have established systems to ensure that clients are identified in ### Client identification systems and shared tools - Financial institutions generally have systems to ensure clients are identified in accordance with ISA. - Regulators enforce ISA by reviewing documents used to identify customers during on-site inspections. - Institutions categorize customers into risk categories requiring more stringent due diligence for higher-risk customers. - Shared databases available to all banks in the Netherlands: - External Reference Application (EVA): provides names of persons whose application for banking services was refused. - Verification and Identification Document System (VIS): provides information on stolen identification documents. - Insurers use a similar system called EVI (External Reference Index). - Derived identification (reliance on identification undertaken by other institutions, principally banks) is permissible under exemptions in Article 4 of ISA where: - the institution accepting the customer is not receiving a cash payment at the outset of the relationship; and - payments received have already passed through an account at an institution located in a country that is a member state of the European community, a country that is party to the treaty regarding the European Economic Area or a country in a state designated by the Minister of Finance. ### Bearer shares, trusts, and trust offices - Bearer shares: - Not generally used in the Netherlands but can be issued by Dutch companies. - CDD provides general guidance that extra care is required when dealing with entities that issue bearer shares. - DNB circular (June 2001) advised banks to comply with Article 1 (1) (b) (7) of ISA and the DUTA where the value of the securities exceeds Guilders 25,000 or there is a suspicion of money laundering. - Practice: bearer shares are apparently immobilized, but no requirement or detailed guidance was seen. - Trusts and trust offices: - "Trust" in the Netherlands commonly refers to a person who provides company management services; trusts as known in common law are not generally used. - Trust offices set up and maintain international group structures, act as manager of the object company, and provide correspondence addresses and administrative support. - New legislation expected to come into force in February 2004 will require trust offices to maintain up-to-date information on ultimate beneficial ownership of all entities under management and the purchaser of any entity being sold, including records showing that the trust office has knowledge of: - (a) the source and destination of funds of the object company, - (b) the relevant parts of the group structure, and - (c) the objective for which the structure was set up. - If the trust office itself acts as a trustee, it must know who the settlor of the trust is. ### Use of business introducers / outsourced identification (Article 5 of ISA) CDD framework requirements for business introducers: - The introducer should comply with the minimum customer due diligence practices set out in the CDD paper. - The introducer's customer due diligence procedures should be as rigorous as those the bank would have conducted itself. - The bank must satisfy itself as to the reliability of the introducer's systems to verify customer identity. - The bank must have an agreement allowing it to verify the due diligence undertaken by the introducer at any stage. - All relevant identification data and other documentation pertaining to the customer's identity should be immediately submitted by the introducer to the bank, which must carefully review the documentation; such information must be available for review by the supervisor and the financial intelligence unit, where appropriate legal authority has been obtained. - DNB reports that during on-site inspections it reviews samples of documentation for such customer accounts to ascertain that these procedures are followed. - Noted gap: although CDD requirements were drafted into the policy document on financial and economic crime, one credit institution indicated they were not being used in practice. ### Customer identification practice details (Articles 3–4 of ISA; CDD Paras) - CDD Para. 27: banks “to obtain all information necessary to establish to their full satisfaction the identity of each new customer.” - Identity is usually based on government issued identification documents; regulators examine these during reviews. - Numbered accounts are used in the Netherlands; CDD 30 requires they be subject to the same KYC procedures as other customers. - During on-site visits regulators assess compliance with Article 4 of ISA and the DNB regulation on protected accounts. - CDD para. 21: definition of customer includes the person/entity “on whose behalf an account is maintained,” “the beneficiaries of transactions conducted by professional intermediaries” and any person/entity connected with a transaction who is in a position to pose a significant reputational or other risk. - Beneficial owners are treated as identification subjects and adherence is assessed during on-site visits. - Noted uncertainty: insurance companies receiving payment requests to third parties — no specific guidance seen; ISA Article 5 language (“a natural person acting on behalf of third party”) is not uniformly interpreted by insurance companies; highlights potential weakness of using CDD document (drafted for banks) as guidance for non-bank FIs. ### Wire transfers and SR VII - Banks indicated they traditionally included customer identification information with wire transfers to the extent allowed by the SWIFT format. - Banks intend to amend practices to provide full details now that previous technical difficulties have been resolved. - DNB expects banks to comply with the requirements of SR VII within the deadline established by FATF. - Analysis: The Netherlands has yet to meet the SR VII requirement on wire transfers; FATF two-year period is the outside date; implementation before that date is encouraged. ### Analysis of Effectiveness — Legal and Institutional (client ID and monitoring) - Identified issues: - While Article 2(1), ISA provides a specific provision regarding withholding services if reasonable doubts arise in establishing initial identity, renewal of identity relies on general CDD principles; specific guidance that FIs should re-establish identity through Article 2(2)-(4) procedures would be helpful. - Heavy reliance on the CDD paper (not intended as detailed guidance for all FIs) creates gaps, especially for risks not common to banking. - DNB circular of June 2001 re: bearer shares addresses instances when a bank handles the shares but does not provide guidance for dealing with corporate customers that issue bearer shares; CDD's guidance is very general. - Absence of guidance by AFM and PVK to assist institutions in meeting AML/CFT requirements considered a weakness (partially addressed with regulations issued under the Integrity Decree in January 2004). - Lack of clarity for insurance companies asked to make payments to third parties; authorities advised post-mission action taken to address this. - Implementation observations: - FIs have policies to identify customers per Article 3 of ISA and CDD; most transaction-monitoring systems are predominantly manual. - Larger institutions are migrating to automated systems; at least one bank has rolled out its system and another expects to start roll-out in 2004. ### Transaction monitoring, jurisdictions, and incoming wires (Criteria 49–51) - Transaction monitoring (49): - DUTA requires reporting institutions to collect and report transactions falling under objective and subjective indicators. - FIs must report all unusual transactions including large transactions with no apparent economic purpose. - For transactions considered for reporting but not reported, with the exception of the securities sector, there are no specific requirements that institutions maintain records relating to these decisions. - Securities sector: Further Regulations of Conduct on the Supervision of the Securities Trade 2002, Annex Article 4.25 requires keeping records of transactions that led to internal reporting, reasons for disclosing or not disclosing to MOT, and transactions reported to MOT. - A Regulation on Incidents at Credit Institutions and Insurance Companies (adopted post-mission, implementation date July 1, 2004 at the latest) imposes a similar requirement on credit institutions and insurance firms. - Jurisdictions with inadequate AML/CFT systems (50): - No legal provision specifically requires FIs to give special attention to relations/transactions with persons in jurisdictions lacking adequate systems; requirement is part of an institution's ongoing duty under the Decree on Integrity. - Supervisors indicated it is a violation of supervisory laws to engage in transactions with specified jurisdictions. - Minister of Finance issues parliamentary letters following updates to the NCCT list and may institute countermeasures (example: countermeasures instituted against Nauru). - DNB, PVK, AFM issue circulars and publish them on websites; regulators provide lists of known terrorists as issued by the United Nations and update on a weekly basis. - High levels of FI awareness about NCCT process; some institutions have policies precluding specific types of business with residents of certain countries. - Incoming wire transfers (51): - FIs not required to give enhanced scrutiny to wire transfers lacking complete originator information; authorities await a common EU regulation. - Obligation to review incoming wires is part of general ML program obligations. - Banks include some identity information with wire transfers and request missing information when alerted; concerns persist about reliance on originator bank systems for correct identity information. ### Analysis of Effectiveness — monitoring and wire transfer specifics - Legal and Institutional: - General provisions exist to ensure enhanced due diligence with regard to customers or businesses originating from NCCT jurisdictions; supervisors actively ensure FIs do not conduct business with countries subject to countermeasures. - No requirement yet for incoming wire transfers; two-year FATF phase-in applies but earlier compliance recommended. - Securities sector has regulations to retain records regarding transactions considered for disclosure to MOT but not disclosed; post-mission DNB/PVK regulation on CDD requires maintaining all client acceptance, ongoing monitoring and transaction records for at least five years. - Implementation: - Regulators have implemented measures to inform institutions about jurisdictions with inadequate KYC standards; institutions have adopted protective systems. ### Record keeping (Criteria 52–54) - Identification records (52): - Article 7 of ISA requires service providers to maintain records of identification data, including document nature, number, date and place of issue. - Records must be accessible throughout a retention period of at least 5 years, which starts: - after the end of the business relationship, and - in the case of one-off transactions or sales of high value goods, from the date of service. - Other information to be maintained includes name, address, date of birth; nature of the service; and particulars regarding the account including account number or other relevant information. - Account files and correspondence: - Duty to record and retain documents other than identification documents is inherent in ongoing CDD obligation under the Integrity Decree of December 1, 2003. - No ISA requirement for these documents; authorities rely on Civil Code Articles 2(10) and 3 and the general guide on account opening (supplement to Basel CDD standards). - Post-mission: DNB/PVK issued a CDD regulation (Section 7) requiring maintenance of all records of client acceptance, ongoing monitoring and transactions for at least five years. - Transaction records (53): - For transaction records, general business-records laws require maintenance for at least 7 years (Civil Code Articles 2(10) and 3; General Act on Taxation Articles 2(1) and 52(4)). - Securities Annex provides detailed requirements for transaction records though period not set in that regulation. - Post-mission DNB/PVK CDD regulation requires maintaining records for at least five years. - Availability of records (54): - Customer records must be maintained to be accessible to competent authorities (Article 6, ISA). - Under Article 5.2 of the General Administrative Law, supervisors have unrestricted access to all records maintained by supervised entities. - MOT has access to supplemental information necessary for consideration of an UTR; domestic law enforcement access via processes set out in response to Criterion 27. ### Recommendations and Comments - Address more specifically a requirement that identity be renewed if, in the course of a business relationship, doubts occur regarding the identity of a client. - Within the two-year period referred to by FATF, amend relevant laws to require that accurate and meaningful originator information (name, address and account number) on funds transfers remain with the transfer throughout the payment chain. - DNB should provide more specific guidance to licensees on measures to minimize the risks inherent in dealing with bearer shares; consider requiring immobilization of bearer shares (often done in practice but not required). - DNB should clarify that the CDD guidance related to introduced business is applicable to the practice of outsourced identification as used by some institutions in the Netherlands. - Develop comprehensive Guidance Notes (see previous recommendation). - Ensure in all sectors that institutions are required to maintain records of transactions considered for reporting but not reported and that these records are available for supervisory review. (Post-mission: authorities report DNB/PVK issued a regulation on CDD that addresses this matter.) - Within the two-year FATF period, impose an obligation, consistent with SR VII, on FSPs to give enhanced scrutiny to wire transfers that do not contain complete originator information and provide guidance encouraging immediate compliance. ### Implications for compliance with FATF Recommendations (as assessed) - Recommendation 10: Largely Compliant (need to strengthen guidance on some customer identification issues; greater specificity/guidance on renewals of identity) - Recommendation 11: Largely Compliant (issues relating to identifying beneficial owners in insurance transactions and bearer shares issues) - SR VII: Not Rated (Recommendation given two year implementation period by FATF) - Recommendation 14: Largely Compliant (need to ensure maintenance of records regarding transactions considered for reporting) - Recommendation 21: Compliant - Recommendation 28: Compliant - SR VII / SR VIII: Not Rated (FATF established two-year period for compliance) *Source: _cr04310 - 45. Financial institutions appear generally to have established systems to ensure that clients are identified in (IMF country report content).* ### 52. Para. 26 of CDD suggests that banks should develop clear standards on what customer identification records ### _cr04310 - 52. Para. 26 of CDD suggests that banks should develop clear standards on what customer identification records ### Recordkeeping (Paras 52–54) - Para. 26 of CDD recommends that copies of customer identification documents should be maintained for at least five years following the date on which the account was closed. - Discussions with financial institutions indicated the requirement is met and that a number of institutions maintain records for longer periods. - The Further Regulation on the Conduct of Supervision of the Securities Trade establishes requirements for client records from a prudential perspective but does not stipulate the period for which records should be maintained; general law contains some requirements. (See 53, above.) - Para. 26 of CDD recommends transaction records be maintained for five years after the transaction has taken place. - The Further Regulation on the Conduct of Supervision of the Securities Trade requires transaction records to show, for each client: - the nature of transaction, - the number and type of securities, - the execution price, - the identity of any counterparties, - the date and time of the transaction, - the amount of commission and other costs. - Transaction records must be sufficient to develop historical analyses by client and stock, but the securities regulation does not stipulate the retention period. - ISA does not address maintenance of transaction records; institutions indicated they maintain transaction records for at least five years and in some cases for as long as seven years. - Despite limited specific reference to transaction records in AML/CFT legislation (besides obligation to keep records of disclosed transactions under DUTA), institutions maintain records in a manner that makes them easily available to competent authorities; regulators verify this during on-site visits. - Post-mission action: DNK/PVK issued a regulation of CDD which at Section 7 sets forth a requirement to maintain all records of client acceptance, ongoing monitoring and transactions of a client for at least five years. ### Analysis of Effectiveness — Legal and Institutional (Recordkeeping) - Only customer identification records are addressed in the ISA. - For transaction records and account correspondence/documents relating to the account relationship (other than initial customer identification documents), authorities generally rely on requirements in general law (Harmonization Law and recent Integrity Decree, Civil Code and Taxation Act) or on DUTA for disclosed transactions. - The report notes the need for clearer record keeping requirements for account relationship materials and recommends authorities consider updating law to address additional record keeping requirements to supplement the current ISA customer identification records requirement. ### Implementation (Recordkeeping) - Guidance given to credit institutions via the CDD paper and general practices of FIs in relation to record keeping accord with best practice. - At time of the mission, no equivalent guidance in relation to record keeping was provided to insurance and securities firms; expected to be rectified by the CDD paper for insurance and securities firms in early 2004. ### Recommendations and Comments (Recordkeeping) - Incorporate specific recordkeeping requirements for account relationship materials (post account opening) and transaction records in revisions to ISA/DUTA Act. - See previous recommendation regarding the development of comprehensive Guidance Notes. ### Implications for compliance with FATF Recommendation 12 - 12: Largely Compliant (no specific requirement on post account opening materials) --- ### V — Suspicious Transactions Reporting (Criteria 55–57 and sector criteria) #### Obligation to Report (55) - Under DUTA, FIs and other service providers are required to make reports of unusual transactions. Article 9 of the DUTA requires service providers to report to MOT without delay any unusual transaction performed or planned. - The disclosure must include: - identity of the client, - information on the client's means of identification, - the nature, time and place of the transaction, - the grounds upon which the transaction is designated as unusual, - other information. - Unusual transactions are defined based upon indicators issued and updated regularly by the Ministers of Justice and Finance. - Securities sector: specific requirement for procedures (Annex, Articles 4.23-4.25, Further Regulations of Conduct on the Supervision of the Securities Trade 2002). - Banking sector: authorities rely on Articles 65 and 67 of the Regulation on Organization and Control (ROC) for policies controlling integrity risks; policies must be communicated to all personnel and incorporated into organizational and administrative procedures. - Post-mission strengthening: Decree on Integrity issued on December 1, 2003 under the Harmonization Act and a regulation, the Regulation on Incidents at Credit Institutions and Insurance Companies, imposes specific requirements with affected institutions to comply by July 1, 2004. #### Liability protection for reporting (56) - Protection from criminal and civil liability for those who file a UTR with MOT (Articles 12 and 13, DUTA). - Data/information supplied shall not be used “as a basis for or serve the purposes of a criminal investigation or prosecution on suspicion, nor shall it be used as evidence in support of charges” of violations of the ML provisions or certain other offenses by the person furnishing the information or a person who cooperated with the furnisher. - Disclosers are not liable for damages to a third party because of a disclosure unless in the circumstances the disclosure should not have been made. - Provisions cover the institution as well as persons, including directors, officers and employees involved in reporting. #### Tipping-off (57) - Article 19 of DUTA contains a tipping off prohibition: prohibits persons performing duties under DUTA from using any information furnished or received under DUTA, or from making the information known “otherwise or further than shall be required for the exercise of duties or by the provisions of this Act.” - Violations may be sanctioned criminally under the Economic Offenses Act. - Financial institutions must provide such additional information as MOT requests (Article 10, DUTA). #### Implementation (Reporting) - Netherlands guidance for detecting suspicious activity includes list of indicators, MOT website, news alerts and annual report. - Ministry of Finance has a special hotline and website to respond to AML/CFT questions. - Task forces and consultative bodies provide guidance. - CDD Para 55: “channels for reporting suspicious transactions should be clearly specified in writing and communicated to all personnel.” - Banks make approximately 35,000 UTRs annually; security firms and insurance companies make virtually no reports. - Insurance companies made 1 report in 2001 and 2 reports in 2002. - Perception in insurance sector: significantly lower level of risk; some believe their position insulates the sector and reduces alertness to AML/CFT risks. - Regulated institutions generally concerned about heavy administrative burden of reporting; bankers’ association advocates fewer but higher-quality reports and consideration of a more subjective reporting system; industry group reviewing past reporting experience including 100 case studies from Egmont and FATF typologies. - MOT has provided reporting institutions with information on money laundering and is working with the compliance officers association to publish typologies and general information. - Some banks have seconded personnel to MOT to familiarize staff with financial sector issues including analysis of financial transactions. - DNB in March 2002 sent a letter to all banks warning of risk in back-to-back loan arrangements and made recommendations. #### Analysis of Effectiveness — Legal and Institutional (Reporting) - At time of mission, other than securities sector, no specific legal requirements for FIs to have reporting procedures communicated to all personnel beyond reliance on ROC Articles 65 and 67; Decree on Integrity (December 1, 2003) and subsequent regulation strengthened legal underpinning with compliance required by July 1, 2004. - Tipping off prohibition limited in scope: applies only to institution and persons within the institution making the report; authorities indicate interpretation intends broader purpose (that client not be informed). Recommendation to expand scope in future DUTA amendments. #### Implementation (Reporting) - Arrangements for reporting among credit institutions are adequate. - Very low reporting in securities and insurance sectors partly due to perception of immunity to AML/CFT; room to sensitize insurance sector. - Post-mission: a CDD paper became effective for insurance and securities firms. #### Recommendations and Comments (Reporting) - Expand scope of tipping off prohibition to ensure anyone who comes into contact with information regarding the reporting or consideration of a decision to report is prohibited from tipping off. - For sectors other than securities, consider specific requirements that regulated institutions have procedures in place for reporting transactions and have those communicated to all personnel. (Post-mission: authorities adopted a regulation imposing specific requirements with compliance required by July 1, 2004.) - See previous recommendation regarding the development of comprehensive Guidance Notes. #### Implications for compliance with FATF Recommendations - 15: Compliant - 16: Compliant - 17: Largely Compliant (enhancements to tipping off prohibition needed) - 28: Compliant --- ### VI — Internal Controls, Compliance and Audit (Criteria 58–61 and sector criteria) #### Internal Procedures (58) - Financial institutions must have procedures in place for reporting based upon the indicators. - ROC (Articles 65 and 67) requires credit institutions to have policies to control integrity risks, including policies based on DUTA and ISA; policies must be communicated to all personnel and incorporated into organizational procedures. - Decree on Integrity (December 1, 2003) requires internal rules to: - establish the identity, nature and background of their customers, and - pursue an appropriate policy to ensure confidence in their organization or financial markets is not damaged because of customers. - Financial supervisory authorities must set rules governing these requirements and may fine failures to comply; supervisory authorities, industry associations and institutions have issued recommendations and guidelines. - Money service offices must have internal control procedures and measures to ensure compliance with DUTA and ISA (Articles 4–6, Money Services Regulation). - Securities sector participants must have procedures to identify and disclose unusual transactions (Regulations of Conduct on the Supervision of the Securities Trade 2002). - Under Articles 70 and 98 of the Insurance Act, insurers must have adequate internal control mechanisms; PVK may issue recommendations and guidelines. #### Training - At time of mission, no specific legal/regulatory requirement regarding training or policies on training; training considered part of general requirement for internal procedures and programs to control risk. - ROC and Decree on Integrity require internal procedures necessary to control risks. - For money services providers, Article 9 of the Money Services Act requires internal procedures to control risks. - Post-mission: under the Decree on Integrity and the Regulation on CDD (article 7), credit institutions and insurers must include CDD in training of relevant staff. - Authorities plan to require specifically that institutions have internal policies on training in revisions of DUTA and ISA. #### Internal Audit - Credit Institutions: ROC requires a permanent internal audit function that operates under senior management control and has sufficient independence to report directly to the chairman of the management board on its own initiative (Articles 21-23 of ROC). - Money remittance/transfer: money transaction offices must have internal control procedures for compliance with DUTA and ISA, including regular reports to the Minister of Finance (Articles 4-5, Regulations on the Conduct of Business by and the Administrative Organization on the Act on Money Services; Article 9, Money Services Act). - Insurance: Articles 70 and 98 of the Insurance Law require adequate internal control mechanisms; regulations issued do not specifically cover internal audit. - Securities: Further Regulation of the Conduct of Supervision of Securities Trade, Article 24, requires supervised institutions to have internal audits. #### Compliance Officer (59) - No requirements that FIs designate compliance officers specific to AML/CFT at management level. - Credit Institutions: Article 69 of ROC requires an independent compliance function for monitoring compliance with internal standards; particulars left to organization and depend on nature/size. Expected to appoint a suitably qualified and experienced officer to whom UTRs are made. Recommendation that compliance officer be authorized to contact designated supervisory board member in cases of possible non-compliance by management board. - Securities: adequate administrative organization on anti-ML procedures is responsibility of highest management (Further Regulations 2002, Annex 4.25). - Insurance: Articles 70 and 98 require administrative procedures and adequate internal control mechanisms. #### Recruitment of Staff (60) - General administrative organization and integrity requirements require FIs to check integrity (criminal and employment records) of employees before employment; Decree on Integrity and Regulation on Integrity-sensitive positions require this. - Credit institutions: Article 65 of ROC requires policy plan addressing recruitment standards for integrity and expertise. Post-mission: Regulation on Integrity-sensitive functions addresses recruitment for credit institutions and insurers. - Money remittance/transfer: Article 7 of regulations requires review of integrity of new and existing staff via previous employer information and certificate of good behavior under Judicial Records Act. - Securities: written references required for prospective employees in covered services (Further Regulation 2002, Article 42 and Annex, Article 4.24). - Insurance: reliance on general integrity requirements; post-mission Regulation on Integrity-sensitive functions addresses recruitment. #### Overseas operations (61) - Credit and financial institutions obliged to maintain appropriate controls and standards in subsidiaries and branches abroad under Article 65 of ROC. - Where host jurisdiction minimum AML/CFT requirements are lower than Netherlands, FIs indicated they apply higher Dutch standards to overseas branches and subsidiaries. - Establishment of overseas branches and subsidiaries subject to DNB permission under Articles 16, 16a, and 16b of the Credit Supervision Act. - Dutch FIs expected to oversee branches and check they observe appropriate AML/CFT measures (for instance through audits). ### Implementation (Internal controls) - Implementation details provided throughout sector descriptions; regulators issued post-mission measures including Decree on Integrity (December 1, 2003), Regulation on Incidents at Credit Institutions and Insurance Companies (compliance by July 1, 2004), and Regulation on Integrity-sensitive functions. *Source: _cr04310 - 52. Para. 26 of CDD suggests that banks should develop clear standards on what customer identification records* ### 58. Paragraphs 55–58 of CDD indicates that institutions should have routines for “proper management ### _cr04310 - 58. Paragraphs 55–58 of CDD indicates that institutions should have routines for “proper management ### Internal systems, controls, and audit - Paragraphs 55–58 of CDD indicate institutions should have routines for “proper management oversight, systems and controls, segregation of duties, training and other related policies.” - The CDD text indicates there should be an internal audit function to evaluate the risk management controls and that employees should be adequately trained. - A joint guidance document is being developed by the DNB, PVK, and AFM to give guidance to all financial institutions on internal systems and controls including those relevant to AML/CFT. - Institutions visited appeared to have appropriate internal systems and controls to undertake customer due diligence and maintain identification and transaction records. - Internal audits are required in the banking and securities sectors but, at the time of the mission, were not specifically noted in laws/regulations for insurance. ### Training, staff competence, and variations across sectors - Institutions generally have AML/CFT training programs for staff; some include online modules with periodic completion requirements followed by assessments requiring a passing grade. - Some securities firms require staff to undergo programs at the Netherlands Institute for the Banking and Stock Broking Industry; AML/CFT training for these firms is focused on front office, research and dealer staff. - The Institute has developed product-specific courses highlighting product vulnerabilities to money laundering. - The Institute has developed courses for the police and the office of the public prosecutor; some course material is based on information provided by the industry. - Resource allocation to training varies across the financial sector with greatest emphasis in the banking sector. - Not all firms maintain ongoing training programs; at least one insurance company visited did not have an ongoing training program for staff. - At the time of the mission a requirement for internal procedures regarding ongoing training was not explicit; authorities indicate a specific requirement was introduced post mission (Decree on Integrity and Regulation on CDD (article 7)). ### Designation of AML/CFT compliance officers and management responsibilities - The Netherlands does not have a specific requirement for the designation of an AML/CFT compliance officer. - General practice: institutions assign AML/CFT compliance responsibilities to an officer with other compliance functions. - Recommendation in analysis: it would be desirable to establish a requirement that a senior officer carry the specific designation. ### Fit and proper examinations and employment screening - Regulators undertake fit and proper examinations of persons who determine day-to-day policy of a financial institution; this includes but is not limited to board members. - Regulators expect FIs will undertake such examinations for all key staff; FIs assess prospective employees on relevant knowledge and experience and request references. - One securities firm indicated approximately one-third of its employees are required to produce certificates of good character; certificates are required for staff working in customer acceptance, dealing and research. - Regulators review institution files during on-site inspection to verify hiring checks. - The DNB, AFM and PVK have drafted a policy rule as a basis for evaluation and decision making with regard to fitness and propriety. - On three occasions in 2002 directors were removed from institutions due to fit and proper concerns. - The central organization of the cooperative of banks undertakes fit and proper examinations of board members of its member banks but does not have a working relationship with the prosecutor’s office and cannot submit its questionnaires to this office. - The Council of Financial Regulators is considering examining persons who are not board members but who are deemed to have influence on an institution’s policy. - Any shareholder holding more than 5% of shares must provide information to the DNB and receive a declaration of no objection from DNB. ### Integrity standards and controls over corporate vehicles and non-profits - Integrity standards apply to policymakers (executive and supervisory board members) and significant ownership interests (generally 5%, see, e.g., Article 9(1), Credit Institutions Act). - Not all senior managers are reviewed by supervisors; reviews are generally conducted only for executive and supervisory board members. Senior managers not reviewed by supervisors must pass reviews within their own institution but lack access to law enforcement data. - A Ministerial Decree on Integrity Testing was issued in April 2000 setting forth a standard review process and norms for all supervisors. - Measures to prevent unlawful use of entities: - Shell corporations are captured under the general KYC and record-keeping requirement; there are no specific provisions to avoid misuse of shell corporations beyond this general requirement. - Companies with little economic substance are often administered by company and trust service providers (CTSP); a law to supervise such providers was expected in February 2004. CTSPs are subject to the ISA and DUTA. - Non-profits (foundations and associations) must register with the Chamber of Commerce following approval by a notary and must keep accounting records. - Some charities register with the tax authorities to qualify for favorable tax treatment; individual donations below certain thresholds are exempt from gift tax: € 8.483 for bequests, € 4.243 for gifts. - Deductibility of donations for income tax does not depend on registration except to the extent donations exceed 10 % of the gross income of the donor. - It is possible for foundations and associations to raise and disburse funds without reporting to the tax authorities. - Registered charities must submit financial statements to the Tax and Customs Administration; audits have been paper audits only and are conducted on a risk-oriented basis. - The private Central Office for Fundraising Organizations (CBF) oversees charities that agree voluntarily; 250 charities participate compared to a total of 14.000 charities registered with the tax authorities. - Neither the CBF nor the tax authority conduct on-site inspections of charities in the Netherlands; there is no verification of the use of funds in third countries. - The large majority of unregistered foundations and associations have no obligation to publish annual accounts or have accounts audited (auditing applies only to large foundations with commercial activities); there is no supervisor for these entities. - Public prosecutor powers to address non-compliance are weak and stronger measures require a court decision under the Dutch civil code. - Authorities, through FEC, have identified weaknesses and are considering measures to address non-profits, including risk-based enhancement of review and monitoring; working groups are expected to propose procedures and changes in laws and regulations. - FIOD-ECD plays an active role in investigating organizations. ### Analysis of Effectiveness — Key findings - At the time of the mission a requirement for internal procedures regarding ongoing training was not explicit; authorities indicate a specific requirement was introduced post mission (Decree on Integrity and Regulation on CDD (article 7)). - Internal audits required in banking and securities sectors; not specified for insurance at time of mission. - Institutions are not required to designate compliance officers at the management level responsible for AML/CFT; in practice most assign an officer with other operational responsibilities. - Inconsistencies exist in the importance FIs attach to AML/CFT training, particularly in the insurance sector. ### Recommendations and policy actions - Introduce an explicit requirement for internal procedures regarding ongoing training, as planned. Amend laws/regulations to address an internal audit function for insurance. (Authorities indicate that post mission a requirement on training was introduced.) - Amend laws/regulation to require a management level compliance officer for AML/CFT. - Regulators should redouble efforts through provision of guidance and on-going surveillance to ensure all FIs, particularly within the insurance sector, provide staff with adequate levels of AML/CFT training on an on-going basis. - Develop comprehensive Guidance Notes (see previous recommendation referenced in source). ### Implications for compliance with the FATF Recommendations - 19: Largely Compliant (Need to address specifically duty to have procedures for ongoing employee training and internal audit in some sectors and requirement for management level compliance officer.) - 20: Compliant *Source: Extract from the referenced IMF country report content unit.* ### 63. Not-for-profit organizations in the Netherlands usually take the form of foundations or associations. They ### _cr04310 - 63. Not-for-profit organizations in the Netherlands usually take the form of foundations or associations. They ### Not-for-profit organizations (foundations and associations) - Not-for-profit organizations in the Netherlands usually take the form of foundations or associations. - Registration: - Required to be registered in the trade register of the administrators. - There is no general registration of foundations and associations with the tax authorities. - Only foundations with commercial activities and foundations and associations which apply for a reduced inheritance tax are registered with the tax authorities. - Filing obligations for registered charities include tax returns and annual accounts. - Foundations not registered with the tax authority: - Have hardly any obligation to publish their accounts. - There is little oversight of these entities. - No immediate plans: - No immediate plans to provide guidance to financial institutions (and other reporting entities) on customer due diligence for these entities. - No specific guidance for reporting unusual transactions by non-profits. - Trust Offices: - No link between foundations and Trust Offices. - Trust Offices usually administer commercial entities with overseas owners and relatively little economic substance; these entities are vulnerable to misuse. - Regulation and supervision are imposed on Trust Offices, including the need to know the beneficial owner of each company they administer. - Cases uncovered: - Authorities have uncovered three instances in which non-profit organizations or charities were implicated in the financing of terrorism. None of them were registered with the tax authorities. - There are some other cases where there are concerns about possible misuse of foundations which are not charities. ### Analysis of Effectiveness (non-profits) - Integrity standards: - Set forth in the laws for each sector. - Senior management not part of the executive board does not generally go through screening by supervisors, although there is a legal basis for screening any policymaker. - Under a Ministerial Decree, there are uniform standards that should ensure a thorough vetting of individuals for fitness and propriety. - Registration and reporting: - Registration and reporting responsibilities apply only to a limited number of foundations and associations (those that register with tax authorities). - This provides a rudimentary framework for monitoring some entities but excludes the vast majority of foundations and associations; effectiveness is therefore limited. - Need for review and guidance: - Need to review current arrangements and develop more specific directions for the financial sector regarding dealings with these entities. - Need measures to ensure reporting and transparency for charities and non-profits beyond those that register with the tax authorities. - Pending legislation: - Pending legislation for the supervision of trust offices will enhance the AML/CFT regulatory framework in relation to these entities. - Fit and proper assessments: - Approach adopted by regulators to assess fitness and propriety of board members is comprehensive. - Inability of central organization to benefit from information known to the prosecutor’s office in undertaking fit and proper examinations makes this process potentially less effective than the fit and proper examinations undertaken by DNB. ### Recommendations and Comments (non-profits) - Extend integrity testing by supervisors in practice to a wider range of senior management outside of the Executive Board. - The working group on non-profits in the Netherlands should propose reasonable measures to improve: - Transparency and monitoring of foundations and associations in general. - Registration, regulation and monitoring of charities. - Provide further direction to financial institutions regarding dealings with non-profit organizations, including: - Information on the characteristics of these types of entities with which FIs should be familiar. - Guidance on the persons who should be subject to due diligence. - Guidance on the type of documents that should be examined. - Consider rectifying the deficiency identified in the central organization's fit and proper examinations. - See previous recommendation regarding the development of comprehensive AML/CFT Guidance Notes. ### Implications for compliance with FATF Recommendation 29 - 29: Largely Compliant (senior management not part of executive board not generally screened by supervisors; issues relating to the central organization of the cooperative in undertaking fit and proper examinations) ### Enforcement powers and sanctions (overview) - Criminal penalties available for infractions such as non-reporting, untimely reporting, or lack of compliance with customer due diligence or records maintenance requirements. - Administrative fines and penalties: - Not currently available, but planned amendments to ISA and DUTA would generally enable supervisors to impose administrative penalties (fines, penalties and punitive damages) for violations of the ISA/DUTA. - Consideration being given to providing for the imposition of measures by self-regulatory bodies for attorneys and notaries. - Current practice: - Supervisors address institution non-compliance by referring matters for consideration for criminal prosecution. - FIOD-ECD investigates and considers referral of cases for criminal sanctions under the Economic Offenses Act. - Existing administrative powers under supervisory laws (available if violations are repeated/egregious): - Cease and desist orders, withdrawal of license and administrative fines under various sectoral acts (e.g., Articles 15, 9, 90b, 90c, Credit Institutions Act; Articles 19, 48b, 48c, Securities Act; Article 15, Investment Act; Articles 148, 29, and 30, Insurance Act). - DNB practice: - If DNB ascertains non-compliance with AML/CFT requirements, it notifies the institution and, if necessary, under Articles 14 and 28 of the Credit Institutions Act, provides a ruling on required actions. - Serious violations may be referred for criminal consideration. - Money remittance/transfer offices: - Act on Money Services provides for withdrawal of registration, directions on actions to be taken, cease and desist orders and administrative fines (Articles 5, 10, 20, and 21, Act on Money Services). ### Analysis of Effectiveness (enforcement sanctions) - Legal and Institutional: - The effective lack of administrative sanctions for violations relating to non-reporting and full compliance with identification and record keeping requirements, except where violations rise to an egregious level, is a limitation on the system; authorities have recognized this and plan to change. ### Recommendations and Comments (enforcement sanctions) - Introduce administrative sanctions for violations of the ISA and DUTA as planned. ### Cooperation between supervisors and other competent authorities - Legal and Institutional (domestic supervisors cooperation): - Supervisors can exchange information with each other (Articles 65, 67a and 68, Credit Systems Act; Articles 11 and 183 (1), Insurance Act; Article 27, Investment Act; and Articles 33 and 36, Securities Act). - DNB, AFM, and PVK cooperate through Council for Financial Supervisors (RFT) and have adopted standard practices with respect to integrity issues (e.g., Policy Rule on Integrity Testing). - Cooperation with other domestic authorities: - Supervisors are members of the Financial Expertise Center (FEC), BC MOT and WG IND, which provide ready means for cooperation. - FEC, BC MOT and WG IND have been active overseers of Netherlands' AML/CFT program, meeting often and tasking members with legislative and other initiatives. - Supervisors provide advice to MOT and police investigators on operations and commercial activities of financial institutions, including matters helpful in analysis of UTRs or investigations. - Legal gateways for assistance to police authorities: Article 65 of the Credit Institutions Act, Article 33 of the Securities Act, and Article 183 of the Insurance Act. - Provisions interpreted broadly to permit supervisors to disclose information to public prosecutors and other law enforcement officials. - Expected single supervisory act will contain a provision permitting supervisors to disclose information when the public prosecutor needs it. - International cooperation: - Supervisors may cooperate internationally spontaneously and upon request regarding AML/CFT matters. - Sectoral acts contain provisions permitting broad cooperation with foreign supervisory authorities; the Minister of Finance has delegated this authority to supervisors. - Foreign authority must use information only for the purpose provided and must assure confidentiality (Article 65, Credit Institutions Act; Article 33, Securities Act; Article 27, Investment Act; Article 183, Insurance Act; Article 14, Money Services Act). - Supervisors do not generally receive requests from foreign law enforcement or FIUs; in such cases information would be provided only after consultation with the Minister of Justice. ### Implementation: Structure, staff, funding of supervisors - DNB: - Supervision department has principal responsibility for supervision of credit institutions; relies on integrity division for AML/CFT matters. - Integrity division developed an integrity audit tool in 1997 used by supervising teams for assessing integrity risks (including AML/CFT). - Integrity division staff complement: 11 persons with skills in financial sector regulation, law and accountancy. - Works with supervising teams to undertake fit and proper tests on board members of FIs and on- and off-site AML/CFT surveillance. - Much work done through off-site surveillance; integrity audits based on this assessment. - Approximately 20 of the 140 banks are visited annually by the integrity division. - Reviews credit card companies and casinos to ensure appropriate AML/CFT regimes; there are four credit card entities visited on average twice a year. - PVK: - AML/CFT oversight responsibility lies with the Centre of Expertise which deals with integrity issues. - Developed a surveillance tool assessing nine main areas of risk (including AML/CFT) faced by licensees. - As part of a 2002 survey of all life insurers, a number of institutions were selected for on-site visits. - Centre undertakes fit and proper tests. - Approximately 60% of the 419 licensed insurers are visited annually by the Centre for these tests. - AFM: - Developed a questionnaire for assessment of internal control policies and practices, including AML/CFT systems and controls. - Questionnaire is completed by institutions and analyzed; institutions are selected for risk interviews based on analysis. - Interviews: on average annually for large firms and every three years for small firms. - AFM has a staff of 35 dedicated to supervisory activities. - Interagency collaboration: - Close collaboration among regulators and other agencies on AML/CFT issues. - Interagency mechanisms include FEC and the Council of Regulators (DNB, PVK, AFM). - Joint projects include developing common integrity standards for all FIs and developing indicators of unusual transactions. - New initiative involving MOT, Ministry of Finance, regulators and bankers association to revise approach for compiling indicators of unusual transactions. - International cooperation in practice: - All regulators cooperate with foreign supervisors in providing supervisory information in response to requests. - DNB undertakes inspections of foreign-owned branches and subsidiaries on behalf of home regulators and facilitates on-site inspection of foreign-owned entities in the Netherlands by foreign regulators. ### Analysis of Effectiveness (cooperation & implementation) - Legal and Institutional: - Legal provisions relating to gateways for cooperation by supervisors appear adequate. - Implementation: - Of the three regulators, the DNB has developed the most robust regulatory regime in relation to AML/CFT. - The merger of the DNB and PVK represents an opportunity to adopt a similar approach for the insurance sector to the extent merited by the AML/CFT risk faced by insurance firms. ### Implications for compliance with FATF Recommendation 26 - 26: Compliant ### Casinos - Ownership and operation: - All casinos in the Netherlands are owned and operated by the Dutch government and all profits go into the Dutch treasury. - One casino franchise — Holland Casino — that has about a dozen locations nationwide. - Controls and procedures: - Financial operations within Holland Casino are very tightly monitored. - Anyone seeking to gamble must register and obtain a casino identification number; process includes identity verification (passport or driver’s license) and, if needed, obtaining bank account information for deposits of winnings. - Casinos are subject to UTR reporting requirements. - Most security personnel at casinos are former law enforcement officials trained to spot ML threats. - Reporting statistics: - UTR filings for Dutch casinos increased from 931 in 1999 to 1,997 in 2002. - Number of STRs generated from these UTRs remains relatively constant at about 400 a year. - The majority of the UTR and STR filings (about 1/3) deal with a suspicion of money laundering. - About 10 percent of UTR filings deal with cash purchases of chips with more than 10,000 Euros. - The total amount of funds involved in STRs generated by Dutch casinos for 2002 totaled only $10.5 million Euros, a very small amount when compared to other reporting industries. *Source: _cr04310 - 63. Not-for-profit organizations in the Netherlands usually take the form of foundations or associations. They* ### 469.5 million, money transfer businesses EUR 365.9 million, exchange houses EUR 68.25 million). Casinos can ### _cr04310 - 469.5 million, money transfer businesses EUR 365.9 million, exchange houses EUR 68.25 million). Casinos can ### Casinos and ML risk in Holland Casino - Casinos can act as a currency exchange entity, but only at a cashier location and not at the gaming tables, where only Euros are accepted. - There is one area of ML risk within the Holland Casino structure: players may request that monies exchanged for game tokens be deposited into a personal bank account. - Dutch law: only the day’s “winnings” can be deposited into a personal account and, even then, only into a bank account in the name of the player who won such money. - Example: a player who bought EUR 50,000 in currency into a casino and who obtained EUR 70,000 in casino gaming tokens at the end of play would be allowed to transfer EUR 20,000 of the value of exchanged tokens into his personal bank account and would have to leave the casino with EUR 50,000 in currency he came in with. - Practical enforcement limitations: difficulty in keeping track of a gambler’s winnings, mitigated by a high number of surveillance cameras; authorities are confident they can track significant winnings with relative accuracy. - Any bank transfers must be made the same day and cannot be deferred for a later date. - Although there is no prohibition on the amount of currency one can exchange in a casino, the equivalent of a EUR 10,000 exchange will always result in a UTR filing based upon the objective UTR factors set by the MOT. - Casinos are supervised on AML by the DNB since 2002; DNB admits limited experience but is learning fast. - A dismissed Holland Casino employee alleged substantial money laundering; political and law enforcement inquiries and internal audits followed, but to date no evidence of criminal activity has substantiated those claims. - Overall assessment: the risk that casinos in the Netherlands will be a major entry point for criminal proceeds into the legitimate economy is low. ### Controls and monitoring of cash and cross-border transactions - Current status: there are no controls or reporting requirements regarding cross border movements of cash. Legislation is being drafted but is on hold pending EU legislation on this issue. - Customs Services: - Investigates unusual cross-border transportation of money, checks and high value goods based on its guidelines. - Unusual transports are reported to the MOT. - 2001: Customs reported 139 unusual transactions to MOT; 29 were forwarded as suspicious to BLOM. - 2002: Customs reported 183 unusual transactions to MOT; 85 were forwarded as suspicious. - Royal Military Police reports suspicious inflows and outflows to BLOM and seizes cash in appropriate instances. - Reporting by banks/financial institutions: - The DUTA list of indicators covers many currency transactions, but there is not a mandated reporting of all transactions above a certain amount. ### FATF Recommendations: ratings of compliance (summary) - Selected Recommendation ratings (based on criteria shown in the source): - Recommendation 1 — Compliant - Recommendation 2 — Largely Compliant - Recommendation 3 — Compliant - Recommendation 4 — Compliant - Recommendation 5 — Compliant - Recommendation 7 — Largely Compliant - Recommendation 10 — Largely Compliant - Recommendation 11 — Largely Compliant - Recommendation 12 — Largely Compliant - Recommendation 14 — Largely Compliant - Recommendation 15 — Complaint - Recommendation 16 — Compliant - Recommendation 17 — Largely Compliant - Recommendation 18 — Compliant - Recommendation 19 — Largely Compliant - Recommendation 20 — Compliant - Recommendation 21 — Compliant - Recommendation 26 — Compliant - Recommendation 28 — Compliant - Recommendation 29 — Largely Compliant - Recommendation 32 — Compliant - Recommendation 33 — Compliant - Recommendation 34 — Compliant - Recommendation 37 — Compliant - Recommendation 38 — Largely Compliant - Recommendation 40 — Compliant - SR I — Compliant - SR II — Compliant - SR III — Compliant - SR IV — Compliant - SR V — Compliant - SR VI — rated where applicable - SR VII — Not rated ### Summary of effectiveness of AML/CFT efforts (selected findings) - Criminalization and legal framework: - Netherlands has ratified and implemented all relevant international conventions except the Palermo Convention (expected to be ratified shortly). - ML offenses follow Vienna, Strasbourg and Palermo standards; self-laundering covered; legal persons have liability. - Penalties for ML are low compared with many jurisdictions and should be reviewed. - Courts may be applying a stricter standard for proof in some ML cases; review of case outcomes under new provisions recommended. - No in personam bulk currency smuggling offence nor border currency reporting requirements outside formal Customs declarations and Military Police declarations. - Confiscation and provisional measures: - Confiscation applies to proceeds, instrumentalities, laundered property, income or profits derived from proceeds and value of proceeds; criminal conviction required; not mandatory. - Provisional measures available including freezing funds of terrorists; substitute assets subject to seizure. - Financial Data Requisition Act (Nr. 28353) under consideration will refine powers to identify, trace and secure customer identification orders. - Netherlands does not have an asset forfeiture fund; all assets forfeited go into the general treasury. - Failure to track seizure/forfeiture data by offense type limits assessment of effectiveness. - FIU (MOT) and information flows: - MOT established in 1994; administrative body within Ministry of Justice; member of Egmont Group. - MOT has access to wide range of public and non-public databases and powers to require additional information. - MOT may share information with police authorities but not all information with supervisory authorities (legislation planned to address this in early 2004). - MOT’s workload: post-9/11 personnel increased by about six employees (~25% increase) while information to analyze increased by as much as 300% over the last three years. - Future UTR reporting will move to “risk-based” analysis and away from rigid listed indicator UTR tests. - Law enforcement, prosecution and coordination: - Adequate powers to require production of records and investigative techniques are available. - Structural inefficiencies: many prosecutorial and police units with AML/CFT responsibilities; lack of clear command structure and coordinated policy mechanism. - Need for consolidation and national coordination to avoid duplication and competition for resources. - International cooperation: - Comprehensive set of bilateral and multilateral treaties for MLA and extradition; in absence of treaties, assistance involving coercive measures or extradition is restricted. - Average reported response time to foreign requests for information: 40 days. - Limited practical experience in recognizing and enforcing foreign confiscation or forfeiture judgments; legal uncertainty exists regarding non-conviction based forfeiture orders. ### Key policy recommendations (selected, verbatim where numeric or precise) - Criminalization of ML and FT: - Ratify the Palermo Convention, as planned as soon as possible. - Consider whether it would be helpful to make it explicit in Dutch law that foreign crimes may serve as predicate offenses. - Within the next year, undertake an evaluation of case outcomes and developing law under the new criminal ML provision and make any legal adjustments/amendments to the ML criminalization necessary to ensure ML prosecutions are successful. - Consider an increase in the maximum penalty for engaging in ML. - Enact legislation as the Acts of Terrorism Act which makes explicit that provision of monetary support to a terrorist organization constitutes criminal participation. - Enact bulk currency smuggling offences and border currency reporting requirements, on projected common EU standards if possible, rather than waiting for EU consensus on this issue. - Consider creating a forfeiture fund and use monies to train law enforcement and police in AF, ML, and FT investigation and prosecutions, to support ongoing stalled forfeiture efforts, and to remit funds back to victims without the need to hire legal private legal counsel and resort to the civil courts for recourse. - Make the consideration of forfeiture a mandatory part of any offence prosecuted that in theory can generate proceeds of more than EUR 10,000 or some other monetary threshold of realizable assets. - Clarify the burden of proof in ML cases. - Raise the 6, 4, and 1 year sentences for ML offences by 3, 2, and 1 years respectively. - Confiscation and asset measures: - Consider empowering MOT to order freezing of accounts, subject to subsequent oversight, if delays are encountered. - Enhance powers to identify and trace and secure customer identification orders as planned in the Financial Data Requisition Act. - Ensure that asset sharing can occur in domestic matters when assistance has been provided by foreign authorities. - Make confiscation of criminal proceeds in ML and FT matters mandatory. - BOOM tracking information should include data fields which indicate whether ML or FT offenses form the basis of a seizure or eventual forfeiture. - Require mandatory forfeiture, ML and FT training for all prosecutors and police that handle forfeitable offenses. - FIU, data tracking and resources: - Introduce administrative sanction for violations of DUTA. - MOT and the BLOM should investigate ways to better track the use of UTR and STR data in investigations, prosecutions and convictions. - Require all users that have access to the MOT STR database indicate if he or she will use the MOT data obtained to initiate an investigation, complement an ongoing investigation, or simply use it to assist a pending prosecution as part of the logon process into the STR database. - For every conviction that involves evidence of a financial nature, the police or prosecution should do a “post mortem” to determine whether MOT data was used and report this to the MOT. - Consider assigning more investigators to the MOT and BLOM. - Law enforcement organization and powers: - Give national prosecutors in the FP more control over local police and prosecutorial assets in ML and FT investigations. - Further consolidate resources within police and prosecutorial units for AML/CFT enforcement. - Pass some type of non-conviction based forfeiture procedure to deal with forfeiture of assets seized in cases that do not result in convictions. - Authorize the use of criminal-civilian infiltrators for serious ML and all FT cases under strict prosecutorial oversight (noting legal and political constraints described in Authorities’ Response). - Require reporting to BLOM of all ML and FT investigations and of all ML and FT prosecutions and results, including length of sentence, amount of fine, amount of forfeiture, and suspected predicate offence. - Financial institutions supervision and guidance: - Ensure clear lines of responsibility for AML/CFT supervision under the Financial Supervision Law (expected by July 2005). - Ensure MOT is able to share specific information with supervisors as planned. - Develop comprehensive AML/CFT Guidance Notes relevant to all financial sectors. - Consider merger of DUTA and ISA. - Amend laws to require that accurate and meaningful originator information (name, address and account number) on funds transfers remain with the transfer throughout the payment chain within FATF timeframes. - DNB should provide specific guidance on dealing with bearer shares and consider immobilization of bearer shares. - Impose obligation, consistent with SR VII, on FSPs to give enhanced scrutiny to wire transfers that do not contain complete originator information. - Incorporate specific recordkeeping requirements for account relationship materials and transaction records in revisions to ISA/DUTA. - Expand scope of tipping off prohibition to cover those who come into contact with information regarding the reporting or consideration of a decision to report. - Introduce explicit requirement for internal procedures regarding ongoing training; amend laws/regulations to address an internal audit function for insurance and require a management level compliance officer. ### Authorities’ response — selected points - The Netherlands welcomes the report and notes general agreement that the Netherlands complies fully with most FATF 40 + 8 Recommendations; many assessment recommendations will be implemented in revisions to DUTA and ISA and some have already been implemented post-mission (e.g., new integrity regulations, merger of the MOT and the BLOM, closer cooperation between national police and fiscal investigation authorities). - On specific disagreements: - Netherlands opposes suggestion that it is a major entry point for heroin into Western Europe or significant transit point for heroin, cocaine, hash and cannabis destined for North America. - Use of criminal civilian infiltrators is subject to a parliamentary ban; the ban concerns criminal civilian infiltrators committing the same types of offences as the organization infiltrated; non-criminal civilian infiltrators and other undercover tactics are not affected. - Netherlands disagrees that penalties for ML are inadequate given concurrence with EU and FATF standards; cumulative sentencing can result in substantive higher sentences (example: up to 8 years if prosecuted for participation in a criminal organization and money laundering). - Netherlands disputes assessment that training of law enforcement and judicial personnel in ML, FT and asset forfeiture is insufficient and states investments and developments have been made since the late 1990s. - Netherlands does not agree that confiscation should be mandatory; prosecutors have discretion and other financial settlement modalities (fines, fiscal claims) are effective. A general instruction (“Aanwijzing ontneming”) asks prosecutors to investigate and seize criminal proceeds when intended fine is at least € 500 or criminal proceeds estimated at seizure are € 500 or more. - Netherlands supports improved data availability but stresses costs and resource implications; improvements should align with broader harmonization and IT upgrades across police services. - Mutual legal assistance: Netherlands states that discretionary MLA in absence of a treaty is already possible for non-coercive measures; only requests requiring coercive measures need to be treaty based. *Source: IMF Detailed Assessment (extracts) from _cr04310 PDF.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04310.pdf_