## _cr10319 ## Source details **Canonical URL:** [_cr10319](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10319.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10319.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10319.pdf.json) --- ### Summary and strategic objective - CBSM rebuilding bank supervisory regime "from a very low base" and needs enhanced independence, resources, and support over many years to restore San Marino’s reputation as a financial center. - Progress since 2005: drafting laws, issuing regulations, recruiting staff, beginning on-site and off-site supervision; nevertheless a "very long way to go" and "substantial period of effective enforcement" required. ### Institutional setting and market structure - CBSM is sole regulatory body; supervisory powers granted by Law 165 of 2005. - Banking sector profile: - 12 banks. - Total banking assets: €11.7 billion (9 times GDP). - The three largest banks hold "almost three-quarters" of banking assets. - Six banks are foreign-owned; two banks are members of foreign banking groups. - Net profit in 2008: €47million. - Nonbank sector contribution to profit: €8.3million. - Nonbank financial sector: - About 56 firms: 52 finance and fiduciary companies, 2 asset management companies, 2 insurance companies. - Fiduciary and finance companies employ one-third of total staff. - Interdependence with Italy: - Banks attract deposits from Italy and lend domestically and in Italy. - Nearly half of banking system’s total assets are lent to customers; half of these are lent to nonresidents (almost exclusively in Euros). - Exposure to Italian policy: the 2009 Italian tax amnesty ("scudo fiscale") produced a substantial outflow of deposits and a developing liquidity problem. ### Preconditions for effective supervision and safety nets - Monetary and fiscal context: - San Marino uses the euro under a monetary agreement; no independent monetary policy. - Little public debt and recent fiscal surpluses, but budget reliant on financial sector. - No deposit insurance system in place despite legal provision for one. - CBSM lender of last resort (LOLR) capacity: - Modest lending facility exists; used to provide a €100 million loan to the largest bank. - In 2006 CBSM provided liquidity assistance equivalent to 1.7 percent of GDP to a small bank; government assumed repayment. - Decree-Law (November 25, 2009) allowed government to guarantee repayment of CBSM borrowing so proceeds could be used for LOLR operations. ### Main prudential, supervisory, and legal findings - Regulatory and supervisory development: - Regulations issued in 2007 (in force 2008) with transitional provisions up to 2013 for key requirements (minimum capital asset ratio, concentration and connected lending limits). - Up to one third of banking system assets are in banks that have adopted transitional provisions. - CBSM has incomplete supervisory methodology, incomplete manuals, few full inspections, and insufficient staff. - Governance and independence weaknesses: - Complex appointment and approval process for GCCB, SCCB, and DGCB undermines full accountability. - State Congress influence on licensing and certain matters; DGCB lacks protection against arbitrary dismissal. - CBSM funding vulnerabilities: levies €1 million, government payments €3 million (agreement expired in 2008), remaining €6 million from trading activities; CBSM funds FIA activities but has no control over FIA budget. - Prudential regulations and gaps: - Minimum risk weighted capital ratio required: 11 percent. - Rule limiting total deposits to 200 times free capital. - No capital requirement for market risk or interest rate risk in the banking book. - Large exposures and related party lending regulations broadly aligned with BCPs but subject to multi-year transition; significant asset share under transitional permissions. - No specific requirements on country and transfer risk; operational risk requirements high-level. - Liquidity circular introduced in 2009 requires frequent reporting by maturity categories; effectiveness not yet assessable. - AML/CFT: - Substantial body of AML/CFT law and regulations introduced; prior to 2008 requirements not effectively enforced. - Current laws and instructions broadly appropriate; banks begun internal programs. - Legacy risks: customers onboarded before current regime and fiduciary activities under old regulations complicate retrospective risk assessment and provenance tracing. ### Recommended action plan (priority measures) - Strengthen legal and institutional independence and governance: - Simplify and increase transparency of GCCB appointment process; encourage more members from outside San Marino. - Reduce State Congress influence over licensing and core supervisory decisions; provide DGCB protection against arbitrary dismissal. - Clarify and secure CBSM funding sources; align budgetary control with supervisory independence. - Build supervisory capacity and methodology: - Increase CBSM staff numbers and technical expertise to conduct regular on-site inspections and complete supervisory manuals and models. - Complete implementation of a full supervisory methodology and operationalize it across all banks. - Strengthen prudential framework and monitoring: - Phase out excessive use of transitional arrangements and enforce capital, large exposure, and related-party limits across all banks. - Introduce explicit capital requirements for market risk and interest rate risk in the banking book where appropriate. - Develop specific requirements and monitoring for country and transfer risk. - Enhance operational risk standards with prescriptive guidance and supervisory review. - Improve liquidity risk management and contingency planning: - Operationalize liquidity reporting introduced in 2009; supplement with stress testing and contingency funding plans. - Establish clear legal and operational LOLR arrangements and consider feasible deposit insurance consistent with fiscal capacity. - Address AML/CFT legacy issues and fiduciary risks: - Require comprehensive risk assessments of existing customers and supervisory oversight of remediation plans where provenance unclear. - Strengthen supervision of fiduciaries and transparency of nominee arrangements for beneficial ownership traceability. - Enhance CBSM–FIA cooperation and CBSM control over funded FIA activities. - Reduce systemic concentration and cross-border vulnerability: - Monitor concentration risk given three banks hold almost three-quarters of assets. - Develop strategies to reduce reliance on depositor flows from Italy and manage exposure to Italian policy changes. ### Enforcement coordination (AML/CFT) — CBSM and FIA - Findings: - Both FIA and CBSM have responsibilities for AML/CFT and have signed an MoU. - Some information sharing exists, but coordination could be enhanced through jointly planned risk-based enforcement. - Need for additional resources to monitor AML/CFT compliance. - Recommendations: - CBSM and FIA to plan enforcement action jointly. - Increase resources available for enforcement. - Issue guidance treating customers who came with cash or endorsed checks over a threshold as high risk. - CBSM to consider prohibiting omnibus accounts from fiduciaries where due diligence inadequate. ### Supervisory methods, powers, and resources (Principles 17 and 19–23) - Findings: - CBSM has broad powers and a reporting regime to analyse banks’ performance. - Only two full-scope bank inspections since 2006; 11 inspections of nonbank financial institutions. - No formal supervisory model (e.g., CAMEL); supervision manuals incomplete. - Judicial investigations and 2009 banking difficulties distracted resources. - Recommendations: - Conduct a first round of on-site inspections with external support to assess bank risks. - Assess staff resource needs and finalize supervision manuals. - Introduce a formal supervisory methodology and consolidated reporting. ### Governance in banks - Findings: - Regulations require Boards to ensure internal controls; CBSM noted over delegation and weak corporate governance. - Recommendations: - CBSM to educate Boards of Directors. - CBSM should have power to remove Boards of Directors as a sanction (subject to appeal). - CBSM should be able to remove individual corporate officers when no longer fit and proper. ### Consolidation and cross-border supervision (Principles 24 and 25) - Findings and legal constraints: - CBSM does not undertake consolidated supervision; law could inhibit consolidated supervision by foreign supervisors. - Article 42 gives only CBSM right of on-site inspection. - Article 36 secrecy provisions restrict disclosure of confidential information to others, appearing to prevent foreign on-site inspections. - Foreign-owned banks report they do not provide confidential customer information to parent banks or head office internal audit—consistent with Article 36. - Recommendations: - Adopt comprehensive consolidated supervision when priorities allow. - Amend Law 165 to allow foreign-owned banks to pass information to parent banks and home supervisors. - Allow foreign supervisors to conduct on-site visits in San Marino on subsidiaries of foreign-owned banks. - Change confidentiality equivalence test from "equivalent" to "adequate" and remove prior agreement/consent requirements for information exchange; substitute requirement to disclose only when obliged and use best endeavors to resist onward disclosure. ### Constraints on international cooperation - Identified barriers: - Need for prior agreements; assessment of equivalence of foreign confidentiality regime; written permission prior to onward disclosure. - Recommendations: - Simplify provisions to allow full and rapid cooperation. - Authorities’ view: - Consider Law 165 permits foreign on-site visits where cooperation agreement exists and CBSM accompaniment occurs; propose more MoUs; anticipate agreement with Italy will enable MoU with Banca d’Italia. ### AML/CFT specifics and supervisory priorities - Notable measures and gaps: - Bearer passbooks: authorities referenced MONEYVAL; bearer passbooks did not hide identity but allowed transferability. - Fiduciary companies expected to know beneficial owners, but legacy customers and fiduciary practices complicate compliance. - Judicial investigations consumed one third of on-site inspection resources in 2009 and may rise to 50 percent in 2010. - Key AML/CFT recommendations (selected): - Require customer acceptance policies and continuous monitoring of transactions. - Strengthen simplified due diligence limits and third-party introducer standards. - Require senior management approval when an existing customer becomes a PEP. - Enhance staff screening for high ethical standards. - Amend exemptions from bank secrecy to allow disclosure to law enforcement of any matter giving rise to knowledge of financial crime (not limited to ML/TF). - Designate customers with deposits over a CBSM- or FIA-set threshold in cash or multiple endorsed checks as high risk and require enhanced due diligence. - Consider advising banks to refuse omnibus accounts from fiduciaries where inadequate due diligence is evident. ### Key supervisory and prudential recommendations (selected) - Strengthen corporate governance regulation: require Boards to assess risks and controls regularly; require Board approval for new products affecting risk profiles; ensure internal audit covers risk management; conduct stress tests. - Strengthen credit risk evaluation, monitoring and reporting: borrowers, collateral, economic circumstances, total indebtedness, limits on borrowers/sectors, implementation of limits. - Introduce capital charges: progress with capital charge for market risk; consider operational risk capital charge on lines of Basel II. - Strengthen liquidity management and operational risk framework. - Enhance internal control and audit requirements: explicit requirement to safeguard assets and liabilities; internal audit must have proper plan and methodology. ### Current developments (authorities’ updates) - Negotiating a monetary agreement with the EU with commitments: - adopting the EU acquis relevant to the financial sector in full by 2015; - adopting the prudential directives by 2013 (including extension of Basel II to banks). - New liquidity management provision: - a reserve requirement for all banks equal to 8 percent of direct deposits. ### Principle 1 — Objectives, Independence, Powers, Transparency and Cooperation (highlights) - Law 165 of 2005 supervises entire financial sector; CBSM established by Law 96 (Central Bank statute); publicly and privately owned with financial institutions owning 30 percent of shares. - CBSM objectives include promoting financial stability and protecting savings. - Powers: licensing, implementing binding regulations, circulars and instructions (Article 39); detailed prudential requirements in Regulation 2007-07. - Publications: CBSM publishes an annual report, monthly information, and audited financial results of each bank on its website. - Independence concerns and recommended amendments (selected): - Remove State Congress power to take final decisions on licensing, extraordinary administration or liquidation (Articles 12, 78, 85). - Clarify CCS role in Article 101 to setting broad objectives only. - Provide statutory protection against arbitrary dismissal to the DGCB (Article 14 of Law 96). - Budget reforms: reimburse CBSM for services to government at cost; full cost of funding FIA reimbursed; cover cost of judicial investigations; trading profits retained in CBSM reserves; CBSM to determine budget justified by its objectives; increase fees on banks to cover supervision costs; any government subvention to be multiyear. ### Licensing, fitness and corporate governance (Principles 2–5 and Part IV of Regulation 2007-07) - Authorization criteria "reasonably comprehensive" including fitness and properness, governance, prudential requirements; main weakness is State Congress influence over licensing decisions. - Corporate officers and Board of Auditors requirements include absence of convictions/bankruptcy, minimum skills, independence, absence of conflicts of interest; no explicit reference to absence of regulatory sanctions. - Article III.III.4 of Regulation 2007-07 sets initial capital at €13 million. - Assessment for corporate officers and licensing: Materially Noncompliant. - Recommended amendments: - Remove State Congress role in licensing. - Include absence of disciplinary actions by regulatory/professional bodies as a fitness criterion. - Require periodic reporting of ownership and reporting of changes in beneficial ownership; publish criteria for assessing compatibility with domestic market structure. ### Capital adequacy and related safeguards (Principle 6) - Legal basis: Article 45 of Law 165; Title III of Part VII of Regulation 2007-07. - Key quantitative requirements: - Total capital must be no less than €13 million. - Risk-weighted solvency ratio required: 11 percent. - Tier 2 capital may include capital gains on listed equities limited to 30 percent of Tier 1 and 35 percent of total capital (Article VII.II.5). - Total direct and indirect deposits limited to 200 times free capital. - Gaps and transitional arrangements: - No specific capital charges for market risk, interest rate risk in the banking book, and operational risk. - CBSM allowed banks to opt for transitional provisions phasing capital ratio to 2013; for those opting, minimum rate for 2009 is 7 percent. - Banks whose assets represent 32 percent of total assets permitted to opt for transitional provision. - Assessment: Materially Noncompliant (after transitional provisions, Largely Compliant). - Recommendations: - Set timetable to move to Standardized approach under Basel II. - Keep under review possibility of shortening transitional period to achieve 11 percent minimum. ### Selected risk principles and assessments (7–18, 19–25 highlights) - Risk management (Principle 7): Largely Compliant; recommend clarify Board responsibilities, require documented risk strategy, annual re-assessment, stress testing, and internal audit assessment. - Credit risk (Principle 8): Compliant; recommend tighten evaluation, monitoring, reporting, and sector/borrower limits. - Problem assets/provisions (Principle 9): Compliant; note Regulation 2008-02 classification and provisioning rules; CBSM expects increase from 2.7 percent once 2009 balance sheets fully reported. - Large exposures (Principle 10): Transitional limits in 2009 — 50 percent of regulatory capital for individual exposure and 13 times capital for total large exposures; 8 of 12 banks (37 percent of total banking assets) approved to adopt transitional arrangements. - Assessment: Materially Noncompliant (after transitional period Largely Compliant). - Recommendation: Keep under review shortening transitional period and require Board reporting and sector/geographic concentration thresholds. - Related parties (Principle 11): Transitional limits in 2009 — 45 percent of regulatory capital for each exposure and 80 percent aggregate; Regulation limits 20 percent for individual equity stake and 60 percent for total related parties in standard rules. - Assessment: Materially Noncompliant (after transitional period Largely Compliant). - Recommendations include expanding related party definition to include close family and require exclusion of conflicted persons from approval/monitoring. - Country and transfer risks (Principle 12): Materially Noncompliant; no specific requirements; Circular 2009-01 requires country-by-country loan reporting. - Recommendation: Amend Regulation 2007-07 to introduce requirements to identify, manage and control country/transfer risk. - Market risk (Principle 13): Materially Noncompliant; no mark-to-market, valuation, or stress testing requirements; CBSM intends to introduce requirements in 2010. - Liquidity risk (Principle 14): Compliant; CBSM issued February 2009 circular, requires liquidity reports and stress testing; reserve requirement introduced equal to 8 percent of direct deposits. - Operational risk and outsourcing (Principle 15 & outsourcing): Largely Compliant for outsourcing; operational risk: no explicit capital requirement; Article VII.IX.13 addresses operational risk at high level; recommendation to establish broader operational risk framework and move toward Basel II capital charge. - Interest rate risk in banking book (Principle 16): Materially Noncompliant; no specific regulatory or quantitative requirements; CBSM proposing regulations. - Internal control and audit (Principle 17): Largely Compliant; gaps include compliance officer reporting line and explicit safeguarding requirements; recommend explicit safeguarding, Board determination of accounting policies, and internal audit methodology. - Abuse of financial services (Principle 18): Materially Noncompliant; substantial AML/CFT legal framework but enforcement weak and legacy risks significant; detailed recommendations under AML/CFT section above. - Supervisory approach and techniques (Principles 19–20): Largely Compliant on approach, but materially noncompliant on techniques due to very limited full bank inspections and incomplete manuals; recommend priority implementation of CAMEL/other methodology, staffing assessment, and first round of inspections. - Supervisory reporting and accounting (Principles 21–22): Reporting: Compliant (solo basis, new frequencies); Accounting and disclosure: Largely Compliant (Regulation 2008-02 broadly aligned with IFRS). - Corrective and remedial powers (Principle 23): Largely Compliant; CBSM lacks direct power to remove individual Board members—recommend amendment to allow removal of individual corporate officers when not fit and proper. - Consolidated supervision and home-host (Principles 24–25): Materially Noncompliant; consolidated supervision regime not yet issued; Article 36 and Article 103 impede timely information exchange and foreign on-site access; recommendations to amend Law 165 per earlier items. ### Balance Sheet of the Banking System (In millions of euro; selected data) - Total assets: - 12/31/2005: 7,723 - 12/31/06: 8,976 - 12/31/07: 10,415 - 12/31/08: 11,536 - Weight % 12/31/08: 100.0 - Credit to banks: - 12/31/2005: 456 - 12/31/07: 840 - Change % Prior Year (12/31/07): 84.0 - 12/31/08: 986 - Change % Prior Year (12/31/08): 17.5 - 12/31/08 (alternate final column): 1,251 - Change % Prior Year: 26.8 - Weight % 12/31/08: 10.8 - Credit to clients: - 12/31/2005: 2,856 - 12/31/07: 3,954 - Change % Prior Year (12/31/07): 38.5 - 12/31/08: 4,470 - Change % Prior Year (12/31/08): 13.0 - 12/31/08 (final column): 5,129 - Change % Prior Year: 14.7 - Weight % 12/31/08: 44.5 - Securities: - 12/31/2005: 3,547 - 12/31/07: 3,778 - Change % Prior Year (12/31/07): 18.6 - 12/31/08: 3,917 - Change % Prior Year (12/31/08): 3.7 - Weight % 12/31/08: 34.0 - Capital and reserves: - 12/31/2005: 887 - 12/31/07: 943 - Change % Prior Year (12/31/07): 6.3 - 12/31/08: 1,078 - Change % Prior Year (12/31/08): 14.3 - 12/31/08 (final column): 1,185 - Change % Prior Year: 10.0 - Weight % 12/31/08: 10.3 - Fiscal year profits: - 12/31/2005: 9 - 12/31/07: 38 - Change % Prior Year (12/31/07): 313.4 - 12/31/08: 46 - Change % Prior Year (12/31/08): 19.7 - 12/31/08 (final column): 48 - Change % Prior Year: 3.8 - Weight % 12/31/08: 0.4 - Source note: "Source: Central Bank of the Republic of San Marino, provisional data with reference to December 31, 2008." ### Income Statement (In millions of euro; selected data) - Lending interest and similar revenue: - 12/31/2005: 237 - 12/31/06: 303 - 12/31/07: 416 - 12/31/08: 530 - Borrowing interest and similar expenditure: - 12/31/2005: -97 - 12/31/06: -134 - 12/31/07: -213 - 12/31/08: -300 - Interest margin: - 12/31/2005: 143 - 12/31/07: 170 - Change % Prior Year (12/31/07): 18.8 - 12/31/08: 208 - Change % Prior Year (12/31/08): 22.1 - 12/31/08 (final column): 236 - Change % Prior Year: 13.5 - Profits from fees: - 12/31/2005: 37 - 12/31/06: 43 - 12/31/07: 50 - 12/31/08: 45 - Profits from financial operations: - 12/31/2005: 7 - 12/31/06: 1 - 12/31/07: -19 - 12/31/08: -66 - Gross operating profits: - 12/31/2005: 116 - 12/31/07: 143 - Change % Prior Year (12/31/07): 23.8 - 12/31/08: 158 - Change % Prior Year (12/31/08): 10.5 - 12/31/08 (final column): 125 - Change % Prior Year: -21.3 - Net profits: - 12/31/2005: 9 - 12/31/07: 38 - Change % Prior Year (12/31/07): 313.4 - 12/31/08: 46 - Change % Prior Year (12/31/08): 19.7 - 12/31/08 (final column): 48 - Change % Prior Year: 3.8 - Source note: "Source: Central Bank of the Republic of San Marino (bank balance sheets, provisional data with reference to December 31, 2008)." *Source: IMF FSAP assessment material and IMF staff report excerpts provided in content unit _cr10319.* ### 2. Recommended Action Plan to Improve Compliance with the Basel Core Principles .....13 ### 2. Recommended Action Plan to Improve Compliance with the Basel Core Principles .....13 ### Summary and strategic objective - The Central Bank of San Marino (CBSM) is rebuilding a bank supervisory regime "from a very low base" and needs enhanced independence, resources, and support over many years to restore San Marino’s reputation as a financial center. - Progress since 2005 includes drafting laws, issuing regulations, recruiting staff, and beginning on-site and off-site supervision; however, a "very long way to go" remains and "substantial period of effective enforcement" is required. ### Institutional setting and market structure - CBSM is the sole regulatory body; supervisory powers granted by Law 165 of 2005. - Banking sector profile: - 12 banks. - Total banking assets: €11.7 billion (9 times GDP). - The three largest banks hold "almost three-quarters" of banking assets. - Six banks are foreign-owned; two banks are members of foreign banking groups. - Net profit in 2008: €47million. - Nonbank sector contribution to profit: €8.3million. - Nonbank financial sector: - About 56 firms: 52 finance and fiduciary companies, 2 asset management companies, 2 insurance companies. - Fiduciary and finance companies employ one-third of total staff. - Interdependence with Italy: - Banks attract deposits from Italy and lend domestically and in Italy. - Nearly half of banking system’s total assets are lent to customers; half of these are lent to nonresidents (almost exclusively in Euros). - Exposure to Italian policy: the 2009 Italian tax amnesty ("scudo fiscale") produced a substantial outflow of deposits and a developing liquidity problem. ### Preconditions for effective supervision and safety nets - Macroeconomic and infrastructure context: - San Marino uses the euro under a monetary agreement; no independent monetary policy. - Little public debt and recent fiscal surpluses, but budget reliant on financial sector. - No deposit insurance system in place despite legal provision for one. - CBSM limited capacity as lender of last resort (LOLR): - A modest lending facility exists; used to provide a €100 million loan to the largest bank. - In 2006 the CBSM provided liquidity assistance equivalent to 1.7 percent of GDP to a small bank; government assumed repayment. - A Decree-Law (November 25, 2009) allowed the government to guarantee repayment of CBSM borrowing so proceeds could be used for LOLR operations. ### Main findings (prudential, supervisory, legal) - Regulatory and supervisory development: - Before 2005 supervision was underdeveloped: only minimum capital requirement, no capital adequacy ratio; supervision staff were minimal and no on-site inspections. - Regulations issued in 2007 (in force 2008) introduced obligations and transitional provisions up to 2013 for key requirements (minimum capital asset ratio, concentration and connected lending limits). - Up to one third of banking system assets are in banks that have adopted transitional provisions. - CBSM has incomplete supervisory methodology, incomplete manuals, few full inspections, and insufficient staff. - Governance and independence weaknesses: - Complex appointment and approval process for CBSM Governing Council (GCCB), Supervision Committee (SCCB), and Director General (DGCB) undermines full accountability. - Decisions on licensing and certain matters are subject to ultimate approval by the State Congress; CCS has influence under Article 45 of the CBSM statute and Article 101 of Law No. 165. - DGCB lacks protection against arbitrary dismissal. - CBSM funding vulnerabilities: relies for over half its income on profits from trading and most of the rest on a contract with government that expired in 2008; CBSM funds FIA activities but has no control over FIA budget. - Licensing and structure (Principles 2–5): - Authorization criteria are "reasonably comprehensive" (fitness and properness, governance, prudential requirements); CBSM has necessary enforcement powers. - Main weakness: State Congress influence over licensing decisions. - Prudential regulations and requirements (Principles 6–16): - CBSM imposes a minimum risk weighted capital ratio of 11 percent—higher than Basel minimum of 8 percent. - Supplemented by rule limiting total deposits to 200 times free capital. - No capital requirement for market risk or interest rate risk in the banking book. - Large exposures and related party lending regulations are broadly in line with BCPs, but transitional arrangements allow phase-in over five years; up to a third of banking system assets are in banks granted transitional permission. - No specific requirements on country and transfer risk; operational risk requirements are high-level. - Recent circular on liquidity risk (introduced in 2009) requires frequent reporting analyzed by maturity categories; effectiveness not yet assessable. - Abuse of financial services / AML/CFT (Principle 18): - A substantial body of AML/CFT law and regulations has been introduced; prior to 2008 requirements were not effectively enforced. - Current law and instructions are broadly appropriate and banks have begun to implement internal programs. - Legacy risks: customers onboarded before current regime and activities of fiduciaries under old regulations (nominee facilities, cash deposits) complicate retrospective risk assessment and tracing provenance. ### Recommended action plan (prioritized measures derived from findings) - Strengthen legal and institutional independence and governance: - Simplify and make more transparent the GCCB appointment process to enhance accountability and reduce conflicts of interest; encourage more members from outside San Marino. - Reduce State Congress influence over licensing and core supervisory decisions; provide DGCB with protection against arbitrary dismissal. - Clarify and secure CBSM funding sources to reduce reliance on trading profits and expired government contracts; align budgetary control with supervisory independence. - Build supervisory capacity and methodology: - Increase CBSM staff numbers and technical expertise to conduct regular on-site inspections and complete supervisory manuals and models. - Complete implementation of a full supervisory methodology and make it operational across all banks. - Strengthen prudential framework and monitoring: - Phase out excessive use of transitional arrangements and enforce capital, large exposure, and related-party limits consistently across all banks. - Introduce explicit capital requirements for market risk and interest rate risk in the banking book where appropriate. - Develop specific requirements and monitoring for country and transfer risk. - Enhance operational risk standards beyond high-level requirements with more prescriptive guidance and supervisory review. - Improve liquidity risk management and contingency planning: - Operationalize liquidity reporting introduced in 2009 and assess its effectiveness; supplement with stress testing and contingency funding plans. - Establish clear legal and operational arrangements for lender of last resort functions and consider feasible deposit insurance arrangements consistent with fiscal capacity. - Address AML/CFT legacy issues and fiduciary risks: - Require comprehensive risk assessments of existing customers, with supervisory oversight of remediation plans where provenance of funds is unclear. - Strengthen supervision of fiduciaries and transparency of nominee arrangements to ensure traceability of beneficial ownership and fund sources. - Enhance cooperation and information sharing between CBSM and FIA, and strengthen CBSM’s control over funded FIA activities. - Reduce systemic concentration and cross-border vulnerability: - Monitor concentration risk closely given that three banks hold almost three-quarters of assets and significant lending is to nonresidents. - Develop strategies to reduce reliance on depositor flows from Italy and to manage exposure to policy changes in Italy. *Source: IMF FSAP assessment material, "2. Recommended Action Plan to Improve Compliance with the Basel Core Principles" (excerpts).* ### 20. The CBSM and FIA should coordinate their enforcement. Both FIA and CBSM ### 20. The CBSM and FIA should coordinate their enforcement. Both FIA and CBSM ### Enforcement coordination (AML/CFT) - Finding: Both FIA and CBSM have responsibilities for enforcing compliance with AML/CFT obligations and they have signed a memorandum of understanding (MoU). - Finding: There is some sharing of information, but effectiveness could be enhanced by coordinating enforcement efforts through a jointly planned risk-based approach. - Finding: There is a need for additional resources for monitoring compliance with AML/CFT obligations. - Recommendation: CBSM and FIA to plan their enforcement action jointly. - Recommendation: Add to the resources available for enforcement. - Recommendation: CBSM and FIA to issue guidance that customers who came to the bank with cash or endorsed checks over a threshold should be regarded as high risk and treated accordingly. - Recommendation: CBSM to consider prohibiting the use of omnibus accounts from fiduciaries especially where there is evidence of inadequate due diligence. ### Supervisory methods, powers, and resources (Principles 17 and 19–23) - Finding: The CBSM has broad and sufficient powers to set, monitor and enforce standards and has implemented a reporting regime from banks to analyze banks’ performance. - Finding: The CBSM was only able to conduct two full scope inspections of a bank since 2006, although it conducts other more specific inspections, primarily related to credit risk. - Finding: The CBSM has conducted 11 inspections of non bank financial institutions. - Finding: The CBSM does not have a formal supervisory model (such as CAMEL) and has not completed its supervisory manuals. - Finding: The CBSM has been distracted by ad hoc requests for judicial investigations and by the pressing need to deal with difficulties facing the banking system in 2009. - Recommendation: The CBSM should make a first round of [ on-site ??] inspections with external support to assess the risks of the banks. - Recommendation: The CBSM should make a full assessment of the staff resources it needs to form the basis of its budget and recruitment plan. - Recommendation: The CBSM should finalize its supervision manuals. - Recommendation: The CBSM should introduce a formal methodology for supervision. - Recommendation: The CBSM should introduce consolidated reporting. ### Governance in banks - Finding: Regulations require that Boards of Directors ensure proper internal controls, but the CBSM has noted a weakness in corporate governance in Sammarinese banks arising from over delegation. - Recommendation: The CBSM can increase efforts to educate Boards of Directors. - Recommendation: The CBSM should have the power to remove Boards of Directors as one of its sanctions (albeit subject to appeal). - Recommendation (from corrective/remedial powers): The CBSM should be able to remove individual corporate officers when no longer fit and proper. ### Consolidation and cross-border supervision (Principles 24 and 25) - Finding: The CBSM does not undertake consolidated supervision; the law could inhibit consolidated supervision by foreign supervisors. - Finding: The CBSM is proposing to introduce comprehensive rules on consolidated supervision in due course. - Finding: Risks arising from the absence of consolidated supervision are relatively small as only one Sammarinese bank has a foreign subsidiaries and domestic subsidiaries are under the direct supervisory responsibility of the CBSM. - Finding: For foreign owned banks, the CBSM ensures the foreign supervisor includes the San Marino bank in its consolidated supervision. - Legal constraint: Article 42 gives only the CBSM the right of on-site inspection. - Legal constraint: Secrecy provisions in Article 36 of Law No. 165 prevent disclosure of confidential information by a bank to anyone except judicial criminal authorities and the CBSM, which appears to prevent on-site inspections by foreign supervisors. - Practice: Foreign-owned banks report they do not report confidential customer information to their parent companies and do not permit head office internal audit or compliance staff access to their files; this is consistent with the prohibition on disclosure in Article 36 of Law 165. - Recommendation: The CBSM should adopt comprehensive consolidated supervision when priorities allow. - Recommendation (home-host relationships): Amend Law 165 to allow a foreign owned bank to pass information to its parent bank and its home state supervisor. - Recommendation: Amend Law 165 to allow foreign supervisors to conduct on-site visits in San Marino on subsidiaries of foreign owned banks. - Recommendation: The requirement that a foreign supervisor's confidentiality protection should be at least equivalent to that in San Marino should be changed so that it is required to be “adequate.” - Recommendation: Remove the requirement for an agreement prior to information exchange. - Recommendation: Remove requirement for undertaking not to disclose without written permission of the CBSM and substitute requirement to disclose only where there is an obligation to do so, using best endeavors to resist the obligation. ### Constraints on international cooperation - Finding: The combination of secrecy and international cooperation provisions in the law places unnecessary barriers to effective and rapid international cooperation. - Identified barriers: need for prior agreements to be in place; assessment of the equivalence of the foreign confidentiality regime; written permission prior to any onward disclosure. - Recommendation: Simplify provisions to allow full and rapid cooperation that the CBSM wishes to offer. - Authorities’ view: Authorities consider Law 165 permits foreign on-site visits of foreign-owned banks in San Marino where there is a cooperation agreement in place, especially when the foreign supervisor is accompanied by the CBSM. - Authorities’ view: Authorities consider that signing more MoUs with foreign supervisors is appropriate and that an agreement between the Sammarinese and Italian government should pave the way for a MoU between CBSM and Banca d’Italia. - Authorities’ view: In the context of an MoU the time taken to assess equivalent confidentiality protection is not unduly burdensome. - Authorities’ view: The Regulation allowing foreign owned banks to provide information to their parent banks was considered fully compliant with the prohibition on disclosure in Article 36. ### AML/CFT specifics and supervisory priorities - Finding: Authorities referred to the MONEYVAL report and stated that bearer passbooks did not hide identity but simply the transferability between persons. - Finding: Authorities questioned whether the mission had demonstrated that the current AML/CFT regulatory regime was less than fully enforced. - Finding: Authorities pointed out that fiduciary companies were expected to know the beneficial owner of assets deposited with them. - Finding: The CBSM emphasized the disruptive effect of judicially inspired investigations: such investigations have taken up a third of on-site inspection resources in 2009 and this may rise to 50 percent in 2010. ### Capital adequacy and related safeguards (Principle 6 context) - Finding: Current regulations limit total deposits to a multiple of free capital. - Rule: Total direct and indirect deposits are limited to 200 times free capital (the surplus of actual over minimum capital). - Authorities’ view: Limits and plans to meet the EU acquis by 2013 were considered sufficient to justify a more favorable rating for Principle 6 on capital adequacy. - Recommendation: The CBSM should set a timetable for the move to a standardized approach under Basel II. - Recommendation: The CBSM should keep under review the possibility of shortening the transitional period for full compliance with the Capital Adequacy Requirement. - Recommendation: The CBSM should keep under review the possibility of shorting the transitional period for achieving full compliance with the regulation on large exposures. ### Key supervisory and prudential recommendations (selected from Table 2) - Strengthen corporate governance regulation: require Boards to assess risks and controls regularly; require Boards to approve new products affecting risk profiles; ensure internal audit covers risk management; train staff in risk management; conduct stress tests. - Strengthen credit risk evaluation, monitoring and reporting: borrowers, collateral, economic circumstances, total indebtedness, limits on borrowers/sectors, implementation of limits. - Introduce capital charges: progress with capital charge for market risk; consider capital charge for operational risk on the lines of Basel II. - Strengthen liquidity management and operational risk framework. - Enhance internal control and audit requirements: explicit requirement to safeguard assets and liabilities; internal audit to have proper plan and methodology. - Strengthen AML/CFT customer due diligence: require customer acceptance policy; strengthen simplified due diligence procedures and limits on third party introductions; require senior management approval when a person becomes a PEP after account opening; require continuous monitoring of transactions; require adequate staff screening for high ethical standards. *Source: _cr10319 - 20. The CBSM and FIA should coordinate their enforcement. Both FIA and CBSM* ### 29. The authorities drew attention to current developments. They noted that they were ### _cr10319 - 29. The authorities drew attention to current developments. They noted that they were ### Current developments - The authorities are negotiating a monetary agreement with the EU that would involve: - adopting the EU acquis relevant to the financial sector in full by 2015; and - adopting the prudential directives by 2013 (which would include the extension of the Basel II framework to their banks). - A new provision was introduced to strengthen liquidity management in banks: - a reserve requirement for all banks equal to 8 percent of direct deposits. ### Principle 1 — Objectives, Independence, Powers, Transparency and Cooperation: overview - Law 165 of 2005 provides supervision of the entire financial sector (banks, insurance, securities business, trust business and other financial services). The list of supervised activity is in Attachment 1 of Law 165 and can be amended by decree (Article 3(1)). - The CBSM is established by Law 96 (the Central Bank statute). It is publicly and privately owned, with some financial institutions owning a total of 30 percent of the shares. - Law 96 sets the CBSM objective inter alia of promoting stability of the financial system and protecting savings, by supervising credit, financial, and insurance activities. - Law 165 gives the CBSM powers to license and supervise financial institutions; Article 3(1) prohibits financial services activity without authorization by the CBSM. Article 39 gives the CBSM power to set implementing binding regulations, circulars and instructions. Article 13 of Law 165 describes minimum authorization criteria; detailed prudential requirements are established in Regulation 2007-07. - The CBSM publishes an annual report and monthly information; it published audited financial results of each bank on its web-site. ### Principle 1(1) — Responsibilities and Objectives - Assessment: Compliant. - Description highlights: - Law 165 establishes CBSM as the only supervisory authority for financial services activities. - Regulation 2007-07 provides detailed prudential requirements and has been updated regularly. - Comments: There are no comments. ### Principle 1(2) — Independence, Accountability and Transparency - Description highlights: - Governing Council (GCCB) appointed by the Grand and General Council (GGCSM) on recommendation of the Committee for Credit and Savings (CCS); GCCB members appointed for five-year term, renewable once. - Director General (DGCB) appointed by GCCB subject to GGCSM approval, term six years, renewable indefinitely; Supervision Committee (SCCB) chaired by DGCB; SCCB members appointed by GCCB with CCS approval, three-year term, renewable indefinitely. - Majority shareholder is the state (Article 20 of Law 96); 30 percent of shareholding held by financial institutions. - CBSM financed by levies (size by decree), state payments, and trading activities; in practice: levies €1 million, government payments €3 million (under an agreement that expired in 2008 and has not yet been formally reviewed), remaining €6 million from trading activities. - CBSM Annual Report states insufficient resources for supervision; judicial investigations consumed over one third of on-site inspection resources in 2009 and forecast to rise to 50 percent in 2010. - Article 17(6) allows dismissal of GCCB members only if cease to be eligible or unable to perform; no protection for DGCB and no requirement to disclose reasons for dismissal. - CBSM accountable to GGCSM; required to publish Annual Report (Article 4); Article 38 requires CBSM to give reasons for its decisions and allows appeal to the administrative court. - Assessment: Materially Noncompliant. - Comments summarizing shortcomings: - Independence compromised by State Congress role in licensing, extraordinary administration and winding-up (Articles 12, 78, 85 of Law 165). - CCS has intrusive direction powers (Article 101 of Law 165). - Government control over budget and insufficient staff resources impair supervision. - Accountability obscured by complex appointment matrix and ambiguous GCCB–SCCB relationship. - Authorities are therefore recommended to: - a. Remove the power of the State Congress to take final decisions on licensing, extraordinary administration or liquidation (in the latter cases, the role of the CCS should also be removed), in Article 12, 78, and 85 of Law 165, leaving these decisions entirely to the CBSM; - b. Clarify that the power of the CCS to give guidance in Article 101 of Law 165 can only result in the setting of broad objectives; - c. Provide statutory protection against arbitrary dismissal to the DGCB in Article 14 of Law 96. - Further recommended reforms to the budget process: - d. Any services supplied to the government by the CBSM should be reimbursed at cost, according to audited accounts; - e. The full cost of funding the FIA should also be reimbursed, again according to the CBSM audited accounts; - f. The cost to the CBSM of conducting judicial investigations should be reimbursed in full and the CBSM permitted to recruit sufficient additional resources to meet the requirement; - g. Trading profits should be taken into the reserves of the CBSM to enhance its capacity to undertake its financial stability and other responsibilities for the government; - h. The CBSM should determine its budget, justifying it on the basis of the resources it needs to complete the objectives set for it in the law; - i. The government should determine the extent to which it wishes to pay for the cost of supervision from general funds rather than through the fees collected from the banks but should not be able to affect the overall budget, except as provided below; - j. Fees on banks should be increased to provide a more stable long term source of funding and to cover the full cost of supervision except to the extent that the government has decided to support the cost of supervision through general taxation; - k. Any government subvention to the CBSM to cover the cost of supervision should be agreed on a multiyear basis, subject only to amendment in the case of fiscal emergency. - Recommended amendments to appointment process for the GCCB: - l. Remove the role of the CCS in proposing the Chairman of the CBSM and members of the GCCB and the Chairman of the Board of Auditors and approving the appointment of the members of the SCCB; - m. The CBSM should appoint a Nominations Committee that would establish specific and objective criteria for GCCB membership; - n. Vacant positions should be advertised widely throughout Europe and further candidates identified by a professional search consultant; - o. A short list should be prepared by the CBSM Nominations Committee for the GGCSM, which should make the final decision; - p. The expectation should be that a substantial proportion of the members of the GCCB would come from outside San Marino; - q. The DGCB should also be a full member of the GCCB with full voting rights. - Recommended clarifications of lines of accountability for the GCCB: - r. Remove the reference to the SCCB in the Statute and vest all of its functions in the GCCB, which could delegate many of its day to day and professional supervisory functions to the DGCB or to any professional committee of executives that it chose; - s. Remove the facility of the GCCB to refer matters within its competence to the general meeting (under Article 8(1)(g) of the Statute); - t. Review the provisions giving the DGCB particular functions in Article 14 of the Statute, especially paragraphs (b) and (d) to ensure they do not detract from the responsibility of the GCCB (with the possibility that the GCCB should, as noted above, delegate whatever matters it wishes to the DGCB, so long as that and all other delegations are documented); - u. Clarify that Article 38(6) allows an appeal against a decision to refuse a license application. ### Principle 1(3) — Legal Framework (authorization and ongoing supervision) - Description highlights: - Article 3 of Law 165 gives the CBSM power to authorize banks and prohibits conducting banking without authorization. - Article 12 of Law 165 states authorization of the CBSM is not effective without approval of the State Congress; approval submitted through CCS. - Article 39 gives CBSM power to issue Regulations, Circulars and instructions; Article 38(5) requires regulations to be issued for consultation; Regulation 2006-02 sets consultation procedure. - Article 41 gives power to seek information from banks; Article 42 provides inspection powers. - Assessment: Compliant. - Comments: Removal of government interference in licensing and extraordinary procedures is recommended under Principle 1(2) and is taken into account in that rating. ### Principle 1(4) — Legal Powers - Description highlights: - Article 41 (information) and Article 42 (inspections) provide CBSM with powers to address compliance and assess safety and soundness. - Article 44 gives power to implement specific measures for authorized persons in circumstances defined in Article 45. - Article 141 sets out administrative sanctions the CBSM may apply on its own authority. - Article 34 of Law 96 allows the CBSM to suspend a license and propose revocation to the State Congress; Part V Title I of Law 165 sets out criminal penalties for egregious offences. - Assessment: Compliant. - Comments: There are no comments. ### Principle 1(5) — Legal Protection - Description highlights: - Article 28 of Law 96 gives protection against civil proceedings where Governing Council, inspectors, management, or staff have acted in good faith or in compliance with CBSM powers and functions. - No direct legal provision for meeting the costs of any actions; CBSM states costs of legal action would be paid by the CBSM where the officer acted in good faith. - Assessment: Compliant. - Comments: There are no further comments. ### Principle 1(6) — Cooperation - Description highlights: - Financial Intelligence Agency (FIA) is the only other domestic authority with jurisdiction over the banking sector. Law 92 of 2008 establishes relations and allows CBSM to report suspicious transactions to FIA and to pass confidential information to it in money laundering investigations. - 2008 agreement reinforces cooperation and allows FIA to pass information to CBSM if transmission does not prejudice FIA work. - Article 29 of Law 96 obliges CBSM (GC, inspectors and staff) to keep confidential particulars, information, and data obtained in supervision; confidentiality can be overridden by judicial authority and disclosure to FIA. - Assessment: Compliant. - Comments: No further comments; international cooperation comments are in Principle 25 assessment. ### Principle 2 — Permissible Activities - Description highlights: - Banking defined in Law 165 (Article 1(k) and Attachment 1) as taking deposits and extending credit. Article 5 states only banks can accept deposits. - Article 11 mandates CBSM to keep a public register of banks and authorized persons (available on the internet, includes location of offices in San Marino). - Article 4 gives CBSM power to determine bank activities; Regulation 2007-07 Article II.II.3 lists additional regulated activities banks may perform: investment services, payment services, cash issuing services, foreign exchange intermediation, and equity holdings (equity holdings only for disposal, not management). - Article II.II.4 lists ancillary activities including investment and business advice; limited real estate management allowed (Title VII of Regulation 2007-07); banks may undertake research, data provision and IT for their own or parent bank’s use. - Use of the words “bank,” “credit,” and “savings” by an unauthorized person is prohibited by Decree 7/6/2006. - Assessment: Compliant. - Comments: There are no further comments. ### Principle 3 — Licensing Criteria - Description highlights: - Article 3 states CBSM responsible for authorizing banks; Article 12 states authorization is not permitted without a declaration of non impediment by the State Congress (submitted through CCS). State Congress is under no obligation to take account of CBSM views and is not bound by Law 165 authorization criteria. - Authorization criteria set in Article 13 of Law 165 and detailed in Part III of Regulation 2007-07. - Regulation 2007-07: Article III.II.3 lists information required with application; Article III.II.9 allows CBSM to interrupt the 90-day time limit for approval if further information requested; Article III.II.8 states interruption must not extend beyond 12 months. - Article III.III.4 of Regulation 2007-07 sets initial capital at €13 million. - Articles 16–21 create requirements for change in ownership; Article III.II.4 requires declaration of beneficial owner; Article III.III.1 insists on Board of Directors and Board of Auditors. - Articles III.III.6, III.III.7 and V.II.1 set minimum conditions for good repute; Article 21 allows CBSM to suspend voting rights of those not of sufficient repute. Article V.II.6 sets principles of sound and prudent management, including transparency of source of invested funds. Article 111.V.9 requires appropriate human resources, custody structures, IT and security. Article III.III.8 requires organization chart submission. - Assessment: (Assessment for Principle 3 not explicitly stated in supplied text excerpt.) *Source: IMF staff report excerpt (chapter on Detailed Findings — Basel Core Principles assessments).* ### Part IV of Regulation 2007-07 sets out the requirements for corporate officers and the Board of ### _cr10319 - Part IV of Regulation 2007-07 sets out the requirements for corporate officers and the Board of Auditors ### Corporate officers, Board of Auditors, and licensing - Requirements cover absence of convictions and bankruptcy, minimum skills and experience qualifications, independence, and absence of conflicts of interest. - No reference to the absence of regulatory sanctions as a factor for determining whether a person is of good repute. - Article III.III.8 requires an applicant for authorization to submit: - details of its business plan and proposed activities, - description of those responsible for internal oversight, internal audit, risk management and oversight of outsourced functions, - projected financial statements. - Roles of compliance officer and risk manager are set out in Articles VII.IX.7 and VII.IX.8; compliance officer obligations include performance of obligations relating to the regulations governing financial crime. - Article V.II.6 requires owners to be financially sound and able to contribute further resources. - Article III.VI.1 requires the CBSM to confirm that the foreign bank (including the Sammarinese branch or subsidiary): - is subject to consolidated supervision by the regulatory authority of the parent bank, - that the parent bank’s regulator has approved the activities to be conducted in San Marino, - that there is a supervisory agreement between the parent bank supervisor and the CBSM. - Article 10 of Law 165 allows the CBSM to revoke authorization where it has been obtained through false information. - Article VII.IX.4 requires the Board of Directors to approve risk management policies, including risk identification, and to take strategic business decisions; however, CBSM states delegation is extensive and this may cast doubt on Board awareness of key business decisions and risks. - Assessment: Materially Noncompliant. - Comments and recommendations: - The State Congress can override CBSM licensing decisions by refusing consent without giving reasons or taking into account the CBSM view—this detracts from CBSM licensing role. - CBSM casts doubt on compliance with corporate governance due to extensive delegation by directors. - No requirement to consider absence of regulatory disciplinary actions in assessing whether corporate officers are of good repute. - Recommended amendments: - Remove the role of the State Congress in licensing (as per recommendations on Principle 1(2)). - Amend Regulation 2007-07 to include absence of disciplinary actions by regulatory or professional bodies as criteria affecting fitness and properness. - Consider requiring owners, beneficial owners, auditors and other corporate officers to report any investigations by civil, criminal, professional, or regulatory bodies so CBSM can consider whether circumstances cast doubt on integrity (e.g., where an officer was allowed to resign rather than be formally disciplined). ### Transfer of significant ownership (Principle 4) - Supervisor power: review and reject proposals to transfer significant ownership or controlling interests in existing banks. - Definitions and thresholds: - Article I.I.2 (51) defines a substantial interest as ownership of more than 2 percent of corporate capital. - Article 2 of Law 165 defines controlling interest broadly (voting rights, special contractual ties, power to appoint managers). - Article 17 of Law 165 permits CBSM to establish circumstances where share purchase must be authorized in advance and to refuse authorization where purchaser is not of good repute or purchase conflicts with supervisory objectives or domestic market structure and economic needs. - Article V.III.1 of Regulation 2007-07 requires prior authorization for purchases bringing ownership above 2 percent of capital or 50 percent of capital; applies to acquiring control. Intermediaries must declare beneficial owner. - CBSM is considering adding further thresholds between 2 percent and 50 percent triggering ownership reports. - Remedies where requirements not met: revoke authorization, nullify shareholders’ resolution, order new owners to dispose of interests (Article V.V.1 to V.V.3); CBSM may set term of assignment under Article 22 of Law 165. - Articles 41 and 42 of Law 165 permit CBSM to seek information on owners and controllers and to demand such information periodically, but it does not do so in practice. - No requirement for a bank to notify CBSM of information that materially and negatively affects suitability of a substantial or beneficial owner. - Assessment: Largely Compliant. - Comments and recommendations: - CBSM does not seek periodic reports of ownership but requires reporting as changes occur. - The criterion allowing CBSM to account for structure and economic needs of the domestic market should not be used to refuse a license on grounds that there are too many banks. - Amend Regulation 2007-07 to: - require periodic reporting of ownership as part of routine returns, - require reporting of a change in beneficial ownership even where nominal ownership unchanged, - introduce further thresholds between 2 percent and 50 percent for reporting ownership changes. - Amend regulation to require banks to notify CBSM if they become aware of information that may materially negatively affect suitability of a substantial or beneficial owner. - Publish criteria by which CBSM will decide whether a bank application is incompatible with the structure and economic needs of the domestic market, making clear this does not permit protection of existing banks. ### Major acquisitions (Principle 5) - Article 52 of Law 165 allows CBSM to make Regulations regarding major acquisitions, mergers, and demergers. - Article VII.VIII.1 requires authorization when a bank seeks to acquire more than 10 percent of the capital of another entity (including indirect ownership through a controlled entity); 60-day deadline for CBSM approval. - Assessment criteria in Article VI.VIII.2: - acquisition must not conflict with sound and prudent management, - must not detract from bank’s financial and organizational performance, - for foreign acquisitions, foreign legal system must allow proper supervision by CBSM. - Information required must show impact on the acquiring bank’s financial position to assess necessary financial resources and organization. - Limits on holdings: - Nonfinancial companies: individual holding limit 5 percent of bank’s regulatory capital; aggregate holding limit 25 percent of regulatory capital. - Financial firms: absolute limit 15 percent of regulatory capital; aggregate limit 25 percent of regulatory capital. - Transitional requirement to move to limits affecting stakes in non financial companies by end of 2010; in 2009 the limit was 20 percent with aggregate limit 50 percent. - Assessment: Compliant. - Comments and recommendation: - Since full requirements for non financial holdings come into effect by end of 2010, rating unchanged. - CBSM is recommended to consider adding the quality of supervision in the host country as an additional assessment criterion for foreign acquisitions. ### Capital adequacy (Principle 6) - Legal basis: Article 45 of Law 165 gives CBSM power to set capital and capital adequacy requirements; Title III of Part VII of Regulation 2007-07 sets out capital requirements. - Key quantitative requirements and definitions: - Total capital must be no less than €13 million. - Tier 1 and Tier 2 capital defined; Tier 1 capital is in accordance with the original Basel capital accord (Basel I). - Tier 2 may include capital gains (net of losses) on listed equities held by the bank: - capital gains must amount to no more than 30 percent of Tier 1 capital and no more than 35 percent of total capital (Article VII.II.5). - CBSM requires deductions from capital for substantial holdings in other financial enterprises (consistent with Basel). - CBSM may allow waiver from deducting investments in finance subsidiaries from capital where BSM satisfied there is no risk of double counting. - CBSM allows a 50 percent risk weighting for financial leases only for claims on “residential real estate.” - Risk weights may be reduced where a loan is covered by a legally binding guarantee (practices not permitted by Basel Accord). - Risk weightings and credit conversion factors are set in Regulation 2007-07 (Article VII.III.4 and Article VII.III.8). - No specific provision for capital for market risk, interest rate risk in the banking book, and operational risk. - Solvency ratio of regulatory capital (Tier 1 and Tier 2) to risk weighted assets is 11 percent—higher than the Basel minimum—to allow for additional risks and absence of specific provisions on market, interest rate, and operational risk. - Transitional provisions and deviations: - CBSM allowed banks to opt for transitional provisions phasing the capital ratio in over a period to 2013. - For banks opting for transitional provisions, minimum rate for 2009 is 7 percent, below the Basel minimum. - Banks whose assets represent 32 percent of total assets have been permitted to opt for transitional provision (in 2009, below Basel minimum). - One largest bank has not yet had its application for transitional provisions approved. - Supervisory powers: - Article 44 allows CBSM to require a bank to increase capital and to limit activities. - Article 46 allows CBSM to convene key decision-making bodies. - Article 10 allows revocation of license. - CBSM does not allow use of internal assessments of risk. - Assessment: Materially Noncompliant (after transitional provisions, Largely Compliant). - Comments and recommendations: - Calculation of risk-weighted capital ratio broadly consistent with original capital accord. - CBSM highlights rule limiting total direct and indirect deposits to 200 times free capital. - CBSM committed to meeting EU acquis in prudential matters by 2013. - Raising minimum capital ratio to 11 percent may take some account of market risk, but adequacy uncertain; related recommendation in Principle 13 assessment. - Transitional provisions mean 32.2 percent of total bank assets are subject to a minimum currently slightly below Basel minimum and below CBSM’s considered necessary minimum for other unprovided risks. - No capital charge for market risk; these departures from Basel lead to rating. - No immediate moves towards Basel II; recommended to set a timetable to move to the Standardized approach to Basel II in due course. - Recommended to keep under review possibility of shortening transitional period for achieving required minimum capital adequacy ratio of 11 percent. ### Risk management process (Principle 7) - Regulatory requirements: - Article VII.IX.2 requires a bank to have a risk management officer. - Article VII.IX.4 requires Board of Directors to take responsibility for risk management policies and risk identification. - Article VII.IX.14 requires standards for bank information systems. - Article VII.IX.5 gives the Head of the Executive Structure responsibility to manage risk. - Articles VII.IX.11–13 obligate banks to assess credit, operational and other strategic risk, but do not require Directors to re-assess capital adequacy in light of their assessment of risk. - Gaps and supervisory practice: - No requirement for internal audit to evaluate effectiveness of the risk evaluation unit. - No direct requirement for Directors to communicate risk management policies to staff (implicit only). - No direct requirement that risk management strategy and risk assessment be documented (implicit only). - CBSM monitors risk management through on-site inspections, though in practice only two full inspections have taken place. - Article 44 gives CBSM power to insist on strengthened measures. - CBSM regards use of models to determine risks as not applicable in San Marino. - Article VII.IX.11 covers credit risk; VII.IX.12 covers interest rate, liquidity and market risk; VII.IX.13 covers operational risk—require policies and controls; standards exist for credit risk and liquidity risk but not other risks. - No requirements for stress tests except for liquidity given exceptional circumstances. - Assessment: Largely Compliant. - Comments and recommendations: - No additional regulatory requirement ensuring Board assesses overall adequacy of capital in relation to risk beyond meeting capital requirements. - No direct requirement for Board approval of new products and major risk management initiatives beyond general requirement to approve risk management policies. - Absence of specific director responsibilities is significant given concerns on corporate governance—this influenced the rating. - Recommended regulatory strengthening: - Clarify Board responsibility to approve a documented risk assessment and risk management strategy. - Require Board to re-evaluate risk management policies after a regular (at least annual) re-assessment of risks, including stress tests as appropriate. - Require Directors to re-assess capital adequacy in light of the bank’s risk profile. - Require Directors to approve new products that affect the risk profile. - Require internal audit to assess quality of risk management and control process. - Require staff training in the risk management system. - Introduce standards for market and interest rate risk. ### Credit risk (Principle 8) - Article VII.IX.11 covers credit risk; requires internal regulations and proper audit. - Board responsibilities: Article VII.IX.4 assigns Board responsibility for approving risk management policies; CBSM states it requests annual Board review of risk management policies though Regulation lacks explicit periodic review requirement. - Article VII.IX.11 requirements include: - documented credit extension policy, - adequate assessment of borrower’s credit rating, - procedures for monitoring loan performance, - processes for dealing with problem loans, - up-to-date record of exposure. - Gaps: - No specific requirement for criteria on decisions to assume credit risk, refinancing existing exposures, or determining level of authority for particular credit exposures. - General loan monitoring does not explicitly require continued analysis of borrower, documentation, contractual requirements, collateral (implicit only). - System required for classifying problem loans, but no requirement that classification reflect bank complexity. - Database and six monthly reporting of problem loans required; no requirement for regular reporting on overall state of loan portfolio. - Regulation requires data on overall exposure to an individual borrower or connected group. - Article VII.V.1 requires related-party transactions to be on market terms; Title contains further requirements and regular reporting. - Articles 41 and 42 of Law 165 give CBSM powers to obtain information on loans. - Assessment: Compliant. - Recommendation: - Strengthen Regulation 2007-07 provisions relating to evaluation of credit risk policy and importance of monitoring and reporting on borrowers, collateral, economic circumstances affecting borrowers or groups, total indebtedness, limits on particular borrowers or sectors, and implementation of those limits. ### Problem assets, provisions and reserves (Principle 9) - Article VII.IX.11 requires criteria for identifying, managing and classifying problem loans and semi-annual reporting to Directors; procedure for steps when problem loans discovered (does not directly reference provisioning or write-offs). - Regulation 2008-02 provides classification for bad debts (including off balance sheet exposures) and requires realistic assessments of repayment and recovery expectations. - Impaired loan classifications: - overdue by 90 days, - borrower in temporary difficulties, - borrower insolvent. - Provisions: - Provision based on amount banks estimate will not be recoverable, considering extent, value and collectability of collateral. - Banks permitted to make a general provision taking account of sectoral or geographic difficulties even where loans are not classified in one of three categories. - Implementation and reporting: - Current rules did not apply before 2009; classifications not captured in supervisory reports prior to full 2009 reporting. - CBSM expects increase in proportion of problem loans from the 2.7 percent level currently reported once 2009 balance sheets fully reported. - Article VII.IX.11 requires review of credit lines at least once a year. - Article VI.III.1 requires banks to set aside at least 20 percent of net earnings into a general reserve fund. - No requirements to re-assess value of collateral and guarantees. - CBSM may examine compliance through off-site and on-site inspection; Articles 44 and 45 allow insistence on remedial measures. - Assessment: Compliant. ### Large exposure limits (Principle 10) - Definitions and limits: - Article I.I.2 (31) defines group of connected persons broadly; CBSM exercises case-by-case discretion. - Article VII.IV.1 defines a large exposure as exposure amounting to 10 percent of total regulatory capital. - Article VII.IV.2: - restricts any single exposure to a person or group of related counterparties to 25 percent of total regulatory capital, - limits aggregate of such large exposures to 8 times total regulatory capital. - “Exposure” (Article I.I) includes indirect and direct exposures. - CBSM may set more stringent limits. - Weight of each exposure adjusted by same factors used to calculate risk weighted solvency ratio. - Calculation excludes certain securities held for trading purposes and exposures to other San Marino banks (or banks in foreign countries where there is a supervisory agreement). - Bank obligations and reporting: - Article VII.IX.11 requires bank information systems to identify exposures to individuals and groups of connected persons. - No specific requirement to establish thresholds for acceptable concentrations beyond Regulations; no requirement for regular reporting of risk concentrations to the Board (President must sign quarterly return on large exposures to CBSM). - Circular 2009-01 requires banks to submit quarterly reports on credit and concentration risk, and concentration of risk to countries of Zone E and B. - No requirement to monitor risks to geographic or economic sectors. - Historical context and transitional regime: - Prior to 2008 there were no limits on large exposures; banks’ exposures to major borrowers were very substantial. - CBSM implemented transitional regime to bring limits down to those in the Regulations. - Assessment: (implicit in description) Regulatory framework established with transitional measures; monitoring and reporting gaps noted. *Italic: IMF staff report content as provided in source PDF.* ### 2013. In 2009, the limits are 50 percent of regulatory capital of an individual exposure and 13 ### 2013. In 2009, the limits are 50 percent of regulatory capital of an individual exposure and 13 times capital for the total of all large exposures. ### Large exposures (transitional arrangements and assessment) - Current transitional limits (2009): 50 percent of regulatory capital for an individual exposure and 13 times capital for the total of all large exposures. - At present, 8 of the 12 banks (which hold 37 percent of the total banking assets) have had their application to adopt the transitional arrangements approved. - The proportion could increase considerably if all outstanding applications by banks to be allowed to adopt the transitional provisions are accepted. - Assessment: Materially Noncompliant (after the transitional period Largely Compliant). - Comments: - Many elements of this Principle are addressed by Regulation 2007-07 in the form of general requirements (for example on the responsibility of the Board and on the requirement for records) and by specific requirements in the Regulations. - The current transitional arrangements allow for very substantial exposures and this explains the rating that applies while the transitional arrangements are in place. - Recommendations: - The CBSM is recommended to keep under review the possibility of shortening the transitional period for reducing the risk concentration limits to the international standard (25 percent of regulatory capital for one exposure and 8 times capital in aggregate). - The CBSM is recommended to amend Regulation 2007-07 to make specific provisions for the bank to make thresholds that limit acceptable risks (in addition to risk concentrations to individuals) to cover risk concentrations to economic or geographic sectors. - There should also be a specific requirement for a regular report to the Board. ### Principle 11 — Exposures to related parties (description and assessment) - Definition (Article I.I.2 of Regulation 2007-07): related parties include those with an equity stake in, or control over, the bank; those who can appoint senior management; and corporate officers of the bank. The Regulation also covers those connected to a related party (firms controlled by a related party and firms at which related parties have management or supervisory functions). - Not explicitly included: close family members of the senior management of the bank or of its related parties (though regulation requires a bank to consider, as a related party, any person who might be expected to assume the debts of another). - Article VII.V.1: transactions with related persons must be conducted on market terms. - Article VII.V.2: requires a report to the Board of Directors in respect of any equity stake in a related party or connected person that exceeds 1 percent of regulatory capital; the Board must approve increases in such exposure; there must be a favorable opinion from an independent person (the statutory auditors). - Article VII.V.2 limits: 20 percent of total regulatory capital on any one exposure and 60 percent on exposure to all related parties and connected persons. - Gaps identified: - No requirement for a report to the Board on such exposures or write-offs, nor for any monitoring of such exposures (except as specified for equity stakes). - Apart from requirement that a connected person be not present when an equity stake is being approved by the Board (Article VII.V.3) and general fraud provisions (Article VII.IX.e), there are no provisions preventing persons benefitting from connected persons’ exposures from participating in granting and managing the exposure. - Article VII.II.4 requires deduction from regulatory capital of exposures to those who have an equity stake in the bank (and connected parties) but not for exposures to other related parties. - The CBSM can authorize the non-deduction of such exposures if it determines that it does not amount to a dilution of capital. - Reporting: Circular 2009-01 requires banks to report related party exposures to the CBSM. - Transitional provisions: CBSM introduced transitional provisions that will allow banks to move towards the limits on exposures to related parties by the end of 2013. In 2009, the limits were 45 percent of regulatory capital for each exposure and 80 percent of regulatory capital for the total of such exposures. - Assessment: Materially Noncompliant (after transitional period, Largely Compliant). - Comments: - Definition of related parties is more limited than Basel Core Principle (BCP) — does not explicitly include family members; risk banks may interpret generic provision narrowly. - No requirement for Board approval other than equity stakes; no provisions for Board to determine action on write-offs. - No general rule that persons party to related transactions take no part in approval or monitoring (except for increase in an equity stake). - Deduction from capital and CBSM’s ability to authorize waivers depart from essential criteria. - Recommendations: - The CBSM is recommended to amend the regulation so that it explicitly covers all related persons, including close family members. The policy of the bank should cover all such related persons. - There should be a general rule that any person who is party to a related transaction should not be present when approval is given and should take no part in monitoring or any other activity. - On a case by case basis, the CBSM should consider requiring banks to deduct related party exposures from capital, unless there is full collateral. - There should be monitoring of all such exposures with aggregates reported regularly to the Board, large exposures reported periodically and exceptions to the bank’s policies reported to the Board for action. - The CBSM is recommended to keep under review the possibility of shortening the transitional period for achieving the limits in the regulation for lending to related parties. ### Principle 12 — Country and transfer risks - Requirement: supervisors must be satisfied that banks have adequate policies and processes for identifying, measuring, monitoring and controlling country risk and transfer risk in international lending and investment. - Description of current framework: - No provisions that require banks to monitor and control country risk, other than general requirement to have risk identification and management systems (Article VII.IX.1 of Regulation 2007-07) and discrimination in risk weighting calculation between countries in the OECD and elsewhere (Article VII.III.5). - No provisions requiring banks to monitor country risks, other than general requirements in Article VII.IX.14 for an appropriate information system relevant to complexity, size and geographic structure. - No requirement to make provision for country risk, other than requirement to write down, on a country basis, the value of loans (Regulation 2008-02). - Circular 2009-01 requires a bank to report to the CBSM the loans on a country basis. - Assessment: Materially Noncompliant. - Comments: - CBSM relies entirely on general requirements for appropriate risk management policies to cover elements of this principle; experience shows bank responses to this discretion will be mixed. - CBSM does not suggest it looks for appropriate country risk management in on-site inspections. - Absence of a requirement for country risk management explains the rating. - Recommendation: - The CBSM is recommended to amend Regulation 2007-07 to introduce requirements for banks to identify, manage and control risks arising from their exposure to different countries, including appropriate information systems and proper provisioning. ### Principle 13 — Market risk - Requirement: supervisors must be satisfied banks have policies/processes to accurately identify, measure, monitor and control market risks; supervisors should have powers to impose limits and/or capital charge on market risk exposures, if warranted. - Description of current framework: - Article VII.IX.4: Board should have risk management and identification policies. - Article VII.IX.12: banks should understand market risk; record, measure, monitor and manage such risks; have proper procedures for managing portfolios including quantitative and qualitative limits approved by the Board. - No provisions requiring timely monitoring or valuation and no requirement to mark positions to market. - No requirements relating to valuation of illiquid instruments, sale prices, or assets with no ready market. - No provisions for scenario analysis or stress testing, although market risk management is identified as part of overall risk management. - No requirement that valuation of trading book positions be undertaken by a function independent of business lines, other than general segregation of duties in Article VII.IX.1. - Assessment: Materially Noncompliant. - Comments: - CBSM accepts its provisions relating to market risk have not been brought into line with amendments to the Basel 1 capital accord (market risk) or Basel II. - The CBSM intends to introduce certain requirements in 2010. - Recommendation: - The CBSM is recommended to make early progress with introducing updated market risk requirements. ### Principle 14 — Liquidity risk - Requirement: supervisors must be satisfied banks have a liquidity management strategy aligned with risk profile, with policies/processes to identify, measure, monitor and control liquidity risk, manage liquidity day-to-day, and contingency plans. - Description of current framework: - Article VII.IX.12: banks should understand liquidity risk; record, measure, monitor, and manage such risks. - CBSM issued a circular setting out guidelines on liquidity risk in February 2009. - Board of Directors required to identify all risk factors, determine a liquidity strategy (diversification of funding, liquidity buffers and liquidity requirements for new investments), detect liquidity tensions on a daily basis, and develop internal controls. - Banks required to analyze liquidity mismatches for different time horizons to identify mismatches and set liquidity limits. - The CBSM is now requiring banks to send their liquidity reports to the CBSM. - CBSM asked banks to undertake stress testing according to scenarios identified by the CBSM. - Assessment: Compliant. - Comments: - San Marino was experiencing considerable tensions in respect of liquidity at the time of the mission; origins arose before current regulation was in place. - Compliant rating arises from regulation requiring proper long term liquidity management to be undertaken by banks in the future. - Requirement for very frequent liquidity reports may give banks impression CBSM has taken over responsibility for monitoring liquidity in practice. - Recommendation: - Given current tensions and possibility of repetition, the CBSM is recommended to pay particular attention to the specific liquidity management measures and liquidity mismatch limits adopted by banks in line with the regulation. ### Principle 15 — Operational risk - Requirement: supervisors must be satisfied banks have risk management policies/processes to identify, assess, monitor and control/mitigate operational risk, commensurate with size and complexity. - Description of current framework: - No explicit capital requirement for operational risk, although CBSM introduced a rule on total deposits (direct and indirect), whose amount cannot exceed 200 times banks’ free capital margin (equal to regulatory capital minus capital requirement for credit risk); this measure is regarded by CBSM as an approximation of the exposure to operational risk provided that the volume of banking intermediation is strictly dependent on banks’ capitalization. - Article VII.IX.13 demands a bank should consider specific operational risks, such as fraud, legal and reputational risk, and conflicts of interest. - No specific requirements to ensure the Board reviews and evaluates operational risk, other than general obligation on the Board to have risk identification and management policies (Article VII.IX.4). - No general obligation on a bank to have contingency plans or business recovery procedures, although Article VII.IX.14 requires a bank to have the ability to recover from an accident, through back-up and emergency procedures. - Article VII.IX.14 requires a bank to have reliable information systems that are constantly upgraded to reflect the bank’s operating environment. - No provision requiring the reporting of operational risk assessment mitigation measures to the CBSM. *Source: IMF staff assessment text provided in the content unit.* ### Chapter IV or Title VII of Regulation 2007-07 addresses the risks from outsourcing. Article ### _cr10319 - Chapter IV or Title VII of Regulation 2007-07 addresses the risks from outsourcing. Article ### Outsourcing and operational risk (Chapter IV / Title VII) - Article VII.IX.18 requires a bank to have a written contract for outsourcing. - The bank must: - identify the criteria for assessing the outsourcer; - establish how to oversee the outsourced service; and - consider action necessary if the services prove inadequate. - There is no explicit reference to a risk assessment per se. - Assessment: Largely Compliant. - Recommendation: - The CBSM is recommended to establish a broader operational risk framework that: - demands the Board of Directors assesses the full range of operational risks to which the bank is subject; - requires an appropriate strategy to mitigate, control, and minimize those risks; - ensures monitoring of the effect of controls and regular evaluation of the risk strategy. - The CBSM is further recommended to move towards introducing a capital charge founded on the Basel II requirements. ### Principle 16 — Interest rate risk in the banking book - Supervisory expectation: banks must have systems to identify, measure, monitor and control interest rate risk in the banking book, including a Board-approved strategy implemented by senior management. - Description: - Article VII.IX.4 insists the Board should have risk management and identification policies. - Article VII.IX.12 requires banks to have an accurate understanding of specified risks, including interest rate risks, and to record, measure, monitor and manage such risks. - No specific regulatory requirements relating to interest rate risk and no quantitative requirements in the Regulations, except loan restrictions: - Loans (other than home mortgages) must not exceed the sum of total regulatory capital, 80 percent of long and medium term deposits and 30 percent of all other deposits. - No requirements for regular monitoring and control and no requirements for stress testing. - Assessment: Materially Noncompliant. - Recommendation: - The CBSM is proposing regulations covering interest rate risk in the banking book and is recommended to continue and implement these as soon as possible. ### Principle 17 — Internal control and audit - Supervisory expectation: adequate internal controls for size/complexity, clear delegation, separation of functions, reconciliation, safeguarding assets, and independent internal audit and compliance. - Description: - Articles VII.IX.1–7 set responsibilities of the Board and Head of the Executive Structure; require separation of duties; require separate risk management, compliance and internal audit departments (CBSM may approve a merger of compliance and risk management units). - Article VII.IX.6 requires internal audit to be independent, have appropriate staff, direct access to the Board and periodic reports; full access to staff and information is insisted. - Article VII.IX.8 requires a separate compliance officer, but no provisions requiring direct access to the Board or periodic reports. - Article VII.IX.9–10 impose reporting duties on the Board of Auditors and external auditors to notify the CBSM of material irregularities. - Law provisions: Article 44 of Law 165 (CBSM can take specific measures); Article 45 (CBSM can propose decisions to bank authorities); Article 15 of Law 165 requires Directors to remove company officers who do not meet requirements of good repute. - Assessment: Largely Compliant. - Comments and recommendations: - Gaps: inability to remove members of the Board directly; absence of a direct reporting line between the Compliance Officer and the Board; absence of explicit requirements for safeguarding assets and liabilities, determination of accounting policies, explicit internal audit methodology, and a proper audit plan. - The CBSM is recommended to amend the Regulation to: - make explicit the need to safeguard assets and liabilities; - require the Board to determine accounting policies; - require internal audit to have an audit plan and appropriate methodology. ### Principle 18 — Abuse of financial services (AML/CFT) - Supervisory expectation: banks have adequate policies and processes (including strict KYC) to prevent misuse for criminal activities. - Institutional responsibilities: - Article 37 of Law 165: CBSM supervisory aim includes prevention of financial crime (AML/CFT). - Article 14 of Law 92 of 2008: CBSM verifies organization and procedures banks must adopt to meet AML/CFT obligations. - Article 4 of Law 92: FIA supervises compliance with Law 92 obligations; Article 5 of Law 92: FIA collects information and undertakes on-site inspections. - CBSM and FIA have an MoU setting out respective roles; primary AML/CFT provisions in Law 92 and FIA Instructions. - CBSM issued Instruction 2008 01 prior to FIA’s establishment; still applicable. - Both CBSM and FIA conduct on-site inspections and ad hoc investigations; FIA used a questionnaire to inform its risk-based approach. - Cooperation exists but: - questionnaire results were not shared with the CBSM; - the two organizations do not coordinate inspection visits (each reports violations to the other); - both consider they have insufficient resources to enforce AML/CFT adequately. - Article 14 of Law 92 requires CBSM to report suspicions to the FIA. - Sanctions: CBSM can use Article 141 of Law 165; FIA has sanctions under Article 61 of Law 92. - Obligations on banks: - Article 15 of Law 165: company officers must be of good repute. - Article VII.IX.13 requires banks to minimize risks of fraud and embezzlement (against the bank). - Apart from AML/CFT measures, no specific legal/regulatory duty to guard against use of a bank for financial crime beyond ML/TF. - Banks reported they did not include tax evasion in their definition of financial crime. - Article 36 of Law 92 requires banks to report ML or TF suspicious transactions to the FIA; no obligation to report fraud or other crime to the CBSM routinely. - Article 21–26 of Law 92: CDD measures; Article 22: banks must monitor customer activity; Article 27: additional measures for non face-to-face customers and PEPs; senior management approval required for new customers identified as PEPs but not for existing customers who later become PEPs. - Article 27 requires enhanced due diligence for high risk customers but does not specify measures. - State Congress Decision 9 of January 26, 2009: guidance on foreign country AML/CFT equivalence. - CBSM Instruction 2008 01 Article 3(a) and (d): banks must obtain incorporation documents of a legal person. - Record retention: Article 34 of Law 92 requires records kept for at least five years. - Article 44 requires banks to adopt policies, procedures, and staff training. - Internal audit: not explicitly required to assess AML/CFT compliance under Article VII.IX.6; compliance officer required to do so. Article 42 of Law 92: compliance officer receives internal suspicious reports. - Article 39: suspicious transaction reporter exempted from any liability if report made in good faith. - Anonymous accounts and bearer instruments: - Article 30 of Law 92: anonymous accounts prohibited (subject to exceptions). - Bearer passbooks banned from June 2010; any passbook with a balance over €15,000 already forbidden. - Checks of more than €15,000 must be crossed non negotiable. - Cash transactions of over €15,000 can only be conducted through banks, fiduciaries or payment service businesses. - Article 28: relationships with shell banks are prohibited. - Potential gaps and legacy issues: - No requirement for a bank customer acceptance policy. - Article 26 (simplified due diligence) relieves banks from due diligence other than determining eligibility for simplified D.D. - No requirement to satisfy itself that a third party relied upon adopts equivalent CDD procedures or to obtain copies of those procedures (Article 24(3) exception for individual customers). - Where business relationship may start prior to completion of due diligence (Article 23), no requirement to manage the associated risks (e.g., restrict transactions). - Instruction 2009/03 Article 6 allows reduced monitoring frequencies: - limited risk customers: once every two years; - low risk customers: once every year; - medium risk customers: once every six months, - instead of continuous monitoring. - Banks permitted correspondent relations with banks in non-AML/CFT countries (Article 27 requires extreme caution). - No general staff screening requirements for high ethical standards beyond corporate officers and general suitability. - Exemption from bank secrecy in Article 39 applies only to money laundering and financing of terrorism; other disclosures of financial crime are not permitted by Article 36 of Law 165. - Legacy: prior to 2008 AML requirements were not actively enforced; many customers onboarded before current requirements; Article 5 of CBSM Instruction 2008 01 requires banks to obtain information from existing customers at first opportunity—some customers remain without up-to-date information. - Fiduciaries: banks may exercise simplified due diligence on fiduciaries; banks may accept accounts from fiduciaries without knowing beneficial owners. - Examples cited: - One fiduciary stated 60–70 percent of funds received came in cash in amounts averaging €100,000 to €300,000 (practice not unusual per banks). - One fiduciary told the mission that 97 percent of customers were classified as low risk despite large cash/endorsed check deposits. - Limited FIA and CBSM resources increase risk that regulations are not yet enforced. - Assessment: Materially Noncompliant. - Key recommendations (authorities are recommended to do the following): - Require a bank to have a customer acceptance policy defining which customers it will accept or reject and procedures for deciding high risk customers. - Specify minimum simplified due diligence procedures for certain limited customers who are subject to AML/CFT obligations. - Restrict use of simplified due diligence and third party introductions unless the bank has analyzed and is satisfied with the introducer’s due diligence processes. - Require senior management approval on maintaining an account when an existing customer is subsequently found to be, or becomes, a PEP. - Limit transactions that can be undertaken in advance of completion of due diligence or otherwise manage those risks appropriately. - Require banks to undertake continuous monitoring of customer transactions. - Require adequate screening of staff for high ethical standards. - Amend exemptions from bank secrecy in Article 36 to allow disclosure to relevant law enforcement of any matter giving rise to knowledge of financial crime (not just suspicion of ML or TF). - Consider adapting the regime to provide defenses against all kinds of financial crime (not just ML and TF) per criterion 6 and 9 of BCP 18—ensuring internal policies and training cover all risks of abuse. - Increase enforcement resources for CBSM and FIA, particularly on-site inspections, assessing resource needs including ad hoc investigations. - Improve CBSM–FIA collaboration and joint planning of enforcement activity (including possible joint inspections), while preserving the FIA’s autonomy in handling STRs. - Address legacy customers: designate customers with deposits over a CBSM- or FIA-set threshold in cash or multiple endorsed checks as high risk, and require enhanced due diligence including: - additional and independent verification of ownership and beneficial ownership of funds (independent of depositor and introducer); - satisfactory evidence showing why large cash use was consistent with legitimate business purpose; - banks asked by fiduciaries to undertake transactions for unknown customers should ask if high risk and insist on seeing CDD information; if requirements not met or information refused, submit an STR and refuse transaction until FIA instructions; - consider advising banks to refuse omnibus accounts from fiduciaries where inadequate due diligence is evident. ### Principle 19 — Supervisory approach - Supervisory expectation: supervisors should understand operations of individual banks, groups and the banking system, focusing on safety and soundness and stability. - Description: - CBSM has powers to discover information about individual banks/groups, insists on proper risk identification processes, and can assess risks of the banking system as sole regulatory authority. - Annual report provides data and comments on strengths of the system. - CBSM has general objective of financial stability and power to authorize financial activity defined in Attachment 1 of Law 165. - CBSM does not yet adopt a risk-based methodology or CAMEL methodology for supervising banks. - CBSM checks bank compliance but does not check compliance by banking groups. - Assessment: Largely Compliant. - Recommendation: - CBSM is recommended to implement a proper methodology for assessing banking risk, using CAMEL or another appropriate technique—this is a priority over immediate transition to risk-based supervision. ### Principle 20 — Supervisory techniques - Supervisory expectation: mix of on-site and off-site supervision and regular contacts with bank management. - Description and facts: - No formal procedures for systematic evaluation of supervisory techniques. - Mix of on-site and off-site supervision deployed at discretion of Supervision Department head and Supervision Committee. - Annual inspection plan for 2009 disrupted by recruitment failure and ad hoc judiciary investigations that absorbed over one third of on-site resources. - Result: only two full inspections of banks conducted since 2006, although other specific compliance inspections and 11 full inspections of finance companies were undertaken. - No on-site inspection manual; a partially completed checklist exists. - Inspection process comprehensive when conducted; full inspections examine corporate governance, Board actions, management quality, risk assessment, policies, controls, procedures, and specific file reviews. - Reporting requirements improved since 2008; frequencies range from bi-weekly (liquidity) to annual (loan by sector). - Off-site department analyzes returns to assess financial strength and set on-site priorities; no formal working procedures but staff use information effectively. - Inspection reports are in two parts: one on compliance breaches (shared with bank, bank must respond), and a fuller analysis/assessment. - Supervision Department staff increased from 12 to 25 by mission time. - Staffing constrained by restrictions on employing staff from outside San Marino. - Assessment: Materially Noncompliant. - Comments and recommendations: - Judicial investigations have heavily burdened inspection capacity—two general inspections of banks in three years is insufficient. - CBSM should assess and document staffing needs, including on-site inspectors and off-site analysts, and incorporate this into its budget (referenced recommendation in Principle 1(2)). - Make a first round of inspections of all banks (possibly using external experts) to determine initial risk views and appropriate future inspection frequencies. - CBSM should finalize on-site and off-site supervision manuals. ### Principle 21 — Supervisory reporting - Supervisory expectation: collect, review and analyse prudential reports and statistical returns, solo and consolidated, with means of independent verification. - Description: - Article 41 of Law 165 gives CBSM power to require bank information. - Data collected on solo basis, not consolidated; Article 53 allows group registration and information collection when done. - CBSM receives reports on balance sheet, profit and loss, liquidity, large exposures, loan loss provisioning, asset quality, related party transactions and loan concentration by economic sector. - Regulation 2008-02 sets accounting rules; 2009 circular gives instructions on compiling reports—these are relatively new; prior to 2008 no consistent reporting rules. - Frequency of reports: - Liquidity: bi-weekly; - Capital adequacy and related party transactions: quarterly; - Balance sheet and loan loss provisions: semi-annual; - Loan by sector: annual. - Articles 41 and 42 give comprehensive powers to obtain information; Article 141 provides administrative sanctions for non-compliance. - CBSM checks reports manually and with automated methods; external auditors expected to check accounts; on-site inspections verify information. - Article 42 allows CBSM to insist on external auditors but no specific regulations yet. - Assessment: Compliant. - Recommendation: - CBSM is contemplating consolidated reporting and is recommended to maintain its timetable on this. ### Principle 22 — Accounting and disclosure - Supervisory expectation: banks maintain records in widely accepted accounting policies and publish information reflecting financial condition/profitability. - Description: - Article VII.IX.4: Board responsible for reliability of accounting system. - Article 29 of Law 165: bank must prepare financial accounts giving a true and fair view. - Article VII.II.3: bank must appoint external auditor; accounts must bear auditor certificate. - Accounting standards and valuation principles in Regulation 2008-02; local practice follows IFRS in almost every respect except financial leasing; gaps addressed with Italian accounting standards where needed. - CBSM has power under Article 41 to verify compliance; little enforcement action to date (first accounts subject to Regulation are for 2009). - Article 34 of Law 165 gives CBSM power to determine criteria/procedures for external audit (not yet done); Article 42 allows CBSM to appoint external auditors for specific investigations. - CBSM states external auditors required to verify loan portfolio, loan loss reserves, nonperforming assets, asset valuations, trading and securities activities, derivatives, securitizations, and adequacy of internal controls over financial reporting. - Article 33 gives CBSM power to set standards for auditors, but only independence has been set in Regulations; auditors follow International Auditing Standards in practice; auditors must qualify for public register and undertake 30 hours of CPD each year. Article 34: auditors must report matters worthy of censure to CBSM. No auditor rotation requirements. - Article 41: CBSM can obtain auditor working papers. - Article 31: banks must have annual financial statements approved by general meeting; Article 29(6) allows departure from standards in exceptional cases if disclosed in notes. - Regulation 2008-02 requires accounts to address business performance, marketing strategy, securities transactions, related party transactions, credit, market and operational risks and risk management strategies. - CBSM publishes aggregate data in Annual Report and monthly information on website. - Assessment: Largely Compliant. - Comments and recommendations: - San Marino does not require IFRS but Regulation 2008-02 is broadly in line with IFRS. - Concern: ability to depart from Regulation where application of standards does not give a true and fair view—CBSM should monitor use of this provision and seek removal if abused. - Authorities recommended to introduce full acceptance of IFRS when possible. - CBSM should develop an enforcement plan for accounting and auditing standards and consider requiring periodic rotation of bank auditors. ### Principle 23 — Corrective and remedial powers - Supervisory expectation: supervisors have tools to bring timely corrective actions, including revocation of banking licence. - Description: - CBSM procedures for supervisory reports described under Principle 20. - Powers in Law 165: - Article 99: approve bank dissolution requests; - Article 52: CBSM permission for mergers/demergers; - Articles 78, 84, 85: extraordinary measures for troubled banks (suspension of administrative bodies, extraordinary administration, compulsory administrative winding-up) for reasons including loss of capital or liquidity; - Administrative liquidation (Article 78) and compulsory winding up (Articles 85–96) require approval of State Congress and CCS. - CBSM regulatory tools include drawing breaches to Board attention, convening bank authorities (Article 46), taking specific measures (Article 44), imposing penalties (Article 14) and revocation (Article 10). - Removal of officers: Board may remove company officers under Article 15; if Board does not act, CBSM can convene bank authorities and propose removal but cannot directly remove individual members (except under extraordinary administration procedures). - Article VII.IX.6 requires CBSM approval for certain acquisitions; Article 4 of Law 165 requires CBSM approval for incidental additional activities. - Article 31 of Law 96 allows CBSM to impose financial penalties on officers, payable by bank then recouped. - Assessment: Largely Compliant. - Comments and recommendation: - CBSM lacks power to remove individual members of the Board directly; removal of other officers subject to Board approval or general meeting. - Recommendation: CBSM should consider seeking an amendment to Law 165 to allow it to remove individual corporate officers it considers no longer fit and proper. - Concern: decisions such as compulsory winding up or appointment of a Manager should not be taken by political bodies (State Congress or Committee for Credit and Savings)—previous recommendation in Principle 1(2). ### Principle 24 — Consolidated supervision - Supervisory expectation: supervise banking group on consolidated basis, monitoring and applying prudential norms worldwide. - Description: - Articles 57 and 58 of Law 165 give CBSM power to regulate banking groups on a consolidated basis; Article 56 provides for a register of a banking group; Part IX requires a Group leader to manage group-wide risks. - Detailed consolidated supervision regulations are yet to be issued. - Some accounting firms prepare accounts showing effect of consolidation in notes, but without regulatory rules results are unreliable. - Where Sammarinese banks have financial company subsidiaries, CBSM has direct supervisory responsibility. - CBSM is preparing for introduction of consolidated supervision. - Assessment: Materially Noncompliant. - Recommendation: - CBSM should move towards a consolidated supervision regime as soon as priorities allow and ensure risks from domestic holdings of Sammarinese banks are fully understood in the interim. ### Principle 25 — Home-host relationships - Supervisory expectation: cooperation and information exchange between home and host supervisors; local operations of foreign banks to meet domestic standards. - Description: - Law 165 provides for information exchange with foreign supervisors. - Article 103 permits CBSM to pass information to foreign supervisory authorities where an agreement exists and information is necessary, subject to safeguards: - confidentiality protections must be equivalent to CBSM’s; - foreign authority must abide by limits on use; and - foreign authority must not disclose information without CBSM written consent. - Regulation 2007-07 (Article III.VI.I 1(b)) prevents authorization of branches/subsidiaries of foreign banks unless there is a cooperation agreement between supervisors. - Agreements: - Croatia agreement signed in September 2009; - Bank of Italy agreement to be negotiated. - Article 36 of Law 165 prohibits disclosures by a bank of confidential information except to a judicial criminal authority or the CBSM itself—no exemption allowing a foreign supervisor to conduct on-site inspections unaided. - MoU with Croatia permits home supervisors to make on-site inspections in host country but only with CBSM consent and two months notice; Law 165 does not allow such inspections absent CBSM authorization. - Article IX.IV.1 of Regulation 2007-07 states information passed to a foreign bank necessary for home supervisor regulatory requirements is exempt from bank secrecy restriction, but Article 36 remains binding. - In practice, San Marino subsidiaries of foreign banks report reluctance to pass confidential information to parent companies or allow head office internal audit/compliance access, impeding parent risk management and consolidated supervision. - CBSM policy: would not take action against a bank passing information to a parent bank in compliance with the Regulation and would not act if a bank cooperated with a foreign supervisor’s on-site visit approved by CBSM. - Article 75 requires foreign banks to seek authorizations for branches and for activities without branches; CBSM has yet to establish regulations for activities carried out without branches. - Assessment: Materially Noncompliant. - Comments and recommendations: - While Articles 36 and 103 allow cooperation, their terms could restrict effective information sharing and impede consolidated supervision. - Specific concerns: - Requirement for an agreement before sharing is time-consuming and may impede urgent information exchange. - Requirement that foreign confidentiality protections be “equivalent” to San Marino’s is burdensome; recommendation to substitute “adequate” per CBSM judgment. - Requirement preventing onward disclosure without prior written CBSM consent is impractical; recommendation to replace with an assurance framework where recipients consult CBSM and use best endeavors to resist onward disclosure, except where legally obliged. - CBSM should consider changing Law 165 to: - expressly allow a foreign-owned bank to pass confidential information to its parent bank and home supervisor; - make clear provisions allowing a foreign supervisor responsible for a bank with a Sammarinese subsidiary to make an on-site inspection in San Marino with the same access to confidential material as CBSM. - Note: a January 2010 amendment to Article 36 of Law 165 was enacted but did not address the two core issues discussed here; information can be passed to foreign parent banks only according to consolidated supervision provisions in Law 165. *Source: _cr10319 - Chapter IV or Title VII of Regulation 2007-07 addresses the risks from outsourcing. Article* ### 165. Furthermore, the new provisions on bank secrecy do not expressly address the issue concerning the access ### _cr10319 - 165. Furthermore, the new provisions on bank secrecy do not expressly address the issue concerning the access ### Bank secrecy and internal access - The document notes: "Furthermore, the new provisions on bank secrecy do not expressly address the issue concerning the access of head office internal audit or compliance staff access to Sammarinese subsidiaries’ files." ### Balance Sheet of the Banking System (In millions of euro) - Total assets: - 12/31/2005: 7,723 - 12/31/06: 8,976 - 12/31/07: 10,415 - 12/31/08: 11,536 - Weight % 12/31/08: 100.0 - Credit to banks: - 12/31/2005: 456 - 12/31/06: n/a - 12/31/07: 840 - Change % Prior Year (12/31/07): 84.0 - 12/31/08: 986 - Change % Prior Year (12/31/08): 17.5 - 12/31/08: 1,251 - Change % Prior Year: 26.8 - Weight % 12/31/08: 10.8 - Credit to clients: - 12/31/2005: 2,856 - 12/31/06: n/a - 12/31/07: 3,954 - Change % Prior Year (12/31/07): 38.5 - 12/31/08: 4,470 - Change % Prior Year (12/31/08): 13.0 - 12/31/08: 5,129 - Change % Prior Year: 14.7 - Weight % 12/31/08: 44.5 - Securities: - 12/31/2005: 3,547 - 12/31/06: n/a3,185-10.2 (table formatting preserves original sequence) - 12/31/07: 3,778 - Change % Prior Year (12/31/07): 18.6 - 12/31/08: 3,917 - Change % Prior Year (12/31/08): 3.7 - Weight % 12/31/08: 34.0 - Stock: - 12/31/2005: 47 - 12/31/06: n/a - 12/31/07: 92 - Change % Prior Year (12/31/07): 98.0 - 12/31/08: 134 - Change % Prior Year (12/31/08): 45.1 - 12/31/08 (note duplicate entry): 89 - Change % Prior Year: -33.3 - Weight % 12/31/08: 0.8 - Investments: - 12/31/2005: 91 - 12/31/06: n/a - 12/31/07: 117 - Change % Prior Year (12/31/07): 28.8 - 12/31/08: 160 - Change % Prior Year (12/31/08): 36.5 - 12/31/08: 176 - Change % Prior Year: 10.0 - Weight % 12/31/08: 1.5 - Real property and other asset components: - 12/31/2005: 726 - 12/31/06: n/a - 12/31/07: 787 - Change % Prior Year (12/31/07): 8.4 - 12/31/08: 887 - Change % Prior Year (12/31/08): 12.7 - 12/31/08: 974 - Change % Prior Year: 9.8 - Weight % 12/31/08: 8.4 - Debts to banks: - 12/31/2005: 121 - 12/31/06: n/a - 12/31/07: 202 - Change % Prior Year (12/31/07): 66.2 - 12/31/08: 329 - Change % Prior Year (12/31/08): 63.1 - 12/31/08: 375 - Change % Prior Year: 13.9 - Weight % 12/31/08: 3.2 - Debts to clients: - 12/31/2005: 2,341 - 12/31/06: n/a - 12/31/07: 2,587 - Change % Prior Year (12/31/07): 10.5 - 12/31/08: 2,896 - Change % Prior Year (12/31/08): 12.0 - 12/31/08: 3,166 - Change % Prior Year: 9.3 - Weight % 12/31/08: 27.4 - Debts represented by securities: - 12/31/2005: 3,615 - 12/31/06: n/a - 12/31/07: 4,386 - Change % Prior Year (12/31/07): 21.3 - 12/31/08: 5,259 - Change % Prior Year (12/31/08): 19.9 - 12/31/08: 5,996 - Change % Prior Year: 14.0 - Weight % 12/31/08: 52.0 - Other liabilities: - 12/31/2005: 750 - 12/31/06: n/a - 12/31/07: 820 - Change % Prior Year (12/31/07): 9.4 - 12/31/08: 807 - Change % Prior Year (12/31/08): -1.6 - 12/31/08: 767 - Change % Prior Year: -5.0 - Weight % 12/31/08: 6.6 - Capital and reserves: - 12/31/2005: 887 - 12/31/06: n/a - 12/31/07: 943 - Change % Prior Year (12/31/07): 6.3 - 12/31/08: 1,078 - Change % Prior Year (12/31/08): 14.3 - 12/31/08: 1,185 - Change % Prior Year: 10.0 - Weight % 12/31/08: 10.3 - Fiscal year profits: - 12/31/2005: 9 - 12/31/06: n/a - 12/31/07: 38 - Change % Prior Year (12/31/07): 313.4 - 12/31/08: 46 - Change % Prior Year (12/31/08): 19.7 - 12/31/08: 48 - Change % Prior Year: 3.8 - Weight % 12/31/08: 0.4 - Source note: "Source: Central Bank of the Republic of San Marino, provisional data with reference to December 31, 2008." ### Income Statement (In millions of euro) - Lending interest and similar revenue: - 12/31/2005: 237 - 12/31/06: 303 - 12/31/07: 416 - 12/31/08: 530 - Borrowing interest and similar expenditure: - 12/31/2005: -97 - 12/31/06: -134 - 12/31/07: -213 - 12/31/08: -300 - Dividends and other revenue: - 12/31/2005: 3 - 12/31/06: 2 - 12/31/07: 5 - 12/31/08: 6 - Interest margin: - 12/31/2005: 143 - 12/31/06: n/a - 12/31/07: 170 - Change % Prior Year (12/31/07): 18.8 - 12/31/08: 208 - Change % Prior Year (12/31/08): 22.1 - 12/31/08: 236 - Change % Prior Year (final column): 13.5 - Profits from fees: - 12/31/2005: 37 - 12/31/06: 43 - 12/31/07: 50 - 12/31/08: 45 - Profits from financial operations: - 12/31/2005: 7 - 12/31/06: 1 - 12/31/07: -19 - 12/31/08: -66 - Other revenue: - 12/31/2005: 3 - 12/31/06: 3 - 12/31/07: 5 - 12/31/08: 5 - Intermediation margin: - 12/31/2005: 190 - 12/31/06: n/a - 12/31/07: 218 - Change % Prior Year (12/31/07): 14.6 - 12/31/08: 243 - Change % Prior Year (12/31/08): 11.8 - 12/31/08: 220 - Change % Prior Year: -9.5 - Administrative expenditure: - 12/31/2005: -60 - 12/31/06: -68 - 12/31/07: -77 - 12/31/08: -86 - Value adjustments, fixed assets: - 12/31/2005: -14 - 12/31/06: -7 - 12/31/07: -7 - 12/31/08: -10 - Gross operating profits: - 12/31/2005: 116 - 12/31/06: n/a - 12/31/07: 143 - Change % Prior Year (12/31/07): 23.8 - 12/31/08: 158 - Change % Prior Year (12/31/08): 10.5 - 12/31/08: 125 - Change % Prior Year: -21.3 - Accrued liabilities: - 12/31/2005: -54 - 12/31/06: -10 - 12/31/07: -3 - 12/31/08: -10 - Revaluations: - 12/31/2005: -71 - 12/31/06: -90 - 12/31/07: -124 - 12/31/08: -96 - Extraordinary revenue and expenditure: - 12/31/2005: 44 - 12/31/06: 13 - 12/31/07: 38 - 12/31/08: 37 - Fiscal year income tax: - 12/31/2005: -25 - 12/31/06: -18 - 12/31/07: -23 - 12/31/08: -8 - Net profits: - 12/31/2005: 9 - 12/31/06: n/a - 12/31/07: 38 - Change % Prior Year (12/31/07): 313.4 - 12/31/08: 46 - Change % Prior Year (12/31/08): 19.7 - 12/31/08: 48 - Change % Prior Year: 3.8 - Source note: "Source: Central Bank of the Republic of San Marino (bank balance sheets, provisional data with reference to December 31, 2008)." *Source: Central Bank of the Republic of San Marino, provisional data with reference to December 31, 2008.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10319.pdf_