## _cr10323

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---

### Executive summary — main findings
- Mission and scope:
  - FSAP mission visited the British Virgin Islands during the period April 12–21, 2010.
  - Mission comprised Jennifer Elliott (mission chief), Katharine Seal (both MCM/IMF); Michael Deasy (Central Bank of Ireland) and José Tuya (banking supervision experts); Tanis MacLaren (securities regulation expert); and Robin Sykes (trust and corporate services provider expert).
  - The FSAP update concentrates on financial regulatory policies and financial stability; FSAP assessments are designed to assess the stability of the financial system as a whole and not that of individual institutions.
- Core economic/financial role:
  - Hosts the largest registry of international companies in the world.
  - Approximately 400,000 registered companies undertake most financial activities outside the BVI; key services: incorporation, administrative, audit, and legal services.
  - Main financial service provided: registration of offshore corporations and trusts, including financial holding companies; asset management companies; and captive insurers.
- Principal risk:
  - Chief risk is reputational risk stemming from loss of international confidence.
- Regulatory and supervisory system:
  - Legislative framework is comprehensive and compliant with international standards; the FSC has adopted a Regulatory Code.
  - FSC has strengthened supervision since 2004, including on-site inspections and improved enforcement capacity.
  - Remaining needs: faster implementation of reforms, clearer communication of new rules, additional resources for on-site inspections.
- Banking system:
  - Small, largely local in activity; banks, branches, and subsidiaries are well capitalized and very liquid.
  - Only one bank is locally owned; remainder are branches and subsidiaries of foreign banks.
  - Two branches hold approximately half of deposit and loan markets.
- Crisis management:
  - Need to enhance crisis management framework for the local banking system.
  - A deposit insurance scheme is being planned.
- International cooperation:
  - BVI signed the IOSCO MMOU in 2008; CFATF AML/CFT assessment completed December 2008 and a ROSC appended to this report.
- Progress since 2004:
  - Recommendations from the 2004 OFC assessment largely addressed; FSC must continue capacity building for likely growth toward more complex financial services (e.g., under SIBA).

### Risk assessment — summarized threats, likelihood, and impacts
- Being designated a noncooperative jurisdiction under FSB rules or FATF:
  - Likelihood: Assessment: Low.
  - Impact: Assessment: High.
- Cross-border cooperation (whole sector):
  - Likelihood: Assessment: Medium.
  - Impact: Assessment: High.
- Financial difficulties of government-owned bank:
  - Likelihood: Assessment: Medium Low.
  - Impact: Assessment: Medium Low.
  - Additional note: U.K. government indicated it would not provide financial help; BVI government cannot borrow to rescue a bank (fiscal constraints).
- Pressure on liquidity of branches and subsidiaries of large groups:
  - Likelihood: Assessment: Low.
  - Impact: Assessment: Medium.

### Key recommendations (priority stratified)
- High Priority:
  - Prompt and full implementation of the Regulatory Code, for all sectors.
  - Prompt and full implementation of the new Securities Investment Business Act.
  - Provide additional resources for on-site review of corporate and trust service providers.
  - Increase the fine amounts contained in financial laws.
- Medium Priority:
  - Shorten filing and publication periods for financial statements for all entities from six months to 90–120 days.
  - Enhance transparency of enforcement actions by requiring publication of enforcement decisions.
  - Require public disclosure of reasons for removal of FSC Board members, including the managing director.
  - Develop a crisis management plan focused on the local banking system.
  - FSC should include discussion of financial stability issues in regular reporting to government.
  - Develop human resources plan to respond to new market intermediary business models under SIBA.
  - Develop a centralized, automated tracking system to follow up on inspection recommendations.
  - FSC should require banks to formulate contingency planning arrangements.

### Financial sector and economic context
- Economic and labor indicators:
  - GDP is estimated at $1.095 billion.
  - GDP per capita is $38,818 (population about 24,000).
  - Unemployment: 3 percent to 4 percent.
  - Expatriate labor comprises 65 percent of the workforce; expatriates fill an estimated 80 percent of financial services jobs.
- Offshore sector scale:
  - Asset holdings of BVI incorporated companies are estimated to be US$615 billion.
  - BVI is the second largest global domicile for investment funds.
- Fiscal vulnerabilities:
  - Government revenues heavily dependent on tourism and financial services, with greater than 60 percent coming from FSC annual fees.
  - UK requires 90 days liquidity in reserves; BVI has breached this target and cannot take on additional debt without UK permission.

### FSC revenues and government totals (figures in thousands of U.S. dollars)
- FSC fees:
  - 2005: 131,923.709
  - 2006: 144,053.668
  - 2007: 159,587.993
  - 2008: 164,896.132
  - 2009: 166,845.762
- Total revenues:
  - 2005: 234,269.183
  - 2006: 247,796.679
  - 2007: 275,672.198
  - 2008: 278,580.223
  - 2009: 268,644.091
- Percentage (FSC fees to total revenues):
  - 2005: 56
  - 2006: 58
  - 2007: 58
  - 2008: 59
  - 2009: 62

### Financial sector structure (selected counts)
- Number of banks (general license): 6
- Number of banks (restricted license): 1
- Number of captive insurers: 287
- Number of insurance managers: 16
- Number of fund managers and administrators: 573
- Number of funds: 2,937
- Number of registered agents: 125
- Number of international business corporations (on register): 448,156

### Banking system — size, composition, and key metrics
- Total banking assets: $2.5 billion; banks range in size from $98 to $915 million.
- System composition:
  - three branches;
  - three subsidiaries of foreign banks;
  - one government-owned domestic bank.
- Aggregate balance-sheet distribution:
  - Aggregate balance sheet size: $2.5 billion.
  - $1.5 billion relates to assets/liabilities of the three branches.
  - $0.9 billion relates to the two subsidiaries.
  - $98 million relates to the National Bank of the Virgin Islands Limited.
- Capital and profitability:
  - Total capital amounted to $402 million.
  - Total pretax/post tax profits amounted to $59 million.
  - Aggregate equity to total assets: 16 percent.
- Liquidity:
  - Of the $2.5 billion, $927 million (37 percent) takes the form of liquid assets.
  - Liquid assets are almost all placed with head office/parent bank overseas; no interbank market in the BVI.

### Banking system vulnerabilities and supervisory stance
- Ownership and concentration:
  - System is 96 percent foreign owned; only one bank locally owned.
  - Two branches hold approximately half of deposit and loan markets; concentration risk present.
- Liquidity and contagion:
  - Banks are highly liquid but rely on parent institutions for surplus fund placement.
  - In stress, most banks would rely on access to liquidity from parent institutions; potential local contagion if a parent faces problems.
  - FSC monitors liquidity levels; quarterly reporting; monitors net liquidity due to/from parent banks and adjusts limits.
- Supervisory arrangements:
  - Entry subject to strict licensing; no new banking license issued in past 20 years except 2006 conversion.
  - FSC participates in supervisory colleges for two Canadian banking groups; has MOU with OSFI; negotiating MOU with U.S. supervisors.
  - FSC requires capital equivalence deposit for branches equal to required CAR for subsidiaries.
- Crisis management weaknesses:
  - No formal crisis management framework; no provision for emergency lending or contingent credit lines.
  - Government constrained by UK oversight for borrowing.
  - FSC has powers to intervene (directions, removal, provisioning, write down equity).
  - FSC has internal Crisis Management Committee (established 2009).
- Deposit Compensation Scheme (DCS) under discussion:
  - Scale under discussion: $50,000 to $100,000.
  - Timescale to introduce and pass legislation: end of 2010 (described as highly ambitious).

### Insurance, investment business, and TCSPs
- Insurance:
  - Dominated by captive insurers: 287 captive insurers.
  - Insurance managers: 16.
  - On-site inspection regime covers insurance managers and captives.
- Mutual funds and investment business:
  - Active mutual funds at end-December 2009: 2,937 (down slightly from 2,953 at end-2008).
  - Increase of 23.8 percent over past five years.
  - Only 7.4 percent of funds are public mutual funds; remainder are professional or private.
  - SIBA enacted in 2010 expands licensed investment activities; SIBA and Regulatory Code require prompt implementation.
  - Licenses granted for fund managers/administrators (end-2009): 573.
- Trust and Corporate Service Providers (TCSPs):
  - Registered Agents (RAs): 125.
  - In 2009, Banking and Fiduciary Services Division carried out 19 inspections for the TCSP sector using a core inspection staff of four individuals.
  - Frequency of inspections considered low given sector scale; recommendation to increase FSC examiners for TCSPs.
  - Bearer shares: companies with bearer shares must deposit with Recognized Custodian or Authorized Custodian; grandfathered bearer shares disabled if not deposited by deadlines.

### Regulatory framework and FSC operations
- Regulatory Code:
  - Enacted December 2009; most sections in force as of March 31, 2010.
  - Provides requirements across licensing, fit-and-proper, governance, risk management, internal audit, record keeping, financial reporting, outsourcing, segregation, protection of customer assets and capital, and insurance requirements.
  - Code must be amended to add investment business part due to SIBA.
- FSC governance:
  - Board: six commissioners plus MD as ex officio; appointments by Cabinet for up to three years; Cabinet must give written reasons for removal but not required to publish them.
  - Recommendation: Public disclosure of reasons for termination would enhance independence and accountability; fix term for MD recommended.
- FSC staffing (2009 totals and selected divisions):
  - Total 2009 staff: 130; 100 percent.
  - Registry of corporate affairs: 52; 36.9 percent.
  - Corporate services: 24; 20.0 percent.
  - Banking & fiduciary services: 10; 10.8 percent.
  - Investment business: 12; 9.2 percent.
  - Insurance: 9; 6.9 percent.
- Funding and training:
  - FSCA permits FSC to retain “from 7.5 percent to 15 percent” of fees as negotiated annually with the Cabinet.
  - More than $3,000 per staff member budgeted for training in recent years.
  - Recommendation: increase focus on junior staff industry understanding.
- Supervision and inspection tools:
  - Off-site review and on-site inspection system in place; KReview (KPMG) used as automated supervisory support.
  - Quarterly prudential returns required of banks.
  - Annual audited statements for regulated entities must be filed within six months of year-end; recommendation to shorten to 90–120 days.
- Enforcement:
  - Enforcement actions increased from 4 in 2005 to 60 in 2009.
  - FSC enforcement powers include cease-and-desist orders, suspension/revocation of licenses, removal of directors, and court orders (asset freeze, administrators).
  - Administrative penalties under AMLTFCOP limited (examples: up to $4,000; AMLR $5,000 to $15,000); recommendation to increase penalties to be dissuasive.
  - Decisions of the Enforcement Committee are not required to be public; recommendation to publish enforcement decisions.

### AML/CFT Mutual Evaluation (CFATF 2008) — key findings and follow-up
- CFATF report (November 2008) incorporated into ROSC:
  - BVI has an AML/CFT system broadly in line with international standards.
  - Money laundering and terrorist financing criminalized with some minor deficiencies.
  - Specific deficiencies cited: customer due diligence; dissuasiveness of penalties; requirements for nonprofit organizations; adequacy of supervisory coverage.
- Follow-up actions:
  - Authorities undertook steps to address cited issues and added supervisory resources.
  - FIA staff training expanded; FIA receives on average one hundred and fifty SARs per year.
  - Amendments enacted: Anti-money Laundering and Terrorist Financing (Amendment) Code of Practice, 2009; Proceeds of Criminal Conduct (Amendment) Act, 2010 enacted in February 2010; Financing and Money Services Act enacted 26th May 2009.
- Remaining concerns:
  - Supervisory resources for AML/CFT require enhancement.
  - Low number of ML prosecutions suggests limited implementation.
  - Law enforcement resources may be insufficient.

### Financial Investigation Agency (FIA) — effectiveness and operations
- Functions and capacity:
  - FIA receives, obtains, investigates, analyzes, and disseminates information related to financial offences; receives SARs and has access to open source databases.
  - FIA is autonomous, controls its budget but dependent on government and FSC for finances.
  - FIA is a member of Egmont and freely exchanges information with Egmont partners.
  - FIA annual reports are legally required; reports now include details on results of disclosures and typologies.
- Reporting and SARs:
  - FIA currently receives about one hundred and fifty SARs per year; filings currently hand delivered with electronic delivery planned while maintaining hand delivery as backup.
  - FIA provides ongoing training and outreach; since 2008 trained eleven reporting entities including two banks.

### AML/CFT legal and technical amendments (selected)
- Section 11A (AMLTFCOP amendment) requires entities/professionals to adopt measures to prevent misuse of technological developments for ML/TF.
- Section 13 amendment requires policies to address specific risks associated with nonface-to-face business relationships or transactions.
- Section 19(3)/(6) amendments address verification of persons acting on behalf of legal persons and allow simplified CDD measures for recognized jurisdictions (Schedule 2 framework).
- Sections 44/45 amended to remove possibility of destroying identification data five years after last transaction when account not formally terminated; account files and business correspondence must be maintained for at least five years following termination.
- PCCA amendments (Proceeds of Criminal Conduct (Amendment) Act, 2010) stiffen penalties and extend tipping-off offence; administrative penalties in Schedule 4 of AMLTFCOP expected to be increased.

### Legal persons, trusts, and NPOs
- Registered agents (RAs) are required to perform CDD and maintain beneficial ownership information; Registry of Corporate Affairs maintains company registers.
- No central register of trusts; information maintained by licensed trust-service providers accessible to competent authorities.
- NPO regime:
  - AMLTFCOP new section 4A applies AML/CFT measures to charities/NPOs with payments in excess of ten thousand dollars in a year and to donors exceeding ten thousand dollars.
  - Section 4A includes provisions for cumulative donations, exceptions for payments for goods/services not exceeding twenty-five thousand dollars, and due diligence on anonymous donors.
  - Recommendation: outreach to NPO sector and supervisory program for NPOs; FSC recommended separate licensing/supervisory regime for NPOs, currently FIA tasked under section 9(2) of AMLTFCOP.

### Financial stability policy and operational priorities
- Strengthen crisis management arrangements for local banks given limited jurisdictional liquidity support options.
- Finalize and implement a deposit insurance scheme.
- FSC to be prepared to use powers to prevent upstreaming of liquidity and to impose ‘net due’ positions on branches when necessary.
- Maintain and deepen international supervisory cooperation and prepare to meet evolving transparency and tax-information demands.
- Recommendation: FSC should report on crisis management and financial stability in regular monthly and annual reporting to government.

### Financial Soundness Indicators (Banking Sector — Commercial Banks)
- Capital Adequacy (percent)
  - Regulatory capital to risk-weighted assets:
    - 2005: 20.37
    - 2006: 22.11
    - 2007: 25.33
    - 2008: 28.91
    - 2009: 30.11
  - Capital to assets:
    - 2005: 10.56
    - 2006: 11.46
    - 2007: 11.87
    - 2008: 14.02
    - 2009: 15.40
- Asset quality
  - Nonperforming loans to total loans:
    - 2005: 2.56
    - 2006: 2.42
    - 2007: 2.80
    - 2008: 2.89
    - 2009: 2.96
  - Loan-loss provision to nonperforming loans:
    - 2005: 225.03
    - 2006: 137.57
    - 2007: 3.84
    - 2008: 7.10
    - 2009: 7.32
- Earnings and profitability
  - Return on assets:
    - 2005: 1.14
    - 2006: 1.52
    - 2007: 2.06
    - 2008: 2.16
    - 2009: 1.76
  - Return on equity:
    - 2005: 32.81
    - 2006: 36.40
    - 2007: 28.76
    - 2008: 28.93
    - 2009: 23.31
- Liquidity
  - Liquid assets (in millions):
    - 2005: 1,204,929
    - 2006: 644,741
    - 2007: 1,081,922
    - 2008: 873,465
    - 2009: 927,411
  - Liquid assets to total assets:
    - 2005: 31.35
    - 2006: 30.41
    - 2007: 26.45
    - 2008: 29.32
    - 2009: 24.71
  - Liquid assets as a percentage of deposits:
    - 2005: 41.95
    - 2006: 41.72
    - 2007: 38.51
    - 2008: 46.48
    - 2009: 36.03

*Prepared by the Monetary and Capital Markets and European Departments — International Monetary Fund. Report contains main findings and recommendations of an IMF FSAP mission that visited the British Virgin Islands April 12–21, 2010.*

### 2010. The views expressed in this document are those of the staff team and do not necessarily reflect

### BRITISH VIRGIN ISLANDS — Financial System Stability Assessment (October 2010)

### Executive summary — main findings
- Mission and scope:
  - FSAP mission visited the British Virgin Islands during the period April 12–21, 2010.
  - Mission comprised Jennifer Elliott (mission chief), Katharine Seal (both MCM/IMF); Michael Deasy (Central Bank of Ireland) and José Tuya (banking supervision experts); Tanis MacLaren (securities regulation expert); and Robin Sykes (trust and corporate services provider expert).
  - The FSAP update concentrates on financial regulatory policies and financial stability; FSAP assessments are designed to assess the stability of the financial system as a whole and not that of individual institutions.
- Core economic/financial role:
  - The BVI hosts the largest registry of international companies in the world.
  - Most of the 400,000 registered companies undertake their financial activities outside of the BVI; key services provided are incorporation, administrative, audit, and legal services to international business companies.
  - Main financial service provided: registration of offshore corporations and trusts, including financial holding companies; asset management companies; and captive insurers.
- Principal risk:
  - Chief risk to the financial sector is reputational risk stemming from loss of international confidence.
  - Authorities are attuned to this risk and maintain surveillance and enforcement frameworks to combat it.
- Regulatory and supervisory system:
  - Legislative framework is comprehensive and compliant with international standards; the FSC has adopted a Regulatory Code.
  - The FSC has significantly strengthened its supervision since the 2004 assessment, including on-site inspections and improved enforcement capacity.
  - Remaining needs include: faster implementation of reforms, clearer and more prompt communication of new rules, and additional resources for on-site inspections.
- Banking system:
  - Banking system is small, largely local in activity; banks, branches, and subsidiaries are well capitalized and very liquid.
  - Only one bank is locally owned; remainder are branches and subsidiaries of foreign banks.
  - System concentration: two branches hold approximately half of deposit and loan markets.
  - Distress at parent banks is a potential transmission channel to local branches/subsidiaries.
- Crisis management:
  - Need to enhance crisis management framework for the local banking system.
  - A deposit insurance scheme is being planned.
- International cooperation:
  - BVI signed the IOSCO multilateral memorandum of understanding (MMOU) in 2008; CFATF AML/CFT assessment completed December 2008 and a ROSC appended to this report.
- Progress since 2004:
  - Recommendations from the 2004 OFC assessment have largely been addressed, though some legislative measures took many years to enact.
  - The FSC must continue capacity building in view of likely growth toward more complex financial services (e.g., under the Securities Investment Business Act).

### Risk assessment — summarized threats, likelihood, and impacts
- Being designated a noncooperative jurisdiction under Financial Stability Board rules or FATF:
  - Likelihood: Assessment: Low.
  - Considerations: BVI has reduced risk via IOSCO MMOU (2008) and favorable BCP assessment in 2010; AML/CFT assessment produced no concerns.
  - Impact: Assessment: High — designation would impair ability to attract and retain offshore business and contract company registration revenue.
- Cross-border cooperation (whole sector):
  - Likelihood: Assessment: Medium.
  - Considerations: BVI attentive to role as information provider; pressure from larger countries persists; BVI must adapt to new information-sharing requirements, including tax information.
  - Impact: Assessment: High — loss of reputation as cooperative jurisdiction would cause contraction of company registration business.
- Financial difficulties of government-owned bank:
  - Likelihood: Assessment: Medium Low.
  - Considerations: Government-owned bank transitioning from development to commercial bank; capital levels sound but profitability decreased; limited recourse to liquidity; FSC working with the bank.
  - Impact: Assessment: Medium Low — failure could cause losses for local depositors but limited sectoral or real-economy spillover.
  - Additional notes: U.K. government indicated it would not provide financial help; BVI government cannot borrow to rescue a bank (fiscal constraints).
- Pressure on liquidity of branches and subsidiaries of large groups:
  - Likelihood: Assessment: Low.
  - Considerations: Retail and commercial banking dominated by branches and subsidiaries of four global banking groups; 40 percent of deposits held in a subsidiary of a Canadian group; branches/subs highly liquid and well capitalized; FSC has good relations with home supervisors.
  - Impact: Assessment: Medium — risk to local depositors if parents draw liquidity up; FSC could impose local liquidity requirements and 'net due' positions; deposit insurance scheme in progress.

### Key recommendations (priority stratified)
- High Priority:
  - Prompt and full implementation of the Regulatory Code, for all sectors.
  - Prompt and full implementation of the new Securities Investment Business Act.
  - Provide additional resources for on-site review of corporate and trust service providers.
  - Increase the fine amounts contained in financial laws.
- Medium Priority:
  - Shorten filing and publication periods for financial statements for all entities from six months to 90–120 days.
  - Enhance transparency of enforcement actions by requiring publication of enforcement decisions.
  - Require public disclosure of reasons for removal of FSC Board members, including the managing director.
  - Develop a crisis management plan for the jurisdiction focused on the local banking system.
  - FSC should include a discussion of financial stability issues as part of regular reporting to government.
  - Develop a plan to put human resources in place to respond to new market intermediary business models under SIBA, should the demand arise.
  - Develop a centralized, automated tracking system to follow up on recommendations made during inspections.
  - FSC should require banks to formulate contingency planning arrangements.

### Regulatory and supervisory detail (high-level)
- Institutional:
  - Financial Services Commission (FSC) has strengthened supervision and enforcement; adopted a Regulatory Code.
  - The FSC devotes attention to international information sharing (e.g., IOSCO MMOU) and monitors territory’s international image.
- Legislative developments and implementation gaps:
  - A full suite of legislation exists; work to ensure full implementation is ongoing.
  - Recent Securities Investment Business Act expands scope for services, but implementation preparedness is limited.
  - The pace of implementation of reforms has been slow in some cases; ongoing need for capacity building and clearer communication of new rules.
- On-site supervision:
  - FSC enhanced its supervisory program with on-site inspections since the 2004 assessment.
  - Need for more resources to increase pace and breadth of on-site reviews, especially for trust and corporate service providers.

### Financial stability policy and operational priorities
- Strengthen crisis management arrangements for local banks, recognizing limited options for liquidity support in the jurisdiction.
- Finalize and implement a deposit insurance scheme as part of depositor protection arrangements.
- FSC to be prepared to use powers to prevent upstreaming of liquidity and to impose ‘net due’ positions on branches to protect local depositors.
- Maintain and deepen international supervisory cooperation and information-sharing arrangements, and prepare to meet evolving transparency and tax-information demands.

*Prepared by the Monetary and Capital Markets and European Departments — International Monetary Fund. Report contains main findings and recommendations of an IMF FSAP mission that visited the British Virgin Islands April 12–21, 2010.*

### 1. Developments in the financial sector and regulatory framework warrant an

### 1. Developments in the financial sector and regulatory framework warrant an update of the assessment conducted under the Fund’s OFC program and finalized in

### Scope and purpose
- The assessment updates the 2004 OFC program review and incorporates stability-related issues and stress tests following integration of the OFC program into the FSAP (Executive Board meeting 08/48 on May 30, 2008).
- The report covers regulation and supervision, soundness of the financial system, and its ability to cope with stress.
- A separately conducted assessment of the AML/CFT framework is incorporated into these findings.

### Key methodological note
- Stress testing of the banking system was not undertaken due to the very small size of the sector, lack of connection of the banking system to systemic vulnerabilities, and limited mission resources.
- The AML/CFT assessment was undertaken by the Caribbean Financial Action Task Force (CFATF) and the ROSC was prepared by CFATF and reviewed by the IMF Legal Department.

### Context and economic overview
- Political status: The BVI is a British overseas territory governed by an elected parliament headed by a premier and a formal Cabinet; a governor represents the British Crown.
- Economic structure:
  - Government revenues are heavily dependent on tourism and financial services, with greater than 60 percent coming from FSC annual fees.
  - The recent global financial crisis slowed growth of financial services (core business: company registration rather than asset management or banking); incorporations were down slightly, but revenue remains fairly steady.
  - The tourism sector is closely tied to the U.S. economy and has been affected by the U.S. recession.
- Living standards and labor:
  - GDP is estimated at $1.095 billion.
  - GDP per capita is $38,818 (population about 24,000).
  - Unemployment remains low at 3 percent to 4 percent.
  - Expatriate labor comprises 65 percent of the total workforce, with expatriates filling an estimated 80 percent of financial services jobs.
- Offshore sector scale:
  - Asset holdings of BVI incorporated companies are estimated to be US$615 billion.
  - The BVI is the second largest global domicile for investment funds.
- External pressures and outlook:
  - Future prospects for offshore financial services are uncertain given changes in onshore tax rules and regulatory treatments (e.g., proposed EU hedge-fund legislation).
  - The Foot report (October 2009) examined British offshore financial centers and raised concerns regarding lack of diversification but drew no firm conclusions for the BVI.

### Fiscal position and vulnerabilities
- Fiscal trends:
  - Growth in expenditures exceeded growth in revenues for several years; flattening of revenue led to a deficit position in 2009.
  - The United Kingdom requires 90 days liquidity in reserves; the BVI has breached this target and cannot take on additional debt without UK permission.
- Revenue concentration and strategy:
  - Dependence on financial sector revenue makes the fiscal position vulnerable to loss of business to competitors.
  - Authorities and industry are coordinating to seek new markets (for example, in the BRIC jurisdictions) and expanding legislative frameworks to provide more product variety.

### FSC revenue to total government revenue (Table 3 — figures in thousands of U.S. dollars)
- FSC fees:
  - 2005: 131,923.709
  - 2006: 144,053.668
  - 2007: 159,587.993
  - 2008: 164,896.132
  - 2009: 166,845.762
- Total revenues:
  - 2005: 234,269.183
  - 2006: 247,796.679
  - 2007: 275,672.198
  - 2008: 278,580.223
  - 2009: 268,644.091
- Percentage (FSC fees to total revenues):
  - 2005: 56
  - 2006: 58
  - 2007: 58
  - 2008: 59
  - 2009: 62
- Source: FSC.

### Structural role of the BVI financial sector
- Main activities: registration of corporations and trusts; domiciling investment funds; incorporation of financial holding companies, asset management companies, captive insurers, etc.
- Many entities are set up in the BVI and are subject to BVI law but conduct business and hold assets elsewhere.
- The BVI’s ability to set incorporation, AML/CFT standards, and to share information and cooperate with other authorities is crucial.

### 2004 OFC mission follow-up
- The 2004 mission found weaknesses in implementation of regulation, recommending increased on-site inspection capacity; the FSC has developed a comprehensive inspections program.
- Shortcomings in the legislative framework noted in 2004 have been addressed, with significant legislative change occurring in 2010.

### Regulatory and supervisory system — Legal framework
- The Financial Services Commission (FSC):
  - Established by the Financial Services Commission Act (FSCA) effective January 2002 as an independent statutory body.
  - Mandate: regulate, supervise, and enforce financial services activities carried on in or from the jurisdiction (insurance; banking; insolvency; fiduciary business; money services business; company management; mutual funds business; registration of companies; limited partnerships; intellectual property).
  - Responsibility includes overseeing compliance with corporate or partnerships legislation.
  - FSCA grants the FSC powers to issue binding guidance, apply terms and conditions to licenses, and take enforcement actions.
- Statutory expansions since last assessment:
  - Authority to act against unlicensed persons carrying on financial services business.
  - Authority to remove officers and directors of licensees if not fit and proper.
  - Authority to impose monetary penalties where criminal action is not taken.
  - Authority to require regulated persons to provide information returns to the FSC.
  - An independent Appeals Board (except for refusal to grant a license) is fully operational.

### Financial sector structure — current (Table 4)
- Number of banks (general license): 6
- Number of banks (restricted license): 1  1/
  - Note: An additional two banks are in the process of winding up.
- Number of captive insurers: 287
- Number of insurance managers: 16
- Number of fund managers and administrators: 573
- Number of funds: 2,937
- Number of registered agents: 125
- Number of international business corporations (on register): 448,156  2/
  - Note: In addition, an almost equal number of entities have been formed under the legislation but have since been struck off the register; sometimes aggregated estimates of 800,000 BVI corporations are made, but 448,156 is the more accurate registered count.

### Regulatory Code and implementation
- The Regulatory Code (enacted December 2009) provides detailed regulatory requirements across licensing processes; fit-and-proper criteria; corporate governance; risk management; internal controls; internal audit; record keeping; financial reporting and auditors; outsourcing; segregation; protection of customer assets and capital; and insurance requirements.
- Implementation status as of March 31, 2010:
  - Most sections were in force.
  - Uncertainty existed about whether firms had fully implemented the required arrangements to comply with the Code’s provisions.
  - The Code must be amended to add a new part addressing investment businesses given Parts of the Securities and Investment Business Act, 2010 (SIBA) came into force in May 2010.
  - Recommendation: The FSC should assess internal and industry communication and ensure a shared understanding of compliance expectations and timing.

### Regulator governance
- Board of Commissioners:
  - Governing body comprises six commissioners plus the managing director (MD) as an ex officio member.
  - Commissioners are appointed by the Cabinet for periods not exceeding three years on terms set by the Cabinet.
  - Cabinet may only remove a Board member for cause and must give written reasons for such removal; the statute does not require publication of those reasons.
  - Recommendation: Public disclosure of reasons for termination would enhance independence and accountability.
- Managing Director:
  - MD is chief executive responsible for operations.
  - Board may remove the MD as permitted by his contract; the Board must give written reasons for removal, but contract terms and reasons for dismissal are not required to be public.
  - Recommendation: Transparency regarding permissible termination reasons in the MD’s contract and public disclosure of reasons for any termination would enhance independence and accountability.
- Consultation with industry:
  - FSC consults extensively via consultative committees and liaison groups.
  - MD holds quarterly round-table meetings with industry association heads.
  - Quarterly “Meet the Regulator” town hall-style meetings are open to the public.

### FSC staffing (Table 5 — FSC Annual Staff Count)
- Division staff counts (selected 2009 figures and percentages):
  - Banking & fiduciary services: 10; 10.8 percent
  - Insolvency: 5; 3.8 percent
  - Investment business: 12; 9.2 percent
  - Insurance: 9; 6.9 percent
  - Legal & enforcement: 8; 6.2 percent
  - Policy, research & statistics: 4; 3.1 percent
  - Registry of corporate affairs: 52; 36.9 percent
  - Corporate services: 24; 20.0 percent
  - Human resources and MDO: 5; 3.1 percent
  - Shipping registry 1/: 0; 0.0 percent
- Total 2009 staff: 130; 100 percent
- Source: FSC.
- Note: Shipping registry ceased to be an FSC function in 2006, but staff were seconded to the Registry thereafter.

### Budget, training and resourcing
- Funding:
  - Primary FSC funding source is fees from company registrations and licenses.
  - FSCA permits the FSC to retain a negotiated percentage of these fees—“from 7.5 percent to 15 percent”—as negotiated annually with the Cabinet.
  - The MD perceives funding as sufficient to meet present needs; there appear to be no impediments to funding extra resources as necessary.
- Training:
  - More than $3,000 per staff member has been budgeted for training in recent years.
  - Recommendation: Increase focus on ensuring junior staff develop a better understanding of the industry and markets they regulate.

### Accountability and reporting
- The FSC is accountable to the Cabinet and to the legislature.
- Budget and work plan are approved by the Cabinet and presented to the legislature.
- The MD meets the minister of finance monthly to report on general matters and work plan progress.
- The FSC can appear before Select Committees of the House of Assembly and publishes its annual report on its website.
- Annual report and financial statements are provided to the Cabinet and are to be tabled with the legislature.

### Supervision and inspection
- Off-site review and on-site inspection system:
  - Detailed and well-executed off-site review and on-site inspection system to mitigate operational and reputational risks.
  - KReview (developed by KPMG) is used by the Banking and Fiduciary Services Division and Insurance Division as an automated supervisory support tool for detailed on-site inspections.
  - Recommendation: Develop a centralized and automated system to follow up on inspection recommendations.
- On-site inspection rollout:
  - Inspections began in 2004 for most Divisions; Investment Business Division inspections commenced in 2008.
  - All Divisions are engaged in regular inspections.
  - Given the size and importance of the corporate and trust service provider sector, a greater number of inspections might be appropriate.
- Reporting and filing requirements:
  - Quarterly prudential returns are required of banks.
  - Mutual funds must file annual returns with information on fund service providers; summary statements of financial position; investment strategy and listing status; asset allocations; and expenses.
  - Annual audited statements for all regulated entities must be filed within six months of year-end; recommendation to shorten filing period to align with international practice of 90–120 days.

### Enforcement
- Enforcement function:
  - Specialized Enforcement Division conducts investigations and brings actions before the Enforcement Committee.
  - FSC enforcement powers include issuing cease-and-desist orders and directives, suspending or revoking licenses, removing directors, and applying to a court for a protection order (which can freeze assets and appoint an administrator).
- Trends and capacity:
  - Enforcement actions increased from 4 in 2005 to 60 in 2009.
  - Surveillance by the Enforcement Division uses information services and scanning of financial publications.
  - With increased examinations, enforcement can better target serious breaches.
- Penalties and transparency:
  - Fine levels for major breaches are relatively low and may not provide a sufficient deterrent.
  - Recommendation: Increase the level of fines available to the FSC and raise administrative penalties proportionately.
  - Decisions of the Enforcement Committee are not required to be made public.
  - Recommendation: Additional transparency (publicizing Enforcement Committee decisions) would enhance understanding of FSC policy and apply market discipline.
  - Appeals: Decisions are appealed to the Financial Services Appeal Board, whose members are appointed by the Cabinet.

*Source: _cr10323 - 1. Developments in the financial sector and regulatory framework warrant an*

### 27. The banking system of the BVI has $2.5 billion in assets and banks range in size

### The banking system of the BVI has $2.5 billion in assets and banks range in size from $98 to $915 million

### Banking system — structure, licenses, and supervision
- The banking system of the BVI has $2.5 billion in assets and banks range in size from $98 to $915 million.
- System composition:
  - three branches;
  - three subsidiaries of foreign banks;
  - one government-owned domestic bank.
- Activities undertaken:
  - traditional banking business;
  - lending;
  - deposit-taking;
  - simple off-balance-sheet activities, such as providing letters of credit.
- Licensing and entry:
  - Entry subject to strict licensing standards that require the applicant be a highly-rated institution from a jurisdiction that exercises consolidated supervision.
  - A new banking license has not been issued in the past 20 years; the only license issued was in 2006 when the government-owned bank converted from a development bank to a commercial bank.
- Classes of banking license under BVI law:
  - General banking license — permits the holder to conduct banking business within and outside the BVI.
  - Restricted Class I banking license — does not allow the holder to take deposits or make loans to BVI residents except in the case of corporations (difference from Class II relates to manner of dealing with BVI corporations).
  - Restricted Class II banking license — same deposit/loan restriction as Class I; differs in how it deals with BVI corporations.
  - Current counts: six general banking licenses, one restricted Class I license, and no restricted Class II licenses.
- Supervision and cross-border considerations:
  - Well-developed legal and regulatory framework and a detailed inspections program, reinforced by consolidated regulation of parent banks.
  - The system is 96 percent foreign owned and benefits from parent/head office systems and expertise that enable institutions to meet international standards established by the BVI.
  - Foreign ownership necessitates strong cross-border collaboration by the FSC with home-country supervisors and review of parent-company systems for applicability and adequacy for the BVI branch or subsidiary.

### Insurance sector — market composition and supervision
- Industry composition and scale:
  - Dominated by captive insurers, majority single-parent captives with parents in the United States.
  - There are currently 287 captive insurers registered in the BVI.
  - Some small general and life insurance companies exist as subsidiaries of large multinational companies serving the local population.
- Recent trends:
  - FSC has seen a relatively large number of exits in recent years, including shutting down inactive or noncompliant firms.
  - Growth of the industry has slowed; an increase in captives from outside the United States is noted, but the BVI faces competition from multiple jurisdictions.
- Licensing and governance:
  - Insurance managers and captive insurers are subject to licensing as set out in legislation, particularly the Regulatory Code, and must meet fit-and-proper criteria.
  - All captive insurers must appoint an insurance manager subject to qualification and books-and-records requirements.
  - Section 51 of the Insurance Act obliges insurance managers to report immediately to the Commission information suggesting insolvency, criminal activity, serious breaches of the Insurance Act, Regulatory Code or AML/CFT enactments or guidelines, default in payments, or failure to conduct business in accordance with sound insurance principles.
- Supervision tools:
  - Insurance managers and the insurers they manage are subject to the FSC on-site inspection regime, covering both the manager and the captive insurers it manages.
  - Shortcomings noted in the 2004 report have largely been addressed; governance and internal control requirements are in place under the Insurance Act and Regulatory Code.
  - The on-site program has developed significantly since the 2004 report; further changes are expected with reference to the recently enacted Regulatory Code.

### Investment business — mutual funds, legislation, and implementation priorities
- Mutual funds sector scale and composition:
  - Principal securities activity is the incorporation and authorization of mutual funds.
  - At the end of December 2009, there were a total of 2,937 active mutual funds registered or recognized in the BVI, down slightly from 2,953 at end-2008.
  - This represents an increase of 23.8 percent over the past five years.
  - Only 7.4 percent of the funds authorized by the FSC are public mutual funds that may be sold by prospectus to any investor; the remainder are professional or private funds (private funds prohibit offers to the public and must have fewer than 50 investors).
  - In practice, even public funds do not make their securities available for purchase in the jurisdiction.
- Legal and regulatory framework:
  - The Mutual Funds Act provided for registration of public mutual funds, recognition of private and professional funds, and governed licensing of mutual fund managers and administrators operating in or from the BVI.
  - The Regulatory Code, enacted at end-2009 and legally enforceable in 2010, supplements the Mutual Funds Act and includes detailed sector-specific rules.
  - SIBA was passed at the start of the mission and the greater part of the legislation came into force in May 2010. SIBA expands categories of investment activities subject to licensing, introduces requirements for public issue of securities (other than by mutual funds), codifies and modernizes regulation of mutual funds and their service providers, recognizes accounting and auditing standards, requires audited financial statements by approved auditors, and addresses market abuse offences.
  - SIBA and related subsidiary instruments (Mutual Fund Regulations and the Public Funds Code) were reviewed; the FSCA and SIBA provide the main legal framework for supervision of securities activities in the BVI.
- Licensing and market participants:
  - The FSC licenses mutual fund administrators and managers operating in or from the jurisdiction.
  - As of the end of 2009, 573 licenses had been granted.
  - Mutual funds authorized by the FSC are not required to have managers or administrators licensed in the jurisdiction; very few licensees are resident.
  - SIBA gives the FSC authority to regulate other market participants such as brokers, dealers and underwriters.
- Implementation status and recommendations:
  - Most areas requiring improvement from the previous assessment will be addressed with full implementation of the investment business sections of the Regulatory Code, SIBA, and subsidiary instruments.
  - Until full implementation, only the recommendations with respect to on-site inspections and additional enforcement resources can be considered fully implemented.
  - The jurisdiction remains partially implemented with respect to the IOSCO Principles relating to collective investment schemes (mutual funds) until the new regime is fully effective.
  - Priority recommendation: prompt and full implementation of the Regulatory Code and the new SIBA regime, including finalization of key parts such as the Public Funds Code and active enforcement of new requirements in the marketplace.
  - Full implementation of the regime for intermediaries (brokers, dealers) requires new regulations and amendments to the Regulatory Code; industry representatives indicate possible near-term interest from market participants for licensing under these categories.
  - Specific disclosure and timing improvements recommended:
    - Public disclosure of material changes should be timelier; while 14 days to amend a prospectus may be acceptable, notice of the change should be published promptly.
    - The deadline for filing and publishing audited financial statements should be shortened; the current requirement to file six months after year-end is two to three months longer than is mandated in major jurisdictions.

### Trust and Corporate Service Providers (TCSPs) — role, regulation, and supervisory gaps
- Sector importance and risks:
  - Incorporation of BVI business companies and the provision of trust and corporate services is the central business of the BVI financial sector.
  - Trust and corporate services are recognized internationally as potential sources of financial risk, including money laundering and terrorist financing risks, and constitute a major source of reputational risk for the BVI.
- Industry composition and Registered Agents (RAs):
  - The TCSP industry is currently comprised of 125 firms offering a mixture of services.
  - Firms commonly act as Registered Agents under the BCA; every business company incorporated under the Act requires a Registered Agent to administer its affairs at all times.
  - RAs may be licensed under the Banks and Trust Companies Act (BTCA) or the Company Management Act (CMA); licensing under either statute grants the right to act as Registered Agents for business companies.
  - RA functions include maintaining the registered office and corporate documents, and maintaining registers of shareholders and directors.
- Trust and company management licensing:
  - Trust business is governed by the BTCA; no trust business may be conducted from within the BVI unless licensed under the BTCA.
  - A Class I trust license entitles the holder to carry out both trust work and company management work.
  - Licensing under the CMA entitles the holder to offer company management services including formation of companies, continuation to BVI companies, registered agent and registered office services, provision of directors or officers, and provision of nominee shareholders.
- Duties, compliance challenges, and RA regime:
  - Registered Agents are considered fiduciaries and are under duties to ensure client interests are protected; TCSP duties may vary depending on services provided but are subject to heavy legislative burdens.
  - RA regime imposes high regulatory burdens on RAs to ensure client compliance with BVI laws, as well as RA obligations under governing and AML/CFT legislation (KYC, suspicious transaction reporting, record-keeping).
  - Obtaining information on ultimate beneficial owners, nature of business, transactions, and changes in ownership can be challenging because most corporate business occurs abroad; RAs maintain stringent acceptance and termination policies and are required to file notice of intention to resign and actual resignation with the Registry.
- Legal and supervisory developments and capacity concerns:
  - Since the last assessment, significant changes to the legal and institutional framework have been implemented under the OFC program; the overarching legislative framework for the TCSP industry is comprehensive and aligns with the OGBS Statement of Best Practice.
  - The Regulatory Code is not being fully enforced at this time because of pending amendments and to provide licensees time to effect compliance.
  - Penalties for offences under the CMA and BTCA (especially for unauthorized business) appear low.
  - FSC monitoring methods include receipt and analysis of data and off-site examinations; the FSC uses a risk-based approach.
  - In 2009, the Banking and Fiduciary Services Division carried out 19 inspections for the TCSP sector using a core inspection staff of four individuals.
  - The frequency of inspections appears low given the size and importance of the sector; recommendation that authorities consider increasing the FSC’s complement of examiners in this area.
- Bearer shares regime:
  - Companies with bearer shares are required to deposit these shares with either a Recognized Custodian (recognized securities exchange or clearing organization) or an Authorized Custodian approved by the Commission pursuant to the FSCA.
  - The FSC must be satisfied of the fitness of an Authorized Custodian and the systems in place for secure custody and compliance with BCA procedures.
  - “Grandfathered” bearer shares (issued by companies authorized prior to the change in law) that have not been deposited with either type of custodian are deemed by operation of law to be disabled and all rights attached to such shares are suspended.
  - Companies wishing to reactivate rights attached to grandfathered bearer shares must apply to the court for an extension of time to deposit bearer shares with a recognized or authorized custodian.

### International information sharing and cooperation
- Legal framework and international engagement:
  - FSC has demonstrated willingness and ability to be a full partner in international information sharing and cooperation.
  - There are no legal impediments to information sharing domestically or internationally.
  - The Financial Services (International Cooperation) Act, 2000 (FSICA) was repealed in 2006; the FSCA was amended to incorporate expanded and clarified information-sharing provisions in response to international cooperation initiatives and IOSCO MMOU negotiations.
  - The FSC is a full-signatory to the IOSCO MMOU.
- Regional and bilateral cooperation:
  - FSC is a member of the Offshore Group of Banking Supervisors, the Caribbean Group of Banking Supervisors and the Association of Supervisors of Banks of the Americas.
  - FSC attends regulatory colleges for two Canadian banking groups and has a Memorandum of Understanding (MOU) with the Office of the Superintendent of Financial Institutions (OSFI).
  - No regulatory colleges exist for U.S. banking groups in the jurisdiction, but the FSC has an MOU with the regulator in Puerto Rico and is negotiating an MOU with U.S. supervisors; the FSC holds regular meetings with head offices of banks in Puerto Rico.
  - The FSC also has an MOU with Jersey.

*Source: IMF staff report text (content unit: _cr10323 - 27. The banking system of the BVI has $2.5 billion in assets and banks range in size).*

### 55. An AML/CFT Mutual Evaluation Assessment was carried out by a team from

### 55. An AML/CFT Mutual Evaluation Assessment was carried out by a team from

### AML/CFT Mutual Evaluation (CFATF, 2008)
- A Mutual Evaluation Assessment was carried out by a team from the Caribbean Financial Action Task Force (CFATF) in 2008. The CFATF Report (November 2008) was incorporated into a ROSC attached to this report.
- Key findings from the CFATF report:
  - The BVI has an AML/CFT system that is broadly in line with international standards.
  - Money laundering and terrorist financing have been criminalized with some minor deficiencies cited.
  - Specific deficiencies identified: customer due diligence; the dissuasiveness of penalties; requirements for nonprofit organizations; adequacy of supervisory coverage.
- Follow-up actions by authorities:
  - Authorities have undertaken steps to address all cited AML/CFT issues.
  - The authorities added resources subsequent to the CFATF report to improve supervision of compliance with AML/CFT standards for both financial institutions and designated nonfinancial businesses and professions.
  - Authorities have stepped up training in AML/CFT investigative techniques.

- Remaining resource and implementation concerns:
  - Supervisory resources devoted to AML/CFT matters require enhancement.
  - The low number of ML prosecutions suggests limited implementation of the legal framework.
  - Law enforcement resources may be insufficient, including an inadequate number of officers with in-depth training and experience in financial crime.

### Financial Stability Issues — Overview
- The report sections III.A–III.C discuss financial stability, vulnerabilities, crisis management, and financial stability policy.

### A. Vulnerabilities of the Banking System
- System characteristics and resilience:
  - The BVI has been relatively insulated from global financial shocks and has remained stable.
  - The banking system is focused on domestic activity and was not directly exposed to volatile asset markets (e.g., structured credit).
  - Revenues and profitability have remained relatively stable and the sector has been largely unaffected by wholesale market distress.
  - BVI is highly unlikely to be an originator of a major systemic shock for wider international markets.
- Ownership and concentration risks:
  - Only one bank is locally owned: the government owned National Bank of the Virgin Islands.
  - The remainder of the system is comprised of branches and subsidiaries of foreign banks.
  - Distress at parent institutions would likely transmit adverse effects to BVI branches and subsidiaries.
  - The banking system is highly concentrated: two branches have approximately half of the deposit and loan markets of the territory.
- Liquidity characteristics and risks:
  - The banking sector appears highly liquid but relies on parent institutions for surplus fund placement.
  - In stress, majority of banks operating in the BVI would rely on access to liquidity from parent institutions.
  - There have been no requirements for branches, subsidiaries or the nationally owned bank to identify contingency arrangements for alternative or diversified sources of funding or liquidity.
  - Potential local contagion if a banking parent faces a crisis.
- Supervisory monitoring and measures:
  - The FSC monitors liquidity levels; banks submit information quarterly.
  - The FSC closely monitors net liquidity due to/from parent banks and adjusts and limits these based on a risk assessment.
  - The FSC requires a capital equivalence deposit for branches equal to the required CAR for subsidiaries.
  - The FSC maintains communications with parent-bank regulators and intensified contact during the recent crisis.
- Internal and developmental risks:
  - Reputational risk is the primary threat to sustainability and development of the island’s financial sector.
  - Association of the BVI with major fraud or misconduct—particularly in trusts and corporations—could damage reputation and lead to flight of business.
  - The state-owned bank is small and sufficiently capitalized for current business but has expressed an interest in growth. Identified skill and management deficits need addressing; growth would require greater capital and deeper management skill.

- Bank liquidity (aggregate) — exact figures from Table 10:
  - Liquid assets (2009 2008 2007 2006 2005): 927,411 873,465 1,081,922 644,741 1,231,407 (In millions of U.S. dollars, unless otherwise indicated)
  - Liquid assets as a percentage of assets: 25 29 33 30 31
  - Liquid assets as a percentage of deposits: 36 46 49 41 41
  - Source: FSC.

- Note: Stress testing of the banking system was not undertaken by the mission due to the small size of the system and its lack of interconnectedness.

### B. Crisis Management Framework
- Current status and gaps:
  - No formal crisis management framework is in place; no formal policies and procedures to respond to a crisis situation.
  - No fully articulated contingency plan for banking or financial sector pressure.
  - No provision for emergency lending and no contingent credit lines in place.
  - The BVI government is under budgetary constraint and cannot increase borrowing further without permission of the United Kingdom; government would have no recourse to reserves or contingent lines of credit in a sectoral pressure scenario.
  - The FSC has not required contingency planning by banks; no requirements for banks to ensure they have reserve committed (and tested) lines of credit or alternative funding.
- Strengths and existing tools:
  - FSC has legal gateways to communicate and exchange information with domestic and overseas authorities, not merely banking supervisors.
  - FSC has broad general powers to intervene with institutions, including powers of direction and removal of executives from failing institutions.
  - The FSC could direct provisioning and write down shareholder equity as necessitated.
  - The authorities demonstrated flexibility and nimbleness during the 2008 crisis: proactive engagement with banks locally and at parental level; FSC requested BVI banks issue a joint public statement outlining their position with respect to liquidity.

### C. Financial Stability Policy
- Institutional role and coordination:
  - In absence of a central bank, the FSC plays a critical role in financial stability issues concerning the Territory.
  - The FSC does not have an explicit mandate, but its core functions essentially comprise guardianship of financial stability.
  - The FSC is supported by government and there is close contact between the FSC and ministry of finance.
  - No formal institutional arrangements for regular coordination or oversight of the financial sector with the ministry or government (e.g., Cabinet).
  - Recommendation: a formal report on crisis management and financial stability as part of regular monthly and annual reporting to government to increase awareness.
- Developments in oversight:
  - In 2009 the FSC set up an internal Crisis Management Committee to assess risk of spill-over from global financial turbulence into the BVI and across sectors.
  - Quarterly data collection and analysis, semi-annual discussions with each bank (quarterly where conditions merit) provide a foundation for macro-prudential oversight, which the FSC has not yet focused upon.
  - Primary focus of the Crisis Committee: ensure reputational integrity of the jurisdiction, with particular emphasis on the company registration sector.
  - The Committee seeks to monitor BVI entities globally on a weekly basis for litigation, investigations, or regulatory concerns.
  - The FSC is an associate member of the UK Financial Intelligence Network (UK FIN-NET).
- Home-host supervisory relationships:
  - Relationship between the FSC and home state supervisors is critical given overseas parentage of most banks.
  - FSC has limited automatic leverage in cross-border supervisory relationships due to size of BVI operations, but pursues proactive supervisory relationships beyond written agreements.
  - FSC requires BVI banks to submit financial data of their parent group to supplement group-wide analysis and risk assessment.
- Policy options and supervisor actions:
  - The FSC should be ready to use its powers to prevent up-streaming of deposits by subsidiaries and branches to parent entities and to require branches to maintain net “due to head office” positions when signs of pressure on parents or groups emerge.
  - FSC is debating this policy with fellow supervisors in the Caribbean Group of Banking Supervisors.
  - FSC should ensure contingency planning is put in place by banks and reviewed regularly by the supervisor, with particular attention to liquidity policies and contingency liquidity arrangements.
- Deposit Compensation Scheme (DCS):
  - A deposit compensation scheme would reinforce systemic stability; plans are underway.
  - Industry, government, and the FSC support plans to introduce a DCS and a project to establish a scheme has been initiated.
  - No details agreed yet; elements under discussion include scale and scope of compensation and mechanism of funding.
  - Scale under discussion: $50,000 to $100,000 is the range under discussion to date.
  - The ministry of finance has begun work using the Canadian model of DCS and Canadian legislation as a basis, but without plans to adopt it without modification.
  - Timescale to introduce and pass required legislation in the BVI: the end of 2010 (described as highly ambitious given outstanding issues and need for industry consultation).
  - Authorities are aware of the new International Association of Deposit Insurers (IADI) principles for deposit insurance and are working within international best practices.

### Annex — Observance of Financial Supervision Standards and Codes — Summary Assessments (selected points)
- The Annex contains summary assessments of standards and codes in the financial sector aimed at identifying adequacy of supervisory and regulatory framework to address risks and vulnerabilities.
- Assessments undertaken included:
  - Basel Core Principles for Effective Banking Supervision — assessors: Mr. Michael Deasy (Central Bank of Ireland) and Mr. José Tula (consultant).
  - The FATF 40+9 Recommendations for AML/CFT — a CFATF team comprised of identified members and approved by Mr. Hagan, IMF LEG Department.
- Overall: The BVI’s compliance with international supervisory standards is generally high, and most issues raised in the 2004 assessment have been addressed.

### A. Basel Core Principles — key observations
- Banking system profile:
  - The banking system in the BVI is small and focused on a limited range of local services.
  - The system has a total of $2.5 billion in assets.
  - Banking services limited to deposit taking and direct lending (mortgages and consumer credit).
  - No payment system; use of the US dollar means no connection to monetary operations.
  - System dominated by branches and subsidiaries of foreign banks (mostly Canadian and Puerto Rican).
  - One small local bank, government owned.
- Legal and supervisory framework:
  - BVI has a solid legal basis for effective banking supervision, particularly after enactment of the Regulatory Code, 2009.
  - Challenges lie in implementation of rules and regulations under this legislation.
  - Elements of the Regulatory Code were largely in place as guidance; additions bring framework into compliance with Basel II.
  - FSC appears to have sufficient resources to oversee current limited banking operations but should keep numbers and expertise under constant review given increased workload from new legislation and complexity of supervision.
  - If jurisdiction decides to expand banking range and size, additional resources would be needed.
- Information and methodology used for assessment:
  - Legal structure for banking supervision based on: Banks and Trust Companies Act, 1990, as amended; Financial Services Commission Act, 2001, as amended; and the Regulatory Code, 2009.
  - Assessment based on FSC self-assessment, responses to questions, meetings with FSC staff, licensed banks, Bankers Association, legal and accounting professions, and Financial Investigation Agency (FIA).
- Licensing structure and numbers:
  - BVI law provides for three classes of banking license: a general banking license, a restricted Class I banking license, and a restricted Class II banking license.
  - There are six general banking licenses, one Class I license and no Class II license.
  - Two other Class I licenses have or are in the course of surrendering their licenses.
  - Of the six general licenses, three are branches of overseas banks and three are locally incorporated.
  - Of the three locally incorporated, two are subsidiaries of overseas banks and one is a BVI government owned bank.

*Source: IMF staff report (extracts provided in the supplied content).*

### 7. The three branches are Banco Popular de Puerto Rico, First Bank Puerto Rico,

### _cr10323 - 7. The three branches are Banco Popular de Puerto Rico, First Bank Puerto Rico,

### Banking system structure and institutions
- The three branches are Banco Popular de Puerto Rico, First Bank Puerto Rico, and First Caribbean International Bank.
- Two subsidiary banks: Scotia Bank BVI Limited (Canada) and VP Bank (Liechtenstein).
- Government-owned bank: National Bank of the Virgin Islands Limited (NB), formerly the Development Bank of the Virgin Islands; came within the regulatory remit of the FSC since 2006 when it was issued a banking license and changed to its present name.
- Class I bank: London International Bank and Trust Limited (group treasury activity for its industrial parent; no deposits; entire share capital invested with group companies).
- Two Class I licensees in winding down: Rathbone Bank (BVI) and Bank of East Asia (BVI) Limited (Hong Kong).

### Business model and exposure
- Banks undertake traditional and conservative business (deposit-taking from and lending to BVI residents).
- First Caribbean International Bank, Scotiabank, and VP Bank interact to some extent with offshore activities in the BVI.
- Little or no off-balance sheet activity.

### Aggregate size, capital, liquidity, and distribution of assets
- At end-December 2009, total assets for all the banks amounted to nearly $2.5 billion, almost all related to the general banks.
- Total capital amounted to $402 million.
- Total pretax/post tax profits amounted to $59 million.
- Aggregate balance sheet size for the six operational banks amounts to $2.5 billion.
  - $1.5 billion relates to the assets/liabilities of the three branches.
  - $0.9 billion relates to the two subsidiaries.
  - $98 million relates to the only true BVI bank, National Bank of the Virgin Islands Limited.
- The FSC is the ultimate supervisor for one bank only, which represents about 4 percent of the banking assets of the jurisdiction.
- The FSC is the primary supervisor for banks representing 36 percent of the banking assets and has a collaborative role for the supervision of banks representing 60 percent of the banking assets.
- Aggregate equity to total assets is 16 percent.
- Of the aggregate balance-sheet size of $2.5 billion, $927 million (37 percent) takes the form of liquid assets.
- Almost all liquid assets are placed with the head office/parent bank overseas; there is no interbank market in the BVI.

### Preconditions for effective supervision and supervisory simplicity
- Preconditions present: legal and accounting regime heavily influenced by international best practice; three of the four main auditing firms have representation in the jurisdiction.
- Small size, static activities, no recent new bank authorizations, falling number of banks, and absence of overseas subsidiaries/branches make the system simple in supervisory terms.
- FSC has detailed knowledge of the banking system.

### Main findings on the Financial Services Commission (FSC) and compliance with Basel Core Principles (BCP)
- Objectives, independence, powers, transparency, and cooperation (CP1)
  - FSC has sufficient autonomy, powers, and resources with clear responsibilities and objectives.
  - Managing Director’s term of employment is not fixed and reasons for dismissal are not stated publicly; recommended that reasons for dismissal be transparent and that a fixed term should be introduced.
  - FSC should keep level and training needs of its staff under constant review due to increasing workload from the Regulatory Code and increased complexity of supervision.
  - Explicit provision should be made for payment by the FSC of costs incurred by staff defending actions/omissions performed in good faith.
- Licensing and structure criteria (CP 2–5)
  - Criteria are adequate; improvement since 2004 due to Regulatory Code, 2009 addressing major acquisitions.
- Prudential regulation and requirements (CP 6–18)
  - Capital adequacy rules meet the 1988 Basel Accord standards; current revisions to the RC will add elements of the 1996 Amendment.
  - FSC working with the Caribbean Group of Banking Supervisors (CGBS) to implement Basel II; region will implement the standardized approach; original plan to implement by 2011 subject to revision at next CGBS meeting in May.
  - Foreign-owned branches and subsidiaries with a general license are already implementing Basel II in compliance with home-country requirements.
  - Risk management regulations address BCP criteria; loan provisioning rules should address general provisions and provisions for expected losses.
  - FSC requires banks to follow IAS 39 to recognize impaired debt but has not issued guidelines for prudential reserves.
  - 2010 revisions to the RC will incorporate BCBS 2006 principles on provisioning (“Sound Credit and Risk Assessment and Valuation for Loans”).
  - FSC does not generally impose specific limits on investments but reviews bank-imposed limits; RC specifies lending limits and limits for investment in fixed assets; for open FX positions and interest rate repricing gaps, banks establish limits approved by the Board; FSC reviews adequacy during inspections and offsite reviews.
- Methods of ongoing supervision (CP 19–21)
  - Well developed on-going supervision with full on- and off-site inspection program and skilled staff; readiness to enforce against non-compliance.
- Accounting and disclosure (CP 22)
  - Recommendation to shorten six-month time frame for submission to the FSC and publication of annual audited accounts to three and, at most, four months (six-month timeframe driven by auditors’ workload and common December 31 year-end).
- Corrective and remedial powers (CP 23)
  - FSC has broad enforcement powers; the Regulatory Code (effective March 31, 2010) is in transition without a specified end-date; recommended that a definite transition period with a clear end-date for mandatory enforcement be established.
- Consolidated and cross-border supervision (CP 24–25)
  - FSC has broad powers for consolidated supervision and information exchange; of the four locally-incorporated banks, none operate subsidiaries or cross-border operations.
  - FSC participates in supervisory colleges hosted by Canadian supervisors and visits Puerto Rico for home-country cooperation.

### Summary compliance observations (selected core points from Table 11)
- Responsibilities and objectives: BVI laws and regulations provide an adequate framework for effective banking supervision.
- Independence/accountability/transparency: Absence of stated reasons for removal of managing director; recommended to align terms/conditions with commissioners and include a fixed term for the managing director. Keep staff level and training under review.
- Legal protection: Suggest explicit provision that FSC pays costs of staff defending actions/omissions performed in good faith.
- Capital adequacy: RC establishes requirements in compliance with Basel requirements (1988); FSC has broad enforcement powers.
- Risk management & provisioning: Amendments to RC pending to cover market risk from trading accounts and to expand loan-loss provisioning to include expected losses and general reserves (amendments expected in 2010).
- Large exposure limits: RC sets 25 percent of capital per counterparty and aggregate limit of 800 percent for large credits.
- Accounting and disclosure: Suggest reduction of six-month deadline to three or at most four months for submission and publication of financial statements.
- Corrective powers: FSC may revoke/suspend licenses, appoint examiners, require appointment of administrators, issue directives, and impose penalties.
- Consolidated supervision: Banks operate without subsidiaries; the one locally-incorporated bank does not have cross-border operations.
- Home-host relationships: FSC has broad powers to exchange information and collaborate with home-country supervisors.

### Recommended action plan (selected recommendations from Table 12)
- CP 7 / CP 9 / CP 13: Complete amendments to the RC to include provisions on market risk of trading accounts and provisioning to address possible losses and general reserves.
- CP1 - Resources: Keep level and training needs of staff under constant review given increasing workload and complexity.
- CP1 - Appointment of Managing Director: Fix term of appointment and introduce stated reasons for his dismissal.
- CP1 - Legal protection for staff: Ensure FSC covers costs for staff defending actions/omissions in good faith.
- CP22 - Accounting and disclosure: Shorten six-month time frame for submission to the FSC and for publication of annual audited statements by regulated firms to three or at most four months.

### Authorities’ response
- The FSC welcomes the IMF assessment, thanks the assessors, and is committed to fully considering and acting on the recommendations.

### FATF AML/CFT assessment (introduction and key finding)
- Report prepared by assessment team (names listed in source) based on mission from February 11–22, 2008 using the 2004 Assessment Methodology; Mutual Evaluation Report adopted by CFATF Plenary November 17–21, 2008.
- Key finding: BVI’s legal framework for combating money laundering (ML) and terrorism financing (FT) is comprehensive.
  - ML offences are applicable to all indictable offences; insider trading and market manipulation are not specifically criminalized.
  - Low number of ML prosecutions suggests limited implementation of the legal framework.
  - Criminalization of FT is in accordance with FATF requirements.
  - Confiscation regime meets most standards and is effective.

*Source: IMF country report content provided in the supplied document excerpt.*

### 3. The Virgin Islands’ financial intelligence unit—the Financial Investigation

### 3. The Virgin Islands’ financial intelligence unit—the Financial Investigation

### Effectiveness of the Financial Investigation Agency (FIA) and operational cooperation
- The Financial Investigation Agency (FIA) is effective and is a focal point of the AML/CFT regime.
- The FIA’s main functions include receiving, obtaining, investigating, analyzing, and disseminating information which relate to a financial offence or the proceeds of such an offence.
- The FIA receives SARs from various reporting institutions and has access to a number of open source databases.
- The FIA can request information from reporting financial institutions, government agencies, and statutory bodies.
- The FIA is an autonomous body that controls its budget but is dependent on the government and the FSC for finances.
- The FIA staff is described as highly professional and has received training in ML, FT and criminal intelligence analysis.
- As a member of Egmont, the FIA freely exchanges information with its Egmont partners.
- Annual reports are legally required to be published, containing limited details on some ongoing cases; no typologies are included in these annual reports.
- There is a high degree of cooperation among competent authorities in operational matters related to AML/CFT.
- A wide range of mutual legal assistance is available in criminal matters; money laundering, terrorist financing, and terrorism offences are extraditable offences.
- Law enforcement, the FIA, and supervisors can engage in a wide range of international cooperation.

### Legal framework and criminalization of ML and FT
- Money laundering has been criminalized under the Proceeds of Criminal Conduct Act, 1997 (POCCA) and the Drug Trafficking Offences Act, 1992 (DTOA).
- ML offences include receiving, possessing, concealing, disposing of, importing, or exporting the proceeds of criminal conduct.
- The physical and material elements of the ML offence include all aspects of the relevant UN Conventions with the exception of certain controlled drugs as required by the Vienna Convention.
- ML offences are applicable to all indictable offences; however, insider trading and market manipulation are not specifically criminalized in the Virgin Islands.
- The offence of ML extends to any type of property and applies to persons who commit the predicate offence; criminal liability extends to legal persons and proof of knowledge can be drawn from objective circumstances.
- The low number of ML prosecutions suggests limited implementation of the legal framework.
- Terrorist financing is criminalized via the Terrorism (United Nations Measures) (Overseas Territories) Order 2001 (TUNMOTO), the Anti-Terrorism (Financial and Other Measures) (Overseas Territories) Order 2002 (ATFOMOTO), and the Al-Qa’ida and Taliban (United Nations Measures) (Overseas Territories) Order 2002 (ATUNMOTO), extended to the Virgin Islands by the United Kingdom government.
- FT offence components capture funding for individual terrorists or terrorist organizations; funds are defined in accordance with the FT Convention. Secondary offences are covered, FT offences are predicate offences for ML, and objective factual circumstances may be used to prove intent. Both natural and legal persons are subject to criminal sanctions.
- There is no evidence of terrorists in the Virgin Islands and there have been no cases of FT in the Virgin Islands.

### Confiscation, freezing, seizure, and cross-border controls
- Provision is made for confiscation, freezing, and seizure of the proceeds of crime under POCCA, DTOA, ATFOMOTO, and TUNMOTO.
- Confiscation of instrumentalities used in or intended for use in the commission of ML or other predicate offences is allowed; confiscation is value-based rather than targeted on specific assets.
- Current measures include freezing and/or seizure of property to prevent dealing, transfer or disposal of property subject to confiscation.
- Police have powers to identify and trace property; rights of bona fide third parties are protected.
- At the time of the mutual evaluation visit, over $45 million was being held under an interim freeze order (this amount was subsequently confiscated by the High Court to be shared equally with Bermuda).
- Freezing of funds used for FT, and funds and assets of specific criminal and terrorist organizations, are included within domestic laws; procedures are in place to freeze pursuant to S/RES/1267 and S/RES/1373.
- There is provision to give effect to foreign freezing orders and specific directions to financial institutions are issued with relevant notices and restraint orders.
- Affected persons can apply for reasonable access to frozen funds or assets; rights of bona fide third parties are protected.
- No terrorist funds have been discovered in the Virgin Islands.
- The Virgin Islands operate a declaration system for incoming cross-border transportation of currency or bearer negotiable instruments and a disclosure system for outgoing transportation of same.
- Customs officers can make enquiries of travelers and can confiscate cash suspected of being related to criminal activity; information from false declarations and disclosures are forwarded to the Joint Intelligence Unit and the FIA.
- The Customs Department works closely with police and immigration; several officers have been sensitized to AML/CFT matters.

### Preventive measures for financial institutions (legal basis and scope)
- The POCCA, DTOA, the Anti-money Laundering and Terrorist Financing Code of Practice (AMLTFCOP), and the Anti-money Laundering Regulations, 2008 (AMLR) provide the legal framework for CDD requirements for regulated (natural and legal) persons in the financial sector, although the scope of each enactment extends to cover nonregulated entities.
- The AMLTFCOP and the AMLR were enacted during the mutual evaluation visit and represented revisions of the Anti-money Laundering Guidance Notes, 1999 and the Anti-money Laundering Code of Practice, 1999 respectively.
- Regulated persons are defined as entities, including DNFBPs, as identified in accordance with the FATF Recommendations, which are regulated by the FSC.
- The AMLTFCOP consists of sections detailing requirements and attached explanations to provide guidance; section 2 (2) states the explanations merely provide guidance and clarity and are not considered enforceable by the assessment team.

### Customer due diligence, record-keeping, and reporting
- Customer due-diligence measures are generally comprehensive and include customer identification, beneficial ownership requirements, ongoing due diligence, measures for politically exposed persons, and correspondent banking.
- Main shortcomings: some requirements are not set out in law or in other enforceable means as required by the FATF standards; effective implementation cannot be assessed due to recent enactment of the AMLTFCOP.
- No specific requirement for financial institutions to have policies to prevent misuse of technological developments in ML or FT or to address risks associated with nonface-to-face business relationships or transactions.
- Obligations for introduced business include all FATF measures, except the requirement for financial institutions to immediately obtain from third parties necessary information concerning certain elements of the CDD process in criteria 5.3 to 5.6.
- There are no financial secrecy laws; information can be obtained by production of a court order or by the FSC or the FIA with appropriate authorization.
- There is a comprehensive framework of international cooperation legislation and procedures to assist foreign judicial, law enforcement, prosecutorial, tax, and regulatory authorities.
- There are no restrictions on sharing of information between financial institutions.
- Record-keeping requirements are extensive and generally observed; however:
  - Record retention of identification data is limited to five years after the last transaction of an account rather than the termination of the account.
  - There is no requirement for account files and business correspondence to be maintained for at least five years following the termination of an account or business relationship.
- Wire-transfer requirements comply with FATF standards except that the monetary penalties in the AMLTFCOP are not dissuasive.
- Financial institutions must maintain records on activities relating to complex or unusual large or unusual patterns of transactions which do not have any apparent economic or visible lawful purpose, but there is no requirement to examine these transactions, set forth findings in writing, and keep those findings available for at least five years.
- Enhanced CDD is required in relation to customers from countries which do not or insufficiently apply the FATF Recommendations; however, there is no requirement to examine transactions with no apparent economic or visible lawful purpose from such countries and make findings available to competent authorities.
- The Virgin Islands can apply appropriate counter-measures to countries that do not, or insufficiently apply, the FATF Recommendations.

### Reporting obligations, protections, and tipping-off
- Section 30A of POCCA makes it an offence for a person not to report to the FIA any knowledge or suspicion of ML acquired in the course of trade, profession, business, or employment.
- Current legislation deals with reporting of suspicious transactions, including attempted transactions; there are no exemptions for reporting of suspicious transactions.
- Mandatory obligation exists on all financial institutions to file suspicious transaction reports where the suspicion is in relation to terrorism and FT as stipulated in TUNMOTO and ATFOMOTO.
- Financial institutions and their directors, officers and employees are protected from both criminal and civil liability for reporting SARs in good faith; the safe harbor provision is extended to the FIA, its Director, officers and personnel in discharging their functions.
- The provision for tipping off is limited to after the submission of a disclosure to the FIA and therefore does not fully comply with FATF obligations.
- The FIA advised that acknowledgement letters are sent upon receipt of any SAR to the reporting entity; interviewed entities were split on whether there was an official response from the FIA on respective SARs, though most reported having a good relationship with the FIA.

### Internal controls, correspondent relationships, and shell banks
- Requirements for internal procedures, policies, and controls in the AMLTFCOP are comprehensive and include all FATF obligations except mandating that financial institutions maintain an adequately resourced and independent audit function.
- Financial institutions are required to ensure foreign branches, subsidiaries, or representative offices observe standards at least equivalent to the AMLR and the AMLTFCOP to the extent permitted by foreign laws.
- No requirement exists for financial institutions to pay particular attention to consistent AML/CFT measures in branches/subsidiaries located in countries which do not or insufficiently apply the FATF Recommendations.
- No requirement to inform home-country supervisor when a foreign branch or subsidiary is unable to observe appropriate AML/CFT measures because prohibited by local laws.
- Shell banks are not directly prohibited in law, but establishment and licensing requirements effectively prevent operation of shell banks.
- The AMLTFCOP prohibits correspondent relationships with shell banks and prohibits banks from maintaining relationships with respondent banks that provide correspondent services to a shell bank.

### Supervision by the Financial Services Commission (FSC)
- The FSC is the supervisory authority responsible for monitoring AML/CFT compliance of all financial institutions and DNFBPs as defined by the FATF.
- The FSC’s supervisory function relates to financial institutions subject to financial services legislation including the Banks and Trust Companies Act, 1990 (BTCA), the Company Management Act, 1990 (CMA), the Insurance Act, 1994 (IA), the Mutual Funds Act, 1996 (MFA), POCCA and the Insolvency Act, 2003.
- The FSC incorporates the Registry of Corporate Affairs, dealing with incorporation and registration of legal persons.
- The FSC is responsible for licensing, enforcement, and administrative decisions; regulatory functions are carried out by professional staff in four regulatory and supervisory divisions, three nonsupervisory divisions, and four support units.
- Staff is duly qualified and must be fit and proper; staff receive in-house training and regional/international AML/CFT training.
- The FSC has a broad range of powers including off-site surveillance and on-site prudential visits and inspections and utilizes a risk-based approach for on-site inspections.
- On-site inspections increased from 2004 to 2007, especially in fiduciary services and insurance divisions, but coverage is limited:
  - Only two out of a total of nine banks were examined during the period.
  - There were no on-site visits on mutual fund managers or administrators.
  - The FSC completed a total of 41 inspections of registered agents during 2004–2007, representing 37 percent of registered agents accounting for only 25 percent of the total number of registered companies.
- The low number of on-site examinations demonstrates limited inspection coverage and is probably the result of an inadequate number of staff.
- Under the Financial Services Commission Act (FSCA), the FSC may require provision of information or production of documents reasonably required in connection with regulatory functions, including internal audit reports.
- Record-keeping requirements and access provisions ensure customer and transaction records are accessible and available to the FSC as required.

### Sanctions, penalties, and upcoming legislation
- Criminal sanctions are available for offences under POCCA and DTOA and their amendments, TUNMOTO, ATFOMOTO, and ATUNMOTO, applicable to all natural and legal persons.
- The FSCA authorizes the FSC to apply sanctions through enforcement actions including revocation or suspension of licenses and imposition of prohibitions, limitations, or restrictions.
- Sanctions for noncompliance with AML/CFT obligations in the AMLTFCOP are specified in section 27 of POCCA and can only be imposed by the court through proceedings brought by the DPP.
- The AMLTFCOP allows the FSC to impose administrative penalties which do not exceed $4,000.
- Sanctions for noncompliance with AMLR requirements range from $5,000 to $15,000.
- Monetary penalties applicable under the AMLTFCOP and the AMLR, ranging from $4,000 to $15,000, are considered too low to be dissuasive to financial institutions operating in the Virgin Islands.
- The Financing and Money Services Act, 2007 (FMSA) is due to come into effect in 2008 and outlines licensing requirements for money service businesses (MSBs); at the time of the assessment, money remitters were not subject to licensing or registration requirements or supervision.
- The AMLTFCOP was drafted and issued by the FSC in collaboration with the Joint Anti-money Laundering and Terrorist Financing Advisory Committee (JALTFAC); it was enacted in February 2008 and stipulates preventive AML/CFT measures for financial institutions and DNFBPs. Due to recent enactment, effective implementation could not be assessed.

### Prosecution and the Director of Public Prosecutions (DPP)
- The position of Director of Public Prosecutions (DPP) established under section 59 of the Virgin Islands Constitution Order 2007 has complete independence in exercise of its powers.
- The DPP’s office is responsible for prosecution of all offences within the Virgin Islands, including ML and FT matters; confiscation, freezing, and forfeiture of criminal proceeds fall within the office’s scope.
- The DPP’s office has a staff complement of 10 persons, including the DPP; provisions have been made to increase staff to improve efficiency.
- Staff has been trained in techniques relevant to prosecution of AML/CFT matters.

### Scope and application to DNFBPs, corporate and trust services, and NPOs
- The preventive system incorporates most FATF Recommendations and applies to a range of financial institutions and designated nonfinancial businesses and professions (DNFBPs) as defined by the FATF.
- All DNFBPs are included in the AML/CFT framework and are subject to the same AML/CFT requirements as financial institutions; deficiencies applicable to financial institutions also apply to DNFBPs.
- Provision of corporate and trust services are regulated activities subject to AML/CFT requirements and FSC supervision.
- Supervisory, law enforcement, and judicial authorities have power to readily access information on beneficial ownership and trusts from financial and trust service providers.
- The Virgin Islands has a system for registering nonprofit organizations (NPOs); while the FIA is responsible for monitoring and supervising NPOs, no supervisory program was in place at the time of the assessment to identify noncompliance.

*Source: _cr10323 - 3. The Virgin Islands’ financial intelligence unit—the Financial Investigation*

### 31. Section 27 of the POCCA, 2008 extends the coverage of the AML/CFT regime to

### _cr10323 - 31. Section 27 of the POCCA, 2008 extends the coverage of the AML/CFT regime to

### Coverage of DNFBPs and supervisory scope
- Section 27 of the POCCA, 2008 extends the coverage of the AML/CFT regime to include DNFBPs.
- The definition of “regulated person” in the AMLTFCOP includes provisions for DNFBPs.
- AML/CFT requirements applicable to financial institutions in the AMLR and the AMLTFCOP are also applicable to DNFBPs.
- Of the DNFBPs, only company managers and trust and company service providers as licensees of the FSC are actively monitored and supervised for compliance with AML/CFT requirements.
- Deficiencies noted with regard to the AML/CFT regime for financial institutions in relation to specific Recommendations are also applicable to DNFBPs.

### Legal persons, legal arrangements, and trusts
- The Registry of Corporate Affairs maintains individual registers for companies, foreign companies and charges.
- Registration of companies is governed by the BVI Business Companies Act, 2004 (BVIBCA) (and amendments).
- Section 6 of the BVIBCA requires that applications to incorporate a company be made to the Registrar; applications may be filed only by the proposed registered agent.
- Customer due diligence, identity verification or background checks regarding organizers or beneficial owners of registered entities are required to be performed by registered agents.
- Registered agents are under the supervision of the FSC and are subject to the AMLTFCOP, which mandates identification of beneficial owners with regard to corporate clients, trusts, and fiduciary clients.
- Section 9 of the BVIBCA allows a company limited by shares to issue bearer shares.
  - International business companies (IBCs) incorporated before January 1, 2005, and that issued bearer shares had until December 31, 2009 to place bearer shares with an authorized or recognized custodian or to immobilize them.
  - IBCs formed after January 1, 2005 are required to immobilize all bearer shares from their date of formation.
- Information on beneficial ownership of registered companies maintained by registered agents is accessible by all competent authorities.
- The relatively low number of FSC inspections makes it difficult to assess whether beneficial ownership information is being adequately and accurately maintained.
- There is no central filing requirement for trusts and no register of all trusts in the Virgin Islands.
  - Information on trusts is maintained by licensed trust-service providers and can be accessed through the investigative and examination powers of regulatory and law enforcement authorities under relevant statutes.
  - Trust-service business is a regulated activity under the BTCA and is governed by the AMLTFCOP and the AMLR.
  - Record-keeping provisions of the AMLTFCOP require licensed trust service providers to ensure records are readily available for timely access by competent authorities.
- Concern regarding beneficial ownership information for companies is also applicable to trusts, though trust and company service providers have indicated awareness and compliance with AML/CFT laws.

### Nonprofit organizations (NPOs)
- The regime for NPOs is governed by the BVIBCA.
- The FSC advised the assessment team that the NPO population is considered “low risk” for potential ML and FT activities.
- Every NPO is required to have a registered agent in the Virgin Islands.
- No evidence was presented that the authorities had reviewed these laws with regard to protecting NPOs from being used to finance terrorism.
- No competent authority has undertaken any formal outreach efforts to the NPO sector regarding AML/CFT requirements or best practices.
- The assessment team was advised that the vast majority of NPOs operate exclusively in the Virgin Islands, serving domestic community needs; moreover, no NPO is viewed by the government as controlling a portion of the sector’s financial resources.
- The Registrar of Corporate Affairs, with the new registration system “VIRRGIN”, can identify companies registered as NPOs.
- Information on an NPO that has the legal form of a company and is registered as such is publicly available.
- There are no competent authorities engaged in formal monitoring of NPOs that have the legal form of a company after registration.
- The FIA is the competent authority, according to section 9 (2) of the AMLTFCOP, to monitor and supervise NPOs; at the time of the assessment, the FIA had no supervisory program in place to identify noncompliance and violations by NPOs.

### National and international cooperation
- Relevant competent authorities maintaining close working relationships include the FIA, the FSC, the RVIPF, the Immigration Department, the Customs Department, the Attorney General’s Chambers, and the Office of the Director of Public Prosecutions.
- The main national coordination body is the Joint Anti-money Laundering and Terrorist Financing Advisory Committee (JALTFAC), with members from public and private sectors.
- The Virgin Islands, as an Overseas Territory, has no legal power to ratify or accede to international treaties; ratification or accession is carried out on its behalf by the government of the United Kingdom.
- The Virgin Islands can enact domestic legislation to implement provisions of relevant international treaties and conventions.
  - The Vienna Convention was ratified by the U.K. government and extended to the Territory on February 8, 1995.
  - The Palermo Convention and the Terrorist Financing Convention were not extended to the Virgin Islands, but they have been given effect under its laws.
  - Provisions of UN Security Council Resolutions S/RES/1267(1999) and S/RES/1373(2001) have been implemented by relevant legislation in the Virgin Islands.
- Mutual legal assistance (MLA) arrangements:
  - Assistance can be provided for the full range of MLA requests envisaged by the FATF Recommendations.
  - MLA request types: law enforcement, regulatory breaches/offences, and tax offences.
  - Central authorities: the governor and the attorney general for law enforcement requests; the managing director/chief executive officer of the FSC for regulatory breaches and offences; the Financial Secretary for tax offences.
  - Mutual legal assistance under the CJICA is granted if an offence has been committed under the requesting country’s laws or there are reasonable grounds to suspect an offence and criminal proceedings or investigations have commenced in the requesting country.
  - Generally, requests for legal assistance are processed within a period of 30 days from receipt; very urgent requests are processed more quickly.
  - Generally, all mutual legal assistance provisions apply to terrorism and terrorism-financing offences.
- Extradition and cooperation:
  - Money laundering is an extraditable offence in the Virgin Islands.
  - The Virgin Islands extradites its own nationals pursuant to Part 1 of the Extradition (Overseas Territories) Order 2002.
  - Extradition is available for any conduct that would be an offence if committed within the Virgin Islands.
  - The Virgin Islands can provide assistance in extradition relating to insider trading and market manipulation since the underlying conduct is regarded as equivalent to conspiracy to defraud.
- The Virgin Islands has a comprehensive framework of international cooperation legislation and procedures to assist foreign judicial, law enforcement, prosecutorial, tax, and regulatory authorities; law enforcement agencies, the FIA, and the FSC can engage in wide international cooperation and render assistance in a timely fashion.

### Resources, statistics, and other operational issues
- Most competent authorities have adequate resources to carry out their functions; however, the FSC and the ADVCTF have quantitatively inadequate human resources.
- Comprehensive statistics are generally maintained; however, the RVIPF does not have records on ML investigations carried out or the number of production orders or search warrants executed.

### Key assessor recommendations (selected, as presented)
- Legal System and Related Institutional Measures
  - Enact legislation criminalizing market manipulation and insider trading and banning Vienna Convention scheduled chemicals not already prohibited.
- The Financial Intelligence Unit and its functions
  - Personnel should continue to be exposed to training in AML/CFT; consider attachments to other FIUs.
  - FIA annual reports should include typologies.
  - Implement electronic delivery of SARs to the FIA; intensify education/training on preparation and filing of SARs.
- Law enforcement, prosecution and other competent authorities
  - ADVCTF should be adequately staffed and trained in ML and FT investigation techniques.
  - RVIPF should maintain adequate statistics on ML investigations, production orders and search warrants.
- Preventive Measures: Financial Institutions
  - Legislate the requirement to verify authorization of persons purporting to act on behalf of legal persons/arrangements.
  - Issue a list of jurisdictions recognized as implementing FATF Recommendations for allowing simplified/reduced CDD.
  - Make enforceable risk management processes for permitting a business relationship before verification.
  - Require financial institutions to have policies to prevent misuse of technological developments and to address non-face-to-face business relationships.
- Record keeping and wire transfer rules
  - Amend AMLTFCOP to remove possibility of destroying identification data five years after last transaction of an account not formally terminated.
  - Maintain account files and business correspondence for at least five years following termination of an account or business relationship.
  - Ensure penalties and sanctions for SR. VII obligations in sections 37 to 47 of the AMLTFCOP are dissuasive.
- Monitoring of transactions and relationships
  - Require financial institutions to examine background and purpose of complex/unusual large transactions or unusual patterns without apparent economic or lawful purpose and set forth findings in writing; keep findings available for at least five years.
  - Put effective measures in place to advise financial institutions of weaknesses in other countries’ AML/CFT systems.
- Supervisory and oversight system
  - Review sanctions in the AMLR and the AMLFTCOP to make them dissuasive.
  - FSC should review present staff complement to improve supervisory coverage.
  - The FMSA should be enacted as soon as possible.
- Preventive Measures: Nonfinancial Businesses and Professions
  - Implement effective systems for monitoring and ensuring compliance with AML/CFT requirements by real estate agents, lawyers, other independent legal advisers, accountants, and dealers in precious metals and stones.
  - Remedy deficiencies regarding sanctions and sufficient resources for the FSC.
- Legal persons and arrangements and NPOs
  - FSC should implement an effective monitoring system to ensure registered agents maintain adequate, accurate and current beneficial ownership information.
  - Authorities should review adequacy of laws related to NPOs, undertake outreach to the NPO sector, and develop a supervisory program for NPOs.
- National and International Cooperation
  - Since relevant laws have been implemented locally, active efforts should be made to the United Kingdom to have the Conventions extended to the Territory and to put in place provisions for denial of landing of any aircraft used on behalf of the Taliban and denial of safe haven in accordance with United Nations Security Council Resolution 1373.

### Authorities’ responses (selected actions reported)
- SIBA: Part V of the Securities and Investment Business Act (SIBA) addresses market abuse and makes insider trading and market manipulation criminal offenses in Sections 88 and 91; SIBA had its first reading on 18th March 2010 and was awaiting final legislative approval (set for 12th March, 2010).
- The Criminal Justice (International Cooperation) (Amendment of Schedule 2) Order, 2009 amending Schedule 2 of the Criminal Justice (International Cooperation) Act, 1993 had been drafted and laid on the Table of the House of Assembly on 29th December, 2009 and was awaiting Cabinet approval; the Order amends Tables I and II by including specified substances in its list of banned substances (substances listed in the source text).
- FIA training: Since the Territory’s evaluation in 2008, a total of eight members of the FIA’s staff have been trained in AML/CFT, all eight in AML/CFT compliance, one in Financial Analysis, one in Intelligence Analysis, one in Financial Crimes Analysis and one in Strategic Analysis.
  - Future training plans include full certification of the FIA’s analysts and investigators as Anti-money Laundering specialists.

*Source: Extract from the referenced IMF assessment chapter.*

### 2010. The Agency is fully committed to identifying and providing the

### _cr10323 - 2010. The Agency is fully committed to identifying and providing the

### Reporting, disclosures, and FIA operations
- FIA annual reports should include typologies.
  - FIA Annual Report now contains details on results of disclosures and information on typologies.
- Efforts to implement electronic delivery of SARs to the FIA.
  - The number of SARs filed by reporting entities is relatively small in comparison to other larger jurisdictions and the FIA currently receives, on average, one hundred and fifty SARs per year.
  - While all SARs filed are currently hand delivered, the FIA intends as part of its current plan to encourage regulated institutions to file reports electronically and it is anticipated that provision will be made for the electronic delivery of these reports in the near future.
  - The FIA feels that the option to hand deliver reports should be maintained as a backup mechanism to the electronic delivery of these reports.
  - Because of the size of the jurisdiction and considering the centers of activity, the BVI does not consider the filing of SARs by means other than electronic filing to be ineffective or to cause any delay.
- Education/training for reporting entities on SAR preparation and filing.
  - The FIA provides training on AML/CFT, the reporting of SARs, and the role of the FIA to reporting entities on an ongoing basis.
  - Since 2008 the FIA has provided AML/CFT and SAR reporting training to eleven reporting entities including two of the Territory’s banks.
  - FIA outreach aims to raise awareness of AML/CFT matters within the financial services sector including targeting NPOs and DNFBPs.
  - The FSC conducts bi-annual Meet the Regulator Forum to educate the industry on current and emerging AML/CFT trends.
  - Regulated entities are required under the AMLR and AMLTFCOP to conduct their own training of staff.

- Relevant regulatory training provisions (verbatim excerpts preserved)
  - Section 47 of the AMLTFCOP:
    - “47.(1) Consistent with the training obligations outlined in the Anti-money Laundering Regulations, 2008, every entity and professional shall, having regard to its commercial or professional disposition and the requirements of this Code, engage in the training of its employees by:
      (a)  ensuring that they receive appropriate and proportionate training to the standard and level required by the Anti-money Laundering Regulations, 2008 in relation to money laundering and terrorist financing; and
      (b)  employing  appropriate  systems and procedures of testing the awareness and understanding of the employees with respect to the training provided to them.
    (2) The training for employees is not restricted to any particular class or rank of employees, although key training requirements will relate to key employees who are critical to an entity’s or a professional’s anti-money laundering and terrorist financing regime.
    (3) The training requirements outlined in subsection (1) shall, notwithstanding subsection (2), be extended
    (a)  to employees who are not considered key to an entity’s or a professional’s anti-money laundering and terrorist financing regime, although such training may be limited to basic anti-money laundering and terrorist financing issues;
    (b) to temporary and contract employees, including (where feasible) employees of third parties who perform anti-money laundering and terrorist financing functions under an outsourcing arrangement.”
  - Regulation 16 of the AMLR (excerpt):
    - “16.(1) A relevant person shall provide education and training for all of its directors or, as the case may be, partners, all other persons involved in its management, and all key staff, to ensure that they are aware of
      (a)  the provisions of these Regulations, Proceeds of Criminal Conduct Act, 1997, the Code and any other enactment relating to money laundering and terrorist financing;
      (b)  the relevant regional and international conventions, United Nations Security Council Resolutions and standards of compliance established from time to time by the CFATF, FATF and other organizations of which the Virgin Islands is a member or in which the Virgin Islands holds associate or observer status, relating to money laundering and terrorist financing;
      (c)  their personal and the relevant person’s obligations under the enactments and instruments referred to in paragraphs (a) and (b);
      (d)  the manual of compliance procedures or internal control systems and other requirements established pursuant to these Regulations and the Code;
      their personal liability for failure to report information or suspicions in accordance with the requirements of these Regulations, the Code and any other enactment, including any established internal procedures.”

### Law enforcement, prosecution, and operational capacity
- FATF-style ratings noted:
  - R.27 – C
  - R.28 – C
  - R.30 – PC
  - R.32 – LC
- ADVCTF (Anti-Drug/Vulnerable Crime Task Force) staffing and training:
  - The ADVCTF should be adequately staffed and trained in the techniques of ML and FT investigations.
  - Government plan: officers of the ADVCTF to be sensitized to AML/CFT investigative techniques.
  - Of the eighteen officers currently assigned to the Task Force, seven have been trained in AML/CFT.
  - Additional training has been identified which members of staff are scheduled to participate in within the next six months.
  - Some in-house training is slated to take place shortly.
  - Plan includes training for members of the Inter-governmental Committee on AML/CFT and their staff regarding AML/CFT obligations and investigative techniques.
- RVIPF statistics and data collection:
  - RVIPF should maintain adequate statistics on ML investigations, productions orders and search warrants.
  - Templates covering the types of statistics that should be collected by all relevant bodies with nexus to AML/CFT supervision have been circulated to and discussed with each body.
  - Relevant statistics are to be provided periodically (mainly on an annual basis) to the FSC which serves as the repository for such statistical data.
  - Statistical data expected to be discussed and analyzed at the level of the Inter-governmental Committee on AML/CFT.
  - Collection of such statistics should aid in the development of proper statistical data and allow for more meaningful analysis.

### Preventive measures: Financial institutions and CDD (Customer Due Diligence)
- Risk of money laundering or terrorist financing: ratings
  - R.5 – PC
  - R.6 – LC
  - R.7 – LC
  - R.8 – PC
- Requirement to verify persons acting on behalf of legal persons/legal arrangements:
  - The requirement for financial institutions to verify that any person purporting to act on behalf of customers that are legal persons or legal arrangements is so authorized, and identify and verify the identity of that person should be legislated.
  - Amendment: Section 19(3) of the Anti-money Laundering and Terrorist Financing Code of Practice, (AMLTFCOP) has been amended to require an entity or professional:
    - “to enquire into and identify a person who purports to act on behalf of an applicant for business or a customer, which is a legal person or a partnership, trust or other legal arrangement, is so authorised and to verify the person’s identity.”
  - The amendment is dealt with under the Anti-money Laundering and Terrorist Financing (Amendment) Code of Practice, 2009 which was enacted in January, 2009.
- Simplified or reduced CDD measures and recognized jurisdictions:
  - Section 19(6) of the AMLTFCOP has been amended to allow entities to apply simplified or reduced CDD measures where:
    - “the applicants for business or customers are resident in foreign jurisdictions which the Commission is satisfied are in compliance with and effectively implement the FATF Recommendations pursuant to the provisions of section 52;
    in the case of a body corporate that is part of a group, the body corporate is subject to and properly and adequately supervised for compliance with anti-money laundering and terrorist financing requirements that are consistent with the FATF Recommendations.”
  - Authorities should issue a list of jurisdictions that they recognize as having in place measures implementing FATF Recommendations to allow financial institutions to apply simplified or reduced CDD measures to customers resident in those countries.
  - Section 52(2) of the AMLTFCOP provides the legal framework for the listing of recognized jurisdictions as laid out in Schedule 2 of the AMLTFCOP. This relates to jurisdictions:
    - “(a)  which apply the FATF Recommendations and which the Commission considers, for the purposes of subsection (1), apply or sufficiently apply those Recommendations; and (b) whose anti-money laundering and terrorist financing laws are equivalent with the provisions of the Anti-money Laundering Regulations, 2008 and this Code.”
  - The amendment is dealt with under the Anti-money Laundering and Terrorist Financing (Amendment) Code of Practice, 2009 which was enacted in January, 2009.
- Risk-based timing of CDD verification and enforceability:
  - The requirement for entities and professionals to adopt relevant risk management processes and procedures for permitting a business relationship before effecting the necessary verification should be enforceable.
  - Section 23(2) of the AMLTFCOP has been amended to allow an entity or professional to complete verification after the establishment of a business relationship on the condition that:
    - (b) prior to the establishment of the business relationship, the entity or professional adopts appropriate risk management processes and procedures, having regard to the context and circumstances in which the business relationship is being developed; and
    - (c) following the establishment of the business relationship, the money laundering or terrorist financing risks that may be associated with the business relationship are properly and effectively monitored and managed.
  - The amendment is dealt with under the Anti-money Laundering and Terrorist Financing (Amendment) Code of Practice, 2009 which was enacted in January 2009.
- Technology and ML/TF risks
  - Financial institutions should be required to have policies in place or take such measures as may be needed to prevent the misuse of technological developments in money laundering or terrorist financing.
  - The AMLTFCOP has been amended to address the issue by including a new [text continues in source].

*Source: _cr10323 - 2010. The Agency is fully committed to identifying and providing the (IMF PDF content).*

### section 11A which states that:

### _cr10323 - section 11A

### Section 11A requirement
- Text: “11A.    An entity or a professional shall adopt and maintain such policies, procedures and other measures considered appropriate to prevent the misuse of technological developments for purposes of money laundering or terrorist financing.”
- The amendment is dealt with under the Anti-money Laundering and Terrorist Financing (Amendment) Code of Practice, 2009 which was enacted in January, 2009.

### Non‑face‑to‑face business relationships or transactions
- Financial institutions should be required to have policies and procedures to address specific risks associated with nonface-to-face business relationships or transactions.
- Section 13 of the AMLTFCOP amendment requires financial institutions to:
  - “(j)   adopt and maintain policies and procedures to deal with any specific risks that may be associated with nonface to face business relationships or transactions, including when establishing or conducting ongoing due diligence with respect to such relationships or transactions.”
- The amendment is dealt with under the Anti-money Laundering and Terrorist Financing (Amendment) Code of Practice, 2009 which was enacted in January 2009.

### Third parties and introduced business (Recommendation 9 – PC)
- Requirement summary:
  - Financial institutions relying upon a third party should be required to immediately obtain from the third party the necessary information concerning certain elements of the CDD process itemized in criteria 5.3 to 5.6.
- AMLTFCOP position and practice:
  - Financial institutions relying on third-party introducers must satisfy themselves that the relevant CDD process has been engaged and all relevant information is maintained and can be provided immediately upon request.
  - The Territory interprets Recommendation 9 as ensuring availability of CDD information whenever required, not necessarily obtaining it upfront for each introduced business.
  - If an introducer resides in a jurisdiction recognized under Schedule 2 pursuant to section 52 of the AMLTFCOP, the presumption is that the introducer would be properly monitored for AML/CFT compliance and that immediate upfront CDD information is not synchronized with this logic.
  - For introductions from nonrecognized jurisdictions, all financial institutions must obtain the required CDD information before or at the time of accepting the introduced business; there is no exception.
- Note: The BVI notes global issues about the meaning and scope of this aspect of Recommendation 9; an FATF Working Group is reviewing the Recommendation.

### Financial institution secrecy/confidentiality (R.4 – C)
- (No specific amendment detail beyond rating provided in the source text.)

### Record keeping and wire transfer rules (R.10 – LC; SR.VII – LC)
- Examiners recommended removing possibility of identification data being destroyed five years after last transaction of an account not formally terminated.
- Amendments:
  - Section 44 and 45 of the AMLTFCOP have been amended to remove the possibility of identification data being destroyed five years after the last transaction of an account that has not been formally terminated.
  - Anti-money Laundering (Amendment) Regulations have been drafted to delete paragraph 10 (1) (c) which allowed maintaining records for a period of five years from the time “when the last transaction was carried out”. The determining period under the amendment now relates only to the time when the established business relationship was formally ended, complying with the Examiners’ recommended action. This amendment is expected to be enacted before the next CFATF Plenary in 2010.
- Account files and business correspondence:
  - Account files and business correspondence should be maintained for at least five years following the termination of an account or business relationship.

### Penalties and sanctions for SR.VII obligations (sections 37 to 47 of AMLTFCOP)
- Recommendation: Penalties and sanctions applicable for obligations of SR. VII in sections 37 to 47 of the AMLTFCOP should be dissuasive.
- Amendments to PCCA:
  - The PCCA has been amended to stiffen the penalties for:
    - contravening provisions of the AMLTFCOP;
    - assisting another to retain the benefit of criminal conduct;
    - the acquisition, possession or use of proceeds of criminal conduct;
    - concealing or transferring proceeds of criminal conduct;
    - failing to report suspicious transactions;
    - tipping-off; and
    - making a disclosure that would likely prejudice an investigation upon knowing that or suspecting that the investigation is taking place once an order has been made or applied for.
  - Administrative penalties outlined in Schedule 4 of the AMLTFCOP are expected to be increased following the enactment of the amendments to the PCCA.
  - The amendments are dealt with under the Proceeds of Criminal Conduct (Amendment) Act, 2010 which was enacted in February 2010.

### Monitoring of transactions and relationships (R.11 – PC; R.21 – PC)
- Requirement: Financial institutions should be required to examine as far as possible the background and purpose of complex, unusual large transactions or unusual patterns of transactions that have no apparent or visible economic or lawful purpose and to set forth their findings in writing.
- Section 13 amendments require:
  - Entities or professionals to “exercise constant vigilance in its dealings with an applicant for business or a customer” and:
    - “(h)    identify and pay special attention to, and examine, as far as possible, the background and purpose of, any complex or unusual large or unusual pattern of transaction or transaction that does not demonstrate any apparent or visible economic or lawful purpose or which is unusual having regard to the pattern of business or known sources of an applicant for business or a customer.”
    - “(i)   record its or his findings in relation to any examination carried out pursuant to paragraph (h) and make such findings available to the Agency, Commission or other lawful authority, including the auditors of the entity or professional, for a period of at least five years;”
  - The amendment addressing the nonface-to-face risks (paragraph (j)) is also included in Section 13.
- The amendment is dealt with under the Anti-money Laundering and Terrorist Financing (Amendment) Code of Practice, 2009 which was enacted in January, 2009.

### Advising financial institutions about weaknesses in other jurisdictions
- Section 52 repeal and replacement:
  - New Section 52 instructs entities and professionals to pay special attention to business relationships and transactions relating to persons from jurisdictions which do not sufficiently apply the FATF Recommendations and allows for the production of a list of recognized jurisdictions.
  - Key provisions of new Section 52:
    - (1) Every entity and professional shall pay special attention to a business relationship and transaction that relates to a person from a jurisdiction which the Commission considers does not apply or insufficiently applies the FATF Recommendations with respect to money laundering and terrorist financing.
    - (2) The jurisdictions listed in Schedule 2 are recognized as jurisdictions which apply the FATF Recommendations and whose AML/CFT laws are equivalent with the Anti-money Laundering Regulations, 2008 and this Code.
    - (3) The Commission may amend Schedule 2 to remove jurisdictions that no longer satisfy or insufficiently satisfy the FATF Recommendations; from the date of removal, that jurisdiction ceases to be recognized.
    - (4) Where an entity relies on this section to not effect obligations with respect to a recognized jurisdiction to the extent permitted, it shall, from the date of removal of the jurisdiction from Schedule 2, perform the obligations imposed by the Anti-money Laundering Regulations, 2008 and this Code.
    - (5)(a) The Commission may issue advisory warnings to entities and professionals pursuant to the Financial Services Commission Act, 2001 or this Code, advising entities and professionals of weaknesses in the AML/CFT systems of other jurisdictions;
    - (5)(a) The Commission may amend Schedule 2, and every amendment of the Schedule shall be published in the Gazette.
- Requirement: The background and purpose of transactions with no apparent economic or visible lawful purpose from countries which do not or insufficiently apply the FATF Recommendations should be examined and the written findings made available to assist competent authorities and auditors.
- Section 13(2) amendment requires entities or professionals to:
  - “(h)    identify and pay special attention to, and examine, as far as possible, the background and purpose of, any complex or unusual large or unusual pattern of transaction or transaction that does not demonstrate any apparent or visible economic or lawful purpose or which is unusual having regard to the pattern of business or known sources of an applicant for business or a customer;”
  - “(i) record its or his findings in relation to any examination carried out pursuant to paragraph (h) and make such findings available to the Agency, Commission or other lawful authority, including the auditors of the entity or professional, for a period of at least five years;”
- The amendments are dealt with under the Anti-money Laundering and Terrorist Financing (Amendment) Code of Practice, 2009 which was enacted in January, 2009.

### Suspicious transaction reports and other reporting (R.13 – LC; R.14 – LC; R.19 – C; R.25 – LC; SR.IV – C)
- FIA reporting:
  - FIA Annual Report now contains details on results of disclosures and information on typologies.
- Predicate offences:
  - Enact legislation criminalizing insider trading and market manipulation as predicate offences for money laundering.
  - The criminalization of insider trading and market manipulation is addressed in sections 88 and 91 respectively of the Securities and Investment Business Act, (SIBA) and makes them predicate offenses for money laundering. Penalties for such acts are also outlined in these sections of the Act. SIBA had its 1st Reading on March 18, 2010 and is awaiting final legislative approval (set for March 12, 2010).
- Tipping‑off:
  - The tipping off offence should be extended to include disclosure of the fact that a STR or related information is being reported or provided to the FIA.
  - PCCA amendment extends the offence of tipping off to include disclosure of the fact that a STR or related information is being reported or provided to the FIA. Section 31(2) (a) now reads:
    - “(2) A person commits an offence if he knows or suspects that a disclosure (“the disclosure”) is being or has been made to the Reporting Authority under section 28 or 29;”
  - The amendment is dealt with under the Proceeds of Criminal Conduct (Amendment) Act, 2010 which was enacted in February 2010.

### Internal controls, compliance, audit and foreign branches (R.15 – PC; R.22 – PC)
- Independent audit function:
  - Financial institutions should be required to maintain an adequately resourced and independent audit function to test compliance with AML/CFT procedures, policies and controls.
  - Section 11 of the AMLTFCOP has been amended by including new sub-section (3A) requiring:
    - “(3A)  Every entity and professional shall establish and maintain an independent audit function that is adequately resourced to test compliance, including sample testing, with its or his written system of internal controls and the other provisions of the Anti-money Laundering Regulations, 2008 and this Code.”
  - The amendment is dealt with under the Anti-money Laundering and Terrorist Financing (Amendment) Code of Practice, 2009 which was enacted in January, 2009.
- Branches and subsidiaries in weaker jurisdictions:
  - Financial institutions should ensure consistent AML/CFT measures are observed with respect to branches and subsidiaries in countries which do not or insufficiently apply the FATF Recommendations.
  - Section 53 amendment inserts subsection (1A):
    - “(1A) An entity shall, in particular, ensure that the requirement of subsection (1) is observed by its branches, subsidiaries or representative offices that operate in foreign jurisdictions which do not or which insufficiently apply anti-money laundering and terrorist financing standards equivalent to those of the Anti-money Laundering Regulations, 2008 and this Code.”
  - Notification where local law prohibits AML/CFT measures:
    - Section 53 further amended by adding subsections (3A) and (3B):
      - “(3A)  An entity that has branches, subsidiaries or representative offices operating in foreign jurisdictions shall notify the Agency and the Commission in writing if any of the entity’s branches, subsidiaries or representative offices is unable to observe appropriate anti-money laundering and terrorist financing measures on account of the fact that such observance is prohibited by the laws, policies or other measures of the foreign jurisdiction in which it operates.
      - (3B)  Where a notification is provided pursuant to subsection (3A),
        - (a)    the entity concerned may consider the desirability of continuing the operation of the branch, subsidiary or representative office in the foreign jurisdiction and act accordingly; and
        - (b)    the Agency and the Commission shall liaise and consider what steps, if any, need to be adopted to properly and efficiently deal with the notification, including the need or otherwise of providing necessary advice to the entity concerned.”
  - The amendments are dealt with under the Anti-money Laundering and Terrorist Financing (Amendment) Code of Practice, 2009 which was enacted in January, 2009.

### Shell banks (R.18 – C)
- (No specific amendment detail beyond rating provided in the source text.)

### Supervisory and oversight system – competent authorities and SROs (Role, functions, duties and powers including sanctions) (R.17 – PC; R.23 – PC; R.25 – LC; R.29 – C; R.30 – PC; R.32 – LC)
- Sanctions review:
  - Review sanctions imposed in the AMLR and the AMLFTCOP with a view to making them dissuasive.
  - PCCA amendments (see Penalties and sanctions section) stiffen a range of penalties and administrative penalties in Schedule 4 of the AMLTFCOP are expected to be increased. Amendments dealt with under the Proceeds of Criminal Conduct (Amendment) Act, 2010 which was enacted in February 2010.
- FSC staffing and supervisory coverage:
  - FSC monitors its staff complement on an ongoing basis to ensure maximum use of resources.
  - Since 2004 there has been a 23 percent increase in staff.
  - 19 additional persons have been added to the staff since the evaluation in 2008.
  - Of these 19 persons, 11 were added to the following regulatory divisions to improve the FSC’s supervisory coverage:
    - Banking and Fiduciary Services  - 3
    - Investment Business - 4
    - Insurance - 4
  - The enhancement of the FSC’s staff complement has allowed for an increase in on-site inspections and strengthened AML/CFT supervision. 53 inspections were conducted in 2008 and 35 in 2009, utilizing a risk-based approach concentrating resources on high end risk-related entities.
- Financing and Money Services Act (FMSA):
  - Recommendation: The FMSA should be enacted as soon as possible.
  - The Financing and Money Services Act was enacted on 26th May 2009 and now requires all financing and/or money service providers to be licensed and to abide by the provisions of the Act. All money service providers are now under the regulatory supervision of the FSC.

### Money value transfer services (SR.VI – NC)
- Recommendation: The FMSA should be enacted as soon as possible.
- Implementation: The Financing and Money Services Act was enacted on 26th May 2009 and now requires all financing and/or money service providers to be licensed and to abide by the provisions of the Act. All money service providers are now under the regulatory supervision of the FSC.

### Preventive measures: Designated non‑financial businesses and professions (DNFBPs)
- Customer due diligence and record-keeping (R.12 – PC):
  - Deficiencies identified for all entities and professionals as noted for Recs. 5, 6, 8-11 are also applicable to DNFBPs. Implementation of the specific recommendations in the relevant sections will also apply to DNFBPs.
  - See relevant changes made in respect of Recs 5, 6, 8-11.
- Suspicious transaction reporting (R.16 – PC):
  - Deficiencies identified with regard to Recs. 13 to 15, and 21 are also applicable to DNFBPs. Implementation of the specific recommendations in the relevant sections will also apply to DNFBPs.
  - See relevant changes made in respect of Recs. 13-15 and 21.
- Regulation, supervision, monitoring, and sanctions (R.24 – PC; R.25 – LC):
  - Effective systems for monitoring and ensuring compliance with AML/CFT requirements by real estate agents, lawyers, other independent legal advisers, accountants and dealers in precious metals and stones should be implemented.
  - JALTFAC has been tasked with reviewing the current AML/CFT supervisory regime and recommending how real estate agents, lawyers, accountants and dealers in precious metals and stones may be dealt with in relation to their supervision for AML/CFT compliance. Independent professionals currently fall under the purview of the FIA by virtue of section 9 (2) of the AMLTFCOP; the process seeks to explore effectiveness of the current arrangement to ensure full monitoring and supervision. This process is ongoing.
  - Deficiencies identified regarding sanctions and sufficient resources for the FSC should be remedied. See relevant changes made in relation to Recs. 17 & 23.
- Other designated nonfinancial businesses and professions (R.20 – C)
  - (No additional amendment detail beyond the rating provided in the source text.)

*Source: _cr10323 - section 11A (text as supplied).*

### 4. Legal Persons and Arrangements & Nonprofit Organizations

### 4. Legal Persons and Arrangements & Nonprofit Organizations

### Legal Persons – Access to beneficial ownership and control information (R. 33 – PC)
- Recommendation:
  - The FSC should implement an effective monitoring system to ensure that registered agents are maintaining adequate accurate and current beneficial ownership information.
- Findings / Implementation:
  - The FSC’s on-site inspection program is a risk-based program which ranks entities based on their risk profile. Entities with a higher risk rating are subject to more frequent inspections than those with a lower rating.
  - During inspections all necessary action is taken to ensure that these entities are maintaining adequate and current beneficial ownership information.
  - Action includes a process of sampling files to establish whether registered agents are indeed maintaining adequate and current information on beneficial ownership.
  - The enhancement of the FSC’s staff complement has allowed for an increase in the number of on-site inspections.
  - In 2008, the FSC conducted 53 on-site inspections and there were 35 inspections conducted in 2009, utilizing more effectively the risk-based approach which concentrates resources on the high end risk-related entities.

### Legal Arrangements – Access to beneficial ownership and control information (R. 34 – LC)
- (No separate narrative beyond R. 34 label is provided in the source content.)

### Nonprofit organizations (SR. VIII – PC)
- Recommendation:
  - The authorities should review the adequacy of the laws that relate to NPOs and conduct periodic reassessment of the sector’s potential vulnerabilities to terrorist activities.
- Legislative amendment (AMLTFCOP – new section 4A) – key provisions preserved verbatim where numeric thresholds appear:
  - “4A.(1) The provisions of this Code relating to the establishment of internal control systems, effecting customer due diligence measures, maintaining record keeping requirements and providing employee training shall apply to every charity or other association not for profit which:
    - (a) is established and carries on its business in or from within the Virgin Islands;
    - (b) is established outside the Virgin Islands and registered to carry on its business wholly or partly in or from within the Virgin Islands; or
    - (c) is established as provided in paragraph (a) and receives or makes payments, other than salaries, wages, pensions and gratuities, in excess of ten thousand dollars in a year.
  - (2) A charity or other association not for profit shall:
    - (a) comply with the provisions outlined in subsection (1) in relation to every donor to the charity or other association not for profit of monies or equivalent assets in excess of ten thousand dollars;
    - (b) maintain relevant documentation with respect to its administrative, managerial and policy control measures in relation to its operations;
    - (c) ensure that any funds that are planned and advertised by or on behalf of the charity or other association not for profit are verified as having been planned and spent in the manner indicated; and
    - (d) adopt such measure as are considered appropriate to ensure that any funds or other assets that are received, maintained or transferred by or through the charity or other association not for profit are not for, or diverted to support,
      - (i) the activities of any terrorist, terrorist organization or other organized criminal group; or
      - (ii) any money laundering activity.
  - (3) For the purposes of subsection (2), where a series of donations from a single donor appear to be linked and cumulatively the donations are in excess of ten thousand dollars in any particular year, the requirements outlined in subsection (1) shall apply.
  - (4) Subsection (1) (c) does not apply where payment is made for goods or services the total of which do not in any particular year exceed twenty-five thousand dollars or its equivalent in any currency.
  - (5) Where a person who makes a donation (whether in cash or otherwise in excess of the amount or its equivalent stipulated in this section) does not wish to have his name publicly revealed, the charity or other association not for profit that receives the donation shall nevertheless carry out the requisite customer due diligence and record keeping measures under this Code, including:
    - (a) establishing the nature and purpose of the donation;
    - (b) identifying whether or not there are any conditions attached to the donation and, if so, what those conditions are;
    - (c) identifying the true source of the donation and whether or not the donation is commensurate with the donor’s known sources of funds or wealth;
    - (d) establishing whether or not the funds or other properties that are the subject of the donation are located in a high-risk country; and
    - (e) establishing that the donor is not placed on any United Nations, European Union or other similar institution’s list of persons who are linked to terrorist financing or against whom a ban, sanction, or embargo exists.
  - (6) Where a charity or other association not for profit suspects that a donation may be linked to money laundering or terrorist financing, it shall:
    - (a) not accept the donation; and
    - (b) report its suspicion to the Agency.
  - (7) For the purposes of the application of the Parts of this Code outlined in subsection (1) to a charity or other association not for profit, the relevant provisions shall be applied with such modifications as are necessary to ensure compliance with the requirements of the provisions.
  - (8) Schedule 1 provides best practices for charities and other associations not for profit and every charity and other association not for profit shall govern its activities utilizing those best practices, in addition to complying with the other requirements of this Code.”
- Recommendations and supervisory outreach:
  - The authorities should undertake an outreach program to the NPO sector with a view to protecting the sector from terrorist financing abuse.
  - A supervisory program for NPOs should be developed to identify noncompliance and violations.
- Implementation / status:
  - The FSC has written to the government recommending the enactment of a separate licensing and supervisory regime for NPOs and is awaiting action on this matter.
  - It is the plan that the new regime would establish a body that would undertake the relevant outreach program to NPOs, but in the meantime this responsibility is reposed in the FIA pursuant to section 9 (2) of the AMLTFCOP.

### National and International Cooperation (R. 31 – C; R. 32 – LC; R. 35 – LC; SR. I – LC)
- Recommendation:
  - Since these laws have now been implemented locally active efforts should be made to the United Kingdom to have the Conventions extended to the Territory and provisions put in place for the denial of landing of any aircraft used on behalf of the Taliban and denial of safe haven in accordance with United Nations Security Council Resolution 1373.
- Implementation / status:
  - The issue of extending the Conventions to the Territory has been approved by the government; it has also been discussed with the UK authorities and recommendations made for extending the said Conventions to the Territory.
  - The Territory has fully implemented S/RES/1373(2001) and S/RES/1267(1999) through the passage of the Terrorism (United Nations Measures) (Overseas Territories) Order, 2001 and the Anti-terrorism (Financial and Other Measures) (Overseas Territories) Order, 2002).
- Mutual legal assistance, extradition, and other forms of cooperation:
  - R. 36 – C; R. 37 – C; R. 38 – C; SR. V – C; R. 32 – LC
  - R.39 – C; R.37 – C; SR.V – C; R. 32 – LC
  - R. 40 – C; SR. V – C; R. 32 – LC

### Other Issues
- (The source text provides headings "Other relevant AML/CFT measures or issues" and "General framework – structural issues" but no further substantive text in the supplied excerpt.)

### Appendix I – Financial Soundness Indicators (Banking Sector — Commercial Banks (only))
- Capital Adequacy (In percent, unless otherwise indicated)
  - Regulatory capital to risk-weighted assets:
    - 2005: 20.37
    - 2006: 22.11
    - 2007: 25.33
    - 2008: 28.91
    - 2009: 30.11
  - Capital to assets:
    - 2005: 10.56
    - 2006: 11.46
    - 2007: 11.87
    - 2008: 14.02
    - 2009: 15.40
- Asset quality
  - Nonperforming loans to total loans:
    - 2005: 2.56
    - 2006: 2.42
    - 2007: 2.80
    - 2008: 2.89
    - 2009: 2.96
  - Loan-loss provision to nonperforming loans:
    - 2005: 225.03 1/
    - 2006: 137.57 2/
    - 2007: 3.84
    - 2008: 7.10
    - 2009: 7.32
- Earnings and profitability
  - Return on assets:
    - 2005: 1.14
    - 2006: 1.52
    - 2007: 2.06
    - 2008: 2.16
    - 2009: 1.76
  - Return on equity:
    - 2005: 32.81
    - 2006: 36.40
    - 2007: 28.76
    - 2008: 28.93
    - 2009: 23.31
  - Net interest income to gross income:
    - 2005: 83.55
    - 2006: 84.78
    - 2007: 85.66
    - 2008: 82.60
    - 2009: 84.63
  - Noninterest expenses to gross income:
    - 2005: 47.32
    - 2006: 41.81
    - 2007: 33.03
    - 2008: 30.74
    - 2009: 42.77
- Liquidity
  - Liquid assets (in millions):
    - 2005: 1,204,929
    - 2006: 644,741
    - 2007: 1,081,922
    - 2008: 873,465
    - 2009: 927,411
  - Liquid assets to total assets:
    - 2005: 31.35
    - 2006: 30.41
    - 2007: 26.45
    - 2008: 29.32
    - 2009: 24.71
  - Liquid assets as a percentage of deposits:
    - 2005: 41.95
    - 2006: 41.72
    - 2007: 38.51
    - 2008: 46.48
    - 2009: 36.03
  - Net open position in foreign exchange to capital:
    - 2005: N/A
    - 2006: N/A
    - 2007: N/A
    - 2008: N/A
    - 2009: N/A
- Source: FSC.
- Footnotes related to loan-loss provision to nonperforming loans:
  - 1/ This percentage is as a result of Bank B reporting nonperforming loans of $78,000 and loan-loss reserves of $401,000, representing a loan-loss provision to nonperforming percentage of 514.10 percent; and Bank C reporting nonperforming loans of $147,000 and loan-loss reserves of $6.1 million, representing a loan-loss provision to nonperforming percentage of 597.28 percent (causing an extraordinary spike in the overall average for that period).
  - 2/ This percentage is as a result of Bank B reporting Non-performing loans of $740,000 and loan-loss reserves $5 million, representing a loan loss provision to nonperforming percentage of 675.81 percent (causing an extraordinary hike in the overall average for that period).

### Appendix II – Implementation of the Recommendations of the 2004 Assessment Report (selected updates)
- Governance and transparency:
  - Executive Council not required to disclose grounds for removal of Board members.
    - FSCA s.9(2A) requires Cabinet (which replaced Executive Council since 2007) to provide, in writing, reasons for removal of Board members. Amendment effected by FSC (Amendment) Act, 2009.
    - Reasons for removal are not required to be disclosed to the public.
  - Conflicts policy for FSC Board members could be more detailed.
    - The Board Code of Conduct has been reviewed and revised to provide necessary details on conflict of interest matters. Amendment approved in March, 2010.
  - MD does not have fixed-term appointment.
    - Appointment of the MD is set based on agreed terms and conditions in a private employment contract.
    - FSCA s.10(1A) requires the Board to provide written reason(s) for removal of MD. Amendment effected by FSC (Amendment) Act, 2009.
    - Reasons for removal of the MD are not required to be disclosed to the public.
- Staffing and inspections:
  - Vacancies in directorships of Legal Department, Policy Planning Department, anticipated vacancies in at least one other department.
    - These posts were filled, there is no significant senior post left open.
  - Need for additional trained regulatory staff.
    - Additional regulatory staff has been added to each regulatory division on a consistent basis over the last five (5) years.
    - New staff receives training by various methods both locally and overseas.
    - Consultants are retained/used in relevant aspects of the Commission’s work – legislation, compliance testing on standards, risk-based assessment program development, etc.
  - No regular and comprehensive audit and compliance program / No on-site inspections / No manual for inspections.
    - A full inspections program has been in place since 2004 for most regulatory divisions, and from 2008 for the investment business division.
    - A KPMG product, KReview, is used to guide the examination staff through an on-site inspection. KReview includes an electronic inspections manual, with updates.
    - The 2010 inspection plan will be drawn up April 2010.
- Accounting standards:
  - Accounting standards for financial statements not detailed; allowed to use home jurisdiction standards.
    - Division 6 of the Regulatory Code outlines the recognized accounting and audit standards that may be used by licensees in the preparation of financial statements. Section 59. (1) states that “a licensee shall ensure that its financial statements, and any group accounts required to be submitted to the Commission, are prepared in accordance with
      - (a) one of the following international standards:
        - (i) the International Financial Reporting Standards, promulgated by the International Accounting Standards Board;
        - (ii) UK GAAP;
        - (iii) U. S. GAAP; or
        - (iv) Canadian GAAP; or
      - (b) such other recognized international accounting standards as may be approved by the Commission on a case-by-case basis.

*Excerpted from: _cr10323 - 4. Legal Persons and Arrangements & Nonprofit Organizations*

### Part IV, Division 2 ss.140 thru

### _cr10323 - Part IV, Division 2 ss.140 thru

### Corporate governance issues specific to insurers (ss.140–142)
- Part IV, Division 2 ss.140 thru 142 of the RC cover corporate governance issues specifically related to Insurers.
- CP 5 findings and recommended action:
  - Finding: The situation in the industry in the BVI does not easily lend itself to strong standards of internal control.
  - Recommended action: Adopt clear and unambiguous requirements for recordkeeping and reporting for the insurance manager/compliance officer.
  - Response: S.38 of the RC covers the requirement for maintenance of adequate and orderly records which shall be sufficient to enable the Commission to monitor the compliance of the licensee with its regulatory obligations and its AML/CFT obligations; and which can be readily retrieved in BVI.
- Note on insurance management firms:
  - The FSC will be requiring insurance management firms to have appropriate procedures for management control of its functions as the nexus between the captive and the FSC, and adhere to quality assurance standards in performing its function as the management of the licensed entity.
  - Insurance managers are likely going to be filling the roles of compliance officers; clear recordkeeping and reporting requirements are critical.

### Prudential rules and off-site analysis
- CP 7 considerations:
  - Question: Was this blank or does it provide a summary of the CP?
  - Recommended action: Consider including test-checks of particular insurers to determine if greater detail for internal (off-site) analysis would be useful.
  - Response: Off-site reviews may require company-specific information triggered by submissions, market intelligence, or thematic trends. Recent themes triggering deeper review include CDOs in the asset list and corporate governance issues such as failure to submit all “change forms”.
- CP 8 performance indicators:
  - Recommended action: Consider promulgating a formalized dynamic set of risk-sensitive performance indicators (indicators only and not inflexible compulsory benchmarks) and make them freely available to insurers, insurance managers, and compliance officers.
  - Response: The Ins. Div. prepared a set of seven performance indicators:
    - (1) Net Loss Ratio;
    - (2) Expense Ratio;
    - (3) Net Earned Premiums /Surplus;
    - (4) Change in Net Written Premiums;
    - (5) Combined Ratio;
    - (6) Operating Profit/Net Earned Premiums; and
    - (7) Operating Ratio.
  - Status: These indicators are currently for internal use only but consideration is being given to making them available to insurers, insurance managers and compliance officers.
- CP 9 derivatives guidance:
  - Finding: Although derivatives are not currently available in the BVI, a market might develop in the future.
  - Recommended action: Issue a guidance note dealing specifically with permissible uses of derivatives and the proper reporting and accounting treatment; restrict initial use to hedging.
  - Response: The Insurance Act and Regulatory Code set out permissible derivatives and requires an insurer to seek permission for any instrument not specified. Applications for a license must include a business plan (including investment strategy) and any significant changes post-licensing must be approved.

### Market conduct
- CP 1 findings and action:
  - Finding: “Neither the nor [words missing after Neither...] the Insurance Act contains precise language governing unfair trade practices, nor is there any statutory scheme proscribing unfair claim settlement practices.”
  - Recommended actions:
    - Establish requirements for direct writing insurers to maintain policyholder complaint logs available to the FSC during on-site inspections.
    - Consider adopting standard insurance contract coverage and unfair trade practice and claim settlement regulations.
  - Response:
    - Colonial Insurance (BVI) is the only group that would be considered a “direct writer”.
    - Under the Regulatory Code a Compliance officer is required to maintain procedures for the monitoring and handling of complaints, and to keep the complaints procedures under review; such procedures are subject to review during an on-site inspection.
    - The Regulatory Code provides that it is the responsibility of the Board and senior management to monitor market conduct activities.
    - S.71 of the IA provides that the licensee is responsible for taking steps to protect its customers and to ensure fair treatment at all times.
    - S.71(2) of the IA lays out the powers of the Commission to address false advertising by a licensee.

### Monitoring, inspection, and sanctions
- CP 13 on-site inspections:
  - Finding: There is no regular program of on-site inspections.
  - Recommended action: Complete preparations of manuals and training for on-site inspections, and implement plan for inspections.
  - Response: An On-site Inspections Coordinator was recruited in January 2007 and now heads up the inspection team consisting of regulators from each Division who conduct the on-site inspections and produce the inspection reports. The procedures manual on inspections is also applicable to the inspection of insurers.
- CP 14 monetary penalties:
  - Finding: While the FSC has broad authority to impose a wide range of penalties; it does not to impose money penalties.
  - Recommended action: Consider amending legislation that would allow levying of money penalties.
  - Response: S. 56 of the (2009 amendment) empowers the Commission to compound an offence by levying on offenders fines, which are then collected and paid into the Commission’s bank account. In addition, the Financial Services (Administrative Penalties) Regulations, 2006 empower the Commission to impose monetary penalties for breaches of the regulatory legislation, which are also paid into the Commission’s bank account.

### IOSCO-related recommendations and updates (Table 17 highlights)
- Principle 2:
  - Action: Consider amending legislation to require the FSC to give reasons for all nonroutine decisions; develop a more detailed conflicts policy for Board members.
  - Response: The FSCA requires the Commission to provide written reasons for its decisions. LSC and EC Guidelines and Operating Procedures revised. Board Code of Conduct reviewed and revised; Amendment approved in March, 2010.
- Principle 3:
  - Action: Increase staff resources for ongoing supervision and enforcement.
  - Response: Investment Business Division currently has a staff complement of 13 involved in ongoing supervision and/or on-site inspections. Dedicated inspection team and enforcement capability established.
- Principle 4:
  - Action: Make detailed licensing and approval processes publicly available; enhance consultation transparency.
  - Response: Guidelines and Operating Procedures published on website. FSC Website makes available legislation, regulations, policy guidelines and forms. Public Register shortened form available. Consultation with industry groups, focus groups, town hall public consultation, and draft legislation circulation practiced.
- Principle 9:
  - Action: Ensure fines under FSCA and SIBA are set at effective deterrent levels.
  - Response: Administrative penalties increased through the 2006 Financial Services (Administrative Penalties) Regulations and amendments in 2007. S.56 of the FSCA repealed and replaced to empower the Commission to impose a fine; SIBA fines are higher than those under the FSCA.
- Principle 10:
  - Action: Increase staff for inspections and enforcement; expedite audit and compliance program.
  - Response: Resources increased. Investment Business Division staff complement of 13, 1/3 participate in on-site inspections. Since 2009 dedicated inspection team of On-site Inspection Coordinator and 4 senior regulators. Dedicated enforcement team in Legal and Enforcement Division. Investment Business Division began on-site inspections in June 2008; by December, 2009, 13 inspections had been completed.
- Principle 11:
  - Action: Broaden legislative language relating to information sharing.
  - Response: The Commission is empowered to provide assistance through S.33C and 33D of the FSCA.
- Principle 16:
  - Action: Assess quality of accounting principles and auditing standards in jurisdictions before approving auditors.
  - Response: Division 6 of the Regulatory Code outlines recognized accounting and auditing standards. Members or controlling persons of auditors must belong to specified professional bodies listed in section 56 (1) of the Code (Institutes of Chartered Accountants of England and Wales, Scotland or Ireland, Association of Certified Chartered Accountants, Canadian Institute of Chartered Accountants and the American Institute of Certified Public Accountants). Licensees must prepare financial statements in accordance with IFRS, UK GAAP, U. S. GAAP, or Canadian GAAP. Commission assesses auditing standards in recognized jurisdictions against RC standards.
- Principle 17:
  - Action: Deal more comprehensively with mutual fund conflicts of interest; require disclosure of relationships among managers, administrators, other functionaries and service providers; require filing of annual audited financial statements; institute regular inspections.
  - Response: Public Funds Code requires disclosure of conflicts of interest; Regulatory Code requires licensees to manage conflicts fairly. SIBA and Mutual Fund Regulations require audited financial statements to be filed within 6 months of financial year end. Since October 2009 funds required to file the Mutual Fund Annual Return with valuation and financial information. Investment Business Division began on-site inspections in June 2008; to date 13 inspections have been completed. Some funds inspected through administrators; most funds and managers are nonresident.
- Principle 18:
  - Action: Impose books and records and asset segregation requirements on all functionaries holding BVI registered public mutual fund assets.
  - Response: SIBA and the Regulatory Code set out requirements for record keeping and identifying/segregating client assets. Draft Mutual Funds Regulations under SIBA require a custodian to be functionally independent of its manager and its administrator.
- Principle 19:
  - Action: Issue prospectus regulations for public mutual funds; require immediate disclosure of material changes; extend statutory liability for misrepresentations to all parties preparing the prospectus.
  - Response: Prospectus requirements are contained in the draft Public Funds Code to be enacted under SIBA. SIBA requires amended prospectus to be registered within 14 days of change and that a copy be provided to each investor. Under the MF Act and SIBA statutory liability is extended to the fund, its directors or other governing body of the fund.
- Principle 20:
  - Action: Enact binding rules on mutual fund asset valuations and related disclosure; prohibit public mutual funds from ceasing redemptions without notification to the FSC.
  - Response: The Schedule to the MFR requires disclosure of who is responsible for valuations, where they will be undertaken, frequency of valuations, circumstances for special valuation, basis for valuation including methodology and procedures, and circumstances in which valuation can be suspended.

### IBC, trust, and company service provider sector (Table 18 highlights)
- OGBS Statement of Best Practice:
  - Action: Ensure continuing and enhanced compliance with current draft of OGBS Statement of Best Practice; monitor Bank & Fiduciary Services Division policies against OGBS Draft Methodology Document.
  - Response: The Commission has fully implemented the OGBS Statement of Best Practice and addressed the recommendations from the 2004 report.
- On-site inspection of CSPs:
  - Finding: More detailed and structured on-site inspection of CSPs needed.
  - Action: Introduce a staff secondment program with the local CSP industry and auditing firms.
  - Response: Commission provided secondment opportunities with overseas regulators in Gibraltar, Jersey, Isle of Man, the Netherlands, and at GAM in Ireland. One member of staff undertook a domestic attachment with BDO Binder (BVI). On-site Inspections Coordinator recruited in January 2007 to head inspection team.
- Industry consultation:
  - Action: Increase contact and consultation with the BVI Association of Registered Agents.
  - Response: FSC established a Fiduciary and Registry Liaison Committee in 2009. The Managing Director holds quarterly roundtable meetings with presidents of industry associations. Regular Meet the Regulator Forums held; presentations made available on the Commission’s website. Senior staff make appearances at CSPs luncheons.
- Transaction testing:
  - Action: Implement transaction testing both as part of on-site inspections and internal audit testing.
  - Response: Transaction testing is now being done through KReview as part of on-site inspection process.
- Immobilization of bearer shares:
  - Action: Amend IBCA and BTCA to effect immobilization.
  - Response: Immobilization effected through amendment to the International Business Companies Act in 2003; Commission began accepting applications for authorized custodians in 2004. Provisions now set out in BVI Business Companies Act Division 5, sections 67 to 77, and Financial Services Commission Act, Part VIIA, sections 50A to 50E. Grandfathering provisions addressed via BVI Business Companies (Amendment of Schedules) Orders in 2006 and 2007; bearer share companies that had not lodged or ceased holding bearer shares on or before 31st December 2009 have had their memoranda amended by operation of law prohibiting issuance or conversion to bearer shares.
- Professional indemnity insurance for CSPs:
  - Action: Include requirement for Professional Indemnity Insurance in licensing regime.
  - Response: Requirement is set out in Section 160(1) of the Regulatory Code.
- Auditor statutory protections:
  - Finding: External auditors do not have statutory protections necessary to report to the competent authority.
  - Action: Amend laws to provide necessary protections.
  - Response: Section 17I (4) of both the Banks and Trust Companies Act and the Company Management Act provides immunity for an auditor.
- Regular compliance and on-site program:
  - Action: Establish regular compliance and on-site program.
  - Response: The KReview on-site inspection process began in 2004. Since 2005, 78 inspections have been carried out by the Banking and Fiduciary Services Division.

### Basel Core Principles recommendations (Table 19 highlights)
- Legal framework for bank supervision (CP 1.3):
  - Action: Place the Development Bank under the full authority of the FSC.
  - Response: The National Bank of the Virgin Islands is now licensed and supervised by the FSC.
- Prudential standards (CP 5–13):
  - Action: Implement prudential standards consistent with international standards to protect the safety and soundness of the system and interests of depositors and creditors.
  - Response:
    - Deficiencies have been addressed.
    - On branches the FSC requires a capital equivalent account maintained at head office consisting of liquid assets; the amount is 12 percent of assets.
    - Plans to implement the standardized approach to Basel II; a timetable has not been fully established.
    - Banks are required to have comprehensive risk management policies and processes.
    - Additional changes under the Regulatory Code will address remaining issues.
- Internal control and audit (CP 13):
  - Action: Implement Corporate Governance Standards and formal requirements for internal audit.
  - Response: Section 34 of the Regulatory Code requires each bank to appoint an internal auditor.
- On-site and off-site supervision (CP 16, 18):
  - Action: Implement on-site supervisory program and changes to off-site supervisory reporting and analysis.
  - Response: FSC has established a full on-site and off-site supervision program.
- Information validation (CP 19):
  - Action: Include verification of regulatory reporting with bank records as part of on-site supervision.
  - Response: Verification is achieved through the on-site inspection regime.
- Off-site supervision (CP 18):
  - Action: Design methodology and add resources for comprehensive analysis and coordinate continuously with home supervisor.
  - Response: A comprehensive system of off-site supervision, supported by an off-site inspection manual, is in place.
- Cooperation with other supervisors (CP 24):
  - Action: Increase interaction with home country supervisors to increase understanding of consolidated entities and coordinate supervision.
  - Response: The FSC participates in a supervisory college for two main banks and is in frequent contact with home regulators for two other banks. The FSC participates in the CGBS, OGBS and ASBA and other international fora.

*Source: _cr10323 - Part IV, Division 2 ss.140 thru*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10323.pdf_