## _cr10324 — Summary Compliance with the Basel Core Principles—Detailed Assessments

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---

### Introduction and methodology
- The banking system in the BVI is small and focused on a limited range of local services; total assets are $2.5 billion.
- Banking services limited to deposit taking and direct lending (mortgages and consumer credit); no payment system; US dollar used; no connection to monetary operations.
- Assessment basis:
  - Self-assessment prepared by the FSC, responses to pre-visit questions, meetings with FSC staff, licensed banks, Bankers Association, legal and accounting professions, and the Financial Investigation Agency (FIA).
  - Assessors: Jose Tuya, Expert; and Michael Deasy, Central Bank of Ireland.

### Institutional and market structure — key facts and metrics
- License classes and permissions:
  - General banking license: permits banking business within and outside the BVI.
  - Restricted Class I and Class II: do not allow taking deposits or making loans to BVI residents except for corporations (difference between Class I and Class II relates to dealing with BVI corporations).
- License counts and composition:
  - Six general banking licenses, one Class I license, and no Class II license.
  - Two other Class I licenses are in the process of surrendering.
  - Of 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 government owned.
  - Branches: Banco Popular de Puerto Rico, First Bank Puerto Rico, First Caribbean International Bank.
  - Subsidiaries: Scotia Bank BVI Limited (Canada), VP Bank (Liechtenstein).
  - Government-owned bank: National Bank of the Virgin Islands Limited (NB).
  - Class I bank: London International Bank and Trust Limited.
  - Other Class I licensees winding down: Rathbone Bank (BVI) and Bank of East Asia (BVI) Limited (Hong Kong).
- Balance sheet and performance (end-December 2009):
  - Total assets for all banks: nearly US$2.5 billion.
  - Total capital: US$402 million.
  - Total pretax/post tax profits: US$59 million.
  - Aggregate balance sheet composition:
    - US$1.5 billion relates to assets/liabilities of three branches.
    - US$0.9 billion to two subsidiaries.
    - US$98 million to National Bank of the Virgin Islands Limited.
  - Aggregate liquid assets: US$927 million (37 percent of US$2.5 billion); almost all placed with head office/parent bank overseas.
  - Aggregate equity to total assets: 16 percent.
  - Supervisory roles:
    - FSC is the ultimate supervisor for one bank representing about 4 percent of banking assets.
    - FSC is primary supervisor for banks representing 36 percent of banking assets.
    - FSC has a collaborative role for supervision of banks representing 60 percent of banking assets.
- Market characteristics:
  - Little or no off-balance sheet activity.
  - No interbank market in the BVI.
  - Five of six general license banks are branches or subsidiaries, with group-based systems and controls.
  - System described as simple in supervisory terms; static activities; declining number of banks; no banks with overseas subsidiaries or branches.

### Preconditions and supervisory capacity
- Legal and accounting regime influenced by international best practice; three of four main auditing firms represented.
- FSC capacity and resources:
  - Appears to have sufficient resources to oversee the current limited range of banking operations.
  - Recommendation: keep resources (numbers and expertise) under constant review due to increased workload from the Regulatory Code and growing complexity.
  - If jurisdiction decides to expand range/size of banking, additional resources will be needed.

### Main findings by Basel Core Principle clusters (summary)
- CP1 (Objectives, independence, powers, transparency, cooperation)
  - FSC has sufficient autonomy, powers, and resources with clear responsibilities and objectives.
  - Managing Director’s appointment: term is not fixed and reasons for dismissal are not published — recommended re-examination to meet Basel Core Principles and international best practice.
  - FSC should explicitly provide for payment of costs incurred by staff defending actions/omissions performed in good faith.
  - FSC should keep staff levels and training needs under constant review.
- CP2–CP5 (Licensing and structure criteria)
  - Criteria adequate; improvement over 2004 assessment. Regulatory Code, 2009 addressed prior deficiency on major acquisitions.
- CP6–CP18 (Prudential regulation and requirements)
  - Capital adequacy rules meet the 1988 Basel Accord standards; RC revisions will add elements of the 1996 Amendment.
  - FSC working with Caribbean Group of Banking Supervisors (CGBS) to implement Basel II (region will implement the standardized approach). Region had planned implementation by 2011; date may be revised at next CGBS meeting in May.
  - Foreign-owned branches/subsidiaries with general license are 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 RC revisions will incorporate BCBS 2006 principles on provisioning.
  - FSC does not generally impose specific limits on investments but reviews bank-imposed limits; for some limits (e.g., open FX positions, interest rate repricing gaps) FSC requires banks to establish and have Board approve and review annually.
- CP19–CP21 (Methods of ongoing supervision)
  - Well developed ongoing supervision system; full on- and offsite inspection program and skilled staff.
  - FSC demonstrates readiness and willingness to enforce against non-compliance.
- CP22 (Accounting and disclosure)
  - Recommendation: shorten the six-month time frame for submission to FSC and publication of annual audited accounts to three and, at most, four months.
- CP23 (Corrective and remedial powers)
  - FSC has broad enforcement powers; RC (effective March 31, 2010) is in transition period without specified end-date — recommendation to establish a definite transition period with a clear end-date when enforcement becomes mandatory.
- CP24–CP25 (Consolidated and cross-border supervision)
  - FSC has broad powers for consolidated supervision and information exchange; however, none of four locally incorporated banks operate subsidiaries or have cross-border operations.
  - FSC participates in supervisory colleges hosted by Canadian supervisors and visits Puerto Rico.

### Selected detailed metrics and compliance gradings (selected)
- Aggregate banking assets: US$2.5 billion.
- Total capital: US$402 million.
- Total pretax/post tax profits: US$59 million.
- Breakdown of US$2.5 billion:
  - US$1.5 billion (three branches);
  - US$0.9 billion (two subsidiaries);
  - US$98 million (National Bank of the Virgin Islands Limited).
- Liquid assets: US$927 million (37 percent of US$2.5 billion).
- Aggregate equity to total assets: 16 percent.
- License counts: six general banking licenses; one Class I license; no Class II license.
- Selected compliance gradings:
  - CP1 (Objectives, independence, powers, transparency, cooperation): LC (Largely compliant).
    - 1.1 Responsibilities and objectives: C
    - 1.2 Independence, accountability and transparency: LC (absence of fixed term and lack of transparency on removal)
    - 1.5 Legal protection: LC (suggest explicit payment provision)
  - CP7 Risk management process: LC
  - CP9 Problem assets, provisions, and reserves: LC
  - CP13 Market risks: LC
  - CP21 Supervisory reporting: C
  - CP24 Consolidated supervision: N/A

### Recommended action plan (summary)
- CP7, CP9, CP13:
  - Complete process to amend 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 FSC’s increasing workload and increasing complexity of banking supervision.
- CP1 — Appointment of Managing Director:
  - Fix term of appointment and introduce stated reasons for his dismissal.
- CP1 — Legal protection for staff:
  - Ensure that staff have their costs paid in the defense of their actions and/or omissions in carrying out supervisory functions in good faith.
- CP22 — Accounting and disclosure:
  - Seek to shorten the six-month time frame for submission to the FSC and for the publication of annual audited statements by regulated firms to three or at most four months.

### FSC response to the assessment
- The FSC welcomes the IMF’s assessment of its compliance against the BCP.
- The Commission commends the assessors “for their efforts to understand the BVI regulatory framework” and thanks them “for their skill and diligence in conducting the exercise.”
- The review “validates the hard work and progress made by the Commission in strengthening the entire regulatory framework since the last assessment in 2004.”
- The Commission is “committed to fully considering the recommendations made and acting accordingly.”

### Detailed Assessment — Principle 1 (Objectives, autonomy, powers, and resources) — overview and selected points
- Overall assessment: Largely compliant.
- Exceptions noted: Principle 1 (2) (terms of appointment of the Managing Director) and Principle 1 (5) (no explicit legal provision for reimbursement to FSC staff for costs incurred defending actions/omissions performed in good faith).
- Principle 1(1) — Responsibilities and objectives:
  - BTCA, FSCA, and Regulatory Code 2009 provide effective banking supervision framework; FSC publishes information and statistics.
  - Assessment: Compliant.
- Principle 1(2) — Independence, accountability and transparency:
  - FSC autonomous, overseen by Board of Commissioners appointed by the Cabinet.
  - Managing Director: no statutory fixed term; removable by the Board pursuant to unpublished terms and conditions; Board shall provide in writing the reason for removal (Section 10(1A)).
  - Funding: FSC retains between 7 and 15 percent of the total annual revenue that it collects from regulated entities; the actual percentage is negotiated annually.
  - Current number of banks: 7.
  - Assessment: Largely compliant.
  - Recommendation: Managing Director should be subject to same terms and conditions as commissioners; keep level and training needs of staff under constant review.
- Principle 1(5) — Legal protection for supervisors:
  - Section 50 of the FSCA provides immunity for acts done in good faith, but no statutory protection for payment of costs of defending staff; suggested explicit provision for payment of such costs.

### Enforcement and penalties (selected)
- Section 14: any person who contravenes the transfer provisions commits an offence and is liable on summary conviction to a fine not exceeding $10,000.
- Section 17: a licensee that contravenes record-keeping and financial statement submission provisions commits an offence and is liable on summary conviction to a fine not exceeding $25,000 or to imprisonment for a term not exceeding one year or to both; separate provision of liability on summary conviction to a fine not exceeding $10,000 for failure to submit accounts within six months.
- Section 37 of the FSCA: Commission can take enforcement action for contraventions, including directives requiring disposal of a significant interest illegally acquired; powers include revocation/suspension of license, appointment of examiner, appointment of a “qualified person,” issue directives, and apply to the court for a liquidator.

### Corporate governance, AML/CFT, supervisory approach and reporting (selected)
- Corporate governance:
  - Section 30 of the Regulatory Code sets out corporate governance requirements; FSC can remove a board member if no longer qualified.
  - Assessment: Compliant.
- AML/CFT:
  - CFATF Mutual Evaluation Report adopted November 2008; BVI legal framework comprehensive though insider dealing and market manipulation not specifically criminalized.
  - FSC is the competent authority monitoring AML/CFT compliance by financial institutions.
  - Under the Proceeds of Criminal Conduct Act, 1997 the FSC must report suspicious transactions to the FIA; in 2009, 11 reports were made: 9 companies/trusts, 1 insurance, 1 investment firms, and none for banks.
  - Assessment: Compliant.
- Supervisory approach and reporting:
  - Seven banks; FSC meets each bank at six-monthly intervals (and more frequently if triggers arise).
  - Quarterly returns include profit and loss, balance sheet, largest loans and deposits, solvency and liquidity calculations, nonperforming loans, and off-balance sheet items.
  - On-site inspections on a two-yearly cycle using a detailed inspection manual.
  - Banking supervisory team: a director of Banking, a senior regulator, and three regulators for seven banks; inspection unit of four people responsible for inspection of all entities supervised by FSC.
  - Assessment: Compliant.
  - Suggestion: reduce six-month deadline for audited accounts submission/publication to three or four months.

*Source: 1. Summary Compliance with the Basel Core Principles—Detailed Assessments*

### 1. Summary Compliance with the Basel Core Principles—Detailed Assessments ...............9

### 1. Summary Compliance with the Basel Core Principles—Detailed Assessments ...............9

### Introduction and methodology
- The banking system in the BVI is small and focused on a limited range of local services; total assets are $2.5 billion.
- Banking services are limited to deposit taking and direct lending (mortgages and consumer credit). There is no payment system; US dollar is used and there is no connection to monetary operations.
- System composition:
  - Dominated by branches and subsidiaries of foreign banks (mostly Canadian and Puerto Rican).
  - One small local bank, government owned.
- Legal/institutional framework:
  - Principal enactments: Banks and Trust Companies Act, 1990 (as amended); Financial Services Commission Act, 2001 (as amended); Regulatory Code, 2009 (full statutory backing).
  - Guidance notes issued periodically (e.g., on licensing policy).
- Assessment basis:
  - Self-assessment prepared by the FSC, responses to pre-visit questions, meetings with FSC staff, licensed banks, Bankers Association, legal and accounting professions, and the Financial Investigation Agency (FIA).
  - Assessors: Jose Tuya, Expert; and Michael Deasy, Central Bank of Ireland.

### Institutional and market structure — key facts and metrics
- Banking licenses classes: general banking license; restricted Class I banking license; restricted Class II banking license.
  - General license permits banking business within and outside the BVI.
  - Restricted Class I and Class II do not allow taking deposits or making loans to BVI residents except for corporations (difference between Class I and Class II relates to dealing with BVI corporations).
- License counts and composition:
  - Six general banking licenses, one Class I license, and no Class II license.
  - Two other Class I licenses are in the process of surrendering.
  - Of 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 government owned.
  - Branches: Banco Popular de Puerto Rico, First Bank Puerto Rico, First Caribbean International Bank.
  - Subsidiaries: Scotia Bank BVI Limited (Canada), VP Bank (Liechtenstein).
  - Government-owned bank: National Bank of the Virgin Islands Limited (NB).
  - Class I bank: London International Bank and Trust Limited.
  - Other Class I licensees winding down: Rathbone Bank (BVI) and Bank of East Asia (BVI) Limited (Hong Kong).
- Balance sheet and performance:
  - At end-December 2009, total assets for all banks amounted to nearly US$2.5 billion.
  - Total capital amounted to US$402 million.
  - Total pretax/post tax profits amounted to US$59 million.
  - Aggregate balance sheet: US$2.5 billion; of which US$1.5 billion relates to assets/liabilities of three branches, US$0.9 billion to two subsidiaries, and US$98 million to National Bank of the Virgin Islands Limited.
  - FSC is the ultimate supervisor for one bank representing about 4 percent of banking assets; primary supervisor for banks representing 36 percent of banking assets; collaborative role for supervision of banks representing 60 percent of banking assets.
  - Aggregate equity to total assets is 16 percent.
  - Aggregate liquid assets: US$927 million (37 percent of US$2.5 billion); almost all placed with head office/parent bank overseas.
- Market characteristics:
  - Little or no off-balance sheet activity.
  - No interbank market in the BVI.
  - Five of six general license banks are branches or subsidiaries, with group-based systems and controls.
  - System described as simple in supervisory terms; static activities; declining number of banks; no banks with overseas subsidiaries or branches (within BVI banks).

### Preconditions and supervisory capacity
- Preconditions for effective supervision present: legal and accounting regime influenced by international best practice; three of four main auditing firms represented.
- FSC capacity and resources:
  - Appears to have sufficient resources to oversee the current limited range of banking operations.
  - Recommendation to keep resources (numbers and expertise) under constant review due to increased workload from the Regulatory Code and growing complexity.
  - If jurisdiction decides to expand range/size of banking, additional resources will be needed.

### Main findings by Basel Core Principle clusters (summarized)
- Objectives, independence, powers, transparency, cooperation (CP1)
  - FSC has sufficient autonomy, powers, and resources with clear responsibilities and objectives.
  - The Managing Director’s appointment terms: term is not fixed and reasons for dismissal are not stated — recommended re-examination to meet Basel Core Principles and international best practice.
  - FSC should explicitly provide for payment of costs incurred by staff defending actions/omissions performed in good faith.
  - FSC should keep staff levels and training needs under constant review.
- Licensing and structure criteria (CP 2 to 5)
  - Criteria adequate; improvement over 2004 assessment. Regulatory Code, 2009 addressed prior deficiency on major acquisitions.
- Prudential regulation and requirements (CP 6 to 18)
  - Capital adequacy rules meet the 1988 Basel Accord standards; RC revisions will add elements of the 1996 Amendment.
  - FSC working with Caribbean Group of Banking Supervisors (CGBS) to implement Basel II (region will implement the standardized approach). Region had planned implementation by 2011; date may be revised at next CGBS meeting in May.
  - Foreign-owned branches/subsidiaries with general license are 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 RC revisions will incorporate BCBS 2006 principles on provisioning.
  - FSC does not generally impose specific limits on investments but reviews bank-imposed limits; for some limits (e.g., open FX positions, interest rate repricing gaps) FSC requires banks to establish and have Board approve and review annually; FSC opines on adequacy during on-site/off-site reviews.
- Methods of ongoing supervision (CP 19 to 21)
  - Well developed on-going supervision system; full on- and offsite inspection program and skilled staff.
  - FSC demonstrates readiness and willingness to enforce against non-compliance.
- Accounting and disclosure (CP 22)
  - Recommendation to shorten the six-month time frame for submission to FSC and publication of annual audited accounts to three and, at most, four months (six-month timeframe tied to auditors’ workload and common December 31 year-end).
- Corrective and remedial powers (CP 23)
  - FSC has broad enforcement powers; RC (effective March 31, 2010) is in transition period without specified end-date — recommendation to establish a definite transition period with a clear end-date when enforcement becomes mandatory.
- Consolidated and cross-border supervision (CP 24 and 25)
  - FSC has broad powers for consolidated supervision and information exchange; however, none of four locally incorporated banks operate subsidiaries or have cross-border operations.
  - FSC participates in supervisory colleges hosted by Canadian supervisors and visits Puerto Rico (home to two local branches).

### Selected detailed metrics and compliance gradings
- Aggregate banking assets: US$2.5 billion.
- Total capital: US$402 million.
- Total pretax/post tax profits: US$59 million.
- Breakdown of US$2.5 billion: US$1.5 billion (three branches); US$0.9 billion (two subsidiaries); US$98 million (National Bank of the Virgin Islands Limited).
- Liquid assets: US$927 million (37 percent of US$2.5 billion).
- Aggregate equity to total assets: 16 percent.
- License counts: six general banking licenses; one Class I license; no Class II license.
- Table 1 summary gradings highlights (selected):
  - Core Principle 1 (Objectives, independence, powers, transparency, cooperation): LC (Largely compliant).
    - 1.1 Responsibilities and objectives: C
    - 1.2 Independence, accountability and transparency: LC (absence of fixed term and lack of transparency on removal)
    - 1.5 Legal protection: LC (suggest explicit payment provision)
  - CP7 Risk management process: LC (rules need expansion on market risks and provisioning)
  - CP9 Problem assets, provisions, and reserves: LC (provisioning to be expanded per BCBS principles)
  - CP13 Market risks: LC (guidance being developed referencing 1996 amendment)
  - CP21 Supervisory reporting: C (suggestion to reduce six-month deadline to three or four months)
  - CP24 Consolidated supervision: N/A (banks operate as solo units without subsidiaries or cross-border activities)
  - Aggregate compliance categories listed in Table 1 (exact counts not reproduced here).

### Recommended action plan (summary of Table 2)
- CP 7, CP 9, CP 13:
  - Complete process to amend 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 FSC’s increasing workload and increasing complexity of banking supervision.
- CP1 — Appointment of Managing Director:
  - Fix term of appointment and introduce stated reasons for his dismissal.
- CP1 — Legal protection for staff:
  - Ensure that staff have their costs paid in the defense of their actions and/or omissions in carrying out supervisory functions in good faith.
- CP22 — Accounting and disclosure:
  - Seek to shorten the six-month time frame for submission to the FSC and for the publication of annual audited statements by regulated firms to three or at most four months.

*Source: 1. Summary Compliance with the Basel Core Principles—Detailed Assessments*

### 28.      The FSC welcomes the IMF’s assessment of its compliance against the BCP. The

### _cr10324 - 28.      The FSC welcomes the IMF’s assessment of its compliance against the BCP. The

### FSC response to the assessment
- The FSC welcomes the IMF’s assessment of its compliance against the BCP.
- The Commission commends the assessors “for their efforts to understand the BVI regulatory framework” and thanks them “for their skill and diligence in conducting the exercise.”
- The review “validates the hard work and progress made by the Commission in strengthening the entire regulatory framework since the last assessment in 2004.”
- The Commission is “committed to fully considering the recommendations made and acting accordingly.”

### Detailed Assessment — Overview (Principle 1)
- Principle title: Objectives, autonomy, powers, and resources.
- General description: The system of banking supervision in the BVI provides the FSC with clear responsibilities and objectives.
- Assessment of Principle 1 (overall): Largely compliant.
- Exceptions noted: Principle 1 (2) and Principle 1 (5).
  - Principle 1 (2): Terms of appointment of the Managing Director.
  - Principle 1 (5): No explicit legal provision for reimbursement to FSC staff for costs incurred defending actions/omissions performed in good faith.

### Principle 1(1) — Responsibilities and objectives
- Description highlights:
  - Banks first authorized under the Banks and Trust Companies Act, 1990 (BTCA).
  - Financial Services Commission Act, 2001 (FSCA) came into effect on 1 January 2002, establishing the Financial Services Commission (FSC).
  - Section 41 of the FSCA: FSC issued the Regulatory Code 2009.
  - The Code has full statutory backing and, together with the Acts, establishes an effective banking supervision system.
  - The FSC publishes information on licensees, statistics and its annual report on compliance-related activities on its website.
- Assessment: Compliant.
- Comment: The legislative framework provides for an effective banking system with clear responsibilities and objectives.

### Principle 1(2) — Independence, accountability and transparency
- Description highlights:
  - FSC constituted as an autonomous body overseen by a Board of Commissioners appointed by the Cabinet.
  - Board composition: no less than four and no more than six commissioners plus the Managing Director (ex officio); one commissioner must be from outside the BVI with a financial services background.
  - Section 8.5 of the FSCA: “A Commissioner shall not act as a delegate of any government, commercial, financial or other interest... and shall not accept directions from any person or authority in respect of his duties.”
  - FSC publishes an annual report to the House of Assembly and prepares annual strategic work plans and objectives; confers annually with the Cabinet on performance.
  - Managing Director: no statutory fixed term; removable by the Board “pursuant to the terms and conditions of his appointment (which are not published)” and the Board shall provide in writing the reason for removal (Section 10(1A)).
  - Funding: Under Section 20 of the FSCA, the FSC retains between 7 and 15 percent of the total annual revenue that it collects from regulated entities; the actual percentage is negotiated annually.
  - Current number of banks: 7.
  - Recommendation: FSC should keep its level of resources and the training needs of its staff under constant review.
- Assessment: Largely compliant.
- Comments and recommendations:
  - Absence in legislation of a fixed term for the Managing Director and lack of transparency on reasons for removal “could give rise to his dismissal for reasons that might not be in the best interests of banking supervision.”
  - Recommendation: “the Managing Director should be subject to the same terms and conditions as apply to commissioners as a whole in this respect.”
  - Recommendation repeated: Keep level and training needs of staff under constant review given increased workload and complexity.

### Principle 1(3) — Legal framework (authorization and ongoing supervision)
- Description highlights:
  - BTCA, AML/CFT regime, FSCA and the Regulatory Code provide a detailed framework.
  - Section 14 of the FSCA: establishes a Licensing and Supervisory Committee of senior executives to receive, review and determine applications and supervise licensees.
  - Part 2, Division 1 of the Regulatory Code: detailed requirements for granting a license.
  - FSC issued banking licensing guidelines: primarily allow branches/subsidiaries of banks with “a well established and proven track record” and effective consolidated supervision.
  - Section 32 of the FSCA: power to require any information reasonably required to discharge functions and ensure compliance.
  - Section 20 of the BTCA: specific powers to take remedial action, including license revocation.
  - Regulatory Code contains requirements on capital adequacy, risk management, large exposures, compliance and auditing.
  - FSC policy: consult with industry on legislative changes; focus groups used; Regulatory Code consulted recently.
- Assessment: Compliant.
- Comment: A suitable legal framework for banking supervision exists.

### Principle 1(4) — Legal powers to address compliance and safety/soundness
- Description highlights:
  - FSCA and Regulatory Code provide sufficient powers.
  - Section 37 of the FSCA: permits enforcement action where a regulated person contravenes financial services legislation or conducts business “in a manner detrimental to the public interest.”
  - Section 35 of the FSCA: grants comprehensive access powers for assessing a licensee’s internal procedures and compliance.
  - Section 37 enforcement actions include: revocation or suspension of license; appointment of an examiner; appointment of a “qualified person” to advise and report; issue directives to the bank; apply to the court for a liquidator.
- Assessment: Compliant.
- Comment: Legislation provides extensive powers to address compliance, laws, and safety and soundness concerns.

### Principle 1(5) — Legal protection for supervisors
- Description highlights:
  - Section 50 of the FSCA: “No action shall be brought against the Commission or any Commissioner... or an employee or agent of the Commission for anything done, in good faith, in the exercise of powers or performance of duties conferred or imposed by this Act or any financial services legislation.”
  - No statutory protection for FSC staff against costs of defending their actions and/or omissions in performing duties in good faith.
- Assessment: Largely compliant.
- Comment and suggestion: While FSC may in fact pay such costs, “it is suggested that the payment of such costs be explicitly provided for.”

### Principle 1(6) — Cooperation and information sharing
- Description highlights:
  - Section 33 of the FSCA: allows provision of assistance to foreign supervisors upon written request; requires information provided to be used only for regulatory function and not shared without FSC written consent.
  - Section 4 of the FSCA: provides for maintaining contact and relationships with foreign regulatory authorities and entering MOUs with regulatory and law enforcement agencies.
  - FSC had MOUs with 14 countries and two organizations.
- Assessment: Compliant.
- Comment: FSC has clear authority to share information and require confidentiality unless it agrees otherwise.

### Principle 2 — Permissible activities and use of the word “bank”
- Description highlights:
  - “Bank” not defined; BTCA defines “banking business” as accepting deposits withdrawable on demand or after fixed period/notice and employing in making or giving loans, advances, etc.
  - Section 16 of the BTCA: limits use of the word “bank”, “savings”, “savings and loans” and related terms; prohibits solicitation or receipt of deposits from the public without a license.
  - Draft amendment “Banks and Trust Companies (Amendment) Act, 2010” before the Assembly proposes definition: “a person that is licensed to carry on banking business.” Expected adoption by mid 2010.
- Assessment: Compliant.
- Comment: Only banks may carry on banking business and use of the term “bank” and its derivatives is prohibited.

### Principle 3 — Licensing criteria
- Description highlights:
  - Part II of the BTCA sets general licensing requirements; elaborated in Part II, Division I of the Regulatory Code.
  - Three license types: general banking license; restricted Class I banking license; restricted Class II banking license.
    - General banking license: permits conduct of banking business within and outside the BVI.
    - Restricted Class I and restricted Class II: do not allow taking deposits from any BVI residents or making loans to BVI residents except in case of corporations. Difference between Class I and Class II relates to manner of dealing with BVI corporations.
    - Current holders: six general, one restricted Class I, and no restricted Class II license holders.
  - Licensing preconditions (as stated in Part II BTCA):
    - Applicant satisfies requirements of the Act and Regulatory Codes and will be in compliance upon license issuance.
    - Applicant satisfies the Commission’s fit and proper criteria.
    - Organization, management and financial resources of the applicant are adequate for the business.
    - Issuing the license is not against the public interest.
  - Regulatory Code requirements: detailed business plan; suitability of directors, senior management, significant owners and certain functionaries; financial resources; management and operation structure; compliance with regulatory and AML/CFT obligations.
  - A banking license will not be granted unless direct confirmation received from supervisory authority in jurisdiction where applicant or parent is incorporated.
  - Section 4 of the BTCA: broad power to refuse to grant a license which is not subject to appeal.
  - FSC November 1993 guidelines: licenses issued only to branches/subsidiaries with well established track record and subject to effective consolidated supervision.
  - Section 16 of the FSCA: FSC responsibility “to supervise licensee to ensure that they continue to satisfy the fit and proper criteria for the conduct of financial services.”
  - Section 76 of the Regulatory Code: minimum tier 1 capital requirements:
    - General banking license: minimum tier 1 capital of US$ 2 million.
    - Restricted Class 1 or Class 11 banking license: minimum capital of US$ 1 million.
- Assessment: Compliant.
- Comment: Legislation provides comprehensive powers regarding licensing of banks.

### Principle 4 — Transfer of significant ownership
- Description highlights:
  - Section 14 of the BTCA: prohibits person owning or holding a significant interest in a bank from selling, transferring, charging or otherwise disposing of interest unless prior written approval of the Commission is obtained.
  - “Significant interest” means a holding that controls five percent or more of the voting rights of the bank.
  - Proposed amendment “Banks and Trust Companies (Amendment) Act, 2010” (expected enactment by midyear 2010) would replace 5 percent with 10 percent.
  - FSC power to reject change in ownership of a significant interest if not satisfied that after acquisition or disposal the bank will continue to meet original licensing criteria (Section 4 of the BTCA) and/or any acquiring person satisfies the FSC’s Fit and Proper criteria (Section 14 of the BTCA).

*Source: IMF staff report content provided in the source PDF.*

### Section 14 provides that any person who contravenes the above provisions commits

### _cr10324 - Section 14 provides that any person who contravenes the above provisions commits

### Enforcement and penalties
- Section 14: any person who contravenes the above provisions commits an offence and is liable on summary conviction to a fine not exceeding $10,000.
- Section 37 of the FSCA: the Commission can take enforcement action against any contravention of financial services legislation, which could include issuing a directive requiring the disposal of a significant interest illegally acquired.
- Assessment: Compliant.
- Comment: The FSC has sufficient powers to accept or reject, as appropriate, any proposal for a transfer of significant ownership of a bank.

### Principle 5. Major acquisitions
- Requirement: Under Section 122 of the Regulatory Code (RC), a bank must obtain the prior approval of the FSC to make any investment/acquisition of 10 percent or more in value of the bank’s capital base.
- Holding limits:
  - shares or interests in a company that is not a subsidiary: 25 percent of the capital base;
  - immovable property: 25 percent;
  - equipment and other personal property: 5 percent.
- Approval criteria: The Commission will not grant approval unless satisfied that:
  - the investment or acquisition does not expose the bank to undue risks or hinder effective supervision; and
  - the capital, and financial and other resources of the bank are adequate to enable it to support the investment or acquisition.
- Decision process: approvals for investments/acquisitions exceeding the 10 percent threshold are assessed on a case-by-case basis considering all relevant factors.
- Assessment: Compliant.
- Comment: Previously rated noncompliant (February 2004); new requirements introduced in the 2009 Regulatory Code effective as and from March 31, 2010. As at March 31, 2010, no bank was in breach of the requirement.

### Principle 6. Capital adequacy
- Regulatory minimums:
  - minimum risk-weighted ratio: 12 percent;
  - minimum ratio for a higher risk-profile bank: 14 percent.
- Legal basis:
  - Section 12 of the BTCA: banks must be adequately capitalized.
  - RC section 76: requirements and capital definition in compliance with Basel requirements (1988).
  - Section 37 (1): FSC broad enforcement powers.
- Branches: capital equivalent account maintained at head office consisting of liquid assets; amount is 12 percent of assets.
- Basel II: plans to implement the standardized approach; timetable not fully established.
- Assessment: Compliant.
- Comment: Rated materially noncompliant in 2004; deficiencies addressed.

### Principle 7. Risk management process
- RC Section 26: sets out requirements for risk management framework covering country and transfer risk, market risk, liquidity risk, credit and counterparty risk and operational risk.
- FSC powers: Section 37 of the FSCA allows enforcement if requirements not met; onsite supervisory process monitors compliance.
- Transition status: RC implemented March 31, 2010 but considered in transition; FSC reviews compliance and can issue directives if progress inadequate. RC revisions to incorporate market risk (paralleling the Basel 1996 amendment) and BCBS 2006 credit risk principles to be completed in 2010.
- Assessment: Largely Compliant.
- Comment: Largely Compliant reflects pending amendments for market risk and need to expand loan loss provisioning to include provisions for expected losses and general reserves. Section 107 requires provisioning but detailed guidance on provisioning for expected losses not yet issued; amendments expected in 2010 or early 2011.

### Principle 8. Credit risk
- Supervisory approach: onsite inspections confirm compliance with bank Board-established credit risk management guidelines.
- RC Section 104 requires documenting borrower creditworthiness, purpose of credit, source of repayment; loan classification; credit limits, group/related party limits, restructuring guidelines; connected lending and arms-length transactions.
- Information powers: Section 32 of the FSCA requires banks to provide the FSC all information required and grants enforcement powers for failure to provide information.
- Assessment: Compliant.
- Comment: Previously materially noncompliant in 2004; current practice includes FSC credit reviews, asset quality monitoring, and review of loan loss reserves and provisioning.

### Principle 9. Problem assets, provisions and reserves
- RC Section 107 (1): board and senior management must ensure appropriate credit risk management and controls to consistently determine appropriate provisions for loan-losses in accordance with bank strategies and international accounting standards; off-balance sheet credit risk and collateral are reflected; provisions must be adequate to absorb estimated losses.
- Enforcement: Sections 37 and 40 of the FSCA provide powers to require adequate provisioning and enforcement action.
- Practice: Onsite inspections manual guides portfolio and reserve reviews. Provisioning is done on the basis of IAS 39; no general provisioning or provisioning for expected losses currently.
- RC amendments: to incorporate loan provisioning principles from the June 2006 BCBS paper “Sound Credit and Risk Assessment and Valuation for Loans”; amendments expected in 2010.
- Assessment: Largely Compliant.
- Comment: FSC has not implemented provisioning to fully cover expected losses or to establish general reserves; amendments expected in 2010.

### Principle 10. Large exposure limits
- Limits (RC):
  - aggregate exposure limit to counterparty (aggregating related parties): 25 percent of capital;
  - aggregate limit for large credits: 800 percent.
- Prior approval: FSC approval required to exceed those limits.
- Definitions: Section 94 defines group of connected parties; Section 99 defines concentrations by region/country, source of repayment, industry; Section 95 defines exposure including all claims, transactions and off-balance sheet items.
- Supervisory verification: FSC verifies compliance during onsite inspections and monitors concentrations through offsite reviews of bank filings.
- Assessment: Compliant.
- Comment: Regulations and supervisory requirements require systems and policies to identify and manage concentrations.

### Principle 11. Exposures to related parties
- Definitions and requirements:
  - Section 102 defines connected parties.
  - Section 104(f): connected lending must be on an arms-length basis; approval by senior management or the board if exceeding certain internal levels.
  - Section 104: mandates exclusion of persons seeking credit from approval process; senior management and Board approval as appropriate.
- Limits and reporting: large exposure limits apply to connected lending; FSC can set lower limits or require deduction from capital when determining capital adequacy. Section 105(b)(1) requires banks’ systems to provide reports on connected lending; banks report connected party lending to the FSC regularly.
- Assessment: Compliant.
- Comment: FSC has regulatory authority and framework to supervise connected lending.

### Principle 12. Country and transfer risks
- RC Section 108: covers country and transfer risk; Section 108(2)(a) requires banks to set country risk limits.
- Board oversight: country risk policies must be approved and reviewed annually.
- BVI banks’ exposure: limited to home country of subsidiaries/branches (Puerto Rico, Canada, Liechtenstein) as a result of head office transactions. NB does not have cross-border exposure.
- Supervisory practice: FSC monitors compliance during onsite inspections and communicates with home country supervisors.
- Assessment: Compliant.
- Comment: Regulatory and supervisory oversight adequately meet the CP.

### Principle 13. Market risk
- Status: BVI has not implemented the 1996 Basel Accord market risk amendment due to low level of market risk as measured by the amendment.
- RC and supervision: FSC including implementation of the amendment in its 2010 additions to the RC; current supervision and RC requirements fully address market risk via onsite inspections and offsite monitoring based on quarterly prudential filings.
- Typical exposures: limited to open foreign exchange positions and interest rate risk; no trading accounts; banking in the BVI is traditional deposit-taking and mortgage and commercial lending. Most banks are subsidiaries or branches subject to consolidated home-country supervision.
- Assessment: Largely Compliant.
- Comment: Given NB’s potential expansion and prior losses from MBS investments, the FSC should codify capital-specific market risk guidance related to trading.

### Principle 14. Liquidity risk
- RC requirements:
  - Section 109: banks must establish liquidity management strategies and policies covering composition of assets and liabilities (including off-balance sheet), cross-currency liquidity, asset liquidity and market access.
  - Section 110: board review and approval of policies and oversight of liquidity management.
- Reporting and testing: banks must file liquidity reports with the FSC; onsite inspections review internal reports, staff qualifications, long-term liquidity planning; stress testing required at a minimum for economic or industry slowdown, market risk events and liquidity conditions.
- Assessment: Compliant.
- Comment: RC provides detailed guidance and FSC reviews liquidity risk management during onsite inspections.

### Principle 15. Operational risk
- RC requirements:
  - Section 118(1): banks must establish strategies and policies for monitoring and controlling operational risk appropriate to size and complexity; board must approve and review annually.
  - Section 119(1): management structure to implement operational risk policies.
  - Section 27: business continuity plans addressing interruptions to management information systems and monitoring of AML/CFT risk.
  - Section 119(3): banks must file operational risk management reports with FSC reflecting significant changes in operational risk.
  - Sections 51 and 52: outsourcing policy requirements.
- Supervisory practice: FSC reviews business continuity plans and operational risk during onsite inspections.
- Assessment: Compliant.
- Comment: Regulatory framework and supervisory processes meet the CP requirements.

### Principle 16. Interest rate risk in the banking book
- RC requirements:
  - Section 116: banks must establish risk management strategies and policies for interest rate risk.
  - Section 115: policies must be approved and reviewed by the board; guidance on issues to be addressed.
  - Policies must establish IRR limits, contingency planning, stress testing and Board reporting.
- Supervisory practice: FSC reviews compliance during onsite inspections and tracks interest rate risk through offsite monitoring.
- Assessment: Compliant.
- Comment: Framework and supervisory monitoring meet the CP.

### Principle 17. Internal control and audit
- Structure and requirements:
  - Most banks are subsidiaries or branches of international banks and benefit from parent/head office internal audit and control systems; local offices subject to external audits.
  - Section 30: banks must put in place a strong internal control system.
  - Section 29(2): detailed listing of essential internal control items; Sections 29(2)(g) and (h) require regular risk assessment and adequate losses/provisions for on and off-balance sheet assets.
  - Sections 34 and 35: requirements for compliance function and internal audit; Section 34 requires appointment of one or more internal auditors; Section 35 sets out requirements for adequate internal audit function.
  - Sections 37 and 40 of the FSCA: FSC power to take enforcement action for inadequate internal control and audit functions.
- Supervisory practice: FSC verifies compliance with internal audit and internal control requirements during onsite inspections.
- Assessment: (assessment statement provided in source through description of powers and procedures). 

*Source: _cr10324 - Section 14 provides that any person who contravenes the above provisions commits*

### Section 30 of the Regulatory Code sets out corporate governance requirements. The

### _cr10324 - Section 30 of the Regulatory Code sets out corporate governance requirements. The

### Corporate governance and board fitness (Section 30)
- Section 30 of the Regulatory Code sets out corporate governance requirements.
- The FSC has the ability to remove a member of the board if he or she is no longer qualifies.
- Assessment: Compliant
- Comments: The framework of regulations and supervisory oversight in addition to controls of the parent provide the elements to achieve compliance with this CP.

### Principle 18 — Abuse of financial services (AML/CFT)
- Description: CFATF inspection in the BVI carried out in February 2008; Mutual Evaluation Report adopted November 2008.
- Key findings from the CFATF report:
  - The BVI’s legal framework for combating money laundering and terrorism financing was comprehensive; money laundering offences applicable to all indictable offences, but insider dealing and market manipulation were not specifically criminalized.
  - The FSC was the competent authority that monitors AML/CFT compliance by financial institutions.
  - Customer-due-diligence measures include customer identification, beneficial ownership requirements, ongoing due diligence, measures for politically exposed persons and corresponding banking.
  - Record-keeping requirements are extensive and generally observed; financial institutions required to maintain records on activities relating to complex or unusually large or unusual patterns of transactions, which do not have any apparent economic or visible lawful.
  - While most competent authorities have adequate resources, the CFATF noted the FSC had quantitatively inadequate resources.
- Present BCP assessment basis: CFATF assessment and discussions with FSC and FIA staff.
- FSC response: CFATF’s reference to inadequate levels of staff relates to trust companies rather than banks. Banks inspected on a two yearly basis and AML/CTF assessments are part of these inspections. Trust companies inspected on a risk assessment basis and some may not be inspected at such frequency.
- Under the Proceeds of Criminal Conduct Act, 1997 the FSC is legally obliged to report to the FIA all instances of suspicious transactions discovered during supervisory functions.
  - In 2009, 11 such reports were made: 9 in respect of companies and trusts, 1 for insurance, 1 for investment firms, and none for banks.
- Assessment: Compliant
- Comments: The law and practices relating to AML/CTF in the banking sector appear adequate in the BVI.

### Principle 19 — Supervisory approach
- Description:
  - Seven banks in total; FSC has detailed knowledge of banks and their operations.
  - FSC meets each bank at six-monthly intervals and additionally where needed (e.g., variance of 4 percent or more in a balance sheet item in a quarterly return compared to the previous return triggers a meeting).
  - Collective meetings with banks at quarterly intervals to discuss common issues.
  - Each bank submits a detailed quarterly return including profit and loss account, balance sheet, details of largest loans and deposits, solvency and liquidity calculations, nonperforming loans, and off-balance sheet items.
  - Data form basis of detailed report for Board of the Commission and input for the FSC Quarterly Bulletin posted on the FSC Website.
  - FSC participates in annual College of Regulators for two Canadian banks and six-monthly meetings with Puerto Rican regulatory authorities for two Puerto Rican banks.
  - On-site inspections of seven banks on a two-yearly cycle, supported by a detailed on-site inspection manual.
  - Banking supervisory team: a director of Banking, a senior regulator, and three regulators responsible for oversight of seven banks; supported by an inspection unit of four people responsible for inspection of all entities supervised by the FSC.
  - FSC has full access to all bank officials including board members; prepares reports and follow-up letters after inspections (copies reviewed by IMF assessors).
- Assessment: Compliant
- Comments: An effective banking supervisory system exists. On-site inspections and off-site reporting are in place. FSC has demonstrated willingness and ability to enforce against non compliance (example: move to remove managing director of the national bank for lack of qualification; action pending court appeal).

### Principle 20 — Supervisory techniques (on-site and off-site)
- Description:
  - FSC operates on-site and off-site supervision supported by an off-site monitoring manual describing regulator role and objectives, approach to ratio analysis and trend analysis.
  - Quarterly returns facilitate off-site analysis (as described under Principle 19).
  - On-site inspections on a two-yearly cycle using a detailed inspection manual (K Review) covering purpose, objectives, planning, and areas (solvency risk, liquidity risk, credit risk, market risk, foreign exchange risk, operating risk, off-balance sheet risk).
- Assessment: Compliant
- Comments: Effective system of on-site and off-site supervision; major improvement since the 2004 report. K review system, recruitment and training, and increased resources have improved capacity.

### Principle 21 — Supervisory reporting
- Description:
  - Section 30 of the FSCA provides that the FSC may request any person engaged in or related to any financial services business to furnish the Commission with such information as the Board may specify.
  - Main information: detailed quarterly return (see Principle 19).
  - Figures verified via on-site inspection regime.
  - All incorporated banks must submit annual audited accounts to the FSC; branches must submit annual audited accounts for the bank as a whole.
- Assessment: Compliant
- Comments: FSC has sufficient powers to collect, review, and analyze prudential reports and a means of independent verification. FSC staff demonstrated skill and understanding.

### Principle 22 — Accounting and disclosure
- Description:
  - Section 17 of the BTCA requires banks to maintain accurate financial records sufficient to show and explain transactions and to be audited in accordance with the BTCA and the Regulatory Code.
  - Audited accounts must be prepared in accordance with recognized international standards as approved by the Commission on a case-by-case basis (IFRS, US GAAP, UK GAAP, Canadian GAAP specifically mentioned).
  - Each bank must submit annual audited accounts within six months of financial year-end to the Commission.
  - Section 17 requires publication of financial statements with auditor’s report within six months of financial year-end in at least two newspapers published and circulated in the BVI.
  - FSC publishes aggregate statistical data in its quarterly statistical bulletin on its website (aggregate balance sheet, income and expenditure, statistics on solvency, asset quality, liquidity, profitability, and exposures).
  - Section 17 detailed requirements:
    - A license holder shall keep financial records that:
      - (a) Are sufficient to show and explain its transactions;
      - (b) Will, at any time, its financial position to be determined with reasonable accuracy;
      - (c) Will enable it to prepare the financial statements and make the returns required under the Act and any Regulatory Code; and will enable its financial statements to be audited in accordance with the Act and the Regulatory Code.
    - A licensee that contravenes this section commits an offence and is liable on summary conviction to a fine not exceeding $25, 000 or to imprisonment for a term not exceeding one year or to both.
    - Financial statements must be signed by a director and submitted within six months of the financial year end with a directors’ certificate and an auditor’s report. A licensee that contravenes this Section commits an offense and is liable on summary conviction to a fine not exceeding $10,000.
    - Where FSC is satisfied the auditor failed obligations or is not fit and proper, it may revoke approval of the auditor and the licensee shall appoint a new auditor in accordance with Section 17 of the BTCA.
  - Audited accounts disclose both qualitative and quantitative information on a bank’s financial performance.
- Assessment: Compliant
- Comments: FSC meets requirements on record keeping, accounting policies/practices and disclosure. Suggestion that six-month deadline for submission and publication be reduced to three or at most four months (reason given: workload of auditors, many firms share December 31 year end).

### Principle 23 — Corrective and remedial powers of supervisors
- Description:
  - Section 37 of the FSCA provides broad enforcement authority: revoke or suspend a license, appoint an examiner, require appointment of an administrator, issue directives, and impose penalties.
  - Section 40 authority to issue directives for prompt remedial action to address capital deficiencies.
  - FSC may apply penalties to the bank and its management.
- Assessment: Compliant
- Comments: FSC has broad enforcement powers and has demonstrated willingness/ability to enforce them.

### Principle 24 — Consolidated supervision
- Description:
  - Banks in BVI are either branches or subsidiaries that operate without subsidiaries.
  - One locally-incorporated bank (home-country supervisor) does not have cross-border operations.
  - Currently FSC does not need to perform consolidated supervision; as a host supervisor the FSC coordinates with home supervisors.
- Assessment: Not Applicable
- Comments: RC section 127 requires banks to provide information on branches and subsidiaries so the FSC can conduct consolidated supervision of the bank and its group. Currently all banks are solo-units without subsidiaries or cross-border activities.

### Principle 25 — Home-host relationships
- Description:
  - Sections 33C and 33D of the FSCA provide broad powers to exchange information and collaborate with home country supervisors, including sharing documents and information.
  - Section 35 permits a foreign regulator to participate in an inspection.
  - FSC ensures information is needed for supervisory functions and that confidentiality protections are available.
  - FSC maintains contact with home supervisors through supervisory colleges with Canada, visits to Puerto Rico, and correspondence with Liechtenstein as needed.
  - Section 10 of the RC states a banking license will not be granted unless the home supervisor consents to the establishment, performs consolidated supervision and will share regulatory information with the FSC.
  - Shell banks are not permitted in the BVI (Anti-money Laundering and Terrorist Financing Code of Practice section 34).
- Assessment: Compliant
- Comments: FSC has demonstrated willingness and ability to exchange information with home supervisors. Although FSC can exchange information without an MOU, it has signed MOUs with 14 countries and two with organizations.

*Source: _cr10324 - Section 30 of the Regulatory Code sets out corporate governance requirements. The*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10324.pdf_