Offshore Financial Centers -- The Role of the IMF

Offshore Financial Centers (OFCs): IMF Staff Assessments

Offshore Banking and Financial Centers

Offshore Financial Centers
The Assessment Program: An Information Note

Prepared by the Monetary and Exchange Affairs Department

August 29, 2002

I. Introduction
II. Update on the Assessments
III. Conclusion
Text Tables
  1. Status of Offshore Financial Center Assessments
  2. Status of FSAPs in Countries with International Financial Centers


I. Introduction

1. In July 2000, the Executive Board initiated an offshore financial center (OFC) program to help members identify gaps and reduce potential vulnerabilities in their financial systems, and improve the coverage of statistics on activities of OFCs in financial markets.1 The assessment component of the program evaluates financial regulation and supervision in jurisdictions with significant financial activity and few previous assessments of standards, following a request from the jurisdiction. The statistical component has assessed the adequacy of statistics with a view to encouraging wider participation in the Fund's Coordinated Portfolio Investment Survey (CPIS) and in the Bank for International Settlement's (BIS) international locational banking statistics, and to help OFCs improve their national macroeconomic statistics. Both the CPIS and the BIS international locational banking statistics contribute to identifying the role of OFCs in global finance.

2. The last progress report to the Board, issued on March 29, 2002 (SM/02/99), covered both the assessment and statistical components of the program. A report on the statistical component of the program will be made in the progress report to the Board on the Offshore Financial Center Program in early 2003. In discussing the assessments conducted up to the end of 2001, the report noted that weaknesses in banking supervision stemmed from inadequate anti-money laundering (AML) measures, insufficient independence of the regulator, and poor onsite and offsite surveillance. Insurance supervision was weaker in general, with market conduct, on-site inspection, and information sharing and cooperation requiring particular attention. Oversight of the company and trust service providers sector was still being developed. The assessments had also identified issues common to all sectors, including a need for improved legal frameworks for anti-money laundering and combating the financing of terrorism (AML/CFT), and found that supervisory capabilities were constrained by high costs and skill shortages. Cross-sectoral information sharing also required enhancement

3. Countries were found in some cases to have moved rapidly to correct deficiencies identified in the assessments by strengthening laws, conducting AML training programs and discontinuing activities which were not cost effective to supervise (see SM/02/99). Looking forward, however, the March 2002 report noted that substantial work was still required:

  • jurisdictions should continue to upgrade their legal, regulatory and supervisory systems;

  • coordinated technical assistance from the Fund, other technical assistance providers, and donors would be required to satisfy the demand resulting from completed assessments; and

  • standard setters should move forward to develop standards for the oversight of company and trust service providers, and advance discussions on the treatment of bearer shares to help guide the assessments.

4. This note considers only the assessment component of the OFC Programs, updating the Board on the assessments completed in 2002. Work is proceeding on the schedule required to complete the assessments by end-2003. Assessment dates have been fixed for almost all the jurisdictions approached, technical assistance (TA) continues in identified areas, and a guidance note on the evaluation of oversight in the company and trust service providers sector is in draft.

II. Update on the Assessments

5. In calendar year 2002, a Financial Sector Assessment Program (FSAP) mission has been conducted for one jurisdiction and Module 2 OFC assessment missions completed for seven jurisdictions2 (six more than in the March 2002 progress report). Four additional FSAPs for countries with international financial centers are scheduled to begin in calendar year 2002. Thirteen more OFC assessment missions are scheduled or underway in calendar year 2002.3,4 Six reports have now been published for both the FSAP and Module 2 assessments. For calendar 2003, six jurisdictions have agreed to assessments in the context of the FSAP, two jurisdictions have been approached for Module 2 assessments, and the scope of the assessment program will be discussed with the authorities in one jurisdiction. Tables 1 and 2 update similar tables in SM/02/99 on the status of offshore financial centers, and of FSAPs in countries with international financial centers.

Table 1. Status of Offshore Financial Center Assessments
    Type and Status of Assessment1
    Module 2
Jurisdiction Module 1 2001 2002 2003

  Seychelles completed
Asia and the Pacific
  Cook Islands scheduled3
  Macao SAR to be published
  Malaysia (Labuan) scheduled
  Marshall Islands comments4
  Nauru planned7
  Niue completed2 planned
  Palau completed
  Samoa underway5
  Vanuatu review6
Middle East
  Bahrain8 planned
  Andorra completed completed
  Cyprus published
  Gibraltar published
  Guernsey scheduled
  Isle of Man scheduled
  Jersey scheduled
  Liechtenstein scheduled
  Monaco completed review
Western Hemisphere
  Anguilla scheduled
  Antigua and Barbuda completed 9
  Aruba completed published
  Belize completed
  Bermuda scheduled
  British Virgin Islands scheduled
  Cayman Islands scheduled
  Dominica completed 9
  Grenada completed 9
  Montserrat scheduled
  Netherlands Antilles completed review
  Panama completed published
  St. Kitts and Nevis completed 9
  St. Lucia completed 9
  St. Vincent and the Grenadines completed 9
  The Bahamas underway
  Turks and Caicos Islands scheduled

Notes: Table 1 updates the information in Table 1 of Executive Board Paper SM/02/99. Six jurisdictions originally listed for Module 2 assessments in 2003 will be assessed under the FSAP and have been added to Table 2.
1Calendar year of the assessment mission(s).
2Completed = assessment mission has been completed and report with authorities.
3Scheduled = either a date or month has been agreed with the authorities. Schedules are subject to change.
4Comments = awaiting comments from authorities.
5Underway = first mission has taken place or mission is underway.
6Review = assessment is undergoing the IMF's internal review.
7Planned = scheduling is under discussion or to be discussed with authorities.
8As Bahrain has had a Basel Core Principles Assessment in 2000 before the start of the OFC program, the scope of the assessment is under discussion.
9See Table 2.

Table 2. Status of FSAPs in Countries with International Financial Centers
Year of Assessment Mission1
Jurisdiction 1999 2000 2001 2002 2003

  Mauritius scheduled3
Asia and the Pacific
  Hong Kong SAR scheduled
  Singapore scheduled
Middle East
  Lebanon5 completed2
  Morocco underway4
  Ireland5 completed
  Luxembourg published
  Malta scheduled
  Switzerland published
  United Kingdom underway
Western Hemisphere
  Antigua and Barbuda scheduled
  Barbados underway
  Costa Rica completed
  Dominica scheduled
  Grenada scheduled
  St. Kitts and Nevis scheduled
  St. Lucia scheduled
  St. Vincent and the Grenadines scheduled

Notes: Table 2 updates the information in Table 2 of Executive Board Paper SM/02/99. Six jurisdictions originally listed for Module 2 assessments in 2003 will now be assessed under the FSAP and are included here.
1Refers to calendar year; FSAP scheduling is subject to change.
2Completed = missions and review have been completed.
3Scheduled = either a date or time period has been agreed with the authorities.
4Underway = missions are underway or reports are being finalized for review.
5Both Ireland and Lebanon had FSAPs before the start of the OFC program. The FSAP for Lebanon, which is a regional financial center, was updated in 2001.

6. As mandated by the Executive Board in November, 2001, all the assessments in 2002 have included assessments of the arrangements for AML/CFT based on the different developing versions of the IMF/World Bank draft methodology.5 Missions have also assessed relevant sections of the Basel Committee's Core Principles for Effective Banking Supervision. Assessment of the supervision of the insurance and securities sectors has been less frequent, or has been confined to a subset of the relevant criteria, since these sectors tend to be small and of lesser macroeconomic significance in the small jurisdictions which have mainly been assessed so far this year. In all cases where these differ, supervision and regulation of both the domestic and offshore sectors have been assessed. A template to permit consistent, streamlined reporting of OFC assessment results is now in use.

7. Most assessments completed by end-August 2002 arrive at conclusions similar to those outlined in the March 2002 report but, as the range of assessed countries has expanded, some patterns are becoming apparent.6 It appears that observance of the principles of effective banking supervision is quite modest in small, low income jurisdictions where outdated legislative provisions, inadequate budgetary resources and limited supervisory skills are, as would be expected, the main constraining factors. These limitations often apply to both domestic and offshore sectors but are especially marked in the offshore sector when the supervisory authority differs. A more common finding is that authorities' knowledge of the activities of corporate entities registered in their jurisdictions is too limited.

Supervisory Capacity and Resources and Autonomy

8. A paucity of supervisory skills continues to be one of the main findings of the assessments, even where there are budgetary resources for additional personnel. However, assessment results are motivating jurisdictions to both allocate increased resources to supervision, and to request technical assistance. In part, the lack of skills reflects an increased demand for supervisory resources as the scope of supervisory concerns broadens. Thus, for example, there are jurisdictions where supervision of AML/CFT is competing with prudential banking supervision for supervisory skills. The growing realization that company and trust service providers should be covered by AML/CFT regulations and should be monitored for compliance with these regulations is an important factor. Autonomy of the regulator and the need for legislative change in order to effect this was also an issue in some jurisdictions.

AML/CFT Regimes

9. Arrangements for AML/CFT are being improved in most jurisdictions. However, all jurisdictions assessed would benefit from some enhancement of their laws and/or supervisory practices. In some cases, as noted, the AML/CFT regime is competing for resources with more general banking supervision. There is also a need to improve communication with other domestic and foreign supervisors, as well as with law enforcement agencies abroad. While legislative reform is often a prior requirement, implementation needs strengthening in several of the cases where legislation has been updated. Requests for technical assistance are being met in eight jurisdictions and programs are being developed in another two OFCs. Even the less structured AML reviews conducted prior to use of the draft methodology elicited considerable demand for TA. In these cases, staff will discuss with authorities the feasibility of evaluating the results of the TA through the conduct of AML/CFT assessments using the draft methodology.

Company and Trust Service Providers

10. As indicated in the March report, some jurisdictions are including the company and trust service providers sector in supervisory arrangements although they continue to need information on the entities' activities. A working group of the Overseas Group of Banking Supervisors (OGBS) has recently drafted a statement of best practice for the oversight of the sector.7 It is anticipated that the statement will recommend an integrity standard for all individuals providing relevant services, and identify requirements for proper business conduct. Those requirements will cover, inter alia, corporate governance, customer due diligence, and conduct of client business. The statement will also advocate arrangements permitting the authorities to obtain information on beneficiaries and owners of companies and trusts for AML/CFT purposes. In discussing the company and trust service providers sector, assessors will be able to use the statement as a guide to good practice; OFC assessments have previously used guidelines drawn from three reports.8

Technical Assistance

11. Technical assistance is being provided in supervisory areas such as problem bank resolution (following assessments' stress on the need to effectively remove shell banks and other problem institutions), improved information exchange arrangements, and reorganization of supervisory agencies. Nine small jurisdictions are also receiving assistance from resident, regional, or visiting experts to strengthen both their general regulatory and supervisory systems as well as AML/CFT regimes, or to develop actions plans for doing so. A donor government is also providing technical assistance on AML/CFT in one jurisdiction.

III. Conclusion

12. The IMF staff continues to implement an accelerated OFC assessment program. Eight Module 2 or FSAP assessment missions have been completed in the year to date. Assessments have been scheduled for a further 18 jurisdictions in 2002, and six jurisdictions are participating in a regional FSAP in 2003. Two jurisdictions are still considering invitations to have assessments in the early part of 2003, and the scope of assessment for a further jurisdiction will be discussed with the jurisdiction.

13. In summary, of the 44 jurisdictions with international financial centers with which the staff has been in contact since the start of the program, 17 have had Module 2 or FSAP assessments; 18, including the most significant, are scheduled to have such assessments in 2002; and seven have agreed to assessments in 2003. Two jurisdictions are still considering proposals for an assessment. Of these two, one has already had a Module 1 assessment. Twelve of the jurisdictions being assessed under the Module 2 or FSAP have had earlier Module 1 assessments9. Staff anticipates that the Progress Report to be presented to the Executive Board in early 2003 will provide a general overview of the regulatory and supervisory systems present in jurisdictions with international financial centers, and suggest where the future priorities of the program should lie.

1Dependent territories of members are covered by virtue of their relationship to the member; the Fund provides policy advice and technical assistance to nonmembers.
2Module 2 assessments are stand-alone assessments by a team of specialized supervisors of jurisdictions' supervisory and regulatory practices. These are assessed relative to the standards determined by the Basel Committee, the International Association of Insurance Supervisors (IAIS), and the International Organization of Securities Commissions (IOSCO). The OFC program also includes Module 1 assessments, which are self-assessments assisted by a staff member or a consultant, and FSAPs (a Module 3 for nonmembers in the OFC context). See SM/00/136.
3Jurisdictions preferred to schedule assessments later in the year. The increased demand on resources in the second half of calendar 2002 is being met both through allocated staff positions coming on line, and the financial year 2003 increase in budget resources for short-term experts.
4Schedules are subject to change.
5Only one OFC assessment conducted in 2001 used the draft methodology. The others reviewed AML issues in accordance with principles drawn from sectoral standard setters, and informal references to the FATF recommendations.
6Executive Board Paper SM/02/99 examined assessment results through a detailed examination of principle observance. The present discussion does not review results on a principle by principle basis because of the limited number of additional jurisdictions covered. A report planned for early 2003 should permit coverage of most of the major jurisdictions.
7The working group comprises representatives from the Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, Cyprus, Gibraltar, Guernsey, the Isle of Man and Jersey, with invited participation from France, Italy, the Netherlands, the UK, Financial Action Task Force (FATF), the IMF and the Organization for Economic Cooperation and Development (OECD). The OGBS is a group of bank supervisors representing 19 offshore centers.
8These reports were the UK-commissioned studies; Review of Financial Regulation in the Crown Dependencies, 1998, by A. Edwards (Edwards Report), and Review of Financial Regulation in the Caribbean Overseas Territories and Bermuda, 1999, by KPMG Peat Marwick (KPMG Reports); and the OECD's Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes, 2001.
9Staff has made enquiries about additional jurisdictions where offshore financial centers have been reported. These have not been contacted since the activity is inconsiderable and/or shrinking.


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