The continuing impact of international assessments on financial centres: The continuing impact of international assessments on financial centres Oxford Symposium 5th September 2005 Marcus Killick


International Assessments: International Assessments Financial Stability Forum IMF Financial Action Task Force Other International Standard Setting Bodies


Part 1: Part 1 The Financial Stability Forum (FSF)


Background to FSF: Background to FSF Established through a G-7 meeting in 1999 to promote international financial stability through information exchange and international co-operation in financial supervision and surveillance. The FSF aims to co-ordinate the efforts of its Members in order to promote international financial stability, improve the functioning of markets, and reduce systemic risk. Three initial working parties were created, one of which was to look at Offshore Financial Centres


Report of the Working Group on Offshore Financial Centres (“OFCs”) (5 April 2000) : Report of the Working Group on Offshore Financial Centres (“OFCs”) (5 April 2000) This report was produced under the terms of reference for the Working Group created to consider OFCs’ The OFC working Group were asked to: Consider the uses of OFC’s and the possible role they have had or could play in posing threats to the stability of the financial system; Evaluate the adherence of OFCs with internationally accepted standards and good practices, and; Make recommendations , including to enhance problematic OFCs’ observance of international standards


Methodology: Methodology A core element of the methodology was a survey which was sent to the supervisors in major financial centres and the supervisors in financial centres with significant offshore activities As such the report paid significant attention to external perceptions Meeting with major internationally active financial institutions together with regulators and other relevant groups. There were no on-site visits to the jurisdictions themselves Emphasis on other jurisdictions views the centres being assessed rather then objective testing


Overall Findings: Overall Findings The report was designed for assisting in the setting of priorities and in encouraging OFC;s to take appropriate steps to improve the quality of supervision and degree of co-operation It was not designed for identifying OFC’s for sanctions or other punitive action Offshore financial activities are not inimical to global financial activity provided they are well supervised and supervisory authorities co-operate, however; OFCs’ that are unwilling or unable to adhere to international standards create a potential systemic risk


Specific concerns(These did not relate to every OFC under review): Specific concerns (These did not relate to every OFC under review) The level of cross border co-operation on information exchange The quality of underlying supervision The lack of due diligence when financial institutions are formed The lack of availability of timely information on beneficial ownership The lack of comprehensive and timely dataon OFCs’ financial activities impedes effective monitoring and analysis of capital movements.


Jurisdictional classes: Jurisdictional classes Following the survey the jurisdictions reviewed were grouped into three categories reflecting their perceived quality of supervision and perceived degree of co-operation The categorisation did not constitute judgements about any jurisdiction’s adherence to international standards nor that the categorisation applies to all sectors of the financial system within the OFC


Jurisdictional classes: Jurisdictional classes Group I jurisdictions would be: “generally perceived as having legal infrastructures and supervisory practices and/or a level of resources devoted to supervision and co-operation relative to the size of their financial activities, and/or a level of co-operation that is largely of a good quality and better than that in other OFCs”; Group II jurisdictions would be: “generally perceived as having legal infrastructures and supervisory practices and/or a level of resources devoted to supervision and co-operation relative to the size of their financial activities, and/or a level of co-operation that is largely of a higher quality than Group III but lower than Group I”; Group III jurisdictions would be: “generally perceived as having legal infrastructures and supervisory practices and/or a level of resources devoted to supervision and co-operation relative to the size of their financial activities, and/or a level of co-operation that is largely of a lower quality than Group I”.


Group I and II Jurisdictions: Group I and II Jurisdictions Group 1 Dublin Guernsey Hong Kong SAR Isle of Man Jersey Luxembourg Singapore Switzerland Group II Andorra Bahrain Barbados Bermuda Gibraltar Labuan (Malaysia) Macau SAR Malta Monaco


Group III Jurisdictions: Group III Jurisdictions Anguilla Antigua and Barbuda Aruba Belize British Virgin Islands Cayman Islands Cook Islands Costa Rica Cyprus Lebanon Liechtenstein  Marshall Islands Mauritius Nauru Netherlands Antilles Niue Panama St Kitts and Nevis St Lucia St Vincent and the Grenadines Samoa Seychelles The Bahamas Turks and Caicos Vanuatu


Recommendations: Recommendations Included That the IMF take responsibility for developing, organising and carrying out a process for assessing OFC’s adherence to relevant international standards That a survey of banking, insurance and securities supervision and degree of co-operation is That the IMF undertake the assessment recommended by FSF


Current Position: Current Position The FSF has announced that the 2000 list has served its purpose and is no longer operative (Press release of 11th March 2005) the FSF has stated that it is committed to a process, based on objective criteria and due process, to promote further improvements in OFCs. Such a process will include a set of initiatives by its members at both international and national levels and appropriate steps by the FSF This multi-tiered process will encompass: Actions by standard setting bodies IMF Assessments Initiatives by National Authorities Provision of Technical Assistance, and Work of the FSF itself; The FSF will review the position again in 2007


Part 2: Part 2 International Monetary Fund


Background: Background The FSF initial 2000 listing of OFCs led to an IMF assessment programme of OFCs, which commended in 2001, The programme consisted of an initial fact finding questionnaire followed by an on site visit. Jurisdictions have been assessed either through a Module 2 assessment or under the Financial Sector Assessment Program (FSAP) Of the 42 assessments 25 have been under Module 2 and 15 have (or will be done under FSAP)


Module 2 Assessments: Module 2 Assessments A Module 2 assessment evaluates the compliance of supervisory and regulatory systems with international standards in the banking sector, and, if significant, in the insurance and securities sectors. It also assesses the effectiveness of the anti-money laundering and combating the financing of terrorism regime. Standards of the Basel Committee on Banking Supervision (BCBS), the International Association of Insurance Supervisors (IAIS), the International Organization of Securities Commissions (IOSCO), and the Financial Action Task Force (FATF) Recommendations are the yardsticks used.


Jurisdictions assessed under Module 2: Jurisdictions assessed under Module 2 Aruba Cyprus Gibraltar Macao Panama Andorra Anguilla Bahamas British Virgin islands Guernsey Jersey Isle of Man Liechtenstein Labuan Marshall islands Monaco Montserrat Netherlands Antilles Palau Samoa Seychelles Vanuatu Belize Bermuda Cayman Islands Turks and caicos islands Cook islands


FSAP Assessments: FSAP Assessments Assessments under the FSAP, in addition to evaluating observance of relevant financial sector standards and codes, consider risks to macroeconomic stability stemming from the financial sector and the capacity of the sector to absorb macroeconomic shocks


Jurisdictions assessed under FSAP: Jurisdictions assessed under FSAP Ireland Lebanon Costa Rica Luxembourg Switzerland Barbados Hong Kong Malta Mauritius Singapore Dominica Grenada St Kitts and Nevis St Lucia St Vincent and the Grenadines Antigua and barbuda


Current position: Current position As at March 2005, The first phase of the OFC assessment program was virtually complete. Forty-one of the 44 jurisdictions contacted at the inception of the program had been assessed. Of the remaining three Bahrain remains to be addressed whilst Nieu and Nauru are receiving technical assistance All but one jurisdiction has published or indicated their intention to publish their assessment reports.


Findings: Findings Compliance with standards in OFCs is, on average, better than in other jurisdictions assessed under the FSAP, For example 50 percent of offshore jurisdictions comply with every principle and recommendation directly concerned with cooperation and information exchange as opposed to 47 percent of other assessed jurisdictions. Deficiencies tend to be in the lower income jurisdictions. Supervisory deficiencies were most frequently found to result from inadequate resources and skills Deficiencies which also remain including inadequate onsite inspections, inability to address cooperation on terrorist financing, need to expand mutual legal assistance treaties, and lack of formal agreements to share information.


Next steps: Next steps In November 2003, the IMF determined that the second phase of the OFC program should incorporate four broad elements: Regular monitoring of OFCs' activities and compliance with supervisory standards; Improved transparency of OFC supervisory systems and activities; Technical assistance in collaboration with bilateral and multilateral donors; Collaboration with standard-setters and the onshore and offshore supervisors to strengthen standards and exchanges of information.


Next Steps (Con’t): Next Steps (Con’t) The IMF has determined that that it would be appropriate to continue periodic monitoring of OFCs’ compliance with relevant international regulatory standards. Module 2 assessments every 4–5 years were generally considered appropriate, focusing mainly on those jurisdictions that are not covered by FSAPs, but it was also noted that the program should be sufficiently flexible to allow for more frequent targeted assessments to address areas of immediate concern (“risk-focused” assessments). Participation in the second round of assessments remains voluntary.. (FSF considers jurisdictions will be incentivised as participation will draw attention to their willingness to cooperate).


The next round of reviews: The next round of reviews Cyprus and Panama have already been through the second round of assessments Gibraltar has agreed to an assessment in early 2006 These are concentrating on addressing the recommendations made in the first round. Some jurisdictions with insignificant cross-border activity will be subject to off-site monitoring only, and additional jurisdictions are being considered for assessment (Brunei, Cubai, Botswana, San Marino and Uruguay During the second round of assessments, priority will be given to assessing weaknesses identified in the first round of assessments; relevant areas not previously assessed; and cooperation and information sharing arrangements. Assessments will take account of revisions in international standards. For instance the FATF Recommendations were revised in 2003 and a ninth Special Recommendation on Terrorist Financing added in 2004, and the IAIS Core Principles were revised in October, 2003 to include, in particular, the supervision of reinsurance. The assessments will also give significantly increased attention to cooperation and information exchange. reports on jurisdictions with international and offshore financial centers (IOFCs) will include a dedicated section bringing together the implications for cooperation and information exchange in each of the sectoral assessments


Technical Assistance (TA): Technical Assistance (TA) TA forms a key part of the IMF programme IMF consider that TA should focus on those OFCs that have the resources and commitment to benefit most, or that experience the greatest shortcomings in complying with international standards. TA has concentrated on the smaller jurisdictions facing the most significant supervisory challenges, with particular emphasis on AML/CFT, as well as basic banking supervision. Particular areas of concern and statistical issues have also been addressed in a small number of larger jurisdictions


Part 3: Part 3 The Financial Action Task Force


What is the FATF?: What is the FATF? Intergovernmental body, established by the G-7 Summit in 1989 Purpose is to develop and promote policies to combat money laundering Has developed a set of forty recommendations designed to achieve the above Original focus was on drug money but this has grown to cover the proceeds of all serious criminal offences FATF have established 40 recommendations (last reviewed in 2003) which form the international standard in the fight against money laundering Following 9/11 * Special Recommendations (now nine) were added to counter the financing of terrorism The FATF also produces an annual “typologies” report looking at new money laundering techniques and ways to counter them.( (for 2004/05 these included Alternative remittance systems, wire transfers and terrorist financing techniques) FATF has no per se power to enforce its recommendations, however recommendation 21 allows it to seek its members take countermeasures against jurisdictions identified as posing a particular money laundering or terrorist threat.


FATF and Offshore: FATF and Offshore FATF had become increasingly concerned as to the use of offshore centres in the laundering of criminal proceeds Concern centres around: Offshore financial institutions and their regulation Offshore companies Inadequate anti money laundering legislation Lack of information sharing and other co-operation (eg because of bank secrecy laws) Ability of persons to operate with effective anonymity FATF therefore agreed on a process of identifying non-cooperative jurisdictions with a view to taking action against them to encourage them into compliance


Report on non-cooperative countries and territories (NCCTs) February 2000: Report on non-cooperative countries and territories (NCCTs) February 2000 Identified detrimental rules and practices that exist in non—cooperative countries and territories Establishment of 25 criteria against which the jurisdictions are to be measured. Criteria based on FATF’s 40 Recommendations Identification of possible non-cooperative jurisdictions. Focus on those whose character or size present the greatest risk to undermining existing anti money laundering regimes


Review to identify NCCT’s- Methodology: Review to identify NCCT’s- Methodology Gathering of relevant laws and regulations, mutual evaluation reports, related progress reports and self assessment surveys; Analysis of the above with respect to the 25 criteria; A draft report was then sent to the relevant jurisdiction for review and comment; Specific further questions were directed to any jurisdictions where considered necessary for clarification of any issues; Open face to face discussions then took place with the jurisdictions and FATF; and Draft reports produced. Reports were then discussed with the respective juisdictions Finalised reports were discussed at FATF Plenary session


Findings: Findings June report summarised findings on 29 jurisdictions Some summaries (ie those who were being placed on the blacklist) detailed the criteria which the jurisdiction met (meeting a criteria meant the jurisdiction was non-cooperative in that area). Others (ie those of jurisdictions who were not on the blacklist )simply made a generalised comment All reviewed jurisdictions had some areas for improvement Further jurisdictions added in a follow up review in 2001. Since 2001, the FATF has not reviewed any new jurisdictions under the NCCT process. Of the 23 jurisdictions designated as NCCTs in 2000 and 2001, only three remain.( Myanmar, Nauru, and Nigeria)


Areas identified as being of particular concern: Areas identified as being of particular concern The practice of some jurisdictions of allowing indirect reporting of suspicious transactions The use of introducers Difficulty in establishing beneficial ownership of some legal entities The lower verification and disclosure requirements imposed on International Business Companies The lack of application of the know your customer rules to clients in existence prior to the requirements coming into force


Further action: Further action In accordance with FATF Recommendation 21 FATF recommended that financial institutions should give special attention to business relationships and transactions from blacklisted jurisdictions. The FATF has also introduced a “tour de table” mechanism where members and observers will be able to raise issues and present cases where international cooperation has been difficult. FATF has offered technical assistance to those on the blacklist to help them improve their legislation, rules and practices


Current position: Current position In 2004 the FATF in conjunction with others produced a AML/CFT methodology designed to provide a common benchmark against which a jurisdiction’s compliance with 40+9 recommendations can be assessed. The FATF started a third round of mutual evaluations for its members in January 2005 The FATF is promoting increased transparency and co-operation through the open distribution of the reports to all FATF members and observers and the discussion of the reports in open session in the FATF Plenary To ensure global consistency, the FATF has agreed similar or common processes, documents and procedures with all the bodies and organisations that produce assessment reports based on the FATF Recommendations and the 2004 AML/CFT Methodology. The IMF in its latest review of OFT’s will use the AML/CFT methodology. This will help overcome concerns that jurisdictions were not all being measured to the same standard.


Part 4: Part 4 Other International Standard setting bodies


International Organisation of Securities Commissions (IOSCO): International Organisation of Securities Commissions (IOSCO) IOSCO was established in 1983 from the transformation of its ancestor inter-American regional association (created in 1974) into aainternational cooperative body Its membership stands at 181 members and is still growing rapidly. The Organization's members regulate more than 90% of the world's securities markets IOSCO has established its “Objectives and Principles of Securities Regulation” which sets out 30 principles of securities1 regulation, which are based upon three objectives of securities regulation. These are: The protection of investors; Ensuring that markets are fair, efficient and transparent; The reduction of systemic risk. These objectives and principles form the benchmark against which IMF assess OFC’s compliance with international standards of investment, mutual funds and securities regulation.


IOSCO- Mutual Memoranda of Understanding: IOSCO- Mutual Memoranda of Understanding IOSCO has expanded its efforts in relation to the signing of Multilateral MOU by all IOSCO members. Giving the commitment to sign the MMOU will also trigger a IOSCO assessment to verify the jurisdiction’s readiness. It is anticipated that the process from commitment to acceptance will take anytime between nine to eighteen months. Problems with jurisdictions will be dealt with confidentially between the two parties until such time as IOSCO believes there to be a need to escalate the process and at which stage it may decide to “blow the whistle” to FSF. Target date for all IOSCO members to have signed the MMOU is 2010.


Basel Committee on Banking Supervision (BCBS): Basel Committee on Banking Supervision (BCBS) RCBS was established at the end of 1974. Countries are represented by their central bank and also by the authority with formal responsibility for the prudential supervision of banking business where this is not the central bank. BCBS formulates broad supervisory standards and guidelines and recommends statements of best practice in the expectation that individual authorities will take steps to implement them through detailed arrangements - statutory or otherwise - which are best suited to their own national systems in 1997 BCBS developed a set of "Core Principles for Effective Banking Supervision", which provides a comprehensive blueprint for an effective supervisory system. To facilitate implementation and assessment, BCBS in October 1999 developed the "Core Principles Methodology". These Core principles form the benchmark against which IMF assess OFC’s compliance with international standards of banking supervision


Basel Committee - Developments: Basel Committee - Developments A review of the Basel Core Principles is presently underway and well advanced. The “offshore perspective” is being catered for through the involvement of Hong Kong. There will still be 25 principles with a number of the existing principles being collapsed into one another making way for some new ones. The assessment methodology for the revised methodology will also be published and will still contain essential and additional criteria. The final document is expected in Summer 2006. The Committee has also worked on revising its Corporate Governance paper in light of the OECD paper on the issue and this was issued for public consultation in July 2005.


International Association of Insurance Supervisors (IAIS): International Association of Insurance Supervisors (IAIS) Established in 1994, the International Association of Insurance Supervisors (IAIS) represents insurance supervisory authorities of some 180 jurisdictions. It was formed to: Promote cooperation among insurance supervisory authorities Set international standards for insurance supervision and regulation Provide training to members Coordinate work with regulators in the other financial sectors and international financial institutions. The IAIS issues global insurance principles, standards and guidance These standards represent the global benchmark against which the IMF assesses insurance regulation in the OFCs