Working Together

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International Monetary Fund
Published Date:
June 2007
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    © 2007 International Monetary Fund

    Production: IMF Multimedia Services Division

    The views expressed in this publication are the personal views of the authors and should not be interpreted as the views of the International Monetary Fund or of any other organizations with which the respective authors are affiliated.

    Unless otherwise indicated herein, the information and data in this publication were current as of the July 2004 Conference on Cross-Border Cooperation and Information Exchange from which the papers included in this volume were drawn.

    Cataloging-in-Publication Data

    Working together : improving regulatory cooperation and information exchange — [Washington, D.C.] : International Monetary Fund, Monetary and Financial Systems Dept., 2007.

    p. cm.

    “In July 2004, the IMF organized the Conference on Cross-Border Cooperation and Information Exchange bringing together representatives of the standard setters”—Pref. Includes bibliographical references.

    ISBN 978-1-58906-487-4

    1. Financial institutions. 2. International cooperation. 3. Legal aid. 4. Banks an banking — State supervision. 5. Securities. I. International Monetary Fund. Monetary and Financial Systems Dept.

    HG101.W67 2007

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    Contents

    The following conventions are used in this publication:

    • In tables, a blank cell indicates “not applicable,” ellipsis points (. . .) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totals are due to rounding.

    • An en dash (–) between years or months (for example, 1998–99 or January-June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 1998/99) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2006).

    • “Billion” means a thousand million; “trillion” means a thousand billion.

    • “Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).

    As used in this publication, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.

    Foreword

    The financial sector standard setters have issued guidance on the cooperation and information exchange required between supervisors in their various sectors, and this guidance has been updated and broadened. Nevertheless, in its work in assessing financial centers, the IMF has become aware that problems in cooperation and information exchange continue to constrain cross-border supervision.

    The IMF has been working indirectly to improve regulatory cooperation through a variety of instruments, including its technical assistance on financial supervision and assessments of compliance with international standards. Its near-universal membership helps it to play a significant role in bringing regulators together for discussion and interaction.

    In July 2004, the IMF organized a conference on cross-border cooperation and information exchange bringing together representatives of the standard setters—the Basel Committee on Banking Supervision, the Financial Action Task Force (FATF), the International Association of Insurance Supervisors (IAIS), the International Organization of Securities Commissions (IOSCO)—as well as other organizations—the Egmont Group of financial intelligence units and the Financial Stability Forum (FSF)—and a cross-section of regulators, supervisors, and law-enforcement representatives from a range of jurisdictions. The conference aimed to identify arrangements that could facilitate improved international cooperation and information exchange for both prudential purposes and the prevention of financial abuse.

    The conference resulted in an aide-mémoire that underlined the critical importance of effective cooperation and information exchange in view of the increasing integration and internationalization of financial markets and services. It noted that while the challenges for cooperation differ among sectors, the differences are narrowing; and it discussed a variety of instruments providing effective channels for information exchange.

    The IMF’s Monetary and Financial Systems Department has brought together some of the contributions from the conference into this book. Its aim is to promote continuing discussions on ways to overcome the identified constraints on cooperation and information exchange. I hope that this collection of articles will help to document both challenges and successes and to encour age further action to improve cooperation and information exchange.

    Stefan Ingves

    Director

    Monetary and Financial Systems Department, IMF

    Contributors

    Muhammad BaasiriSecretary, Special Investigation Commission, Lebanon; President of the Middle East North Africa FATF (MENAFATF), 2004–2005
    Y. K. ChoiExecutive Director, Hong Kong Monetary Authority
    Rochelle A.Deleveaux Legal Counsel, Central Bank of The Bahamas
    Chris GaskellHead of International Relations, Australian Prudential Regulation Authority
    Giuseppe GodanoHead, International Cooperation Division, Banca d’Italia
    Eva HüpkesHead of Regulation, Swiss Federal Banking Commission
    Stefan IngvesDirector, Monetary and Financial Systems Department, IMF
    R. Barry JohnstonAssistant Director, Monetary and Financial Systems Department, IMF
    Shoba KammulaSenior International Counsel, Financial Crimes Enforcement Network, U.S. Department of the Treasury; Vice Chair, Egmont Legal Working Group
    Cheryl-Ann ListerChairman and CEO, Bermuda Monetary Authority
    William C. MurdenDirector of the Office of International Banking and Securities Markets, U.S. Department of the Treasury; Chairman of Financial Action Task Force Working Group on Evaluations and Implementation (then Working Group on International Financial Institutions Issues)
    Oana M. NedelescuResearch Assistant, Monetary and Financial Systems Department, IMF
    Peter NevilleDirector General, Guernsey Financial Services Commission
    Alvaro Pinilla RodríguezHead of International Cooperation, Servicio Ejecutivo de la Comisión de Prevención de Blanqueo de Capitales e Infracciones Monetarias (SEPBLAC), Bank of Spain
    Richard PrattConsultant to the IMF
    Henry N. SchiffmanConsultant to the IMF
    Dunja SuessliDue Diligence Unit, Liechtenstein
    Ethiopis TafaraDirector of International Affairs, United States Securities and Exchange Commission
    Jean-François ThonyAssistant General Counsel, Legal Department, IMF
    Erna Va’aiCEO, Samoa International Finance Authority
    Jacqueline WilsonDirector of Legal and Enforcement Division, British Virgin Islands Financial Services Commission
    Mary G. ZephirinDeputy Division Chief, Monetary and Financial Systems Department, IMF

    Preface

    R. BARRY JOHNSTON*

    The Conference on Cross-Border Cooperation and Information Exchange was held at IMF headquarters on July 7–8, 2004 to facilitate developing the close cooperation and information-sharing arrangements required for well-functioning international financial services. The growing integration of world markets has deepened the international operations of financial firms. As a result, there is growing cross-border interdependency of financial institutions; and this requires enhanced information flows to enable financial institutions and national authorities to monitor prudential risk. Financial internationalization also expands the reach of those using the system for criminal purposes. From these perspectives, communications among financial regulators and agencies, both domestically and across borders, have become essential in the maintenance of financial market stability and integrity.

    Since the raison d’être of international and offshore financial centers is cross-border financial transactions, cross-border information sharing is of particular importance for these jurisdictions. International financial centers have been successful in developing innovative financial instruments that may challenge supervisors’ current knowledge and oversight. Effective dissemination of information on these instruments or institutions is an important contribution to the network of financial oversight.

    A quick look at the websites of the standard setters would suggest that both supervisors and nonsupervisors know how and about what they need to cooperate and exchange information. When the IMF organized a roundtable on issues facing the offshore financial centers in May 2003, however, one of the main conclusions reached was that although each of the standard setters provides extensive guidance, and cooperation and information exchange have considerably improved in recent years, several issues remain to be addressed: (1) finding ways to share information while protecting legitimate rights to privacy and taking account of supervisors’ confidentiality obligations; (2) sharing information among supervisors of different sectors (e.g., between banking and securities regulators); (3) sharing information for regulatory, compliance, and law-enforcement purposes; (4) solving the complexity of multiple gateways for information exchange; and (5) addressing possible differences in the treatment of information exchange among the standards.

    Furthermore, our assessments under the Financial Sector Assessment Program (FSAP) and Offshore Financial Center (OFC) programs, which utilize the Basel Committee, International Association of Insurance Supervisors (IAIS), International Organization of Securities Commissions (IOSCO), and Financial Action Task Force (FATF) standards as sectoral yardsticks, illustrate the areas that international financial centers need to address with regard to meeting international standards and the practical implementation of the requirements. Capacity constraints among low-income countries, limitations on the powers of some supervisory authorities, and secrecy and confidentiality requirements continue to inhibit effective information exchange in some jurisdictions.

    The 2004 conference was organized with the following objectives:

    • to exchange information on what standard setters, and national and international agencies are doing to strengthen information exchange and cooperation;

    • to identify the impediments to effective information exchange and coop eration, and to learn about the effectiveness of the different approaches to addressing these impediments;

    • to hear views about the priorities for action (Given the scarcity of supervisory resources available worldwide, which areas are judged to warrant greater attention than others?);

    • to hear views about the additional steps different agencies and the IMF can and should take to strengthen cooperation and information exchange; and

    • to develop a road map and work program to strengthen cooperation and improve international information sharing.

    In fact, the conference facilitated a rich exchange of views and was sufficiently successful in meeting these objectives to encourage us to bring together several of the contributions in this publication so that we could make them available to a wider audience.

    To do so, we asked Richard Pratt to edit the written contributions that we solicited from participants. These are presented in Part I, preceded by an introductory chapter. Richard Pratt and Henry Schiffman, both experienced in the supervisory arena and in cross-border work, expanded their conference presentation on the instruments of information exchange, the approaches used in the different standards, and the barriers and gateways to information exchange to form Part II of this publication. Part II also presents the final results of the survey we conducted of financial regulatory agencies and financial intelligence units.

    In the opening session of the conference, I mentioned a few issues that continue to be discussed in the following articles and warrant further consideration.

    First, several presentations highlighted the need for memoranda of under standing (MoUs) on sharing information, and IMF assessments have often advised that jurisdictions should prepare MoUs. The conference also heard a number of contrary views on the benefits of MoUs, however. At the same time, it was pointed out that the due-diligence process that accompanies the negotiation of an MoU is often as important as the MoU itself, in that the former allows the negotiators to learn about each other and how they can exchange information effectively. MoUs can be expensive to negotiate; and smaller, developing members have limited capacity to build the necessary relations to negotiate formal agreements.

    Second, exchanging information between supervisors covering different sectors (e.g., banking and securities) and between supervisory and financial intelligence units (FIUs) is still cited as a constraint. Working, as we do, on both prudential supervisory areas and anti-money laundering and combating the financing of terrorism (AML/CFT), we are aware of the challenges supervisors have in cooperating and exchanging information outside their areas. The conference provided some useful practical suggestions on how to handle these constraints.

    Third, the results of our assessments against the relevant codes and standards show that there are differences between sectors in their degree of compliance with the relevant criteria for cooperation and information exchange. The banking sector is most advanced in information sharing; insurance does well if supervision is in place; but securities and AML/CFT require a lot of work.

    The lattermost finding seems to be related in part to the type of information that these sectors most need to share—concerning clients and information needed for court actions—rather than financial supervisory information. Conferees suggested that expanded AML/CFT supervision may be narrowing the differences between the sectors.

    Fourth, the workshop identified areas where there is a need for improved, secure gateways for information exchange. Examples included the presence of confidentiality agreements and bank secrecy, or conditions on the use of information passed on to a foreign supervisor. While our assessments show that the number of jurisdictions with strong secrecy laws is decreasing, there remain other constraints on information exchange. For example, many jurisdictions are required to consider individual privacy and the public interest in the sharing of information.

    Fifth, surprisingly mundane constraints on information exchange were mentioned during the workshop. For example, supervisors may not know whom to contact to obtain information; and by the time the required individual is identified, that information may be of little use. As a concrete result of the workshop, an increased number of standard setters are posting information on supervisory contacts and looking into cross-sectoral issues to improve information exchange.

    In summary, the conference proved to be the venue of a strong cross-fertilization process for the establishment of communication channels among the supervisors and FIUs to improve cross-border and cross-sectoral cooperation and information exchange. The aide-mémoire of the conference provided a road map to take the work forward. We hope that the chapters in this book will stimulate improved communication in a wider group.

    Introduction: Key Issues in Removing the Barriers to Cooperation

    RICHARD PRATT

    1. Introduction

    • 1.1. The purpose of this book is to contribute to the enhancement of inter national cooperation for financial sector regulation and supervision. It seeks to identify the main barriers to effective and timely cooperation and to suggest ways of removing them.

    • 1.2. The book has two parts. Part I consists of a series of chapters written by representatives of international standard-setting bodies, regulatory authorities,1 and financial intelligence units (FIUs). The chapters are based on presentations given to an International Monetary Fund (IMF) conference on cross-border cooperation and information exchange held in Washington in July 2004. Part II consists of two chapters: one reports on research into international standards and practices in respect of international cooperation, and the other reports on a survey of regulatory authorities and FIUs seeking information on their practical experience of cooperation.

    • 1.3. The book includes commentary and analysis that is the result of a wealth of different experiences by a wide variety of regulators, law-enforcement experts, and policy advisors. It demonstrates substantial common ground between the various contributors. It also demonstrates some variations in approach and practice that may create barriers to effective and timely cooperation. The analysis of these differences leads to some suggestions for future action to enhance cooperation between regulatory authorities and FIUs.

    2. Support for International Cooperation

    • 2.1. Each part of the book demonstrates that all regulatory authorities attach importance to effective and timely international regulatory cooperation. The contributors, the survey, and the review of standards and practices make it clear that regulatory authorities understand the need for better international and domestic cooperation.

    • 2.2. Contributors also agree on the importance of the right attitude among officials of the regulatory authorities and FIUs. Commitment to the process of cooperation is important (Baasiri). Time spent building relationships pays off (Wilson, Va’ai). Officials who know and trust each other can find ways of cooperating and exchanging information within the law. Informal contacts (within the law) are frequently cited by contributors as more effective and faster than formal requests (Neville, Gaskell).

    • 2.3. The survey of regulatory authorities, described in the second half of the book, also shows that the system is working reasonably well. The overall results of the survey suggest that most regulators have a high degree of satisfaction with the assistance received through international cooperation and that, in most cases, assistance is provided within a month of a request being made. The survey also suggests, however, that the differences of approach among jurisdictions discussed later on are an important source of information exchange failure.

    3. Barriers to Cooperation

    Confidentiality Provisions and Legal Gateways

    • 3.1. Notwithstanding the degree of satisfaction with the process at present, there is clearly scope for improving the effectiveness of cooperation and information exchange. Not all regulatory authorities are equally satisfied with the assistance they receive from other authorities. Moreover, there are important differences in approach between regulatory authorities, as revealed by the chapters in Part I and further demonstrated in the review of standards and practices (particularly Section 5 and Appendix C of Chapter 17 by Pratt and Schiffman) and the survey report (Chapter 18) in Part II.

    • 3.2. On the one hand, the survey results show that 44 percent of requesting authorities2 indicated that the main impediments to the satisfactory exchange of information were secrecy laws or confidentiality provisions in the requested authority. On the other hand, for some authorities the—International and Offshore Financial Centers (IOFCs)—the main reason for refusing assistance (cited by 37 percent of such centers) was the incapacity of the requesting authority to provide the necessary confidentiality undertakings. This result is illuminating, in that it demonstrates that what appears to one authority to be an unreasonable secrecy or blocking provision may appear to another to be a necessary confidentiality protection.

    • 3.3. In fact, few would question that there are sound reasons for confidentiality of personal or business financial affairs (Va’ai). There will not be a regulatory authority in any jurisdiction that is not bound by secrecy or confidentiality restrictions of some kind (since such restrictions are required by international standards). Equally, there will be hardly any regulatory authorities whose confidentiality restrictions are not subject to some exemptions (or gateways)—again, as required by international standards. The real problem experienced by the 44 percent who referred to excessive secrecy provisions, therefore, is not whether a secrecy law exists but whether the gateways allow cooperation to be given or information to be exchanged.

    • 3.4. The limitations placed by many regulatory authorities on the use of gateways tend to be concerned with the following:

      • 3.4.1. the nature of the information that can pass through them (and in particular, whether it includes information on customers and the beneficial owners of accounts, companies, and trusts);3

      • 3.4.2. the protection given by the requesting authority to confidential information, once it has been received (and in particular, whether the requesting authority is expected to seek permission from the requested authority before passing information to a third party);

      • 3.4.3. the purposes for which the information is to be used;

      • 3.4.4. whether or not the requesting authority would be able to provide similar assistance (reciprocity);

      • 3.4.5. where the information relates to a breach of law or regulation, the nature of the offense that has been committed and whether the offense has a close parallel in the requested jurisdiction; and

      • 3.4.6. the nature of the authority requesting the information (and in particular, whether it is an authority exercising functions similar to those of the authority from whom assistance is sought).

    • 3.5. Clearly, in the past (and, in some cases, at present), there have been jurisdictions that have seen it as being in their economic interests to frame the law so as to shield their financial businesses and customers from legitimate enquiry. The kinds of factors listed previously may have been used as devices to find respectable reasons for refusing requests. International pressure has substantially reduced the number of such jurisdictions.

    • 3.6. Even if there were no such jurisdictions, however, virtually all regulator authorities and FIUs would continue to impose some limitations of the kind described in paragraph 3.4.

    Nature of Information and Purpose for Which It Is Sought

    • 3.7. Confidential information is sought primarily about regulated financial services institutions (banks, insurance companies, and securities businesses), on the one hand, and the customers of such institutions, on the other hand. Information is sought to assist in licensing and supervision of financial institutions and for the enforcement of financial services laws, where offenses have been detected—including insider dealing, market manipulation, financial fraud, other frauds, and others. It is a reasonable generalization (although not necessarily true in every case) to note that banking and insurance supervisors tend to seek information for licensing and supervision purposes and are more likely to seek information about regulated institutions. In contrast, securities regulators and FIUs are much more likely to seek information related to enforcement action and are also more likely than banking or insurance supervisors to seek information about the customers of financial institutions.

    • 3.8. The survey results show that all banking supervisors request information related to supervision matters, about 80 percent to licensing, and only 47 percent to enforcement. For securities regulators, 83 percent of agencies made requests related to enforcement, 67 percent to licensing, and only 42 percent to supervision. Similar results apply to agencies receiving requests. According to the survey, securities regulators and FIUs (who engage in a higher proportion of enforcement cases) are less satisfied (77 percent) with the process of cooperation than banking and insurance supervisors (90 percent).

    • 3.9. It is worth noting that this distinction between the focus (in the context of information exchange) of banking and insurance supervisors, on the one hand, and securities regulators (and FIUs), on the other hand, is becoming less marked. Increasingly, banking and insurance supervisors consider that legal and reputational risks, as well as responsibilities to combat money laundering and terrorist financing, demand that they share information about customers of financial institutions with other regulatory and law-enforcement authorities (Neville).

    • 3.10. Nevertheless, there is an important distinction between the issues that arise when information about regulated businesses is exchanged for purposes of supervision and licensing, and where information about customers is exchanged for enforcement purposes (Lister). It is worth noting that information about regulated businesses will frequently already be in the hands of the requested authority, whereas information about customers frequently has to be obtained using investigative powers. As a generalization, it is reasonable to say that information about regulated institutions that is in the hands of the requested authority can be exchanged more readily and with fewer difficulties than information about customers that has to be obtained using investigative (often compulsory) powers (Lister).

    Information About Regulated Businesses

    • 3.11. The survey confirms that most information relating to supervision and licensing matters concerns regulated businesses rather than their customers. Where information on these matters is passed between regulatory authorities, the following issues arise.

      • 3.11.1. If a supervisor (usually a banking or insurance supervisor) is concerned about the financial stability of a financial institution, any disclosure of that concern could precipitate the very failure that the supervisor feared (Gaskell). It is therefore essential to ensure that the relevant information is restricted to supervisors with a key interest.

      • 3.11.2. There is a danger that a supervisor in one country receiving the news that another supervisor is concerned about the stability of a financial institution may take action that, although protecting the customers in its own jurisdiction, may not be in the interests of the customers in the jurisdiction of the supervisor releasing the information or more generally (Choi).

      • 3.11.3. Where a multinational financial services institution has branches or subsidiaries in many different countries, the relative responsibilities of home and host supervisors are asymmetric (Godano). The home supervisor, responsible for consolidated supervision, needs as much information as possible about the worldwide activities of the business. It must be able to conduct wide-ranging on-site visits in every part of the business. In contrast, although the host supervisors have a legitimate interest in the financial soundness of the parent (Deleveaux), it is impractical for all of them to have rights to conduct visits to the parent.

      • 3.11.4. Moreover, the asymmetry could also apply to the importance of the information to the supervisor. On the one hand, in some countries, a large proportion of the banking system is effectively controlled by foreign banks, and their activity in the jurisdiction is critical to the jurisdiction’s financial and economic well-being. On the other hand, business in that jurisdiction accounts for only a small proportion of those foreign banks’ activities. There exists an asymmetry between the high importance of the business in the jurisdiction to the host supervisor and the relatively low importance of the business in that jurisdiction to the foreign banks and their consolidated supervisors.4

    • 3.12. These are important issues. Nevertheless, there is much evidence that these issues can be resolved by discussion between supervisory authorities, provided that requested authorities develop trust in the requesting authorities. This may explain the high degree of satisfaction with information exchange referred to in paragraph 2.3.

    Information About Customers for Licensing and Supervision

    • 3.13. The survey shows that information about the customers of financial institutions is required by regulatory authorities for licensing (by 8 percent of agencies), supervision (18 percent), and enforcement (36 percent) purposes. In the case of licensing and supervision, the information about customers is probably required to determine the extent and nature of the exposure of a financial institution to individual major customers. For enforcement, the information may be required to investigate offenses.

    • 3.14. The exchange of information about customers to determine the exposure of a financial institution to important customers (for licensing and supervision purposes) raises different issues from those raised when information is required for an investigation into alleged improper action by the customer (unless it becomes clear that the customer has been deliberately concealing his/her/its identity to disguise the fact that what appear to be a series of smaller, unrelated exposures should, in fact, be regarded as a single large one).

    • 3.15. Although this book is mostly concerned with information exchanged between regulatory authorities, it is also important that there be proper information flows within a multinational financial institution, so that it can manage its risks. Those risks will include large hidden exposures to a single customer. They will also include reputational risks arising from relationships with certain kinds of customers, such as politically exposed persons. It is essential that a multinational financial institution be allowed to transmit information between branches and subsidiaries in different jurisdictions and its head office so that it can adequately manage these risks (Hüpkes). It is important to ensure that this does not conflict with domestic laws in host countries that restrict the flow of information on customers in order to protect the confidentiality of customer information (Deleveaux).

    • 3.16. In either case—information exchanged within a multinational financial institution or information exchanged between regulatory authorities—where the information concerns customers for the purpose of managing a financial institution’s risks, there would appear to be no threat arising to the civil rights of the customer. It is difficult to see why there should be any more constraints on the flow of such information than where the information is solely about regulated financial institutions. It is important that constraints on information flows that are designed to protect the rights of those under investigation do not inhibit the flow of information designed to enable proper risk management and its supervision.

    Information About Customers for Enforcement

    Due Process and Use of Compulsory Powers to Collect Information

    • 3.17. The issues that arise where information is exchanged that may lead to judicial action against individuals or customers of financial institutions are described by Thony in Chapter 1. In respect of information that can be used in court as evidence that may result in a criminal conviction, jurisdictions’ laws seek to balance the need to provide information quickly, in a form that can be used in evidence, against the need to ensure that it is collected and distributed in a way that respects the demands of due process and does not infringe the legitimate rights or interests of the requested countries or of those who might be the subject of the information that is exchanged (Thony). Given the sensitivity of these issues, most jurisdictions’ mutual legal assistance arrangements insist that the courts review individual cases to determine that civil rights are not infringed, and the government (executive branch) reviews the cases to ensure that sovereignty is not affected.

    • 3.18. In most countries, the desire to protect the civil rights of a person under investigation has resulted in rules that constrain the investigation of offenses and the use of information acquired in such investigations. These rules sometimes apply differently to regulatory authorities than to law-enforcement authorities. The contributors to the book display a range of different approaches. These differences of approach often appear to cause the most significant barriers to information exchange. The survey shows that 47 percent of respondents identified difficulties in understanding the differences in legal and institutional frameworks across jurisdictions as impediments to information exchange.

    • 3.19. In some jurisdictions, all regulatory authorities and law-enforcement agencies abide by the same due-process principles so that information is only ever collected in a way that protects the civil rights of those under investigation (including the bar on compulsory self incrimination, for example). According to this approach, once the information is collected, it can be exchanged between different authorities and used in whatever way is most efficient for civil and criminal enforcement (Tafara).

    • 3.20. In other jurisdictions, although these constraints apply to law-enforcement agencies and perhaps to FIUs, certain regulatory authorities are given compulsory powers that allow them to insist on information being provided and that provide no rights to individuals to refuse to cooperate beyond the preservation of legal privilege. Where this is the case, however, civil rights are protected by insisting that information collected using compulsory powers can be used only in certain ways. (For example, a statement given under compulsion cannot be used in court against the person giving the statement (Pratt and Schiffman).) Jurisdictions taking this latter approach often argue that their legislatures have given them exceptional information-gathering powers because of the wider public interest in ensuring stable and fair financial intermediaries and markets. They argue that it would be defeating the intentions of their legislatures to use compulsory powers to bypass the civil rights protections that apply in the context of the investigation of criminal offenses.

    Approach of FIUs5

    • 3.21. Some FIUs argue that information, however obtained, can be exchanged on any matter, provided that it is used only for intelligence purposes, remains under the control of the transmitting authority, and is never used in a court of law (Kammula). Assuming that such a proviso is accepted, then, according to this approach, there is no jeopardy to the civil rights of the subject of the information exchange.

    • 3.22. The Egmont statement of best practice says that the transmitting authority should not unreasonably withhold permission for the use of information, unless giving permission for the use of such information would be clearly disproportionate to the legitimate interests of a natural or legal person or the state of the providing FIU, or would otherwise not be in accordance with fundamental principles of its national law. These are broadly the same considerations that underpin the need for formal mutual legal assistance (MLA) treaties (Thony), but the Egmont statement of best practice suggests that such decisions should be made not by a government or a court (as is normal in MLA cases) but rather by the officials of an FIU.

    • 3.23. Other FIUs consider that information exchanged between FIUs can include documents and statements taken under oath. They also consider that the information exchanged should be available for passing to a prosecuting authority and could be the justification for the seizing and freezing of assets (Baasiri).

    Approach of Regulatory Authorities

    • 3.24. Some regulatory authorities with compulsory information-gathering powers impose conditions on the use of the information collected. Some insist that information collected using regulatory powers cannot be used for prosecution (Lister). Others insist on written under takings that information will not be disclosed to a third party without the prior written permission of the originating authority. Some of the regulators provide that such an undertaking should not apply where there is a legal or constitutional obligation to disclose (Gaskell, Hüpkes), but not all regulators have such an exemption. Those that do not argue that, in practice, in such circumstances, they would not unreasonably withhold their permission (Wilson, Deleveaux, Choi).

    • 3.25. Even though requested authorities may, in practice, be prepared to give such consent on a case-by-case basis, the retention of a requirement to seek permission, even in the face of a legally enforceable demand, may mean that the requesting authority is unable to accept information that is subject to such a condition. For if the requested authority is unable to give a blanket authority to disclose information in the face of legally enforceable demands, it follows that there may be some circumstances in which it would not do so. The requested authority may not know what these circumstances might be. If permission were refused, the requesting authority would be forced to choose between breaking a domestic obligation and breaking their undertaking to the transmitting authority. Moreover, in some cases, a requirement for an undertaking not to pass information to another authority may frustrate the whole purpose of the request for information—for example, where a regulatory authority is responsible for investigating a market-related offense but would normally pass the case to another authority for prosecution according to the legal and constitutional requirements of that country. On balance, therefore, there is a strong case for discouraging the use of such undertakings, and many argue that their use is contrary to international standards.

    • 3.26. Some regulatory authorities argue that there should be a clear distinction between civil and criminal issues. Where a criminal prosecution is in prospect, information should be supplied through the mutual legal assistance route. Even if information leading to the criminal investigation was originally supplied on a regulator-to-regulator basis, criminal prosecutions should not be based on information originally supplied for regulatory purposes. Using the regulatory cooperation route is not transparent and does not give the individual the opportunity to make representations about whether or not information should be trans mitted. There are no international standards as to whether, in these circumstances, the individual should be told, or whether there should be an anti-tipping-off provision (Lister). According to this view, if the mutual legal assistance route causes delays because its procedures are slow, then the answer should be to reform the mutual legal assistance procedures. Attempting to bypass them using regulatory cooperation will simply undermine confidence in regulator-to-regulator information exchange (Lister).

    • 3.27. The conditions and restrictions previously described may be perceived by the originating authority to be necessary to protect the rights of their jurisdiction and those of the regulated businesses and customers. They may be perceived by the requesting authority as arbitrary barriers. Where regulatory authorities exchange information regularly and build up trust with each other, the issues can be resolved fairly readily. When information is sought from jurisdictions that have only recently opened gateways or are new to using compulsory information powers on behalf of other authorities, however, there is a higher degree of caution (Lister). This may increase the likelihood of information exchange being frustrated in practice.

    Other Barriers to Cooperation

    Case-by-Case Examinations of Regulators and Requests

    • 3.28. Many regulatory authorities insist that they should judge, for every request, whether or not the requesting authority is genuinely a regulatory authority, whether the request itself falls within acceptable limits, whether the information supplied is relevant, whether there is a real investigation that justifies the request, and so on (Deleveaux, Lister). Despite such procedures, however, it is rare, in practice, for such a request to be refused as a result of these considerations (Lister).

    Need for an Independent Interest in Subject Matter of a Request

    • 3.29. Some regulatory authorities are content to provide assistance to any authority regardless of whether or not they have an independent interest in the matter under investigation and regardless of whether the facts of the case would constitute an offense in their own jurisdiction (Tafara). Others cannot use compulsory powers to obtain information where the use of such powers is solely in order to assist another authority (Gaskell).

    Dual Criminality

    • 3.30. Law-enforcement agencies are more likely to have dual criminality requirements—that is, they are unable to provide assistance for the investigation of an offense if the action under investigation would not constitute an offense if committed in their own country (Thony, Suessli). Dual criminality requirements are less likely, however, when the nature of the crime is broadly similar in the jurisdictions of requested and requesting authorities. The Financial Action Task Force (FATF) recommendations discourage dual criminality requirements from preventing information exchange in cases of suspected money laundering or terrorist financing. Similarly, dual criminality requirements are also discouraged in the case of regulatory offenses, even though many regulatory authorities are required, when considering a request from a foreign authority for assistance, to take account of whether an offense for which assistance is requested has no close parallel in the requested jurisdictions (Lister, Deleveaux, Wilson).

    Diagonal Information Sharing

    • 3.31. Whether or not a regulator can share information with an authority carrying out functions rather different from its own is a matter of concern to a number of authorities (Murden). Indeed, the difficulty of “diagonal cooperation” is a matter of concern to the international standard-setting bodies. The survey’s design does not allow any conclusions to be drawn about cooperation between different kinds of regulators, but it does show that, internationally, the extent of cross-border exchange of information between FIUs, on the one hand, and banking, insurance, or securities regulators, on the other hand, is very low at between 10 percent and 15 percent.

    • 3.32. In addition to the problem of information exchange between different kinds of regulatory authorities and between regulatory authorities and FIUs, a further potential barrier can be created when different jurisdictions divide functions in different ways. For example, some jurisdictions give FIUs responsibility for assessing compliance by regulated businesses with anti-money laundering/combating the financing of terrorism (AML/CFT) requirements (customer due diligence, internal controls, staff training, account monitoring, and so forth) (Gaskell, Pinilla Rodríguez). There may be many advantages in this arrangement (Pinilla Rodríguez), but it does create a potential problem for regulated businesses by making them subject to different and conflicting requirements in respect of their priorities, their internal controls, and corporate governance; and it risks wasting the regulator’s superior knowledge of the business of the regulated institutions. Moreover, it is essential that FIUs with this responsibility be able to exchange information with regulatory authorities in other jurisdictions where foreign regulatory authorities have AML/CFT responsibility. As Pinilla Rodríguez emphasizes, it is essential that such potential barriers not be allowed to become real ones.

    Reciprocity

    • 3.33. The extent to which a regulator should insist that assistance be given only to an authority capable and willing to provide reciprocal assistance is discussed in the book (Tafara). Reciprocity is commonly taken into account by requested authorities. The survey suggests that no banking supervisor finds that reciprocity constitutes a barrier but that 38 percent of securities regulators state that they have to take such matters into account. It is rare, however, to find that this leads to a refusal to cooperate.

    Availability of Information-Collecting Powers

    • 3.34. Although not raised to any significant extent by contributors to the conference, the survey and the Pratt and Schiffman chapter suggest that the absence of powers to collect information is an important constraint. For example, 43 percent of unified regulators give limited powers to collect information as a reason for refusing requests for information, although the survey results suggested that some unfilled requests in this area may reflect misdirected queries.

    Proactive Information Exchange

    • 3.35. Another issue not raised by contributors but discussed by Pratt and Schiffman is the ability of a regulatory authority to provide assistance without being asked. This kind of assistance is clearly implicit in the structure of suspicious activity reports. It is also frequently given by regulators when they come across information that would be useful to foreign regulators. Some authorities cannot give assistance, however, unless they have received a written request, and this inhibits proactive information exchange.

    4. Common Values

    • 4.1. It is clear that regulatory authorities share a strong belief in the importance of international cooperation. It is clear from the contributions to this book that the barriers to cooperation that remain do not arise primarily because of a lack of good will or intent but rather from genuinely different approaches to the issues that were raised at the July 2004 conference.

    • 4.2. It is an irony, therefore, that the vast majority of requests for information are made and received by jurisdictions that share common values. They wish to detect and deter wrongdoing, and they wish to respect due process and the civil and commercial rights of businesses and their customers. Regarding civil rights and the demands of due process, whether the civil rights are expressed in the European Convention on Human Rights, the U.S. Constitution, or in other forms, the vast majority of regulators who seek and give information are in jurisdictions that are subject to broadly similar requirements. Moreover, where the information concerns a regulated business, both the requested authority and the authority receiving the information are committed to, and subject to, the same international standards of supervision—the Basel Committee on Banking Supervision (Basel), the International Organization of Securities Commissions (IOSCO), and the International Association of Insurance Supervisors (IAIS)—and therefore are likely to be subject to comparable confidentiality restrictions and using the information for broadly similar purposes. Equally, all FIUs that are members of the Egmont Group are committed to the same group principles.

    • 4.3. In contrast, the legal, constitutional, and other institutional requirements that give effect to these high-level principles are often very different. The survey results and the individual contributions to the book show that different legal and institutional arrangements are among the most significant barriers to cooperation (Godano). Moreover, many countries frame their legislative requirements and, in particular, the tests that they insist be applied before information is exchanged in a way that requires the requested authority to make assessments of the precise legal arrangements of the requesting authority (either on a case-by-case basis or when concluding a memorandum of understanding (MoU)) and/or to impose conditions on the use of the information.

    • 4.4. In some cases, the test that has to be applied is that the requesting authority has equivalent provisions to those of the requested authority (Lister, Gaskell). This can often involve a time-consuming analysis. Where legal and constitutional traditions are very different, such a test may result in the frustration of cooperation.

    • 4.5. The contributors also agree on the importance of informal contact and the establishment of trust to facilitate information agreement. Trust can be built up through contact and communication. Conversely, inadequate communication can undermine trust where direct action by a foreign regulator interferes with the relationship between a regulator and a regulated institution in its own jurisdiction (Wilson).

    5. Removing the Barriers

    • 5.1. The international standard-setting bodies have actively addressed these issues. First, by organizing conferences and forums for discussion of issues arising from international cooperation, they help to build up the trust that is essential for effective information exchange. For smaller jurisdictions with fewer resources available for travel, it may be helpful to include provision for travel to conferences as part of technical assistance packages.

    • 5.2. Second, the standard-setting bodies in this context have clearly defined the legal and regulatory powers that regulatory authorities should have to collect and share information, and have established standards for the use and protection of confidential information.

    • 5.3. Third, standard-setting bodies define and describe best practice in information exchange.

    • 5.4. In addition, most of the standard-setting bodies recognize the value of MoUs and have drawn up model memoranda of understanding or defined the items that should be included within such agreements. The IAIS has prepared a model MoU, and the Basel Committee has issued a paper on the essential elements of cross-border cooperation. The survey results show that the majority of respondents found MoUs useful as a means of building trust and facilitating information exchange. Although the standard setters clearly indicate that the existence of an MoU should not be a prerequisite for information exchange, 40 percent of regulators in advanced economies responding to the survey cited the absence of an agreement as an important impediment (the second-highest one, below only secrecy laws).

    • 5.5. IOSCO has gone one step further in agreeing the Multilateral Memorandum of Understanding (MMoU).6 This sets clear standards regarding the powers that should be available to the requested authority, the confidentiality of the information that is exchanged, and the use to which it may be put. All IOSCO members are invited to sign it. Moreover, for all signatories, an independent verification team assesses whether potential signatories have the necessary legal powers.

    • 5.6. The IOSCO MMoU was drafted on the basis of the existing objectives and principles of IOSCO, together with resolutions that the IOSCO President’s Committee has adopted over a number of years. Some consider that the MMoU demands too much of signatories. The MMoU was drafted, however, on the basis of existing IOSCO policies that have already been endorsed by the entire membership. The MMoU is cited by some survey respondents as a useful model for other standard-setting bodies to follow.

    • 5.7. The Egmont Group statement of best practice, principles, and model agreement may fulfill the same purpose, given that the group has devised a procedure for independently assessing the legal powers of new entrants (Kammula).

    • 5.8. It may be helpful, therefore, to undertake a review of the way in which the IOSCO MMoU and Egmont statement are implemented in order to establish the lessons learned, with a view to considering whether other international standard-setting bodies should develop their detailed requirements in respect of information exchange along similar lines, including a process of independent assessment of adherence to these standards.

    • 5.9. Standard-setting bodies might then consider encouraging regulatory authorities to rely upon independent assessments of compliance with international standards rather than making case-by-case assessments of requesting authorities and of the nature of an information request in every case.

    • 5.10. Although it is conceivable that a regulatory authority could rely upon the assessment of an independent body to judge whether a counterparty had arrangements that met international standards, it is not reasonable to expect such an assessment to judge whether another regulatory authority had equivalent standards to its own. Given resource constraints, the independent body can assess only whether or not minimum standards are met. Where some jurisdictions exceed minimum standards (and most will do so in some respects), the use of the “equivalence” requirement is likely to result in repeated, time-consuming assessments of each jurisdiction’s arrangement by every other counterparty to information exchange. These time-consuming assessments are especially burdensome on smaller jurisdictions that may not have the resources to conduct them.

    • 5.11. Many of the barriers to cooperation are well known and have been the focus of developing international standards. The list of possible action points described in Chapter 17 by Pratt and Schiffman are reinforced by the discussions that took place at the conference and by means of the survey. Increasing mutual trust, developing awareness of international standards, encouraging transparency in compliance, and undertaking independent assessments of compliance with those standards continue to be sound and sensible ways of improving cooperation.

    Notes

    Assistant Director, Monetary and Financial Systems Department, IMF.

    The term “regulator” has tended to be used for securities authorities and those combined authorities responsible for all financial services sectors, whereas the term “supervisor” has been used for banking and insurance authorities. Supervision has traditionally meant a focus on monitoring the overall (usually financial) performance of a financial institution, whereas regulation has involved setting standards governing the conduct of business and relationships with customers. This distinction is becoming less relevant, since all regulators and supervisors both set standards and monitor performance. In this chapter, the term “regulation” is used to denote both regulation and supervision. The term “supervisor” is retained for banking and insurance authorities. “Supervision” is used (for any authority) where this refers to the ongoing monitoring of a financial institution’s compliance with the law and regulation.

    Throughout this chapter, the term “requesting authority” is used to denote the authority seeking assistance and receiving information; “requested authority” is the authority whose assistance is sought and which is transmitting information.

    In the case of trusts, the reference should be to the beneficiary rather than the beneficial owner.

    This point was emphasized by participants at the IMF conference in July 2004.

    See also the IMF/World Bank publication FIUs: An Overview, available on the Web at http://www.imf.org/external/pubs/ft/fiu/fiu.pdf.

    In their April 2005 Annual Conference, IOSCO decided that by January 1, 2010 all member regulators should have applied for and been accepted as signatories under Appendix A of the IOSCO MoU or have expressed (via Appendix B) a commitment to seek legal authority to enable them to become signatories/members.

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