Vanuatu
Assessment of the Supervision and Regulation of the Financial Sector Volume II––Detailed Assessment of Observance of Standard and Codes

This paper summarizes the Detailed Assessment of Observance of Standards and Codes in the financial sector of Vanuatu in the context of the offshore financial center program. It assesses the supervision and regulation of the financial sector compliance with the Basel Core Principles for Effective Banking Supervision and the International Association of Insurance Supervisors Core Principles using the Core Principles Methodology. It also assesses the elements of legal and institutional antimoney laundering and of combating the financing of terrorism.

Abstract

This paper summarizes the Detailed Assessment of Observance of Standards and Codes in the financial sector of Vanuatu in the context of the offshore financial center program. It assesses the supervision and regulation of the financial sector compliance with the Basel Core Principles for Effective Banking Supervision and the International Association of Insurance Supervisors Core Principles using the Core Principles Methodology. It also assesses the elements of legal and institutional antimoney laundering and of combating the financing of terrorism.

I. Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision

A. Domestic Banks

General

1. With the agreement of the Reserve Bank of Vanuatu (RBV), the mission assessed compliance with the Basel Core Principles for Effective Banking Supervision (BCP) using the Core Principles Methodology. The assessment was undertaken in the context of the Offshore Financial Center (OFC) Assessment Program, Module 2. The domestic and offshore sectors were subject to individual assessments, since they are covered by different legislation and supervised within different institutional frameworks. The assessment took place in May 2002, and was undertaken primarily by Mr. Richard Lang, a former Deputy Governor of the Reserve Bank of New Zealand, with the assistance of Mr. Richard Chalmers, mission chief. The resulting recommended action plan is contained in the appendix to Volume I of this report.

Information and methodology used for assessment

2. The assessment was based on a review of the applicable laws, regulations, and prudential guidelines (as detailed in Volume I), and discussions with staff of the RBV (primarily the deputy governor and staff of the banking supervision unit), industry groups (e.g., the bankers’ and accountants’ associations, and the finance center association), and representatives of individual financial institutions. More general background information was obtained from meetings with representatives of government ministries (e.g., ministry of finance and the State Law Office). Where relevant, a review was also undertaken of the RBV’s internal procedures manuals, statistical and other reporting forms, policy notices (including drafts under preparation), and similar documentation. Prior to the mission, the RBV had responded to a questionnaire on the regulatory environment and had undertaken an informal review of its compliance with the core principles, but this did not constitute a formal self-assessment.

Institutional and macroprudential setting, market structure—overview

3. The RBV is responsible for the licensing and supervision of the domestic banking sector, while responsibility for the offshore banks falls to the Vanuatu Financial Services Commission (VFSC) (see separate detailed assessment). The RBV has a small banking supervision unit headed by the deputy governor. It carries out its responsibilities through a combination of routine off-site surveillance, based on a quarterly reporting system, and an on-site examination program.

4. The domestic banking sector comprises five commercial banks, including three branches and subsidiaries of Australian institutions; one government-owned institution; and a private bank; which, although it holds a domestic license, is not involved in the local market, but offers private banking facilities to nonresidents. The domestic license permits a universal banking operation, servicing both resident and nonresident customers, but the focus of the banks is primarily on traditional retail and commercial activities. The trend in recent years has been a gradual withdrawal of foreign banks from the domestic market, as institutions have sought to consolidate and to close their marginal operations. The total assets of the domestic banking system, as at end-2001, were $345.6 million, of which about 40 percent comprised local assets, the balance representing almost entirely deposit placements overseas, mostly by the foreign banks with their respective parent banks. About 15 percent of the deposit base was sourced from nonresidents.

Principle-by-principle assessment

Table 1.

Detailed Assessment with Compliance with the Basel Core Principles—Domestic Banks

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Table 2.

Summary Compliance with the Basel Core Principles—Domestic Banks

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Compliant.

Largely compliant.

Materially noncompliant.

Noncompliant.

Not applicable.

B. Offshore Banks

General

5. With the agreement of the VFSC, the mission assessed compliance with the Basel Core Principles for Effective Banking Supervision for the offshore sector, using the Core Principles Methodology. The assessment was undertaken in the context of the OFC Assessment Program, Module 2. The domestic and offshore sectors were subject to individual assessments, since they are covered by different legislation and supervised within different institutional frameworks. The assessment took place in May 2002 and was undertaken by Richard Chalmers, mission head, and Richard Lang, a former deputy governor of the Reserve Bank of New Zealand. The resulting recommended action plan is contained in the appendix to Volume I of this report.

Information and methodology used for assessment

6. The assessment was based on a review of the applicable laws, regulations and policy statements issued by the VFSC (as detailed in Volume I) and discussions with the chairman and staff of the VFSC (primarily the commissioner and banking supervisors), the RBV (the deputy governor and banking supervision unit), industry groups (e.g., the Finance Center Association and associations representing the accountants and lawyers), and representatives of individual institutions that provide services to the offshore banking sector. More general background information was obtained from meetings with representatives of government ministries (e.g., ministry of finance and the State Law Office). The near-complete absence of any offshore banks with a physical presence in Vanuatu prevented any direct discussion with the banks themselves. Where available, note was also taken of the VFSC’s statistical reporting and other forms, policy statements issued to the industry, internal guidance memoranda and other similar documentation. Prior to the mission, the VFSC had submitted a response to a detailed questionnaire, but had not undertaken a formal self-assessment.

Institutional and macroprudential setting, market structure—overview

7. The VFSC is responsible for the ongoing supervision of the offshore banking sector, but the minister of finance retains responsibility for licensing and the exercise of enforcement powers. The supervisory processes employed by the VFSC are relatively underdeveloped and are largely based upon the receipt and review of quarterly financial returns.

8. The offshore banking sector consists of 34 licensed banks, of which only 3 have a real physical presence in Vanuatu. The remaining are “shell banks” with no presence beyond either a resident “nominee” director or resident agent who acts mainly as a service address. All 34 are prohibited from undertaking business with Vanuatu residents, while those licensed since 1993 are also restricted, under a general condition of their license, from soliciting funds from the public in any jurisdiction. They may however, take deposits from associated and non-associated persons provided they do not publicly advertise for deposits. Total known assets of the 34 banks as at December 2001, were approximately $2.4 billion, of which $1.8 billion were recorded as market-related instruments and investments.

9. The authorities have very little information on the nature of the business of the offshore banks, but some are believed to be in-house treasuries for trading conglomerates. The mission was informed that the others are understood to be mainly associated with financial sector groups and are used principally to facilitate tax avoidance and/or asset protection schemes for themselves and their clients.

Principle-by-principle assessment

Table 3.

Detailed Assessment with Compliance with the Basel Core Principles—Offshore Banks

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Table 4.

Summary Compliance with the Basel Core Principles—Offshore Banks

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Compliant.

Largely compliant.

Materially noncompliant.

Noncompliant.

Not applicable.

II. Assessment of the Observance of the IAIS Core Principles

General

10. At the request of the Vanuatu Financial Services Commission, the mission undertook an assessment of compliance with the IAIS Insurance Core Principles using the Core Principles Methodology. The assessment was undertaken in the context of the OFC Assessment Program, Module 2. It extended to both the domestic and offshore sectors, since both are covered by the same legislation and subject to supervision within the same institutional framework. The assessment took place in May 2002 and was completed primarily by Gordon Rowell, head of insurance at the Cayman Islands Monetary Authority. The resulting action plan is contained in the appendix to Volume I of this report.

Information and methodology used for assessment

11. The assessment was based on a review of the relevant legislation and regulations (as described in Volume I) and discussions with the staff of the VFSC (primarily the commissioner), industry bodies (e.g., the Finance Center Association and the associations representing domestic insurers, accountants, and lawyers) and representatives of individual institutions. Immediately before the arrival of the mission, the only person within the VFSC to have direct responsibility for day-to-day supervision of the insurance industry resigned his position, and was subsequently unavailable for meetings with the mission. As a result, discussions had to be held with staff members who were less directly familiar with the issues. In addition, there was relatively little available within the VFSC by way of policy documents and operating guidelines to which the mission could refer. Prior to the mission’s arrival, the VFSC had submitted responses to a questionnaire, but this did not represent a self-assessment.

Institutional and macroprudential setting—overview

12. Responsibility for the supervision of the insurance sector is vested in the VFSC, but the minister of finance retains the authority to license and apply enforcement actions. At the time of the assessment, there was a vacancy for the supervisor of insurance within the VFSC, following the immediate and unexpected resignation of the previous incumbent prior to the mission’s arrival.

13. At end-December 2001, 12 domestic insurance companies, 1 underwriting association, 7 insurance agents, 6 brokers, and 15 offshore insurance companies were licensed under the Insurance Act. Of the 13 domestic insurers, 5 were locally incorporated companies subject to home regulation in Vanuatu and 8 were external “foreign branch” operations subject to host regulation. The majority of these companies were based in Australia, Europe, and New Zealand.

14. The domestic insurance market in Vanuatu is small, comprising a mixture of life and nonlife companies that predominantly write property, motor, life, and health insurance. Supervision covers only private insurance, which is largely related to property. Complete market statistics for the year ending 2001 are not available. The only available figures for 2001 estimate that gross property premiums of the licensed insurers were approximately Vt 320 million. In general, the domestic market is heavily reliant on overseas reinsurance, particularly for cyclone, flood, and earthquake catastrophe cover. The main domestic distribution channels are through agencies or on a direct basis. All agents, brokers, and salesmen are required to be licensed under the Insurance Act.

15. No data is available publicly, or was provided to the mission, on the type of companies that write offshore insurance business, although the primary market for such companies appears to be Australia, and the business may be linked to investment schemes, rather than traditional insurance products.

Principle-by-principle assessment

Table 5.

Detailed Assessment of Observance of the IAIS Insurance Core Principles

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Table 6.

Summary of Observance of International Association of Insurance Supervisors (IAIS) Core Principles

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III. Assessment of Legal, Institutional, and Supervisory Aspects of AML/CFT

General

16. The AML/CFT assessment was undertaken at the request of the authorities in Vanuatu, using the April version of the draft IMF/World Bank methodology,1 and was in the context of the OFC Assessment Program, Module 2. The assessment took place in May 2002, and was undertaken primarily by Cecilia Marian, Legal Department, in conjunction with the financial sector experts on the mission. The mission also benefited from the input of Ms. Pat O’Sullivan, an IMF consultant, who was in Vanuatu at the same time pursuing the technical assistance program to develop a regional FIU. The resulting recommended action plan from the assessment is contained in the appendix to Volume I of the report.

Information and methodology used for assessment

17. The assessment was based on a review of the legislation and regulations in force, and guidance notes and policy statements issued by the authorities (as described in Volume I), as well as discussions with the staff of the FIU; government law officers; the police; the regulatory authorities (the Reserve Bank of Vanuatu and the Vanuatu Financial Services Commission); and industry bodies (e.g., the Finance Center Association and associations representing the bankers, accountants, and lawyers). The mission also discussed practical implementation procedures with representatives of private sector institutions. In advance of the mission’s arrival, the authorities had submitted responses to questionnaires on the AML/CFT regime, but this did not constitute a detailed self-assessment.

Institutional framework—overview

18. The Financial Transactions Reporting Act gives a pivotal role to the FIU established in the State Law Office. Its functions are to:

  • receive suspicious transaction reports (STRs) given by financial institutions;

  • disseminate STRs to law enforcement and regulatory agencies;

  • conduct investigations to ensure compliance with the Act;

  • receive information from domestic and foreign regulatory or law enforcement bodies in relation to the investigation or prosecution of money laundering;

  • issue guidelines regarding record-keeping and reporting obligations; and

  • provide training programs for financial institutions about record-keeping and reporting obligations.

19. The financial regulators have played a minimal role in enforcing the AML requirements in the banking sector, although the RBV has been developing its supervisory role in this area. The offshore banking, insurance, and trust companies’ sectors are not currently subject to effective supervision, while company service providers, money remitters, and moneychangers fall outside any regulatory regime.

20. The Vanuatu Police Force is responsible for investigating money-laundering offences while the public prosecutor is responsible for prosecutions of money-laundering offences. To date, there have been no prosecutions. The attorney general is responsible for international cooperation on money-laundering matters.

Part 1: Adequacy of the Legal and Institutional AML/CFT Elements

Table 7.

Detailed Assessment of the Legal and Institutional AML/CFT Elements

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