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© 2003 International Monetary Fund

August 2003

IMF Country Report No.03/262

Monaco: Assessment of the Supervision and Regulation of the Financial Sector Volume I—Review of Financial Sector Regulation and Supervision

This review of financial sector regulation and supervision in Monaco in the context of the offshore financial center assessment program contains technical advice and recommendations given by the staff team of the International Monetary Fund in response to the authorities of Monaco’s request for technical assistance. It is based on the information available at the time it was completed on May 2003. The staff’s detailed assessment of the observance of standards and codes can be found in Volume II. The views expressed in these documents are those of the staff team and do not necessarily reflect the views of the government of Monaco or the Executive Board of the IMF.

The policy of publication of staff reports and other documents by the IMF allows for the deletion of market-sensitive information.

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Assessment of the Supervision and Regulation of the Financial Sector

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Volume I: Review of Financial Sector Regulation and Supervision

Principality of Monaco

May 2003

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“The contents of this report constitute technical advice and recommendations given by the staff of the International Monetary Fund (IMF) to the authorities of Monaco in response to their request for technical assistance. With the written authorization of the recipient country’s authorities, this report (in whole or in part) or summaries thereof may be disclosed to IMF Executive Directors and their staff, and to technical assistance providers and donors outside the IMF. Disclosure of this report (in whole or in part) or summaries thereof to parties outside the IMF other than technical assistance providers and donors shall require the written authorization of the recipient country’s authorities and the IMF’s Monetary and Financial Systems Department.”

Contents

• Acronyms

• Preface

• Executive Summary

• Follow-up Plan

• I. Introduction

• II. Financial System Overview

  • A. Background

  • B. Financial Institutions and Markets

  • C. Regulatory Framework, Oversight, and Market Integrity Arrangements

• III. Observance of Financial System Standards and Codes: Summary Assessments

  • A. Basel Core Principles for Effective Banking Supervision

  • B. AML/CFT Assessment Based on Fund/Bank Draft Methodology

  • C. IOSCO Objectives and Principles of Securities Regulation

• Text Tables

• 1. Key Recommendations and Follow-Up Plan

• 2. Monaco: Developments in the Financial Sector

• 3. Monaco: Banking Sector

• 4. Monaco: Portfolio Management Companies by Age and Activity, 2001

• 5. Monaco: Portfolio Management Companies by Capital and Ownership, 2001

• 6. Monaco: Mutual Funds - Market Structure, 2001

• 7. Monaco: Regulatory Structure, 2002

• Figure

• 1. Flow of Information and Cooperation

Acronyms

Preface

The Offshore Financial Centers Assessment Report for the Principality of Monaco assesses, in particular, the anti-money laundering and combating the financing of terrorism (AML/CFT) regime based on the April 2, 2002 version of the Draft Fund and Bank AML/CFT Methodology.¹ It also evaluates the regulation of portfolio management and mutual funds relative to the IOSCO Objectives and Principles of Securities Regulation.

The assessments were carried out during a mission from April 22 to May 3, 2002, whose members included Ms. Mary G. Zephirin (Mission Chief), Ms. Jennifer Elliott (both MFD), Messrs. Louis Forget (Consulting Counsel, LEG), Marcel Maes, and Ronald Ranochak (both consultants), and Ms. Sonia Echeverri (Mission Assistant, MFD). The report was updated in May 2003 to take account of legislation passed, and regulatory measures undertaken, since the mission.

The members of the missions were privileged to meet with the Minister of State, Mr. Patrick Leclercq, Mr. Franck Biancheri, Government Finance and Economic Counselor, Mr. Patrice Davost, Director of Judicial Services, Ms. Sophie Thevenoux, Director of the Budget and Treasury Division, and Ms. Isabelle Rosabrunetto, Assistant to the Director of the Budget and Treasury Division. The mission also met with a number of officials from these institutions and with representatives of various public entities, financial institutions, auditors, and private lawyers.

The members of the mission wish to express their gratitude and deep appreciation to the Monegasque authorities and the staff of all the public institutions which they visited and with whom they worked during their stay for their hospitality, cooperation, and openness in sharing insights and information. The feedback provided by the authorities during all meetings was particularly useful in strengthening the report. Special thanks are in order to Ms. Sophie Thevenoux for her assistance in organizing the technical activities of the mission and channeling the flow of information and to Ms. Isabelle Rosabrunetto for her very effective handling of logistical support and general assistance to the mission.

Executive Summary

The Principality of Monaco has in place a comprehensive legal framework, supervisory structure, and practices that support a well regulated financial environment. The authorities have over the past two years adopted a strongly proactive approach to supervision, especially in the AML/CFT area. This emphasis is appropriate to a system largely dominated by internationally-active private banking and related financial services, the supervision of which benefits from close collaboration with the French supervisory authorities. Monaco’s proactive stance, crucial to reducing the potential for reputational risk, could be enhanced by further developing the supervisory architecture through additional formal agreements for information exchange and cooperation, additions to the AML/CFT regime, and some fine-tuning of supervisory arrangements

Monaco’s financial system is largely comprised of private banks providing asset management for high-net worth clients who are, in the main, attracted to the jurisdiction by the absence of personal direct taxes on residents, a very secure environment and convenient location. Portfolio management services and mutual funds are also offered by nonbank institutions. Company and trust service providers contribute to Monaco’s strategy of attracting wealthy residents by facilitating wealth management services appropriate to the particular circumstances of clients from different jurisdictions. No insurance companies have been established in Monaco, insurance being offered only by the agents or brokers of French insurance companies.

Based on a treaty of 1918 between France and Monaco² and the 1919 Treaty of Versailles, Monaco has close economic and financial relations with France, the specifics of which are determined by several agreements and exchanges of letters. Inter alia, a Convention of 1945 established the principle that French banking regulations would apply in Monaco, and a 1963 Agreement established a customs union between the two, as well as a common legal framework for insurance. These agreements and further exchanges of letters made the banking sector in Monaco subject to French regulations and supervision by the French Commission Bancaire (FCB).

Legally, AML arrangements are a Monegasque responsibility, and portfolio management is subject to Monegasque rather than French regulation. Two commissions supervise securities activities in portfolio management and mutual funds, respectively. At the same time, the FCB, while having no legal responsibility, monitors portfolio management in banks, resulting in some overlap in the oversight of banks’ securities activity. Company and trust service providers (CSPs) are licensed and monitored by the Direction de l’ Expansion Economique (DEE). SICCFIN, the Monegasque financial intelligence unit (FIU), has an active supervisory role that goes beyond the core functions of an FIU.³ It supervises the anti-money laundering regime of all financial institutions, as well as CSPs.

Together with the provisions of the Criminal Code criminalizing money laundering, Law No. 1162 of July 7, 1993, Relating to the Participation of Financial Undertakings in Countering Money Laundering (the AML Law) is the main element of the AML/CFT legal framework in Monaco. The AML Law requires financial institutions to verify the identity of their customers, maintain client and transaction records, have internal controls, and train their staff. In addition, both financial institutions and certain listed professions are required to report suspicious transactions to SICCFIN, which is established pursuant to the AML Law. An amendment to the 1993 AML Law, enacted in July 2002, updates the Law on a number of important points. In particular, it integrates CSPs in the AML/CFT framework and adds a requirement to report transactions related to terrorism financing. The financing of terrorism is criminalized through the Sovereign Order under which Monaco implemented the Convention on the Suppression of the Financing of Terrorism. Freezing of suspect transactions is authorized by law. Confiscation of laundered funds is also authorized and may be obtained by court order.

The assessments carried out reflect the potential risks faced by the jurisdiction and the relative macroeconomic significance of the sectors. Hence, AML-related principles of the Basel Core Principles for Effective Banking Supervision were assessed, and the AML/CFT assessment of non-prudentially regulated institutions covered both CSPs and gaming establishments. In addition, the supervision of portfolio management and mutual funds was assessed relative to the IOSCO Objectives and Principles of Securities Regulation.

Overall, the assessments found that, while the supervisory structure is relatively complex, current arrangements are generally effective but may require strengthening to respond to new challenges and rapid or complex financial developments. The AML/CFT legal and institutional framework is sound and is implemented with increasing efficiency. AML legislation imposes sufficient measures on financial institutions with respect to customer due diligence, record-keeping, suspicious transaction reporting, and internal controls, and SICCFIN is in the process of establishing the procedures and inspections necessary to monitor compliance. Effective sanctions are provided for failure to observe the law. Integrity standards are set out in the laws regulating each industry in the financial sector, and also are implemented through the licensing requirements applicable to all business activities in Monaco.

The system of securities regulation as currently structured is effective within the Monegasque context of careful government planning of commercial activity, which includes a rigorously controlled company registration system, in addition to licensing of securities activity, and explicit limits on permitted securities activity. A recent series of initiatives to allow, for example, for consolidated cross-border supervision in banking and cross-border information sharing among securities regulators has greatly improved Monaco’s cross-border cooperation and information-sharing. The resulting system has proven to be effective in practice, but formalizing and clarifying information avenues would optimize the existing arrangements and provide a strong demonstration of continuing progress in strengthening the system.

Table 1.

Key Recommendations and Follow-Up Plan

Table 1.

Key Recommendations and Follow-Up Plan

Observations	Recommendations
Information Sharing
Ongoing work, especially with respect to information-sharing with foreign supervisors, remains necessary.	The planned MOU between SICCFIN (the FIU) and the French Commission Bancaire (FCB) should be completed as soon as possible. Work on establishing MOUs with foreign supervisory authorities should be intensified.
The Coordination Committee established in September 2002 is an important information-sharing mechanism. However, CSOM is not represented.	A formal agreement for information exchange should be developed between SICCFIN and CSOM.
Information sharing between the Supervisory Commission for Portfolio Management (CCGP) and the FCB depends on the dual roles of the Director of Budget and Treasury.	To provide, in the medium term, for possible changes in industry structure, to strengthen the cooperative base and enhance regulatory reputation; arrangements for information exchange between these parties should be formalized.
There is legal provision for information sharing between the CCGP and foreign supervisory authorities provided a formal arrangement is in place. Similar provisions were not made for the mutual funds supervisory commission.	The mutual funds law should be amended to allow for information sharing with foreign supervisory authorities.
AML/CFT
Terrorism financing is being brought into AML framework, but is not a predicate offence for money-laundering.	The financing of terrorism should be made a predicate crime for money laundering, and the list of predicate offenses should be reviewed to ensure that all serious offenses are included.
Customer due diligence arrangements are in place and observed but could benefit from some enhancement.	Increased due diligence for higher risk customers, especially politically exposed persons (PEPs), their families, and associates.
SICCFIN’s supervisory role is expanding and the AML/CFT workload is very heavy.	A comprehensive review of SICCFIN’s ongoing work should be undertaken, preferably no later than in the second half of 2003.
Legislation on confiscation of assets does not include confiscation of “instrumentalities” (i.e. assets used in the commission of a crime), and does not provide for the confiscation of assets of equivalent value.	The legislation on confiscation should be modified to provide for confiscation on instrumentalities of crime and for confiscation of assets of equivalent value.
DEE is responsible for general CSP oversight but SICCFIN assumed responsibility for AML/CFT in CSPs in the July 2002 AML Law.	Ensure that the new arrangements for dividing supervisory responsibilities between DEE and SICCFIN are well executed.
Mutual Funds and Portfolio Management
The legal framework is comprehensive and is supported by a system of reporting and inspections. The Supervisory Commissions bring important skills to the regulatory structure.	To enhance soundness of regulation and establish a system compatible with international practices, in the short term, serious consideration should be given to a merger of the two Commissions and, in the medium term, greater independence of the regulator. Additional attention to transparency and accountability, and the development of conflicts of interest policies would enhance the quality of the regulatory structure.

View Table

Table 1.

Key Recommendations and Follow-Up Plan

Observations	Recommendations
Information Sharing
Ongoing work, especially with respect to information-sharing with foreign supervisors, remains necessary.	The planned MOU between SICCFIN (the FIU) and the French Commission Bancaire (FCB) should be completed as soon as possible. Work on establishing MOUs with foreign supervisory authorities should be intensified.
The Coordination Committee established in September 2002 is an important information-sharing mechanism. However, CSOM is not represented.	A formal agreement for information exchange should be developed between SICCFIN and CSOM.
Information sharing between the Supervisory Commission for Portfolio Management (CCGP) and the FCB depends on the dual roles of the Director of Budget and Treasury.	To provide, in the medium term, for possible changes in industry structure, to strengthen the cooperative base and enhance regulatory reputation; arrangements for information exchange between these parties should be formalized.
There is legal provision for information sharing between the CCGP and foreign supervisory authorities provided a formal arrangement is in place. Similar provisions were not made for the mutual funds supervisory commission.	The mutual funds law should be amended to allow for information sharing with foreign supervisory authorities.
AML/CFT
Terrorism financing is being brought into AML framework, but is not a predicate offence for money-laundering.	The financing of terrorism should be made a predicate crime for money laundering, and the list of predicate offenses should be reviewed to ensure that all serious offenses are included.
Customer due diligence arrangements are in place and observed but could benefit from some enhancement.	Increased due diligence for higher risk customers, especially politically exposed persons (PEPs), their families, and associates.
SICCFIN’s supervisory role is expanding and the AML/CFT workload is very heavy.	A comprehensive review of SICCFIN’s ongoing work should be undertaken, preferably no later than in the second half of 2003.
Legislation on confiscation of assets does not include confiscation of “instrumentalities” (i.e. assets used in the commission of a crime), and does not provide for the confiscation of assets of equivalent value.	The legislation on confiscation should be modified to provide for confiscation on instrumentalities of crime and for confiscation of assets of equivalent value.
DEE is responsible for general CSP oversight but SICCFIN assumed responsibility for AML/CFT in CSPs in the July 2002 AML Law.	Ensure that the new arrangements for dividing supervisory responsibilities between DEE and SICCFIN are well executed.
Mutual Funds and Portfolio Management
The legal framework is comprehensive and is supported by a system of reporting and inspections. The Supervisory Commissions bring important skills to the regulatory structure.	To enhance soundness of regulation and establish a system compatible with international practices, in the short term, serious consideration should be given to a merger of the two Commissions and, in the medium term, greater independence of the regulator. Additional attention to transparency and accountability, and the development of conflicts of interest policies would enhance the quality of the regulatory structure.

Follow-up Plan

• Customer due diligence: SICCFIN plans to issue a new set of guidelines covering increased due diligence for higher risk customers and politically exposed persons.⁴

• Organization of the regulation of mutual funds and portfolio management: The Monegasque authorities acknowledge the complexity of the structures now in effect to monitor the financial sector in comparison to the size of this sector. The merger of the two commissions, CSOM and CCGP, is already a step that the authorities plan to take in the near future. However, considering the general evolution of the matter worldwide (FSA in Great Britain, merger of COB and CMF in France), this should only be considered a first step. A major evolution would be to create a legal entity that would be entrusted with all the missions of a financial supervisor. SICCFIN would keep its role of FIU, reporting to the judicial authorities. The role of the Finance and Economic Department and Direction du Budget et du Trésor would mainly consist of drafting the legislation submitted to Parliament. This evolution could be considered only after the current organisation of surveillance has been examined and evaluated in order that the new structure give priority to addressing identified weaknesses.