Guernsey-Crown Dependency of the United Kingdom
Assessment of the Supervision and Regulation of the Financial Sector Volume II—Detailed Assessment of Observance of Standards and Codes

The completion of the detailed assessment serves several purposes. First, it benchmarks the current state of banking supervision, recognizing that there have been extensive changes in the last years. Second, it suggests a number of further improvements or changes. Thus, this report provides a key input for the development of an action plan to move toward full compliance with the Core Principles. The assessment of the effectiveness of banking supervision was based on a review of the legal framework.

Abstract

The completion of the detailed assessment serves several purposes. First, it benchmarks the current state of banking supervision, recognizing that there have been extensive changes in the last years. Second, it suggests a number of further improvements or changes. Thus, this report provides a key input for the development of an action plan to move toward full compliance with the Core Principles. The assessment of the effectiveness of banking supervision was based on a review of the legal framework.

I. Basel Core Principles for Effective Banking Supervision

A. General

1. This assessment of Guernsey’s compliance with the Basel Core Principles for Effective Banking Supervision has been completed as part of the IMF Offshore Financial Sector (OFC) assessment program. Completion of a formal assessment serves several purposes. First, it benchmarks the current state of banking supervision, recognizing that there have been extensive changes in the last years. Second, it suggests a number of further improvements or changes. Thus, this report provides a key input for the development of an action plan to move toward full compliance with the Core Principles. The assessment team2 expresses its thanks to the staff of the Banking Division who cooperated in the completion of the assessment.

Information and methodology used for assessment

2. This assessment of the effectiveness of banking supervision was based on a review of the legal framework, both generally and as specifically related to the financial sector, the self-assessment of the Core Principles, and extensive discussions with the staff of the Guernsey Financial Supervision Commission (GFSC) the external auditors and the management of commercial banks.

Institutional and macroprudential setting, market structure overview

3. There are 69 banks licensed to take deposits under the Banking Supervision (Bailiwick of Guernsey) Law, 1994. These banks are subsidiaries or branches and come from Europe; Asia; the Middle East; North America; and South Africa. Total deposits stood at £71.8 billion at the end of September 2002, the largest source being fiduciary deposits.

4. Licensed banks carry out private banking services for nonresidents, corporate banking, deposit gathering for funding parent operations, and retail banking for the local population. Some banks also carry out custody work for mutual funds, and others provide banking services to the captive insurance sector.

5. Financial sector supervision is undertaken by the GFSC which was established as a statutory body under the Financial Services Commission (Bailiwick of Guernsey) Law, 1987 as a unitary regulator responsible for the regulation of financial services business. The Advisory and Finance Committee of the parliament (States Assembly) is mandated to oversee the financial services sector and to monitor and act as the channel of communication with the GFSC.

6. The Banking Supervision Law, 1994, as amended, provides for the regulation of deposit-taking business. It gives the GFSC the ability to set out conditions for issuing licenses. The Law restricts the acceptance of deposits to licensed institutions and provides for the regulation and supervision of such institutions. It also gives the GFSC the ability to impose conditions on licensees, to give directions to institutions, and to provide for penalties for breach of the legislation and for the revocation of licenses.

General preconditions for effective banking supervision

7. The GFSC operates within a context of a generally strong legal and regulatory framework and effective implementation of supervisory processes. An effective licensing authority is in place supplemented by fair and equitable criteria to ensure a consistent approach is applied to permissible activities, ownership, and investment criteria. Prudential regulations and requirements compare favorably with international standards and best practices.

8. The GFSC applies an effective supervisory process that blends off-site assessment of internationally active banking organizations and regulatory agencies with a visitation program to confirm the results of the off-site assessment process. It is the policy of the GFSC to grant licenses only to banks or branches that have parent organizations with an acceptable international presence in accordance with criteria established by the Commission.

9. The GFSC has emphasized the importance and need for transparency of accounting policies and practices and conformance with international standards. Legal provisions are in place, which enable the GFSC to take regulatory action against a noncompliant bank.

10. The GFSC has a range of gateways to enable it to share information domestically and internationally.

B. Detailed Assessment

Table 1.

Detailed Assessment of Compliance with the Basel Core Principles

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Table 2.

Summary Compliance with the Basel Core Principles

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C: Compliant;

LC: Largely compliant;

MNC: Materially noncompliant;

NC: Noncompliant;

NA: Not applicable.

Recommended actions and authorities’ response to the assessment

Recommended actions
Table 3.

Recommended Actions to Improve Compliance with the Basel Core Principles

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Authorities’ Response to the Recommended Action Plan to Improve Compliance with the Basel Core Principles

Overview

11. The authorities welcome the IMF’s assessment and confirmation that the Bailiwick of Guernsey has achieved a high level of compliance with the Basel Committee Core Principles on Banking Supervision.

Objectives (CP 1.1)

12. Currently, the GFSC has a responsibility under the Financial Services Commission (Bailiwick of Guernsey) Law, 1987 to develop and effectively supervise finance business in Guernsey. The IMF’s recommendation that the GFSC should be provided with a statutory obligation for the safety, soundness and integrity of the financial system in place of its responsibility to develop the finance sector has been noted. The States of Guernsey Advisory and Finance Committee and the GFSC agree with the IMF’s view that formalising the GFSC’s approach in this manner better expresses the GFSC’s current and continuing objectives and will enhance the reputation and contribute to the continuing development of the financial system in Guernsey. The Committee proposes to seek amendment of the law at an early stage.

Independence (CP 1.2)

13. The IMF’s conclusion that the States of Guernsey Advisory and Finance Committee’s ability under the Financial Services Commission (Bailiwick of Guernsey) Law, 1987 to give guidance and directions of a general character to the GFSC has not interfered with the GFSC’s capacity to carry out its functions is noted. As stated by the IMF, the Committee has never unilaterally provided guidance or directions to the GFSC. As is also acknowledged, the law permits the Committee to give the GFSC guidance and directions only of general character. Both the Committee and the GFSC consider that this provision provides proper accountability by the GFSC to the Committee, which is the senior political body of Guernsey’s parliament. The Committee and the GFSC consider that the ability to give guidance and directions of general character is in compliance with the international standard which applies to the independence of regulatory bodies.

14. Staff resources of the GFSC have continued to grow in line with the size of the finance sector and the responsibilities of the GFSC. The IMF has recommended that the GFSC’s Banking Division should carry out a “zero based” analysis of its staff needs based on the expected number of banks. This has been completed and, as a consequence, an additional analyst has been recruited since the assessment in order to assist the Division to carry out a systematic programme of corporate governance and full scope safety and soundness on-site visits to banks.

Loan Evaluation and Loan Loss Provisioning (CP 8)

15. Following the introduction of the Banking Supervision (Bailiwick of Guernsey) (Amendment) Law, 2003, it is a legal requirement for all Guernsey banks to review, at least annually, their individual loans, asset classification and loss provisioning (including on and off balance sheet exposures). Should the review identify any shortcomings, the bank is required to report any findings to the GFSC, together with the details of how it proposes to address the shortcomings.

16. With regard to policies followed by the GFSC, the scope of on-site credit assessments of banks was extended in early 2003 to give additional emphasis to credit quality and provisioning levels.

On-Site and Off-Site Supervision (CP 13 and 16)

17. The GFSC’s Banking Division is planning full safety and soundness on-site visits for 2004. Additional training of staff in this field of work will continue. The visits will include techniques and practices to confirm or otherwise the existence and application of an effective and comprehensive risk management process and control culture.

18. Meetings by the GFSC with external bank auditors will be more frequent and scope for increasing synergies will be explored.

Internal Control and Audit (CP 14)

19. Following the introduction of the Banking Supervision (Bailiwick of Guernsey) (Amendment) Law, 2003, it is a legal requirement for each Guernsey bank to review, at least annually, the responsibilities and conduct of the bank’s board of directors with respect to corporate governance principles. Should the review identify any shortcomings, the bank is required to report any findings to the GFSC, together with the details of how it proposes to address the shortcomings.

20. GFSC guidance notes entitled “Guidelines for Corporate Governance and Risk Management” are being revised in light of comments received during consultation with banks and will be formally issued as soon as possible, following consideration of the comments arising from the consultation.

Validation of Supervisory Information (CP 19)

21. Meetings will be held with the Guernsey Society of Chartered and Certified Accountants to explore the possibility of the GFSC having access to working papers in connection with the verification of quarterly returns and preparing audited accounts. Where necessary, the GFSC will also consider the benefits of bilateral and trilateral meetings with auditors.

II. FATF Recommendations for Anti-money Laundering and Combating the Financing of Terrorism

A. General

Information and methodology used for the assessment

22. A detailed assessment of the anti-money laundering (AML) and combating the financing of terrorism (CFT) regime of Guernsey was prepared by a team of assessors that included staff of the International Monetary Fund (IMF) and an expert not under the supervision of IMF who was selected from a roster of experts in the assessment of criminal law enforcement and nonprudentially regulated activities3. IMF staff reviewed the relevant AML/CFT laws and regulations, and supervisory and regulatory systems in place to deter money laundering (ML) and financing of terrorism (FT) among prudentially regulated financial institutions. In addition, the IMF staff reviewed the framework in respect of trust and company service providers, which were in a transitional stage towards full prudential regulation. The expert not under the supervision of IMF reviewed the capacity and implementation of criminal law enforcement systems.

23. This assessment is based in part on discussions on AML/CFT issues that were held with officers and other representatives of the following offices among others, all of whom were most helpful in the preparation of this assessment: the GFSC; the Bailiffs Chambers; Attorney General’s Chambers; Customs and Excise Department; Guernsey Police and the Financial Intelligence Service (FIS). In addition, the assessors met with a number of financial sector parties, including banks, investment management companies, fiduciaries, insurance companies, lawyers, and associations representing these sectors.

24. Information used for the assessment was obtained from the following:

The Money Laundering (Disclosure of Information) (Guernsey)4 Law, 1995 (the “1995 Law”); the Money Laundering (Disclosure of Information) (Alderney) Law, 1998 (the “1998 Law”); the Money Laundering (Disclosure of Information) (Sark) Law, 2001 (the “2001 Law”); the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999 as amended (the “POC Law”); the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Regulations 2002 (the Regulations); the Criminal Justice (International Cooperation) (Bailiwick of Guernsey) Law, 2001 (the “CJIC Law”); the Criminal Justice (Fraud Investigation) (Bailiwick of Guernsey) Law, 1991 (the “Fraud Investigation Law”); the Terrorism and Crime Law (Bailiwick of Guernsey) Law, 2002 (the “Terrorism Law”); the Terrorism (United Nations Measures) (Channel Islands) Order 2001 (the “Terrorism Order”) and the Al-Qa’ida and Taliban (United Nations Measures) (Channel Islands) Order 2002 (the “Al-Qa’ida Order”); the Drug Trafficking (Bailiwick of Guernsey) Law, 2000 (the “DT Law”); the Banking Supervision (Bailiwick of Guernsey) Law, 1994 (the “Banking Law”); and the Guidance Notes on the Prevention of Money Laundering and Countering the Financing of Terrorism issued by the Guernsey Financial Services Commission (the “Notes”);5 Position Paper entitled Overriding Principles for a Revised Know Your Customer Framework issued in February 2002 jointly by the Guernsey, Jersey and Isle of Man Commissions (the “Position Paper”); Business from Sensitive Sources Notices issued by the Guernsey Financial Services Commission; The Protection of Investors (Bailiwick of Guernsey) Law, 1987 and associated rules and regulations (the “POI Law”); The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2000 and associated Codes of Conduct (the “Fiduciary Law”); the Insurance Business (Bailiwick of Guernsey) Law, 2002 (the “Insurance Business Law”); the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 (the “Insurance Managers and Intermediaries Law”); the Financial Services Commission (Bailiwick of Guernsey) Law, 1987 as amended (the “Commission Law”); the Control of Borrowing Ordinance, 1959 as amended (the “Control of Borrowing Ordinance); the Companies (Guernsey) Law, 1994 as amended (the “Companies Law”); the Data Protection (Bailiwick of Guernsey) Law, 2001 (the “DP Law”); the Data Protection (Transfer in the Substantial Public Interest) Order, 2002; the Interpretation (Guernsey) Law 1948 (the “Interpretation Law”); the Misuse of Drugs (Bailiwick of Guernsey) Law, 1974 (the “Misuse of Drugs Law”) Law; Licensees (Financial Resources, Notification, Conduct of Business and Compliance) Rules 1998 (the “Investment Licensees Rules”); the Policy Letter dated September 26, 2002 with respect to Amendments to Regulatory Legislation (the “Policy Letter”); Projet de Loi (draft law) entitled The Prevention of Corruption (Bailiwick of Guernsey) Law 2003 (the “Draft Corruption Law”); Project de Loi entitled The Criminal Justice (Miscellaneous Provisions)(Bailiwick of Guernsey) Law, 2003, (the “Draft Miscellaneous Provisions Law”); The United Kingdom Recording and Dissemination of Intelligence Material, Code of Practice (the “Intelligence Material Code of Practice”); The Royal Court (Bar Administration) Order, 1993 (the “Royal Court Order”); the Rules of Professional Conduct for Guernsey Advocates.

25. For purposes of this assessment, the term Financial Institution (FI) has the definition found in the Schedule to the POC Law, as follows:

  • Any person or body carrying on or providing services in or from within the Bailiwick of Guernsey in relation to the business of: (i) lending (including, but not limited to, consumer credit, mortgage credit, factoring with or without recourse, financing of commercial transactions (including forfeiting) and advancing loans against checks); (ii) financial leasing; (iii) money service business including money or value transmission services, currency exchange (bureaux de change) and/or cheque cashing; (iv) provision of services for, and/or the facilitation of, the transmission of money or value through an informal money or value transfer system or network; (v) issuing, redeeming, management and/or administration of means of payment (for example, credit, charge and debit cards, checks, travelers’ checks, money orders and bankers’ drafts); (vi) providing financial guarantees and/or commitments; (vii) trading for account of customers (spot, forward, swaps, futures, options etc) in: money market instruments (for example checks, bills, certificates of deposit); foreign exchange; exchange, interest rate and/or index instruments; commodity futures, transferable securities and/or other negotiable instruments and/or financial assets, including bullion; (viii) participating in securities issues, including underwriting and/or placement as agent (whether publicly or privately) and/or the provision of services related to such issues; (ix) settlement and/or clearing services for financial assets including securities, derivative products and/or other negotiable instruments; (x) providing advice to undertakings on capital structure, industrial strategy and/or related questions and/or advice as well as services relating to mergers and/or the purchase of undertakings; (xi) money broking/changing; (xii) providing individual and/or collective portfolio management services and/or advice; (xiii) providing safe custody services; (xiv) providing the services of safekeeping and/or administration of cash or liquid securities on behalf of clients; (xv) credit unions; and/or (xvi) accepting repayable funds other than deposits.
  • ‘Deposit taking’ as a deposit-taking business as defined in Section 3 of the Banking Law.
  • ‘Controlled investment business’ as defined in Section 1, and Schedules 1 and 2 of the POI Law.
  • ‘Insurance business’ as defined in Section 2 and schedule 1 of the Insurance Business Law and Sections 1 and 2 of the Insurance Managers and Intermediaries Law.
  • ‘Regulated activities’ as defined in Section 2 of the Fiduciary Law.
  • Section 1 above applies to lawyers,6 accountants and actuaries providing non-incidental financial services.

26. The main institutions in Guernsey in the AML/CFT area are the Financial Intelligence Service, which is an independent unit of the Guernsey Police and Customs and Excise Department jointly staffed by each and is the FIU for Guernsey; the Police and the Customs and Excise Department, each of which investigate criminal activities; the Attorney General’s Chambers, which prosecutes ML and FT, defends Guernsey authorities against any suit, and advises the States Assembly (Parliament) and the government on legal issues; the GFSC, which is the financial regulator for Guernsey and is responsible for monitoring compliance for FIs that are regulated by it; and the Advisory and Finance Committee of the States Assembly (the “Committee), which issues regulations on AML/CFT and other matters.

Overview of measures to prevent money laundering and terrorism financing

Legal and Institutional Framework

27. Guernsey has a developed legal and institutional framework generally, particularly with respect to confiscation of the proceeds of criminal conduct, exchange of information, and international cooperation. The broad regulation of the financial sector, including banking, investment companies, insurance business, and fiduciaries (company and trust service providers), is another strength. However, Guernsey’s legal and institutional framework falls short in a number of areas outlined in greater detail below.

Implementation of the Legal and Institutional Framework, and Financial Sector-specific Issues

28. The general framework for AML/CFT in Guernsey has been implemented well. The GFSC has devoted an appropriate level of resources to this issue. Detailed Guidance Notes have been developed and the GFSC has established a program of on- and off-site surveillance of financial service businesses to assess compliance with required standards. There is a strong relationship amongst the principal institutions involved including the GFSC, the FIS, the Attorney General’s chambers, and prudentially regulated financial institutions (FSBs). Visits to FIs revealed a high level of awareness and, in general, the existence of appropriate AML/CFT policies and procedures. However, there are a number of areas in which the implementation of the AML/CFT framework could be strengthened as set forth in greater detail below.

B. Detailed Assessment

29. The following detailed assessment was conducted using the October 11, 2002 version of Methodology for assessing compliance with the AML/CFT international standard, i.e., criteria issued by the Financial Action Task Force (FATF) 40+8 Recommendations (the Methodology).

Assessing criminal justice measures and international cooperation

Table 4.

Detailed Assessment of Criminal Justice Measures and International Cooperation

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Assessing preventive measures for financial institutions

30. In order to assess compliance with the following criteria assessors must verify that: (a) the legal and institutional framework are in place and (b) there are effective supervisory/regulatory measures in force that ensure that those criteria are being properly and effectively implemented by all financial institutions. Both aspects are of equal importance.

Table 5.

Detailed Assessment of the Legal and Institutional Framework for Financial Institutions and its Effective Implementation

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