Abstract
This assessment of the Basel Core Principles for Effective Banking Supervision has been completed as part of the IMF Offshore Financial Center (OFC) assessment program. First, the assessment benchmarks the current state of banking supervision, recognizing that there have been extensive changes in the last few 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.
I. Basel Core Principles for Effective Banking Supervision
A. General
1. This assessment of the current state of compliance by the Isle of Man (“the Island”) with the Basel Core Principles for Effective Banking Supervision has been completed as part of the IMF Offshore Financial Center (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 few 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 was conducted by Jack Heyes and Marcel Maes (both consultants of MFD). The team expresses its thanks to the staff of the Financial Supervision Commission (FSC), 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 an examination 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 FSC, external auditors, and the management of commercial banks.
Institutional and macroprudential setting, market structure overview
3. The Isle of Man has 59 licensed banks and 2 licensed building societies. The banks come from a variety of geographical areas, including Europe, Ireland, South Africa, United Kingdom, and the United States. Total bank deposits were £27.1billion. The majority of banks are engaged in providing private banking services to nonresidents. The services offered by banks are directed toward deposit taking with the funds on loan primarily in the international interbank markets. Some banks act as custodians and trustees to collective investment schemes, while others conduct trade, finance, and treasury operations.
4. The Financial Supervision Commission (FSC) was established in July 1983, under the Financial Supervision Commission Order, 1983, as a statutory board. It is governed by the Statutory Boards Act of 1987. The FSC originally regulated both deposit-taking institutions and insurance business and, later, investment business. In 1986, a separate insurance authority to supervise and regulate the insurance industry was established. This has since evolved into the Insurance and Pensions Authority (IPA), which is also constituted as a statutory board governed by the Statutory Boards Act of 1987.
5. As a statutory board, eight commissioners appointed by the treasury, subject to the approval of the parliament, Tynwald, oversee the FSC’s work.
6. The Banking Act, 1998, regulates banking business, which may not be carried on in or from within the island without a license. The Act confers licensing power to the FSC. The Act provides substantial powers for supervisory, disciplinary, and enforcement purposes.
General condition for effective banking supervision
7. Taken collectively, the banking laws, orders, and guidance notes provided by the supervisor constitute a generally appropriate legal framework for banking supervision. The BA gives the FSC the power to grant and refuse licenses.
8. A range of sanctions is available to the FSC where a bank is noncompliant. The FSC can make recommendations and issue directions to a bank. The ultimate enforcement sanction is revocation of a license.
9. The FSC uses both off-site surveillance and on-site visits in its supervision of banking entities.
10. All banks must maintain a minimum risk-based capital ratio of not less than 10 percent. The components of capital and the methodology used are in accordance generally with the Basel Capital Accord.
11. All banks incorporated in the Isle of Man are required to draw up annual financial statements. These must be prepared in accordance with U.K. accounting standards adopted by the United Kingdom Accounting Standards Board or other accounting standards approved by the FSC.
12. The Financial Supervision Act, 1988, permits the disclosure by the FSC of confidential information to other governmental agencies within the Isle of Man and to external agencies with statutory functions corresponding to the FSC.
B. Detailed Assessment
Table 1.
Detailed Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision
Table 1.
Detailed Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision
| Principle 1. | Objectives, Autonomy, Powers, and Resources An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banks. Each such agency should possess operational independence and adequate resources. A suitable legal framework for banking supervision is also necessary, including provisions relating to the authorization of banking establishments and their ongoing supervision; powers to address compliance with laws, as well as safety and soundness concerns; and legal protection for supervisors. Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place. |
| Principle 1(1) | An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banks. |
| Description | The Financial Supervision Commission Order, 1983, established the FSC as the body responsible for the licensing and supervision of the finance sector (with the exception of insurance and pensions business) in the Isle of Man. The FSC’s general functions are to take steps leading to the effective supervision of the private financial and commercial sector. The FSC is the sole agency with responsibility for banking supervision in the Isle of Man, and its detailed responsibilities and powers are outlined in the Banking Act 1998 (BA). This legislation, and regulations and codes made under the BA—in particular, the Banking (General Practice) Regulatory Code, 1999 (“the Code”)1—provide the framework for the minimum prudential standards that banks must meet. The FSC’s policy function is to ensure that its regulatory framework keeps up to date with international standards and best practices. Normal practice is that the FSC identifies the need for particular regulatory measures and proposes the necessary legislation and guidance to achieve the objective. In July 2001, the FSC conducted a detailed review of the compliance of the Isle of Man’s law and supervisory practices with the Basel Core Principles for Effective Banking Supervision. Although the results were generally positive, the exercise was helpful in identifying areas where further work could be done to strengthen the supervisory approach. As a result of the new FATF recommendations and the report of the Basel Committee on Banking Supervision entitled, “Customer Due Diligence for Banks,” the FSC revised its Anti-Money Laundering Guidance Notes in December 2001. As a general rule, the Isle of Man’s banking laws are updated as necessary to ensure that they remain effective and relevant to changing industry and international regulatory practices. The FSC’s overall objectives are set out in its mission statement2 and its medium-term objectives are set out in its “medium-term plan.” The FSC reviews annually its performance against that plan. The regulatory structure in the Isle of Man was also subject to a major review in 1998 by the U.K. Home Office (“Edwards Review”). As a medium-term project, the FSC is currently conducting a review of legislation governing the regulated activities of its license holders (banks, corporate service providers, investment companies, etc.). The underlying objective is the consolidation of the primary supervisory legislation administered by the FSC in one new Act. For this purpose, a working group is being formed with the industry to examine the Banking Act, 1998; the Investment Business Act, 1991; the Building Societies Act, 1986; the Financial Supervision Act, 1988; the Corporate Service Providers Act, 2000; and the Fiduciary Services Bill. The FSC also works closely with the other crown dependencies to achieve a consensus approach in the prevention of money laundering. The primary purpose is to ensure greater consistency, to address observations made previously by FATF, and to commit to the Basel document mentioned above. A draft position paper entitled, ”Overriding Principles for a Revised “Know-Your-Customer Framework,” was issued in February 2002, and is now being discussed with the industry prior to a redrafting of the relevant guidance notes and legislation. |
| Assessment | Compliant |
| Comments | The FSC has to be commended for its continuous proactive attitude towards enhancing the Isle of Man’s regulatory and supervisory regime, and its endeavor to meet international standards. The FSC holds discussions with the industry on the contents of its proposed guidance notes to ensure that implementation will be practicable. The FSC has also identified the need to rationalize and clarify its existing supervisory powers. In this respect, and similar to the objective pursued in the United Kingdom by the Financial Services and Markets Acts 2000, a one-license system encompassing the various categories of regulated business will be explored. Current duplication and potential inconsistencies between the various Acts that have been developed piecemeal over the last sixteen years will be identified and addressed. The FSC’s administrative workload should benefit considerably from the results of this exercise. However, the present legislative timetable is such that a consolidation bill cannot be introduced for another two to three years. This lengthy process may adversely affect the efficiency and comparative attraction of the Isle of Man’s financial services sector. It is therefore recommended that the Isle of Man authorities explore the possibility of revisiting the existing time schedule. |
| Principle 1(2) | Each such agency should possess operational independence and adequate resources. |
| Description | The FSC is a statutory body established in 1983 by the Financial Supervision Order 1983 (Section 3). The members of the FSC direct its affairs. Section 3(2) of the Order provides that the FSC shall consist of no less than three persons appointed by the treasury, subject to the approval of Tynwald (the Isle of Man parliament). Currently, there are eight commissioners, seven of whom are non-executive. Members of the treasury and persons in receipt of a salary from the government or the FSC shall be eligible for appointment to the FSC (Section 3 (3)). Presently, eight commissioners direct3 the FSC, seven of whom are non-executive. The chief executive is the only executive member. The chairman is a politician and a member of the treasury. His tenure of office as FSC chairman, as well as the tenure of the other members, is determined by the Statutory Boards Act, 1987 (SBA). Following the issue of the Edwards Report, which questioned the policy of having a politician on the Board, the composition of the Board was considered and it was concluded that there was no reason to change. In appointing a new political chairman in December 2001, the treasury minister, confirmed that he was still considering whether it was appropriate to appoint a nonpolitical chairman. The commissioners as a group (“Board”) meet formally monthly. According to Section 8 of the Financial Supervision Commission Act, 1984, the expenses of the FSC in performing its duties are defrayed out of money provided by Tynwald. According to the Isle of Man’s business planning process, the council of ministers establish government aims, objectives, corporate indicators, and targets. These are provided to departments and the statutory boards, such as the FSC, together with their budget and resource allocation. During the year 2001, an internal audit was undertaken by the government’s internal audit division; no major issues were identified. In its meeting on January 25, 2001, the FSC approved a code of conduct designed to assist the commissioners in identifying for themselves potential conflicts of interests and in being aware of the appropriate action to take. In practice, the FSC’s costs are met from annual license fees and from charges related to the companies’ registry functions. The FSC has discretion in the appointment of its staff within a headcount and a budget agreed with the treasury. The majority of its staff has significant experience in the regulatory field or private financial services firms (or both) and has a range of professional qualifications (mainly in accountancy and law). The FSC places a high priority on staff training. Every staff member discusses and agrees with his or her superior a training program for the year ahead. The quality of the staff is also acknowledged by the industry. During the period of 2001/2002, seven persons (out of 54.5)4 left the FSC, some of them for senior compliance positions outside. The existing full employment situation and the predominance of the financial sector in the economy also contribute to staff turnover. In this context, and in order to restore or maintain a competitive pay structure, a job evaluation exercise has been held. As a result, existing pay bands have been adapted. The FSC has the ability to hire outside experts as the need arises. Until now this has occurred on one occasion only. The FSC’s budget has allocations for the training of staff, the purchase of technological equipment, and for expenditure related to the conduct of on-site and off-site supervision. |
| Assessment | Materially noncompliant |
| Comments | Edwards Report, and concluded that there was no reason to make any changes. However, when appointing a new political chairman in December 2001, the treasury minister confirmed that he was still considering whether it was appropriate to appoint a nonpolitical chairman. Regarding the issue of the FSC’s lack of independence mention must also be made of the following circumstances, most of which arise because the FSC is a “Board” governed by the provisions of the Statutory Boards Act 1987 (SBA): As mentioned above, the authorities considered the composition of the FSC in the wake of the • a member of the FSC may be removed from office by a resolution of Tynwald (Section 3 (4) of the SBA); • the council of ministers may, after consultation with the FSC, give to the FSC such directions as to the exercise of its functions in relation to any matter, which appears to the council of ministers to affect the public interest, and the FSC shall comply with any such directions (Section 12 (1) of the SBA); • the FSC shall supply to the chief minister such information, and render such other assistance, as the chief minister may from time to time require, and for that purpose shall permit any person appointed for the purpose by the chief minister to inspect and make copies of its accounts, books, documents and papers, and shall afford such explanation thereof as that person may reasonably require (Section 12(2) of the SBA); • the treasury may give the FSC such directions as it thinks fit with respect to the exercise or performance of its powers under sections 4 to 75 and 13(1) to (3)6 of the BA or SBA whether generally or in any particular case and the FSC shall comply with such directions; • According to Section 8 of the Financial Supervision Commission Act 1984 the expenses of the FSC in performing its duties are defrayed out of money provided by Tynwald. According to the business planning process (mentioned above) the council of ministers establishes government aims, objectives and corporate indicators and targets. These are provided to departments and the statutory boards, such as the FSC, together with their budget and resource allocation. Although in the past the FSC has made the case for additional resources in order to deliver the planned program of work, the request has only been partially met. In practice, except for the limitations imposed on the financial and staffing resources of the FSC, there are no signs of government intervention in the FSC’s regulatory decision making. However, the existence of several legal powers enabling the government to intervene in the FSC’s operations represents a potential impediment to its autonomy. The budgetary restrictions imposed on the FSC prevent it from fully achieving its supervisory objectives. The FSC’s annual report 2001/2002 draws attention to the growing workload and the limited resources. FSC Direct Costing of Supervisory Responsibilities (percent) |
| Total | Banking | Inv. | Bus | CIS | CSP |
| 100 | 28 | 24 | 21 | 27 |
| The case for additional resources would benefit from an in-depth analysis of the FSC’s supervisory objectives and the means needed to achieve them. The ongoing review of the business process of prudential supervision should be continued in order to enhance its efficiency and an appropriate change process should be agreed in the near future. This would help take account of the growing iversity and complexity of financial products. The Isle of Man will also need to continue to give due regard to other developments in international standards, arising from pronouncements by the international regulatory bodies or other international initiatives. | |
| Principle 1(3) | A suitable legal framework for banking supervision is also necessary, including provisions relating to authorization of banking establishments and their ongoing supervision. |
| Description | Section 6 of the BA gives the FSC the power to grant and refuse licenses. Section 7 gives the FSC the power to revoke licenses in certain circumstances. As stated above, section 30 confers on the treasury the right to give the FSC such directions as it thinks fit with respect to its licensing powers, whether generally or in any particular case. The FSC’s licensing policy is based on the belief that the Isle of Man is too small and too vulnerable to shoulder high risk banking operations, including start-up operations. The FSC therefore encourages applications from banks incorporated outside the Isle of Man, which meet its criteria for the establishment of a branch, or locally incorporated subsidiary. These banks must be licensed in their principal place of business that must be in a jurisdiction, which, in the FSC’s judgment, exercises proper licensing and supervision and subscribes to the principles of the International Concordat on Banking Supervision. The FSC has reviewed its licensing policy for banks, in the light of changing demands and the fact that an entry criterion based too narrowly on size can exclude other, smaller high quality institutions, which might wish to apply for a license. The FSC’s policy was revised to emphasize the importance of the credit rating of the banking group concerned and the jurisdiction of its home regulator. Reference to the world’s top 500 banks as an overriding criterion was removed. Section 10 of the BA gives the FSC the power to make prudential rules (in the form of Regulatory Codes) without the need for primary legislation. However, if Tynwald subsequently fails to approve them they cease to have effect. The prudential rules issued in this context, and approved by Tynwald, are contained in the Banking (General Practice) Regulatory Code 1999. They relate to a variety of issues (e.g. capital requirements, auditing standards, ownership, acquisitions, mergers, and management). Guidance notes appended to a Code give guidance to banks about how the FSC will operate in particular circumstances. The Notes are not part of the Code. As a rule extensive consultation is held with the industry in formulating policy guidance and best practice. Section 12 of the BA empowers the FSC to seek whatever information from banks that it requires for the performance of its functions. The form and frequency of the prudential banking returns are outlined in Section 2.3 of the Code. The FSC has a comprehensive system in assessing applications for bank licenses. Initially, the assessment is conducted at executive level and will include “fit and proper” enquiries and assessment of the ability of the applicant to meet the licensing criteria and the general prudential requirements on an ongoing basis. The application is then considered at a meeting of the chief executive’s licensing committee, following which a recommendation is made to a Licensing Committee, which comprises members of the FSC’s Board who have not been involved in the initial review of the application. The applicant receives a copy of the recommendation. The applicant has the opportunity to attend, be represented and make representations when the license application is formally considered. These procedures were introduced in order to ensure compliance with the Human Rights Act 2001 (although not yet in force). However no new banking license applications have been filed during the past few years. On August 1, 2000, the FSC issued a guidance note on the responsibilities and duties of directors under the Laws of the Isle of Man (Appendix N). |
| Assessment | Compliant |
| Comments | |
| Principle 1(4) | A suitable legal framework for banking supervision is also necessary, including powers to address compliance with laws, as well as safety and soundness concerns. |
| Description | Section 6 of the BA gives the FSC power to revoke licenses in certain circumstances. A range of sanctions is available to the FSC where a bank is noncompliant. Section 7 of the BA allows the FSC to impose conditions on a license at any time. The FSC can make recommendations and issue directions to a bank under Section 11. The ultimate enforcement sanction is revocation of a license under Section 7. As stated above Section 10 gives the FSC power to set prudential rules (in the form of Regulatory Codes) administratively. Guidance notes explain what the FSC considers to be best practice. Strictly speaking guidance notes are not legally binding but if needed, they provide elements which the Courts take into account. The notes do, however, provide a basis for regulatory action, including the imposition of conditions on banks. Section 12 of the Act allows the FSC to seek whatever information from banks that it requires for the performance of its functions. The form and frequency of the prudential banking returns are outlined in Section 2.3 of the Code. In the Isle of Man, two methods are used for collecting and assessing the information needed for making supervisory judgments: • off-site supervision - requiring information from banks and their auditors, assessing it and discussing it with management; and • on-site visits. Section 12 of the BA states that the FSC may request such information from a banking institution or former banking institution or a manager or past manager of a banking institution that it may reasonably require for the performance of its functions. The FSC may issue directions to any banking institution to secure that effect is given to any such request. The FSC is also proactively engaged in identifying illegal financial activities. The FSC has specific powers to enter premises and seize relevant documents where it has reasonable grounds to suspect that illegal activity is being performed. It can then apply to the High Court for the appointment of a provisional liquidator, deemed official receiver. This gives the FSC the ability to move quickly with the approval of the Court, to protect the interests of investors or depositors. |
| Assessment | Largely compliant |
| Comments | The range of sanctions available to the FSC is to be augmented by the power to impose penalties. During the past year, consideration was also given to developing the FSC’s powers to appoint managers or administrators to problem license holders. It was agreed that such powers would be desirable and that the necessary legislative changes will be considered further. The need to obtain prior treasury agreement for the Regulatory Codes developed by the FSC might represent an impediment to the development of necessary secondary legislation. In addition, Tynwald has to approve the Regulatory Codes of the FSC after they are issued, although this has not caused problems in practice. However, the rigidity and workload of Tynwald procedures could at some point of time hamper the efficiency and required speed. The FSC has to apply to the High Court for the appointment of a temporary manager or administrator. |
| Principle 1(5) | A suitable legal framework for banking supervision is also necessary, including legal protection for supervisors. |
| Description | The FSC and its officers have statutory immunity from suit, under Section 15A of the Investment Business Act 1991 and Section 19 of the Corporate Service Providers Act 2000. They are protected from liability in damages for, or in respect of, acts done or omitted in conducting their statutory supervisory functions unless shown to be acting in bad faith. Additionally, the FSC’s officers are indemnified for acts or omissions, under Schedule 2 (paragraph 11) to the Statutory Boards Act 1987, provided that they acted reasonably and honestly. The FSC has the discretion to indemnify officers for any damages or costs which they have been ordered to pay, provided that it is satisfied that the officers honestly believed that they had acted within the scope of their functions. |
| Assessment | Compliant |
| Comments | |
| Principle 1(6) | Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place. |
| Description | Section 24 of the Financial Supervision Act 1988 permits the disclosure by the FSC of confidential information to other governmental agencies within the Isle of Man and to external agencies with statutory functions corresponding to the FSC. The disclosure must be for the purpose of enabling those bodies to exercise their statutory functions. The legal provisions are drafted so that the disclosure of information by the FSC is permissive and not mandatory. When releasing information under this Section, the FSC specifies that the information must remain confidential to the receiving agency and must not be passed on without the FSC’s written consent. The FSC has also signed and is in the process of completing a number of MOUs with foreign regulators. The disclosure of information about the affairs of individual customers is prohibited except in very limited circumstances (Section 24(6)). The FSC is addressing this issue and is proposing to government that this provision be dispensed with. |
| Assessment | Compliant |
| Comments | |
| Principle 2 | Permissible Activities The permissible activities of institutions that are licensed and subject to supervision as banks must be clearly defined, and the use of the word “bank” in names should be controlled as far as possible. |
| Description | “Banking Business” is defined in Section 1 of the BA. This definition primarily covers the taking of deposits (from the public), while Section 2 makes it an offence to conduct such business without a banking license. Section 9 makes it an offence to use the word “bank” without the written consent of the FSC. The activities that banks can conduct, other than the taking of deposits or the receipt and payment of checks, are not explicitly specified in legislation, nor are they specified in the banking license. The approach to date has been to give a letter of consent to a bank for the conduct of additional activities, in accordance with the requirements of the Code. |
| Assessment | Largely compliant |
| Comments | The legislation is largely compliant with this principle. Expanding the definition of “banking business” to include other activities and altering banking licenses to state more specifically the activities that holders are allowed to conduct, will be considered in a future review of the banking law, possibly in conjunction with the proposal to have a composite financial services law. (However, the requirement to have a banking license will still be based on deposit taking). As the range of activities conducted by banks is rather limited for the moment, the absence of full transparency through a listing of the activities that can be conducted is not considered material. |
| Principle 3. | Licensing Criteria The licensing authority must have the right to set criteria and reject applications for establishments that do not meet the standards set. The licensing process, at a minimum, should consist of an assessment of the banking organization’s ownership structure, directors and senior management, its operating plan and internal controls, and its projected financial condition, including its capital base; where the proposed owner or parent organization is a foreign bank, the prior consent of its home country supervisor should be obtained. |
| Description | The FSC’s policy in assessing applicants for banking licenses is outlined in the Regulatory Guide to Banking Business in the Isle of Man. The policy is based on the belief that the Isle of Man is too small and too vulnerable to shoulder high-risk banking operations, including start-up operations. The FSC therefore encourages applications from banks incorporated outside the Isle of Man, which fulfill the FSC’s criteria for the establishment of a branch, or an Isle of Man incorporated subsidiary. These banks must be licensed in their principal place of business that must be in a jurisdiction, which in the FSC’s judgment, exercises proper licensing and supervision and subscribes to the Core Principles for Effective Banking Supervision. The basic licensing criteria are set out in Section 5 of the BA. The FSC cannot grant a license unless these criteria are met. Section 4 (2) of the Act allows the FSC to prescribe the form of a license application and to request whatever specific information and documentation it requires from the applicant in order to assess an application. The FSC has a formal application form, which sets out the detailed information that the FSC requires from applicants in support of an application. The Code outlines in greater detail the general regulatory requirements and, in particular, the minimum capital requirements (see also CP 6 para1). The FSC is also required to examine the operating plans, internal controls and proforma accounts of proposed banks. These include a “fit-and-proper” assessment of the applicant, its shareholders, directors and senior management, and the ability of the FSC to exercise effective supervision over the applicant. It is important to note that the fit and proper test is both an initial test at the time of granting a license and a continuing test in relation to the conduct of the business and the relationship with the FSC. Section 5 of the Code requires disclosure of all shareholders holding more than 5 percent of the applicant’s shares. Section 4(2) of the Act allows the FSC to prescribe the form of a license application and to request whatever specific information and documentation it requires from the applicant in assessing an application. As a matter of policy the FSC prefers that banks operating in the Isle of Man are directly held, wholly owned subsidiaries of banks as this facilitates the communication and control necessary for proper parental oversight of Isle of Man operations. Nevertheless, there are occasions when an intermediate holding company, which is not a bank, is interposed between the Isle of Man bank and its banking parent. It is important that this does not complicate communication and control, or dilute responsibility by introducing a further jurisdiction into the ownership chain. In such cases, the FSC requires not only that the intermediate holding company has positive free resources but also that the parent bank provides a Letter of Comfort in terms acceptable to the FSC. In general, the positive free resources requirement for a nonbank holding company obliges a holding company to have sufficient equity (including convertible unsecured loan stock) to fund its assets and contingent liabilities without recourse to third parties for new resources. This is an ongoing minimum requirement designed to ensure that a future Isle of Man banking subsidiary cannot be imperiled by the actions of creditors of a nonbank holding company. Such actions may arise for a number of reasons, including breaches of covenants, etc. In the FSC’s view, it is also desirable that the holding company of a bank should be a demonstrable source of strength to the bank it owns, thereby enhancing the confidence of depositors. In cases where the intermediate holding company is itself a bank, the FSC’s requirements are influenced by the requirements of the home supervisor of that bank. If the intermediate holding company is owned directly by a bank which has also provided a satisfactory Letter of Comfort, the FSC may be prepared to relax its requirements with regard to the financing of the equity of the subsidiary, provided that it is satisfied that there is no danger to the Isle of Man subsidiary from third party creditors. Section 7 of the BA allows the FSC to revoke a license should it subsequently emerge that the applicant provided false information. The FSC consults with the home supervisor where an applicant is a foreign bank that proposes to establish a branch or subsidiary in the Isle of Man. Following the issue of a license, the FSC’s on-site and off-site procedures ensure that compliance with the licensing criteria and other supervisory requirements are continuously met. |
| Assessment | Compliant |
| Comments | |
| Principle 4. | Ownership Banking supervisors must have the authority to review and reject any proposals to transfer significant ownership or controlling interests in existing banks to other parties. |
| Description | Section 5 of the Code requires the prior written consent of the FSC for transfers of voting shares of 5 percent or more of a licensed bank’s total voting shares, and for transfers of a lesser amount which would have a material effect on beneficial ownership or control. The disclosure—to the FSC—of the ultimate beneficial ownership of all shares in excess of 5 percent of the issued capital of a bank institution is required. (Section 5.2 of the Code). A bank whose shares are quoted on a recognized Stock Exchange, should inform the FSC—in writing—within seven days of the discovery of any transfer of 5 percent or more of its voting shares or any lesser transfer which has a material effect on its immediate or ultimate beneficial control (Section 5.2 of the Code). The FSC must also be informed in writing not less than 21 days in advance of any proposed change in the ownership structure between it and its ultimate parent company (Section 5.2 of the Code). The guidance note on this issue, attached to the Code, indicates further that in some instances, a change of the parental ownership structure may not involve any changes in immediate or ultimate parent companies. However, if any material changes are to be made to any of the other companies in the structure linking the banking institution to its ultimate parent, the FSC must be notified. This would include, for example, the ultimate parent selling part of its stake in a subsidiary which itself forms part of the link between it and the banking institution. Furthermore these changes are to be covered by the annual certificate from senior bank management. (see also CP 14 para.3) The FSC must be aware at all times of the identity of the owners of a banking institution. Connected parties are considered to be one shareholder in considering questions of control. In assessing a license application, the FSC must not only be satisfied that the owners are “fit and proper” but also that the ownership is both appropriate and suitable. In particular, the FSC must be satisfied that there will be no conflict between the other business interests of the owners and those of the banking institution and that the owners recognize a moral responsibility to support the bank and have the substance to do so, if required. The accuracy of the FSC’s information on significant shareholders in banks is checked to the annual financial statements of license holders and their parents (where applicable). The FSC does not receive a periodic return on controllers/significant shareholders. Furthermore, as part of the annual review of the bank’s operations, the supervision division verifies with the Company Registrar that there have been no material changes in ownership. |
| Assessment | Compliant |
| Comments | |
| Principle 5. | Investment Criteria Banking supervisors must have the authority to establish criteria for reviewing major acquisitions or investments by a bank and ensuring that corporate affiliations or structures do not expose the bank to undue risks or hinder effective supervision. |
| Assessment | Compliant |
| Comments | |
| Principle 6. | Capital Adequacy Banking supervisors must set minimum capital adequacy requirements for banks that reflect the risks that the bank undertakes, and must define the components of capital, bearing in mind its ability to absorb losses. For internationally active banks, these requirements must not be less than those established in the Basel Capital Accord |
| Description | Section 2 of the Code specifies a minimum absolute paid-up capital of £1 million for all banks. Additionally, all banks must maintain a minimum risk asset ratio of not less than 10%. The components of capital and the methodology used are generally in accordance with the Basel Capital Accord (Section 2.2 of the Code). Risk weightings are applied to both on-balance-sheet and off-balance-sheet risks. Interest rate and foreign exchange mismatches are also included in the calculation of risk asset ratios (see CP12). Risk asset ratios are set individually for banks according to the FSC’s perception of the risks attached to a particular bank’s business and may be higher than the 10% minimum.. A higher minimum may be set where the FSC believes this to be appropriate due to the nature of a bank’s business, and/or by reference to its peer group (Section 2.2 of the Code). In addition, the FSC takes into account such factors as the bank’s parent (and its ability to provide additional capital if required), the risk asset ratio applied to the parent bank by its home supervisor and the quality of the bank’s management. At present required risk asset ratios vary between 10 and 18 %. Out of a total of thirty-four bank subsidiaries, eight have to comply with a capital ratio that exceeds the 10 % minimum. The FSC also employs “trigger ratios”, which are set higher than the required minimum risk asset ratios in order to draw attention to the approaching need for more capital. If a bank’s actual risk asset ratio falls to the trigger level, it is expected to discuss its capital adequacy planning with the FSC to ensure that its minimum required ratio is not breached. The Code (Section 11.1)also requires a bank to notify the FSC immediately if it breaches its minimum risk asset ratio.. In calculating its capital adequacy (its risk asset ratio) a bank should observe the principle of prudence, particularly when evaluating the quality of its assets and accruing income. Required risk asset ratios must be maintained on a solo and - where applicable - on a consolidated basis. Although the risk asset ratio - and the large exposure limits (see CP9) are related to a bank’s adjusted capital base, the FSC recognizes that current earnings represent the first line of defense against losses and that profitability also affects a bank’s decisions on whether or not to expand its Isle of Man operation, whether to invest additional resources, and so on. Accordingly, the FSC pays close attention to a bank’s reported earnings, size as well as source. It calculates a number of ratios designed to measure not just profitability but also the strength and source of earnings. These reveal not only the success or otherwise of the business but often also the role the bank is playing within the banking group of which it is a part. Because the results of the Isle of Man operation are often the consequence of decisions taken as part of a wider strategy, the ratios need to be carefully interpreted but they are considered to be a vital supervisory tool. The amount of profits paid out as dividends needs to be compatible with a continuing need to maintain adequate capital. The FSC has no explicit power to suspend payments by banks to their shareholders. However, the FSC can achieve the same effect by issuing a direction to suspend such payments under Section 11 of the BA. If the payment of a dividend results in a breach of a bank’s risk asset ratio the FSC has the power to require that the breach be rectified immediately (such breaches must be reported under Section 11.1 of the Code). In practice, as most banks have risk asset ratios well above their required minimums this is not a significant issue. The banks submit detailed quarterly prudential returns to the FSC. |
| Assessment | Complaint |
| comments | |
| Principle 7. | Credit Policies An essential part of any supervisory system is the independent evaluation of a bank’s policies, practices, and procedures related to the granting of loans and making of investments and the ongoing management of the loan and investment portfolios. |
| Description | Section 8 of the Code (in particular the related Appendix D) requires that banks must have internal controls, policies and procedures relating to the assessment and granting of loans and the ongoing management of these risks. Paragraph 4 of Appendix D requires banks to establish and adhere to adequate policies and procedures for evaluating the quality of assets and the adequacy of loan-loss provisions and reserves. Assessment of compliance with these requirements may be covered in the FSC’s future on-site programs in accordance with its powers in Section 13 of the Act. The FSC has also stated that consideration will be given to applying more prescriptive requirements in these areas if necessary. These might include more detailed reporting (such as quarterly reporting of loan classifications (gradings) and detailed arrears figures) and a requirement to have prescribed levels of specific provisions in respect of such arrears. The FSC’s requirements in this area are general in nature, and not detailed prescriptions. To some extent the FSC has taken into consideration the fact that most banks are part of larger U.K. entities, which apply group policies to their Isle of Man operations. Also, the priority which the FSC has given to addressing AML issues has prevented it from assessing the specific areas to which the criteria relate (except in isolated cases) with on-site examinations. In the opinion of the FSC CPs 7-10 are also inter-linked. It therefore decided to address these issues/criteria as part of a review of the Code, which was already being carried out by the policy unit, in conjunction with the Supervision Division. This review of the Code had not been completed at the time of the IMF mission. However the FSC has acknowledged the need for such a review and has indicated that the review will be completed as priorities allow. |
| Assessment | Largely compliant |
| Comments | The FSC places emphasis on banks’ own standards of corporate governance and their audited financial statements. The FSC does not, however, review the scope and quality of the work carried out by banks’ external auditors in order to achieve reasonable assurance that the required independent evaluation of credit risk policies, credit quality and provisioning assessments is being carried out in a consistent manner. Up to now there has been no formal or ongoing program for the independent assessment of banks’ credit risk policies, practices and procedures. It is acknowledged that between November 2000 and December 2001, three focused reviews to ensure compliance with internal bank credit risk policies were carried out. In addition, and for particular business reasons, Reporting Accountants were employed on one occasion to confirm a bank’s compliance with its own credit risk policies. No guidance/guidelines covering generally accepted credit risk policies and procedures have been provided to the industry. The FSC has recognized the lack of guidance in this area and has indicated that this subject will be addressed as part of the review of the Code. The reinforcement of the need for sound credit risk practices, policies and procedures is a primary requirement of supervisors. To balance the FSC’s belief in being able to rely on home jurisdictions’ own assessments the FSC may want to consider the possibility of reinforcing the need for international credit risk “best practices” by providing a copy of the Basel Committee guidance on this subject to all licensees. A covering letter would likely be needed to indicate that the FSC supports the content of the guidance and will be seeking compliance with the guidance during its on-site visitation program. Addendum: Subsequent to the mission the FSC has taken a constructive step to reaffirm the need for banks to have sound credit risk practices, policies and procedures. A letter to the industry has been developed which focuses on amongst other issues the importance of having sound credit risk policies, procedures and practices. Reference in the proposed letter is also given to Basel Committee guidance to banks on Credit Risk “best practices.” The FSC, plans to develop more industry specific guidance on Credit Risk in the future. The FSC also plans to extend their on-site visitation program to include an in-depth assessment of the credit risk policies, procedures and practices where appropriate. |
| Principle 8. | Loan Evaluation and Loan-Loss Provisioning Banking supervisors must be satisfied that banks establish and adhere to adequate policies, practices, and procedures for evaluating the quality of assets and the adequacy of loan-loss provisions and reserves. |
| Description | See also comments outlined in CP 7—The FSC has not carried out a single independent review of asset quality in a bank nor appointed outside professionals to do this on its behalf. |
| Assessment | Largely compliant |
| Comments | The FSC has viewed compliance with this principle to be of lower risk. Historically, banks in the Isle of Man have been primarily “providers” of funds to their parent bank or affiliates of their parent. At the end of August 2002, total loans and advances represented only 18.6 percent of total assets. The FSC is currently the home supervisor for only two independent banks, one of which has a restricted license. Reliance for loan evaluation and loan-loss provisioning assessments for subsidiaries has been placed on the home supervisor. An additional degree of comfort to the FSC has been the “true and fair” opinion provided by external auditors on banks’ annual audited financial statements. No independent assessment of credit quality and loan-loss provisioning has been carried out as part of the on-site visitation program. Over the past three years the on-site visitation program has primarily focused on AML/KYC assessments. For this reason, the FSC has been unable to assess credit risk techniques and practices including such features as the quality of the credit risk management, credit risk administration, valuation of collateral and the processes for classifying loans and ensuring adequate provisions. The FSC has the power to employ Reporting Accountants to carry out special purpose audits. In our review of the one occasion when Reporting Accountants were employed to assess credit risk, the opinion formulated was limited to providing confirmation of the application of the bank’s own provisioning policies and compliance with its own lending practices. No opinion was provided on the overall asset quality or the adequacy of provisioning. No specific guidance has been provided to the industry covering the identification and recording of impaired assets or the valuation of collateral to reflect net realizable value. The FSC has not yet developed an in-depth on-site credit risk evaluation process. In developing appropriate on-site examination criteria the FSC may want to consider the following: Credit process: • Do credit risk policies and procedures reflect the risk appetite of the licensee, and have they been confirmed by the board of directors; • Are policies and procedures in place for all credit risk products, and are they reviewed at least annually to ensure they remain up to date and relevant; • Are credit risk exposure limits reasonable, considering the risk appetite and the ability of the licensee’s resources; • Have clearly defined and articulated policies and procedures been established for reporting and monitoring out of order conditions; • Has a risk rating system been put in place to the management and the board of the licensee to monitor asset quality trends in a timely and anticipatory manner. Credit assessment/quality: Before the FSC can have a successful asset quality review process, it will be of paramount importance that the FSC ensures that its staff has sufficient knowledge and understanding of credit risk assessment processes. The FSC may want to establish its own credit risk rating system that can be applied on a consistent basis to all credit risk assessments. The FSC credit risk rating system could then be used to assess the integrity of a licensee’s own credit risk rating system; and The FSC could select a sample of a bank’s loans and review these in order to confirm the quality and application of the bank’s own credit risk policies and lending activities, including its credit administration process, its ability to identify possible adverse trends and its processes for reporting out of order conditions and loans. Loan-loss provisioning: Independent credit reviews could also assess banks’ existing processes for identifying deteriorating situations in a timely manner, so appropriate provisioning is applied not only to known loss positions but also to deteriorating situations in a performing portfolio. We recognize that in developing a more prescriptive approach to loan evaluation and provisioning due consideration has to be given to ensuring that the FSC has staff capable of carrying out this type of specialized review. Addendum: Refer to comments Addendum CP 8. The FSC has also requested banks to provide the FSC by December 31, 2002, with a copy of their “documented Credit, Loan Grading and Provisioning Policy Statement (s). We will then review the statement (s) and provide feedback by March 31, 2003.” The action taken by the FSC is reflected in the assessment provided. |
| Principle 9 | Large Exposure Limits Banking supervisors must be satisfied that banks have management information systems that enable management to identify concentrations within the portfolio, and supervisors must set prudential limits to restrict bank exposures to single borrowers or groups of related borrowers. |
| Description | Paragraph 3 of Appendix D to the Code requires that banks have management information systems to enable ongoing management of exposures, including the identification of concentrations. A “large exposure” is defined in the Code as an exposure of more than 10 percent of the bank’s adjusted capital base. All large exposures must be reported to the FSC but only in the case of exposures of more than 25 percent of the adjusted capital base need the notification to be in advance of the granting of the facility. Also, banks may not incur large exposures, which in aggregate exceed 800 percent of the adjusted capital base. Large exposures are reported by banks as part of the quarterly reporting returns. Exposures to “connected counterparties” (defined in Paragraph 3 of the definitions to the Banking Return) must be aggregated. Concessions are granted to the large exposures limits in limited circumstances, e.g., in the case of exposures, which are covered by “take-out” agreements given by the bank’s parent or other group company. However, it is recognized that the FSC’s policy in granting concessions needs to be more formalized, particularly in the area of group “take-out” arrangements. |
| Assessment | Largely compliant |
| Comments | The FSC is cognizant of the concessions provided to the industry and has implemented procedures to monitor the approved concessions. The confirmation of the accuracy of the regulatory returns adds a further element of control. The FSC has acknowledged the need for bringing more clarity to the approval process particularly in the area of group “take-out” arrangements. |
| Principle 10 | Connected Lending In order to prevent abuses arising from connected lending, banking supervisors must have in place requirements that banks lend to related companies and individuals on an arm’s-length basis, that such extensions of credit are effectively monitored, and that other appropriate steps are taken to control or mitigate the risks. |
| Description | Paragraph 5 of Appendix D to the Code requires that banks lend to related parties (as defined in Paragraph 2 of the definitions to the Banking Return) on an arm’s length basis only and that they have information systems to monitor such credits. In addition, the FSC imposes an additional 50 percent weighting for capital adequacy purposes to such credits or, alternatively, reserves the right to deduct the exposures from a bank’s adjusted capital base. Related party exposures must be reported in the quarterly Banking Return. The large exposure limits referred to in Principle 9 apply also to related party transactions. Transactions with such parties must be assessed and conducted on nonconcessionary terms and monitored and reported by the banks’ managements on a regular basis. However, to date the banks’ internal procedures in this area have not been subject to on-site review. It is also a matter for consideration if the FSC should have more prescriptive limits for the amounts which banks may lend to related parties. See also comments CP 19 re independent reviews completed by external auditors. |
| Assessment | Compliant |
| Comments | The issuance of credit risk guidance would add additional clarity to the process |
| Principle 11. | Country Risk Banking supervisors must be satisfied that banks have adequate policies and procedures for identifying, monitoring, and controlling country risk and transfer risk in their international lending and investment activities, and for maintaining appropriate reserves against such risks. |
| Description | Paragraph 6 of Appendix D of the Code requires banks to have adequate policies and procedures for identifying, monitoring and controlling country risk and transfer risk and for maintaining adequate reserves against such risks. The FSC has not issued detailed requirements for provisions against these risks. However, the FSC imposes limits on a bank-by-bank basis on exposures to certain countries, e.g., as regards interbank or intercompany placements. The FSC believes that the adequacy of provisions made against such exposures, as well as their recoverability, would be assessed by banks’ external auditors as part of the annual audit. As banks are not exposed to country and transfer risk to any significant extent, the FSC does not consider that more prescriptive requirements are necessary at present. The FSC deals with the issue on a case-by-case basis, through the imposition of conditions or directions, where the need arises. |
| Assessment | Compliant |
| Comments | |
| Principle 12. | Market Risks Banking supervisors must be satisfied that banks have in place systems that accurately measure, monitor, and adequately control market risks; supervisors should have powers to impose specific limits and/or a specific capital charge on market risk exposure, if warranted. |
| Description | Paragraph 7 of Appendix D (Controls and Procedures) to the Code requires that banks have systems that accurately measure, monitor and control market risks. The FSC measures, monitors and discusses with banks their exposure to movements in both interest and exchange rates. These arrangements form part of the regular process of supervision and are included within the scope of prudential interviews. There are different arrangements for Isle of Man incorporated banks and for branches of foreign banks, although both participate in the same reporting system. In the opinion of the FSC the primary responsibility for the control of exposures arising from foreign currency operations, as for any other aspect of a bank’s business, must rest with a bank’s own management. However, in the discharge of supervisory responsibilities, the FSC needs to know the methods by which bank management control such exposures, the extent of each bank’s exposure, and its relation to other risks and to its capital. Section 3.2 of the Code requires banks to submit to the FSC their written policies (approved by their boards) on liquidity, interest rate and foreign exchange risk (including limits for overall currency positions against reporting currency position and for individual currencies). The FX operations of banks must also be covered by appropriate systems and controls. In this respect reference must be made to the Regulatory Code which requires banks to have in place internal controls that are adequate for the nature and scale of their operations and the systems of internal control procedures and management information systems are required to be documented and approved by the board of directors.(see CP14). These requirements by the Code must be covered by an annual compliance certificate from each bank’s “4 eyes” (see CP14). The external auditors are required to provide annually, reasonable assurance as to the accuracy of a regulatory return. Interest rate and foreign exchange mismatch positions are reported in the quarterly Banking Return. Such mismatches attract risk weightings for capital adequacy purposes. The FSC requires banks’ net open FX positions to be added to their risk-weighted assets when their risk-asset ratios are calculated. This means in effect that each individual bank has to maintain capital for FX risk in line with its risk-asset ratio - depending on its required risk-asset ratio the amount will be between 10 and 18 percent of its net open FX position. Only four banks demonstrate FX-exposures and interest rate exposures, which combined, exceeded 1 percent of their respective capital requirements (from 3.40 percent to 1.33 percent)]. |
| Assessment | Compliant |
| Comments | |
| Principle 13. | Other Risks Banking supervisors must be satisfied that banks have in place a comprehensive risk management process (including appropriate board and senior management oversight) to identify, measure, monitor, and control all other material risks and, where appropriate, to hold capital against these risks. |
| Description | Refer to comments under CP 12. These comments outline the process the FSC has in place to address liquidity, interest rate and foreign exchange risk. A liquidity gap report is required as part of the quarterly prudential returns. Banks incorporated in the Isle of Man provide the FSC with a written statement, approved by the board of directors, detailing their policies for the management of liquidity. In these policy statements banks have to stipulate their cumulative maximum mismatches for each time band detailed on Form SR-3 of the Banking returns and for cumulative time bands (Section 3.1 of the Code). This statement must also include a bank’s own internal limits for funds placed with other banks including those belonging to the same banking group. A bank incorporated outside the Isle of Man has to provide the FSC with a written statement detailing its policy for the management of the liquidity of its branch (es) in the Isle of Man. The relevant guidance note further indicates that in all cases the FSC wishes to ensure that a bank’s liquidity policy is appropriate to the nature and scale of its business. The quality and availability of its assets are important factors in determining its ability to meet obligations as they fall due. The FSC recognizes that it is not always possible to lay down supervisory rules for the management of liquidity that are both comprehensive and relevant to every institution. The activities of banks in the Isle of Man vary widely and are, in many cases, dependent on the role and tasks allotted to them by their parent bank. Their need for and approach to liquidity, therefore, depends not only on the nature and scale of their business, but also in many cases on group policy. Nevertheless, the FSC believes that every bank operating in the Isle of Man should have a policy detailing its approach to the management of liquidity and that the supervisors should know and understand that policy. If necessary, the FSC proposes changes. This is normally the exception and is usually done with the knowledge and agreement of the home supervisor (under the terms of the International Concordat on banking supervision, responsibility for supervision of local liquidity is placed on the host supervisor). In its assessment of liquidity the FSC concentrates on measuring the mismatch between maturing liabilities and assets in various time bands as revealed by the maturity analyses provided quarterly by the banks. It focuses its attention primarily on the short maturities, particularly the time bands up to one month. It has not so far attempted to establish any general overall limits for mismatching, preferring—if necessary to set any limits on a case by case basis. However, it may seek to do so, particularly if such limits were to be established in the major financial centers. In assessing the amount of any mismatch for an individual bank the FSC takes account of any marketable assets, which the bank may hold. The test of marketability is strict: the assets must be of a quality that they will be marketable in adverse market conditions at a price not far removed from book value. In practice, these are usually assets in which central banks are prepared to deal regularly. Many banks in the Isle of Man use the inter-bank market or their parent bank as the repository of their liquidity. The FSC examines inter-bank limits (where appropriate) to ensure that interbank risk is properly spread. It may also impose its own placement limits on individual banks (including limits on placements with parent banks) if it perceives a need to do so. Another source of liquidity is, of course, a bank’s ability to buy funds from other banks through the inter-bank market, or to obtain standby or other borrowing facilities from them. Here again few banks in the Isle of Man are active takers of funds from the inter-bank market. A few are occasional takers but most are regular givers. Experience teaches that agreed standbys and similar facilities are not always available to a bank facing liquidity pressures. While the FSC is prepared to make allowance for standby and other borrowing facilities in its assessment of liquidity mismatches, it does so on the assumption that these are available in fair weather markets only, except where the facility is provided by a parent bank and the FSC is satisfied with the standing and financial condition of the parent bank. This regular desk analysis of liquidity management is part of off-site supervisory program Another part of the task is discussing with the management the results for the business as revealed by the returns. The returns provide a useful snapshot of the business at particular points in time and the financial magnitudes revealed are, of course, the consequence of management decisions. The FSC considers that its ‘stand alone” policy of supervision is in the interests of the Isle of Man as a financial centre. The FSC further considers that a license holder should create independent liquidity by placing funds outside its own group. This is regarded as a logical and appropriate extension of the ‘stand-alone’ policy. For the time being the FSC has decided not to introduce an industry-wide requirement to create independent liquidity. The FSC and the industry have indicated that other than limited exposure to market risk the primary risk is reputation risk. To assess the possible exposure to this risk the FSC undertook a series of focused AML/KYC visitations during the past three years. Section 9.2 of the Code requires banks to seek the prior consent of the FSC before making any addition or material change to any of their services or products (including unregulated services or products). As part of the approval process the FSC considers banks’ ability to introduce and sustain new products or services. |
| Assessment | Largely compliant |
| Comments | The introduction of a more in-depth visitation program will allow the FSC to confirm the existence and application of comprehensive risk management policies and procedures. |
| Principle 14. | Internal Control and Audit Banking supervisors must determine that banks have in place internal controls that are adequate for the nature and scale of their business. These should include clear arrangements for delegating authority and responsibility; separation of the functions that involve committing the bank, paying away its funds, and accounting for its assets and liabilities; reconciliation of these processes; safeguarding its assets; and appropriate independent internal or external audit and compliance functions to test adherence to these controls, as well as applicable laws and regulations. |
| Description | Paragraph 2 of Appendix D of the Code requires that banks have in place internal controls that are adequate for the nature and scale of their businesses. Section 8.4 of the Code requires that the systems of internal control, procedures and management information are documented, approved by the board of directors, and are in accordance with the Code and any other relevant legislation. Section 8 of the Code also requires that the day-to-day operations of a bank are effectively controlled by at least two individuals (the “four-eye” principle) and that at least two of its directors are Isle of Man resident with at least one being non-executive. The FSC requires prior notification of the appointment of directors and senior officers in order to assess their fitness and properness. The appointment of certain officers, e.g., compliance officers and money laundering reporting officers is obligatory. Furthermore, banks incorporated in the Isle of Man must comply with the requirements of the Companies Acts. In assessing compliance with the requirements in this area, the FSC receives an annual compliance certificate from each bank’s “4-eyes” that it has complied with the Code. The FSC also receives copies of external auditors’ management letters and there is an obligation on external auditors (or reporting accountants), under Section 20 of the Act, to report matters, which come to their attention, during the course of their audit work, relevant to the FSC’s statutory functions. The requirements of the general law, i.e., the Companies Acts (where applicable), the BA and the Code also place responsibility on the banks directors and senior management with respect to corporate governance. The FSC reviews the reports of Internal Audit and where appropriate meets with Internal Auditors to discuss issues of common interest. While no specific corporate governance guidance has been issued for banks, a guidance note on the responsibilities and duties of directors under the laws of the Isle of Man was issued by the FSC in August 2000. The guidance note describes amongst other issues—duties of Directors—Powers of Directors—Knowledge of the Legal Framework—Liabilities—Criminal and Civil and also provides a definition of “Good Corporate Governance.” The FSC plans to implement a more extensive on-site visitation process during the fiscal year 2002-2003. |
| Assessment | Largely compliant |
| Comments | The introduction of expanded visitation techniques and practices will provide an additional level of confidence for supervisory purposes. Addendum: The FSC is to be commended for the development of comprehensive corporate governance guidance entitled, “Corporate Governance for Banking Institutions.” This guideline was developed subsequent to the IMF mission and when in force will articulate the accountabilities and fiduciary responsibilities of senior management and the board of directors for ensuring that banks operate in a safe and sound manner. The current process to have an annual certificate completed by senior management will ensure that an appropriate acknowledgement of fiduciary responsibilities is provided to the FSC. |
| Principle 15 | Money Laundering Banking supervisors must determine that banks have adequate policies, practices, and procedures in place, including strict “know-your-customer” rules that promote high ethical and professional standards in the financial sector and prevent the bank being used, intentionally or unintentionally, by criminal elements. |
| Descriiption | Section 12.5 of the Code requires that banks have adequate policies and procedures in place to ensure high ethical standards and to prevent their use by criminal elements. Banks are required to comply with anti-money laundering legislation in place. The main legislation in place is the Anti-Money Laundering Code 1998. To ensure that banks (and other licensed financial institutions) comply with the requirements of this law, the FSC has issued comprehensive anti-money laundering guidelines. These guidelines are kept under continuous review and the most recent guidance notes were issued in April 2003. These guidance notes link into the regulatory framework through Section 12.5 of the Code and Section 6.1 of the Financial Supervision (Conduct of Business) Regulatory Code issued under the Investment Business Act 1991, which both state: “A license-holder shall have adequate policies and procedures in place, including strict “know-your-customer” rules that promote high ethical standards in the financial sector and prevent the institution being used, intentionally or unintentionally, by criminal elements. These policies and procedures shall ensure compliance with the money laundering legislation in force at that time.” As stated above, the guidance notes are designed to assist license holders in complying with the money laundering legislation by specifying best practice in this regard. The FSC recognizes that license holders may have systems and procedures in place which, whilst not identical to those outlined in these guidance notes, nevertheless impose controls and procedures which are at least equal to if not higher than to those contained in these guidance notes. The FSC will take this into account when assessing the adequacy of a license-holder’s systems and controls. Banks are required by the FSC to appoint money laundering reporting officers and are obliged by the law to report suspicious transactions to a constable (which includes officers of both the Isle of Man Constabulary and Isle of Man Customs and Excise.) During the last three years the FSC has conducted on-site visits in all the banks specifically to test their KYC procedures and their compliance with the anti-money laundering legislation. |
| Assessment | Compliant |
| Comments | |
| Principle 16 | On-Site and Off-Site Supervision An effective banking supervisory system should consist of some form of both on-site and off-site supervision. |
| Description | Off-site supervision is focused on the submission by the banks of a detailed quarterly Banking Return. These returns are checked for compliance with the prudential supervisory requirements (see CP18 for a more detailed description of the off-site supervision process). Follow-up on noncompliance with prudential requirements or other unusual situations is performed. Historically, on-site supervision has consisted of annual meetings (ARMs or Annual Review Meetings) with the senior management of banks to review significant areas of their operations. These meetings are held to review with senior management, issues coming out of off-site supervision and other issues of supervisory interest. Over the last three years the FSC has given priority to carrying out assessments of AML/KYC techniques and practices coupled with selected ARM meetings whenever the risk profile indicated an ARM meeting was warranted. The FSC formulates an annual on-site program for the ARM visits. The focus of these visits is determined by an internal risk assessment (CAMELB.COM methodology). Issues coming out of the ARM meetings are monitored as part of the off-site-monitoring program. |
| Assessment | Largely compliant |
| Comments | The long-standing off-site supervisory process, coupled with the ARM process, has been effective. A standardized assessment and reporting process is in place for off-site reviews. It was encouraging to note that the FSC requires external auditors to provide reasonable assurance annually as to the accuracy of a regulatory return. In addition, the practice of obtaining an annual certificate from senior management of banks confirming their compliance with the Regulatory Code brings a further degree of accountability and possible liability to senior management should a distress situation occur. The FSC also obtains a letter from home supervisors confirming there were no issues of significant concern that would adversely impact the FSC as a host supervisor. The FSC is to be commended for the implementation of these control and accountability frameworks. The FSC has also made progress in its efforts to enhance the structure and approach to on and off-site supervision. Contributing factors to the enhanced supervisory process include: • An organizational structure will be introduced which when fully implemented and staffed will focus on a consolidated approach to supervision of FSC licensees; • A risk-rating system has been introduced for banks and is being applied on an ongoing basis; • A draft on-site methodology has been developed. The methodology developed parallels the risk-rating system (see comments re methodology below): • The existing technology platform provides for statistical comparisons. Unusual items are followed up. A more advanced technology platform was undergoing acceptance testing at the time of the mission; and, • Existing reporting formats are standardized and focused. Production of reports is timely. Copies of reports produced for supervisory purposes are also provided to boards of directors and parent banks, where appropriate. Three years ago, the FSC identified the need to ensure that licensed banks had an effective anti-money laundering regime in place. Over this period all banks have had a special focus on AML/KYC visitation. The on-site work was well documented. Industry representatives and auditing firms also confirmed that the focused visitations were effective. As a result of the focused AML/KYC visitation program, no full-scope safety and soundness visitations were carried out during this period. For example, while three visitations focused on credit-risk policies and procedures, the scope of the visitation did not assess credit quality or the reasonableness of loan-loss provisions. In addition, the effectiveness of the overall corporate governance regime in banks has yet to be subject to an independent assessment during visitations. In our opinion the on-site visitation program must be expanded. Significant risk areas should be assessed to confirm that an effective process of control exists throughout all areas of a bank’s operations and that the corporate governance regime is reflective of the risk appetite and profile of the bank. The FSC has developed a draft methodology designed to provide for a more probing visitation program. Our review of the proposed methodology revealed that while the methodology is sound the format of the methodology will be difficult to implement. The FSC has acknowledged this weakness and has confirmed the methodology will be reformatted in a manner to support risk-based assessments. We are however concerned that the FSC may not be able to achieve their departmental objectives particularly in the area of on-site safety and soundness visitations. Central to our concerns is that it appears that while staff employed is well qualified and supportive of the directional statements being made, the Supervision Division has a resource deficit. Another concern is the dynamic knowledge gap that is occurring as a result of the accelerated changes that have and continue to occur within the industry. The FSC has established an on-site visitation program that is reflective of the risk profile of their banks. The visitation objective is designed to ensure that all banks are visited at least within three years. Extrapolating the numbers of person days for scheduled on and off-site supervision estimated by the Supervision Division suggests that there will be a significant shortfall. Other issues that will have an impact on the effectiveness of the Supervision Division include: • In general, the industry feedback concerning the quality of FSC staff was positive although some concerns were registered regarding the FSC’s ability to assess in a detailed manner some of the new products and services and the required control practices being provided by the industry; • There are no prescribed quality control procedures being applied to support the on-site observations and judgments; and, • Turnover at the management level has occurred. Turnover within the Supervision Division for the year ending March31, 2002 was 17 percent. For the period ending September 30, 2002 turnover has been 7 percent. While recruited staff is well qualified they will need time and guidance to be able to assume their new accountabilities. To address the aforementioned issues the FSC would now benefit from adding a further degree of discipline to the on and off-site supervisory process. Examples of the types of additional discipline that would add value to the process include: • Accelerate the plan to finalize the on-site examination methodology. For example, refer to the comments and recommendations contained in CP8 for guidance on this particular subject; • Training programs focused on the expectations of the enhanced on-site methodology will be required; • The quality control or assurance process be formalized; and, • A time accounting process should be put in place that would provide quantitative and where appropriate qualitative data on how the division allocates it time. This type of reporting will become more important as the Supervision Division moves toward the implementation of a fully integrated on and off-site supervisory process. In general, we are concerned that unless the Supervision Division department is adequately resourced, the progress made to date will not be sustained. |
| Principle 17 | Bank Management Contact Banking supervisors must have regular contact with bank management and a thorough understanding of the institution’s operations. |
| Description | The FSC has formal contact with senior management in banks through Annual Review Meetings (ARMs). Additionally, “ad hoc” meetings are held at the request of either the FSC or the bank. The rationale for these meetings and the on-site visits is to ensure that a good understanding of the bank’s business is obtained. To date, the ARMs have focused on the results of the off-site surveillance activities and other issues of interest. Banks are required to notify the FSC of any significant changes in their operations (Section 9.2 of the Code). The FSC conducts an ongoing assessment of the quality of a bank’s management as well as an assessment of its business operations and this is fed into the overall risk assessment of the institution as referred to in the assessment of compliance with CP16. Feedback obtained during visits with senior management from a selection of banks, the Association of Licensed Banks and the Society of Chartered Accountants confirmed the constructive dialogue that exists between the FSC and other interested stakeholders. There appears to be a common interest within the Isle of Man that is directed at encouraging the development and sustainability of a sound regulatory regime. |
| Assessment | Compliant |
| Comments | A more in-depth, on-site examination process that addresses safety and soundness issues, will allow the FSC to assess compliance with regulatory requirements and obtain evidential confirmation of its understanding of the quality of management. |
| Principle 18. | Off-Site Supervision Banking supervisors must have a means of collecting, reviewing, and analyzing prudential reports and statistical returns from banks on a solo and consolidated basis. |
| Description | Section 2.3 of the Code requires banks to submit a quarterly Banking Return (calendar basis) in a format prescribed by the FSC. Where the bank’s year-end is different from the calendar quarters a bank is required to provide a further return to take into consideration the period to the calendar year-end. The Banking Returns consist of 4 distinct sections—(1) Balance Sheet, (2) Profit and Loss, Related-Party Transactions and Capital, (3) Liquidity, and (4) Foreign Currency and Interest Rate Exposure (off-balance sheet data). A less detailed reporting regime is in place where a subsidiary or associate company exists or a branch operates in the jurisdiction. Where applicable, these returns must be on a consolidated and solo basis. The information provided is mainly prudential but is also partially statistical. Prudential returns must be signed by a recognized director or senior manager. Section 12 of the BA permits the FSC to seek information on entities related to the bank, if it so requires. The Banking Return must be submitted to the FSC no later than 21 calendar days after the quarter-end date. The reporting process is monitored to ensure returns are being received on a timely basis and to highlight anomalies and concerns in the information provided that may have implications for the effective management and operation of the bank. Where issues warrant further assessment queries are sent to banks and followed up. An internal procedures document has been developed to ensure consistency of assessment over regulatory returns. An internal data base of information has been developed to provide validation checks on specific reporting items. This data base is available to the banking team as well as other selected staff. An enhanced “Financial Reporting System” (“FRS”) is currently undergoing acceptance testing. The development is being driven by the Operations Division, in conjunction with the Isle of Man government ISD Division. The development team includes representation from the Banking Team as well as two other representatives from the FSC knowledgeable about investment business and investment schemes. When implemented the technology platform is expected to allow the bank supervision team to expand their institution specific analysis to allow for more focus to be placed on broader trends and systemic issues. |
| Assessment | Largely Compliant |
| Comments | The relationship and ownership of the technology platform that exists between the FSC and the Isle of Man government ISD Division should be reassessed. Confirmation should be obtained from the government that the data provided by banks is “ring-fenced” from possible access by other government departments. |
| Principle 19. | Validation of Supervisory Information Banking supervisors must have a means of independent validation of supervisory information either through on-site examinations or use of external auditors. |
| Description | Section 13 of the BA provides for the conduct by the FSC of inspections (on-site visits) on banks. The powers contained in this Section do not limit the scope of the inspection. In addition, the FSC may appoint external officers to conduct such inspections. Section 21 permits the FSC to appoint “Reporting Accountants” to report on any aspect of a bank’s business. Banks are also required to have an annual audit by external auditors and there are obligations on such auditors (and also on Reporting Accountants), under Section 20, to report to the FSC if they become aware of facts during the course of their audits that they believe to be of material significance in relation to the FSC’s functions under the BA. The requirements of the Act focus on what could be referred to as “dire straits”—likely to lead to a serious qualification or refusal of the certificate of audit—endanger the existence of the banking institution; or gravely impair its development—imperil the protection of customers of the institution—indicate that the principles of sound management have been seriously violated. The external auditor is also required to submit a letter to the FSC confirming that to the best of his knowledge and belief, the banking institution has complied with several sections of the Code: 4.2(b)—verification of banking returns, 4.5—accounting records in the Isle of Man, 4.6-records retention, 4.7—accounting records—written communications with the FSC, 7.1-creation of charges over assets, and 8.4—existence and application of internal controls, procedures, and management information. While the FSC is receiving the required letter sections 4.2(b), 4.5, 4.6, 4.7 and 7.1, external auditors have not agreed to provide an opinion relating to section 8.4e—existence and application of a sound process of control. This issue was discussed at length with the accounting profession following the introduction of the code in 1999. As no resolution was able to be achieved the issue has remained outstanding. Auditors are also required to verify the accuracy of a bank’s supervisory returns with the underlying accounting records at least once per year and provide an opinion as to the accuracy of the information reported. The Isle of Man Society of Chartered Accountants has provided its members with an explanatory memorandum dated February 2000 entitled “Explanatory Memorandum for the Guidance of Auditors and Reporting Accountants of Regulated Financial Service Entities in The Isle of Man.” Amongst other issues covered in this document is a reference to the Auditing Practices Board support for allowing auditors’ to have the right and duty to report to regulators in the Financial Sector and the Isle of Man reporting requirements. |
| Assessment | Largely Compliant |
| Comments | The FSC is to be commended for obtaining reasonable assurance through independent audit opinions, which confirm the accuracy of regulatory reports. In addition, the letter required from external auditors indicating that nothing has come to their attention that would indicate noncompliance with sections of the Code adds further value to the supervisory process. However, a weakness in the process is that external auditors are not providing an opinion on internal controls as prescribed in section 8.4 of the Regulatory Code. This issue is under discussion with the FSC. An important degree of reliance is being placed on the work and opinions provided by external auditors. However, the FSC has not put in place a process to monitor the quality of work performed by external auditors in order to establish if reliance can be placed on it. The type of assurance sought could be achieved if the FSC was able to review the audit working papers supporting the prescribed regulatory returns or where appropriate the work undertaken as part of the Reporting Accountant process. In discussions with representatives of the Isle of Man Society of Chartered Accountants concerning the aforementioned subject, the representatives from the Society indicated that they understood the need for the FSC to obtain the necessary quality assurance. They also indicated that they were willing to work with the FSC to develop a methodology to achieve the desired results. The power of the FSC to conduct on-site safety and soundness examinations has not been exercised to any great extent. Nor has the FSC been active in using Reporting Accountants to complete special purpose or systemic reviews covering particular supervisory concerns. Refer also to comments CP 16 (On and Off-site supervision). Without a more in-depth on-site examination process that is designed to focus on a bank’s process of control or reaching an agreement with the external auditors to fulfill the specific requirements of section 8.4 of the Code an element of a supervisor’s responsibilities is not fulfilled. |
| Principle 20. | Consolidated Supervision An essential element of banking supervision is the ability of the supervisors to supervise the banking group on a consolidated basis. |
| Description | The FSC has the power, in Section 12 of the BA, to seek information on the activities of any member of a group of which a licensed bank is a part. The FSC therefore has the ability to monitor the activities of such groups on a consolidated basis. All of the prudential requirements apply to licensed banks and their subsidiaries (i.e., on a consolidated basis). There are no impediments to the direct and indirect supervision of affiliates and subsidiaries of licensed banks. A bank, or banking group, must seek the consent of the FSC, under Section 9 of the Code, for any expansion of its activities. Memoranda of Understandings (MOUs) have or are in the process of being put in place for nine jurisdictions. The MOUs referred to are associated with the more significant “home” jurisdictions. On an annual basis the FSC obtains a standardized confirmation from all “home” supervisors covering the operations of banks licensed on the Isle of Man. This annual request seeks confirmation that: • the parent bank is compliant with regulatory requirements; • there are no special conditions applied to the parent bank; • that the home supervisor has no objections to the continuation of the bank’s operations on the isle of Man; • the home supervisor undertakes consolidated supervision; and, • there are no specific supervisory issues that could impact the bank’s Isle of Man operations. Almost all banks regulated by the FSC would fall under the category of being within a host supervisory regime. |
| Assessment | Compliant |
| Comments | |
| Principle 21. | Accounting Standards Banking supervisors must be satisfied that each bank maintains adequate records drawn up in accordance with consistent accounting policies and practices that enable the supervisor to obtain a true and fair view of the financial condition of the bank and the profitability of its business, and that the bank publishes on a regular basis financial statements that fairly reflect its condition. |
| Description | The requirements in relation to financial statements and accounting records are contained in Section 4 of the Code. These place the onus on banks’ management for ensuring that the accounting records reflect accurately the financial position of their banks’ business at any time. All banks incorporated in the Isle of Man are required to draw up annual financial statements. These must be prepared in accordance with U.K. Accounting Standards adopted by the United Kingdom Accounting Standards Board or other accounting standards approved by the FSC and must take account of the disclosure requirements specified in Appendix B to the Code and any additional disclosure requirements made by the FSC. The annual financial statements must be audited by a member of one of the accounting bodies mentioned in section 14(1)(a) of the Companies Act 1982. The auditor must have professional indemnity insurance, acceptable to the FSC, of at least £20 million. The audited accounts must be submitted to the FSC within four months of the end of the accounting period to which they relate and must be accompanied by a detailed profit and loss account, consolidated accounts, if appropriate, and a compliance certificate (see Appendix F of the Code). Branches of banks which are not incorporated in the Isle of Man are required to submit a copy of the audited annual accounts of the bank of which they are a part, together with a detailed profit and loss account relating to the activities of the Isle of Man branch, and a compliance certificate, within four months of the end of the period to which they relate. All banks, whether incorporated in the Isle of Man or not, must submit in computerized and hard copy a completed set of the FSC’s Banking Returns (see Appendix A of the Code) as at the end of each calendar quarter date within 21 days of the date to which they relate. The FSC examines any significant differences between the figures reported to it and the figures in the audited accounts. As a further check on the integrity and efficiency of the reporting system to the FSC, license holders are required to arrange—on an annual basis—for their auditors to verify to the accounting books and records a set of quarterly returns chosen by the auditors (unless the FSC specifies a particular set of returns). The accounting records are tested, as part of the annual statutory audit of the bank (Section 4.2 of the Code), and the auditors must report that such books and records are properly kept. The FSC (under Sections 13 or 21 of the Act) can inspect, or commission reporting accountants to examine, such accounting records. Under Section 4.8 of the Code, banks are required to file their audited financial statements with the Registrar of Companies within four months of their financial year-end and to make available such statements at their registered offices and branches in the Isle of Man. There is no specific provision in the BA granting the FSC the power to revoke the appointment of an external auditor. However, in practice the FSC could request/direct (i.e., issue a direction to the bank under Section 11 of the BA) a bank to remove its auditor and such a motion could be submitted before a general meeting of the bank’s shareholders. Where the auditor in the course of his work becomes aware of matters of material significance in relation to the work of the FSC he must report such matters to the Commission under Section 20 of the BA. Matters of material significance include facts which are likely to lead to a serious qualification or refusal of the certificate of audit, endanger the existence of the banking institution, imperil the protection of its customers or which indicate that the principles of sound management have been violated. Section 22 of the BA enables the auditor to communicate with the FSC without breaching any duty of confidentiality, which he may owe to his client. These circumstances will be exceptional. Guidance notes have been issued by the FSC in relation to such issues (Appendix M of the Code). |
| Assessment | Compliant |
| Comments | |
| Principle 22 | Remedial Measures Banking supervisors must have at their disposal adequate supervisory measures to bring about timely corrective action when banks fail to meet prudential requirements (such as minimum capital adequacy ratios), when there are regulatory violations, or where depositors are threatened in any other way. In extreme circumstances, this should include the ability to revoke the banking license or recommend its revocation. |
| Description | Section 11 of the BA empowers the FSC to make recommendations to a bank, such as the suspension or discontinuance of part or all of its operations. They extend also to a bank whose license has been revoked, lapsed or surrendered and to managers and past managers of banks. These powers are reinforced by the power to issue directions. Failure to comply with a direction is a criminal offence, which can render banks and their directors, managers and officers liable to fines and even imprisonment. The FSC’s direction-making powers can be used to ensure compliance with its requirements in cases where appropriate measures cannot be agreed with the directors and management and where the FSC wishes to reinforce its supervisory concern. An alternative course of enforcement action is for the FSC to attach special conditions to a bank’s license—breach of which would also be a criminal offence. However, license conditions (including special conditions) are open for public inspection, and so the FSC chooses this course only when it considers that the matter will not unjustifiably undermine public confidence in a bank. The issue of directions is not a matter of public record unless a bank fails to comply and a prosecution is to be brought. Because the FSC’s direction-making powers are wide-ranging and backed by criminal sanctions there is a procedure in Section 24 of the BA for a bank, which is aggrieved by the issue of directions by the FSC. The bank can apply to the chief secretary who shall report the application to the council of ministers for a review of the decision to issue such directions. The council of ministers must appoint a Review Committee consisting of 3 persons who must be independent of both the FSC and the applicant. The Review Committee may confirm, vary, or revoke the direction appealed against, but until the Committee decides, the direction remains in force and the previous operation of the direction is unaffected by any decision the Review Committee may make. However, in cases of noncompliance with prudential requirements or other situations where depositor’s funds may be threatened, the FSC would initially seek to have these issues addressed in an informal way, generally by verbal or written communication. If the matters are not rectified as a result of this moral suasion, the FSC has the statutory power to impose conditions on the bank’s license (Section 7(3) of the BA). The FSC can also issue recommendations (Section of the BA) or issue directions on the bank (Section 11(2) of the BA). Failure to comply with any of these enforcement actions entitles the FSC to revoke the license (Section 7 (1) of the BA/ Section 33(2) (Enforcement Action). Enforcement action can be applied to the bank itself or to any managers of the bank. Sections 25 to 29 of the BA also cover a number of other offences, which could lead to fines, custodial sentences, or revocations of licenses. The bank or any other person can appeal, under Section 24 of the Act, to the council of ministers’ Review Committee for a review of the FSC’s decision where a license has been revoked or a condition or direction is imposed. As stated above under CP 6 the FSC has no explicit power to suspend payments to shareholders. However, the FSC could issue a direction under Section 11 of the BA to suspend such payments. If the payment of a dividend resulted in a breach of the capital requirement of a bank, the FSC has the power to require that the breach be rectified immediately (such breaches must be reported under Section 11.1 of the Code). There is no specific provision in the BA granting the FSC the power to revoke the appointment of an external auditor (see CP 21). However, in practice the FSC could request/direct (i.e., issue a direction to the bank under Section 11 of the BA) a bank to remove its auditor and such a motion could submitted before a general meeting of the bank’s shareholders. |
| Assessment | Complaint |
| Comments | Legal provisions are in place, which enable the FSC to take regulatory action against a noncompliant bank. The action required can apply to any or all elements of a bank’s business. The FSC keeps a log of regulatory breaches by banks and the action taken to ensure corrective action. The powers available to the FSC are significant and wide-ranging and are in compliance with the principle. During the past year, the FSC made a policy decision to introduce fining, initially for administrative breaches. It was agreed to request whatever legislative amendments were necessary to grant this power. It was also agreed to publicly “name and shame” persons deemed not “fit and proper” under Section 16 of the Act. |
| Principle 23 | Globally Consolidated Supervision Banking supervisors must practice global consolidated supervision over their internationally active banking organizations, adequately monitoring and applying appropriate prudential norms to all aspects of the business conducted by these banking organizations worldwide, primarily at their foreign branches, joint ventures, and subsidiaries. |
| Description | Banks in the Isle of Man could not be said to be internationally active, as they have limited overseas operations. However, the legal instruments are in place in order to supervise these operations on a consolidated basis (banking returns on both a solo and consolidated basis and, for some operations, individual branch or subsidiary returns). In the recent past one bank used to have subsidiaries outside the IOM Banks in the Isle of Man could not be said to be internationally active, as they have limited. |
| Assessment | Compliant |
| Comments | This principle currently has no application in the Isle of Man but is being complied with. |
| Principle 24 | Host Country Supervision A key component of consolidated supervision is establishing contact and information exchange with the various other supervisors involved, primarily host country supervisory authorities. |
| Description | As per CP 23 above, the IOM licensed banks have presently no branches or subsidiaries in other jurisdictions so the FSC does not act in the role of home supervisor. The FSC has signed MOUs with a number of foreign regulators and is in the process of signing a number of others. |
| Assessment | Compliant |
| Comments | |
| Principle 25 | Supervision Over Foreign Banks’ Establishments Banking supervisors must require the local operations of foreign banks to be conducted with the same high standards as are required of domestic institutions and must have powers to share information needed by the home country supervisors of those banks for the purpose of carrying out consolidated supervision. |
| Description | Local branches and subsidiaries of foreign banks that are licensed in the Isle of Man have to comply with the same prudential and regulatory requirements as domestic banks. As mentioned before many of the IOM-licensed banks are subsidiaries or branches of overseas operations. In the past the FSC has demonstrated close cooperation with other regulators. In licensing a foreign subsidiary or branch the FSC requires prior approval of the home supervisor. In these cases the FSC would also need to be satisfied that the home supervisor exercises global consolidated supervision. The FSC cooperates in the exchange of information with the home supervisors of these banks (formally at least annually). The FSC’s powers to exchange confidential information with other regulators are contained in Section 24 of the Financial Supervision Act 1988. Visits by home supervisors to local subsidiaries and branches for supervisory purposes are permitted and take place. Home country supervisors are advised of regulatory action taken by the FSC in respect of local subsidiaries or branches of foreign banks and copies of reports on on-site inspection visits are sent to the home supervisors as a matter of course. |
| Assessment | Compliant |
| Comments |
Table 1.
Detailed Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision
| Principle 1. | Objectives, Autonomy, Powers, and Resources An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banks. Each such agency should possess operational independence and adequate resources. A suitable legal framework for banking supervision is also necessary, including provisions relating to the authorization of banking establishments and their ongoing supervision; powers to address compliance with laws, as well as safety and soundness concerns; and legal protection for supervisors. Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place. |
| Principle 1(1) | An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banks. |
| Description | The Financial Supervision Commission Order, 1983, established the FSC as the body responsible for the licensing and supervision of the finance sector (with the exception of insurance and pensions business) in the Isle of Man. The FSC’s general functions are to take steps leading to the effective supervision of the private financial and commercial sector. The FSC is the sole agency with responsibility for banking supervision in the Isle of Man, and its detailed responsibilities and powers are outlined in the Banking Act 1998 (BA). This legislation, and regulations and codes made under the BA—in particular, the Banking (General Practice) Regulatory Code, 1999 (“the Code”)1—provide the framework for the minimum prudential standards that banks must meet. The FSC’s policy function is to ensure that its regulatory framework keeps up to date with international standards and best practices. Normal practice is that the FSC identifies the need for particular regulatory measures and proposes the necessary legislation and guidance to achieve the objective. In July 2001, the FSC conducted a detailed review of the compliance of the Isle of Man’s law and supervisory practices with the Basel Core Principles for Effective Banking Supervision. Although the results were generally positive, the exercise was helpful in identifying areas where further work could be done to strengthen the supervisory approach. As a result of the new FATF recommendations and the report of the Basel Committee on Banking Supervision entitled, “Customer Due Diligence for Banks,” the FSC revised its Anti-Money Laundering Guidance Notes in December 2001. As a general rule, the Isle of Man’s banking laws are updated as necessary to ensure that they remain effective and relevant to changing industry and international regulatory practices. The FSC’s overall objectives are set out in its mission statement2 and its medium-term objectives are set out in its “medium-term plan.” The FSC reviews annually its performance against that plan. The regulatory structure in the Isle of Man was also subject to a major review in 1998 by the U.K. Home Office (“Edwards Review”). As a medium-term project, the FSC is currently conducting a review of legislation governing the regulated activities of its license holders (banks, corporate service providers, investment companies, etc.). The underlying objective is the consolidation of the primary supervisory legislation administered by the FSC in one new Act. For this purpose, a working group is being formed with the industry to examine the Banking Act, 1998; the Investment Business Act, 1991; the Building Societies Act, 1986; the Financial Supervision Act, 1988; the Corporate Service Providers Act, 2000; and the Fiduciary Services Bill. The FSC also works closely with the other crown dependencies to achieve a consensus approach in the prevention of money laundering. The primary purpose is to ensure greater consistency, to address observations made previously by FATF, and to commit to the Basel document mentioned above. A draft position paper entitled, ”Overriding Principles for a Revised “Know-Your-Customer Framework,” was issued in February 2002, and is now being discussed with the industry prior to a redrafting of the relevant guidance notes and legislation. |
| Assessment | Compliant |
| Comments | The FSC has to be commended for its continuous proactive attitude towards enhancing the Isle of Man’s regulatory and supervisory regime, and its endeavor to meet international standards. The FSC holds discussions with the industry on the contents of its proposed guidance notes to ensure that implementation will be practicable. The FSC has also identified the need to rationalize and clarify its existing supervisory powers. In this respect, and similar to the objective pursued in the United Kingdom by the Financial Services and Markets Acts 2000, a one-license system encompassing the various categories of regulated business will be explored. Current duplication and potential inconsistencies between the various Acts that have been developed piecemeal over the last sixteen years will be identified and addressed. The FSC’s administrative workload should benefit considerably from the results of this exercise. However, the present legislative timetable is such that a consolidation bill cannot be introduced for another two to three years. This lengthy process may adversely affect the efficiency and comparative attraction of the Isle of Man’s financial services sector. It is therefore recommended that the Isle of Man authorities explore the possibility of revisiting the existing time schedule. |
| Principle 1(2) | Each such agency should possess operational independence and adequate resources. |
| Description | The FSC is a statutory body established in 1983 by the Financial Supervision Order 1983 (Section 3). The members of the FSC direct its affairs. Section 3(2) of the Order provides that the FSC shall consist of no less than three persons appointed by the treasury, subject to the approval of Tynwald (the Isle of Man parliament). Currently, there are eight commissioners, seven of whom are non-executive. Members of the treasury and persons in receipt of a salary from the government or the FSC shall be eligible for appointment to the FSC (Section 3 (3)). Presently, eight commissioners direct3 the FSC, seven of whom are non-executive. The chief executive is the only executive member. The chairman is a politician and a member of the treasury. His tenure of office as FSC chairman, as well as the tenure of the other members, is determined by the Statutory Boards Act, 1987 (SBA). Following the issue of the Edwards Report, which questioned the policy of having a politician on the Board, the composition of the Board was considered and it was concluded that there was no reason to change. In appointing a new political chairman in December 2001, the treasury minister, confirmed that he was still considering whether it was appropriate to appoint a nonpolitical chairman. The commissioners as a group (“Board”) meet formally monthly. According to Section 8 of the Financial Supervision Commission Act, 1984, the expenses of the FSC in performing its duties are defrayed out of money provided by Tynwald. According to the Isle of Man’s business planning process, the council of ministers establish government aims, objectives, corporate indicators, and targets. These are provided to departments and the statutory boards, such as the FSC, together with their budget and resource allocation. During the year 2001, an internal audit was undertaken by the government’s internal audit division; no major issues were identified. In its meeting on January 25, 2001, the FSC approved a code of conduct designed to assist the commissioners in identifying for themselves potential conflicts of interests and in being aware of the appropriate action to take. In practice, the FSC’s costs are met from annual license fees and from charges related to the companies’ registry functions. The FSC has discretion in the appointment of its staff within a headcount and a budget agreed with the treasury. The majority of its staff has significant experience in the regulatory field or private financial services firms (or both) and has a range of professional qualifications (mainly in accountancy and law). The FSC places a high priority on staff training. Every staff member discusses and agrees with his or her superior a training program for the year ahead. The quality of the staff is also acknowledged by the industry. During the period of 2001/2002, seven persons (out of 54.5)4 left the FSC, some of them for senior compliance positions outside. The existing full employment situation and the predominance of the financial sector in the economy also contribute to staff turnover. In this context, and in order to restore or maintain a competitive pay structure, a job evaluation exercise has been held. As a result, existing pay bands have been adapted. The FSC has the ability to hire outside experts as the need arises. Until now this has occurred on one occasion only. The FSC’s budget has allocations for the training of staff, the purchase of technological equipment, and for expenditure related to the conduct of on-site and off-site supervision. |
| Assessment | Materially noncompliant |
| Comments | Edwards Report, and concluded that there was no reason to make any changes. However, when appointing a new political chairman in December 2001, the treasury minister confirmed that he was still considering whether it was appropriate to appoint a nonpolitical chairman. Regarding the issue of the FSC’s lack of independence mention must also be made of the following circumstances, most of which arise because the FSC is a “Board” governed by the provisions of the Statutory Boards Act 1987 (SBA): As mentioned above, the authorities considered the composition of the FSC in the wake of the • a member of the FSC may be removed from office by a resolution of Tynwald (Section 3 (4) of the SBA); • the council of ministers may, after consultation with the FSC, give to the FSC such directions as to the exercise of its functions in relation to any matter, which appears to the council of ministers to affect the public interest, and the FSC shall comply with any such directions (Section 12 (1) of the SBA); • the FSC shall supply to the chief minister such information, and render such other assistance, as the chief minister may from time to time require, and for that purpose shall permit any person appointed for the purpose by the chief minister to inspect and make copies of its accounts, books, documents and papers, and shall afford such explanation thereof as that person may reasonably require (Section 12(2) of the SBA); • the treasury may give the FSC such directions as it thinks fit with respect to the exercise or performance of its powers under sections 4 to 75 and 13(1) to (3)6 of the BA or SBA whether generally or in any particular case and the FSC shall comply with such directions; • According to Section 8 of the Financial Supervision Commission Act 1984 the expenses of the FSC in performing its duties are defrayed out of money provided by Tynwald. According to the business planning process (mentioned above) the council of ministers establishes government aims, objectives and corporate indicators and targets. These are provided to departments and the statutory boards, such as the FSC, together with their budget and resource allocation. Although in the past the FSC has made the case for additional resources in order to deliver the planned program of work, the request has only been partially met. In practice, except for the limitations imposed on the financial and staffing resources of the FSC, there are no signs of government intervention in the FSC’s regulatory decision making. However, the existence of several legal powers enabling the government to intervene in the FSC’s operations represents a potential impediment to its autonomy. The budgetary restrictions imposed on the FSC prevent it from fully achieving its supervisory objectives. The FSC’s annual report 2001/2002 draws attention to the growing workload and the limited resources. FSC Direct Costing of Supervisory Responsibilities (percent) |
| Total | Banking | Inv. | Bus | CIS | CSP |
| 100 | 28 | 24 | 21 | 27 |
| The case for additional resources would benefit from an in-depth analysis of the FSC’s supervisory objectives and the means needed to achieve them. The ongoing review of the business process of prudential supervision should be continued in order to enhance its efficiency and an appropriate change process should be agreed in the near future. This would help take account of the growing iversity and complexity of financial products. The Isle of Man will also need to continue to give due regard to other developments in international standards, arising from pronouncements by the international regulatory bodies or other international initiatives. | |
| Principle 1(3) | A suitable legal framework for banking supervision is also necessary, including provisions relating to authorization of banking establishments and their ongoing supervision. |
| Description | Section 6 of the BA gives the FSC the power to grant and refuse licenses. Section 7 gives the FSC the power to revoke licenses in certain circumstances. As stated above, section 30 confers on the treasury the right to give the FSC such directions as it thinks fit with respect to its licensing powers, whether generally or in any particular case. The FSC’s licensing policy is based on the belief that the Isle of Man is too small and too vulnerable to shoulder high risk banking operations, including start-up operations. The FSC therefore encourages applications from banks incorporated outside the Isle of Man, which meet its criteria for the establishment of a branch, or locally incorporated subsidiary. These banks must be licensed in their principal place of business that must be in a jurisdiction, which, in the FSC’s judgment, exercises proper licensing and supervision and subscribes to the principles of the International Concordat on Banking Supervision. The FSC has reviewed its licensing policy for banks, in the light of changing demands and the fact that an entry criterion based too narrowly on size can exclude other, smaller high quality institutions, which might wish to apply for a license. The FSC’s policy was revised to emphasize the importance of the credit rating of the banking group concerned and the jurisdiction of its home regulator. Reference to the world’s top 500 banks as an overriding criterion was removed. Section 10 of the BA gives the FSC the power to make prudential rules (in the form of Regulatory Codes) without the need for primary legislation. However, if Tynwald subsequently fails to approve them they cease to have effect. The prudential rules issued in this context, and approved by Tynwald, are contained in the Banking (General Practice) Regulatory Code 1999. They relate to a variety of issues (e.g. capital requirements, auditing standards, ownership, acquisitions, mergers, and management). Guidance notes appended to a Code give guidance to banks about how the FSC will operate in particular circumstances. The Notes are not part of the Code. As a rule extensive consultation is held with the industry in formulating policy guidance and best practice. Section 12 of the BA empowers the FSC to seek whatever information from banks that it requires for the performance of its functions. The form and frequency of the prudential banking returns are outlined in Section 2.3 of the Code. The FSC has a comprehensive system in assessing applications for bank licenses. Initially, the assessment is conducted at executive level and will include “fit and proper” enquiries and assessment of the ability of the applicant to meet the licensing criteria and the general prudential requirements on an ongoing basis. The application is then considered at a meeting of the chief executive’s licensing committee, following which a recommendation is made to a Licensing Committee, which comprises members of the FSC’s Board who have not been involved in the initial review of the application. The applicant receives a copy of the recommendation. The applicant has the opportunity to attend, be represented and make representations when the license application is formally considered. These procedures were introduced in order to ensure compliance with the Human Rights Act 2001 (although not yet in force). However no new banking license applications have been filed during the past few years. On August 1, 2000, the FSC issued a guidance note on the responsibilities and duties of directors under the Laws of the Isle of Man (Appendix N). |
| Assessment | Compliant |
| Comments | |
| Principle 1(4) | A suitable legal framework for banking supervision is also necessary, including powers to address compliance with laws, as well as safety and soundness concerns. |
| Description | Section 6 of the BA gives the FSC power to revoke licenses in certain circumstances. A range of sanctions is available to the FSC where a bank is noncompliant. Section 7 of the BA allows the FSC to impose conditions on a license at any time. The FSC can make recommendations and issue directions to a bank under Section 11. The ultimate enforcement sanction is revocation of a license under Section 7. As stated above Section 10 gives the FSC power to set prudential rules (in the form of Regulatory Codes) administratively. Guidance notes explain what the FSC considers to be best practice. Strictly speaking guidance notes are not legally binding but if needed, they provide elements which the Courts take into account. The notes do, however, provide a basis for regulatory action, including the imposition of conditions on banks. Section 12 of the Act allows the FSC to seek whatever information from banks that it requires for the performance of its functions. The form and frequency of the prudential banking returns are outlined in Section 2.3 of the Code. In the Isle of Man, two methods are used for collecting and assessing the information needed for making supervisory judgments: • off-site supervision - requiring information from banks and their auditors, assessing it and discussing it with management; and • on-site visits. Section 12 of the BA states that the FSC may request such information from a banking institution or former banking institution or a manager or past manager of a banking institution that it may reasonably require for the performance of its functions. The FSC may issue directions to any banking institution to secure that effect is given to any such request. The FSC is also proactively engaged in identifying illegal financial activities. The FSC has specific powers to enter premises and seize relevant documents where it has reasonable grounds to suspect that illegal activity is being performed. It can then apply to the High Court for the appointment of a provisional liquidator, deemed official receiver. This gives the FSC the ability to move quickly with the approval of the Court, to protect the interests of investors or depositors. |
| Assessment | Largely compliant |
| Comments | The range of sanctions available to the FSC is to be augmented by the power to impose penalties. During the past year, consideration was also given to developing the FSC’s powers to appoint managers or administrators to problem license holders. It was agreed that such powers would be desirable and that the necessary legislative changes will be considered further. The need to obtain prior treasury agreement for the Regulatory Codes developed by the FSC might represent an impediment to the development of necessary secondary legislation. In addition, Tynwald has to approve the Regulatory Codes of the FSC after they are issued, although this has not caused problems in practice. However, the rigidity and workload of Tynwald procedures could at some point of time hamper the efficiency and required speed. The FSC has to apply to the High Court for the appointment of a temporary manager or administrator. |
| Principle 1(5) | A suitable legal framework for banking supervision is also necessary, including legal protection for supervisors. |
| Description | The FSC and its officers have statutory immunity from suit, under Section 15A of the Investment Business Act 1991 and Section 19 of the Corporate Service Providers Act 2000. They are protected from liability in damages for, or in respect of, acts done or omitted in conducting their statutory supervisory functions unless shown to be acting in bad faith. Additionally, the FSC’s officers are indemnified for acts or omissions, under Schedule 2 (paragraph 11) to the Statutory Boards Act 1987, provided that they acted reasonably and honestly. The FSC has the discretion to indemnify officers for any damages or costs which they have been ordered to pay, provided that it is satisfied that the officers honestly believed that they had acted within the scope of their functions. |
| Assessment | Compliant |
| Comments | |
| Principle 1(6) | Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place. |
| Description | Section 24 of the Financial Supervision Act 1988 permits the disclosure by the FSC of confidential information to other governmental agencies within the Isle of Man and to external agencies with statutory functions corresponding to the FSC. The disclosure must be for the purpose of enabling those bodies to exercise their statutory functions. The legal provisions are drafted so that the disclosure of information by the FSC is permissive and not mandatory. When releasing information under this Section, the FSC specifies that the information must remain confidential to the receiving agency and must not be passed on without the FSC’s written consent. The FSC has also signed and is in the process of completing a number of MOUs with foreign regulators. The disclosure of information about the affairs of individual customers is prohibited except in very limited circumstances (Section 24(6)). The FSC is addressing this issue and is proposing to government that this provision be dispensed with. |
| Assessment | Compliant |
| Comments | |
| Principle 2 | Permissible Activities The permissible activities of institutions that are licensed and subject to supervision as banks must be clearly defined, and the use of the word “bank” in names should be controlled as far as possible. |
| Description | “Banking Business” is defined in Section 1 of the BA. This definition primarily covers the taking of deposits (from the public), while Section 2 makes it an offence to conduct such business without a banking license. Section 9 makes it an offence to use the word “bank” without the written consent of the FSC. The activities that banks can conduct, other than the taking of deposits or the receipt and payment of checks, are not explicitly specified in legislation, nor are they specified in the banking license. The approach to date has been to give a letter of consent to a bank for the conduct of additional activities, in accordance with the requirements of the Code. |
| Assessment | Largely compliant |
| Comments | The legislation is largely compliant with this principle. Expanding the definition of “banking business” to include other activities and altering banking licenses to state more specifically the activities that holders are allowed to conduct, will be considered in a future review of the banking law, possibly in conjunction with the proposal to have a composite financial services law. (However, the requirement to have a banking license will still be based on deposit taking). As the range of activities conducted by banks is rather limited for the moment, the absence of full transparency through a listing of the activities that can be conducted is not considered material. |
| Principle 3. | Licensing Criteria The licensing authority must have the right to set criteria and reject applications for establishments that do not meet the standards set. The licensing process, at a minimum, should consist of an assessment of the banking organization’s ownership structure, directors and senior management, its operating plan and internal controls, and its projected financial condition, including its capital base; where the proposed owner or parent organization is a foreign bank, the prior consent of its home country supervisor should be obtained. |
| Description | The FSC’s policy in assessing applicants for banking licenses is outlined in the Regulatory Guide to Banking Business in the Isle of Man. The policy is based on the belief that the Isle of Man is too small and too vulnerable to shoulder high-risk banking operations, including start-up operations. The FSC therefore encourages applications from banks incorporated outside the Isle of Man, which fulfill the FSC’s criteria for the establishment of a branch, or an Isle of Man incorporated subsidiary. These banks must be licensed in their principal place of business that must be in a jurisdiction, which in the FSC’s judgment, exercises proper licensing and supervision and subscribes to the Core Principles for Effective Banking Supervision. The basic licensing criteria are set out in Section 5 of the BA. The FSC cannot grant a license unless these criteria are met. Section 4 (2) of the Act allows the FSC to prescribe the form of a license application and to request whatever specific information and documentation it requires from the applicant in order to assess an application. The FSC has a formal application form, which sets out the detailed information that the FSC requires from applicants in support of an application. The Code outlines in greater detail the general regulatory requirements and, in particular, the minimum capital requirements (see also CP 6 para1). The FSC is also required to examine the operating plans, internal controls and proforma accounts of proposed banks. These include a “fit-and-proper” assessment of the applicant, its shareholders, directors and senior management, and the ability of the FSC to exercise effective supervision over the applicant. It is important to note that the fit and proper test is both an initial test at the time of granting a license and a continuing test in relation to the conduct of the business and the relationship with the FSC. Section 5 of the Code requires disclosure of all shareholders holding more than 5 percent of the applicant’s shares. Section 4(2) of the Act allows the FSC to prescribe the form of a license application and to request whatever specific information and documentation it requires from the applicant in assessing an application. As a matter of policy the FSC prefers that banks operating in the Isle of Man are directly held, wholly owned subsidiaries of banks as this facilitates the communication and control necessary for proper parental oversight of Isle of Man operations. Nevertheless, there are occasions when an intermediate holding company, which is not a bank, is interposed between the Isle of Man bank and its banking parent. It is important that this does not complicate communication and control, or dilute responsibility by introducing a further jurisdiction into the ownership chain. In such cases, the FSC requires not only that the intermediate holding company has positive free resources but also that the parent bank provides a Letter of Comfort in terms acceptable to the FSC. In general, the positive free resources requirement for a nonbank holding company obliges a holding company to have sufficient equity (including convertible unsecured loan stock) to fund its assets and contingent liabilities without recourse to third parties for new resources. This is an ongoing minimum requirement designed to ensure that a future Isle of Man banking subsidiary cannot be imperiled by the actions of creditors of a nonbank holding company. Such actions may arise for a number of reasons, including breaches of covenants, etc. In the FSC’s view, it is also desirable that the holding company of a bank should be a demonstrable source of strength to the bank it owns, thereby enhancing the confidence of depositors. In cases where the intermediate holding company is itself a bank, the FSC’s requirements are influenced by the requirements of the home supervisor of that bank. If the intermediate holding company is owned directly by a bank which has also provided a satisfactory Letter of Comfort, the FSC may be prepared to relax its requirements with regard to the financing of the equity of the subsidiary, provided that it is satisfied that there is no danger to the Isle of Man subsidiary from third party creditors. Section 7 of the BA allows the FSC to revoke a license should it subsequently emerge that the applicant provided false information. The FSC consults with the home supervisor where an applicant is a foreign bank that proposes to establish a branch or subsidiary in the Isle of Man. Following the issue of a license, the FSC’s on-site and off-site procedures ensure that compliance with the licensing criteria and other supervisory requirements are continuously met. |
| Assessment | Compliant |
| Comments | |
| Principle 4. | Ownership Banking supervisors must have the authority to review and reject any proposals to transfer significant ownership or controlling interests in existing banks to other parties. |
| Description | Section 5 of the Code requires the prior written consent of the FSC for transfers of voting shares of 5 percent or more of a licensed bank’s total voting shares, and for transfers of a lesser amount which would have a material effect on beneficial ownership or control. The disclosure—to the FSC—of the ultimate beneficial ownership of all shares in excess of 5 percent of the issued capital of a bank institution is required. (Section 5.2 of the Code). A bank whose shares are quoted on a recognized Stock Exchange, should inform the FSC—in writing—within seven days of the discovery of any transfer of 5 percent or more of its voting shares or any lesser transfer which has a material effect on its immediate or ultimate beneficial control (Section 5.2 of the Code). The FSC must also be informed in writing not less than 21 days in advance of any proposed change in the ownership structure between it and its ultimate parent company (Section 5.2 of the Code). The guidance note on this issue, attached to the Code, indicates further that in some instances, a change of the parental ownership structure may not involve any changes in immediate or ultimate parent companies. However, if any material changes are to be made to any of the other companies in the structure linking the banking institution to its ultimate parent, the FSC must be notified. This would include, for example, the ultimate parent selling part of its stake in a subsidiary which itself forms part of the link between it and the banking institution. Furthermore these changes are to be covered by the annual certificate from senior bank management. (see also CP 14 para.3) The FSC must be aware at all times of the identity of the owners of a banking institution. Connected parties are considered to be one shareholder in considering questions of control. In assessing a license application, the FSC must not only be satisfied that the owners are “fit and proper” but also that the ownership is both appropriate and suitable. In particular, the FSC must be satisfied that there will be no conflict between the other business interests of the owners and those of the banking institution and that the owners recognize a moral responsibility to support the bank and have the substance to do so, if required. The accuracy of the FSC’s information on significant shareholders in banks is checked to the annual financial statements of license holders and their parents (where applicable). The FSC does not receive a periodic return on controllers/significant shareholders. Furthermore, as part of the annual review of the bank’s operations, the supervision division verifies with the Company Registrar that there have been no material changes in ownership. |
| Assessment | Compliant |
| Comments | |
| Principle 5. | Investment Criteria Banking supervisors must have the authority to establish criteria for reviewing major acquisitions or investments by a bank and ensuring that corporate affiliations or structures do not expose the bank to undue risks or hinder effective supervision. |
| Assessment | Compliant |
| Comments | |
| Principle 6. | Capital Adequacy Banking supervisors must set minimum capital adequacy requirements for banks that reflect the risks that the bank undertakes, and must define the components of capital, bearing in mind its ability to absorb losses. For internationally active banks, these requirements must not be less than those established in the Basel Capital Accord |
| Description | Section 2 of the Code specifies a minimum absolute paid-up capital of £1 million for all banks. Additionally, all banks must maintain a minimum risk asset ratio of not less than 10%. The components of capital and the methodology used are generally in accordance with the Basel Capital Accord (Section 2.2 of the Code). Risk weightings are applied to both on-balance-sheet and off-balance-sheet risks. Interest rate and foreign exchange mismatches are also included in the calculation of risk asset ratios (see CP12). Risk asset ratios are set individually for banks according to the FSC’s perception of the risks attached to a particular bank’s business and may be higher than the 10% minimum.. A higher minimum may be set where the FSC believes this to be appropriate due to the nature of a bank’s business, and/or by reference to its peer group (Section 2.2 of the Code). In addition, the FSC takes into account such factors as the bank’s parent (and its ability to provide additional capital if required), the risk asset ratio applied to the parent bank by its home supervisor and the quality of the bank’s management. At present required risk asset ratios vary between 10 and 18 %. Out of a total of thirty-four bank subsidiaries, eight have to comply with a capital ratio that exceeds the 10 % minimum. The FSC also employs “trigger ratios”, which are set higher than the required minimum risk asset ratios in order to draw attention to the approaching need for more capital. If a bank’s actual risk asset ratio falls to the trigger level, it is expected to discuss its capital adequacy planning with the FSC to ensure that its minimum required ratio is not breached. The Code (Section 11.1)also requires a bank to notify the FSC immediately if it breaches its minimum risk asset ratio.. In calculating its capital adequacy (its risk asset ratio) a bank should observe the principle of prudence, particularly when evaluating the quality of its assets and accruing income. Required risk asset ratios must be maintained on a solo and - where applicable - on a consolidated basis. Although the risk asset ratio - and the large exposure limits (see CP9) are related to a bank’s adjusted capital base, the FSC recognizes that current earnings represent the first line of defense against losses and that profitability also affects a bank’s decisions on whether or not to expand its Isle of Man operation, whether to invest additional resources, and so on. Accordingly, the FSC pays close attention to a bank’s reported earnings, size as well as source. It calculates a number of ratios designed to measure not just profitability but also the strength and source of earnings. These reveal not only the success or otherwise of the business but often also the role the bank is playing within the banking group of which it is a part. Because the results of the Isle of Man operation are often the consequence of decisions taken as part of a wider strategy, the ratios need to be carefully interpreted but they are considered to be a vital supervisory tool. The amount of profits paid out as dividends needs to be compatible with a continuing need to maintain adequate capital. The FSC has no explicit power to suspend payments by banks to their shareholders. However, the FSC can achieve the same effect by issuing a direction to suspend such payments under Section 11 of the BA. If the payment of a dividend results in a breach of a bank’s risk asset ratio the FSC has the power to require that the breach be rectified immediately (such breaches must be reported under Section 11.1 of the Code). In practice, as most banks have risk asset ratios well above their required minimums this is not a significant issue. The banks submit detailed quarterly prudential returns to the FSC. |
| Assessment | Complaint |
| comments | |
| Principle 7. | Credit Policies An essential part of any supervisory system is the independent evaluation of a bank’s policies, practices, and procedures related to the granting of loans and making of investments and the ongoing management of the loan and investment portfolios. |
| Description | Section 8 of the Code (in particular the related Appendix D) requires that banks must have internal controls, policies and procedures relating to the assessment and granting of loans and the ongoing management of these risks. Paragraph 4 of Appendix D requires banks to establish and adhere to adequate policies and procedures for evaluating the quality of assets and the adequacy of loan-loss provisions and reserves. Assessment of compliance with these requirements may be covered in the FSC’s future on-site programs in accordance with its powers in Section 13 of the Act. The FSC has also stated that consideration will be given to applying more prescriptive requirements in these areas if necessary. These might include more detailed reporting (such as quarterly reporting of loan classifications (gradings) and detailed arrears figures) and a requirement to have prescribed levels of specific provisions in respect of such arrears. The FSC’s requirements in this area are general in nature, and not detailed prescriptions. To some extent the FSC has taken into consideration the fact that most banks are part of larger U.K. entities, which apply group policies to their Isle of Man operations. Also, the priority which the FSC has given to addressing AML issues has prevented it from assessing the specific areas to which the criteria relate (except in isolated cases) with on-site examinations. In the opinion of the FSC CPs 7-10 are also inter-linked. It therefore decided to address these issues/criteria as part of a review of the Code, which was already being carried out by the policy unit, in conjunction with the Supervision Division. This review of the Code had not been completed at the time of the IMF mission. However the FSC has acknowledged the need for such a review and has indicated that the review will be completed as priorities allow. |
| Assessment | Largely compliant |
| Comments | The FSC places emphasis on banks’ own standards of corporate governance and their audited financial statements. The FSC does not, however, review the scope and quality of the work carried out by banks’ external auditors in order to achieve reasonable assurance that the required independent evaluation of credit risk policies, credit quality and provisioning assessments is being carried out in a consistent manner. Up to now there has been no formal or ongoing program for the independent assessment of banks’ credit risk policies, practices and procedures. It is acknowledged that between November 2000 and December 2001, three focused reviews to ensure compliance with internal bank credit risk policies were carried out. In addition, and for particular business reasons, Reporting Accountants were employed on one occasion to confirm a bank’s compliance with its own credit risk policies. No guidance/guidelines covering generally accepted credit risk policies and procedures have been provided to the industry. The FSC has recognized the lack of guidance in this area and has indicated that this subject will be addressed as part of the review of the Code. The reinforcement of the need for sound credit risk practices, policies and procedures is a primary requirement of supervisors. To balance the FSC’s belief in being able to rely on home jurisdictions’ own assessments the FSC may want to consider the possibility of reinforcing the need for international credit risk “best practices” by providing a copy of the Basel Committee guidance on this subject to all licensees. A covering letter would likely be needed to indicate that the FSC supports the content of the guidance and will be seeking compliance with the guidance during its on-site visitation program. Addendum: Subsequent to the mission the FSC has taken a constructive step to reaffirm the need for banks to have sound credit risk practices, policies and procedures. A letter to the industry has been developed which focuses on amongst other issues the importance of having sound credit risk policies, procedures and practices. Reference in the proposed letter is also given to Basel Committee guidance to banks on Credit Risk “best practices.” The FSC, plans to develop more industry specific guidance on Credit Risk in the future. The FSC also plans to extend their on-site visitation program to include an in-depth assessment of the credit risk policies, procedures and practices where appropriate. |
| Principle 8. | Loan Evaluation and Loan-Loss Provisioning Banking supervisors must be satisfied that banks establish and adhere to adequate policies, practices, and procedures for evaluating the quality of assets and the adequacy of loan-loss provisions and reserves. |
| Description | See also comments outlined in CP 7—The FSC has not carried out a single independent review of asset quality in a bank nor appointed outside professionals to do this on its behalf. |
| Assessment | Largely compliant |
| Comments | The FSC has viewed compliance with this principle to be of lower risk. Historically, banks in the Isle of Man have been primarily “providers” of funds to their parent bank or affiliates of their parent. At the end of August 2002, total loans and advances represented only 18.6 percent of total assets. The FSC is currently the home supervisor for only two independent banks, one of which has a restricted license. Reliance for loan evaluation and loan-loss provisioning assessments for subsidiaries has been placed on the home supervisor. An additional degree of comfort to the FSC has been the “true and fair” opinion provided by external auditors on banks’ annual audited financial statements. No independent assessment of credit quality and loan-loss provisioning has been carried out as part of the on-site visitation program. Over the past three years the on-site visitation program has primarily focused on AML/KYC assessments. For this reason, the FSC has been unable to assess credit risk techniques and practices including such features as the quality of the credit risk management, credit risk administration, valuation of collateral and the processes for classifying loans and ensuring adequate provisions. The FSC has the power to employ Reporting Accountants to carry out special purpose audits. In our review of the one occasion when Reporting Accountants were employed to assess credit risk, the opinion formulated was limited to providing confirmation of the application of the bank’s own provisioning policies and compliance with its own lending practices. No opinion was provided on the overall asset quality or the adequacy of provisioning. No specific guidance has been provided to the industry covering the identification and recording of impaired assets or the valuation of collateral to reflect net realizable value. The FSC has not yet developed an in-depth on-site credit risk evaluation process. In developing appropriate on-site examination criteria the FSC may want to consider the following: Credit process: • Do credit risk policies and procedures reflect the risk appetite of the licensee, and have they been confirmed by the board of directors; • Are policies and procedures in place for all credit risk products, and are they reviewed at least annually to ensure they remain up to date and relevant; • Are credit risk exposure limits reasonable, considering the risk appetite and the ability of the licensee’s resources; • Have clearly defined and articulated policies and procedures been established for reporting and monitoring out of order conditions; • Has a risk rating system been put in place to the management and the board of the licensee to monitor asset quality trends in a timely and anticipatory manner. Credit assessment/quality: Before the FSC can have a successful asset quality review process, it will be of paramount importance that the FSC ensures that its staff has sufficient knowledge and understanding of credit risk assessment processes. The FSC may want to establish its own credit risk rating system that can be applied on a consistent basis to all credit risk assessments. The FSC credit risk rating system could then be used to assess the integrity of a licensee’s own credit risk rating system; and The FSC could select a sample of a bank’s loans and review these in order to confirm the quality and application of the bank’s own credit risk policies and lending activities, including its credit administration process, its ability to identify possible adverse trends and its processes for reporting out of order conditions and loans. Loan-loss provisioning: Independent credit reviews could also assess banks’ existing processes for identifying deteriorating situations in a timely manner, so appropriate provisioning is applied not only to known loss positions but also to deteriorating situations in a performing portfolio. We recognize that in developing a more prescriptive approach to loan evaluation and provisioning due consideration has to be given to ensuring that the FSC has staff capable of carrying out this type of specialized review. Addendum: Refer to comments Addendum CP 8. The FSC has also requested banks to provide the FSC by December 31, 2002, with a copy of their “documented Credit, Loan Grading and Provisioning Policy Statement (s). We will then review the statement (s) and provide feedback by March 31, 2003.” The action taken by the FSC is reflected in the assessment provided. |
| Principle 9 | Large Exposure Limits Banking supervisors must be satisfied that banks have management information systems that enable management to identify concentrations within the portfolio, and supervisors must set prudential limits to restrict bank exposures to single borrowers or groups of related borrowers. |
| Description | Paragraph 3 of Appendix D to the Code requires that banks have management information systems to enable ongoing management of exposures, including the identification of concentrations. A “large exposure” is defined in the Code as an exposure of more than 10 percent of the bank’s adjusted capital base. All large exposures must be reported to the FSC but only in the case of exposures of more than 25 percent of the adjusted capital base need the notification to be in advance of the granting of the facility. Also, banks may not incur large exposures, which in aggregate exceed 800 percent of the adjusted capital base. Large exposures are reported by banks as part of the quarterly reporting returns. Exposures to “connected counterparties” (defined in Paragraph 3 of the definitions to the Banking Return) must be aggregated. Concessions are granted to the large exposures limits in limited circumstances, e.g., in the case of exposures, which are covered by “take-out” agreements given by the bank’s parent or other group company. However, it is recognized that the FSC’s policy in granting concessions needs to be more formalized, particularly in the area of group “take-out” arrangements. |
| Assessment | Largely compliant |
| Comments | The FSC is cognizant of the concessions provided to the industry and has implemented procedures to monitor the approved concessions. The confirmation of the accuracy of the regulatory returns adds a further element of control. The FSC has acknowledged the need for bringing more clarity to the approval process particularly in the area of group “take-out” arrangements. |
| Principle 10 | Connected Lending In order to prevent abuses arising from connected lending, banking supervisors must have in place requirements that banks lend to related companies and individuals on an arm’s-length basis, that such extensions of credit are effectively monitored, and that other appropriate steps are taken to control or mitigate the risks. |
| Description | Paragraph 5 of Appendix D to the Code requires that banks lend to related parties (as defined in Paragraph 2 of the definitions to the Banking Return) on an arm’s length basis only and that they have information systems to monitor such credits. In addition, the FSC imposes an additional 50 percent weighting for capital adequacy purposes to such credits or, alternatively, reserves the right to deduct the exposures from a bank’s adjusted capital base. Related party exposures must be reported in the quarterly Banking Return. The large exposure limits referred to in Principle 9 apply also to related party transactions. Transactions with such parties must be assessed and conducted on nonconcessionary terms and monitored and reported by the banks’ managements on a regular basis. However, to date the banks’ internal procedures in this area have not been subject to on-site review. It is also a matter for consideration if the FSC should have more prescriptive limits for the amounts which banks may lend to related parties. See also comments CP 19 re independent reviews completed by external auditors. |
| Assessment | Compliant |
| Comments | The issuance of credit risk guidance would add additional clarity to the process |
| Principle 11. | Country Risk Banking supervisors must be satisfied that banks have adequate policies and procedures for identifying, monitoring, and controlling country risk and transfer risk in their international lending and investment activities, and for maintaining appropriate reserves against such risks. |
| Description | Paragraph 6 of Appendix D of the Code requires banks to have adequate policies and procedures for identifying, monitoring and controlling country risk and transfer risk and for maintaining adequate reserves against such risks. The FSC has not issued detailed requirements for provisions against these risks. However, the FSC imposes limits on a bank-by-bank basis on exposures to certain countries, e.g., as regards interbank or intercompany placements. The FSC believes that the adequacy of provisions made against such exposures, as well as their recoverability, would be assessed by banks’ external auditors as part of the annual audit. As banks are not exposed to country and transfer risk to any significant extent, the FSC does not consider that more prescriptive requirements are necessary at present. The FSC deals with the issue on a case-by-case basis, through the imposition of conditions or directions, where the need arises. |
| Assessment | Compliant |
| Comments | |
| Principle 12. | Market Risks Banking supervisors must be satisfied that banks have in place systems that accurately measure, monitor, and adequately control market risks; supervisors should have powers to impose specific limits and/or a specific capital charge on market risk exposure, if warranted. |
| Description | Paragraph 7 of Appendix D (Controls and Procedures) to the Code requires that banks have systems that accurately measure, monitor and control market risks. The FSC measures, monitors and discusses with banks their exposure to movements in both interest and exchange rates. These arrangements form part of the regular process of supervision and are included within the scope of prudential interviews. There are different arrangements for Isle of Man incorporated banks and for branches of foreign banks, although both participate in the same reporting system. In the opinion of the FSC the primary responsibility for the control of exposures arising from foreign currency operations, as for any other aspect of a bank’s business, must rest with a bank’s own management. However, in the discharge of supervisory responsibilities, the FSC needs to know the methods by which bank management control such exposures, the extent of each bank’s exposure, and its relation to other risks and to its capital. Section 3.2 of the Code requires banks to submit to the FSC their written policies (approved by their boards) on liquidity, interest rate and foreign exchange risk (including limits for overall currency positions against reporting currency position and for individual currencies). The FX operations of banks must also be covered by appropriate systems and controls. In this respect reference must be made to the Regulatory Code which requires banks to have in place internal controls that are adequate for the nature and scale of their operations and the systems of internal control procedures and management information systems are required to be documented and approved by the board of directors.(see CP14). These requirements by the Code must be covered by an annual compliance certificate from each bank’s “4 eyes” (see CP14). The external auditors are required to provide annually, reasonable assurance as to the accuracy of a regulatory return. Interest rate and foreign exchange mismatch positions are reported in the quarterly Banking Return. Such mismatches attract risk weightings for capital adequacy purposes. The FSC requires banks’ net open FX positions to be added to their risk-weighted assets when their risk-asset ratios are calculated. This means in effect that each individual bank has to maintain capital for FX risk in line with its risk-asset ratio - depending on its required risk-asset ratio the amount will be between 10 and 18 percent of its net open FX position. Only four banks demonstrate FX-exposures and interest rate exposures, which combined, exceeded 1 percent of their respective capital requirements (from 3.40 percent to 1.33 percent)]. |
| Assessment | Compliant |
| Comments | |
| Principle 13. | Other Risks Banking supervisors must be satisfied that banks have in place a comprehensive risk management process (including appropriate board and senior management oversight) to identify, measure, monitor, and control all other material risks and, where appropriate, to hold capital against these risks. |
| Description | Refer to comments under CP 12. These comments outline the process the FSC has in place to address liquidity, interest rate and foreign exchange risk. A liquidity gap report is required as part of the quarterly prudential returns. Banks incorporated in the Isle of Man provide the FSC with a written statement, approved by the board of directors, detailing their policies for the management of liquidity. In these policy statements banks have to stipulate their cumulative maximum mismatches for each time band detailed on Form SR-3 of the Banking returns and for cumulative time bands (Section 3.1 of the Code). This statement must also include a bank’s own internal limits for funds placed with other banks including those belonging to the same banking group. A bank incorporated outside the Isle of Man has to provide the FSC with a written statement detailing its policy for the management of the liquidity of its branch (es) in the Isle of Man. The relevant guidance note further indicates that in all cases the FSC wishes to ensure that a bank’s liquidity policy is appropriate to the nature and scale of its business. The quality and availability of its assets are important factors in determining its ability to meet obligations as they fall due. The FSC recognizes that it is not always possible to lay down supervisory rules for the management of liquidity that are both comprehensive and relevant to every institution. The activities of banks in the Isle of Man vary widely and are, in many cases, dependent on the role and tasks allotted to them by their parent bank. Their need for and approach to liquidity, therefore, depends not only on the nature and scale of their business, but also in many cases on group policy. Nevertheless, the FSC believes that every bank operating in the Isle of Man should have a policy detailing its approach to the management of liquidity and that the supervisors should know and understand that policy. If necessary, the FSC proposes changes. This is normally the exception and is usually done with the knowledge and agreement of the home supervisor (under the terms of the International Concordat on banking supervision, responsibility for supervision of local liquidity is placed on the host supervisor). In its assessment of liquidity the FSC concentrates on measuring the mismatch between maturing liabilities and assets in various time bands as revealed by the maturity analyses provided quarterly by the banks. It focuses its attention primarily on the short maturities, particularly the time bands up to one month. It has not so far attempted to establish any general overall limits for mismatching, preferring—if necessary to set any limits on a case by case basis. However, it may seek to do so, particularly if such limits were to be established in the major financial centers. In assessing the amount of any mismatch for an individual bank the FSC takes account of any marketable assets, which the bank may hold. The test of marketability is strict: the assets must be of a quality that they will be marketable in adverse market conditions at a price not far removed from book value. In practice, these are usually assets in which central banks are prepared to deal regularly. Many banks in the Isle of Man use the inter-bank market or their parent bank as the repository of their liquidity. The FSC examines inter-bank limits (where appropriate) to ensure that interbank risk is properly spread. It may also impose its own placement limits on individual banks (including limits on placements with parent banks) if it perceives a need to do so. Another source of liquidity is, of course, a bank’s ability to buy funds from other banks through the inter-bank market, or to obtain standby or other borrowing facilities from them. Here again few banks in the Isle of Man are active takers of funds from the inter-bank market. A few are occasional takers but most are regular givers. Experience teaches that agreed standbys and similar facilities are not always available to a bank facing liquidity pressures. While the FSC is prepared to make allowance for standby and other borrowing facilities in its assessment of liquidity mismatches, it does so on the assumption that these are available in fair weather markets only, except where the facility is provided by a parent bank and the FSC is satisfied with the standing and financial condition of the parent bank. This regular desk analysis of liquidity management is part of off-site supervisory program Another part of the task is discussing with the management the results for the business as revealed by the returns. The returns provide a useful snapshot of the business at particular points in time and the financial magnitudes revealed are, of course, the consequence of management decisions. The FSC considers that its ‘stand alone” policy of supervision is in the interests of the Isle of Man as a financial centre. The FSC further considers that a license holder should create independent liquidity by placing funds outside its own group. This is regarded as a logical and appropriate extension of the ‘stand-alone’ policy. For the time being the FSC has decided not to introduce an industry-wide requirement to create independent liquidity. The FSC and the industry have indicated that other than limited exposure to market risk the primary risk is reputation risk. To assess the possible exposure to this risk the FSC undertook a series of focused AML/KYC visitations during the past three years. Section 9.2 of the Code requires banks to seek the prior consent of the FSC before making any addition or material change to any of their services or products (including unregulated services or products). As part of the approval process the FSC considers banks’ ability to introduce and sustain new products or services. |
| Assessment | Largely compliant |
| Comments | The introduction of a more in-depth visitation program will allow the FSC to confirm the existence and application of comprehensive risk management policies and procedures. |
| Principle 14. | Internal Control and Audit Banking supervisors must determine that banks have in place internal controls that are adequate for the nature and scale of their business. These should include clear arrangements for delegating authority and responsibility; separation of the functions that involve committing the bank, paying away its funds, and accounting for its assets and liabilities; reconciliation of these processes; safeguarding its assets; and appropriate independent internal or external audit and compliance functions to test adherence to these controls, as well as applicable laws and regulations. |
| Description | Paragraph 2 of Appendix D of the Code requires that banks have in place internal controls that are adequate for the nature and scale of their businesses. Section 8.4 of the Code requires that the systems of internal control, procedures and management information are documented, approved by the board of directors, and are in accordance with the Code and any other relevant legislation. Section 8 of the Code also requires that the day-to-day operations of a bank are effectively controlled by at least two individuals (the “four-eye” principle) and that at least two of its directors are Isle of Man resident with at least one being non-executive. The FSC requires prior notification of the appointment of directors and senior officers in order to assess their fitness and properness. The appointment of certain officers, e.g., compliance officers and money laundering reporting officers is obligatory. Furthermore, banks incorporated in the Isle of Man must comply with the requirements of the Companies Acts. In assessing compliance with the requirements in this area, the FSC receives an annual compliance certificate from each bank’s “4-eyes” that it has complied with the Code. The FSC also receives copies of external auditors’ management letters and there is an obligation on external auditors (or reporting accountants), under Section 20 of the Act, to report matters, which come to their attention, during the course of their audit work, relevant to the FSC’s statutory functions. The requirements of the general law, i.e., the Companies Acts (where applicable), the BA and the Code also place responsibility on the banks directors and senior management with respect to corporate governance. The FSC reviews the reports of Internal Audit and where appropriate meets with Internal Auditors to discuss issues of common interest. While no specific corporate governance guidance has been issued for banks, a guidance note on the responsibilities and duties of directors under the laws of the Isle of Man was issued by the FSC in August 2000. The guidance note describes amongst other issues—duties of Directors—Powers of Directors—Knowledge of the Legal Framework—Liabilities—Criminal and Civil and also provides a definition of “Good Corporate Governance.” The FSC plans to implement a more extensive on-site visitation process during the fiscal year 2002-2003. |
| Assessment | Largely compliant |
| Comments | The introduction of expanded visitation techniques and practices will provide an additional level of confidence for supervisory purposes. Addendum: The FSC is to be commended for the development of comprehensive corporate governance guidance entitled, “Corporate Governance for Banking Institutions.” This guideline was developed subsequent to the IMF mission and when in force will articulate the accountabilities and fiduciary responsibilities of senior management and the board of directors for ensuring that banks operate in a safe and sound manner. The current process to have an annual certificate completed by senior management will ensure that an appropriate acknowledgement of fiduciary responsibilities is provided to the FSC. |
| Principle 15 | Money Laundering Banking supervisors must determine that banks have adequate policies, practices, and procedures in place, including strict “know-your-customer” rules that promote high ethical and professional standards in the financial sector and prevent the bank being used, intentionally or unintentionally, by criminal elements. |
| Descriiption | Section 12.5 of the Code requires that banks have adequate policies and procedures in place to ensure high ethical standards and to prevent their use by criminal elements. Banks are required to comply with anti-money laundering legislation in place. The main legislation in place is the Anti-Money Laundering Code 1998. To ensure that banks (and other licensed financial institutions) comply with the requirements of this law, the FSC has issued comprehensive anti-money laundering guidelines. These guidelines are kept under continuous review and the most recent guidance notes were issued in April 2003. These guidance notes link into the regulatory framework through Section 12.5 of the Code and Section 6.1 of the Financial Supervision (Conduct of Business) Regulatory Code issued under the Investment Business Act 1991, which both state: “A license-holder shall have adequate policies and procedures in place, including strict “know-your-customer” rules that promote high ethical standards in the financial sector and prevent the institution being used, intentionally or unintentionally, by criminal elements. These policies and procedures shall ensure compliance with the money laundering legislation in force at that time.” As stated above, the guidance notes are designed to assist license holders in complying with the money laundering legislation by specifying best practice in this regard. The FSC recognizes that license holders may have systems and procedures in place which, whilst not identical to those outlined in these guidance notes, nevertheless impose controls and procedures which are at least equal to if not higher than to those contained in these guidance notes. The FSC will take this into account when assessing the adequacy of a license-holder’s systems and controls. Banks are required by the FSC to appoint money laundering reporting officers and are obliged by the law to report suspicious transactions to a constable (which includes officers of both the Isle of Man Constabulary and Isle of Man Customs and Excise.) During the last three years the FSC has conducted on-site visits in all the banks specifically to test their KYC procedures and their compliance with the anti-money laundering legislation. |
| Assessment | Compliant |
| Comments | |
| Principle 16 | On-Site and Off-Site Supervision An effective banking supervisory system should consist of some form of both on-site and off-site supervision. |
| Description | Off-site supervision is focused on the submission by the banks of a detailed quarterly Banking Return. These returns are checked for compliance with the prudential supervisory requirements (see CP18 for a more detailed description of the off-site supervision process). Follow-up on noncompliance with prudential requirements or other unusual situations is performed. Historically, on-site supervision has consisted of annual meetings (ARMs or Annual Review Meetings) with the senior management of banks to review significant areas of their operations. These meetings are held to review with senior management, issues coming out of off-site supervision and other issues of supervisory interest. Over the last three years the FSC has given priority to carrying out assessments of AML/KYC techniques and practices coupled with selected ARM meetings whenever the risk profile indicated an ARM meeting was warranted. The FSC formulates an annual on-site program for the ARM visits. The focus of these visits is determined by an internal risk assessment (CAMELB.COM methodology). Issues coming out of the ARM meetings are monitored as part of the off-site-monitoring program. |
| Assessment | Largely compliant |
| Comments | The long-standing off-site supervisory process, coupled with the ARM process, has been effective. A standardized assessment and reporting process is in place for off-site reviews. It was encouraging to note that the FSC requires external auditors to provide reasonable assurance annually as to the accuracy of a regulatory return. In addition, the practice of obtaining an annual certificate from senior management of banks confirming their compliance with the Regulatory Code brings a further degree of accountability and possible liability to senior management should a distress situation occur. The FSC also obtains a letter from home supervisors confirming there were no issues of significant concern that would adversely impact the FSC as a host supervisor. The FSC is to be commended for the implementation of these control and accountability frameworks. The FSC has also made progress in its efforts to enhance the structure and approach to on and off-site supervision. Contributing factors to the enhanced supervisory process include: • An organizational structure will be introduced which when fully implemented and staffed will focus on a consolidated approach to supervision of FSC licensees; • A risk-rating system has been introduced for banks and is being applied on an ongoing basis; • A draft on-site methodology has been developed. The methodology developed parallels the risk-rating system (see comments re methodology below): • The existing technology platform provides for statistical comparisons. Unusual items are followed up. A more advanced technology platform was undergoing acceptance testing at the time of the mission; and, • Existing reporting formats are standardized and focused. Production of reports is timely. Copies of reports produced for supervisory purposes are also provided to boards of directors and parent banks, where appropriate. Three years ago, the FSC identified the need to ensure that licensed banks had an effective anti-money laundering regime in place. Over this period all banks have had a special focus on AML/KYC visitation. The on-site work was well documented. Industry representatives and auditing firms also confirmed that the focused visitations were effective. As a result of the focused AML/KYC visitation program, no full-scope safety and soundness visitations were carried out during this period. For example, while three visitations focused on credit-risk policies and procedures, the scope of the visitation did not assess credit quality or the reasonableness of loan-loss provisions. In addition, the effectiveness of the overall corporate governance regime in banks has yet to be subject to an independent assessment during visitations. In our opinion the on-site visitation program must be expanded. Significant risk areas should be assessed to confirm that an effective process of control exists throughout all areas of a bank’s operations and that the corporate governance regime is reflective of the risk appetite and profile of the bank. The FSC has developed a draft methodology designed to provide for a more probing visitation program. Our review of the proposed methodology revealed that while the methodology is sound the format of the methodology will be difficult to implement. The FSC has acknowledged this weakness and has confirmed the methodology will be reformatted in a manner to support risk-based assessments. We are however concerned that the FSC may not be able to achieve their departmental objectives particularly in the area of on-site safety and soundness visitations. Central to our concerns is that it appears that while staff employed is well qualified and supportive of the directional statements being made, the Supervision Division has a resource deficit. Another concern is the dynamic knowledge gap that is occurring as a result of the accelerated changes that have and continue to occur within the industry. The FSC has established an on-site visitation program that is reflective of the risk profile of their banks. The visitation objective is designed to ensure that all banks are visited at least within three years. Extrapolating the numbers of person days for scheduled on and off-site supervision estimated by the Supervision Division suggests that there will be a significant shortfall. Other issues that will have an impact on the effectiveness of the Supervision Division include: • In general, the industry feedback concerning the quality of FSC staff was positive although some concerns were registered regarding the FSC’s ability to assess in a detailed manner some of the new products and services and the required control practices being provided by the industry; • There are no prescribed quality control procedures being applied to support the on-site observations and judgments; and, • Turnover at the management level has occurred. Turnover within the Supervision Division for the year ending March31, 2002 was 17 percent. For the period ending September 30, 2002 turnover has been 7 percent. While recruited staff is well qualified they will need time and guidance to be able to assume their new accountabilities. To address the aforementioned issues the FSC would now benefit from adding a further degree of discipline to the on and off-site supervisory process. Examples of the types of additional discipline that would add value to the process include: • Accelerate the plan to finalize the on-site examination methodology. For example, refer to the comments and recommendations contained in CP8 for guidance on this particular subject; • Training programs focused on the expectations of the enhanced on-site methodology will be required; • The quality control or assurance process be formalized; and, • A time accounting process should be put in place that would provide quantitative and where appropriate qualitative data on how the division allocates it time. This type of reporting will become more important as the Supervision Division moves toward the implementation of a fully integrated on and off-site supervisory process. In general, we are concerned that unless the Supervision Division department is adequately resourced, the progress made to date will not be sustained. |
| Principle 17 | Bank Management Contact Banking supervisors must have regular contact with bank management and a thorough understanding of the institution’s operations. |
| Description | The FSC has formal contact with senior management in banks through Annual Review Meetings (ARMs). Additionally, “ad hoc” meetings are held at the request of either the FSC or the bank. The rationale for these meetings and the on-site visits is to ensure that a good understanding of the bank’s business is obtained. To date, the ARMs have focused on the results of the off-site surveillance activities and other issues of interest. Banks are required to notify the FSC of any significant changes in their operations (Section 9.2 of the Code). The FSC conducts an ongoing assessment of the quality of a bank’s management as well as an assessment of its business operations and this is fed into the overall risk assessment of the institution as referred to in the assessment of compliance with CP16. Feedback obtained during visits with senior management from a selection of banks, the Association of Licensed Banks and the Society of Chartered Accountants confirmed the constructive dialogue that exists between the FSC and other interested stakeholders. There appears to be a common interest within the Isle of Man that is directed at encouraging the development and sustainability of a sound regulatory regime. |
| Assessment | Compliant |
| Comments | A more in-depth, on-site examination process that addresses safety and soundness issues, will allow the FSC to assess compliance with regulatory requirements and obtain evidential confirmation of its understanding of the quality of management. |
| Principle 18. | Off-Site Supervision Banking supervisors must have a means of collecting, reviewing, and analyzing prudential reports and statistical returns from banks on a solo and consolidated basis. |
| Description | Section 2.3 of the Code requires banks to submit a quarterly Banking Return (calendar basis) in a format prescribed by the FSC. Where the bank’s year-end is different from the calendar quarters a bank is required to provide a further return to take into consideration the period to the calendar year-end. The Banking Returns consist of 4 distinct sections—(1) Balance Sheet, (2) Profit and Loss, Related-Party Transactions and Capital, (3) Liquidity, and (4) Foreign Currency and Interest Rate Exposure (off-balance sheet data). A less detailed reporting regime is in place where a subsidiary or associate company exists or a branch operates in the jurisdiction. Where applicable, these returns must be on a consolidated and solo basis. The information provided is mainly prudential but is also partially statistical. Prudential returns must be signed by a recognized director or senior manager. Section 12 of the BA permits the FSC to seek information on entities related to the bank, if it so requires. The Banking Return must be submitted to the FSC no later than 21 calendar days after the quarter-end date. The reporting process is monitored to ensure returns are being received on a timely basis and to highlight anomalies and concerns in the information provided that may have implications for the effective management and operation of the bank. Where issues warrant further assessment queries are sent to banks and followed up. An internal procedures document has been developed to ensure consistency of assessment over regulatory returns. An internal data base of information has been developed to provide validation checks on specific reporting items. This data base is available to the banking team as well as other selected staff. An enhanced “Financial Reporting System” (“FRS”) is currently undergoing acceptance testing. The development is being driven by the Operations Division, in conjunction with the Isle of Man government ISD Division. The development team includes representation from the Banking Team as well as two other representatives from the FSC knowledgeable about investment business and investment schemes. When implemented the technology platform is expected to allow the bank supervision team to expand their institution specific analysis to allow for more focus to be placed on broader trends and systemic issues. |
| Assessment | Largely Compliant |
| Comments | The relationship and ownership of the technology platform that exists between the FSC and the Isle of Man government ISD Division should be reassessed. Confirmation should be obtained from the government that the data provided by banks is “ring-fenced” from possible access by other government departments. |
| Principle 19. | Validation of Supervisory Information Banking supervisors must have a means of independent validation of supervisory information either through on-site examinations or use of external auditors. |
| Description | Section 13 of the BA provides for the conduct by the FSC of inspections (on-site visits) on banks. The powers contained in this Section do not limit the scope of the inspection. In addition, the FSC may appoint external officers to conduct such inspections. Section 21 permits the FSC to appoint “Reporting Accountants” to report on any aspect of a bank’s business. Banks are also required to have an annual audit by external auditors and there are obligations on such auditors (and also on Reporting Accountants), under Section 20, to report to the FSC if they become aware of facts during the course of their audits that they believe to be of material significance in relation to the FSC’s functions under the BA. The requirements of the Act focus on what could be referred to as “dire straits”—likely to lead to a serious qualification or refusal of the certificate of audit—endanger the existence of the banking institution; or gravely impair its development—imperil the protection of customers of the institution—indicate that the principles of sound management have been seriously violated. The external auditor is also required to submit a letter to the FSC confirming that to the best of his knowledge and belief, the banking institution has complied with several sections of the Code: 4.2(b)—verification of banking returns, 4.5—accounting records in the Isle of Man, 4.6-records retention, 4.7—accounting records—written communications with the FSC, 7.1-creation of charges over assets, and 8.4—existence and application of internal controls, procedures, and management information. While the FSC is receiving the required letter sections 4.2(b), 4.5, 4.6, 4.7 and 7.1, external auditors have not agreed to provide an opinion relating to section 8.4e—existence and application of a sound process of control. This issue was discussed at length with the accounting profession following the introduction of the code in 1999. As no resolution was able to be achieved the issue has remained outstanding. Auditors are also required to verify the accuracy of a bank’s supervisory returns with the underlying accounting records at least once per year and provide an opinion as to the accuracy of the information reported. The Isle of Man Society of Chartered Accountants has provided its members with an explanatory memorandum dated February 2000 entitled “Explanatory Memorandum for the Guidance of Auditors and Reporting Accountants of Regulated Financial Service Entities in The Isle of Man.” Amongst other issues covered in this document is a reference to the Auditing Practices Board support for allowing auditors’ to have the right and duty to report to regulators in the Financial Sector and the Isle of Man reporting requirements. |
| Assessment | Largely Compliant |
| Comments | The FSC is to be commended for obtaining reasonable assurance through independent audit opinions, which confirm the accuracy of regulatory reports. In addition, the letter required from external auditors indicating that nothing has come to their attention that would indicate noncompliance with sections of the Code adds further value to the supervisory process. However, a weakness in the process is that external auditors are not providing an opinion on internal controls as prescribed in section 8.4 of the Regulatory Code. This issue is under discussion with the FSC. An important degree of reliance is being placed on the work and opinions provided by external auditors. However, the FSC has not put in place a process to monitor the quality of work performed by external auditors in order to establish if reliance can be placed on it. The type of assurance sought could be achieved if the FSC was able to review the audit working papers supporting the prescribed regulatory returns or where appropriate the work undertaken as part of the Reporting Accountant process. In discussions with representatives of the Isle of Man Society of Chartered Accountants concerning the aforementioned subject, the representatives from the Society indicated that they understood the need for the FSC to obtain the necessary quality assurance. They also indicated that they were willing to work with the FSC to develop a methodology to achieve the desired results. The power of the FSC to conduct on-site safety and soundness examinations has not been exercised to any great extent. Nor has the FSC been active in using Reporting Accountants to complete special purpose or systemic reviews covering particular supervisory concerns. Refer also to comments CP 16 (On and Off-site supervision). Without a more in-depth on-site examination process that is designed to focus on a bank’s process of control or reaching an agreement with the external auditors to fulfill the specific requirements of section 8.4 of the Code an element of a supervisor’s responsibilities is not fulfilled. |
| Principle 20. | Consolidated Supervision An essential element of banking supervision is the ability of the supervisors to supervise the banking group on a consolidated basis. |
| Description | The FSC has the power, in Section 12 of the BA, to seek information on the activities of any member of a group of which a licensed bank is a part. The FSC therefore has the ability to monitor the activities of such groups on a consolidated basis. All of the prudential requirements apply to licensed banks and their subsidiaries (i.e., on a consolidated basis). There are no impediments to the direct and indirect supervision of affiliates and subsidiaries of licensed banks. A bank, or banking group, must seek the consent of the FSC, under Section 9 of the Code, for any expansion of its activities. Memoranda of Understandings (MOUs) have or are in the process of being put in place for nine jurisdictions. The MOUs referred to are associated with the more significant “home” jurisdictions. On an annual basis the FSC obtains a standardized confirmation from all “home” supervisors covering the operations of banks licensed on the Isle of Man. This annual request seeks confirmation that: • the parent bank is compliant with regulatory requirements; • there are no special conditions applied to the parent bank; • that the home supervisor has no objections to the continuation of the bank’s operations on the isle of Man; • the home supervisor undertakes consolidated supervision; and, • there are no specific supervisory issues that could impact the bank’s Isle of Man operations. Almost all banks regulated by the FSC would fall under the category of being within a host supervisory regime. |
| Assessment | Compliant |
| Comments | |
| Principle 21. | Accounting Standards Banking supervisors must be satisfied that each bank maintains adequate records drawn up in accordance with consistent accounting policies and practices that enable the supervisor to obtain a true and fair view of the financial condition of the bank and the profitability of its business, and that the bank publishes on a regular basis financial statements that fairly reflect its condition. |
| Description | The requirements in relation to financial statements and accounting records are contained in Section 4 of the Code. These place the onus on banks’ management for ensuring that the accounting records reflect accurately the financial position of their banks’ business at any time. All banks incorporated in the Isle of Man are required to draw up annual financial statements. These must be prepared in accordance with U.K. Accounting Standards adopted by the United Kingdom Accounting Standards Board or other accounting standards approved by the FSC and must take account of the disclosure requirements specified in Appendix B to the Code and any additional disclosure requirements made by the FSC. The annual financial statements must be audited by a member of one of the accounting bodies mentioned in section 14(1)(a) of the Companies Act 1982. The auditor must have professional indemnity insurance, acceptable to the FSC, of at least £20 million. The audited accounts must be submitted to the FSC within four months of the end of the accounting period to which they relate and must be accompanied by a detailed profit and loss account, consolidated accounts, if appropriate, and a compliance certificate (see Appendix F of the Code). Branches of banks which are not incorporated in the Isle of Man are required to submit a copy of the audited annual accounts of the bank of which they are a part, together with a detailed profit and loss account relating to the activities of the Isle of Man branch, and a compliance certificate, within four months of the end of the period to which they relate. All banks, whether incorporated in the Isle of Man or not, must submit in computerized and hard copy a completed set of the FSC’s Banking Returns (see Appendix A of the Code) as at the end of each calendar quarter date within 21 days of the date to which they relate. The FSC examines any significant differences between the figures reported to it and the figures in the audited accounts. As a further check on the integrity and efficiency of the reporting system to the FSC, license holders are required to arrange—on an annual basis—for their auditors to verify to the accounting books and records a set of quarterly returns chosen by the auditors (unless the FSC specifies a particular set of returns). The accounting records are tested, as part of the annual statutory audit of the bank (Section 4.2 of the Code), and the auditors must report that such books and records are properly kept. The FSC (under Sections 13 or 21 of the Act) can inspect, or commission reporting accountants to examine, such accounting records. Under Section 4.8 of the Code, banks are required to file their audited financial statements with the Registrar of Companies within four months of their financial year-end and to make available such statements at their registered offices and branches in the Isle of Man. There is no specific provision in the BA granting the FSC the power to revoke the appointment of an external auditor. However, in practice the FSC could request/direct (i.e., issue a direction to the bank under Section 11 of the BA) a bank to remove its auditor and such a motion could be submitted before a general meeting of the bank’s shareholders. Where the auditor in the course of his work becomes aware of matters of material significance in relation to the work of the FSC he must report such matters to the Commission under Section 20 of the BA. Matters of material significance include facts which are likely to lead to a serious qualification or refusal of the certificate of audit, endanger the existence of the banking institution, imperil the protection of its customers or which indicate that the principles of sound management have been violated. Section 22 of the BA enables the auditor to communicate with the FSC without breaching any duty of confidentiality, which he may owe to his client. These circumstances will be exceptional. Guidance notes have been issued by the FSC in relation to such issues (Appendix M of the Code). |
| Assessment | Compliant |
| Comments | |
| Principle 22 | Remedial Measures Banking supervisors must have at their disposal adequate supervisory measures to bring about timely corrective action when banks fail to meet prudential requirements (such as minimum capital adequacy ratios), when there are regulatory violations, or where depositors are threatened in any other way. In extreme circumstances, this should include the ability to revoke the banking license or recommend its revocation. |
| Description | Section 11 of the BA empowers the FSC to make recommendations to a bank, such as the suspension or discontinuance of part or all of its operations. They extend also to a bank whose license has been revoked, lapsed or surrendered and to managers and past managers of banks. These powers are reinforced by the power to issue directions. Failure to comply with a direction is a criminal offence, which can render banks and their directors, managers and officers liable to fines and even imprisonment. The FSC’s direction-making powers can be used to ensure compliance with its requirements in cases where appropriate measures cannot be agreed with the directors and management and where the FSC wishes to reinforce its supervisory concern. An alternative course of enforcement action is for the FSC to attach special conditions to a bank’s license—breach of which would also be a criminal offence. However, license conditions (including special conditions) are open for public inspection, and so the FSC chooses this course only when it considers that the matter will not unjustifiably undermine public confidence in a bank. The issue of directions is not a matter of public record unless a bank fails to comply and a prosecution is to be brought. Because the FSC’s direction-making powers are wide-ranging and backed by criminal sanctions there is a procedure in Section 24 of the BA for a bank, which is aggrieved by the issue of directions by the FSC. The bank can apply to the chief secretary who shall report the application to the council of ministers for a review of the decision to issue such directions. The council of ministers must appoint a Review Committee consisting of 3 persons who must be independent of both the FSC and the applicant. The Review Committee may confirm, vary, or revoke the direction appealed against, but until the Committee decides, the direction remains in force and the previous operation of the direction is unaffected by any decision the Review Committee may make. However, in cases of noncompliance with prudential requirements or other situations where depositor’s funds may be threatened, the FSC would initially seek to have these issues addressed in an informal way, generally by verbal or written communication. If the matters are not rectified as a result of this moral suasion, the FSC has the statutory power to impose conditions on the bank’s license (Section 7(3) of the BA). The FSC can also issue recommendations (Section of the BA) or issue directions on the bank (Section 11(2) of the BA). Failure to comply with any of these enforcement actions entitles the FSC to revoke the license (Section 7 (1) of the BA/ Section 33(2) (Enforcement Action). Enforcement action can be applied to the bank itself or to any managers of the bank. Sections 25 to 29 of the BA also cover a number of other offences, which could lead to fines, custodial sentences, or revocations of licenses. The bank or any other person can appeal, under Section 24 of the Act, to the council of ministers’ Review Committee for a review of the FSC’s decision where a license has been revoked or a condition or direction is imposed. As stated above under CP 6 the FSC has no explicit power to suspend payments to shareholders. However, the FSC could issue a direction under Section 11 of the BA to suspend such payments. If the payment of a dividend resulted in a breach of the capital requirement of a bank, the FSC has the power to require that the breach be rectified immediately (such breaches must be reported under Section 11.1 of the Code). There is no specific provision in the BA granting the FSC the power to revoke the appointment of an external auditor (see CP 21). However, in practice the FSC could request/direct (i.e., issue a direction to the bank under Section 11 of the BA) a bank to remove its auditor and such a motion could submitted before a general meeting of the bank’s shareholders. |
| Assessment | Complaint |
| Comments | Legal provisions are in place, which enable the FSC to take regulatory action against a noncompliant bank. The action required can apply to any or all elements of a bank’s business. The FSC keeps a log of regulatory breaches by banks and the action taken to ensure corrective action. The powers available to the FSC are significant and wide-ranging and are in compliance with the principle. During the past year, the FSC made a policy decision to introduce fining, initially for administrative breaches. It was agreed to request whatever legislative amendments were necessary to grant this power. It was also agreed to publicly “name and shame” persons deemed not “fit and proper” under Section 16 of the Act. |
| Principle 23 | Globally Consolidated Supervision Banking supervisors must practice global consolidated supervision over their internationally active banking organizations, adequately monitoring and applying appropriate prudential norms to all aspects of the business conducted by these banking organizations worldwide, primarily at their foreign branches, joint ventures, and subsidiaries. |
| Description | Banks in the Isle of Man could not be said to be internationally active, as they have limited overseas operations. However, the legal instruments are in place in order to supervise these operations on a consolidated basis (banking returns on both a solo and consolidated basis and, for some operations, individual branch or subsidiary returns). In the recent past one bank used to have subsidiaries outside the IOM Banks in the Isle of Man could not be said to be internationally active, as they have limited. |
| Assessment | Compliant |
| Comments | This principle currently has no application in the Isle of Man but is being complied with. |
| Principle 24 | Host Country Supervision A key component of consolidated supervision is establishing contact and information exchange with the various other supervisors involved, primarily host country supervisory authorities. |
| Description | As per CP 23 above, the IOM licensed banks have presently no branches or subsidiaries in other jurisdictions so the FSC does not act in the role of home supervisor. The FSC has signed MOUs with a number of foreign regulators and is in the process of signing a number of others. |
| Assessment | Compliant |
| Comments | |
| Principle 25 | Supervision Over Foreign Banks’ Establishments Banking supervisors must require the local operations of foreign banks to be conducted with the same high standards as are required of domestic institutions and must have powers to share information needed by the home country supervisors of those banks for the purpose of carrying out consolidated supervision. |
| Description | Local branches and subsidiaries of foreign banks that are licensed in the Isle of Man have to comply with the same prudential and regulatory requirements as domestic banks. As mentioned before many of the IOM-licensed banks are subsidiaries or branches of overseas operations. In the past the FSC has demonstrated close cooperation with other regulators. In licensing a foreign subsidiary or branch the FSC requires prior approval of the home supervisor. In these cases the FSC would also need to be satisfied that the home supervisor exercises global consolidated supervision. The FSC cooperates in the exchange of information with the home supervisors of these banks (formally at least annually). The FSC’s powers to exchange confidential information with other regulators are contained in Section 24 of the Financial Supervision Act 1988. Visits by home supervisors to local subsidiaries and branches for supervisory purposes are permitted and take place. Home country supervisors are advised of regulatory action taken by the FSC in respect of local subsidiaries or branches of foreign banks and copies of reports on on-site inspection visits are sent to the home supervisors as a matter of course. |
| Assessment | Compliant |
| Comments |
Table 2.
Summary Compliance with the Basel Core Principles
C: Compliant.
LC: Largely compliant.
MNC: Materially noncompliant.
NC: Noncompliant.
NA: Not applicable.
Table 2.
Summary Compliance with the Basel Core Principles
| Core Principle | C1/ | LC2/ | MNC3/ | NC4/ | NA5/ |
| 1. Objectives, Autonomy, Powers, and Resources | |||||
| 1.1 Objectives | X | ||||
| 1.2 Independence | X | ||||
| 1.3 Legal framework | X | ||||
| 1.4 Enforcement powers | X | ||||
| 1.5 Legal protection | X | ||||
| 1.6 Information sharing | X | ||||
| 2. Permissible Activities | X | ||||
| 3. Licensing Criteria | X | ||||
| 4. Ownership | X | ||||
| 5. Investment Criteria | X | ||||
| 6. Capital Adequacy | X | ||||
| 7. Credit Policies | X | ||||
| 8. Loan Evaluation and Loan-Loss Provisioning | X | ||||
| 9. Large Exposure Limits | X | ||||
| 10. Connected Lending | X | ||||
| 11. Country Risk | X | ||||
| 12. Market Risks | X | ||||
| 13. Other Risks | X | ||||
| 14. Internal Control and Audit | X | ||||
| 15. Money Laundering | X | ||||
| 16. On-Site and Off-Site Supervision | X | ||||
| 17. Bank Management Contact | X | ||||
| 18. Off-Site Supervision | X | ||||
| 19. Validation of Supervisory Information | X | ||||
| 20. Consolidated Supervision | X | ||||
| 21. Accounting Standards | X | ||||
| 22. Remedial Measures | X | ||||
| 23. Globally Consolidated Supervision | X | ||||
| 24. Host Country Supervision | X | ||||
| 25. Supervision Over Foreign Banks’ Establishments | X |
C: Compliant.
LC: Largely compliant.
MNC: Materially noncompliant.
NC: Noncompliant.
NA: Not applicable.
Table 2.
Summary Compliance with the Basel Core Principles
| Core Principle | C1/ | LC2/ | MNC3/ | NC4/ | NA5/ |
| 1. Objectives, Autonomy, Powers, and Resources | |||||
| 1.1 Objectives | X | ||||
| 1.2 Independence | X | ||||
| 1.3 Legal framework | X | ||||
| 1.4 Enforcement powers | X | ||||
| 1.5 Legal protection | X | ||||
| 1.6 Information sharing | X | ||||
| 2. Permissible Activities | X | ||||
| 3. Licensing Criteria | X | ||||
| 4. Ownership | X | ||||
| 5. Investment Criteria | X | ||||
| 6. Capital Adequacy | X | ||||
| 7. Credit Policies | X | ||||
| 8. Loan Evaluation and Loan-Loss Provisioning | X | ||||
| 9. Large Exposure Limits | X | ||||
| 10. Connected Lending | X | ||||
| 11. Country Risk | X | ||||
| 12. Market Risks | X | ||||
| 13. Other Risks | X | ||||
| 14. Internal Control and Audit | X | ||||
| 15. Money Laundering | X | ||||
| 16. On-Site and Off-Site Supervision | X | ||||
| 17. Bank Management Contact | X | ||||
| 18. Off-Site Supervision | X | ||||
| 19. Validation of Supervisory Information | X | ||||
| 20. Consolidated Supervision | X | ||||
| 21. Accounting Standards | X | ||||
| 22. Remedial Measures | X | ||||
| 23. Globally Consolidated Supervision | X | ||||
| 24. Host Country Supervision | X | ||||
| 25. Supervision Over Foreign Banks’ Establishments | X |
C: Compliant.
LC: Largely compliant.
MNC: Materially noncompliant.
NC: Noncompliant.
NA: Not applicable.
Table 3.
Recommended Actions to Improve Compliance with the Basel Core Principles
Table 3.
Recommended Actions to Improve Compliance with the Basel Core Principles
| Reference Principle | Recommended Action |
|---|---|
| CP 1(2) - Operational independence and adequate resources | • The existing framework of government dependence and the lack of budgetary autonomy should be addressed. • Perform an in-depth analysis of the resources required to fulfill the supervisory objectives and as a consequence establish a change plan for the business process of banking supervision. |
| CP 16 - On-site and off-site supervision | • Prioritize the completion of the examination methodology for full scope examinations supplemented by formalized quality control procedures. • Explore increased synergies between FSC and external auditors |
Table 3.
Recommended Actions to Improve Compliance with the Basel Core Principles
| Reference Principle | Recommended Action |
|---|---|
| CP 1(2) - Operational independence and adequate resources | • The existing framework of government dependence and the lack of budgetary autonomy should be addressed. • Perform an in-depth analysis of the resources required to fulfill the supervisory objectives and as a consequence establish a change plan for the business process of banking supervision. |
| CP 16 - On-site and off-site supervision | • Prioritize the completion of the examination methodology for full scope examinations supplemented by formalized quality control procedures. • Explore increased synergies between FSC and external auditors |
C. Authorities’ Response to the Assessment
| Reference Principle | Action Taken/To be Taken |
|---|---|
| CP 1 (2) - Operational independence and adequate resources | • The Isle of Man treasury is currently undertaking a full review of the Island’s regulatory bodies (scheduled for completion by June 2004). This review will have full regard for independence, accountability and proposed changes to the legislative framework. |
| CP 16 - On-site and off-site supervision | • The examination methodology for full scope examinations has now been completed. • Formalized quality control procedures have been put in place. • Within the reorganization of Supervision Division there will be one senior individual assigned responsibility for consistency of approach and quality control for both on-site and off-site supervision. • There will be a validation panel, consisting of experienced supervisors, to validate / challenge risk assessments and supervisory programs for individual license holders. |
| • Since the IMF visit, two meetings have taken place with the external auditors of banks. Each audit firm was represented at partner level at both meetings. The first meeting sought to identify synergies between the external auditors and the FSC. The second was to discuss industry wide current auditing and supervisory issues on a nonlicense holder-specific basis. It was agreed that formal half-yearly meetings will take place. In addition, the Commission and the auditors agreed to enhance cooperation with each other on specific issues and to consider more regular bilateral or trilateral meetings. The Commission will also consider making greater use of the Reporting Accountants regime. |
| Reference Principle | Action Taken/To be Taken |
|---|---|
| CP 1 (2) - Operational independence and adequate resources | • The Isle of Man treasury is currently undertaking a full review of the Island’s regulatory bodies (scheduled for completion by June 2004). This review will have full regard for independence, accountability and proposed changes to the legislative framework. |
| CP 16 - On-site and off-site supervision | • The examination methodology for full scope examinations has now been completed. • Formalized quality control procedures have been put in place. • Within the reorganization of Supervision Division there will be one senior individual assigned responsibility for consistency of approach and quality control for both on-site and off-site supervision. • There will be a validation panel, consisting of experienced supervisors, to validate / challenge risk assessments and supervisory programs for individual license holders. |
| • Since the IMF visit, two meetings have taken place with the external auditors of banks. Each audit firm was represented at partner level at both meetings. The first meeting sought to identify synergies between the external auditors and the FSC. The second was to discuss industry wide current auditing and supervisory issues on a nonlicense holder-specific basis. It was agreed that formal half-yearly meetings will take place. In addition, the Commission and the auditors agreed to enhance cooperation with each other on specific issues and to consider more regular bilateral or trilateral meetings. The Commission will also consider making greater use of the Reporting Accountants regime. |
II. FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism
A. General
Information and methodology used for the assessment
13. A detailed assessment of the anti-money laundering (AML) and combating the financing of terrorism (CFT) regime of the Isle of Man 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 activities. The 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 arrangements for trust and corporate service providers which were in a transitional phase towards full prudential regulation. The experts not under the supervision of IMF reviewed the capacity and implementation of criminal law enforcement systems.
14. The team consisted of Ian Carrington, (MFD) and Ross Delston, (Consulting Counsel, LEG), with Washington-based assistance from Stuart Yikona, (Technical Assistance Officer, LEG). Messrs. Carrington and Delston were part of a Fund-led mission to Isle of Man during the period October 21-30, 2002. The independent law enforcement expert was Detective Chief Superintendent Felix McKenna of Ireland’s Criminal Assets Bureau who visited Isle of Man during February 11-13, 2003.
15. 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 FSC; the IPA: the attorney general’s chambers: the Isle of Man Police; Customs and Excise and the FCU. In addition, the assessors met with a number of financial sector parties, including banks, investment management companies, CSPs, insurance companies, lawyers, and associations representing these sectors.
16. Information used for the assessment was obtained from the Anti-Money Laundering Code 1998 as amended (the “Code”); Corporate Service Providers “(General Requirements) Regulatory Code 2000” “CSP Code”); the Banking (General Practice) Regulatory Code 1999 (the “Banking Code”); the Financial Supervision Commission Conduct of Business Regulatory Code (the “Conduct of Business Code”); the Criminal Justice Act 1990 as amended (the “CJA”); the Criminal Justice Act 1991 (the “CJA2”); the Drug Trafficking Act 1996 as amended (the “Drug Act”); the Banking Act 1998 (the “Banking Act”); the Insurance Act 1986 (the “IA”); the Insurance (Amendment) Bill (Draft 2) (the “IA Bill”);7 the Companies Acts 1931-1993 (the “Companies Acts”) ; the Charities Registration Act 1989 (the “Charities Act”); the European Communities (Money Laundering Directive)(Application) Order 2002 (the “Directive”); the Corporate Service Providers Act 2000 (the “CSP Act”); the Extradition Act (the “Extradition Act”); the Anti-Money Laundering (Money Service Businesses) Regulations 2002 (the “Regulations”); the Anti-Money Laundering Guidance Notes (the “Notes”)8; the Prevention of Terrorism Act 1990 (the “POTA”); Terrorism (United Nations Measures) (Isle of Man) Order 2001 (the “UN Order”); Iraq (United Nations Sanctions) (Isle of Man) Order 2000 (the “UN Sanctions Order”); Al-Qa’ida and Taliban (United Nations Measures) (Isle of Man) Order 2002; Anti-Terrorism and Crime Bill (June 2002); Insurance (Amendment) Regulations 1998 (the “1998 Insurance Amendment”); Insurance and Pensions Authority Common Trading Practices for Isle of Man Insurers (Guidance Notes on the Prevention of Money Laundering, effective March 31, 2003)(the “CTP”)9; Investment Business Acts 1991-1993 (“IBA”); the Financial Supervision Act 1988 (the “FSA”); the Finance Act 1958; the Interpretation Act 1976 (“the Interpretation Act”); Police Powers and Procedures Act 1998 (the “PPP Act”); the Customs and Excise Etc. (Amendment) Act 2001 (the “Customs Amendment Act”); the Off-shore Group of Banking Supervisors Mutual Evaluation Report on the Anti-Money Laundering System in the Isle of Man (1999); Position Paper: Overriding Principles for a Revised Know Your Customer Framework (February 2002), issued by the Guernsey Financial Services Commission, the Isle of Man Financial Supervision Commission and the Jersey Financial Services Commission,
17. For the purposes of this assessment, the term ‘Financial Institutions’ (FIs) means the following: banking business within the meaning of the BA; investment business within the meaning of the IBA; insurance business within the meaning of the IA; business carried on by a building society within the meaning of Section 7 of the Industrial and Building Societies Act; business carried by a society registered as a credit union within the meaning of the Credit Unions Act; business carried on by a society (other than a building society or credit union) registered under the Industrial and Building Societies Act; any activity carried on for the purpose of raising money authorized to be borrowed under the Isle of Man Loans Act; any activity carried on for the purpose of raising money by a local authority; the business of a bureau de change; the business of an estate agent within the meaning of the Estate Agents Act; the business of a bookmaker within the meaning of the Gaming, Betting and Lotteries Act; any activity permitted to be carried on by a license holder under a casino license granted under the Casino Act; the business of the Post Office in respect of any activity undertaken on behalf of the National Savings Bank; any activity involving money transmission services or check encashment; any activity in which money belonging to a client is held or managed by an advocate, a registered legal practitioner within the meaning of the Legal Practitioners Registration Act, and an accountant or a person who, in the course of business, provides accountancy services; the business of promoting or forming bodies corporate, acting as company secretary of bodies corporate, or providing registered offices for bodies corporate, or engaging in any regulated activity within the meaning of the CSP Act (i.e., the sale, transfer or disposal of companies; the provision of accommodations address facilities for a company; acting as director or alternate director of companies, or arranging for others to act as officers of corporate bodies; acting as or arranging for others to act as nominee shareholders of companies and the provision of company administration services); and the business of acting as trustee in return for payment, or providing or taking steps to provide persons to act as trustees in return for payment.
overview of measures to prevent money laundering and terrorism financing
18. The attorney general for the Isle of Man is the central authority for the purposes of mutual assistance in criminal matters. The main institutions in the Isle of Man in the AML/CFT area are the Financial Crimes Unit (FCU), which is part of the Isle of Man Police and is the FIU for Isle of Man; the police and the customs and excise, which provide staff to the FCU and investigate criminal activities; the attorney general’s chambers which prosecutes ML and FT, defends the Isle of Man authorities against suit, and advises the Tynwald (parliament) and the government on legal issues; and the FSC and IPA, which are the financial regulators for the Isle of Man and are responsible for monitoring compliance for FIs that are regulated by them.
Legal and institutional framework
19. The Isle of Man has a developed legal and institutional framework generally, particularly with respect to measures relating to confiscation of the proceeds of criminal conduct, information exchange and international cooperation. The broad regulation of the financial sector, including banking, investment companies and CSPs regulated by the FSC, and insurance business regulated by the IPA, is a strength. However, the Isle of Man’s legal and institutional framework falls short in a number of areas outlined below.
Implementation of the legal and institutional framework and financial sector-specific issues
20. Discussions with the FSC, IPA and industry representatives suggest a high level of awareness of AML/CFT issues and that considerable effort has been undertaken to put appropriate practices into place. The oversight function employed by the two regulatory bodies is generally satisfactory. Both regulators employ a regime of on-site and off-site surveillance and have visited the majority of licensed institutions in the last two years. Most of the institutions visited had comprehensive documentation on AML policies and procedures.
B. Detailed Assessment
21. 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
Table 4.
Detailed Assessment of Criminal Justice Measures and International Cooperation
| I—Criminalization of ML and FT (compliance with criteria 1-6) | ||||||
|---|---|---|---|---|---|---|
| Description | ||||||
| 1. The Isle of Man is a crown dependency and not a sovereign state and therefore the United Kingdom is responsible for its international affairs. The Isle of Man is not therefore in a position to sign or ratify international Conventions in a formal sense. Conventions are usually extended to the Isle of Man in accordance with the procedures set out in the Conventions. | ||||||
| The following have been extended to the Isle of Man: UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna Convention); Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime; and the European Convention on Mutual Assistance in Criminal Matters 1959 (Strasbourg) which operates as between Isle of Man and Austria, Denmark, Greece, Italy, Luxembourg, Spain, Netherlands and Sweden. Operation between other Council of Europe States and the Island has been requested and awaits confirmation by those States. (The Additional Protocol to the Strasbourg Convention does not apply but extension of the Second Additional Protocol has been requested of the Council of Europe states). UN Security Council Resolution 1373 is implemented by Article 10 of the UN Order. | ||||||
| The UN Convention for the Suppression of the Financing of Terrorism, and the UN Convention Against Transnational Organized Crime (Palermo Convention) have not been extended to the Isle of Man. | ||||||
| 2. Money laundering extends to proceeds of criminal conduct and appears to be generally consistent with the Vienna and Palermo conventions. The POTA and the UN Order contain provisions criminalizing the financing of terrorism. There is no specific provision requiring inference of an intentional element from objective factual circumstances in all cases. According to the authorities, under the Isle of Man legal system, knowledge, suspicion or grounds for suspicion are themselves normally ascertained by reference to objective factual circumstances. Certain of the ML and FT provisions specify reasonable grounds (or cause) for suspicion rather than specific knowledge (CJA Section 17(C)(2), Drug Act Section 45(2), POTA Sections 7, 8 and 9 and UN Order Articles 4 and 5). The offense of money laundering extends not only to those who have committed money laundering but also extends to persons who have committed both laundering and the predicate offense (Section 17C (1) of the CJA and Section 45(1) of the Drug Act). It is not necessary for a person to be convicted of a predicate offence to establish that assets were the proceeds of a predicate offence and to convict any person under Section 17A or 17B of the CJA of laundering such proceeds. The offence under Section 17C of the CJA is aimed at money laundering for the purpose of avoiding prosecution. The money laundering offences under the Drug Act relate to the proceeds of drug trafficking and do not require that a person be convicted of a predicate offence. Predicate offenses for money laundering extends to all serious crimes (criminal conduct) (Section 17A (7) of the CJA) and drug trafficking offences (Sections 45-47 of the Drug Act). The offence of money laundering extends to property that directly or indirectly represents the proceeds of crime (Sections 17A (2), 17B (1) and 17C (1) and (2) of CJA and Sections 45(1) and (2), 46(2) and 47(1) of the Drug Act). Predicate offenses include conduct which would constitute an offense if it had occurred in the Isle of Man (Section) | ||||||
| 17A (7)(b) of the CJA and Section 1 of the Drug Act). In addition, financing proscribed organizations (Section 8 of POTA) and terrorist acts (Section 7 of POTA are predicate offenses for the purposes of the money laundering offences under Section 9 of the POTA. Membership in a proscribed organization (Section 2 of POTA) is a predicate offence under the CJA (Sections 17A-D). | ||||||
| There is a gap in the POTA relating to acts of terrorism committed on the island, which are not covered in the POTA. Also, the definition of terrorism in Sec. 18 of the POTA does not include any reference to “the use or threat is made for the purpose of advancing a political, religious or ideological cause.” However, the UN Order contains a broader definition of terrorism (Article 3(1) of the UN Order) that would include acts committed on the island and a reference to the use or threat provision referred to above. The operative provisions of the POTA and the UN Order will be consolidated in the Anti-Terrorism and Crime Act 2002 which has recently been enacted by the Tynwald (parliament), but will not be in force until later in 2003. | ||||||
| 3. Sections 7-11 of the POTA and Articles 4-7 of the UN Order criminalize the financing of terrorism. The ability to ensure full implementation of the Convention will arise when the Anti-Terrorism and Crime Act is implemented. | ||||||
| 4. The offences of money laundering in the CJA (Sections 17A-C), the Drug Act (Sections 45-47) and POTA (Sections 7-9) apply different tests of knowledge. 17B (1) and 17C (1) CJA and 45(1) and 47(1) of the Drug Act apply to persons that know that property is the proceeds of criminal conduct (drug trafficking or terrorist financing). Sections 17C (2) of CJA, 45(2) of the Drug Act and 7 of the POTA require knowledge or reasonable grounds to suspect. Sections17A (1) of CJA, 46(1) of the Drug Act and 8 and 9(1) of the POTA are silent on the point but it is a defense to prove that there was no knowledge or suspicion that the arrangement related to proceeds of crime (drug trafficking or terrorist financing). However, there is no specific provision regarding inference of an intentional element from objective factual circumstances in all cases but, according to the authorities, under the Isle of Man legal system knowledge, suspicion or grounds for suspicion are themselves normally ascertained by reference to objective factual circumstances. | ||||||
| Acts of Tynwald (parliament) are construed by reference to Section 3 of the Interpretation Act 1976 under, which references to “person” include a body corporate or incorporate. The offences therefore apply to bodies corporate as well as individuals. | ||||||
| 5. With respect to criminal sanctions, persons (including corporations) found guilty of engaging in money laundering are liable on summary conviction to imprisonment for a term not exceeding six months or a fine not exceeding 5000 pounds, or on conviction on information to imprisonment for a term not exceeding fourteen years or a fine or both (Sections 17A (6), 17B (9) and 17C (4) of the CJA; Section 51(1) of the Drug Act and Section of the POTA). In addition, under the Code, persons may be found liable for offenses that do not involve money laundering (Para. 3(2) of Code), on summary conviction the same as above, and on information, imprisonment of up to two years and/or an unlimited fine (Section 17 F of CJA). Section 42 of High Court Act of 1991, provides that the court may by order appoint a receiver in all cases in which it appears to be just and convenient to do so. | ||||||
| (For further discussion on sanctions see Section VIII, Criterion 64) | ||||||
| 6. The Isle of Man Authorities have the legal means and resources available to them to effectively implement Money Laundering and Financial Terrorism Laws. There is legislation in the Isle of Man statute to effectively combat, investigate and prosecute money laundering and the financing of terrorism. In the attorney general’s chambers there is one dedicated legal officer, with responsibility for dealing with Mutual Assistance Requests, ML and FT. The Isle of Man authorities have and are currently carrying on a number of investigations into suspected Money Laundering, which involve millions of pounds in assets. The investigation structure in the Isle of Man is divided between Police and Customs and Excise. The Isle of Man Police Force consists of 248 Police Officers and there are 54 Customs and Excise Officers. Due to the heavy demands imposed on the attorney general’s staff, the attorney general is currently reviewing his staffing levels with a view to recruiting an assistant to the dedicated legal officer. The Isle of Man authorities recognize the complexities involved in the investigation of ML/FT and regularly participate in joint investigations with other countries to successfully investigate and prosecute ML/FT. | ||||||
| The resources available to the Isle of Man Financial Crime Unit (FCU) are as indicated below: | ||||||
| Authorized Personnel One Detective Inspector Three Detective Sergeants Nine Detective Constables Two Customs and Excise Officers (Part-time) One Analyst (Civilian) One Administration Manager (Civilian) One Administration Assistant (Civilian) One Accountant (Civilian) | Current Personnel One Detective Inspector One Detective Sergeant Eight Detective Constables Two Customs and Excise Officers (Part-time) One Analyst (Civilian) One Administration Manager (Civilian) One Administration Assistant (Civilian) One Accountant (Civilian) | |||||
The functions of the FCU are:
| ||||||
The FCU also undertakes the following functions:
| ||||||
| The functions outlined above are too widespread thus lessening the ability of the unit to focus on ML/FT. The investigation, prosecution and conviction of persons/companies requires specialist and dedicated skills and therefore the functions as outlined over-burden the FCU. Its workload has increased steadily over the last few years. | ||||||
| The resources dedicated to ML/FT in the Isle of Man Customs and Excise consists of six investigators with a further two intelligence officers working on a part-time basis with the FCU as outlined above. The set-up and structure of the FCU should be streamlined in that a particular number of personnel therein are wholly and fully engaged on ML/FT investigations. | ||||||
| The Isle of Man Customs and Excise have 6 investigators dedicated to the investigation of ML/FT. A further two intelligence officers work on a part-time basis with the FCU as outlined above. | ||||||
| Analysis of Effectiveness | ||||||
| The Isle of Man’s framework for criminalizing money laundering is generally adequate. With respect to criminalizing the financing of terrorism, there is a gap relating to the limited scope of terrorist activities covered by the POTA and the inadequate definition of the financing of terrorism therein that will be remedied once the Anti-Terrorism and Crime Act has been implemented. The island needs to implement legislation to allow the UN Convention for the Suppression of the Financing of Terrorism, and the UN Convention Against Transnational Organized Crime (Palermo Convention) to be extended to the Isle of Man. | ||||||
| Recommendations and Comments | ||||||
| Implementing legislation, in particular the Anti-Terrorism and Crime Act, should be adopted or implemented by the Isle of Man so that the UN Convention for the Suppression of the Financing of Terrorism, and the UN Convention Against Transnational Organized Crime (Palermo Convention) may be extended to the Isle of Man. The Isle of Man authorities should increase the staffing level in the FCU to its authorized strength. The authorities should also re-evaluate the organizational structure/functions of the FCU in order that resources are permanently dedicated to ML/FT operations/investigations, because their workload is too widespread i.e., they are required to investigate all financial related frauds etc. The appointment of an assistant to the dedicated legal officer in the attorney general’s chambers should be pursued. | ||||||
| Implications for compliance with FATF Recommendations 1, 4, 5, SR I, SR II | ||||||
| Full compliance will be achieved when implementing legislation for the UN Convention for the Suppression of the Financing of Terrorism is adopted and implemented and the Convention is extended to the Isle of Man. | ||||||
| II—Confiscation of proceeds of crime or property used to finance terrorism (compliance with criteria 7-16) | ||||||
| Description | ||||||
| 7. Laws provide for the confiscation of assets upon conviction of a person. Provision is made for confiscation of proceeds of criminal conduct where a person is found guilty of an offense (Sections 1 and 2 of the CJA; Section 2 of Drug Act; Section 11 and Schedule 4 of the POTA). Provision is also made for the forfeiture of the instrumentalities of crime (Section 16 of the Criminal Law Act 1981 and section 32 of the CJA2). The attorney general may make an application for a Court order to restrain any person from dealing with realizable property held by a defendant, and where such an order is made, the police seize the property to prevent its removal from the Isle of Man (Section 7(1), 7(5) and 7(10) of the CJA). There are similar provisions under Section 26 of the Drug Act and Paragraph 3, Schedule 4 of the POTA. There is a provision that deals with the seizure and forfeiture of proceeds of criminal conduct with respect to imported or exported cash (Sections 23A and 23B of the CJA). There is a similar provision under Sections 39-44 of the Drug Act in respect of the import and export of drugs cash. In addition, Article 6 of the UN Order enables terrorist funds to be frozen on suspicion. Sections 8 and 11 and Schedule 4 of POTA enable the confiscation of funds of proscribed terrorist organizations. With respect to all crimes and drug crimes, the laws provide for the payment of a sum corresponding in value to the benefit to the defendant and are not limited to specific property. (Section 1 of CJA and Sections 2 and 4 of Drug Act). There is no direct equivalent in the POTA. Section 11 of the POTA is limited to forfeiture of money or property in the possession of a person convicted of an offence under sections 7-9 of POTA. Civil forfeiture currently applies in respect of import and export of drug proceeds cash (Section 39-44 of the Drug Act) and crime proceeds cash (Section 23A-23F of the CJA). The Anti-Terrorism and Crime Bill (Sec.17) will provide for the seizure and forfeiture of terrorist cash in the Isle of Man whether or not being imported or exported. According to the authorities, in civil cases, the Isle of Man High Court may grant a freezing injunction (“Mareva Order”), an injunction to prevent a defendant removing assets from the jurisdiction or from dealing with assets within the jurisdiction. Applications for such orders are normally made ex parte. Section 56A of the High Court Act 1991 (as amended by the Civil Jurisdiction Act 2001) allows for such an order to be obtained pending a civil trial or pending determination of an appeal where the High Court has jurisdiction to entertain the proceedings or where civil proceedings are to be or have been commenced in a country or territory outside the Isle of Man. 8. Police and customs officers have the legal authority to obtain information about money laundering, which includes the power to identify and trace property suspected of being the proceeds of crime or used for FT. Sections 52-54A of the Drug Act provide powers to obtain information about drug trafficking (includes money laundering—see Sections 1(2) and (3)(f)). Those provisions also have effect in respect of all crimes money laundering under section 17J of the CJA. With respect to FT, Paragraph 2 of Schedule 7 of the POTA deals with orders for the production of material for the purposes of terrorist investigations (defined in section 15(1)) which includes FT offences under sections 7-9 of the POTA. Article 10 of the UN Order confers a power on the Isle of Man treasury to obtain information and documents to implement the Order or prevent evasion. Failure to comply with a treasury request for information is an offence. 9. Under section 7(7) of CJA, section 26(10) of Drug Act and paragraph 3(4) of Schedule 4 to the POTA, provision is made to safeguard the rights of third parties who may be affected by restraint orders. Under section 39(8) of the Drug Act and section 23A (8) of the CJA there is a right for any person to apply to the High Bailiff for the release of cash detained under section 39 or 23A (import/export of cash). Under section 6(1) of the Drug Act, obligations that have priority (e.g. a mortgage) are to be deducted from the value of the realizable property for confiscation. It is inherent in section 6(2) that property that has been acquired by a third party for full payment is not to be available for confiscation. (equivalent provisions in CJA are sections 4(1) and (3)). The authorities have indicated that without prejudice to those specific provisions, the High Court has an inherent power to hear and determine competing claims in respect of property. If property is not frozen, seized or confiscated strictly in accordance with the statutory powers conferred on the appropriate authorities then the High Court can be asked to make an appropriate order (e.g. return of property, damages, etc.). 10. Although there is no explicit authority under Isle of Man law to void contracts or render them unenforceable where parties to the contract knew or should have known that as a result of the contract the authorities would be prejudiced in their ability to recover financial claims resulting from the operation of AML/CFT laws, the authorities have indicated that a contract to achieve an illegal purpose would be void under Isle of Man law. 11. The Isle of Man authorities do record all statistics relating to amounts of property frozen, seized and confiscated relating to ML, the predicate offences and FT. 12. The Isle of Man FCU has a budget specifically for the training of their personnel. All members have undergone numerous courses relevant to the investigation of ML/FT e.g.: National Terrorist Financial Investigation Course organized by the London Metropolitan Police; Development Course for Financial Investigators organized by the London Metropolitan Police and the Assets Forfeiture/Money Laundering Course organized by the U.S. Drug Enforcement Administration. Custom and Excise Officers also receive financial investigation and intelligence training from HM Customs and Excise. There is also in-house training provided on an ongoing basis and external institutions provide seminars/courses to the members of the FCU about the industry in particular on the issues of constructive trust., trust funds, banking and on-line gaming. The prosecutorial and judicial authorities of the Isle of Man are legal experts and regularly attend and participate in seminars and conferences both in the Isle of Man and in the United Kingdom covering the subjects of freezing, seizing and confiscation of assets. 13. Laws provide for freezing of funds or other property of terrorists, those who finance terrorism and terrorist organizations (Article 6 of the UN Order; Article 4 Iraq (United Nations Sanctions) (Isle of Man) Order 2000; Article 8 of Al-Qa’ida and Taliban (United Nations Measures) (Isle of Man) Order 2002). 13.1 The Isle of Man authorities keep statistics of property frozen relating to FT and the number of individuals or identities, which have been examined by the evaluator. 14. The authorities have the power to identify and freeze the property of suspected terrorists, those who finance terrorism and terrorist organizations, whose names may not appear on the list (s) maintained by the relevant committees of the U.N. Security Council. In the UN Order there is power to obtain information under Article 10 and a power to freeze funds under Article 6. 15. As an administrative matter, a fund (the Seized Assets Fund or SAF) administered by the Isle of Man treasury already exists and is used for the purposes of depositing confiscated property relating to all crimes. These assets are then used by Government for various AML and CFT initiatives in law enforcement, health, education or other appropriate purposes. 16. According to the authorities, there is statutory authority to provide for asset sharing. The ability to share exists both prior to (as part of a plea bargain after a seizure) and following confiscation of assets. The attorney general deals with letters of request seeking repatriation and sharing of assets within the jurisdiction and where possible voluntary repatriation/sharing is used. Assets confiscated that are the proceeds of drugs offences are paid into a seized assets fund which is dealt with administratively but whose assets may be shared and may be used in relation to law enforcement. Assets that are confiscated in the Isle of Man that are not the proceeds of drugs offences fall to General Revenue. Section 2 of the Finance Act 1958 allows moneys to be paid out of the General Revenue where voted or appropriated by resolution of Tynwald (parliament) with the concurrence of the treasury for the purposes of the Isle of Man Government. According to the authorities, the Isle of Man is currently seeking the extension of the Treaty between the government of the United Kingdom and the Government of the United States on Mutual Legal Assistance in Criminal Matters with Exchange of Notes, Treaty Series No. 14 (1997). Article 16 of the Treaty states that “[a] Requested Party in control of forfeited assets or the proceeds of their sale shall dispose of them according to its laws. Either Party may transfer forfeited assets or the proceeds of their sale to the other Party to the extent permitted by their respective laws, upon such terms as may be agreed.” Pending the extension of the Treaty, the Isle of Man wishes to act consistently with the principles of law enforcement through cooperation and mutual legal assistance in criminal matters as exemplified by the Treaty and would intend to deal with net proceeds of confiscation in accordance with the provisions of Article 16 of the Treaty. | ||||||
| Analysis of Effectiveness | ||||||
| The framework for the confiscation of proceeds of crime or property used to finance terrorism is generally adequate. However the framework would be enhanced if relevant legislation provided for forfeiture of property of corresponding value in connection with terrorist activities and the authority to share assets other than drug assets with other jurisdictions. There is also some concern about the limited scope for civil forfeiture. | ||||||
| Recommendations and Comments | ||||||
| The relevant legislation should be amended to provide for forfeiture of property of corresponding value in connection with terrorist activities, in the event that property that is subject to confiscation is not available. In addition, consideration should be given to passage of a law establishing an asset forfeiture fund into which all or a portion of confiscated property will be deposited and will be used in the management of seized and confiscated property, as well as for law enforcement, health, education or other appropriate purposes. Finally, the relevant laws should be amended to explicitly provide for the authority to share assets other than drug assets with other jurisdictions along the lines of Section 63(4) of the Drug Act. Consideration should be given to the adoption of a civil forfeiture law for crimes other than FT. | ||||||
| Implications for compliance with FATF Recommendations 7, 38, SR III | ||||||
| Full compliance will be achieved when laws allow for the forfeiture of property of corresponding value. | ||||||
| III—The FIU and processes for receiving, analyzing, and disseminating financial information and other intelligence at the domestic and international levels (compliance with criteria 17-24) | ||||||
| Description | ||||||
| 17. The Isle of Man FCU is the FIU. However, under the relevant Acts and the Code, police and customs officers are the recipients of STRs and there is no reference in the relevant Acts and the Code to the FCU. Reporting parties are required by law to make their disclosures to “a constable,” which includes a Customs Officer for the purposes of the relevant laws (Sec. 17J, CJA and Sec. 58, Drug Act, although not under POTA). In practice, all disclosures are made to the FCU though there is no law requiring this. The FSC and the IPA have issued guidelines for the identification of unusual transactions in the form of the Notes and the CTP, although the authority of the FSC to do so is unclear, and the authority of the IPA is pursuant to a provision not designed for that purpose—section 24A of the IA that was cited by the authorities as the basis of the issuance of the CTP provides that the IPA may publish information or give advice to insurance licensees. However, the authorities have provided a copy of the Insurance (Amendment) Bill, enactment of which would explicitly provide for authority to issue binding guidance notes with explicit sanctions for noncompliance. The Notes and the CTP provide guidelines for the identification of complex and unusual transactions or patterns of transactions, and suspicious patterns of behavior (Notes Sec. 6.01; CTP Sec. 8.4). There is no provision in law indicating the manner in which STRs are to be made. Although disclosure of suspicious transactions may be made on the Isle of Man Disclosure Form (Section 6.04 and Appendix H of the Notes, and Section 8.1 and Appendix 4 of the CTP), there is no legal requirement to do so. Further, the Notes and the CTP do not apply to all parties required to file STRs by the relevant laws. 18. The FCU is not authorized to obtain from reporting parties, either directly or through another competent authority, additional documentation needed to assist in its analysis of financial transactions. However, there are laws and procedures regarding the production of records by financial institutions and other persons, the search of persons and premises, seizure and obtaining of evidence for use in investigations and criminal proceedings (Sections 11—25 of the PPP Act; Sections 17J, 24 and 25 of the CJA; Section 15 of the POTA; Sections 52 and 53 of the Drug Act). In addition, under the FSA, the FSC has authority to disclose information “to any constable for the purpose of enabling or assisting the Isle of Man Constabulary to discharge its functions.” (Section 24(1)(aa)). This would allow the FSC to provide information in its possession to the FCU, which is principally staffed by constables. With respect to insurance business, under the ‘Agreement on the dissemination of information from suspicious transaction reports to the Insurance and Pensions Authority’ between the FCU and the IPA, requests for information may be passed to the IPA from the FCU and, once information has been obtained from the licensee (Sections 21 and 22 of the IA), such information may then be passed to the FCU (Section 24 of the IA). In addition, the IA Bill will expand the powers of the IPA to include disclosure for certain additional purposes, including the following: any criminal proceedings on the island or elsewhere (new Section 24(1)(a)); facilitating a determination of whether any such investigation should be initiated (new Section 24(1)(c))10; and any criminal investigation (new Section 24(1)(d). The Customs Amendment Act creates legal gateways allowing the exchange of information between Customs and other Isle of Man Government bodies such as Income Tax, DHSS, FSC, IPA, Gambling Control, Office of Fair Trading and the Police as it relates to the discharge of their relevant functions. 19. The FCU has full direct access to the companies’ registry and vehicle licensing database of the Isle of Man government main frame and the land records on an expedited basis. There is no legal authority for access to other government databases, such as social security, but information may be made available to the FCU on an expedited basis if the requirements of Section 27 of the Data Protection Act 1986 are fulfilled, i.e., that the request is for the prevention or detection of crime. In addition Customs officers attached to the FCU have access from Custom House to certain information from the VAT Office rates and voters roll and Income Tax as well as direct access to a variety of intelligence and accounting databases run by the United Kingdom’s HM Customs and Excise. 20. Although the FCU is not authorized to order sanctions or penalties, the FSC and the IPA have broad authority to order administrative sanctions (Section 7 of the Banking Act; Section of 4 of the CSP Act; Sections 6 and 9 of the IA; Section 3 of the IBA). See generally, the response to criterion 5, above. Failure to report could lead to a breach of Paragraph 12 of the Code. An FI which fails to report, risks committing a money laundering offence under CJA or Drug Act if there are reasonable grounds for suspecting ML and the institution undertakes transactions. 21. Since the FCU is not a body created by statute, a police or customs officer is authorized to disseminate financial information and intelligence to domestic authorities for investigation (Section 17H of the CJA). 22. The sharing of information and intelligence is authorized under Section 17I(1) of the CJA. Under this section, information may be passed off the Island by the FCU of its own volition for the purposes of the prevention or detection of crime, or for the institution of or otherwise in connection with criminal proceedings. Where necessary the FCU has negotiated memoranda of understanding to facilitate the exchange of information, including the United Kingdom, and are in negotiations with, Australia, Belgium, Republic of Ireland and Thailand. The consent of the chief minister under Section 17I(2) of the CJA is required for the passing of information where the information is for purposes other than the investigation and prosecution of crime. There are restrictions on the use of information disclosed by the police to domestic authorities (Section 17G(1) of the CJA). The FCU may impose conditions on the use of the information that is passed to foreign counterpart FIUs under Section 17I(1) of the CJA. In practice, these conditions are those accepted by the Egmont Group as part of the Egmont generic MOU. 23. The Isle of Man FCU (FIU) and other competent authorities record statistics of all STRs received which include the number analyzed and disseminated. The number of STRs are as follows: | ||||||
| 1998 | 1999 | 2000 | 2001 | 2002 | ||
| 1,021 | 1,214 | 1,012 | 1,642 | 1,836 | ||
| Records are kept relating to STRs resulting in investigation, prosecution or convictions (to date there are no ML convictions in the Isle of Man, however the Isle of Man authorities have assisted in numerous ML investigations with other jurisdictions that have resulted in prosecutions and convictions elsewhere). Detailed records are kept in relation to the requests for assistance received by the FCU and other competent authorities from both foreign and domestic authorities as well as the number of responses provided to the requests received. The Isle of Man spontaneously refers all STRs to NCIS and also following a preliminary evaluation of the STR they are referred to competent authorities both domestically and foreign. Although there is no legal requirement to do so, it is normal practice for the Isle of Man financial institutions to make (STRs) on large currency transactions to the authorities and statistics are kept. It is generally speaking unusual for individuals to deal in large cash transactions and this therefore immediately raises suspicion. 24. The officer in charge is a Detective Inspector, who is appointed by the Chief Constable of the Isle of Man Police and is answerable to him on the activities of the FCU. The Isle of Man FCU operates with a number of personnel dedicated to Intelligence (statistics, analysis and dissemination), International Cooperation team and an Investigative Team who specialize in Fraud, ML and FT investigations. Investigations into ML and FT are also carried out by an Isle of Man Customs and Excise Team. The close relationship between the FCU and Customs and Excise avoids any conflict in relation to investigations being conducted by these two authorities. The staffing levels are as outlined in Criteria No. 6 and the FCU is currently operating below capacity. The FCU’s funding is “ring fenced” and is under the control of the chief constable who specially allocates funds that do not impinge on the rest of the Isle of Man’s Police Force budget. The FCU’s IT facilities although sufficient are being upgraded at present to facilitate the sharing of information with Customs and Excise. The FCU is established as a unit within the Isle of Man Police Force, accountable to the chief constable who has delegated the responsibility of the investigation of ML/FT to it. The operational structure of the FCU enables it to operate with a limited independence and is generally free from unauthorized outside influence or interference. The practice on the Isle of Man is for the head of the FCU to have regular contact with the attorney general and other authorities. On law enforcement operational matters the FCU in the Isle of Man is recognized as the venue for receipt of all STRs (notwithstanding the legislation which authorizes STRs to be made to any Constable in the Island). The operational system in place ensures that all information and intelligence is securely protected and disseminated according to the legislation of the Isle of Man. The Isle of Man FCU submits statistics to enable the chief constable to prepare a publicly available Annual Report on the performance of the Isle of Man Constabulary. Quarterly statistics, trends and typologies are also produced at crown dependency meetings. Public warnings in relation to trends and typologies are also sent to the FSC who in turn alert the financial industry by way of posting the warnings on their public website and also for more sensitive matters by way of direct email/post to the authorized industry contacts. The FSC also arranges conferences and seminars attended by members of the financial sector and other Government agencies where they, the FCU and Customs and Excise lecture on Anti-Money Laundering issues thus allowing the Unit to play its part in educating the financial services sector on ML/FT. Conferences and seminars organized by the FSC and the industry are attended by members of the FCU and Customs and Excise as speakers thus enabling them to share information on the statistics, trends and typologies of their industry. The FCU and Customs and Excise attend and participate in the quarterly meetings of the Joint Anti-Money Laundering Advisory Group (JAMLAG) where the issues of ML/FT investigations are addressed with representatives of the financial associations. | ||||||
| Analysis of Effectiveness | ||||||
| Arrangements for receiving, analyzing, and disseminating financial information are generally adequate. The absence of a requirement for STRs to be submitted to the FCU is a potential weakness as is the inability of the FCU to access all government databases on a real-time basis. | ||||||
| Recommendations and Comments | ||||||
| Consideration should be given to amending the relevant laws to require that the report be made directly to the FCU, and that it be made in writing on a form to be issued by the FCU. Consideration should also be given to amending relevant laws to permit the FCU to require the submission of additional information by reporting parties, and to provide expeditious or real-time access to public and nonpublic databases without the need for a court order. Consideration should be given to amending the relevant laws to provide explicit legal authority for the FSC to issue guidance notes. With respect to the IPA, consideration should be given to enactment of the Insurance (Amendment) Bill to explicitly provide for authority to issue binding guidance notes with explicit sanctions for noncompliance. The operational structure of the Isle of Man FCU needs to be evaluated in order to prioritize and focus on the subject of ML/FT. The staffing levels should be increased to the authorized strength and in addition the financial investigation team of Customs and Excise could be amalgamated with the FCU in order to improve the effectiveness and streamlining of enquiries into ML/FT. The number of support staff working in the FCU should be increased in order that Law Enforcement personnel therein can dedicate themselves to the investigative process of ML/FT. | ||||||
| Implications for compliance with FATF Recommendations 14, 28, 32 | ||||||
| Compliant | ||||||
| IV—Law enforcement and prosecution authorities, powers and duties (compliance with criteria 25-33) | ||||||
| Description | ||||||
| 25. The Isle of Man FCU and Customs and Excise have responsibility for ensuring that ML and FT offences are properly investigated. There are a number of ongoing ML and FT investigations in the Isle of Man and the authorities are taking all necessary steps to ensure that these investigations reach a successful conclusion. There is close liaison between the attorney general’s chambers, the FCU and customs and excise in relation to ongoing investigations and chambers are available to give advice when required. 26. There is no explicit legal basis for controlled delivery or undercover operations but they are not restricted by current law. Interception of communications is controlled by the Interception of Communications Act 1988. According to the authorities, there is included in the official Isle of Man legislative program ending in July 2003 a proposal for a bill to regulate the exercise of certain undercover techniques such as covert surveillance. It is anticipated that the provisions are likely to be passed to coincide with the coming into operation of the Human Rights Act 2001 in mid-2003 which contains certain protections relevant to the exercise of Police Powers. 26.1 At present there is no legislation enacted in the Isle of Man permitting the use of such techniques, however the FCU and Customs and Excise Investigation Team, use the techniques of controlled delivery/undercover operations on a case by case basis in their pursuit of the investigation of ML and FT offences. The interception of telephone communications are authorized by the Chief Minister of the Isle of Man with the advice of the attorney general pursuant to the Interception of Communications Act 1998 as amended in 2001. 27. Law enforcement authorities are able to compel production of bank account records, financial transaction records, and other records maintained by FIs by lawful process, including the production or seizure of information, documents or evidence, searches of financial institutions and other entities, taking of witnesses’ statements. (Sections 52, 53, 54 and 54A of the Drug Act; Sections 6, 7 and 24 of the CJA; Section 20 of the CJA2; Section 15 and Schedule 7 to the POTA; and Sections 24 and 25 and Schedules 5 and 6 of the Anti-Terrorism Act). 28. The Geographic nature of the Isle of Man creates a close working environment for Law Enforcement authorities (FCU, Customs and Excise, FSC and attorney general) tasked with combating ML/FT. On a case by case basis representatives of these agencies are assembled, information is shared and a coordinated approach is agreed amongst the agencies in order to investigate fully and expertly ML and FT, thus creating a “task force” approach to the issue of ML/FT. 29. The FCU structure, funding and staffing has been answered in Criterion 24. The FCU and the other investigation teams are provided with a reasonable standard of IT facilities which are in the process of being upgraded. The law enforcement and prosecution services of the Isle of Man take all reasonable steps to provide whatever resources are necessary to carry out their functions regarding the investigation and prosecution of ML and FT. 30. The FCU is the recognized authority with responsibility for keeping statistics on ML and FT. It keeps records and statistics of all investigations, prosecutions and convictions on its ML/FT cases and its statistics database enables it to identify investigations originated from STRs or from other sources. Its database contains the statistics on any criminal, civil or administrative sanctions. Such information is obtained through fora that promote frequent contact with regulators, law enforcement and other government officials. The Isle of Man Financial Institutions have frozen monies linked to suspected terrorist funding (sanctions). 31. The FCU actively disseminates the above information to all persons/agencies concerned through the medium of seminars, conferences, FSC publications and by participating in the Joint Anti-Money Laundering Advisory Group and the crown dependencies meetings. 32. As outlined previously in Criterion 12, the Isle of Man Law Enforcement, Prosecutorial and Judicial authorities have taken all reasonable actions to ensure that the personnel tasked with the responsibilities as outlined above receive adequate training i.e.: participation in training courses, seminars and conferences. 32.1 The Isle of Man has provided special training/certification for the FCU and Customs and Excise investigators, enabling them to achieve the recommended standard of excellence required to conduct their investigations of ML, FT and the predicate offences. 33. The Isle of Man Law Enforcement agencies are making reasonable efforts to meet their demands in order to successfully investigate, prosecute, convict, freeze, seize and confiscate the proceeds of crime or property to be used to finance terrorism. The FCU and Customs and Excise have a number of personnel working closely with the American and U.K. authorities on this matter. Any legal issues encountered are addressed by the attorney general’s office and the chief constable. Due to the complexities involved in the investigation of ML/FT the prosecutorial authorities of the Isle of Man, when necessary, do engage the services of recognized experts in order to successfully investigate ML/FT. | ||||||
| Analysis of Effectiveness | ||||||
| The framework for powers and duties of law enforcement and prosecution authorities is generally adequate. The framework would however be enhanced if there were an explicit legal basis for the use of controlled delivery and other undercover operations. | ||||||
| Recommendations and Comments | ||||||
| Consideration should be given to passage of the existing bill to regulate undercover techniques in order to provide an explicit legal basis for controlled delivery and other undercover operations. | ||||||
| Implications for compliance with the FATF Recommendation 37 | ||||||
| Compliant | ||||||
| V—International Cooperation (compliance with criteria 34—12) | ||||||
| Description | ||||||
| 34. There are laws and procedures for mutual legal assistance in relation to money laundering, drug trafficking, the prevention of terrorism and other crimes regarding the use of compulsory measures including the production of records by financial institutions and other persons, the search of persons and premises, seizure and obtaining of evidence for use in investigations and criminal proceedings and in related actions in foreign jurisdictions (Sections 17J, 24 and 25 of the CJA; Sections 21 and 22 of the CJA2; Section 15 of the POTA; Sections 52 and 53 of the Drug Act and Sections 11-25 of the Police Powers and Procedures Act 1998). There are appropriate laws and procedures to provide mutual legal assistance in the production or seizure of information, documents or evidence, searches of financial institutions and other entities, taking of witnesses’ statements and identification and freezing of assets, seizing of cash at borders and enforcement of external forfeiture/confiscation orders (See legislation referred to in the first paragraph above and see Sections 25-26, 3537 and 39-40 of the Drug Act and the Orders made thereunder; Sections 6-7, 23A-F and 18-20 of the CJA and the Orders made thereunder; Section 32 of the CJA2 (and the Orders made thereunder), and Schedule 4 to the POTA as well as the UN Order.) Assistance is provided in both investigations and proceedings where persons have committed both laundering and the predicate offence as well as in investigations and proceedings where persons have committed laundering only (see citations above). 35. The Isle of Man requires that requests for assistance from foreign jurisdictions be processed through mutual legal assistance as its laws and procedures require. 35.1 In the Isle of Man there is no prerequisite of dual criminality to affect its ability to provide mutual legal assistance other than in relation to fiscal offences. In practice this does not prevent assistance being given as invariably the conduct in the requesting jurisdiction constitutes the same or a similar offence in the Isle of Man. All requests for Mutual Assistance are evaluated in the attorney general’s chambers, which transmits them to the relevant investigative authorities for execution. 35.2 The Isle of Man has successful structures in place to facilitate timely and effective follow up to requests for mutual legal assistance. 35.3 Detailed statistics are kept on all requests, made or received, for mutual legal assistance relative to ML/FT and the predicate offences. The records include details of the date, source, nature and outcome of the request. 36. While there are a small number of bilateral agreements which extend to the Isle of Man concerning the investigation of crime and the restraint and confiscation of the proceeds and instrumentalities of crime or drug trafficking, the agreements do not affect the giving of assistance or the level of assistance given. The Isle of Man has mutual legal assistance treaties with the Bahamas, Saudi Arabia, Spain, Sweden, Ukraine, and the United States. With respect to informal mechanisms, the Isle of Man is a member of the European Judicial Network and the legal officer (Financial Crime) is a contact point for the Network, regularly attending the Network meetings. The attorney general’s chambers are also a member of the International Association of Prosecutors, set up largely to facilitate international cooperation amongst prosecutors. The legal officer (Financial Crime), officers from the FCU Unit, and officers from Customs and Excise attend a variety of national and international conferences and meetings to advise how assistance may be obtained from the Isle of Man. 37. Section 17I of the CJA allows for the provision of information to overseas authorities for the prevention or detection of crime or for the institution or other use in criminal proceedings. The FCU has also negotiated memoranda of understanding to facilitate the exchange of information where necessary. Information is exchanged either directly or through Interpol where the information refers to the subjects of investigations in other jurisdictions. In addition, the Customs Amendment Act provides for the disclosure of information or documents held for the purposes of, or in relation to, any Customs and Excise assigned matter to any agency for the purposes of any criminal investigation or proceedings, or for the purposes of initiating or bringing to an end such matters (section 174B(2)). Also, due to the Island’s special relationship with the EU and Customs membership of the Customs Union, many of the EC Regulations governing exchange of information on customs, excise and VAT fraud are applicable in the Isle of Man along with other Conventions such as the Nairobi Convention, the 1998 Vienna Convention, the Naples II Convention and the CIS Convention. The Drug Act contains restrictions on disclosure of information (section 50). This is limited to restrictions on publishing or broadcasting details in relation to STRs and restrictions on compelling witnesses in civil or criminal proceedings to give evidence in relation to the existence of an STR or the identity of the disclosing person. The POTA does not contain any restrictions on disclosure. 38. There is no explicit legal basis for controlled delivery or undercover operations, but current Isle of Man law does not restrict them. Interception of communications is controlled by the Interception of Communications Act 1988. There is included in the official Isle of Man legislative program ending in July 2003 a proposal for a bill to regulate the exercise of certain undercover techniques such as covert surveillance. It is anticipated that the provisions are likely to be passed to coincide with the coming into operation of the Human Rights Act 2001 in mid-2003. Isle of Man Customs has the option to carry out investigations where controlled deliveries of money, monetary instruments, restricted or prohibitive goods would take place. Such operations have to be authorized by treasury line management at the appropriate level, and voluntarily the UK’s Regulation of Investigatory Powers Act authorization is also completed, if the modus operandi requires it, to ensure that any operation is Human Rights compliant in terms of being proportional, legal, authorized and necessary. There is no requirement or provision for judicial authorization. In unusual cases it is standard practice to seek legal advice from H.M. attorney general’s chambers. 39. The Isle of Man has no objections to the issue of asset sharing and each case is dealt with on an individual basis. The Isle of Man regularly participates in the investigation of cases where an international dimension or aspect is identified and by agreement and co-ordination simulated actions can be taken to ensure the seizure and forfeiture of ML/FT assets. Some problems related to asset sharing are discussed under criterion 16. 40. There are procedures to extradite individuals charged with money laundering, drug trafficking and terrorism offences (Sections 7-15 of the Extradition Act 1989 (Act of Parliament) 41. The Isle of Man ensures that the Island is not a safe haven for individuals charged with FT. Extradition procedures are in place with other jurisdictions so that persons sought on charges relating to ML/FT can be extradited. The FCU and Police Special Branch and Officers of the Customs and Excise regularly liaise with the U.K. and U.S. authorities on the identity and movement of suspected terrorists. The geographic location of the Isle of Man would not be conducive to a “safe-haven” for terrorists. 42. The Isle of Man authorities generally provide adequate funding to ensure that the FCU is staffed properly supported by technical resources. The investigation of ML/FT is overseen by a Detective Inspector who is subject to advice from the attorney general. There is a current resource issue that could be resolved by the allocation of additional personnel as identified in Criterion No.6. Mutual Assistance Requests from International Law Enforcement Agencies to the FCU/Customs and Excise account for approximately 60% of their workload. These requests are processed, the evidence uplifted and responses given in a prompt manner. | ||||||
| Analysis of Effectiveness | ||||||
| The framework for international cooperation is considered to be adequate. | ||||||
| Recommendations and Comments | ||||||
| Implications for compliance with FATF Recommendations 3, 32, 33, 34, 37, 38, 40, SR I, SR V | ||||||
| Largely Compliant | ||||||
Table 4.
Detailed Assessment of Criminal Justice Measures and International Cooperation
| I—Criminalization of ML and FT (compliance with criteria 1-6) | ||||||
|---|---|---|---|---|---|---|
| Description | ||||||
| 1. The Isle of Man is a crown dependency and not a sovereign state and therefore the United Kingdom is responsible for its international affairs. The Isle of Man is not therefore in a position to sign or ratify international Conventions in a formal sense. Conventions are usually extended to the Isle of Man in accordance with the procedures set out in the Conventions. | ||||||
| The following have been extended to the Isle of Man: UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna Convention); Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime; and the European Convention on Mutual Assistance in Criminal Matters 1959 (Strasbourg) which operates as between Isle of Man and Austria, Denmark, Greece, Italy, Luxembourg, Spain, Netherlands and Sweden. Operation between other Council of Europe States and the Island has been requested and awaits confirmation by those States. (The Additional Protocol to the Strasbourg Convention does not apply but extension of the Second Additional Protocol has been requested of the Council of Europe states). UN Security Council Resolution 1373 is implemented by Article 10 of the UN Order. | ||||||
| The UN Convention for the Suppression of the Financing of Terrorism, and the UN Convention Against Transnational Organized Crime (Palermo Convention) have not been extended to the Isle of Man. | ||||||
| 2. Money laundering extends to proceeds of criminal conduct and appears to be generally consistent with the Vienna and Palermo conventions. The POTA and the UN Order contain provisions criminalizing the financing of terrorism. There is no specific provision requiring inference of an intentional element from objective factual circumstances in all cases. According to the authorities, under the Isle of Man legal system, knowledge, suspicion or grounds for suspicion are themselves normally ascertained by reference to objective factual circumstances. Certain of the ML and FT provisions specify reasonable grounds (or cause) for suspicion rather than specific knowledge (CJA Section 17(C)(2), Drug Act Section 45(2), POTA Sections 7, 8 and 9 and UN Order Articles 4 and 5). The offense of money laundering extends not only to those who have committed money laundering but also extends to persons who have committed both laundering and the predicate offense (Section 17C (1) of the CJA and Section 45(1) of the Drug Act). It is not necessary for a person to be convicted of a predicate offence to establish that assets were the proceeds of a predicate offence and to convict any person under Section 17A or 17B of the CJA of laundering such proceeds. The offence under Section 17C of the CJA is aimed at money laundering for the purpose of avoiding prosecution. The money laundering offences under the Drug Act relate to the proceeds of drug trafficking and do not require that a person be convicted of a predicate offence. Predicate offenses for money laundering extends to all serious crimes (criminal conduct) (Section 17A (7) of the CJA) and drug trafficking offences (Sections 45-47 of the Drug Act). The offence of money laundering extends to property that directly or indirectly represents the proceeds of crime (Sections 17A (2), 17B (1) and 17C (1) and (2) of CJA and Sections 45(1) and (2), 46(2) and 47(1) of the Drug Act). Predicate offenses include conduct which would constitute an offense if it had occurred in the Isle of Man (Section) | ||||||
| 17A (7)(b) of the CJA and Section 1 of the Drug Act). In addition, financing proscribed organizations (Section 8 of POTA) and terrorist acts (Section 7 of POTA are predicate offenses for the purposes of the money laundering offences under Section 9 of the POTA. Membership in a proscribed organization (Section 2 of POTA) is a predicate offence under the CJA (Sections 17A-D). | ||||||
| There is a gap in the POTA relating to acts of terrorism committed on the island, which are not covered in the POTA. Also, the definition of terrorism in Sec. 18 of the POTA does not include any reference to “the use or threat is made for the purpose of advancing a political, religious or ideological cause.” However, the UN Order contains a broader definition of terrorism (Article 3(1) of the UN Order) that would include acts committed on the island and a reference to the use or threat provision referred to above. The operative provisions of the POTA and the UN Order will be consolidated in the Anti-Terrorism and Crime Act 2002 which has recently been enacted by the Tynwald (parliament), but will not be in force until later in 2003. | ||||||
| 3. Sections 7-11 of the POTA and Articles 4-7 of the UN Order criminalize the financing of terrorism. The ability to ensure full implementation of the Convention will arise when the Anti-Terrorism and Crime Act is implemented. | ||||||
| 4. The offences of money laundering in the CJA (Sections 17A-C), the Drug Act (Sections 45-47) and POTA (Sections 7-9) apply different tests of knowledge. 17B (1) and 17C (1) CJA and 45(1) and 47(1) of the Drug Act apply to persons that know that property is the proceeds of criminal conduct (drug trafficking or terrorist financing). Sections 17C (2) of CJA, 45(2) of the Drug Act and 7 of the POTA require knowledge or reasonable grounds to suspect. Sections17A (1) of CJA, 46(1) of the Drug Act and 8 and 9(1) of the POTA are silent on the point but it is a defense to prove that there was no knowledge or suspicion that the arrangement related to proceeds of crime (drug trafficking or terrorist financing). However, there is no specific provision regarding inference of an intentional element from objective factual circumstances in all cases but, according to the authorities, under the Isle of Man legal system knowledge, suspicion or grounds for suspicion are themselves normally ascertained by reference to objective factual circumstances. | ||||||
| Acts of Tynwald (parliament) are construed by reference to Section 3 of the Interpretation Act 1976 under, which references to “person” include a body corporate or incorporate. The offences therefore apply to bodies corporate as well as individuals. | ||||||
| 5. With respect to criminal sanctions, persons (including corporations) found guilty of engaging in money laundering are liable on summary conviction to imprisonment for a term not exceeding six months or a fine not exceeding 5000 pounds, or on conviction on information to imprisonment for a term not exceeding fourteen years or a fine or both (Sections 17A (6), 17B (9) and 17C (4) of the CJA; Section 51(1) of the Drug Act and Section of the POTA). In addition, under the Code, persons may be found liable for offenses that do not involve money laundering (Para. 3(2) of Code), on summary conviction the same as above, and on information, imprisonment of up to two years and/or an unlimited fine (Section 17 F of CJA). Section 42 of High Court Act of 1991, provides that the court may by order appoint a receiver in all cases in which it appears to be just and convenient to do so. | ||||||
| (For further discussion on sanctions see Section VIII, Criterion 64) | ||||||
| 6. The Isle of Man Authorities have the legal means and resources available to them to effectively implement Money Laundering and Financial Terrorism Laws. There is legislation in the Isle of Man statute to effectively combat, investigate and prosecute money laundering and the financing of terrorism. In the attorney general’s chambers there is one dedicated legal officer, with responsibility for dealing with Mutual Assistance Requests, ML and FT. The Isle of Man authorities have and are currently carrying on a number of investigations into suspected Money Laundering, which involve millions of pounds in assets. The investigation structure in the Isle of Man is divided between Police and Customs and Excise. The Isle of Man Police Force consists of 248 Police Officers and there are 54 Customs and Excise Officers. Due to the heavy demands imposed on the attorney general’s staff, the attorney general is currently reviewing his staffing levels with a view to recruiting an assistant to the dedicated legal officer. The Isle of Man authorities recognize the complexities involved in the investigation of ML/FT and regularly participate in joint investigations with other countries to successfully investigate and prosecute ML/FT. | ||||||
| The resources available to the Isle of Man Financial Crime Unit (FCU) are as indicated below: | ||||||
| Authorized Personnel One Detective Inspector Three Detective Sergeants Nine Detective Constables Two Customs and Excise Officers (Part-time) One Analyst (Civilian) One Administration Manager (Civilian) One Administration Assistant (Civilian) One Accountant (Civilian) | Current Personnel One Detective Inspector One Detective Sergeant Eight Detective Constables Two Customs and Excise Officers (Part-time) One Analyst (Civilian) One Administration Manager (Civilian) One Administration Assistant (Civilian) One Accountant (Civilian) | |||||
The functions of the FCU are:
| ||||||
The FCU also undertakes the following functions:
| ||||||
| The functions outlined above are too widespread thus lessening the ability of the unit to focus on ML/FT. The investigation, prosecution and conviction of persons/companies requires specialist and dedicated skills and therefore the functions as outlined over-burden the FCU. Its workload has increased steadily over the last few years. | ||||||
| The resources dedicated to ML/FT in the Isle of Man Customs and Excise consists of six investigators with a further two intelligence officers working on a part-time basis with the FCU as outlined above. The set-up and structure of the FCU should be streamlined in that a particular number of personnel therein are wholly and fully engaged on ML/FT investigations. | ||||||
| The Isle of Man Customs and Excise have 6 investigators dedicated to the investigation of ML/FT. A further two intelligence officers work on a part-time basis with the FCU as outlined above. | ||||||
| Analysis of Effectiveness | ||||||
| The Isle of Man’s framework for criminalizing money laundering is generally adequate. With respect to criminalizing the financing of terrorism, there is a gap relating to the limited scope of terrorist activities covered by the POTA and the inadequate definition of the financing of terrorism therein that will be remedied once the Anti-Terrorism and Crime Act has been implemented. The island needs to implement legislation to allow the UN Convention for the Suppression of the Financing of Terrorism, and the UN Convention Against Transnational Organized Crime (Palermo Convention) to be extended to the Isle of Man. | ||||||
| Recommendations and Comments | ||||||
| Implementing legislation, in particular the Anti-Terrorism and Crime Act, should be adopted or implemented by the Isle of Man so that the UN Convention for the Suppression of the Financing of Terrorism, and the UN Convention Against Transnational Organized Crime (Palermo Convention) may be extended to the Isle of Man. The Isle of Man authorities should increase the staffing level in the FCU to its authorized strength. The authorities should also re-evaluate the organizational structure/functions of the FCU in order that resources are permanently dedicated to ML/FT operations/investigations, because their workload is too widespread i.e., they are required to investigate all financial related frauds etc. The appointment of an assistant to the dedicated legal officer in the attorney general’s chambers should be pursued. | ||||||
| Implications for compliance with FATF Recommendations 1, 4, 5, SR I, SR II | ||||||
| Full compliance will be achieved when implementing legislation for the UN Convention for the Suppression of the Financing of Terrorism is adopted and implemented and the Convention is extended to the Isle of Man. | ||||||
| II—Confiscation of proceeds of crime or property used to finance terrorism (compliance with criteria 7-16) | ||||||
| Description | ||||||
| 7. Laws provide for the confiscation of assets upon conviction of a person. Provision is made for confiscation of proceeds of criminal conduct where a person is found guilty of an offense (Sections 1 and 2 of the CJA; Section 2 of Drug Act; Section 11 and Schedule 4 of the POTA). Provision is also made for the forfeiture of the instrumentalities of crime (Section 16 of the Criminal Law Act 1981 and section 32 of the CJA2). The attorney general may make an application for a Court order to restrain any person from dealing with realizable property held by a defendant, and where such an order is made, the police seize the property to prevent its removal from the Isle of Man (Section 7(1), 7(5) and 7(10) of the CJA). There are similar provisions under Section 26 of the Drug Act and Paragraph 3, Schedule 4 of the POTA. There is a provision that deals with the seizure and forfeiture of proceeds of criminal conduct with respect to imported or exported cash (Sections 23A and 23B of the CJA). There is a similar provision under Sections 39-44 of the Drug Act in respect of the import and export of drugs cash. In addition, Article 6 of the UN Order enables terrorist funds to be frozen on suspicion. Sections 8 and 11 and Schedule 4 of POTA enable the confiscation of funds of proscribed terrorist organizations. With respect to all crimes and drug crimes, the laws provide for the payment of a sum corresponding in value to the benefit to the defendant and are not limited to specific property. (Section 1 of CJA and Sections 2 and 4 of Drug Act). There is no direct equivalent in the POTA. Section 11 of the POTA is limited to forfeiture of money or property in the possession of a person convicted of an offence under sections 7-9 of POTA. Civil forfeiture currently applies in respect of import and export of drug proceeds cash (Section 39-44 of the Drug Act) and crime proceeds cash (Section 23A-23F of the CJA). The Anti-Terrorism and Crime Bill (Sec.17) will provide for the seizure and forfeiture of terrorist cash in the Isle of Man whether or not being imported or exported. According to the authorities, in civil cases, the Isle of Man High Court may grant a freezing injunction (“Mareva Order”), an injunction to prevent a defendant removing assets from the jurisdiction or from dealing with assets within the jurisdiction. Applications for such orders are normally made ex parte. Section 56A of the High Court Act 1991 (as amended by the Civil Jurisdiction Act 2001) allows for such an order to be obtained pending a civil trial or pending determination of an appeal where the High Court has jurisdiction to entertain the proceedings or where civil proceedings are to be or have been commenced in a country or territory outside the Isle of Man. 8. Police and customs officers have the legal authority to obtain information about money laundering, which includes the power to identify and trace property suspected of being the proceeds of crime or used for FT. Sections 52-54A of the Drug Act provide powers to obtain information about drug trafficking (includes money laundering—see Sections 1(2) and (3)(f)). Those provisions also have effect in respect of all crimes money laundering under section 17J of the CJA. With respect to FT, Paragraph 2 of Schedule 7 of the POTA deals with orders for the production of material for the purposes of terrorist investigations (defined in section 15(1)) which includes FT offences under sections 7-9 of the POTA. Article 10 of the UN Order confers a power on the Isle of Man treasury to obtain information and documents to implement the Order or prevent evasion. Failure to comply with a treasury request for information is an offence. 9. Under section 7(7) of CJA, section 26(10) of Drug Act and paragraph 3(4) of Schedule 4 to the POTA, provision is made to safeguard the rights of third parties who may be affected by restraint orders. Under section 39(8) of the Drug Act and section 23A (8) of the CJA there is a right for any person to apply to the High Bailiff for the release of cash detained under section 39 or 23A (import/export of cash). Under section 6(1) of the Drug Act, obligations that have priority (e.g. a mortgage) are to be deducted from the value of the realizable property for confiscation. It is inherent in section 6(2) that property that has been acquired by a third party for full payment is not to be available for confiscation. (equivalent provisions in CJA are sections 4(1) and (3)). The authorities have indicated that without prejudice to those specific provisions, the High Court has an inherent power to hear and determine competing claims in respect of property. If property is not frozen, seized or confiscated strictly in accordance with the statutory powers conferred on the appropriate authorities then the High Court can be asked to make an appropriate order (e.g. return of property, damages, etc.). 10. Although there is no explicit authority under Isle of Man law to void contracts or render them unenforceable where parties to the contract knew or should have known that as a result of the contract the authorities would be prejudiced in their ability to recover financial claims resulting from the operation of AML/CFT laws, the authorities have indicated that a contract to achieve an illegal purpose would be void under Isle of Man law. 11. The Isle of Man authorities do record all statistics relating to amounts of property frozen, seized and confiscated relating to ML, the predicate offences and FT. 12. The Isle of Man FCU has a budget specifically for the training of their personnel. All members have undergone numerous courses relevant to the investigation of ML/FT e.g.: National Terrorist Financial Investigation Course organized by the London Metropolitan Police; Development Course for Financial Investigators organized by the London Metropolitan Police and the Assets Forfeiture/Money Laundering Course organized by the U.S. Drug Enforcement Administration. Custom and Excise Officers also receive financial investigation and intelligence training from HM Customs and Excise. There is also in-house training provided on an ongoing basis and external institutions provide seminars/courses to the members of the FCU about the industry in particular on the issues of constructive trust., trust funds, banking and on-line gaming. The prosecutorial and judicial authorities of the Isle of Man are legal experts and regularly attend and participate in seminars and conferences both in the Isle of Man and in the United Kingdom covering the subjects of freezing, seizing and confiscation of assets. 13. Laws provide for freezing of funds or other property of terrorists, those who finance terrorism and terrorist organizations (Article 6 of the UN Order; Article 4 Iraq (United Nations Sanctions) (Isle of Man) Order 2000; Article 8 of Al-Qa’ida and Taliban (United Nations Measures) (Isle of Man) Order 2002). 13.1 The Isle of Man authorities keep statistics of property frozen relating to FT and the number of individuals or identities, which have been examined by the evaluator. 14. The authorities have the power to identify and freeze the property of suspected terrorists, those who finance terrorism and terrorist organizations, whose names may not appear on the list (s) maintained by the relevant committees of the U.N. Security Council. In the UN Order there is power to obtain information under Article 10 and a power to freeze funds under Article 6. 15. As an administrative matter, a fund (the Seized Assets Fund or SAF) administered by the Isle of Man treasury already exists and is used for the purposes of depositing confiscated property relating to all crimes. These assets are then used by Government for various AML and CFT initiatives in law enforcement, health, education or other appropriate purposes. 16. According to the authorities, there is statutory authority to provide for asset sharing. The ability to share exists both prior to (as part of a plea bargain after a seizure) and following confiscation of assets. The attorney general deals with letters of request seeking repatriation and sharing of assets within the jurisdiction and where possible voluntary repatriation/sharing is used. Assets confiscated that are the proceeds of drugs offences are paid into a seized assets fund which is dealt with administratively but whose assets may be shared and may be used in relation to law enforcement. Assets that are confiscated in the Isle of Man that are not the proceeds of drugs offences fall to General Revenue. Section 2 of the Finance Act 1958 allows moneys to be paid out of the General Revenue where voted or appropriated by resolution of Tynwald (parliament) with the concurrence of the treasury for the purposes of the Isle of Man Government. According to the authorities, the Isle of Man is currently seeking the extension of the Treaty between the government of the United Kingdom and the Government of the United States on Mutual Legal Assistance in Criminal Matters with Exchange of Notes, Treaty Series No. 14 (1997). Article 16 of the Treaty states that “[a] Requested Party in control of forfeited assets or the proceeds of their sale shall dispose of them according to its laws. Either Party may transfer forfeited assets or the proceeds of their sale to the other Party to the extent permitted by their respective laws, upon such terms as may be agreed.” Pending the extension of the Treaty, the Isle of Man wishes to act consistently with the principles of law enforcement through cooperation and mutual legal assistance in criminal matters as exemplified by the Treaty and would intend to deal with net proceeds of confiscation in accordance with the provisions of Article 16 of the Treaty. | ||||||
| Analysis of Effectiveness | ||||||
| The framework for the confiscation of proceeds of crime or property used to finance terrorism is generally adequate. However the framework would be enhanced if relevant legislation provided for forfeiture of property of corresponding value in connection with terrorist activities and the authority to share assets other than drug assets with other jurisdictions. There is also some concern about the limited scope for civil forfeiture. | ||||||
| Recommendations and Comments | ||||||
| The relevant legislation should be amended to provide for forfeiture of property of corresponding value in connection with terrorist activities, in the event that property that is subject to confiscation is not available. In addition, consideration should be given to passage of a law establishing an asset forfeiture fund into which all or a portion of confiscated property will be deposited and will be used in the management of seized and confiscated property, as well as for law enforcement, health, education or other appropriate purposes. Finally, the relevant laws should be amended to explicitly provide for the authority to share assets other than drug assets with other jurisdictions along the lines of Section 63(4) of the Drug Act. Consideration should be given to the adoption of a civil forfeiture law for crimes other than FT. | ||||||
| Implications for compliance with FATF Recommendations 7, 38, SR III | ||||||
| Full compliance will be achieved when laws allow for the forfeiture of property of corresponding value. | ||||||
| III—The FIU and processes for receiving, analyzing, and disseminating financial information and other intelligence at the domestic and international levels (compliance with criteria 17-24) | ||||||
| Description | ||||||
| 17. The Isle of Man FCU is the FIU. However, under the relevant Acts and the Code, police and customs officers are the recipients of STRs and there is no reference in the relevant Acts and the Code to the FCU. Reporting parties are required by law to make their disclosures to “a constable,” which includes a Customs Officer for the purposes of the relevant laws (Sec. 17J, CJA and Sec. 58, Drug Act, although not under POTA). In practice, all disclosures are made to the FCU though there is no law requiring this. The FSC and the IPA have issued guidelines for the identification of unusual transactions in the form of the Notes and the CTP, although the authority of the FSC to do so is unclear, and the authority of the IPA is pursuant to a provision not designed for that purpose—section 24A of the IA that was cited by the authorities as the basis of the issuance of the CTP provides that the IPA may publish information or give advice to insurance licensees. However, the authorities have provided a copy of the Insurance (Amendment) Bill, enactment of which would explicitly provide for authority to issue binding guidance notes with explicit sanctions for noncompliance. The Notes and the CTP provide guidelines for the identification of complex and unusual transactions or patterns of transactions, and suspicious patterns of behavior (Notes Sec. 6.01; CTP Sec. 8.4). There is no provision in law indicating the manner in which STRs are to be made. Although disclosure of suspicious transactions may be made on the Isle of Man Disclosure Form (Section 6.04 and Appendix H of the Notes, and Section 8.1 and Appendix 4 of the CTP), there is no legal requirement to do so. Further, the Notes and the CTP do not apply to all parties required to file STRs by the relevant laws. 18. The FCU is not authorized to obtain from reporting parties, either directly or through another competent authority, additional documentation needed to assist in its analysis of financial transactions. However, there are laws and procedures regarding the production of records by financial institutions and other persons, the search of persons and premises, seizure and obtaining of evidence for use in investigations and criminal proceedings (Sections 11—25 of the PPP Act; Sections 17J, 24 and 25 of the CJA; Section 15 of the POTA; Sections 52 and 53 of the Drug Act). In addition, under the FSA, the FSC has authority to disclose information “to any constable for the purpose of enabling or assisting the Isle of Man Constabulary to discharge its functions.” (Section 24(1)(aa)). This would allow the FSC to provide information in its possession to the FCU, which is principally staffed by constables. With respect to insurance business, under the ‘Agreement on the dissemination of information from suspicious transaction reports to the Insurance and Pensions Authority’ between the FCU and the IPA, requests for information may be passed to the IPA from the FCU and, once information has been obtained from the licensee (Sections 21 and 22 of the IA), such information may then be passed to the FCU (Section 24 of the IA). In addition, the IA Bill will expand the powers of the IPA to include disclosure for certain additional purposes, including the following: any criminal proceedings on the island or elsewhere (new Section 24(1)(a)); facilitating a determination of whether any such investigation should be initiated (new Section 24(1)(c))10; and any criminal investigation (new Section 24(1)(d). The Customs Amendment Act creates legal gateways allowing the exchange of information between Customs and other Isle of Man Government bodies such as Income Tax, DHSS, FSC, IPA, Gambling Control, Office of Fair Trading and the Police as it relates to the discharge of their relevant functions. 19. The FCU has full direct access to the companies’ registry and vehicle licensing database of the Isle of Man government main frame and the land records on an expedited basis. There is no legal authority for access to other government databases, such as social security, but information may be made available to the FCU on an expedited basis if the requirements of Section 27 of the Data Protection Act 1986 are fulfilled, i.e., that the request is for the prevention or detection of crime. In addition Customs officers attached to the FCU have access from Custom House to certain information from the VAT Office rates and voters roll and Income Tax as well as direct access to a variety of intelligence and accounting databases run by the United Kingdom’s HM Customs and Excise. 20. Although the FCU is not authorized to order sanctions or penalties, the FSC and the IPA have broad authority to order administrative sanctions (Section 7 of the Banking Act; Section of 4 of the CSP Act; Sections 6 and 9 of the IA; Section 3 of the IBA). See generally, the response to criterion 5, above. Failure to report could lead to a breach of Paragraph 12 of the Code. An FI which fails to report, risks committing a money laundering offence under CJA or Drug Act if there are reasonable grounds for suspecting ML and the institution undertakes transactions. 21. Since the FCU is not a body created by statute, a police or customs officer is authorized to disseminate financial information and intelligence to domestic authorities for investigation (Section 17H of the CJA). 22. The sharing of information and intelligence is authorized under Section 17I(1) of the CJA. Under this section, information may be passed off the Island by the FCU of its own volition for the purposes of the prevention or detection of crime, or for the institution of or otherwise in connection with criminal proceedings. Where necessary the FCU has negotiated memoranda of understanding to facilitate the exchange of information, including the United Kingdom, and are in negotiations with, Australia, Belgium, Republic of Ireland and Thailand. The consent of the chief minister under Section 17I(2) of the CJA is required for the passing of information where the information is for purposes other than the investigation and prosecution of crime. There are restrictions on the use of information disclosed by the police to domestic authorities (Section 17G(1) of the CJA). The FCU may impose conditions on the use of the information that is passed to foreign counterpart FIUs under Section 17I(1) of the CJA. In practice, these conditions are those accepted by the Egmont Group as part of the Egmont generic MOU. 23. The Isle of Man FCU (FIU) and other competent authorities record statistics of all STRs received which include the number analyzed and disseminated. The number of STRs are as follows: | ||||||
| 1998 | 1999 | 2000 | 2001 | 2002 | ||
| 1,021 | 1,214 | 1,012 | 1,642 | 1,836 | ||
| Records are kept relating to STRs resulting in investigation, prosecution or convictions (to date there are no ML convictions in the Isle of Man, however the Isle of Man authorities have assisted in numerous ML investigations with other jurisdictions that have resulted in prosecutions and convictions elsewhere). Detailed records are kept in relation to the requests for assistance received by the FCU and other competent authorities from both foreign and domestic authorities as well as the number of responses provided to the requests received. The Isle of Man spontaneously refers all STRs to NCIS and also following a preliminary evaluation of the STR they are referred to competent authorities both domestically and foreign. Although there is no legal requirement to do so, it is normal practice for the Isle of Man financial institutions to make (STRs) on large currency transactions to the authorities and statistics are kept. It is generally speaking unusual for individuals to deal in large cash transactions and this therefore immediately raises suspicion. 24. The officer in charge is a Detective Inspector, who is appointed by the Chief Constable of the Isle of Man Police and is answerable to him on the activities of the FCU. The Isle of Man FCU operates with a number of personnel dedicated to Intelligence (statistics, analysis and dissemination), International Cooperation team and an Investigative Team who specialize in Fraud, ML and FT investigations. Investigations into ML and FT are also carried out by an Isle of Man Customs and Excise Team. The close relationship between the FCU and Customs and Excise avoids any conflict in relation to investigations being conducted by these two authorities. The staffing levels are as outlined in Criteria No. 6 and the FCU is currently operating below capacity. The FCU’s funding is “ring fenced” and is under the control of the chief constable who specially allocates funds that do not impinge on the rest of the Isle of Man’s Police Force budget. The FCU’s IT facilities although sufficient are being upgraded at present to facilitate the sharing of information with Customs and Excise. The FCU is established as a unit within the Isle of Man Police Force, accountable to the chief constable who has delegated the responsibility of the investigation of ML/FT to it. The operational structure of the FCU enables it to operate with a limited independence and is generally free from unauthorized outside influence or interference. The practice on the Isle of Man is for the head of the FCU to have regular contact with the attorney general and other authorities. On law enforcement operational matters the FCU in the Isle of Man is recognized as the venue for receipt of all STRs (notwithstanding the legislation which authorizes STRs to be made to any Constable in the Island). The operational system in place ensures that all information and intelligence is securely protected and disseminated according to the legislation of the Isle of Man. The Isle of Man FCU submits statistics to enable the chief constable to prepare a publicly available Annual Report on the performance of the Isle of Man Constabulary. Quarterly statistics, trends and typologies are also produced at crown dependency meetings. Public warnings in relation to trends and typologies are also sent to the FSC who in turn alert the financial industry by way of posting the warnings on their public website and also for more sensitive matters by way of direct email/post to the authorized industry contacts. The FSC also arranges conferences and seminars attended by members of the financial sector and other Government agencies where they, the FCU and Customs and Excise lecture on Anti-Money Laundering issues thus allowing the Unit to play its part in educating the financial services sector on ML/FT. Conferences and seminars organized by the FSC and the industry are attended by members of the FCU and Customs and Excise as speakers thus enabling them to share information on the statistics, trends and typologies of their industry. The FCU and Customs and Excise attend and participate in the quarterly meetings of the Joint Anti-Money Laundering Advisory Group (JAMLAG) where the issues of ML/FT investigations are addressed with representatives of the financial associations. | ||||||
| Analysis of Effectiveness | ||||||
| Arrangements for receiving, analyzing, and disseminating financial information are generally adequate. The absence of a requirement for STRs to be submitted to the FCU is a potential weakness as is the inability of the FCU to access all government databases on a real-time basis. | ||||||
| Recommendations and Comments | ||||||
| Consideration should be given to amending the relevant laws to require that the report be made directly to the FCU, and that it be made in writing on a form to be issued by the FCU. Consideration should also be given to amending relevant laws to permit the FCU to require the submission of additional information by reporting parties, and to provide expeditious or real-time access to public and nonpublic databases without the need for a court order. Consideration should be given to amending the relevant laws to provide explicit legal authority for the FSC to issue guidance notes. With respect to the IPA, consideration should be given to enactment of the Insurance (Amendment) Bill to explicitly provide for authority to issue binding guidance notes with explicit sanctions for noncompliance. The operational structure of the Isle of Man FCU needs to be evaluated in order to prioritize and focus on the subject of ML/FT. The staffing levels should be increased to the authorized strength and in addition the financial investigation team of Customs and Excise could be amalgamated with the FCU in order to improve the effectiveness and streamlining of enquiries into ML/FT. The number of support staff working in the FCU should be increased in order that Law Enforcement personnel therein can dedicate themselves to the investigative process of ML/FT. | ||||||
| Implications for compliance with FATF Recommendations 14, 28, 32 | ||||||
| Compliant | ||||||
| IV—Law enforcement and prosecution authorities, powers and duties (compliance with criteria 25-33) | ||||||
| Description | ||||||
| 25. The Isle of Man FCU and Customs and Excise have responsibility for ensuring that ML and FT offences are properly investigated. There are a number of ongoing ML and FT investigations in the Isle of Man and the authorities are taking all necessary steps to ensure that these investigations reach a successful conclusion. There is close liaison between the attorney general’s chambers, the FCU and customs and excise in relation to ongoing investigations and chambers are available to give advice when required. 26. There is no explicit legal basis for controlled delivery or undercover operations but they are not restricted by current law. Interception of communications is controlled by the Interception of Communications Act 1988. According to the authorities, there is included in the official Isle of Man legislative program ending in July 2003 a proposal for a bill to regulate the exercise of certain undercover techniques such as covert surveillance. It is anticipated that the provisions are likely to be passed to coincide with the coming into operation of the Human Rights Act 2001 in mid-2003 which contains certain protections relevant to the exercise of Police Powers. 26.1 At present there is no legislation enacted in the Isle of Man permitting the use of such techniques, however the FCU and Customs and Excise Investigation Team, use the techniques of controlled delivery/undercover operations on a case by case basis in their pursuit of the investigation of ML and FT offences. The interception of telephone communications are authorized by the Chief Minister of the Isle of Man with the advice of the attorney general pursuant to the Interception of Communications Act 1998 as amended in 2001. 27. Law enforcement authorities are able to compel production of bank account records, financial transaction records, and other records maintained by FIs by lawful process, including the production or seizure of information, documents or evidence, searches of financial institutions and other entities, taking of witnesses’ statements. (Sections 52, 53, 54 and 54A of the Drug Act; Sections 6, 7 and 24 of the CJA; Section 20 of the CJA2; Section 15 and Schedule 7 to the POTA; and Sections 24 and 25 and Schedules 5 and 6 of the Anti-Terrorism Act). 28. The Geographic nature of the Isle of Man creates a close working environment for Law Enforcement authorities (FCU, Customs and Excise, FSC and attorney general) tasked with combating ML/FT. On a case by case basis representatives of these agencies are assembled, information is shared and a coordinated approach is agreed amongst the agencies in order to investigate fully and expertly ML and FT, thus creating a “task force” approach to the issue of ML/FT. 29. The FCU structure, funding and staffing has been answered in Criterion 24. The FCU and the other investigation teams are provided with a reasonable standard of IT facilities which are in the process of being upgraded. The law enforcement and prosecution services of the Isle of Man take all reasonable steps to provide whatever resources are necessary to carry out their functions regarding the investigation and prosecution of ML and FT. 30. The FCU is the recognized authority with responsibility for keeping statistics on ML and FT. It keeps records and statistics of all investigations, prosecutions and convictions on its ML/FT cases and its statistics database enables it to identify investigations originated from STRs or from other sources. Its database contains the statistics on any criminal, civil or administrative sanctions. Such information is obtained through fora that promote frequent contact with regulators, law enforcement and other government officials. The Isle of Man Financial Institutions have frozen monies linked to suspected terrorist funding (sanctions). 31. The FCU actively disseminates the above information to all persons/agencies concerned through the medium of seminars, conferences, FSC publications and by participating in the Joint Anti-Money Laundering Advisory Group and the crown dependencies meetings. 32. As outlined previously in Criterion 12, the Isle of Man Law Enforcement, Prosecutorial and Judicial authorities have taken all reasonable actions to ensure that the personnel tasked with the responsibilities as outlined above receive adequate training i.e.: participation in training courses, seminars and conferences. 32.1 The Isle of Man has provided special training/certification for the FCU and Customs and Excise investigators, enabling them to achieve the recommended standard of excellence required to conduct their investigations of ML, FT and the predicate offences. 33. The Isle of Man Law Enforcement agencies are making reasonable efforts to meet their demands in order to successfully investigate, prosecute, convict, freeze, seize and confiscate the proceeds of crime or property to be used to finance terrorism. The FCU and Customs and Excise have a number of personnel working closely with the American and U.K. authorities on this matter. Any legal issues encountered are addressed by the attorney general’s office and the chief constable. Due to the complexities involved in the investigation of ML/FT the prosecutorial authorities of the Isle of Man, when necessary, do engage the services of recognized experts in order to successfully investigate ML/FT. | ||||||
| Analysis of Effectiveness | ||||||
| The framework for powers and duties of law enforcement and prosecution authorities is generally adequate. The framework would however be enhanced if there were an explicit legal basis for the use of controlled delivery and other undercover operations. | ||||||
| Recommendations and Comments | ||||||
| Consideration should be given to passage of the existing bill to regulate undercover techniques in order to provide an explicit legal basis for controlled delivery and other undercover operations. | ||||||
| Implications for compliance with the FATF Recommendation 37 | ||||||
| Compliant | ||||||
| V—International Cooperation (compliance with criteria 34—12) | ||||||
| Description | ||||||
| 34. There are laws and procedures for mutual legal assistance in relation to money laundering, drug trafficking, the prevention of terrorism and other crimes regarding the use of compulsory measures including the production of records by financial institutions and other persons, the search of persons and premises, seizure and obtaining of evidence for use in investigations and criminal proceedings and in related actions in foreign jurisdictions (Sections 17J, 24 and 25 of the CJA; Sections 21 and 22 of the CJA2; Section 15 of the POTA; Sections 52 and 53 of the Drug Act and Sections 11-25 of the Police Powers and Procedures Act 1998). There are appropriate laws and procedures to provide mutual legal assistance in the production or seizure of information, documents or evidence, searches of financial institutions and other entities, taking of witnesses’ statements and identification and freezing of assets, seizing of cash at borders and enforcement of external forfeiture/confiscation orders (See legislation referred to in the first paragraph above and see Sections 25-26, 3537 and 39-40 of the Drug Act and the Orders made thereunder; Sections 6-7, 23A-F and 18-20 of the CJA and the Orders made thereunder; Section 32 of the CJA2 (and the Orders made thereunder), and Schedule 4 to the POTA as well as the UN Order.) Assistance is provided in both investigations and proceedings where persons have committed both laundering and the predicate offence as well as in investigations and proceedings where persons have committed laundering only (see citations above). 35. The Isle of Man requires that requests for assistance from foreign jurisdictions be processed through mutual legal assistance as its laws and procedures require. 35.1 In the Isle of Man there is no prerequisite of dual criminality to affect its ability to provide mutual legal assistance other than in relation to fiscal offences. In practice this does not prevent assistance being given as invariably the conduct in the requesting jurisdiction constitutes the same or a similar offence in the Isle of Man. All requests for Mutual Assistance are evaluated in the attorney general’s chambers, which transmits them to the relevant investigative authorities for execution. 35.2 The Isle of Man has successful structures in place to facilitate timely and effective follow up to requests for mutual legal assistance. 35.3 Detailed statistics are kept on all requests, made or received, for mutual legal assistance relative to ML/FT and the predicate offences. The records include details of the date, source, nature and outcome of the request. 36. While there are a small number of bilateral agreements which extend to the Isle of Man concerning the investigation of crime and the restraint and confiscation of the proceeds and instrumentalities of crime or drug trafficking, the agreements do not affect the giving of assistance or the level of assistance given. The Isle of Man has mutual legal assistance treaties with the Bahamas, Saudi Arabia, Spain, Sweden, Ukraine, and the United States. With respect to informal mechanisms, the Isle of Man is a member of the European Judicial Network and the legal officer (Financial Crime) is a contact point for the Network, regularly attending the Network meetings. The attorney general’s chambers are also a member of the International Association of Prosecutors, set up largely to facilitate international cooperation amongst prosecutors. The legal officer (Financial Crime), officers from the FCU Unit, and officers from Customs and Excise attend a variety of national and international conferences and meetings to advise how assistance may be obtained from the Isle of Man. 37. Section 17I of the CJA allows for the provision of information to overseas authorities for the prevention or detection of crime or for the institution or other use in criminal proceedings. The FCU has also negotiated memoranda of understanding to facilitate the exchange of information where necessary. Information is exchanged either directly or through Interpol where the information refers to the subjects of investigations in other jurisdictions. In addition, the Customs Amendment Act provides for the disclosure of information or documents held for the purposes of, or in relation to, any Customs and Excise assigned matter to any agency for the purposes of any criminal investigation or proceedings, or for the purposes of initiating or bringing to an end such matters (section 174B(2)). Also, due to the Island’s special relationship with the EU and Customs membership of the Customs Union, many of the EC Regulations governing exchange of information on customs, excise and VAT fraud are applicable in the Isle of Man along with other Conventions such as the Nairobi Convention, the 1998 Vienna Convention, the Naples II Convention and the CIS Convention. The Drug Act contains restrictions on disclosure of information (section 50). This is limited to restrictions on publishing or broadcasting details in relation to STRs and restrictions on compelling witnesses in civil or criminal proceedings to give evidence in relation to the existence of an STR or the identity of the disclosing person. The POTA does not contain any restrictions on disclosure. 38. There is no explicit legal basis for controlled delivery or undercover operations, but current Isle of Man law does not restrict them. Interception of communications is controlled by the Interception of Communications Act 1988. There is included in the official Isle of Man legislative program ending in July 2003 a proposal for a bill to regulate the exercise of certain undercover techniques such as covert surveillance. It is anticipated that the provisions are likely to be passed to coincide with the coming into operation of the Human Rights Act 2001 in mid-2003. Isle of Man Customs has the option to carry out investigations where controlled deliveries of money, monetary instruments, restricted or prohibitive goods would take place. Such operations have to be authorized by treasury line management at the appropriate level, and voluntarily the UK’s Regulation of Investigatory Powers Act authorization is also completed, if the modus operandi requires it, to ensure that any operation is Human Rights compliant in terms of being proportional, legal, authorized and necessary. There is no requirement or provision for judicial authorization. In unusual cases it is standard practice to seek legal advice from H.M. attorney general’s chambers. 39. The Isle of Man has no objections to the issue of asset sharing and each case is dealt with on an individual basis. The Isle of Man regularly participates in the investigation of cases where an international dimension or aspect is identified and by agreement and co-ordination simulated actions can be taken to ensure the seizure and forfeiture of ML/FT assets. Some problems related to asset sharing are discussed under criterion 16. 40. There are procedures to extradite individuals charged with money laundering, drug trafficking and terrorism offences (Sections 7-15 of the Extradition Act 1989 (Act of Parliament) 41. The Isle of Man ensures that the Island is not a safe haven for individuals charged with FT. Extradition procedures are in place with other jurisdictions so that persons sought on charges relating to ML/FT can be extradited. The FCU and Police Special Branch and Officers of the Customs and Excise regularly liaise with the U.K. and U.S. authorities on the identity and movement of suspected terrorists. The geographic location of the Isle of Man would not be conducive to a “safe-haven” for terrorists. 42. The Isle of Man authorities generally provide adequate funding to ensure that the FCU is staffed properly supported by technical resources. The investigation of ML/FT is overseen by a Detective Inspector who is subject to advice from the attorney general. There is a current resource issue that could be resolved by the allocation of additional personnel as identified in Criterion No.6. Mutual Assistance Requests from International Law Enforcement Agencies to the FCU/Customs and Excise account for approximately 60% of their workload. These requests are processed, the evidence uplifted and responses given in a prompt manner. | ||||||
| Analysis of Effectiveness | ||||||
| The framework for international cooperation is considered to be adequate. | ||||||
| Recommendations and Comments | ||||||
| Implications for compliance with FATF Recommendations 3, 32, 33, 34, 37, 38, 40, SR I, SR V | ||||||
| Largely Compliant | ||||||
Assessing preventive measures for financial institutions
22. In order to assess compliance with the following criteria assessors must verify that: (a) the legal and institutional framework is 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
Table 5.
Detailed Assessment of the Legal and Institutional Framework for Financial Institutions and its Effective Implementation
| I—General Framework (compliance with criteria 43 and 44) |
|---|
| Description |
| 43. Disclosure of information related to a suspicious transaction does not constitute a breach of any restriction imposed by statute or common law (Sections 17A(3)(a), 17B(5)(a) and 21 of the CJA, Sections 46(3)(a), 47(5)(a) and 48(4) of the Drug Act and Sections 10(1) and 16A(4) of POTA). 44. Although neither the laws nor any Isle of Man governmental authority designates a supervisor/regulator to ensure effective implementation of AML/CFT policies consistent with the FATF 40+8 Recommendations by all financial institutions, in practice, the function is allocated administratively, the FSC taking responsibility for the FIs regulated by it, the IPA taking responsibility for the FIs regulated by it. However, the FSC does not currently have the authority to regulate (except to the extent that a regulated FI engages in such activities) or to monitor compliance of businesses that engage in activities such as bureaux de change, check cashing and money transmission services (“MSBs”). Such regulation and monitoring is done by Customs and Excise under the Anti-Money Laundering (Money Services Businesses) Regulations 2002. |
| Analysis of Effectiveness |
| Although the framework is generally effective, the FSC does not have the statutory authority to regulate or monitor compliance for MSBs, which is the responsibility of Customs and Excise. This is considered to be a potential weakness. |
| Recommendations and Comments |
| Consideration should be given to rationalizing the existing regulatory arrangements for MSBs by enacting legislation under which the statutory responsibilities of Customs and Excise with respect to MSBs would be transferred to the FSC. |
| Implications for compliance with FATF Recommendation 2 |
| Compliant |
| II—Customer identification (compliance with criteria 45-48 for the (i) banking sector; (ii) insurance sector; (iii) securities sector; and (iv) other financial institutions sector, plus sector specific criteria 68-83 for the banking sector, criteria 101-104 for the insurance sector and criterion 111 for the securities sector) |
| Description |
| 45. The Code requires FIs to establish and maintain procedures for customer identification (Article 3). However, the Code contains no explicit requirement that such procedures be followed by FIs, although such a requirement is clearly implied from the language of the Code. Section 3.1 of the CTP requires that verification of identity be undertaken on each applicant for a policy. There is no provision for an exception to this requirement. Section 3.02 of the Notes states that license holders must satisfy themselves as to the identity of their customers. It goes on to list the identity information required. 46. FIs are required to put in place procedures to seek satisfactory evidence of identity of a prospective customer, either occasional or usual, when establishing business relations or conducting one-off transactions (Sections 4(1) and 5(1) of the Code). However, the Code does not specify what may or may not represent satisfactory evidence of identity. Notwithstanding the absence of explicit requirements in the Code, the Notes do provide that in order to establish an individual’s identity the information should include, his/her name and all other names used and reason for any aliases, the address at which he/she can be located and the date of birth, nationality, purpose of account, or in the case of a CSP, the reason for establishing the client company or trust, valid passport, driving license, government issued National Identity Card (Section 3.02(a) and (b) of the Notes). There is no requirement to renew identification when doubts appear as to the identity of a customer in the course of the business relationship. There is a requirement to record the identity of all customers (Section 7 of the Code). However, there are exemptions from the identification procedure under Sections 4 and 5 of the Code. No steps are required to be taken to obtain evidence of any person’s identity: where there are reasonable grounds for believing that the potential FI is a regulated person, or covered by the EU Money Laundering Directive, or an authorized credit or financial institution in a country which is a member of FATF and which has anti-money laundering requirements approved by FATF, or a registered legal practitioner or an accountant, where the relevant person is satisfied that the rules of the applicant’s professional body embody requirements of the Code (Sections 4(2), 4(3), 5(2) and 5(3) of the Code). Under Paragraph 4 of the CSP Code, a CSP must (a) “identify its client” and (b) “identify the beneficial owner of each of its companies (if not the same person as the client).” This is not limited to the point at which new business is accepted, but rather is an ongoing obligation. Paragraph 12.5 of the Banking Code 1999 requires that banks know their customers and that they comply with the anti-money laundering legislation in force. Paragraph 6.1 of the Conduct of Business Code requires that investment business license holders know their customers and that they comply with the anti-money laundering legislation in force. The Notes require FIs, in the case of corporate customers, to take particular care to verify among others, the evidence of identity of all beneficial owners and persons, the legal existence of a company, details of the nature of the applicant’s business including sources of funds, satisfactory evidence of the identity of each of the beneficial owners, account signatories and those who are able to issue instructions relating to the operations of the applicant, and, in the case of a CSP, evidence of identity of at least two directors and a Board Resolution authorizing the opening of the account or establishment of the client company (Sections 3.03(a) and (b) of the Notes). There is no explicit prohibition of numbered accounts, nor is there any exemption from customer identification requirements for numbered accounts. b) Implementation Section 4.1.2 of the CTP requires that insurers receive the following documents as proof of identity for individual applicants—Passport or a National Identity Card (carrying a photograph of the individual) This should be accompanied by documents to confirm their address. Where it is not possible to obtain either a passport or national ID card an insurance business can accept two other formal documents carrying appropriate personal details which show verifiable reference numbers. Section 8.3 of the CTP details that if, for any reason, at any stage of the life of a policy, the Insurance Business becomes aware of any doubts as to the identity of a Client (or any other party to a policy) this must be reported to the Money Laundering Reporting Officer using the normal reporting procedure for suspicious transactions. The Money Laundering Reporting Officer may take whatever steps they consider appropriate to satisfy the Insurance Business as to the identity of the Client (or other party) and if they consider there is a suspicion they should report as detailed in Section 8.2 which may include reporting to the FCU. Section 5.1 of the CTP which addresses the issue of retrospective reviews indicates that relationships which are not yet being reviewed on a risk basis should be reviewed for any deficiency in verification documentation following the occurrence of a “trigger” event. Examples of trigger events are given as: a subsequent business transaction on the policy; or a surrender or redemption request. Section 3.02 (a) of the Notes indicates information and documentation should be obtained and retained to support, or give evidence to, the details provided by the applicant for business. Acceptable identification documents include: (i) current valid “full” passport; (ii) Armed Forces ID card; (iii) known employer ID card bearing the photograph and signature of the applicant; or (iv) provisional or full driving license bearing the photograph and signature of the applicant, or (v) government-issued National Identity Card bearing the photograph and signature of the applicant. Identification documents which do not bear photographs or signatures, or are easy to obtain, are not appropriate as sole evidence of identity, e.g. birth certificate, credit cards, NHS cards, non-Isle of Man provisional driving license, student union cards. Section 3.06 of the Notes describes exempt one-off transactions as follows: Less than Euros 3,000 (or the equivalent thereof) in the case of a transaction or series of linked transactions entered into in the course of bookmaking or casino businesses; Less than Euros 15,000 (or the equivalent thereof) in any other case. Verification of identity is required for all other one-off transactions. Section 3.03 of the Notes suggests that license holders should conduct periodic checks to ensure that corporate information they hold is correct and up to date. There are no provisions re reverification in respect of personal customers. This issue is however addressed in the Overriding Principles Paper. The Isle of Man has a regime for introduced business. Introducers are broadly categorized as eligible or non-eligible. Eligible introducers are broadly speaking persons licensed under the Banking Act 1998, the Investment Business Act 1991, the Industrial and Building Societies Act 1892, the Corporate Service Providers Act 2000, the Insurance Act 1986, an authorized credit or financial institution in the European Economic Area which is covered by the Money Laundering Directive, an authorized credit or financial institution in a country which is a member of FATF and which has AML requirements which have been approved by FATF, an advocate, a registered legal practitioner within the meaning of the Legal Practitioners Registration Act or an accountant, where the license holder is satisfied that the rules of the introducer’s professional body embody requirements equivalent to the Anti-Money Laundering Code 1998. The Notes indicate that an eligible introducer is allowed to retain identity verification documents where it undertakes, among other things, to supply the license holder forthwith upon request evidence of the verification of identity of any customer, to give the license holder the right to undertake compliance checks and /or visits to the introducer’s premises when deemed appropriate and to supply the license holder all identity verification documents in the event that the introducer’s relationship with the original applicant is terminated. The CTP provides that under the Terms of Business between an insurance business and an introducer, the introducer shall undertake to provide to the insurance business original or suitably certified copy documents which verify the identity of all applicants. The Overriding Principles Paper envisages that under a revised framework for introduced business a license holder will always hold either originals or copies of identity verification documents. The existing framework for introduced business creates some weaknesses in relation to the verification of customer identity as license holders do not at all times necessarily have immediate access to verification documents. There is even greater concern where introducers are persons such as accountants and attorneys who are not subject to prudential regulation. 47. There is no legal requirement for FIs to verify the identity of a person on whose behalf an applicant may be acting. Section 3.03 of the Notes indicates that satisfactory evidence of the identity of each of the beneficial owners of an applicant and any persons or persons on whose instruction the signatories are to act or may act. Section 3.05 of the Notes indicates that in the case of all types of trust, if practical, license holders should obtain and verify the identity of any principal beneficiaries. The Notes also provide that where an applicant for a business is a “trustee or a person acting in a fiduciary capacity in relation to a third party … the Commission expects license holders to obtain satisfactory evidence of the nature of his trustee or fiduciary capacity or duties, satisfactory evidence of the identity of the settlor, protector and any controller or similar person who has the power to remove the trustees and evidence as to the source or origin of the assets under his control or which he holds as trustee. Section 3.05 of the Notes indicates that where the applicant for business is a trustee, or a person acting in a fiduciary capacity in relation to a third party and is a regulated financial institution in the Isle of Man, the EEA or from a FATF member country with AML requirements which have been approved by FATF, the Commission expects license holders to obtain: (i) satisfactory evidence of the nature of his trustee or fiduciary capacity or duties; (ii) satisfactory evidence of identity of the settlor (and the person providing the funds where not the settlor), protector, and any controller or similar person who has power to appoint or remove the trustee. The Notes go on to indicate that the license holder may wish to obtain copies of satisfactory evidence from the trustee or fiduciary showing the verification of identity of any and every party (including where relevant discretionary and contingent beneficiaries) for whom he is acting. Section 4.4 of the CTP indicates that where the applicant is a trustee that the insurance business must satisfy itself that the Trustees have been identified in accordance with the appropriate verification requirements for corporate applicants or individuals. Where there is more than one Trustee, appropriate identification must be obtained for each. Then “provided that the trustees have been identified to the satisfaction of the Insurance Business and satisfactory evidence of proper appointment of the Trustees has been received e.g. extracts of the Deed of Trust; the nature and purpose of the trust is known; the source or origin of the assets under the trust is known and the Insurance Business considers it satisfactory; the persons from whom the Insurance Business is to take instructions have been identified and specimen signatures have been obtained (although their identity need not be verified); the trustees may then provide details of the parties to the trust at the time the application is being made.” These parties will be: the settlor(s), whose details should include the full name(s), date(s) of birth and, if they are still living, the current addresses of any individuals. If the settlor is no longer living, the date of death should be included. If the settlor has been other than an individual, or individuals, the trustee should provide sufficient information for the Insurance Business to identify the settlor(s) should they wish to do so; any protector(s), whose details should include the full name(s), date(s) of birth and the current addresses of any individuals; all beneficiaries (as and when defined). Section 4.5 of the CTP indicates that where the applicant is a nominee the insurance business must satisfy itself that the Nominees have been identified in accordance with the appropriate verification requirements for corporate or individual clients and that satisfactory evidence of the appointment of the Nominees has been received; The persons from whom the Insurance Business is to take instructions have been identified and specimen signatures obtained (although their identity need not be verified); and provided that the Nominees have been identified to the satisfaction of the Insurance Business, the Nominees may then provide details of the parties to the arrangement. These will be the beneficial owner of the assets; and the ‘settlor’ or original source of the assets under the nominee arrangement. The Notes do not specifically address the issue of nominee shareholders as such persons are usually company or trust service providers who are regulated by the FSC. This approach does not however address instances in which where nominees are resident outside of the jurisdiction. 48. There is no legal requirement for FIs to include accurate and meaningful originator information and related messages on funds transfers that should remain with the transfer through the payment chain. Section 6.3 and 6.4 of the CTP indicates that where the Insurance Business does not receive complete originator information from the remitting bank the Insurance Business must review the information provided and consider whether additional information should be sought. A risk-based approach may be used in deciding whether to seek additional information. Further, where the monies are being remitted from several accounts the Insurance Business should understand the reasons for this and be satisfied in each case. Section 6.2 of the CTP requires that the Insurance Business must establish how payments are to be made, from where and by whom, and that where the monies are being remitted from accounts other than in the name of the Applicant the Insurance Business must be satisfied that the reasons for the account remitting the monies not being in the name of the Applicant are understood, and where considered necessary, the identity of the holder of the account from which remittance has been made should be verified. In the absence of being so satisfied, insurance businesses are required to terminate the application process. The CTP does not clearly indicate what criteria should be applied in the “risk based approach” to be used in determining when additional originator information is required. This issue is not specifically addressed by the Notes. Institutions visited generally had good customer identification requirements in place. They generally employed more onerous requirements for customers in categories considered to be higher risk. There was less consistency across institutions in relation to the issues addressed in the Overriding Principles Paper; principally in relation to to the holding of identity documents by introducers and the status of the Progressive Program. |
| Analysis of Effectiveness |
| Arrangements for customer identification are generally adequate. There are however some concerns about requirements related to satisfactory evidence of identity, the identity requirements for legal entities and reverification of existing customers. |
| Recommendations and Comments |
| The relevant laws should be amended to explicitly require that customer identification procedures be followed by reporting parties. Consideration should be given to the imposition of a requirement for the re-verification of existing customers. Consideration should be given to amending the relevant laws to limit the availability of the AML exemption to those entities regulated in EU States rather than to entities covered under the EU AML Directive. The Notes should be amended to require licensees to exercise care in initiating transactions with companies that have nominee shareholders. The FSC has already undertaken considerable work to direct FSBs towards the customer identification standards proposed by the Position Paper. It is nevertheless recommended that these efforts be redoubled to ensure a greater degree of consistency in the approach adopted by licensees. |
| Implications for compliance with FATF Recommendations 10, 11, SR VII |
| Full compliance will be achieved when the relevant laws are amended to explicitly require that customer identification procedures be followed and financial institutions have timely access to all customer identification records under the regime for introduced business. |
| III—Ongoing monitoring of accounts and transactions (compliance with Criteria 49-51 for the (i) banking sector; (ii) insurance sector; (iii) securities sector; and (iv) other financial institutions sector, plus sector specific criteria 84-87 for the banking sector, and criterion 104 for the insurance sector) |
| Description |
| 49. There is no legal requirement for FIs to scrutinize all complex or unusual transactions and complex or unusual patterns of transactions that have no apparent or visible economic or lawful purpose, to examine as far as possible the background and purpose of such transactions. However, paragraph 4(4) of the Code requires that FIs establish procedures to verify the evidence of identity of the applicant for business where a transaction is undertaken that is significantly different from the normal pattern of previous business. This, linked to the requirement to file STRs under paragraph 12 of the Code, makes it implicit that FIs must monitor business relationships for such transactions. Section 6.01 of the Notes indicates that where a transaction is inconsistent in amount, origin, destination, or type with a customer’s known, legitimate business or personal activities, the transaction must be considered unusual, and the license holder put “on enquiry.” Such enquiries may lead to a suspicion being formed and may result in the filing of an STR. Appendix G provides examples of suspicious transactions. Section 8.4 of the CTP requires that all complex or unusual transactions and complex or unusual patterns of transactions, that have no apparent or visible economic or lawful purpose, must be scrutinized by the Insurance Business and the background and purpose of such transactions ascertained so that the Insurance Business is satisfied as to why the transaction is being structured in this way. In the absence of being so satisfied the Insurance Business must not proceed with the transaction and report the suspicion in the normal way. Full details of any information obtained, and decisions made, should be recorded on the file. Under section 8.3 0f CTP which deals with suspicious transaction reporting suspicions should be aroused where there are unexplained changes in a client’s investment pattern or sudden changes in intermediary transaction patterns. While the CTP requires findings to be recorded, the Notes contain no such requirement. However, both require the reporting of suspicious transactions. 50. There is no legal requirement to scrutinize transactions with persons in jurisdictions that do not have adequate systems in place to prevent or deter ML or FT. There is no legal requirement for FIs to provide effective measures to ensure that financial institutions are advised of concerns about weaknesses in the AML or CFT systems of other countries. The Notes only address this issue in relation to correspondent banking. Section 3.13 of the Notes provides as follows with respect to correspondent banking: In particular, banks should refuse to enter into or continue a correspondent banking relationship with a bank incorporated in a jurisdiction in which it has no physical presence and which is unaffiliated with a regulated financial group (i.e., shell banks). Banks should pay particular attention when continuing relationships with respondent banks located in jurisdictions that have poor KYC standards or have been identified as being “noncooperative” in the fight against money laundering. Banks should establish that their respondent banks have due diligence standards of at least an equal standard to their own, and employ enhanced due diligence procedures with respect to transactions carried out through the correspondent accounts. Appendix D of the Notes lists NCCT countries as well as other countries that have been subject to advisories and indicates that FIs must treat business from these countries as requiring further scrutiny. Section 3.17 of the CTP requires that the Insurance Business must have procedures in place to examine those Applicants who have connections with any country appearing on the list of FATF Non Cooperative Countries. The Insurance Business should consider whether any additional verification of identity or source of funds is necessary in these cases. Appendix D of the Notes list countries that appear on the FATF NCCT list and countries subject to money laundering related advisories. 51. There is no legal requirement for FIs to include accurate and meaningful originator information and related messages on funds transfers that should remain with the transfer through the payment chain. Section 6.3 of the CTP indicates that where the Insurance Business does not receive complete originator information from the remitting bank the Insurance Business must review the information provided and consider whether additional information should be sought. A risk based approach may be used in deciding whether to seek additional information. The Notes do not specifically address this issue. Discussion with institutions as well as a review of documented procedures indicated that staff of financial institutions would be generally alert to unusual patterns of client activity. Most of the documented procedures adopted by the institutions visited, list NCCT jurisdictions and other countries over which there is some level of concern about AML/CFT standards. In general a higher level of due diligence in required when dealing with business associated with these countries. |
| Analysis of Effectiveness |
| Arrangements for the ongoing monitoring of accounts and transactions are generally adequate. The overall framework would be strengthened if the Notes broadened the focus of its guidance in respect of business relationships and transactions with persons from countries with inadequate AML/CFT systems. There are also concerns with respect to enhanced scrutiny to wire transfers and reporting of unusual or complex transactions. |
| Recommendations and Comments |
| Within the two-year period referred to by FATF, the relevant laws should be amended to require that accurate and meaningful originator information on funds transfers remain with the transfer through the payment chain, and that FIs give enhanced scrutiny to wire transfers that do not contain complete originator information. The Notes should be expanded to require financial institutions to give special attention to business relationships and transactions with persons from countries that do not have adequate systems to prevent money laundering, in circumstances other than those related to correspondent banking. |
| Implications for compliance with FATF Recommendations 14, 21, 28, SR VII |
| Compliant |
| IV—Record keeping (compliance with Criteria 52-54 for the (i) banking sector; (ii) insurance sector; (iii) securities sector; and (iv) other financial institutions sector, plus sector specific criterion 88 for the banking sector, criteria 106 and 107 for the insurance sector, and criterion 112 for the securities sector) |
| Description |
| 52. FIs are required to maintain records of a person’s identity (Para. 7 of the Code) which indicate the nature of the evidence and comprises a copy of the evidence, for a period of five years commencing from the date when all activities relating to a one-off transaction or a series of linked transactions were completed, or the business relationship was formally ended, or if the business relationship was not formally ended, when the last transaction was carried out (Paras. 7, 8 and 9 of the Code) and these documents are available to a competent authority to inspect. With respect to FT, Section 15(2) of the POTA requires full auditable records in relation to any suspicion reported to be retained in perpetuity. CTP Section 9.1 indicates that the records prepared and maintained by an Insurance Business on its Client relationships and transactions should be such that: competent third parties will be able to assess the Insurance Business’ observance of money laundering policies and procedures; any transactions effected via the Insurance Business can be reconstructed; and the Insurance Business can satisfy, within a reasonable time, any enquiries or court orders from the appropriate authorities as to disclosure of information. Further, under the CTP all documentary items relevant to Client identity and transaction history must be maintained and be capable of being retrieved efficiently. The Required Period for the purposes of the CTP is at least six years from the date when all activities relating to a one-off transaction or a series of linked transactions were completed; or the business relationship was formally ended; or if the business relationship was not formally ended, when the last transaction was carried out. Where a report has been made to the FCU, or the Insurance Business knows or believes that a matter is under investigation, the Insurance Business shall retain all relevant records for as long as required by the FCU. Section 7.01 of the Notes refers to the provisions of the Code requiring records to be maintained in respect of identification and verification and transactions. The notes indicate that records in respect of identification, verification and transactions should be retained for the period of the business relationship with the client plus five years. 53. FIs are required to maintain a record containing details relating to all transactions carried out by their customers and to keep the record for a period of five years commencing from the date when all activities relating to a one-off transaction or a series of linked transactions were completed, or the business relationship was formally ended, or if the business relationship was not formally ended, when the last transaction was carried out (Sections 8 and 9(1) of the Code; see also Section 7.01 and 7.02 of the Notes) and these documents are available to a competent authority to inspect the documents. With respect to banking and investment business, transaction records are required to be kept for five years (section 4(5) of the Banking Code and section 8(6) of the Conduct of Business Code). With respect to FT, Section 15(2) of the POTA requires full auditable records in relation to any suspicion reported to be retained in perpetuity. Records are required to be sufficient to identify the source and recipient of payments from which investigating authorities are able to compile an audit trail for suspected money laundering (Section 8 of the Code). Section 7.01 of the Notes recommends that records of the following information be maintained :
Sections 9.1 and 9.4 of the CTP cover transactions records. 54. There are laws and procedures regarding the production of records by financial institutions and other persons, the search of persons and premises, seizure and obtaining of evidence for use in investigations and criminal proceedings (Sections; Secs. 11 - 25 of the PPP Act; Sections 17J, 24 and 25 of the CJA; Section 15 of the POTA; Sections 52 and 53 of the Drug Act; Section 24 of the CJA2 enables information to be obtained for external authorities). With respect to insurance business, under section 22 of the IA, the IPA has the power to investigate the transactions and inspect the books, accounts and other documents of any authorized insurer. Section 13 of the Banking Act provides that the FSC may inspect the books accounts and documents and investigate transactions of a banking institution a former banking institution or any other person who, acts or has acted as the manager of any banking business. The section also gives the Commission the power of entry and access to books, accounts and documents. Section 8 of the IBA provides that the FSC may inspect the books, accounts and documents and investigate the transactions of a permitted person. The section also gives the FSC the power of entry and access to books, accounts and documents. Section 10 of the CSP Act provides that the FSC may inspect the books, accounts and documents and investigate transactions of a CSP or a former CSP. The section also gives the FSC the power of entry and access to books, accounts and documents. Visits to financial institutions indicated that procedures are maintained requiring that records be maintained for a period of six years after the termination of a business relationship. |
| Analysis of Effectiveness |
| The overall framework in respect of record keeping is generally adequate. |
| Recommendations and Comments |
| Implications for compliance with FATF Recommendation 12 |
| Compliant |
| V—Suspicious transactions reporting (compliance with Criteria 55-57 for the (i) banking sector; (ii) insurance sector; (iii) securities sector; and (iv) other financial institutions sector, plus sector specific criteria 101-104 for the insurance sector) |
| Description |
| 55. Where an FI has reason to suspect that assets are derived from criminal activity, it is an offence not to disclose the information to a constable (Section 17J of the CJA; Sec. 48 of DTA; Sec. 16A of POTA). With respect to FT, the Terrorism (United Nations Measures)(Isle of Man) Order 2001 permits financial sanctions to be imposed against named individuals and entities notified by the relevant authority (treasury in the IoM, Bank of England in the United Kingdom), rather than having to have them named in the Order. For example FIs must freeze any assets they identify as connected to either the individuals or organizations named post-9/11 by the FBI and make a disclosure to Customs and Excise which in practice goes via or is copied to the FCU. Section 16A of the POTA requires that suspicions of FT be reported to a constable and makes it an offence to fail to disclose information. In addition, Section 14 of the Anti-terrorism and Crime Bill requires the reporting of suspicions of terrorism. Section 48 of the Drug Act deals with the disclosure of information relating to drug trafficking proceeds. FIs are required to put procedures in place to identify an “appropriate person” to whom a suspicious report can be made (Section 12(1)(c) of the Code). The FSC has issued guidelines for the identification of unusual transactions, but there is no explicit legal basis for doing so. It should be noted, however, that the Code makes reference to the court taking into account compliance with the Notes and the CTP (Section 3(3)(a) of the Code). The IPA has issued such guidelines in the form of the CTP although the authority of the IPA is pursuant to a provision not designed for that purpose—section 24A of the IA was cited by the authorities as the basis of the issuance of the CTP provides that the IPA may publish information or give advice to insurance licensees. Section 8.2 of the CTP requires that a senior officer of the Insurance Business, resident on the Isle of Man, must be appointed by the Board of the Insurance Business as Money Laundering Reporting Officer and that the name of the Money Laundering Reporting Officer must be notified to the Insurance and Pensions Authority within 28 days of appointment. Section 8.5 of the CTP addresses the issue of suspicious transaction reporting. It provides examples of suspicious activity, and details on the reporting procedure. It also provides guidelines for reporting to the FCU. Section 5. of the Notes requires the appointment of an MLRO. Section 6 addresses the issue of identifying and reporting suspicious transactions. Appendix G provides a list of suspicious transactions. 56. Disclosure of information related to a suspicious transaction does not constitute a breach of any restriction imposed by statute or common law (Section 17A(3)(a) of the CJA). Similar provisions are in place in section 48(6) of the Drug Act and section 16A(6) of POTA. 57. FIs including their staff are prohibited from tipping off their customers when information relating to them is reported to authorized government officials (Section 17D(1) of the CJA). Similar provisions are in place in section 49 of the Drug Act and section 15(2) of POTA. There is no explicit requirement in law that provides legal authority for the FIS or any other competent authority to give instructions to FIs or to require FIs to observe those instructions. Tipping off is addressed in 6.01 and Appendix N of the Notes and Section 8.7 of the CTP. All institutions visited have internal procedures for reporting of suspicious transactions usually to the person designated as MLRO. In one instance no reference was made to the MLRO and reports were required to be sent initially to the supervisor, manager or director. The institutions also had guidelines addressing the issue of the tipping-off offence. |
| Analysis of Effectiveness |
| The framework in respect of the reporting of suspicious transactions is generally adequate. |
| Recommendations and Comments |
| Consideration should be given to providing the FCU with the authority to give instructions to reporting entities and to require FIs to observe instructions of the FCU. |
| Implications for compliance with FATF Recommendations 15, 16, 17, 28 |
| Compliant |
| VI—Internal controls, Compliance and Audit (compliance with Criteria 58-61 for the (i) banking sector; (ii) insurance sector; (iii) securities sector; and (iv) other financial institutions sector, plus sector specific criteria 89-92 for the banking sector, criteria 109 and 110 for the insurance sector, and criterion 113 for the securities sector) |
| Description |
| 58. Regulated FIs are required to establish procedures of internal control and communication as may be appropriate for the purposes of forestalling and preventing money laundering (Section 3(1)(a)(iv) of the Code; the Code applies to terrorist financing as well, see definition of “money laundering requirements” in Paragraph 2(1) of the Code). Financial institutions are required to take appropriate measures for purposes of making employees aware of the FI’s anti-money laundering procedures and enactments relating to money laundering (Section 13 of the Code). In addition, FIs are required to provide employees with training in the recognition and handling of transactions carried out by or on behalf of any person who is or appears to be engaged in money laundering (Sections 3(1)(b), 3(1)(c) and 14 of the Code). The Notes cover internal procedures and policies and training. The CTP cover internal procedures and policies and training. The issue of an audit function for AML/CFT systems is not specifically addressed. The IPA however requires the auditors of licensees to provide annual certification of compliance with regulations made under Insurance Act. This includes compliance with CTP. Under the IA and the Insurance regulations it is a requirement that all insurance companies appoint external auditors. Section 10.1 of the CTP indicates that the Insurance Business shall provide, or shall arrange to be provided, education and training for all staff to ensure that they are, as a minimum, aware of:
Additionally, the Insurance Business shall provide training to assist all staff:
Section 10.2 of the CTP details the additional training required for senior, specific and key staff on the basis of the job performed. Section 10.4 requires all new employees to undergo training as soon as reasonably practicable. 59. While FIs are required to put procedures in place to identify an “appropriate person” to whom an STR may be made (Section 12(1)(c) of the Code), except for banks, there is no explicit requirement in law to appoint or designate such person, although such a requirement is clearly implied from the language of the Code. With respect to banks only, Section 11.12 of the Banking (General Practice) Regulatory Code 1999 requires the appointment of a senior executive as the MLRO, and the notification of the appointment of such officer and any change to the FSC within 14 days. With respect to banks, fund and investment management businesses and CSPs, section 5.01 of the Notes states that the Code requires the designation of an MLRO such person (although not technically correct, see above). The Notes then state that the Commission would generally expect the MLRO to be a senior member of the staff. Section 8.2 of the CTP indicates that a senior officer of the Insurance Business, resident on the Isle of Man, must be appointed by the Board of the Insurance Business as Money Laundering Reporting Officer to oversee relevant policies and procedures; receive reports of suspicions from employees; determine whether the information gives rise to a suspicion; investigate that suspicion; decide whether to report or not; record his action (which may involve further disclosure to the Financial Crime Unit) and act as the central co-ordination point. The name of the Money Laundering Reporting Officer must be notified to the Insurance and Pensions Authority within 28 days of appointment. Neither the Notes nor the CTP specifically require the appointment of a compliance officer. The CTP’s description of the functions to be undertaken by the MLRO includes oversight of relevant policies and procedures. 60. There is no requirement in law, Notes or CTP that FIs should be required to put in place adequate screening procedures to ensure high standards when hiring employees. There is an industry standard for the insurance sector which requires that references be taken for all employees. 61. The law and Notes are silent on the following: FIs should ensure that their foreign branches and subsidiaries observe appropriate AML/CFT measures consistent with the home jurisdiction requirements; FIs should inform their home jurisdiction supervisor/regulator when a foreign branch or subsidiary is unable to observe appropriate AML/CFT measures of the home jurisdiction; and where the minimum AML/CFT requirements of the home and host jurisdictions differ, branches and subsidiaries in host jurisdictions should be required to apply the higher standard. With respect to insurance business, section 1 of the CTP states that where such business has branches or subsidiaries in other jurisdictions, practices and procedures, consistent with the CTP, must be operated throughout all parts of the organization. The section also indicates that where the requirements of the local jurisdiction differ from those required by the CTP the higher of the requirements must be applied. Section 8.2 of the CTP allows that where Insurance Businesses have associated operations in other jurisdictions, a local officer may be appointed to deal with suspicion reports raised in those operations. In normal circumstances that local officer will be responsible for co-coordinating suspicion reports with the local authorities and for co-coordinating their activities with the senior officer responsible. At all times the Money Laundering Reporting Officer should be aware of any suspicion reports raised in these offices and should include details within the records and reports maintained in the Isle of Man under these Standards. This applies to both reports made by the Insurance Business and enquiries made by Financial Crime Unit. Where a local officer is not appointed, the Money Laundering Reporting Officer is responsible for ensuring that both local and Isle of Man obligations are met by the branch. All but one of the institutions visited have substantive training programs in place for staff. There appears to be active collaboration between the industry and the regulators on the issue of training. With one exception the institutions visited have appointed MLROs. In general AML/CFT compliance came under the main compliance function. The institutions visited generally assess a prospective employee’s suitability on the basis of a CV and references (usually two) provided by the applicant. Apart from this approach there was in general no specific mechanism for investigating any past criminal activity on the part of prospective employees. This is to some extent influenced by the relatively small size of the jurisdiction. |
| Analysis of Effectiveness |
| The framework for internal controls, compliance and audit is generally adequate but would be strengthened by a requirement in the Notes for institutions to test the compliance of AML/CFT systems against home and host country standards. There are also concerns about requirements for the designation of an MLRO and the application of AML/CFT standards to foreign braches and subsidiaries and the adequacy of screening of employees. |
| Recommendations and Comments |
| Consideration should be given to the imposition of a requirement that all Isle of Man FIs apply Isle of Man legal and regulatory requirements in respect of AML/CFT to their branches and subsidiaries outside of Isle of Man. Consideration should also be given to ensuring that institutions test compliance of AML/CFT systems against home and host country standards. Consideration should be given to the imposition of a requirement to appoint or designate an MLRO for FIs other than banks. However, the authorities have indicated that the Code will be amended to require such appointment. Consideration should also be given to amending the appropriate laws to require banks and insurance companies to report any change in such position to the FSC and IPA, as is already required for trust and investment company businesses. Consideration should be given to amending the relevant laws to require all FIs to put in place adequate screening procedures to ensure high standards when hiring employees. |
| Implications for compliance with the FATF Recommendations 19, 20 |
| Full compliance will be achieved when the AML/CFT framework ensures that all FIs apply Isle of Man standards to branches and subsidiaries in other jurisdictions. |
| VII—Integrity standards (compliance with Criteria 62 and 63 for the (i) banking sector; (ii) insurance sector; (iii) securities sector; and (iv) other financial institutions sector, plus sector specific criterion114 for the securities sector) |
| Description |
| 62. There are laws that require that FIs be licensed and that controllers and certain officials of regulated FIs be fit and proper on their entry into a licensee and on a continuing basis, but do not define what fit and proper means (Sections 4(1) and 16 of the Banking Act; Sections 3(3) and 10 of the IBA; Section 20 of the IA; Sections 3(3) and 9 of the CSP). In addition, with respect to banking, any person who wishes to hold more than 5% of the share capital of an FSC-regulated FI must receive the prior consent of the FSC (Para. 11.5 of the Banking Code). With respect to CSPs, see also the definition of “controller” in section 27(1) of CSP Act and requirement for Controllers to be fit and proper under section 3(3). The laws cited do not explicitly address the matter of criminals being prohibited from involvement in FIs. What is covered is the failure to meet the fit and proper criteria or some other reason as the basis for refusing to permit a person from controlling or continuing to control an FI or to serve as a director or officer. This issue is not addressed in either the CTP or the Notes. 63. Under the Charities Act, an institution which holds itself out as a charity is guilty of an offence unless it is registered (Section 1 of the Charities Act). Under the Charities Act, “Institution’ means any institution (wherever established) whether corporate or not and includes any trust or undertaking” (Section 15(1)). The chief registrar may refuse registration if satisfied that the institution is not established for charitable purposes or does not have a substantial and genuine connection with the Island. According to the authorities, in practice, the Registrar can and does take advice from the attorney general if in doubt. Any person who is a trustee, director, manager or other similar officer or agent of an institution which does not register while holding itself out as a charity is himself guilty of an offence. A company which wishes to establish itself for charitable purposes may apply under the Companies Act 1931 (Section 18) to the attorney general for a license so that it can carry on business without using the word “limited” in its name. The attorney general will not grant such a license unless satisfied that the company is formed for promoting commerce, art, science, religion, charity or some other useful object, that the company will apply its profits, if any, or other income in promoting its objects and prohibits the payment of dividends to its members (Section 18 of the Companies Act). With respect to shell corporations, incorporated charities or other incorporated entities, the Code requires that CSPs put procedures in place to identify customers (Paras. 4, 5 and 6 of the Code). In addition, under Paragraph 4 of the CSP (General Requirements) Code, a CSP must identify its client and identify the beneficial owner of each of its companies. In addition, with respect to licensees of the FSC and the IPA, there is a requirement that such businesses conduct client due diligence of all customers, including shell companies and incorporated and unincorporated charities and other businesses (Section 3 of Notes and Section 4 of CTP). 3.03 (a) (ii) of the Notes which relates to private companies indicates that the Commission expects all license holders to obtain details of the nature of the applicant’s business, the reason for the account or client company being established, an indication of the expected turnover of the account or the client company and its anticipated usage, the source of funds and source of wealth, and a copy of the last available accounts of the applicant where appropriate. Section 3.14 of the Notes requires license holders to undertake extra due diligence on nonprofit organizations and foundations. License holders are required to be especially vigilant for unusual transaction patterns or sizeable transactions and to ascertain geographical activity and business partners of such organizations. Section 4.11 of the CTP requires that where an application is received in the name of a charity the insurance business must satisfy itself that: (i) The charity exists and the investment is legitimately made on behalf of the charity; and (ii) The application is being made with the knowledge of the charity. The following information is received: (i) evidence of the registered office of the charity; (ii) a list of all directors and where the charity is not on an acceptable register of charities, verification of the identity of at least two directors; and (iii) a list of the officers from whom the insurance business is to take instructions. In the case of a foundation the insurance business must satisfy itself that The foundation Council has been identified in accordance with the appropriate verification requirements The following information has been received: (i) a certified extract from the public registry showing the protocolization of the public deed; (ii) satisfactory evidence of the appointment of the Foundation Council; (iii) The nature and the purpose of the foundation is known; (iv) The source of origin of the assets under the foundation is known; and (v) the persons from whom the insurance business is to take instructions is known. Section 4.2 and 4.3 of the CTP sets out identification requirements for corporate clients. |
| Analysis of Effectiveness |
| The legal framework is generally adequate except in respect of the need to expand the definition of “fit and proper” to include conviction for a serious crime. |
| Recommendations and Comments |
| Consideration should be given to amending the Code to explicitly prohibit involvement of criminals in FIs and to define minimum standards for ‘fit and proper,’ in a manner consistent with Isle of Man human rights and other relevant legislation. |
| Implications for compliance with FATF Recommendation 29 |
| Compliant |
| VIII—Enforcement powers and sanctions (compliance with Criteria 64 for the (i) banking sector; (ii) insurance sector; (iii) securities sector; and (iv) other financial institutions sector, plus sector specific criteria 93-96 for the banking sector and criteria 115-117 for the securities sector) |
| Description |
| 64. With respect to explicit statutory authority to impose administrative sanctions, the FSC and IPA have the following powers relating to banks, investment business, CSPs and insurance business: (i) issuance of a written directive or order (Sections 11 of Banking Act; 9 and 9A of IBA, 6 of FSA; 7 of CSP Act; 24A of IA); (ii) issuance of a public notice or statement (Section 17 of Banking Act; 12 of IBA, 22 of FSA, 14 of CSP Act; 5.7 of IA Bill); (iii) placing conditions on the license with respect to specified lines of business or activities (Sections 6 of Banking Act; 3 of IBA; 3 of FSA, 3 of CSP Act; 6 and Schedule 4(6)) of the IA; (iv) suspension or removal of directors, officers and controllers (Sections 16 of Banking Act; 10 of IBA; 18(1) of FSA; 9 of CSP Act; 7(3) of the IA Bill); (v) removal and disqualification of external auditor (6(2) of FSA (provides for the issuance of regulations by FSC to do so); (vi) appointment of a special auditor or reporting accountant at expense of licensee (Sections 21 of Banking Act; 8 of IBA; 19 of FSA (on application of FSC to High Court); 25 of CSP Act;); (vii) appointment for a defined period of a provisional or temporary administrator or conservator is only explicitly provided for CSPs (Section 16 of CSP Act (with petition by FSC to High Court), however, the High Court has authority by order to appoint a receiver in all cases in which it appears to be ‘just and convenient’ to do so (Section 42 of High Court Act 1991); (viii) with respect to investment business and CSPs only, imposition of civil money penalties (administrative fines) on licensees, i.e., legal persons and not individuals except with respect to sole traders (proprietors) and partnerships (Sections 6A of IBA and 8 of CSP Act; 5.9 of the Insurance Bill); (ix) revocation of license (Sections 7 of Banking Act, 3(6) of IBA, 4 and 14 of FSA; 4 of CSP Act; 9 of the IA); (x) the FSC may petition a court to wind up a company in the public interest (Sections 162(6) and 164(d)of the Companies Act 1931); and (xi) the FSC and through it the IPA may petition the High Court to disqualify a person from acting as a director or manager (Section 26 of Companies Act 1992). In addition, with respect to the regulatory laws governing FIs, any person who violates any provision of the Banking Act is liable on summary conviction to imprisonment for a term not exceeding six months or to a fine not exceeding 5000 pounds, or to both, or on conviction on information to imprisonment for a term not exceeding three years or to a fine or to both, or have a banking license revoked upon conviction (Section 29 of the Banking Act); Any insurer violating any provision of the IA is liable on summary conviction to imprisonment for a term not exceeding six months or to a fine not exceeding 5000 pounds, or to both, or on conviction on information to imprisonment for a term not exceeding two years or to a fine or to both (Section 31 of the IA); Any CSP violating any provision of the CSP Act is liable on summary conviction to imprisonment for a term not exceeding six months or to a fine not exceeding 5000 pounds, or to both, or on conviction on information to imprisonment for a term not exceeding two years or to a fine or to both (Section 21(1) of the CSP). However, where there is a contravention of an order of the Financial Supervision Commission relating to the appointment of an individual who is not a fit and proper person, a CSP is liable on summary conviction to a fine not exceeding 5000 pounds (Section 21(2) of the CSP). With respect to insurance business, under Section 1 of the CTP, companies are warned that in addition to possible sanctions under Sections 12 and 31 of the IA, failure to comply with the CTP will also result in the IPA examining the fitness and propriety of the company. With respect to investment business, Section 19 of the IB Act provides that any person who violates any provision of the Act is liable on summary conviction to imprisonment for a term not exceeding six months or to a fine not exceeding 5000 pounds, or to both, or on conviction on information to imprisonment for a term not exceeding three years or to a fine or to both. With respect to the power to remove or disqualify an auditor (see para. v above) for malfeasance or criminal conduct, this power is available only with respect to collective investment schemes under the FSA, and, since the FSC has not issued regulations, it is not an operative provision. This power is also not available under current law to the IPA. The relevant laws should be amended to provide for this power with respect to all businesses supervised by the FSC and IPA. With respect to the power to appoint a provisional or temporary administrator (see para. (vii) above), the relevant laws should be amended to provide this authority to the FSC and IPA, with court approval if necessary under the legal framework in the Isle of Man, with respect to banks, investment business and insurance business. With respect to civil money penalties (para. (viii) above), there are a number of concerns: First, under current law, none of the available powers under the IBA and CSP Act have been implemented through secondary legislation; second, that under such Acts there is no ability to impose penalties against individuals, such as directors, officers and controllers; third, that the Banking Act does not have any comparable provision; and finally, that the range of penalties has not been set forth in secondary legislation, but should be sufficiently large so as to discourage wrongdoers from continuing their actions. While the authorities have indicated that the Trust Service Providers Bill will allow the imposition of such penalties on banks, investment business and CSPs, the Bill will incorporate the same weaknesses as under current law. Hence, the relevant provisions of the Bill should be revisited in light of these recommendations. |
| Analysis of Effectiveness |
| With respect to administrative sanctions that the FSC may impose, there are a number of gaps in coverage and uniformity as identified in the above-referenced description. The effectiveness of the existing framework would also be enhanced by expanding statutory enforcement sanctions available to the FSC and IPA. |
| Recommendations and Comments |
| With respect to explicit statutory enforcement sanctions available to the FSC and IPA, consideration should be given to adding the following to the legal framework: the power to remove or disqualify an auditor should be expanded to apply to all regulated FIs and not just collective investment schemes, and the regulations for such schemes should be issued by the FSC; the power to appoint a provisional or temporary administrator, with court approval if necessary; and the power to impose civil money penalties or administrative fines against individuals, such as directors, officers, and controllers; as well as legal persons. Consideration should also be given to empowering the FSC and the IPA to disqualify principal persons from regulated activities. In addition, the grounds for imposition of these sanctions should explicitly refer to ML and FT. Finally, the sanctions should be uniform across all financial sectors, so that the same rules apply to every FI. |
| IX—Cooperation between supervisors and other competent authorities (compliance with Criteria 65-67 for the (i) banking sector; (ii) insurance sector; (iii) securities sector; and (iv) other financial institutions sector, plus sector specific criteria 97-100 for the banking sector and criteria 118-120 for the securities sector) |
| Description |
| 65. While no members of the IPA staff are employed full time on AML/CFT, 2 members of staff spend a significant proportion of their time on AML/CFT matters, and have the ability to call upon the assistance of other staff of the IPA whenever required. All members of the supervisory staff have some experience of AML/CFT matters, and refresher training is undertaken. It is the intention of the IPA that all life assurance companies will be visited at least once in every two years, with follow-up and additional visits if appropriate. Over the last two years, all but one of the insurance companies have been visited. An enforcement officer at the FSC devotes the vast majority of his time to AML/CFT issues and is able to call upon the assistance of other FSC staff as required. All staff attends training on AML/CFT annually. Over the last three years the FSC has visited most licensed banks and fund and investment managers and 27 CSPs. AML/CFT reviews are also undertaken through off-site surveillance. The reviews undertaken by both regulators appear to be thorough and in a number of cases licensees were required to undertake remedial action to meet required standards. In some instances concerns arising from on-site reviews were referred to the attorney general to determine if specific action should be taken against the institutions in question. While both the FSC and the IPA have undertaken a good level of surveillance of licensed institutions in relation to AML/CFT over the last three and two years respectively, this may have impacted on resources available to cover other categories of risk. 66. Under the FSA, the FSC has authority to disclose information “to any constable for the purpose of enabling or assisting the Isle of Man Constabulary to discharge its functions.” (Section 24(1)(aa)). The FSC also has authority under that Act to disclose information “with a view to the institution of or otherwise for the purposes of criminal proceedings whether in the island or elsewhere.” (Section 24(1)(a). Under the IA, according to the Isle of Man authorities, there is no statutory prohibition applying to the IPA to prevent it from disclosing information gained from on-site inspections and reports submitted by licensees to other domestic competent authorities. In addition, the IPA has explicit statutory authority to disclose certain other categories of information to the FSC (Section 24(2)(bb) of the IA) and “with a view to the institution of, or otherwise for the purposes of, any criminal proceedings, whether under this Act [the IA] or otherwise” (Section 24(2)(d)). With respect to the Customs Service, there is similar authority to disclose information in aid of criminal investigations, domestic and foreign (Section 174B of Customs Amendment Act) and allows the financial regulators to disclose information to Customs (Section 174C). According to the authorities, there is close cooperation with other domestic competent authorities including the lending of expertise with respect to AML/CFT analysis, investigations, and prosecutions between the financial supervisors, the FSC and IPA, and the FCU, Police and Customs. An example of this level of cooperation is the existence of a task force made up of enforcement and banking officials of the FSC, FCU officers, and an official from the attorney general’s chambers relating to a specific ML investigation on the island. With respect to insurance, under the IA, according to the Isle of Man authorities, there is no statutory prohibition preventing the IPA from disclosing information gained from on-site inspections and reports submitted by licensees to other foreign authorities. In addition, the IPA may disclose certain other categories of information the authorities the IPA may disclose information “to authorities which appear to the Supervisor [IPA] to exercise in a country or territory outside of the Island functions corresponding to those of the Authority and the Supervisor.” The IA Bill will substantially expand this section to include disclosure for certain additional purposes. The FSC has entered into MOUs with the United Kingdom, Ireland, Jersey, Guernsey, and South Africa. Negotiations are currently ongoing with the Cayman Islands. Foreign supervisors have undertaken on-site visits to FSC regulated financial institutions in the Isle of Man and have had access to information at the institutions visited. The FSC and the IPA cooperate with other regulators outside the Isle of Man. There is strong coordination amongst the FSC, IPA Customs, the FCU and the attorney general’s chambers. 67. With respect to banking, investment business and CSPs, the FSC may disclose information for a range of purposes, including with respect to criminal proceedings in other countries (Section 24(1)(a)), for the purpose of discharging its functions under the laws administered by it (Section 24(1)(e), and for the purpose of assisting an authority in other countries to exercise functions that correspond to the FSC’s functions (Section 24(5)(b)). In relation to the disclosure of information about an individual customer, the chief minister must provide written concurrence that the disclosure is in the public interest and that it is likely to be of substantial value to the authority to which it is made (Section 24(6)). With respect to insurance, under the IA, according to the Isle of Man authorities, there is no statutory prohibition preventing the IPA from disclosing information gained from on-site inspections and reports submitted by licensees to other foreign authorities. In addition, the IPA may disclose certain other categories of information the authorities the IPA may disclose information “to authorities which appear to the Supervisor [IPA] to exercise in a country or territory outside of the island, functions corresponding to those of the Authority and the Supervisor” (Section 24(2) of the IA). The IA Bill will expand this section to include disclosure for certain additional purposes, including the following: any criminal proceedings on the island or elsewhere (new Section 24(1)(a)); facilitating a determination of whether any such investigation should be initiated (new Section 24(1)(c))11; any criminal investigation (new Section 24(1)(d)); all financial regulators, as well as those exercising functions similar to the IPA (new Section 24(2)(b)); and to assist any foreign or domestic public authority specified in a treasury order to be issued (new Section 24(4)). |
| Analysis of Effectiveness |
| The framework for cooperation with supervisory authorities is generally adequate. The FSC does not however appear to have an adequate level of resources to cover AML/CFT as well as all other areas of risk. |
| Recommendations and Comments |
| The level of resources in the FSC’s Supervisory Division should be increased to ensure that all areas of risk related to the operation of licensed institutions are adequately covered. |
| Implications for compliance with FATF Recommendation 26 |
| Compliant |
Table 5.
Detailed Assessment of the Legal and Institutional Framework for Financial Institutions and its Effective Implementation
| I—General Framework (compliance with criteria 43 and 44) |
|---|
| Description |
| 43. Disclosure of information related to a suspicious transaction does not constitute a breach of any restriction imposed by statute or common law (Sections 17A(3)(a), 17B(5)(a) and 21 of the CJA, Sections 46(3)(a), 47(5)(a) and 48(4) of the Drug Act and Sections 10(1) and 16A(4) of POTA). 44. Although neither the laws nor any Isle of Man governmental authority designates a supervisor/regulator to ensure effective implementation of AML/CFT policies consistent with the FATF 40+8 Recommendations by all financial institutions, in practice, the function is allocated administratively, the FSC taking responsibility for the FIs regulated by it, the IPA taking responsibility for the FIs regulated by it. However, the FSC does not currently have the authority to regulate (except to the extent that a regulated FI engages in such activities) or to monitor compliance of businesses that engage in activities such as bureaux de change, check cashing and money transmission services (“MSBs”). Such regulation and monitoring is done by Customs and Excise under the Anti-Money Laundering (Money Services Businesses) Regulations 2002. |
| Analysis of Effectiveness |
| Although the framework is generally effective, the FSC does not have the statutory authority to regulate or monitor compliance for MSBs, which is the responsibility of Customs and Excise. This is considered to be a potential weakness. |
| Recommendations and Comments |
| Consideration should be given to rationalizing the existing regulatory arrangements for MSBs by enacting legislation under which the statutory responsibilities of Customs and Excise with respect to MSBs would be transferred to the FSC. |
| Implications for compliance with FATF Recommendation 2 |
| Compliant |
| II—Customer identification (compliance with criteria 45-48 for the (i) banking sector; (ii) insurance sector; (iii) securities sector; and (iv) other financial institutions sector, plus sector specific criteria 68-83 for the banking sector, criteria 101-104 for the insurance sector and criterion 111 for the securities sector) |
| Description |
| 45. The Code requires FIs to establish and maintain procedures for customer identification (Article 3). However, the Code contains no explicit requirement that such procedures be followed by FIs, although such a requirement is clearly implied from the language of the Code. Section 3.1 of the CTP requires that verification of identity be undertaken on each applicant for a policy. There is no provision for an exception to this requirement. Section 3.02 of the Notes states that license holders must satisfy themselves as to the identity of their customers. It goes on to list the identity information required. 46. FIs are required to put in place procedures to seek satisfactory evidence of identity of a prospective customer, either occasional or usual, when establishing business relations or conducting one-off transactions (Sections 4(1) and 5(1) of the Code). However, the Code does not specify what may or may not represent satisfactory evidence of identity. Notwithstanding the absence of explicit requirements in the Code, the Notes do provide that in order to establish an individual’s identity the information should include, his/her name and all other names used and reason for any aliases, the address at which he/she can be located and the date of birth, nationality, purpose of account, or in the case of a CSP, the reason for establishing the client company or trust, valid passport, driving license, government issued National Identity Card (Section 3.02(a) and (b) of the Notes). There is no requirement to renew identification when doubts appear as to the identity of a customer in the course of the business relationship. There is a requirement to record the identity of all customers (Section 7 of the Code). However, there are exemptions from the identification procedure under Sections 4 and 5 of the Code. No steps are required to be taken to obtain evidence of any person’s identity: where there are reasonable grounds for believing that the potential FI is a regulated person, or covered by the EU Money Laundering Directive, or an authorized credit or financial institution in a country which is a member of FATF and which has anti-money laundering requirements approved by FATF, or a registered legal practitioner or an accountant, where the relevant person is satisfied that the rules of the applicant’s professional body embody requirements of the Code (Sections 4(2), 4(3), 5(2) and 5(3) of the Code). Under Paragraph 4 of the CSP Code, a CSP must (a) “identify its client” and (b) “identify the beneficial owner of each of its companies (if not the same person as the client).” This is not limited to the point at which new business is accepted, but rather is an ongoing obligation. Paragraph 12.5 of the Banking Code 1999 requires that banks know their customers and that they comply with the anti-money laundering legislation in force. Paragraph 6.1 of the Conduct of Business Code requires that investment business license holders know their customers and that they comply with the anti-money laundering legislation in force. The Notes require FIs, in the case of corporate customers, to take particular care to verify among others, the evidence of identity of all beneficial owners and persons, the legal existence of a company, details of the nature of the applicant’s business including sources of funds, satisfactory evidence of the identity of each of the beneficial owners, account signatories and those who are able to issue instructions relating to the operations of the applicant, and, in the case of a CSP, evidence of identity of at least two directors and a Board Resolution authorizing the opening of the account or establishment of the client company (Sections 3.03(a) and (b) of the Notes). There is no explicit prohibition of numbered accounts, nor is there any exemption from customer identification requirements for numbered accounts. b) Implementation Section 4.1.2 of the CTP requires that insurers receive the following documents as proof of identity for individual applicants—Passport or a National Identity Card (carrying a photograph of the individual) This should be accompanied by documents to confirm their address. Where it is not possible to obtain either a passport or national ID card an insurance business can accept two other formal documents carrying appropriate personal details which show verifiable reference numbers. Section 8.3 of the CTP details that if, for any reason, at any stage of the life of a policy, the Insurance Business becomes aware of any doubts as to the identity of a Client (or any other party to a policy) this must be reported to the Money Laundering Reporting Officer using the normal reporting procedure for suspicious transactions. The Money Laundering Reporting Officer may take whatever steps they consider appropriate to satisfy the Insurance Business as to the identity of the Client (or other party) and if they consider there is a suspicion they should report as detailed in Section 8.2 which may include reporting to the FCU. Section 5.1 of the CTP which addresses the issue of retrospective reviews indicates that relationships which are not yet being reviewed on a risk basis should be reviewed for any deficiency in verification documentation following the occurrence of a “trigger” event. Examples of trigger events are given as: a subsequent business transaction on the policy; or a surrender or redemption request. Section 3.02 (a) of the Notes indicates information and documentation should be obtained and retained to support, or give evidence to, the details provided by the applicant for business. Acceptable identification documents include: (i) current valid “full” passport; (ii) Armed Forces ID card; (iii) known employer ID card bearing the photograph and signature of the applicant; or (iv) provisional or full driving license bearing the photograph and signature of the applicant, or (v) government-issued National Identity Card bearing the photograph and signature of the applicant. Identification documents which do not bear photographs or signatures, or are easy to obtain, are not appropriate as sole evidence of identity, e.g. birth certificate, credit cards, NHS cards, non-Isle of Man provisional driving license, student union cards. Section 3.06 of the Notes describes exempt one-off transactions as follows: Less than Euros 3,000 (or the equivalent thereof) in the case of a transaction or series of linked transactions entered into in the course of bookmaking or casino businesses; Less than Euros 15,000 (or the equivalent thereof) in any other case. Verification of identity is required for all other one-off transactions. Section 3.03 of the Notes suggests that license holders should conduct periodic checks to ensure that corporate information they hold is correct and up to date. There are no provisions re reverification in respect of personal customers. This issue is however addressed in the Overriding Principles Paper. The Isle of Man has a regime for introduced business. Introducers are broadly categorized as eligible or non-eligible. Eligible introducers are broadly speaking persons licensed under the Banking Act 1998, the Investment Business Act 1991, the Industrial and Building Societies Act 1892, the Corporate Service Providers Act 2000, the Insurance Act 1986, an authorized credit or financial institution in the European Economic Area which is covered by the Money Laundering Directive, an authorized credit or financial institution in a country which is a member of FATF and which has AML requirements which have been approved by FATF, an advocate, a registered legal practitioner within the meaning of the Legal Practitioners Registration Act or an accountant, where the license holder is satisfied that the rules of the introducer’s professional body embody requirements equivalent to the Anti-Money Laundering Code 1998. The Notes indicate that an eligible introducer is allowed to retain identity verification documents where it undertakes, among other things, to supply the license holder forthwith upon request evidence of the verification of identity of any customer, to give the license holder the right to undertake compliance checks and /or visits to the introducer’s premises when deemed appropriate and to supply the license holder all identity verification documents in the event that the introducer’s relationship with the original applicant is terminated. The CTP provides that under the Terms of Business between an insurance business and an introducer, the introducer shall undertake to provide to the insurance business original or suitably certified copy documents which verify the identity of all applicants. The Overriding Principles Paper envisages that under a revised framework for introduced business a license holder will always hold either originals or copies of identity verification documents. The existing framework for introduced business creates some weaknesses in relation to the verification of customer identity as license holders do not at all times necessarily have immediate access to verification documents. There is even greater concern where introducers are persons such as accountants and attorneys who are not subject to prudential regulation. 47. There is no legal requirement for FIs to verify the identity of a person on whose behalf an applicant may be acting. Section 3.03 of the Notes indicates that satisfactory evidence of the identity of each of the beneficial owners of an applicant and any persons or persons on whose instruction the signatories are to act or may act. Section 3.05 of the Notes indicates that in the case of all types of trust, if practical, license holders should obtain and verify the identity of any principal beneficiaries. The Notes also provide that where an applicant for a business is a “trustee or a person acting in a fiduciary capacity in relation to a third party … the Commission expects license holders to obtain satisfactory evidence of the nature of his trustee or fiduciary capacity or duties, satisfactory evidence of the identity of the settlor, protector and any controller or similar person who has the power to remove the trustees and evidence as to the source or origin of the assets under his control or which he holds as trustee. Section 3.05 of the Notes indicates that where the applicant for business is a trustee, or a person acting in a fiduciary capacity in relation to a third party and is a regulated financial institution in the Isle of Man, the EEA or from a FATF member country with AML requirements which have been approved by FATF, the Commission expects license holders to obtain: (i) satisfactory evidence of the nature of his trustee or fiduciary capacity or duties; (ii) satisfactory evidence of identity of the settlor (and the person providing the funds where not the settlor), protector, and any controller or similar person who has power to appoint or remove the trustee. The Notes go on to indicate that the license holder may wish to obtain copies of satisfactory evidence from the trustee or fiduciary showing the verification of identity of any and every party (including where relevant discretionary and contingent beneficiaries) for whom he is acting. Section 4.4 of the CTP indicates that where the applicant is a trustee that the insurance business must satisfy itself that the Trustees have been identified in accordance with the appropriate verification requirements for corporate applicants or individuals. Where there is more than one Trustee, appropriate identification must be obtained for each. Then “provided that the trustees have been identified to the satisfaction of the Insurance Business and satisfactory evidence of proper appointment of the Trustees has been received e.g. extracts of the Deed of Trust; the nature and purpose of the trust is known; the source or origin of the assets under the trust is known and the Insurance Business considers it satisfactory; the persons from whom the Insurance Business is to take instructions have been identified and specimen signatures have been obtained (although their identity need not be verified); the trustees may then provide details of the parties to the trust at the time the application is being made.” These parties will be: the settlor(s), whose details should include the full name(s), date(s) of birth and, if they are still living, the current addresses of any individuals. If the settlor is no longer living, the date of death should be included. If the settlor has been other than an individual, or individuals, the trustee should provide sufficient information for the Insurance Business to identify the settlor(s) should they wish to do so; any protector(s), whose details should include the full name(s), date(s) of birth and the current addresses of any individuals; all beneficiaries (as and when defined). Section 4.5 of the CTP indicates that where the applicant is a nominee the insurance business must satisfy itself that the Nominees have been identified in accordance with the appropriate verification requirements for corporate or individual clients and that satisfactory evidence of the appointment of the Nominees has been received; The persons from whom the Insurance Business is to take instructions have been identified and specimen signatures obtained (although their identity need not be verified); and provided that the Nominees have been identified to the satisfaction of the Insurance Business, the Nominees may then provide details of the parties to the arrangement. These will be the beneficial owner of the assets; and the ‘settlor’ or original source of the assets under the nominee arrangement. The Notes do not specifically address the issue of nominee shareholders as such persons are usually company or trust service providers who are regulated by the FSC. This approach does not however address instances in which where nominees are resident outside of the jurisdiction. 48. There is no legal requirement for FIs to include accurate and meaningful originator information and related messages on funds transfers that should remain with the transfer through the payment chain. Section 6.3 and 6.4 of the CTP indicates that where the Insurance Business does not receive complete originator information from the remitting bank the Insurance Business must review the information provided and consider whether additional information should be sought. A risk-based approach may be used in deciding whether to seek additional information. Further, where the monies are being remitted from several accounts the Insurance Business should understand the reasons for this and be satisfied in each case. Section 6.2 of the CTP requires that the Insurance Business must establish how payments are to be made, from where and by whom, and that where the monies are being remitted from accounts other than in the name of the Applicant the Insurance Business must be satisfied that the reasons for the account remitting the monies not being in the name of the Applicant are understood, and where considered necessary, the identity of the holder of the account from which remittance has been made should be verified. In the absence of being so satisfied, insurance businesses are required to terminate the application process. The CTP does not clearly indicate what criteria should be applied in the “risk based approach” to be used in determining when additional originator information is required. This issue is not specifically addressed by the Notes. Institutions visited generally had good customer identification requirements in place. They generally employed more onerous requirements for customers in categories considered to be higher risk. There was less consistency across institutions in relation to the issues addressed in the Overriding Principles Paper; principally in relation to to the holding of identity documents by introducers and the status of the Progressive Program. |
| Analysis of Effectiveness |
| Arrangements for customer identification are generally adequate. There are however some concerns about requirements related to satisfactory evidence of identity, the identity requirements for legal entities and reverification of existing customers. |
| Recommendations and Comments |
| The relevant laws should be amended to explicitly require that customer identification procedures be followed by reporting parties. Consideration should be given to the imposition of a requirement for the re-verification of existing customers. Consideration should be given to amending the relevant laws to limit the availability of the AML exemption to those entities regulated in EU States rather than to entities covered under the EU AML Directive. The Notes should be amended to require licensees to exercise care in initiating transactions with companies that have nominee shareholders. The FSC has already undertaken considerable work to direct FSBs towards the customer identification standards proposed by the Position Paper. It is nevertheless recommended that these efforts be redoubled to ensure a greater degree of consistency in the approach adopted by licensees. |
| Implications for compliance with FATF Recommendations 10, 11, SR VII |
| Full compliance will be achieved when the relevant laws are amended to explicitly require that customer identification procedures be followed and financial institutions have timely access to all customer identification records under the regime for introduced business. |
| III—Ongoing monitoring of accounts and transactions (compliance with Criteria 49-51 for the (i) banking sector; (ii) insurance sector; (iii) securities sector; and (iv) other financial institutions sector, plus sector specific criteria 84-87 for the banking sector, and criterion 104 for the insurance sector) |
| Description |
| 49. There is no legal requirement for FIs to scrutinize all complex or unusual transactions and complex or unusual patterns of transactions that have no apparent or visible economic or lawful purpose, to examine as far as possible the background and purpose of such transactions. However, paragraph 4(4) of the Code requires that FIs establish procedures to verify the evidence of identity of the applicant for business where a transaction is undertaken that is significantly different from the normal pattern of previous business. This, linked to the requirement to file STRs under paragraph 12 of the Code, makes it implicit that FIs must monitor business relationships for such transactions. Section 6.01 of the Notes indicates that where a transaction is inconsistent in amount, origin, destination, or type with a customer’s known, legitimate business or personal activities, the transaction must be considered unusual, and the license holder put “on enquiry.” Such enquiries may lead to a suspicion being formed and may result in the filing of an STR. Appendix G provides examples of suspicious transactions. Section 8.4 of the CTP requires that all complex or unusual transactions and complex or unusual patterns of transactions, that have no apparent or visible economic or lawful purpose, must be scrutinized by the Insurance Business and the background and purpose of such transactions ascertained so that the Insurance Business is satisfied as to why the transaction is being structured in this way. In the absence of being so satisfied the Insurance Business must not proceed with the transaction and report the suspicion in the normal way. Full details of any information obtained, and decisions made, should be recorded on the file. Under section 8.3 0f CTP which deals with suspicious transaction reporting suspicions should be aroused where there are unexplained changes in a client’s investment pattern or sudden changes in intermediary transaction patterns. While the CTP requires findings to be recorded, the Notes contain no such requirement. However, both require the reporting of suspicious transactions. 50. There is no legal requirement to scrutinize transactions with persons in jurisdictions that do not have adequate systems in place to prevent or deter ML or FT. There is no legal requirement for FIs to provide effective measures to ensure that financial institutions are advised of concerns about weaknesses in the AML or CFT systems of other countries. The Notes only address this issue in relation to correspondent banking. Section 3.13 of the Notes provides as follows with respect to correspondent banking: In particular, banks should refuse to enter into or continue a correspondent banking relationship with a bank incorporated in a jurisdiction in which it has no physical presence and which is unaffiliated with a regulated financial group (i.e., shell banks). Banks should pay particular attention when continuing relationships with respondent banks located in jurisdictions that have poor KYC standards or have been identified as being “noncooperative” in the fight against money laundering. Banks should establish that their respondent banks have due diligence standards of at least an equal standard to their own, and employ enhanced due diligence procedures with respect to transactions carried out through the correspondent accounts. Appendix D of the Notes lists NCCT countries as well as other countries that have been subject to advisories and indicates that FIs must treat business from these countries as requiring further scrutiny. Section 3.17 of the CTP requires that the Insurance Business must have procedures in place to examine those Applicants who have connections with any country appearing on the list of FATF Non Cooperative Countries. The Insurance Business should consider whether any additional verification of identity or source of funds is necessary in these cases. Appendix D of the Notes list countries that appear on the FATF NCCT list and countries subject to money laundering related advisories. 51. There is no legal requirement for FIs to include accurate and meaningful originator information and related messages on funds transfers that should remain with the transfer through the payment chain. Section 6.3 of the CTP indicates that where the Insurance Business does not receive complete originator information from the remitting bank the Insurance Business must review the information provided and consider whether additional information should be sought. A risk based approach may be used in deciding whether to seek additional information. The Notes do not specifically address this issue. Discussion with institutions as well as a review of documented procedures indicated that staff of financial institutions would be generally alert to unusual patterns of client activity. Most of the documented procedures adopted by the institutions visited, list NCCT jurisdictions and other countries over which there is some level of concern about AML/CFT standards. In general a higher level of due diligence in required when dealing with business associated with these countries. |
| Analysis of Effectiveness |
| Arrangements for the ongoing monitoring of accounts and transactions are generally adequate. The overall framework would be strengthened if the Notes broadened the focus of its guidance in respect of business relationships and transactions with persons from countries with inadequate AML/CFT systems. There are also concerns with respect to enhanced scrutiny to wire transfers and reporting of unusual or complex transactions. |
| Recommendations and Comments |
| Within the two-year period referred to by FATF, the relevant laws should be amended to require that accurate and meaningful originator information on funds transfers remain with the transfer through the payment chain, and that FIs give enhanced scrutiny to wire transfers that do not contain complete originator information. The Notes should be expanded to require financial institutions to give special attention to business relationships and transactions with persons from countries that do not have adequate systems to prevent money laundering, in circumstances other than those related to correspondent banking. |
| Implications for compliance with FATF Recommendations 14, 21, 28, SR VII |
| Compliant |
| IV—Record keeping (compliance with Criteria 52-54 for the (i) banking sector; (ii) insurance sector; (iii) securities sector; and (iv) other financial institutions sector, plus sector specific criterion 88 for the banking sector, criteria 106 and 107 for the insurance sector, and criterion 112 for the securities sector) |
| Description |
| 52. FIs are required to maintain records of a person’s identity (Para. 7 of the Code) which indicate the nature of the evidence and comprises a copy of the evidence, for a period of five years commencing from the date when all activities relating to a one-off transaction or a series of linked transactions were completed, or the business relationship was formally ended, or if the business relationship was not formally ended, when the last transaction was carried out (Paras. 7, 8 and 9 of the Code) and these documents are available to a competent authority to inspect. With respect to FT, Section 15(2) of the POTA requires full auditable records in relation to any suspicion reported to be retained in perpetuity. CTP Section 9.1 indicates that the records prepared and maintained by an Insurance Business on its Client relationships and transactions should be such that: competent third parties will be able to assess the Insurance Business’ observance of money laundering policies and procedures; any transactions effected via the Insurance Business can be reconstructed; and the Insurance Business can satisfy, within a reasonable time, any enquiries or court orders from the appropriate authorities as to disclosure of information. Further, under the CTP all documentary items relevant to Client identity and transaction history must be maintained and be capable of being retrieved efficiently. The Required Period for the purposes of the CTP is at least six years from the date when all activities relating to a one-off transaction or a series of linked transactions were completed; or the business relationship was formally ended; or if the business relationship was not formally ended, when the last transaction was carried out. Where a report has been made to the FCU, or the Insurance Business knows or believes that a matter is under investigation, the Insurance Business shall retain all relevant records for as long as required by the FCU. Section 7.01 of the Notes refers to the provisions of the Code requiring records to be maintained in respect of identification and verification and transactions. The notes indicate that records in respect of identification, verification and transactions should be retained for the period of the business relationship with the client plus five years. 53. FIs are required to maintain a record containing details relating to all transactions carried out by their customers and to keep the record for a period of five years commencing from the date when all activities relating to a one-off transaction or a series of linked transactions were completed, or the business relationship was formally ended, or if the business relationship was not formally ended, when the last transaction was carried out (Sections 8 and 9(1) of the Code; see also Section 7.01 and 7.02 of the Notes) and these documents are available to a competent authority to inspect the documents. With respect to banking and investment business, transaction records are required to be kept for five years (section 4(5) of the Banking Code and section 8(6) of the Conduct of Business Code). With respect to FT, Section 15(2) of the POTA requires full auditable records in relation to any suspicion reported to be retained in perpetuity. Records are required to be sufficient to identify the source and recipient of payments from which investigating authorities are able to compile an audit trail for suspected money laundering (Section 8 of the Code). Section 7.01 of the Notes recommends that records of the following information be maintained :
|