Isle of Man
Crown Dependency of the United Kingdom: Assessment of the Supervision and Regulation of the Financial Sector Volume II—Detailed Assessment of Observance of Standards and Codes

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.

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

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Table 2.

Summary Compliance with the Basel Core Principles

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C: Compliant.

LC: Largely compliant.

MNC: Materially noncompliant.

NC: Noncompliant.

NA: Not applicable.

Table 3.

Recommended Actions to Improve Compliance with the Basel Core Principles

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C. Authorities’ Response to the Assessment

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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

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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

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