Anguilla-Overseas Territory of the United Kingdom
Assessment of the Supervision and Regulation of the Financial Sector—Review of Financial Sector Regulation and Supervision

Anguilla is in the process of strengthening its legal and supervisory framework, which includes the creation of an operationally independent regulatory body, the Financial Services Commission. Priority should be given to improving the system for suspicious transaction reports, enhancing the customer due diligence requirements for introduced business, and conducting onsite inspections of company and trust service providers. The aim is to issue regulatory and industry codes that broadly meet the recommended best practices as contained in the draft Offshore Group of Banking Supervisors’ Statement.

Abstract

Anguilla is in the process of strengthening its legal and supervisory framework, which includes the creation of an operationally independent regulatory body, the Financial Services Commission. Priority should be given to improving the system for suspicious transaction reports, enhancing the customer due diligence requirements for introduced business, and conducting onsite inspections of company and trust service providers. The aim is to issue regulatory and industry codes that broadly meet the recommended best practices as contained in the draft Offshore Group of Banking Supervisors’ Statement.

I. Financial System Overview

A. Background

1. Anguilla is a coral limestone Caribbean island with sub-tropical climate that is 90 square kilometers (35 square miles) in size with an estimated population of 11,560. It lies 113 km north of the island of St. Kitts, eight km to the north of St. Maarten, and is east of Puerto Rico and the Virgin Islands. It is known as a friendly, low-crime society and is establishing a reputation as a high-end tourist destination. Its offshore sector is modest by international standards mainly consisting of two licensed offshore banks and a company and trust services sector that has grown in recent years but is small relative to other offshore centers.

Government

2. Anguilla is a British Overseas Territory that became a Dependent Territory in 1980 after being administered as a single federation with St. Kitts and Nevis from 1958 to 1962. Constitutionally, Anguilla is an internally-governing Overseas Territory. It enjoys a high degree of political and social stability. Government is enacted through a Governor appointed by the Crown, an elected House of Assembly and an Executive Council. Her Majesty Queen Elizabeth II is the Head of State and the Constitution gives the Governor certain fundamental powers. All legislation is assented to by the Governor acting as Her Majesty the Queen’s representative. The Governor has constitutional responsibility for all international (offshore) financial services but the day-to-day supervisory responsibility rests with the FSD which forms part of the Ministry of Finance. The supervision of domestic banks is undertaken by the ECCB of which Anguilla is a member jurisdiction.

3. Anguilla is a common law jurisdiction based on English law. Its judicial system is administered by the Eastern Caribbean Supreme Court but the appeal process culminates with the Privy Council in England.

Economic activity

4. Anguilla’s main industry is tourism with GDP per capita of about EC$20,500 (2001—at market prices) and an unemployment rate of 7.8 percent (2002). It also has a small but growing tourism and offshore financial sector with the latter primarily focused upon the incorporation and management of international business corporations.

5. Anguilla is a neutral tax jurisdiction. There is no income, capital gains, estate, profit or other forms of direct taxation either on individuals or corporations, whether resident in Anguilla or not. In addition, there are no exchange controls and the official currency is the Eastern Caribbean Dollar.5 The United States dollar is commonly used.

6. With the exception of 2000, the table below shows that over the last five years Anguilla’s economy has been performing well with real Gross Domestic Product (GDP) growing at an average of about five percent over the period 1997 to 2001. In nominal terms, GDP grew on average about 6.5 percent during the same period. In 2000, GDP growth was flat with real GDP showing a -0.3 percent decline.

7. As a share of GDP, the hotel and restaurant industry accounts for some 30 percent with the finance sector contributing about 16 percent and construction 12 percent. Agriculture, mining and manufacturing together only account for about 7 percent of GDP. It is important to note that the contribution to the economy made by the finance industry has been growing steadily over the last five years and was the only sector that recorded significant growth in 2000 and 2001.

Table 1.

Estimated Gross Domestic Product: 1997 to 2001

(In EC$ millions)

article image
Source: Anguilla Planning Unit and ECCB

8. The table below shows that the majority of the work force is employed in the hotel and restaurant business reflecting economic concentration in the tourism industry. Government is the second largest employer while the number of persons employed in the financial services industry is comparatively small accounting for less than 7 percent of those employed. As at July 2002, the unemployment rate stood at 7.8 percent.

Table 2.

Number of Persons Employed September 2002

article image
Source: Anguilla Government Labor Survey, July 2002

B. Financial Institutions and Markets

9. Anguilla offers a modest range of financial services with most financial assets being concentrated in the domestic banking sector. However, a significant proportion of financial assets are held by nonresidents that are in process of being transferred to offshore banking subsidiaries. None of the offshore banks was operational at the time of the mission. The CSP sector has been reporting a high rate of growth in recent years but is still relatively small.

Banking

10. Anguilla has licensed four domestic and until recently two offshore banks. Bank deposits in the domestic sector at the end of December 2002 totaled EC$783 million (of which $613 million were foreign currency deposits) reflecting a significant increase from EC$488 million in June 1999. The relatively large proportion of foreign currency (78 percent) and nonresident deposits contributed to a decision by some banks to establish offshore subsidiaries to which some of these deposits are being transferred. It is intended that only foreign currency deposits held be nonresidents will be transferred to the offshore banks.

Table 3.

Bank Deposits 1998 to 2002

(EC$’000)

article image
Source: Anguilla Government Statistics

Insurance

11. The insurance industry in Anguilla is relatively small. There are 20 registered insurers including two domestic companies with local shareholding. All of the others are foreign-based institutions underwriting domestic business and subject to home country regulation and supervision. Most of the insurance entities are engaged in property and casualty insurance with only five carrying on life business only. Total gross premiums are as follows:

Table 4.

Gross Premiums Written for 2000

article image
Source: Financial Services Department, Ministry of Finance

Companies and trusts

12. The company services sector has been the fastest growth area of Anguilla’s offshore industry. The attraction of Anguilla in this area of activity is mainly its tax neutral status and the ease and flexibility of incorporation. The number of licensed company managers and trust companies as at October 2002 were 29 and 12, respectively.

13. As at August 2002, 4,642 companies and partnerships had been registered as shown in the following table. Only 78 trusts had been reported to the authorities although there is no requirement to register trusts. Accordingly the precise level of trust activity may not be known.

Table 5.

Company and Partnership Registration

article image
Source: Financial Services Department, Ministry of Finance

14. Company registration is being actively promoted through Anguilla’s Commercial Online Registration Network (ACORN). This registration system was developed with the assistance from Companies House UK and the UK Government that enables instant electronic incorporation and registration of Anguillian corporate and trust entities. ACORN allows companies to be incorporated electronically from anywhere in the world 24 hours a day, 365 days a year. Users can file all required incorporation documents electronically in a variety of languages, and the system will provide guidance on completing registration documents. Electronic access is available to all licensed company and trust services providers and to authorized intermediaries. The FSD conducts due diligence on behalf of the Registrar of Companies on all overseas intermediary clients (“introducers”) for fit and proper purposes.

15. There is only one entity engaged in securities business in the Island and one unit trust that operates under a trust license.

C. Regulatory Framework, Oversight, and Market Integrity Arrangements

16. Under the Constitution, the Governor has responsibility for international financial services. Responsibility for regulation has been delegated to Inspectors under various pieces of financial sector legislation. The Inspector in this context is the Director of the Financial Services Department (FSD) which forms part of the Ministry of Finance. The supervision of domestic banks is undertaken by the ECCB.

17. The main functions of the FSD are:

  • Licensing recommendations made to the Governor
  • Compliance and inspections
  • International supervisory initiatives
  • Legislative initiatives

18. The FSD comprises a Director, a Deputy Director, an Assistant Director, a Senior Executive Officer and an Administrative Assistant. It also encompasses the Registry of Commercial Activities (mainly company registration) which includes a Registrar, a Deputy Registrar, and administrative staff of four.

19. Draft legislation is currently under consideration to transform the FSD into an operationally independent Financial Services Commission (FSC). The original intention was for the FSC to be established by the end of 2002 but this has been postponed to the end of September 2003. The mission encouraged the authorities to establish the FSC and to implement plans for adequately funding and resourcing its operations. The FSC Act will transfer to the FSC all of the statutory functions, powers and duties currently vested with the Inspectors under the offshore banking, company, trust and insurance laws. Constitutionally the Governor will still have overall responsibility for offshore finance, including the power to make regulations under the applicable financial laws. Under the draft FSC Act, the FSC is expected to assume13 functions but the principal ones will be:

  • to supervise all licensees in accordance with the Act, the financial services laws and the Regulatory Code to be issued by the FSC;
  • to consider and decide on the issue of licenses;
  • to monitor compliance with the Anti-Money Laundering Regulations, 2000 and such other enactments or Guidelines relating to money laundering;
  • to monitor activity in the financial services sector and to take enforcement action against persons carrying on unauthorized activities;
  • to make recommendations to the Governor on new laws or legislative amendments;
  • to maintain contact and forge relations with foreign regulatory authorities and to provide assistance to such authorities; and
  • to provide such information and advice to the public concerning financial services.

20. It is the intention for the FSC to be operationally independent from the Governor and the Government. Suitable funding arrangements mainly arising from industry fees should support its autonomy and operations. Under the draft FSC Act, the Governor will approve the annual budget of the FSC but any modifications he may require must be agreed with the FSC in writing.

21. The FSC will be governed by a Board of Directors consisting of the FSC’s Director as an ex officio member, and not less than four or more than five other individuals appointed by the Governor. No more than one member may be a public officer. The Governor will appoint the Chair and Deputy Chair of the Board. No person who is a member of the House of Assembly, who is an undischarged bankrupt or who has been convicted of an offence involving dishonesty can qualify as a Board member. In making appointments, the Governor is required to ensure that individuals are fit and proper persons with appropriate knowledge and expertise that are relevant to the functions of the FSC. All appointments to the Board shall be published in the Government Gazette.

22. The FSC will prepare an Annual Report to be submitted to the Governor, along with audited accounts, within six months of the end of its financial year. Audited accounts shall be completed within three months of the financial year end. The Governor shall table the Annual Report and audited accounts before the House of Assembly within two months of receiving them, and publish them in the Gazette.

23. The authorities consider that the development of the offshore financial sector will largely depend on maintaining a clean reputation. Consequently, the proposed FSC will be vested with appropriate powers to vet new applicants for business and to enforce the regulatory laws. Provisions have been made in the draft FSC Act for the FSC to obtain information, to cooperate with overseas regulators, to approve the appointment of compliance officers of licensees, to conduct compliance inspections, and to take enforcement and disciplinary action against licensees. A major thrust of its activities will be to review compliance with AML/CFT requirements, particularly in the company and trust services sector.

24. There is legislation in place covering the regulation of banks (both domestic and offshore), insurance, companies and trust services providers. Securities legislation, including collective investment schemes, was passed in 2001 as part of a regional ECCB effort to establish a common securities market. This legislation, however, is primarily for the domestic sector. The ECCB has established a regional stock exchange (The Eastern Caribbean Securities Exchange–ECSE) for its member countries.

Legislation

25. Banking. The legislation relating to offshore banking is the Trust Companies and Offshore Banking Act, 2000 and Regulations. It sets out a regime for licensing offshore banks, and also addresses other matters including: maintenance of capital, responsibility of the Inspector, confidentiality, and the issue of regulations and a code of practice. The applicable legislation for domestic banks is the Banking Act, Regulations, guidelines and the Eastern Caribbean Central Bank Agreement Act. Supervision and regulation of domestic banks is the primary responsibility of the Eastern Caribbean Central Bank (ECCB). However, a MOU has been signed between the Governor and the ECCB under which the ECCB accepts responsibility for supervising Anguilla’s two recently licensed offshore banks, while the making of regulations remains the responsibility of the Governor.

26. Company Management. The applicable legislation is the Company Management Act, 2000, and Regulations. The Company Registry is currently under the administrative responsibility of the FSD although legal responsibility lies with the Registrar. Twenty nine company managers have been licensed and are subject to supervision by the FSD. Of these, 12 do not have a physical presence (cubicle agents)6. Registration of companies can be made online using the automated ACORN system by company managers and authorized overseas sub-agents which are vetted for fit and proper requirements by the FSD. There are currently 62 authorized sub-agents who, for purposes of the Anti-Money Laundering Regulations and Guidance Notes, are classified as approved introducers of business. The other company laws include: the Companies Act, 2000 and Regulations, the International Business Companies Act, 2000 and Regulations, the Limited Liability Companies Act, 2000 and Regulations, and the Limited Partnership Act, 2000 and Rules. The International Business Companies Act allows for the issue of bearer shares but plans are underway to amend the law to immobilize bearer shares.

27. Trust Companies. The applicable legislation is the Trust Companies and Offshore Banking Act, 2000, and Regulations, and the Trust Ordinance, 1994. Trust companies are authorized to carry on company management business and are supervised by the FSD.

28. Insurance. The applicable legislation is the Insurance Act and Regulations. However, the FSC is in process of preparing a new Insurance Act to include provisions for captive insurance business, and to allow for the supervision of insurance intermediaries. The FSD is responsible for the supervision of insurance companies.

29. Securities/Funds. The Eastern Caribbean Securities Exchange is based in the ECCB in St. Kitts. ECCB member countries have introduced a Securities Act and ten subsidiary Regulations. The authorities plan to introduce mutual funds legislation in an effort to diversify the offshore sector.

30. Anti-Money Laundering. The principal legislation consists of the Proceeds of Criminal Conduct Act, the Money Laundering Reporting Authority Act, the Drug Trafficking Offences Act, the Criminal Justice (International Cooperation) (Anguilla) Act, Regulations, and the Anti-Terrorism (Financial and other Measures) (Overseas Territories) Order. Codes of Practice and Guidance Notes have also been issued to guide financial institutions in the implementation of the various laws.

D. Previous Regulatory Reviews

31. In March 1999, the UK Government White Paper “Partnership for Progress and Prosperity: Britain and the Overseas Territories” was presented to the UK Parliament. The White Paper recognized that the international financial service industry has grown dramatically in recent decades and that a significant number of the Overseas Territories have developed offshore financial sectors. The White Paper further commented that it was essential for the future of the financial services sector that the Overseas Territories reputation for honest administration and probity be preserved and enhanced. The accounting firm of KPMG was appointed in December 1999 to assess the Overseas Territories’ performance against international standards and good practice, and to make recommendations for improvement where any territory falls below those standards. The KPMG review found that Anguilla has many features necessary to be considered a well-regulated jurisdiction but identified a number of areas of concern that the authorities are addressing, including the implementation of legislation.

32. In July 2000, the Caribbean Financial Action Task Force (CFATF) carried out an evaluation of Anguilla’s anti-money laundering regime. The CFATF found that Anguilla had introduced legislation that addressed many of the FATF and CFATF Recommendations but that implementation mechanisms were still required.

33. In the second quarter of 2000, the Financial Stability Forum published its report on Offshore Financial Centers (OFCs) that placed Anguilla in the bottom group (group 3) defined as a jurisdiction that is generally perceived as having a low quality supervisory oversight, and/or as being noncooperative with onshore supervisors.7

II. Strengths and Vulnerabilities in the Financial Regulatory and Supervisory Arrangements

A. Observance of Financial System Standards and Codes: Summary Assessments and Recommended Actions

Basel Core Principles for Effective Banking Supervision

General

34. An assessment of the current state of Anguilla’s compliance with the Basel Core Principles for Effective Banking Supervision (CP) was conducted in the context of the IMF’s October 2002 Module 2 Offshore Financial Center assessment program assessment, and updated in September 2003 during the Eastern Caribbean Central Bank (ECCB) Financial Sector Assessment Program (FSAP). Its scope is limited to the regulation and supervision of offshore banks licensed in Anguilla. An assessment of domestic banking regulation and supervision, which are the responsibility of the ECCB, is being carried out separately as part of the 2003 FSAP.

35. This assessment serves several purposes. First, it benchmarks the current state of preparations for the supervision of Anguilla’s offshore banks, recognizing the progress made to date with the enactment of Trust Companies and Offshore Banking Act (2000) and the September 2002 MOU with the ECCB. Second, it suggests a number of further steps, some already contemplated, that will further strengthen the regulation and supervision of offshore banks in Anguilla. Thus, the report provides key input for the development of an action plan to move towards full compliance with the Core Principles.

Institutional and macroprudential setting, market structure—overview

36. Under the Constitution the Governor has overall responsibility for international financial services in Anguilla, including the power to issue regulations under the various regulatory laws. Responsibility for the supervision of offshore banks currently rests with the FSD. A draft Financial Services Commission (FSC) Act has been developed that initially aimed to transform the FSD into an autonomous supervisory agency by the end of 2002. The target date for its establishment has now been extended to September 2003. In September 2002, a MOU was entered into between the Governor and the ECCB that delegates to the ECCB responsibility for the consolidated supervision of the two Anguillian offshore banks. However, before the MOU can be fully implemented, Anguilla needs to put in place appropriate regulations and prudential requirements suitable for offshore banks. The ECCB will, however, apply existing prudential guidelines to the offshore banks.

37. At the time of the assessment, two banks had recently been licensed to carry on offshore banking business, although none was yet in operation. These licenses were granted to subsidiaries of Anguillian domestic banks that plan to commence offshore operations in 2003.8 The offshore subsidiaries plan to transfer business currently conducted by the parent banks meet the requirements of the Offshore Banking Act and to more efficiently provide services to nonresidents in foreign currencies. The parent banks estimate that between 25–30 percent of their current business will be transferred to their offshore subsidiaries which amount to approximately 17 percent of the total deposits in the domestic banking sector.

General preconditions for effective banking supervision

38. Although the licensed offshore banks have not commenced operations, Anguilla has developed an appropriate legal framework that would allow for their effective supervision, including adequate provisions for enforcement and information sharing arrangements. A main drawback is the absence of an independent regulatory authority but this will be largely be remedied by the implementation of an Act to establish the Financial Services Commission by December 2003. Once established, it will be necessary to hire and broaden the professional and managerial strength of the regulatory Commission. The participation of the ECCB in the consolidated supervision of the two offshore banks, which are subsidiaries of domestic banks, should also strengthen supervision. Draft amendments to the uniform Banking Act for domestic banking are being considered to provide additional powers to the ECCB for the supervision of domestic bank affiliates.

Main findings

39. The assessment of compliance with the Basel Core Principles is mainly based on the supervisory framework in place for licensed offshore banks which at the time of the mission had not started operations. The assessment also takes into account the planned transformation of the FSD into an autonomous Financial Services Commission to be established by the end of September 2003. The mission did not undertake a full review the supervisory processes of the ECCB which, as the home supervisor, is responsible for the consolidated supervision of the offshore banks. A full assessment of the ECCB supervisory processes is being undertaken as part of the regional FSAP in September–October 2003.

40. The assessment found that Anguilla’s is either compliant or largely compliant with many of the Basel Core Principles. It has a relatively strong legal framework, which clearly sets out the supervisory objectives for the proposed FSC, and has robust provisions for sharing of information, licensing and for monitoring bank ownership and control. In addition, the FSC has put in place suitable arrangements to effectively conduct offsite and onsite supervision of offshore banks through an MOU recently signed with the ECCB. However, there is still a need to formally adopt prudential regulations and guidelines suitable for offshore banking, and to make the MOU fully operational once the offshore banks commence operations.

41. The regulatory framework for managing investment and credit risk still needs to be put in place. There is also a need to implement appropriate regulations and guidelines governing investment criteria, connected lending, market and other operational risks. In the area of anti-money laundering, the authorities have taken measures to raise the level of awareness in the banking sector. The ECCB also recently commenced onsite inspections to review compliance with local anti-money laundering requirements that included the parent banks of the licensed subsidiaries. These inspections will extend to the offshore banks under the terms of the MOU. Training of staff on AML for the banking sector has commended but there is still a need to enhance training for banking staff on the identification and reporting of suspicious activities. This training should also focus on increasing the level of awareness of senior bank officers on the particular financial and reputational risks posed by money laundering to their institutions and to the banking sector.

Objectives, autonomy, powers and resources (CP 1)

42. Anguilla has developed an appropriate legal framework for the supervision of offshore banks, including adequate provisions for enforcement and information sharing arrangements. Although the FSD currently does not enjoy legal and operational independence, the authorities will largely remedy the shortcomings with the passage of a Bill creating the FSC by the end of December 2003. Much will depend, however, on there being suitable funding arrangements for its operations, and on preserving the other provisions of the August 27, 2002 draft Bill. Also, attention should be given to broadening the professional and managerial strength of the proposed FSC. The participation of the ECCB in the consolidated supervision of offshore banking subsidiaries should also help to reduce staff constraints.

Licensing and structure (CPs 2-5)

43. The Trust Companies and Offshore Banking Act (TCOB Act) does not appropriately address the issue of major investments or acquisitions. Laws or regulations should define and specify investment criteria and supervisory approval requirements. With respect to licensing, ownership and permissible activities, Anguilla has robust legal provisions and procedures. In order to enhance compliance, the authorities plan to amend the current licensing documentation under the TCOB regulations and adopt the licensing procedures developed by the ECCB to enhance implementation of the requirements under CP 3.

Prudential regulations and requirements (CP 6-15)

44. With the exception of CP 15, there is still a need to implement the necessary regulatory framework to achieve compliance with these core principles. The overriding deficiency in all cases is the absence of comprehensive regulations or guidelines relating to credit, investment and other banking risks. In the case of connected lending and market risks, the authorities plan to formally adopt and implement regulations and guidelines which are broadly similar to those issued by the ECCB.

45. With regards to money laundering (CP 15), the ECCB recently implemented a program of onsite AML/CFT inspections of domestic banks that included the parent institutions of Anguillian offshore banks. To maintain effective compliance with CP 15, much will depend on the implementation of the MOU with the ECCB to enable consolidated supervision of the offshore banks, and on the continuation of AML/CFT inspections. Training of bank staff has commenced through the Caribbean Anti-Money Laundering Programme, but there is still a need to enhance skills in the identification of suspicious activities, and to raise the level of awareness of senior management on the risks posed by money laundering.

Methods of ongoing supervision (CPs 16-20)

46. With the signing of the MOU with the ECCB, Anguilla has put in place a suitable arrangement for ongoing supervision, including for onsite inspections, of offshore banks. Consequently, there is a high degree of compliance with these principles. CP 20–consolidated supervision–was determined to be not applicable.

Information requirements (CP 21)

47. The supervisory authorities need more control over the choice of accounting standards to be used for record-keeping and supervisory reports. In addition, there is a need to specify the scope of, and standards to be applied in, external and internal audits, and supervisors should have the power to revoke the appointment of bank auditors. To address these deficiencies, the authorities have arranged to discuss this matter with the ECCB to ensure compatibility with their procedures and requirements. This is particularly important in view of the status of the Anguillian offshore banks as subsidiaries of domestic banks that are supervised by the ECCB.

Formal powers of supervisors (CP 22)

48. The supervisor does not have adequate authority, backed by legal sanctions against the bank/management/directors, to take appropriate remedial action to address problems such as failure to meet prudential requirements and violations of regulations. The proposed FSC Act should address most of these shortcomings. However, the respective enforcement powers of the Inspector and the ECCB under the MOU need to be clarified to ensure compatibility with the TCOB and FSC Act.

Cross-border banking (CPs 23-25)

49. CPs 23 and 24 were not applicable to Anguilla. With respect to CP 25, there are no provisions for home supervisors to readily conduct on-site inspections of Anguillian offshore banks. However, under the proposed draft FSC Act the FSC may allow a foreign regulatory authority to participate in the inspection of banks only in conjunction with FSC inspections. There are at the moment no significant risks associated with CP 25 as the offshore banks have not commenced operations as yet. Once they become operational, the MOU with the ECCB should provide an appropriate mechanism to facilitate onsite examinations of the two offshore banks covered by the MOU.

Table 6.

Recommended Action Plan to Improve Compliance with the Basel Core Principles

article image
article image
article image
Authorities’ response

50. The Government of Anguilla was pleased to respond to the IMF’s assessment. With respect to the recommendation to pass the Financial Services Commission Bill, which will convert the existing financial services regulatory body into an independent commission, the delay in passing the FSC Bill has been due to the need to seek HMG’s approval for the proposed structure of the Commission. This approval was received in June 2003 and the Bill is due to be enacted before the end of 2003, at which time the Commission will be ready to commence operations. As the IMF Report indicates, the setting up of the Commission will give additional strength to Anguilla’s regulatory and supervisory powers.

51. With respect to the assessment of compliance with the other Basel Core Principles for Effective Banking Supervision (BCPs), the IMF has made recommendations on a number of the BCPs. It should be noted that at the time of the IMF assessment, there were in operation in Anguilla only four domestic banks, which are regulated by the Eastern Caribbean Central Bank (ECCB), based in St Kitts, since Anguilla forms part of the Eastern Caribbean Currency Union. The legislation covering the regulation and supervision of domestic banking is the Banking Act. An IMF assessment of the ECCB and domestic banking regulation will take place during September–October 2003.

52. Anguilla has, however, separate legislation for licensing and supervising offshore banks. Offshore banking is defined as dealing in a currency other than Eastern Caribbean dollars with nonresidents. During 2002 Anguilla granted offshore banking licenses to the subsidiaries of two Anguillian domestic banks. Since the ECCB is the domestic regulator, a Memorandum of Understanding was signed on September 30, 2002, between the Governor of Anguilla and the ECCB, whereby the ECCB accepts responsibility for the consolidated supervision of the two banks, establishing offshore banking subsidiaries. The MOU details further the procedures for supervisory cooperation and on-site inspections.

53. The IMF Report makes reference to the fact however that in order to meet Basel Core Principles fully there is a need for Anguilla to implement in its offshore banking legislation a number of appropriate technical regulations and guidelines governing bank investment criteria, connected lending, market risks, credit risks and other operational risks. It should be noted that a number of these BCP recommendations will be addressed by the ECCB through the proposed amendments to the domestic Banking Act.

54. In anticipation of the two banks commencing offshore banking operations in late 2003, Anguilla’s regulatory body wrote in June 2003 to the Barbados-based Caribbean Technical Assistance Center (CARTAC), with a request to assist Anguilla in speeding up the drafting of such regulations and guidelines. CARTAC responded that it was carrying out similar work for the ECCB and recommended that, as the regulations and guidelines are developed, the ECCB should transmit the same to Anguilla for review and implementation in its offshore banking legislation.

55. In the meantime, Anguilla’s financial services regulatory department has already drafted amendments to the existing offshore banking legislation in order to cover a number of the IMF recommendations and is in contact with the ECCB on the remaining BCP recommendations, covering specifically the issuance of guidelines for country, transfer, market, liquidity, interest rate and operational risks, as mentioned above. Such an approach will ensure appropriate consistency between the domestic and offshore banking legislation and supervision.

III. Report on Observance of Standards and Codes—FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism

A. Introduction

56. This Report on the Observance of Standards and Codes for the FATF 40 Recommendations for Anti-Money Laundering and 8 Special Recommendations for the Financing of Terrorism was prepared by a team of assessors that included staff of the International Monetary Fund (IMF) and experts under the supervision of the IMF staff. An independent law enforcement expert (IAE) not under the supervision of the IMF also participated in the assessment. IMF staff reviewed the relevant AML/CFT laws and regulations, and supervisory and regulatory systems in place to deter money laundering (ML) and the financing of terrorism (FT) in the regulated financial sector. The IAE reviewed the capacity and implementation of criminal law enforcement systems.9

57. This report provides a summary of the level of observance with the FATF 40+8 Recommendations, and proposes a number of measures for strengthening compliance with these Recommendations. The views expressed in this document are those of the team members and do not necessarily reflect the views of the Government of Anguilla or the Executive Board of the IMF.

B. Information and Methodology used for the Assessment

58. In preparing the detailed assessment, IMF staff and other experts under the supervision of the IMF reviewed the relevant AML/CFT laws, regulations, guidelines and associated instruments, as well as the supervisory and regulatory systems in place to counter money laundering and the financing of terrorism in the regulated financial system. The review of the financial sector focused mainly on the banking sector but also reviewed the AML/CFT systems in place for the company and trust services sector. The IAE not under the supervision of IMF staff reviewed the capacity and implementation of criminal law enforcement systems10. The assessment is mainly based on information available at the time of the mission which was completed on November 1, 2002.

C. Main Findings

Criminal justice measures and international cooperation

59. Anguilla has a relatively comprehensive legal and institutional AML/CFT framework, particularly with respect to measures to combat terrorism and terrorist financing; criminalization of offenses; confiscation of the proceeds of criminal conduct; international cooperation; and law enforcement and prosecution powers. Its legislation contains many of the principal elements required for compliance with the FATF Recommendations and efforts are underway to introduce improvements in the AML/CFT regime and for addressing a number of recommendations made in the KPMG Report.11

Criminalization of ML and FT

60. As an Overseas Territory of the United Kingdom (UK), Anguilla is not able to ratify conventions but depends upon extensions to it by the UK. It has, however, implemented the provisions of the Vienna Convention and of the Convention for the Suppression of the Financing of Terrorism in local legislation. Since the UK has not yet ratified the Palermo Convention, it has not been extended to Anguilla.

61. Anguillian legislation is broadly consistent with international standards. It criminalizes money laundering and extends to the proceeds of all serious offences including those that occur extraterritorially. The offences of money laundering apply to both individuals and legal entities.

62. Legislation for combating the financing of terrorism is strong. These laws apply to terrorists and terrorist organizations irrespective of whether terrorist acts occur in Anguilla or in other countries. For both ML and FT offences, there are appropriate dissuasive sanctions including confiscation of property, fines and, with respect to regulated entities, the legislation provides for the suspension and revocation of licenses.

63. While the basic elements are in place, the legal framework could be strengthened in a number of areas. Anguillian legislation does not allow for the extradition of individuals for financing of terrorism and money laundering offences. The authorities are also considering the adoption of a number of provisions contained in the new UK Proceeds of Crime Act which should significantly strengthen the AML/CFT regime. With regards to combating the financing of terrorism, the authorities are still to develop appropriate administrative arrangements for the filing and analysis of suspicious activity reports. Specific guidance to the industry on this issue is also required.

Confiscation of proceeds of crime or property used to finance terrorism

64. Confiscation and seizure provisions are generally available in the Anguillian ML and FT legislation. Under these provisions law enforcement authorities can freeze property but only after criminal proceedings have been initiated for ML offences. For FT offences, ex parte restraint orders may be obtained once an investigation has commenced. The counter-terrorism laws contain comprehensive seizure and confiscation provisions, including for the seizure of cash under civil proceedings. The rights of innocent and bona fide third parties are protected under law for restraint and confiscation orders. Law enforcement authorities also have adequate powers to identify and trace property, particularly with respect to the production of material. Adoption of the provisions similar to those contained in the new UK Proceeds of Crime Act would also improve the seizure and confiscation regime for ML, particularly those relating to account monitoring orders, restraining orders and the voiding of contracts.

65. Law Enforcement Considerations—There have been no seizure or confiscation of property arising out of ML and FT cases. A few suspicious transaction reports have been filed but these have not resulted in seizures or confiscations. Notwithstanding, a system has been developed to keep statistics on such issues. Training has been provided to police officers through the Trinidad and Tobago-based Caribbean Anti-Money Laundering Program on basic money laundering investigations but more advanced training is now required. Training has also been provided to prosecution staff on money laundering issues. No timeframe has been established for the provision of advanced training for law enforcement officers.

The FIU and processes for receiving, analyzing and disseminating intelligence

66. The Money Laundering Reporting Authority (RA) has been designated under the Money Laundering Reporting Authority Act as Anguilla’s FIU with general functions to receive and disseminate information on suspicious transactions relating to suspected ML offences. The law does not specify a responsibility for the RA to analyze reports of suspicious transactions and in practice it has not fully developed an analytical role for processing such reports. Reports of suspected terrorism financing activities are not filed with the RA but are provided directly either to the police or to the Governor. The RA is required to provide information on suspicious activity to the police and customs authorities for investigation. In practice most reports are forwarded by the police to an investigative agency of the UK (WCCIT)12 established overseas for assistance in their investigations.

67. The RA has access to financial, administrative and law enforcement databases and is authorized to disclose information to law enforcement authorities in Anguilla and abroad. When disclosing information to a foreign agency, due regard is given to the interests of third parties and on the use of such information by the recipients. However, there is no specific provision in the law that mandates reporting institutions to provide additional information to the RA upon request although in practice this is reported to occur.

68. Law Enforcement Considerations—The RA is comprised of the Commissioner of Police, a senior police officer, the Comptroller of Customs and the Director of Financial Services. The RA does not have an independent budget and given the current resource constraints, processing of suspicious transaction reports is not conducted in a systematic manner. There have been a few cases of suspicious activity reported to the RA (5) and no requests for assistance have been made or received from foreign FIUs. There is no centralized system for filing of suspicious activity reports which can be sent to any one of the agencies that comprise the RA. There is a need to develop a centralized reporting mechanism and for keeping statistics of such reports as well as for requests for assistance when these occur.

Law enforcement and prosecution authorities, powers and duties

69. Law enforcement authorities have adequate powers to compel the production of records from financial institutions to assist in ML and FT investigations by applying to the High Court. More robust powers are required for money laundering cases particularly those relating to account monitoring and tracking orders, similar to those contained in the new UK Proceeds of Crime Act and in the FT laws.

70. Although law enforcement staff has undergone basic training on money laundering, their skills are underutilized locally as most reports of suspicious transactions (STRs) are sent overseas for assistance from WCCIT. As the number of STRs increases, there will be a need to develop local intelligence and investigative capacity that could include the creation of a law enforcement/intelligence task force comprising police, customs and immigration officials. The pooling of resources would help alleviate the current resource constraints.

71. The use of undercover operations, including controlled deliveries, is not unlawful in Anguilla. In the past, local law enforcement agencies have collaborated with overseas counterparts in an undercover operation.

International cooperation

72. Anguillian law provides for a wide range of assistance to be granted to foreign authorities in criminal investigations and proceedings, including on a discretionary basis. In addition, compulsory measures are possible under the legislation and a mutual legal assistance treaty (MLAT) with the USA. The authorities may also enforce foreign restraining and confiscation orders for various types of cases, including for terrorism finance. The RA can also share information freely with foreign law enforcement authorities through various mechanisms, including Interpol and a regional information sharing network (OTCRIS). A main drawback to international cooperation is the inability under Anguillian law to extradite individuals for money laundering and terrorist financing cases. Notwithstanding, the Governor is authorized to deport individuals who are deemed to be “undesirables”.

73. Law Enforcement Considerations—In light of the small number of requests for mutual legal assistance received each year (2-3) from abroad, there is no immediate need to maintain statistics and assign staff solely for this purpose. None of these requests has involved ML or FT cases.

Preventive measures for financial institutions

Prudentially-regulated sectors (Banking, insurance, and company and trust services)

74. The establishment of an operationally autonomous Financial Services Commission (FSC) has been postponed from December 2002 to September 2003. The proposed FSC should significantly strengthen Anguilla’s ability to implement its AML/CFT laws. However, its effectiveness will largely depend on the financial and staffing resources available to the FSC to undertake ongoing supervision of financial institutions, particularly onsite inspections. Important amendments to the Anti-Money Laundering Regulations and Guidance Notes are also required as well as extension of the AML/CFT laws to specifically cover insurance agents and certain aspects of mutual funds business.

General framework

75. The ML Regulations and Guidance Notes comprise the primary legal and institutional instruments for anti-money laundering controls in Anguilla. The Guidance Notes, which are not mandatory, were issued under the ML legislation to provide practical assistance to financial institutions for complying with the AML requirements. They also form the basis by which they are supervised for compliance. Both the Regulations and the Guidance Notes apply to a wide range of financial service providers including but not limited to banking (both domestic and offshore), insurance companies, company managers, trust companies and money transmission services.

76. The Director of the Financial Services Department (FSD) in the Ministry of Finance is currently at the forefront of efforts to implement the AML/CFT laws of Anguilla. The planned establishment of the FSC as an omnibus supervisory body to replace the FSD will provide the authorities with enhanced supervisory powers, including for enforcing and applying disciplinary action for noncompliance with AML requirements. Much will depend, however, on maintaining a well-resourced cadre of supervisory staff for the new FSC. The recent signing of an MOU with the ECCB, which supervises domestic banks, should enable consolidated supervision of offshore and domestic banks for AML/CFT purposes. The authorities should formally assign responsibility to an agency, such as the FSC, for supervising compliance with CFT requirements.

77. To improve implementation of AML/CFT requirements in the financial sector, the authorities should consider revising the Guidance Notes to provide more industry-specific guidance and to require a more risk-focused approach for customer due diligence and monitoring activities. In addition, they should specifically address issues relating to CFT. Enhanced training and awareness in the financial sector is also required.

Customer due diligence, monitoring of transactions and record keeping

78. All covered financial institutions are required to have procedures in place that require evidence of the identity of customers, either occasional or habitual. What constitutes satisfactory evidence under the ML Regulations is to be determined by reference to the Guidance Notes. There is no legal requirement to periodically review customer identification and due diligence documentation but the Guidance Notes provide situations where further evidence of identify should be obtained. Records of customer identification and transactions are required to be retained for at least six years.

79. Important improvements can be made to the legal and institutional arrangements for customer identification and due diligence. These include the introduction of core customer identification requirements in the ML Regulations that: (i) establish general requirements for what constitutes satisfactory evidence of identity including for legal entities; (ii) require reverification of customer identity under certain circumstances; (iii) require identification and due diligence information for introduced business to be made available to financial institutions promptly on request; (iv) establish an obligation on company and trust services providers to ascertain the adequacy of AML/CFT systems and controls of eligible introducers; and (v) require financial institutions to monitor for unusual complex transactions, and unusual patterns of transactions. In addition, FIs should be required to comply with the Directive on information for funds transfers to comply with the FATF 8 Special Recommendations on terrorist financing. Legislative initiatives are also planned with respect to money remittance firms which are expected to come under the supervision of the ECCB or the FSC.

Suspicious activity reporting

80. One of the areas requiring attention is the need for an explicit suspicious transaction reporting requirement supported by a more effective sanctioning system. Failure to promptly file a suspicious activity report should be made an offence. There is also a need for a more explicit requirement regarding the internal review and recording of unusual complex transactions and patterns of transactions. With regards to FT, additional guidance is required to assist financial institutions in identifying and reporting suspicious activity, including through amendments to the Guidance Notes and training for staff. The authorities should also investigate the reasons for the small number of suspicious activity reports filed to date.

Non-prudentially regulated sector (Company and trust services providers)

81. Company and trust services providers comprise the fastest growth area in financial services in Anguilla. Many licensed CSPs do not have a physical presence on the Island which will pose a challenge for the authorities in the conduct of onsite inspections for AML/CFT. With the establishment of the FSC, a program of periodic onsite examinations of CSPs should be fully implemented and focused on compliance with AML/CFT requirements. These examinations should extend to CSPs that do not have a physical presence in Anguilla and should review the implementation of arrangements for reliance on customer due diligence carried out by overseas introducers/sub-agents. CSPs should also be required to ascertain that the AML/CFT systems of overseas agents are at least as rigorous as those required under the Anguillian legislation and Guidance Notes.

Medium-term challenges

82. One of the principal challenges for the authorities will be the establishment of a well-resourced and functioning FSC that can continue to act as the lead agency in supervising the implementation of the AML/CFT requirements in the financial sector. Attracting and retaining qualified staff for the FSC should be a primary objective, as well as the implementation of the MOU with the ECCB for the supervision of offshore banks. Another challenge will be reviewing and enforcing compliance with AML/CFT requirements by CSPs that do not have a physical presence in Anguilla and who rely on eligible introducers for customer due diligence.

Summary assessment against the FATF Recommendations

83. Overall, Anguilla complies well with the FATF 40+8 Recommendations. Its legal framework is relatively strong but improvements in provisions relating to extradition and in the regulations would significantly improve the AML/CFT regime. Adoption of some of the provisions of the new UK Proceeds of Crime Act would also strengthen the legal framework. With regards to implementation, more comprehensive monitoring for compliance, heightened awareness and guidance for the financial sector, including for the combating of the financing of terrorism, would enhance compliance with the Recommendations. Table 7 below summarizes recommended action in areas that would assist the authorities in further strengthening the AML/CFT regime.

Table 7

Recommended Action Plan to Improve Compliance with the FATF Recommendations

article image
article image
article image
Table 8.

Other Recommended Actions

article image
Authorities’ response

84. Anguilla agreed to be assessed under the new AML/CFT Methodology document, which was introduced shortly before the IMF assessment. As a result the IMF has made a number of AML/CFT recommendations, which are accepted. Anguilla was pleased to learn that the IMF considers Anguilla to have a relatively robust legal and institutional AML/CFT framework.

85. Anguilla’s existing Proceeds of Crime legislation and Anti-Money Laundering Regulations and Guidance Notes on the Prevention of Money Laundering were largely drafted on similar UK legislation in place at the time. Since then, the UK has adopted a new Proceeds of Crime Act, and the proposed adoption by Anguilla of a number of new measures contained in that new Act, should go a long way to meeting the IMF’s legal and institutional recommendations directed at Anguilla’s current AML legislation. In addition the IMF recommends that a number of provisions already contained in the Guidance Notes for the Prevention of Money Laundering should be transferred into existing Regulations to give them more force of law. Anguilla has already identified these provisions and they are being transferred into Regulations accordingly. A number of other minor recommendations concerning Anguilla’s AML Regulations are also being formalized.

86. The IMF also recommends that Anguilla’s Money Laundering Reporting Authority should take on a more centralized structure. Arrangements and an extra resource person have already been put in place to ensure that this recommendation is met in line with other FIU-type requirements, which Anguilla would need to strengthen as a newly elected member of the Egmont Group.

D. Regulatory Arrangements in Relation to Other OFC Sectors

Oversight of company and trust services providers

87. Anguilla is actively promoting the development the offshore company industry. As at August 31, 2002, 4,642 companies and partnerships had been registered through its online registration system (ACORN). Twenty nine company managers have been licensed. Like other offshore jurisdictions, there is no requirement to register trusts in Anguilla and it is therefore not known how many trusts have been formed. At the time of the mission, 12 trust companies have been licensed to operate from within Anguilla. Both company managers and trust companies are supervised by the FSD, which is to be replaced by the FSC in September 2003 as an operationally autonomous supervisory body.

88. The Company Management Act, 2000 (CMA) and related Regulations govern the regulation and supervision of company management business. Company managers are licensed under this Act and are authorized to provide the following services:

  • incorporation and formation of companies including international business companies (IBCs), Company Ordinance Companies, and Limited Liability Companies. It excludes the formation of partnerships;
  • acting as director, manager or officer of companies, including foreign companies;
  • acting as registered agent for companies;
  • providing registered office for companies;
  • preparation and filing of statutory documents on behalf of companies; and
  • acting as nominee shareholder for companies, including foreign companies.

89. Trust companies are licensed under the Trust Companies and Offshore Banking Act, 2000 (TCOB) which defines trust business as the business of “acting as trustee of property.” Section 3 of the Trusts Ordinance (1994) defines a trustee as a person who “holds or has vested in him, or is deemed to hold or have vested in him, property which does not form, or which has ceased to form, part of his own estate, for the benefit of any persons, purposes or both.” This Ordinance allows for settlors of a trust relationship to also be a trustee, protector and beneficiary of the same trust. The Trusts Ordinance allows for the designation of corporate trustees and protectors who can be appointed to enforce trusts. Trust companies are also authorized to carry on company management business under a trust license without the need for a company manager license. According to the authorities, the practice has been for trust companies to mainly engage in company services as opposed to trust administration.

90. The CMA authorizes the Inspector of company managers to issue directions for purposes of filing regulatory returns and to examine the books and records of licensees during onsite inspections. Similar powers are contained in the TCOB with respect to trust companies. In addition, the proposed FSC Act will contain enhanced authority for the conduct of compliance inspections without restriction on access to information. The new Act will also provide more effective enforcement and disciplinary powers to the FSC, including the imposition of financial penalties for noncompliance with legal and other regulatory requirements, including for AML/CFT. Under the CMA and the TCOB, the Governor’s authority to take enforcement action against CSPs is mainly restricted to the suspension and revocation of licenses.

91. Governor and the Inspector are not restricted under the law to access information on the operations of CSPs. With regards to sharing of information, Section 17 of the CMA prohibits the regulator from disclosing information obtained during the course of an examination of a licensee regarding a company managed by the licensee, or in the exercise of its functions under the CMA, except as required by a Court in Anguilla or where a disclosure is made to the Governor. The Court will authorize disclosure only where there is prima facie evidence of illegality and where the information may be useful for the investigation of illicit activity. Information, except for details of companies under management, can be provided under Section 23 of the CMA to foreign regulators for regulatory purposes subject to restrictions on further disclosure by the recipient.

92. Section 31 of the TCOB imposes similar restrictions on the disclosure of information acquired by the regulator in respect of the name and title of a settlor of a trust. Section 35 of the TCOB makes provisions for disclosure to a foreign regulator on the same basis as under Section 23 of the CMA above.

93. Section 21 of the draft FSC Bill will enable the FSC unrestricted access to information on CSPs in the performance of its duties under the CMA and TCOB or any other law. The FSC will also be able to share such information with foreign regulators under Section 24 of the FSC Bill for regulatory purposes only. Such information will be provided on the basis of reciprocity and subject to restrictions on further disclosure. Information may not be provided if it will be used in criminal proceedings against the person furnishing it. Under the proposed law, the FSC will be able to require that a foreign regulator contributes towards the costs associated with the provision of information.

94. Plans are underway for the FSD/FSC to undertake onsite inspections of CSPs. The current structure of the CSP industry, where a number of licensees do not have a physical presence (cubicle agents) and where business is introduced by overseas sub-agents of CSPs, poses a not too insignificant challenge to the implementation of onsite inspections. The FSD has indicated that strengthening staffing resources for the FSC will be a primary objective of the authorities. However, its ability to conduct periodic inspections will depend on securing sufficient funding for its operations. It may also require entering into cooperation arrangements with foreign regulators from jurisdictions where CSPs and their sub-agents operate.

Recommended plan of action for the company and trust services sector

Table 9.

Recommended Plan of Action for the Company and Trust Services Sector

article image

Authorities’ response

95. The IMF also reviewed Anguilla’s oversight of company and trust service providers (CSPs), for which the IMF recognizes that there are no codes or standards set but only best practices. A main recommendation by the IMF is the need to implement a proposed program of onsite inspections of CSPs. At the time of the IMF visit, an on-site program had been established but had not yet commenced. By September 2003, the majority of CSPs had undergone on-site inspection by the regulatory body and had been asked to correct a number of deficiencies in their practices. The other four recommendations cover minor amendments to the existing Code of Practice for CSPs, clarifying issues concerning introduced business and an enhanced role for external auditors for AML/CFT compliance. These recommendations are being reviewed and amended directives are to be put in place accordingly.

1

A Module 2 assessment is described in SM/00/136, Offshore Financial Centers—The Role of the IMF.

2

The Offshore Group of Banking Supervisors.

3

Eight of these licensees are reported to be affiliates of foreign CSPs that are supervised in other jurisdictions under requirements that are broadly similar to those of Anguilla.

4

Legislation for CSPs was amended in December 2000.

5

Exchange rates: US$1.00 = EC$2.68 (fixed)

6

Eight of these licensees are reported to be affiliates of foreign CSPs that operate and are supervised under requirements that are broadly similar to those of Anguilla.

7

The FSF stated in its press release of May 26, 2000, “It is important to stress that the categorization of OFCs into these three groupings is based on responses of OFC supervisors and the impressions of a wide range of onshore supervisors at a particular point in time. The categorization does not constitute judgments about any jurisdiction’s adherence to international standards.”

8

An offshore banking license was granted to an international bank operating in the domestic market. However, the license has remained dormant and there are no plans to activate it in the foreseeable future.

9

The assessment was conducted by Mr. Manuel Vasquez (Mission Chief, MFD); Ms. Margaret Cotter and Mr. Stuart Yikona (both LEG); Ms. Candice Huggins (Technical Expert); and Mr. Pierre Lapaque (Independent Law Enforcement Expert, Organization of American States–CICAD9). Ms. Cotter, Ms. Huggins and Mr. Lapaque were part of a larger OFC mission led by Mr. Vasquez to both Anguilla and Montserrat during October 21 – November 1, 2002.

10

Throughout this report, the assessments relating to law enforcement conducted by the IAE are shown in italics.

11

1999 UK Review of Financial Regulation in the Caribbean Overseas Territories and Bermuda.

12

White Collar Crime Investigation Team is a joint UK/US police unit based in Florida, USA.