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© 2003 International Monetary Fund

November 2003

IMF Country Report No. 03/371

Montserrat—Overseas Territory of the United Kingdom: Assessment of the Supervision and Regulation of the Financial Sector—Review of Financial Sector Regulation and Supervision

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

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Assessment of the Supervision and Regulation of the Financial Sector

Review of Financial Sector Regulation and Supervision

Montserrat

October 2003

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

Contents

  • Preface

  • Executive Summary

  • I. Financial System Overview

    • A. Background

      • Government

      • Economic activity

    • B. Financial Institutions and Markets

    • C. Regulatory Framework, Oversight and Market Integrity Arrangements

      • Offshore banking

      • Anti-money laundering

      • Previous regulatory reviews

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

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

      • Basel Core Principles for Effective Banking Supervision

      • Main findings

      • Authorities’ response

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

    • A. Introduction

    • B. Information and Methodology used for the Assessment

    • C. Main Findings

      • Criminal Justice Measures and International Cooperation

      • Medium Term Challenge

      • Summary Assessment against the FATF Recommendations

      • Authorities’ response

  • Text Tables

  • 1. Estimated Gross Domestic Product

  • 2. Offshore Banks Country of Origin/Location

  • 3. Montserrat—Recommended Action Plan to Improve Compliance of the Basel Core

  • 4. Recommended Action Plan to Improve Compliance with the FATF Recommendations

  • 5. Other Recommended Actions

Preface

At the request of the authorities, an MAE-led mission visited Montserrat from October 21 to November 1, 2002, to assess observance of financial sector supervisory standards in the context of a Module 2 offshore financial center assessment1. The mission assessed the extent to which the regulatory and supervisory arrangements for the offshore financial sector complied with internationally accepted standards in the offshore banking sector. The assessment also included an evaluation of measures related to anti-money laundering and combating the financing of terrorist (AML/CFT) based on the October 11, 2002 version of the AML/CFT Methodology (Methodology), which was endorsed by the Financial Action Task Force (FATF).

Prior to the mission, it was agreed with the authorities that, with the exception of the AML/CFT components, the domestic financial sector would not be assessed at this time as this was to be covered as part of a regional FSAP in 2003 of countries comprising the Organization of Eastern Caribbean States. This did not pose practical difficulties for the mission because the domestic banking sector is governed by separate legislation and is supervised by the regional Eastern Caribbean Central Bank (ECCB).

The mission reviewed all of the relevant legislation and documentation, and held discussions with the regulatory authorities, government officials, the Governor, and representatives from the banking industry. The mission was grateful for the excellent cooperation, support, frankness and gracious hospitality of the staff of the Financial Services Commission (FSC), government officials, and representatives of the banking sector.

The mission was led by Mr. Manuel Vasquez (MAE), and included Ms. Margaret Cotter (LEG), Mr. Anthony Maxwell (Banking Advisor), Mr. Timothy Sullivan (Banking Advisor), and Ms. Candice Huggins (AML/CFT Advisor). Mr. Pierre Lapaque, independent law enforcement expert from the OAS-CICAD, conducted an assessment of the implementation of the criminal law enforcement elements of the AML/CFT Methodology.

The report consists of two volumes. Volume I presents a general overview of the financial system and the AML/CFT framework as well as a summary of the assessment findings and recommendations. Volume II presents a detailed assessment of compliance with the supervisory and regulatory principles relative to the Basel Core Principles for Effective Banking Supervision (BCP), and a detailed assessment of Montserrat’s AML/CFT regime.

Executive Summary

Montserrat has one of the smallest financial sectors of the six UK Overseas Territories. Besides offshore banking, there is very little economic and financial activity largely due to the devastation caused by the eruptions of the Soufriere Hills volcano which began in 1995. As a result of these eruptions, about two-thirds of the population left the Island but some have since returned.

Whilst the volume of economic and financial sector activity contracted due to the volcanic eruptions, 11 offshore banks remain, down from 15 in 2000. Two banks are licensed to operate in the domestic banking sector. All of the offshore banks are owned and controlled by Latin American interests. During the time of the mission only three offshore banks had opened small offices in Montserrat.2 None of the offshore banks have a meaningful physical presence (mind and management) on the Island that would enable comprehensive ongoing supervision by the FSC. However, MOUs have been entered into with overseas regulators that provide a mechanism for collaboration in the supervision of most of the offshore banks.

The volcanic eruptions effectively suspended financial sector supervision in the offshore sector between 1996 and 1999, with bank records becoming irretrievable. The whole supervisory process resumed almost from scratch after 1999, and in 2001 a Financial Services Commission was established by law that has commenced to put in place supervisory arrangements for the offshore banks. The FSC recently signed Memoranda of Understanding (MOUs) with four regulators from Central and South America to participate in the supervision of the offshore banks with affiliates in those two regions. At the time of the mission, these MOUs had not been fully implemented particularly with respect to onsite inspections. The FSC recently held prudential meetings with offshore bank representatives overseas and is in process of enhancing offsite supervision. There is still a need to more clearly ascertain whether the ownership and control structure of some of the offshore banks will allow overseas regulators to conduct consolidated supervision. As well, restrictions on access to customer account information contained in three of the MOUs will limit the ability of the overseas regulator to effectively supervise these banks.

The FSC currently does not have sufficient staff and resources to conduct onsite examinations of offshore banks. To help resolve its capacity constraints, the FSC entered into a MOU with the ECCB in September 2002 to assist the FSC in supervising offshore banks. The ECCB will take the lead supervisory role but regulatory authority will remain with the FSC and the Governor. Prudential regulations are still required to be issued under the Financial Services Commission Act, 2001 to effectively implement the MOU.

Although the MOUs with the ECCB and overseas regulators should significantly enhance the FSC’s supervisory capacity, the mission recommended that the authorities remove the restriction on access to information placed on the overseas regulators. In addition, where offshore banks cannot be subject to effective ongoing supervision, the mission recommended the authorities to either require such entities to establish a substantive physical presence on the Island or to cease operations.

Montserrat’s is materially non-compliant or non-compliant with most of the Basel Core Principles (CPs), particularly those relating to prudential requirements and supervision. However, the legal framework relating to autonomy and supervisory powers was found to be relatively sound particularly with regards to CPs on licensing and information sharing. To address the identified shortcomings, this report recommends the development and implementation of regulations and guidelines setting forth prudential standards. This report also recommends: granting the supervisor the authority to take a range of remedial actions; working with the ECCB to ensure that the MOU is implemented expeditiously and clarifying the respective roles of the ECCB and FSC in enforcement actions; augmenting acquisition/investment approval requirements; and specifying accounting and auditing standards. The authorities were also urged to fully implement the MOUs with the overseas supervisors that would enable onsite inspections of offshore banks including a review of compliance with Montserrat’s anti-money laundering laws and Practice Code.

A fuller assessment of Montserrat’s compliance with the CPs is being undertaken as part of a review of the ECCB’s supervisory systems during an FSAP carried out in September -October 2003.

Where progress has been achieved in developing a comprehensive AML/CFT legislative and regulatory framework, significant gaps remain in its implementation, particularly in the offshore banking sector. Nonetheless, the authorities should be commended for their efforts in spite of severe capacity constraints. The primary money laundering legislation provides appropriate tools for the criminalization, freezing and confiscation of the proceeds of crime, and for international cooperation. The anti-money laundering Regulations impose broad obligations on financial institutions for customer identification, record-keeping, monitoring and reporting of suspicious transactions. These Regulations should be upgraded to bring them in line with international standards. An AML Practice Code has been issued under the Proceeds of Crime Act to give practical directions for compliance with the Regulations. Although the Code only represents good practice and is not mandatory, the Regulations provide that a court may take it into account in determining whether a person has complied with the Regulations.

A number of recommendations were made to improve the legislative and regulatory framework, particularly in the areas of extradition, affirmative requirements for financial institutions to file suspicious activity reports (STRs), and streamlined Regulations and Practice Code. The Regulations and the Code also require enhancements in the area of customer due diligence. The legal role and capacity of the financial intelligence unit (Money Laundering Reporting Authority) should be strengthened. In addition, there is a need to introduce measures to implement counter-terrorism financing provisions, particularly those relating to the Terrorism Orders and the FATF 8 Special Recommendations. The recommendations to fully implement the MOUs with the ECCB and overseas supervisors, including the removal of restrictions on access to customer account information, will also strengthen Montserrat’s AML/CFT efforts. Additional recommendations are contained in the detailed assessment report.

The Montserrat authorities should also investigate the reasons for the absence of STRs submitted by financial institutions. Only one offshore bank has filed suspicious activity reports so far. The authorities maintain that suspicious transactions that also affect the overseas affiliates of the Montserrat offshore banks are reported to the overseas competent authorities. However, this does not absolve the offshore banks of their responsibility under Montserrat legislation.

Montserrat — Overseas Territory of the United Kingdom: Assessment of the Supervision and Regulation of the Financial Sector—-Review of Financial Sector Regulation and Supervision
Author: International Monetary Fund