General

25. This assessment is based on of the current state of Montserrat’s compliance with the Basel Core Principles for Effective Banking Supervision (CP) conducted as part of the IMF’s October 2002 Offshore Financial Center—Module 2 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 Montserrat. An assessment of domestic banking regulation and supervision, which is the responsibility of the Eastern Caribbean Central Bank (ECCB), has been carried out separately as part of the 2003 FSAP.

26. This assessment serves several purposes. First, it benchmarks the current state of preparations for the supervision of Montserrat’s offshore banks, recognizing the potential for progress through the full implementation of 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 Montserrat. Thus, the report provides key input for the development of an action plan to move towards full compliance with the Core Principles.

27. The assessment was carried out by independent bank supervision experts, and included an examination of the legal framework as it related to offshore banking. The self-assessment questionnaire, completed in 2002, also provided some useful information, although much more useful information was provided in meetings with the Commissioner, who made himself freely available. Meetings were held with local junior management of one of the offshore banks that currently maintain a limited, record-keeping office in Montserrat and two local attorneys who act as local Authorized Agents for most of the offshore banks. The assessment reviewed ECCB draft off-site surveillance and on-site examination procedures for offshore banking; however, there were no meetings with ECCB officials, nor was there a review of ECCB prudential policies or guidelines, which will only have effect once they are formally adopted by the FSC. The update review in September 2003 consisted of a half-day meeting in Anguilla with the Commissioner.

Institutional and macroprudential setting, market structure overview

28. The Governor has overall constitutional responsibility for international financial services in Montserrat. In his capacity as Governor-in-Council, he has the authority to issue regulations under the Offshore Banking Act and the Financial Services Commission Act. A Financial Services Commission (FSC) was created by law in November 2001 to license and supervise the financial services sector, including offshore banks.⁷ The FSC has responsibility for, inter alia, all aspects of financial institution supervision including granting and revoking licenses; monitoring compliance with anti-money laundering requirements; and maintaining relations with foreign regulatory authorities. The Governor appoints all of the members of the FSC including a Commissioner, who acts as the chief executive officer, and three other members.

29. None of the 11 offshore banks licensed in Montserrat has a substantive physical presence (mind and management) on the Island although three (later increased to five) have opened local offices largely in response to the US Patriot Act requirements. All of the offshore banks are controlled by interests in Central America and South America. At the time of the mission, two banks were direct subsidiaries of foreign banks while the remaining institutions were either affiliated with financial groups through holding company structures, as parallel banks, or were shell institutions.

General preconditions for effective banking supervision

30. Montserrat is a member of the Eastern Caribbean Currency Union. It has a very small domestic banking sector which is supervised by the ECCB under the uniform Banking Act. The ECCB has a fairly well developed regulatory and supervisory structure. Offshore banks are regulated under the Offshore Banking Act, and are subject to supervision under by the FSC. The Governor retains overall regulatory responsibility for the offshore financial sector, including for offshore banking. Both the Offshore Banking Act and the Financial Services Commission Act provide the legal framework for the supervision of the 11 offshore banks. While the legal structure is largely adequate, the absence of a substantial physical presence in Montserrat by a number of the offshore banks, and limited supervisory capacity of the FSC, pose a significant limitation to the conduct of ongoing effective supervision by the FSC. The MOUs entered into with the ECCB and the overseas regulators seek to address this concern. However, the MOUs are still to be fully implemented.

Objectives, autonomy, powers and resources (CP1)

34. Montserrat has a relatively well-developed legal and regulatory framework with adequate provisions for information sharing and permissible activities. Provisions relating to the independence of the FSC, licensing procedures and enforcement powers are also strong. However, there is a need to clarify the need for an amendment to the FSC Act to bring the MOU with the ECCB into effect, and for establishing the respective supervisory roles and objectives of the ECCB and the FSC. MOU with four overseas regulators in Latin America are still to be fully implemented. There is still a need to increase and broaden the professional and managerial strength of the FSC as well as enhance its supervisory powers to address compliance and safety and soundness concerns.

Licensing and structure (CPs 2—5)

35. Provisions relating to the licensing and ownership of banks, as well as the range of permissible activities, are relatively sound. However, legal provisions only partly address criteria for appropriately judging investment proposals or for addressing the banks’ capacity to take on major investments or acquisitions. The Offshore Banking Act does require prior approval of the FSC for investments in certain financial and non-financial institutions.

Prudential regulations and requirements (CPs 6-15)

36. Montserrat lacks effective legal and regulatory provisions, and supervisory procedures for addressing key prudential requirements. The over-riding deficiency in all cases identified is the absence, with the resulting operational deficiencies, of comprehensive and appropriate regulations or guidelines on prudential matters, although the regulatory power is available to the supervisor to issue such regulations and/or guidelines. The MOU between the ECCB and the FSC commits the FSC to adopt and implement internationally accepted supervisory standards, and to require the implementation of standards of sound business and financial practice. The FSC recognizes these deficiencies and is addressing them in consultation with the ECCB; prudential guidelines on loan classification criteria and provisioning were issued in September 2002. With regards to money laundering, the FSC has not reviewed the extent to which offshore banks are complying with anti-money laundering legislation and the Practice Code of Montserrat.

Methods of ongoing supervision (CP 16-20)

37. Montserrat has not yet commenced a full onsite inspection program for offshore banks, and offsite supervision procedures needs to be strengthened. In addition, the absence of a meaningful physical presence (mind and management) by the banks in Montserrat does not facilitate periodic onsite inspections by the FSC/ECCB. At least two institutions appear to meet the definition of “shell” banks and, as such, prompt action should be taken either to have real mind and management established in Montserrat, or to close them down. Although the ECCB has developed draft offsite and onsite supervision processes, they have not been applied to offshore banks, pending the implementation of the MOU. Through the use of MOU, the FSC plans to initiate a program of joint onsite examinations with four overseas supervisors from Central and South America, and to share periodic quarterly bank returns with them. Several onsite inspections have been carried out under the MoU with the parent supervisors, but a detailed onsite inspection program covering all the banks will not be carried out until 2004. Restrictions on access to customer account information imposed on the overseas regulators by three of the MOU should be removed. The FSC recently introduced enhanced quarterly reporting requirements for offshore banks which reportedly has helped improve the dialogue with bank management, although ECCB review and reporting based on the quarterly returns is only expected to commence in late 2003. CP 20 (consolidated supervision) was determined to be not applicable.

Information requirements (CP 21)

38. The FSC needs more control over the choice of accounting standards and the scope of, and standards to be applied in, external and internal audits. In addition, it should have the power to revoke the appointment of external auditors.

Formal powers of supervision (CP 22)

39. When the FSC believes that a bank is facing serious financial difficulties, is in breach of applicable legislation, or is carrying on business that is detrimental to the public interest, it has the power to, inter alia: revoke and suspend a license, impose conditions on licensees, require the substitution of directors, and appoint official controllers. However, the FSC currently lacks authority, backed by appropriate legal or administrative sanctions against the bank and management, to take a range of remedial actions to address problems such as failure to meet prudential requirements and violations of regulations. The respective enforcement powers of the FSC and the ECCB under the MOU also need to be clarified. The FSC concurs that a range of penalties for non-compliance is necessary.

Cross-border banking (CPs 23—25)

40. CPs 23 and 24 were determined to be not applicable. Appropriate provisions exist in the law for cooperating with foreign regulators in the supervision of the local affiliates of foreign banks. The MOU with four overseas supervisors were signed pursuant to these provisions.

Table 3.

Montserrat—Recommended Action Plan to Improve Compliance of the Basel Core Principles

Table 3.

Montserrat—Recommended Action Plan to Improve Compliance of the Basel Core Principles

Reference Principle	Recommended Action
Responsibilities and Objectives – CP 1(1)	Review the need for enabling legislation to allow the ECCB to participate fully in the supervision process, particularly with respect to the implementation of the MOU.
Legal Framework – CP 1(4)	Review the need to amend the Offshore Banking (OB) Act and the FSC Act to more clearly set out their powers to address compliance and safety and soundness concerns, including compliance with anti-money laundering requirements.
Licensing criteria – CP 3	Augment the licensing criteria to cover corporate governance, and other issues as described in the detailed assessment report.
Investment criteria – CP 5	Define types and amounts of acquisitions and investments requiring supervisory approval, beyond what is now addressed in the OB Act.
Capital Adequacy – CP 6 Credit Policies – CP 7 Loan Evaluation and Loan Loss Provisioning – CP 8 Large Exposure Limits – CP 9 Connected Lending – CP 10 Country Risk – CP 11 Market Risk – CP 12 Other Risks – CP 13 Internal Control and Audit – CP 14	Implement appropriate prudential regulations or guidelines for offshore banks taking into account those that the ECCB has issued for the domestic banks, and addressing the issues noted in each case under the main findings above.
Money Laundering – CP 15	Fully implement the MOUs with the ECCB and the overseas regulators, particularly with respect to the conduct of onsite examinations, and ascertain compliance with Montserrat’s AML/CFT requirements.
On-Site and Off-Site Supervision – CP 16	Intensify efforts to fully implement the off-site surveillance and on-site examination processes that have recently been put in place through the MOU signed with the ECCB and the overseas regulators. Address the issue of shell banks, to the extent any such banks are still licensed in Montserrat.
Bank Management Contact – CP 17	Intensify efforts to thoroughly understand the activities of all of the offshore banks through frequent, comprehensive meetings with bank management, as well as through off-site surveillance and on-site examinations.
Off-site Supervision – CP 18	Establish the principles and norms regarding the consolidation of accounts as well as the accounting techniques to be used.
Validation of Supervisory Information – CP 19	Provide for the validation and examination of supervisory reporting, including returns related to capital adequacy.
Information Requirements – CP 21	Grant the supervisor the authority to specify the accounting standards to be used in preparing supervisory and audit reports.
Formal Powers of Supervision – CP 22	Grant the supervisor the authority, backed by legal sanctions, to take an appropriate range of remedial actions and to impose penalties, etc. beyond the range currently provided for in the law.
Cross-Border Banking – CP 25	Continue to take steps, in concert with the ECCB, to ensure that the cross-border MOUs work effectively in practice.

View Table

Table 3.

Montserrat—Recommended Action Plan to Improve Compliance of the Basel Core Principles

Reference Principle	Recommended Action
Responsibilities and Objectives – CP 1(1)	Review the need for enabling legislation to allow the ECCB to participate fully in the supervision process, particularly with respect to the implementation of the MOU.
Legal Framework – CP 1(4)	Review the need to amend the Offshore Banking (OB) Act and the FSC Act to more clearly set out their powers to address compliance and safety and soundness concerns, including compliance with anti-money laundering requirements.
Licensing criteria – CP 3	Augment the licensing criteria to cover corporate governance, and other issues as described in the detailed assessment report.
Investment criteria – CP 5	Define types and amounts of acquisitions and investments requiring supervisory approval, beyond what is now addressed in the OB Act.
Capital Adequacy – CP 6 Credit Policies – CP 7 Loan Evaluation and Loan Loss Provisioning – CP 8 Large Exposure Limits – CP 9 Connected Lending – CP 10 Country Risk – CP 11 Market Risk – CP 12 Other Risks – CP 13 Internal Control and Audit – CP 14	Implement appropriate prudential regulations or guidelines for offshore banks taking into account those that the ECCB has issued for the domestic banks, and addressing the issues noted in each case under the main findings above.
Money Laundering – CP 15	Fully implement the MOUs with the ECCB and the overseas regulators, particularly with respect to the conduct of onsite examinations, and ascertain compliance with Montserrat’s AML/CFT requirements.
On-Site and Off-Site Supervision – CP 16	Intensify efforts to fully implement the off-site surveillance and on-site examination processes that have recently been put in place through the MOU signed with the ECCB and the overseas regulators. Address the issue of shell banks, to the extent any such banks are still licensed in Montserrat.
Bank Management Contact – CP 17	Intensify efforts to thoroughly understand the activities of all of the offshore banks through frequent, comprehensive meetings with bank management, as well as through off-site surveillance and on-site examinations.
Off-site Supervision – CP 18	Establish the principles and norms regarding the consolidation of accounts as well as the accounting techniques to be used.
Validation of Supervisory Information – CP 19	Provide for the validation and examination of supervisory reporting, including returns related to capital adequacy.
Information Requirements – CP 21	Grant the supervisor the authority to specify the accounting standards to be used in preparing supervisory and audit reports.
Formal Powers of Supervision – CP 22	Grant the supervisor the authority, backed by legal sanctions, to take an appropriate range of remedial actions and to impose penalties, etc. beyond the range currently provided for in the law.
Cross-Border Banking – CP 25	Continue to take steps, in concert with the ECCB, to ensure that the cross-border MOUs work effectively in practice.

Criminalization of ML and FT

46. As an Overseas Territory of the United Kingdom (UK), Montserrat is not able to ratify Conventions but depends upon extensions to it by the UK. Montserrat has implemented in local legislation the provisions of the Vienna Convention. Although the UN International Convention for the Suppression of the Financing of Terrorism has not been extended to it, relatively strong legislative measures have been introduced to implement the applicable provisions of this Convention, including UN Security Council Resolution 1373. The Palermo Convention has not been implemented and the UK is still to ratify and extend it to Montserrat.

47. Money laundering is criminalized and extends to the proceeds of all serious offences with the exception for money laundering by persons who had also committed domestic drug trafficking offences (self-laundering). There are significant dissuasive penalties for criminal conduct associated with ML and FT. The ML and FT offences apply to both individuals and legal entities and in most cases to criminal acts committed in Montserrat and in other jurisdictions. Additional steps are still required, however, to allow for the extradition of offenders associated with terrorist financing and money laundering, and for complying with the FATF 8 Special Recommendations on terrorism finance. The Montserrat authorities plan to adopt a number of provisions contained in the UK’s Proceeds of Crime Act to strengthen its anti-money laundering regime.

Confiscation of proceeds of crime or property used to finance terrorism

48. Legal provisions for the seizure and confiscation of funds derived from or used for the financing of terrorism are strong. The laws allow the authorities to freeze property related to ML but only after criminal proceedings have been initiated. For FT-related crimes, ex parte restraint orders can be obtained once a criminal investigation has commenced but before proceedings have been instituted. Although adequate provisions exist that allow for the issue of orders for the production of material, they could be enhanced to provide for account monitoring and tracing orders to assist with the identification and tracing of property associated with ML. Account monitoring orders are available only for terrorist related offences. The authorities should also consider amending the CJICO provision relating to searches to remove the limitation to searches of offenders’ premises. Some of the deficiencies identified could be remedied if Montserrat adopts the relevant provisions of the new UK Proceeds of Crime Act, as currently envisioned. Adequate provisions exist in the legislation to protect the rights of bona fide third parties.

49. Law Enforcement Considerations—Although some ML investigations have been conducted, there have been no prosecutions for ML or FT offences. Consequently, no property has been seized or confiscated and there is no immediate need to establish a system for keeping such statistics. A few police officers have been trained in basic ML investigations but no prosecution staff has been trained in either ML or FT issues.

The FIU and processes for receiving, analyzing and disseminating intelligence

50. A financial intelligence unit, the Reporting Authority (RA), was only recently created by law in September 2002 and is not as yet operational. Although its functions are to receive suspicious activity reports related to ML and forward them for investigation and prosecution, the law does not impose a specific duty to receive and analyze such reports. There is no specific provision in the law that requires reporting institutions to provide additional information to the RA upon request. With respect to FT cases, suspicious activity reports are to be provided directly to the police or to the Governor. The RA has access to financial, administrative and law enforcement databases and is authorized to disclose information to law enforcement authorities in Montserrat and abroad subject to certain safeguards on the use of such information and the protection of the rights of innocent third parties. In practice, the RA forwards reports of suspicious activity for investigation to the police or customs authorities and to the UK’s White Collar Crime Investigation Team (WCCT) based in Florida, USA.

51. A non-mandatory ML Practice Code has been issued under the law to provide practical guidance to reporting entities for complying with the ML Regulations. Regulated entities that fail to report suspicious transactions may, as a general rule, be subject to certain sanctions including the suspension or revocation of their licenses. The authorities plan to draft amendments to the relevant law to enhance and broaden the legal scope of the RA’s duties, including its power to request additional information from reporting parties. Specific provisions requiring that suspicious activity reports be disclosed to the RA rather than to the police are also recommended both for ML and FT matters. A tipping-off offence for drugs-related money laundering should also be introduced.

52. Law Enforcement Considerations—The RA is comprised of the Attorney General, the Commissioner of Police and the Director of Financial Services/Commissioner. As of the date of the mission the RA had not met as yet and it is too early to ascertain the adequacy of its structure, staff and funding resources. Nonetheless, about 20 reports of suspicious activity have been filed by an offshore bank with the Financial Services Commission. These have all been referred to WCCT due to their international connection.

Law enforcement and prosecution authorities, powers and duties

53. Law enforcement authorities have adequate powers to compel the production of financial records by applying to the Court for an order that requires financial institutions to make available material for investigations. More robust provisions that allow for obtaining account monitoring and tracing orders, similar to those contained in the new UK Proceeds of Crime Act and in the FT laws, would enhance the powers of the law enforcement authorities.

54. Law Enforcement Considerations—Montserrat has trained only two police officers inbasic ML investigation techniques in courses organized by the Trinidad and Tobago-basedCaribbean Anti-Money Laundering Programme. No specialized training has been provided for prosecutors on ML but they have remained abreast of ML issues through participation inregional seminars. No training on FT has been provided to either police or prosecution staff. In practice, police officers were not very familiar with the legal framework and tools available for investigating ML and FT offences. The use of investigation techniques such as controlled delivery and undercover operations is possible in Montserrat. However, these techniques have not been used in the past. To date no criminal or civil sanctions have been applied in ML or FT cases.

International cooperation

55. The law allows Montserrat to provide, on a discretionary basis, a wide range of assistance to foreign authorities in relation to criminal investigations and proceedings. Compulsory measures are also allowed under the legislation and in particular under an MLAT with the USA. There is also provision in the law for the authorities to enforce foreign confiscation and restraining orders in relation to both ML and FT cases, though for ML cases, there is a need for the issue of Orders designating jurisdictions whose orders are recognized by Montserrat. The RA can also share information freely with the Montserrat police and foreign law enforcement authorities. In addition, the police can access Interpol and a regional information sharing network (OTCRIS) to communicate with their counterparts in other jurisdictions. A main drawback to international cooperation is the inability under the law to extradite individuals for ML and FT cases. Nonetheless, the Governor is authorized to deport or exclude individuals from Montserrat who are deemed to be “undesirable.”

56. Law Enforcement Considerations—In light of the small number of requests for legal assistance from other countries (approximately one every five years under the MLAT with the USA), there is no immediate need to maintain statistics and assign staff solely for this purpose. There have been no requests involving ML or FT cases.

Preventive measures for financial institutions

General framework

58. Montserrat has passed anti-money laundering Regulations and a non-mandatory Practice Code issued by the Governor under the ML legislation to give practical guidance to financial institutions for complying with the ML 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. The Regulations and Practice Code apply to a wide range of financial institutions but do not specifically cover offshore banks, mutual funds and insurance business by reference to the applicable laws. Confidentiality and secrecy laws do not inhibit implementation of AML/CFT legislation. Neither the ML Regulations nor the Practice Code makes provision for FT issues.

59. With the creation of the FSC in 2001 as a relatively autonomous supervisory body, an appropriate mechanism was established to supervise for compliance with the ML Regulations and any related laws and guidelines. The FSC has supervisory responsibility for offshore banking, insurance, trust and company service providers, investments and asset management services. To strengthen AML/CFT supervision, the FSC Act should provide the FSC with appropriate administrative and disciplinary sanctioning authority, in line with those contained in the Anguillian draft FSC Act.

60. The ability of the FSC to supervise for AML/CFT compliance is significantly constrained by the absence of a substantive physical presence by the offshore banks in Montserrat. Full implementation of the supervisory MOUs with the ECCB and the four overseas regulators should partly address this limitation but there is still a need to lift the restrictions on access to customer account information contained in some of these MOUs.

Customer due diligence, monitoring of transactions and record keeping

61. The ML Regulations require financial institutions to have procedures for conducting customer identification but not an explicit requirement to identify their customers, thus raising issues with regard to the enforcement and effectiveness of customer due diligence requirements. Procedures to maintain records of customer identification and transactions for five years are also required under the ML Regulations. An explicit requirement for customer identification and record keeping, with clear sanctions for non-compliance, would strengthen and clarify the customer due diligence requirements and make them more consistent with the Practice Code. The Montserrat authorities plan to introduce a number of improvements to the ML Regulations, broadly similar to those planned for Anguilla, including: (i) creating an affirmative obligation to conduct customer identification/due diligence and record keeping; (ii) provisions for internal audit; and (iii) an explicit requirement to retain records of customers and transactions, including for unusual and suspicious transactions. In addition, the authorities plan to introduce in regulations provisions for complying with the FATF 8 Special recommendations particularly those relating to funds (wire) transfers. Legislative initiatives are also planned with respect to money remittance firms which will come under the supervision of the FSC and/or the ECCB.

Suspicious activity reporting

62. The ML Regulations provide a framework for filing suspicious activity reports but do not explicitly require the filing of such reports. The authorities plan to introduce an affirmative obligation in the law with appropriate sanctions for non-compliance. The Practice Code requires that reports be made promptly but does not give a timeframe by which they are to be submitted to the authorities. It also provides general guidelines for monitoring and identifying suspicious ML activity. In practice, very few STRs have been filed with the RA indicating a possible weakness in compliance. No industry guidelines have been issued for FT.