Front Matter

Front Matter Page

© 2004 International Monetary Fund

April 2004

IMF Country Report No. 04/92

British Virgin Islands—Overseas Territory of the United Kingdom:

Assessment of the Supervision and Regulation of the Financial Sector Volume I—Review of Financial Sector Regulation and Supervision

This review of financial sector regulation and supervision in the British Virgin Islands 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 the British Virgin Islands’ request for technical assistance. It is based on the information available at the time it was completed in February 2004. The staff’s detailed assessment of the observance of standards and codes can be found in Volume II. The views expressed in these documents are those of the staff team and do not necessarily reflect the views of the government of the British Virgin Islands or the Executive Board of the IMF.

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Front Matter Page

Assessment of the Supervision and Regulation of the Financial Sector

Volume I: Review of Financial Sector Regulation and Supervision

British Virgin Islands

February 2004

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

  • Glossary

  • Preface

  • Executive Summary

  • I. Financial System and Offshore Overview

    • A. Background

    • B. Financial Institutions and Markets

    • C. Regulatory Framework, Oversight, and Market Integrity Arrangements

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

    • A. Summary Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision

    • B. Summary Assessment of Implementation of the IOSCO Objectives and Principles of Securities Regulation

    • C. Summary Assessment of Compliance with the International Association of Insurance Supervisors (IAIS) Insurance Core Principles

    • D. Summary Assessments of Compliance with the FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism

  • III. Regulatory Arrangements of Particular Concern in the OFC Context

    • A. Oversight of Companies and Trusts Service Providers (CSP)

    • B. Cross-Border Cooperation and Information Sharing

  • Tables

  • 1. Summary of Findings, Follow-Up Action Plan, and Response of Authorities, Including Possible TA Needs, Regarding Financial Sector Supervision

  • 2. Recommended Action Plan to Improve Compliance of the Basel Core Principles

  • 3. Recommended Actions to Improve Implementation of the IOSCO Objectives and Principles of Securities Regulation

  • 4. Recommended Action Plan

  • 5. Recommendations and Actions

Glossary

AGC

Attorney General’s Chambers

AML

Anti-Money Laundering

AMLCP

Anti-Money Laundering Code of Practice

ARA

Association of Registered Agents

BTCA

Banks and Trust Companies Act, 1990

BCP

Basel Core Principle for Effective Banking Supervision

BIS

Bank for International Settlements

BVI

British Virgin Islands

CA

Companies Act, 1885

CFT

Combating the Financing of Terrorism

CJIC

The Criminal Justice (International Cooperation) Act

CMA

Companies Management Act, 1990

CSP

Companies and Trusts Service Providers

EU

European Union

FATF

Financial Action Task Force

FIA

Financial Investigative Authority

FS(IC)A

Financial Services (International Cooperation) Act, 2000

FT

Financing of Terrorism

FCO

Foreign and Commonwealth Office

FSC

Financial Services Commission

FSCA

Financial Services Commission Act, 2001

FSD

Financial Services Department

GOB

Government-Owned Bank

GTL

General Trust License

IAE

Independent AML/CFT Expert

IA

Insurance Act, 1994

IR

Insurance Regulations, 1995

IBCA

International Business Companies Act, 1984

IOSCO

International Organization of Securities Commissions

JAMLACC

The Joint Anti-Money Laundering Coordinating Committee

KYC

Know Your Customer

MD

Managing Director of the Financial Services Commission

MFD*

Monetary and Financial Systems Department

MF Act

Mutual Funds Act, 1996

ML

Money Laundering

MLAT

Mutual Legal Assistance Treaty

OECD

Organization for Economic Cooperation and Development

OFC

Offshore Financial Center

OGBS

Offshore Group of Bank Supervisors

Police FINU

Police Financial Investigations Unit of the Royal Virgin Islands Police Force

PCCA

The Proceeds of Criminal Conduct Act

RA

Reporting Authority

RCA

Registry of Corporate Affairs

STR

Suspicious Transaction Report

*

The IMF’s Monetary and Exchange Affairs Department (MAE) was renamed the Monetary and Financial Systems Department (MFD) as of May 1, 2003. The new name has been used throughout the report.

Preface

At the request of the authorities, an IMF team conducted a Module 2 Offshore Financial Center (OFC) assessment1 of the British Virgin Islands (BVI) during the period November 11–22, 2002. The mission undertook an assessment of the BVI’s regulatory and supervisory arrangements with respect to internationally accepted standards and evolving good practices. The mission completed separate assessments of the BVI’s observance of five standards and evolving good practices:

  • (1) The Basel Core Principles for Effective Banking Supervision (BCP);

  • (2) The Insurance Core Principles of the International Association of Insurance Supervisors (IAIS Insurance Core Principles);

  • (3) The Objectives and Principles of Securities Regulation of the International Organization of Securities Commissions (IOSCO Principles) (primarily with respect to the regulated mutual fund sector);

  • (4) The Methodology for Assessing Compliance with Anti-Money Laundering and Combating the Financing of Terrorism Standards (AML/CFT Methodology);2 and

  • (5) Good practices for company and trust service providers in the context of the September 6, 2002, draft statement of Best Practice of the Offshore Group of Banking Supervisors (OGBS Good Practices).

The assessment team consisted of Mr. Richard Gordon (Mission Chief, Monetary and Financial Systems Department); Ms. Pramita Moni Sengupta (Deputy Mission Chief, Legal Department); Mr. Joseph O’Neill (Banking Advisor); Mr. Tomas Power (Insurance Advisor); Ms. Tanis MacLaren (Securities Advisor); Mr. Hermann Krull (Company and Trust Services Advisor); and Ms. Marie-Christine Dupuis (AML/CFT Financial Sector Advisor), and Mr. Simon Quin (STA). Mr. Atle Roaldsøy, Norwegian Ministry of Justice, participated in the mission as an independent AML/CFT expert (IAE).

To conduct the assessments, the mission held discussions with the Governor of the BVI, the Honorable Chief Minister and Minister of Finance, senior management (including the Managing Director, Deputy Managing Director, and directors) and regulators of the BVI Financial Services Commission (FSC), the Attorney General of the BVI, the Financial Secretary of the BVI, the Commissioner of Royal Virgin Islands Police, and a very broad range of representatives of the financial services industry.

The team is very grateful for the cooperation and hospitality received from the BVI authorities and from private sector representatives. The team is especially grateful for the FSC’s efforts in making all necessary logistical arrangements for the mission.

Executive Summary

Sectoral supervisory issues

The BVI has most of the essential elements for a suitable framework for financial supervision. Primary legislation provides the FSC with adequate independence and authority to license and supervise covered financial services, which include banking,3 insurance, securities (mutual funds, their management, and investors), and trust and company service providers, whether onshore or offshore, and implementation has largely been good. In particular, the professionals who staff the FSC, led by senior management and directors, are dedicated and experienced professionals with a clearly articulated goal of maintaining and, where possible, improving the framework and implementation of financial services supervision in the BVI. While there are several weaknesses in the framework, the FSC and the BVI Government have indicated that they are keenly interested in addressing those weaknesses, and in many cases have already taken steps to that end.

While all indications are that the FSC acts in a fully independent and professional fashion, there are some changes to the FSCA that would further ensure that it continue to be independent and professional in the future, including with respect to selection of and term of the managing director, and the method of selecting board members.

There is a weakness with respect to onsite supervision of banking, insurance, and securities sectors. While there is often detailed and well-executed off-site inspection of relevant documents in the course of granting both initial licenses and license renewal (as well as on an ad hoc basis), there is currently no regular and comprehensive examination and compliance program in operation, and no on-site inspections of regulated entities/providers (regulated persons) other than trust and company service providers. However, the authorities, with KPMG’s assistance, are implementing a comprehensive examination methodology and plan to start on site inspections in 2003. While there has been an increasing and dedicated effort to engage in consultations with industry, particularly with respect to education, this needs to be regularized and deepened, especially with respect to feedback from the regulated persons. Finally, in order to implement the proposed plan for on-site inspections, there is also a need to increase human resources, which the authorities are now undertaking with the help of, inter alia, international headhunting firms. In addition to these shortcomings that apply throughout all sectors, there are a number of issues specific to each of the banking, insurance, securities, and trust and company services provider sectors.

With respect to the banking sector, virtually all banks are subsidiaries or branches of high-quality banking institutions subject to effective consolidated supervision by the home country supervisor. However, there are few key weaknesses. While the FSC has requested that banks confirm that their policies and procedures are in compliance with relevant Bank for International Settlements (BIS) papers, prudential standards such as guidance and parameters for assuming and managing risk have not been issued. The Government-Owned Bank (GOB),4 which operates in the local retail and commercial market, but which appears to have multiple weaknesses including high levels of nonperforming loans and outdated financial statements, is not currently under any outside prudential supervision, although this is planned to be introduced in 2003. In the past the FSC has in effect required an 8 percent risk-weighted capital requirement for subsidiaries (although such a requirement has been imposed as a matter of administrative discretion rather than by law or regulation) and the FSC imposed a 14 percent capital assignment for one of the three branches. A proposed amendment to the BTCA provides for a 12 percent risk-weighted capital requirement.

With respect to the insurance sector, all insurance companies insuring domestic risk are subsidiaries or branches of high-quality institutions subject to effective consolidated supervision, and most captives have single U.S.-based parents whose structure and operations have been vetted by the U.S. Internal Revenue Service., This, when combined with the FSC’s supervision, has resulted in a well-supervised sector. However, a weakness can be found in a lack of guidelines for corporate governance and internal controls, which is of particular importance to supervision of managers of captives. Such guidelines are, however, planned to be introduced in early 2003. There is no compulsory errors and omissions, fidelity and surety and broad-form professional liability insurance for all providers, although this is also planned.

With respect to the securities sector, the FSC has generally done a good job of supervision. However, a few weaknesses include that the FSC needs to set out the prospectus disclosure requirements applicable for public funds, and generally the disclosure obligations of mutual funds need to be enhanced. In addition, business conduct rules and requirements for books and records, internal controls and risk management systems for mutual fund managers and administrators should be strengthened, and all managers, administrators and other mutual fund functionaries, such as custodians, should be required to segregate client assets effectively. Most of these issues, however, are addressed in a draft code of practice, expected to come into force in early 2004, while the remaining are expected to be addressed in proposed regulations for mutual funds.

With respect to international business companies the regime for registering and maintaining IBCs in the territory meets or exceeds most best practices; this is largely because IBCs have to be registered (incorporated) by registered agents who are themselves subject to regulation supervision (see below). A draft amendment to the (International Business Companies Act, 1984 (IBCA) is planned to require that the registered agents keep information on IBC directors in the territory. Amending legislation to the IBCA is currently being finalized to implement the immobilization of bearer shares. This requirement appears to satisfy concerns of the Financial Action Task Force (FATF) and (Organization for Economic Cooperation and Development) OECD, among others.

With respect to the trust and company services provider sector, all CSPs are subject to regulation and supervision by the FSC. Such oversight largely meets industry best practices as provided in the OGBS Statement of Best Practices. However, particularly in view of very large IBC client base and, in particular, the need to assess compliance with the OGBS statement of best practice (including that action can be taken where there is evidence of noncompliance); there is a need to complete inspections of all CSPs, and to draft a regular compliance and on-site inspection program. Also, inspections could be more detailed and structured. Greater contact and consultation by the FSC and the BVI Association of Registered Agents would also be helpful.

Framework for anti-money laundering/combating the financing of terrorism

The legal framework for AML/CFT measures in the BVI is generally compliant with international standards. Sufficient legal means and measures are in place for criminalization of (money laundering) ML and (financing of terrorism) FT, to facilitate international cooperation in ML and FT matters, and to provide for confiscation and forfeiture of assets associated with ML and FT. Although the Attorney General’s Chambers (AGC) appear to be well versed to handle complex matters, few prosecutions have taken place in the BVI, and any increase in the number of prosecutions would impose a heavy burden on the AGC’s Commercial Crimes Unit. Required measures for FT, including criminalization and freezing/confiscation of FT assets have been fully integrated into the legal framework. The BVI has taken a pragmatic approach to establishing the supervisory framework for AML/CFT measures and applying due diligence requirements to all regulated persons. Money remitters are not yet subject to licensing or prudential supervision, although this is contemplated under a proposed law, which authorities expect to be enacted in the first half of 2003. The FSC is carefully building its staff to cover the range of its mandates, by enhancing the staff for AML/CFT compliance, including filling vacancies in the Legal and Enforcement Division; such staff will have a significant role in implementing the legal and supervisory framework under the AMLCP and the guidance notes.

While the legal and supervisory frameworks are adequately structured, the implementation of the full range of AML/CFT supervisory measures has not yet been fully achieved. Verification of AML/CFT must be an essential part of these examination procedures and manuals. Specific file review and transaction testing are also needed as the supervisory measures are implemented. Nevertheless, the mission notes significant progress in the FSC’s development of necessary supervisory measures the supervisors have kept abreast of the concerns of the financial sector and have provided extensive training and guidance to the financial intermediaries to aid in establishing adequate internal compliance measures.

Cross-border information exchange and cooperation

Cross-border information exchange and cooperation has been excellent in all areas.

Table 1.

Summary of Findings, Follow-Up Action Plan, and Response of Authorities, Including Possible TA Needs, Regarding Financial Sector Supervision5

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British Virgin Islands-Overseas Territory of the United Kingdom: Assessment of the Supervision and Regulation of the Financial Sector Volume I—Review of Financial Sector Regulation and Supervision
Author: International Monetary Fund