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© 2004 International Monetary Fund

August 2004

IMF Country Report No. 04/271

Kingdom of the Netherlands—Netherlands Antilles: 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 Kingdom of the Netherlands—Netherlands Antilles 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 Kingdom of the Netherlands—Netherlands Antilles’ 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 Kingdom of the Netherlands—Netherlands Antilles or the Executive Board of the IMF.

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Assessment of the Supervision and Regulation of the Financial Sector

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Volume I: Review of Financial Sector Regulation and Supervision

Kingdom of the Netherlands—Netherlands Antilles

February 2004

The contents of this report constitute technical advice and recommendations given by the staff of the International Monetary Fund 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. Background

  • A. Introduction

  • B. Macro Economic

  • C. Financial Sector Environment

• II. Other International Assessments of the Netherlands Antilles

• III. The Netherlands Antilles as an Offshore Financial Center

  • A. Introduction

  • B. Offshore Banks

  • C. Offshore Insurance

  • D. Offshore Corporate Entities

  • E. Curaçao Free Trade Zone

  • F. International Investment Institutions

• IV. Company Service Providers

• V. Banking Supervision

  • A. Introduction

  • B. Basel Core Principles Assessment—Main Findings

• VI. Insurance and Pension Fund Supervision

  • A. Insurance

  • B. Insurance Supervision

  • C. Main Findings and Recommendations

  • D. Captives and Professional Reinsurers

  • E. Pension Funds

• VII. Anti-Money Laundering and Combating Financing of Terrorism—Summary Assessment

  • A. Legal and Institutional Framework

  • B. Banking

  • C. Insurance

  • D. Strengthening the AML/CFT Framework

• Tables

• 1. Aggregate Balance Sheet of Commercial Banks Operating in the International Banking Sector at Year-End

• 2. International Debt Securities by Country of Residence

• 3. Curaçao Free Trade Zone, Customs Value

• 4. Aggregate Balance Sheet of Commercial Banks Operating in the Domestic Banking Sector at Year-End

• 5. Summary Compliance of the Basel Core Principles

• 6. Insurance Sector—Total Admissible Assets

• 7. Insurance Companies in the Netherlands Antilles at End-2001

• 8. Consolidated Balance Sheet of Life Insurance Companies

• 9. Consolidated Balance Sheet of the Nonlife Insurance Industry

• 10. Compliance with the FATF Recommendations and Eight Special Recommendations

• Figures

• 1. Composition of the Institutional Investor’s Sector

• Attachment

• Comments on Company Service Provider Legislation

Glossary

Preface

At the request of the authorities, a Module II offshore financial center assessment of the Netherlands Antilles was carried out during a two-part MFD/LEG mission, January 14–18 and April 15–24, 2002.¹ An update was performed by written procedure and in a series of telephone conferences with the authorities in May and June 2003. In its assessment, the mission reviewed offshore as well as onshore regulation and supervision. A review of both onshore and offshore activities was considered appropriate as supervision of both sectors is identical, with the exception of supervision over captive insurance companies and professional reinsurers. Furthermore, supervision is exercised by the same agency and review of both onshore and offshore supervision is necessary for an adequate assessment of the authorities’ treatment of the risks associated with offshore financial business. Onshore banking supervision is also relevant to the effectiveness of anti-money laundering/combating financing of terrorism (AML/CFT) policies and practices.

The mission met with the Dr. E.D. Tromp, President of the Bank of the Netherlands Antilles; Mr. R.S.J. Martha, Minister of Justice; Mr. S. Betrian, Chairman of the Supervisory Board for Company Service Providers; Ms. H. Chirino Roosberg, Head of the Reporting Center for Unusual Transactions;² Ms. Deborah Bolton, Consul General of the United States; Mr. S. Salesia, Deputy Director of the Bank of the Netherlands Antilles for Banking Supervision; Mr. U. Dalnoot, Head of Banking Supervision Examinations; Mr. R. Rooi, Head Banking Supervision General; Mr. H.L. Willems, Head Policy Department; Mrs. N. Davelaar, Deputy Director Institutional Investors and Investment Institutions; Ms. R. Garcia, Deputy Director of the Bank of the Netherlands Antilles for International Relations; Ms. S. Herrera, Head of International Relations; Mr. E. Smeulders, Managing Director of the Curaçao Free Zone; representatives of commercial banks, insurance companies, members of the legal and notarial professions; and other private and public sector representatives in the financial, anti-money laundering, and law enforcement fields.

The authorities of the Netherlands Antilles agreed to the use of the full Basel Core Principles (BCP) Methodology for the assessment of banking supervision and regulation, including the essential and additional criteria, as well as the MFD Anti-Money Laundering and counterterrorist-finance methodology developed by MFD, in its February 2002 version.

The mission wishes to express its sincere gratitude for the hospitality, flexibility, and excellent cooperation of the authorities, which contributed greatly to the success of the mission.

Executive Summary

The Netherlands Antilles has taken the initiative to undergo a full Module I and II Offshore Financial Center assessment, comprising a Fund-assisted self assessment of compliance with international standards on banking and insurance supervision, as well as on AML/CFT (Module I), and an external Fund assessment (Module II).

This initiative underscores the authorities’ determination, in the face of budget and staff constraints, to continue their ongoing program to upgrade financial sector supervision and AML/CFT efforts for the offshore as well as the onshore sectors. Together with other parts of the Kingdom of the Netherlands, a concerted effort is underway to introduce more explicit and focused anti-terrorism legislation and regulation.

Furthermore, the Netherlands Antilles is resolved to remove the perception created by placement of the jurisdiction in the weakest category of the list of offshore financial centers, published by the Financial Stability Forum (FSF).

Overall, the legal and institutional framework for financial sector supervision meets high standards. It is comprehensive, effective, and to great extent in line with international standards. Bank of the Netherlands Antilles (BNA) staff is highly capable, well-trained and dedicated, and is able to attract appropriate personnel and material resources to perform its functions.

Banking supervision is compliant or largely compliant with the great majority of the Basel Core Principles. The banking system is stable and adequately capitalized. The legal and regulatory structure of banking supervision is very good. However, the nexus of adequate loan classification and provisioning, and the supporting on-site and off-site supervision functions, requires a more proactive approach, in particular, in the current economic situation. Verification of the quality of assets and AML/CFT compliance by on-site inspections of once every 1–2 years, based on the assumption that the banks, as well as their external auditors, will address asset quality in a sufficiently rigorous way, may not be sufficient. In March 2003, the BNA issued a new policy rule on integrity testing of managers of banks.

Several signals support this conclusion. Banks have been required to operate in a deteriorating economic environment. Nonperforming loans are rising, returns on assets are falling, and there are signs that rollovers and capitalization of interest could be increasing. Furthermore, banks’ reporting on their problem loans, according to the normal schedule used to support Regulation No. V, does not address the economic and repayment prospects of the borrower.

The mission would, therefore, recommend engaging in a specific exercise within the banking supervision department to analyze the condition and the prospects of the banks, specifically, with a view to assessing asset quality based on review of their files and focused on the economic prospects of the borrowers. Follow-up with the banks should include risk-oriented discussions of the portfolios that give rise to concern. Subsequently, decisions need to be taken on appropriate provisioning levels.

Insurance supervision is also observant or broadly observant with the great majority of the International Association of Insurance Supervisors (IAIS) Core Principles, and supervisory staff is of high quality. Although more detailed recommendations are included in the Action Plan, some issues can be highlighted here. The mission recommends that the current, lighter, regulatory regime for captive and professional reinsurance supervision be replaced for more rigorous approach applied to onshore insurance companies, including licensing requirements. More extensive contacts and structures for cooperation with insurance supervisors abroad are also needed, through exchange of information and conclusion of more memoranda of understanding (MoUs). The BNA may wish to consider joining the newly created International Association of Pension Supervisors. In general, the mission strongly supports the review of pension legislation, with a view to strengthening the position of pensioners, transparency of the financial condition of the funds, and removing the excessively lenient exemptions clause in the current law.

AML/CFT framework. In general, the AML/CFT legal and institutional framework is comprehensive and well designed. However, there are some areas to be strengthened as follows: nonlife insurance companies, as well as lawyers, notaries, accountants, consultants, real estate agents, and dealers in high-end goods, such as antiques, jewelry, and auctioneers, are not currently covered by the AML/FT framework.

Per June 2003, new AML/CFT guidelines have been issued by the BNA for financial institutions and intermediaries. An explicit statutory requirement that financial institutions screen applicants for employment to prevent the use of their institutions by money launderers or terrorists is needed. Also, in March 2003, a new Integrity Test was introduced by the BNA for managers of supervised financial institutions. On-site AML/CFT inspections by the BNA and other agencies, including the Company Service Providers (CSP) Supervisory Board and the local Gaming Control Board, should occur on a more frequent basis. Finally, the legal authority to impose, with a court order if necessary, civil money penalties (administrative fines) should be granted to the BNA, the Gaming Control Board, the Unusual Transactions Reporting Center (UTRC), the FIU, and the CSP Supervisory Board, for violations of law, including AML/CFT laws. In the fall of 2002, several measures were taken by the authorities to strengthen the AML/CFT framework, for instance, by creating an obligation to report activities related to the financing of terrorism to the UTRC. An enhanced program of AML on-site inspections of insurance companies was started in March 2003. Draft legislation to include nonlife insurance companies, underwriters, brokers and agents under AML/CFT legislation was submitted to parliament.

Company service providers. While it is helpful that CSPs have been brought under the supervision of a regulatory entity, consideration could be given to allocate supervision to the BNA. The BNA already regulates banks, insurance companies, pension funds, investment institutions, and fund administrators. In addition, this approach is consistent with an increasing trend to consolidate regulation and supervision of financial activities internationally, including in the Netherlands.

The mission has agreed with the authorities on the elements of a comprehensive prioritized action plan, to address remaining issues.³