Kingdom of the Netherlands—Netherlands Antilles
Assessment of the Supervision and Regulation of the Financial Sector Volume II— Detailed Assessment of Observance of Standards and Codes

This detailed assessment of the observance of standards and codes in the financial sector of the Kingdom of the Netherlands—Netherlands Antilles reviews implementation of the Basel Core Principles for effective banking. Legal provisions are in place entrusting the Bank of the Netherlands Antilles (BNA) to regulate the insurance sector and designate it as the licensing authority. The BNA considered that asset quality issues were relevant primarily for domestic institutions and less for international banks in the Netherlands Antilles.

Abstract

This detailed assessment of the observance of standards and codes in the financial sector of the Kingdom of the Netherlands—Netherlands Antilles reviews implementation of the Basel Core Principles for effective banking. Legal provisions are in place entrusting the Bank of the Netherlands Antilles (BNA) to regulate the insurance sector and designate it as the licensing authority. The BNA considered that asset quality issues were relevant primarily for domestic institutions and less for international banks in the Netherlands Antilles.

I. Assessment of Implementation of the Basel Core Principles for Effective Banking Supervision

A. Basel Core Principles Assessment—Main Findings

1. With the concurrence of the Bank of the Netherlands Antilles (BNA), the mission assessed compliance with the Basel Core Principles for Banking Supervision using the essential and additional criteria of the Core Principles Methodology. The assessment was based on the BNA’s self assessment of compliance with the Core Principles (CP), a review of the relevant laws and regulations, interviews with the staff of the BNA, and discussions with onshore and offshore banks. The Netherlands Antilles are compliant or largely compliant with all, but two of the Basel Core Principles (BCP).

Table 1.

Summary Compliance of the Basel Core Principles

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Objections, autonomy, powers, and resources (CP 1)

2. The elements of CP 1 were found to be compliant. Although Netherlands Antilles law does not contain specific provisions protecting supervisors from lawsuits, administrative law precludes that individual civil servants can be sued for damages ensuing from actions or omissions committed in the good faith exercise of their functions. Actions and omissions by BNA staff in the exercise of their duties are considered actions of the BNA, which can be sued if the actions are wrongful. There is no explicit mention in the law of protection of the supervisory staff nor is there mention of covering the costs incurred in defending their actions while discharging their duties. Nevertheless, the BNA is going to study the possibility of including explicit legal protection for individual staff members as part of the Banking Supervision Ordinance. After introduction of the Harmonization Law currently being prepared, remaining restrictions in the confidentiality regime against the appropriate exchange of customer names will be removed.

Licensing and structure (CPs 2–5)

3. These criteria were found to be compliant. Licensing criteria are sufficiently broad. The BNA received 11 applications for bank licenses from 1999 through 2001; 9 were granted and 2 applications were withdrawn. Five of the nine licenses granted were to local banks for the establishment of new international subsidiaries within the Netherlands Antilles. No applications have been denied in the past two years. The law adequately defines “significant ownership” and “controlling interest” and there are legal requirements to obtain supervisory approval for proposed changes in ownership and control. The BNA has established adequate criteria for reviewing major acquisitions or investments by credit institutions.

Prudential regulations and requirements (CPs 6–15)

4. Prudential regulations are generally adequate in scope. CP 6, CP 7, CP 9, and CP 10 were found to be compliant and CP 11 and CP 14 were found to be largely compliant. CP 8, loan evaluation and loan loss provisioning, was found to be materially noncompliant. The BNA’s directives on risk management are sufficiently broad, but the BNA needs to enhance the effectiveness of both off-site surveillance and on-site examinations to ensure that its regulations are properly implemented, especially with regard to credit risk management. The BNA’s oversight of credit institutions’ loan evaluation and loan loss provisioning guidelines would benefit from requiring more frequent reviews by credit institutions of their performing and nonperforming loan portfolios and improved reporting of specific provisioning for loan losses. The BNA does not require credit institutions to assess and manage their interest rate risk and it does not oversee the risk for the banking system. The mission recommended that they require the credit institutions to address this risk and that they provide supervisory oversight of it. The BNA’s oversight of internal control and internal audit was found to be largely compliant. The BNA imposes fines for late submission of the COAs. CP 15 is fully compliant as no significant deficiencies were found (see separate template on anti-money laundering (AML) and combating the financing of terrorism (CFT)).

Methods of ongoing supervision (CP 16–20)

5. There are weaknesses in BNA’s off-site surveillance and on-site supervision and CP 16 was found to be materially noncompliant. CPs 17–19 were found to be largely compliant and CP 20 was found to be compliant. The oversight of credit risk management needs improvement, especially with regard to the frequency of loan portfolio reviews and loan loss provisioning and the required reporting of problem loans. The BNA needs to be more proactive in monitoring trends and assessing the condition of the banking sector as a whole. In addition, it needs to develop an action plan to assess the increased risk in credit institutions’ operations and the impact on earnings and capital in light of continuing weak economic conditions. In addition, the BNA should implement a program of credit-risk-targeted on-site examinations to allow for more frequent reviews of credit institutions’ loan portfolios. The BNA should include assessments of country risk and interest rate risk in its on-going supervision. It should complete its survey on market risk and decide the extent to which market risk needs to be monitored and managed.

Information requirements (CP 21)

6. CP 21 was found to be largely compliant. The BNA requires banks to submit annually audited financial statements, which are generally prepared in accordance with U.S. General Accepted Accounting Standards (GAAP), Dutch GAAP or International Accounting Standards (IAS). External auditors have the legal duty to report matters of material significance to the supervisor.

Formal powers of supervisors (CP 22)

7. CP 22 was found to be compliant. The BNA has adequate formal powers and the authority to take corrective measures if it determines that a bank is not complying with its directives regarding solvency, liquidity, or risk management. It has the authority to restrict a bank’s operations and to revoke its license. The BNA would benefit from having the ability to impose fines or penalties on senior management and/or directors and to remove management without having to threaten to revoke a credit institution’s license.

Cross border banking (CP 23–25)

8. CP 23 was found to be compliant and CP 24 and CP 25 were found to be largely compliant. The BNA has adequate cross-border banking arrangements which allow for reasonably effective supervision of off shore credit institutions. The risks posed by overseas operations of local institutions is limited. There is only one branch and one subsidiary of local banks, both in Aruba. The BNA has memoranda of understanding (MoUs) with Aruba, the Netherlands, and Venezuela and there is regular communication with the supervisors, both formally and informally. There are no formal arrangements with other countries and given the number of foreign bank operations, the mission recommended the BNA to continue to arrange appropriate MoU with foreign supervisory authorities whose credit institutions maintain operations in the Netherlands Antilles. The BNA should advise all home country supervisors of any material remedial action it takes regarding the operations of their offshore credit institutions.

B. Detailed Assessment of Compliance of the Basel Core Principles

Table 2.

Detailed Assessment of Compliance of the Basel Core Principles

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Recommended action plan

Table 3.

Recommended Action Plan to Improve Compliance of the Basel Core Principles

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Authorities’ response to the assessment

9. The main comments of the authorities concern the assessment of the interrelated principles 8 and 16, on credit policies and on-site inspections. While recognizing that some work remained to be done with regard to asset quality monitoring and on-site work in this field, the BNA pointed out that work is underway to increase the frequency of targeted inspections. Meanwhile, it considered the suggestion that insufficient frequency of inspections will lead banks to not review their portfolio on a regular basis, and that more intrusive monitoring is necessary as too harsh. It also contests the implication that insufficient frequency of on-site work implies that inspectors are not in a position to monitor banks’ portfolios adequately. The BNA also considered that asset quality issues were relevant primarily for domestic institutions and less for international banks in the Netherlands Antilles. The domestic situation is considered to be under control. A more balanced rating than “materially noncompliant” is considered merited.

10. Also, interest rate risk was not considered a major risk, in light of the stability of interest rates, the breadth of spreads, and repricing possibilities. However, the BNA will look into this and develop a monitoring mechanism. The BNA considers that more proactive monitoring of how banks deal with problem loans would be more labor intensive than is warranted, given limited staff resources.

II. Assessment of Observance of the International Association of Insurance Supervisors Insurance Core Principles

A. General

11. The assessment was conducted in the context of the Module II Offshore Financial Center Assessment performed by a joint MAE1/LEG mission in January and April 2002 and based on updated information provided by the BNA through September 2003. The legal and regulatory framework, as well as the policies and practices of the BNA, as the supervisory authority for the pensions and insurance sectors, were assessed. The assessment was based on study of the laws and regulations, and discussions with private sector representatives, professional organizations, and BNA management and staff. The assessment was conducted by Mr. Steve Butterworth, Director for Insurance of the Guernsey Financial Services Commission. The assessment was based on the International Association of Insurance Supervisors (IAIS) standards for insurance supervision and the IAIS methodology. The assessor enjoyed full cooperation of the authorities.

Table 4.

Summary Observance of IAIS Insurance Core Principles

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B. Main Findings and Recommendations

Organization of an insurance supervisor (Principle 1)

12. The BNA is observant of this principle. Responsibilities of the BNA are clear and objectively stated, and the BNA is operationally and financially independent from the government, although it is capitalized by the government. It is also independent from the industry. Staff is of high quality and trained on an ongoing basis. Procedures for on-site and off-site supervisory work are in place and are clear and well documented, although some of the newer ones still await completion. It is recommended that the BNA continue to evaluate the resources needed to implement the planned program of on-site examinations, and for the introduction of new rules and regulations and the associated additional supervisory workload. New staff has been hired, including an actuary, and additional staff is being interviewed. The new regulations need to be completed as soon as possible.

Licensing (Principle 2)

13. The authorities are broadly observant of this principle.

Part 1: Companies underwriting risks in the domestic market. Legal provisions are in place entrusting the BNA to regulate the insurance sector and designate it as the licensing authority. Appropriately rigorous licensing arrangements are in place. Actual refusal of a formal license application rarely takes place, as in appropriate cases the applicant is usually persuaded to withdraw the application.

Part 2: Assessment of key functionaries and business plan. The requisite legal and regulatory standards are in place. To assist the assessment of compliance with fit and proper criteria, a new Integrity Unit has been created, which is able to exchange information with the public prosecutor’s office.

Part 3: Reliance on insurance supervisors in other jurisdictions. Reliance on the information of insurance supervisors in other jurisdictions is an integral part of the licensing process and will be strengthened when more MoU’s are concluded with supervisors abroad.

14. Licensing of captives or professional reinsurers can raise specific issues when it is incorporated abroad. In such cases, licensing should wait until satisfactory arrangements have been made for cooperation and exchange of information with the foreign supervisor. Licensing of composites should be excluded.

Changes in control (Principle 3)

15. The authorities are broadly observant of this principle. The BNA monitors changes in control. These requirements need to be brought explicitly into the legislation. Prior approval for any changes should be required. These aspects are now dealt with in a Licensing Manual, of which, the legal basis is found in Article 17 of the Insurance Ordinance and Article 4 of the Special Insurance License Decree. In one recent case a six month negotiation process preceded the BNA approval of a change in control over one of the largest companies in the Netherlands Antilles. The BNA recently refused a nonlife insurance company permission to acquire shares in a newly incorporated life insurance company.

Corporate governance (Principle 4)

16. The authorities are broadly observant of this principle. Assessment of management and ownership takes place as described above. For Board members, the guidelines are laid down in “Guidance Notes,” which also need to be given the status of a binding law or regulation, and made applicable to captives and professional reinsurers. Currently, it is not mandatory for captives and professional reinsurers to have a Supervisory Board. In practice, most do and they consequently must adhere to the BNA Guidance Notes.

Internal controls (Principle 5)

17. The authorities are broadly observant of this principle. Internal controls are a standard element in the well established program of off-site analysis and on-site inspections. Guidance notes on internal controls—even if abided by—should be given a more binding legal status.

Assets (Principle 6)

18. The authorities are broadly observant of this principle. Supervisory control of assets is outlined in supervisory procedures and the new Annual Report Automated Statements (ARAS) system, but not in regulations. These procedures need to be given more binding status. Supervision over assets held abroad may pose practical difficulties, requiring good cooperation with foreign supervisors.

Liabilities (Principle 7)

19. The authorities are broadly observant of this principle. As in many other jurisdictions, financial statements and the valuation of assets takes place according to GAAP or international standards relevant to the Netherlands Antilles. Technical provisions are described extensively in ARAS and examined annually. The BNA should develop its own standards for the valuation of liabilities. A new valuation manual is expected to be issued in December 2003, taking into account IAS.

Capital adequacy and solvency (Principle 8)

20. The authorities are broadly observant of this principle. The implementation of supervision in the Netherlands Antilles goes a considerable way towards capital adequacy requirements that reflect the size complexity and risks of the insurer. IAIS have not developed standards in this area. The authorities intend to revise the solvency requirements, to reflect more of the complexity and risks of the different categories of insurers. At present, the solvency requirement for professional reinsurers seems to be on the low side. This needs review. Captives should also be subjected to more risk based capital requirements. After implementation of these rules, a higher level of compliance will be achieved.

Derivatives and “off-balance sheet” items (Principle 9)

21. The authorities are currently broadly observant of this principle. However, based on a survey conducted a few years ago it was determined that none of the insurers use these instruments. Thus, no rules are currently in place, although a regulation is in development based on the IAIS guidance paper. In the current draft asset valuation guide developed by the BNA, guidelines relative to the valuation of derivatives have been included in the “invested assets” section under the heading “other investments.” The guidance paper could be given binding status in due course, should activities in derivatives actually develop.

Reinsurance (Principle 10)

22. The authorities are observant of this principle. Prior to the hurricane season the BNA reviews all reinsurance agreements. These checks are also performed during desk and field examinations. Training in the area of reinsurance is needed for all the staff members within the department since there is currently only one reinsurance specialist in the BNA. More of the rules on reinsurance should be given binding status.

Market conduct (Principle 11)

23. The authorities are materially nonobservant of this principle. The proposed National Ordinance on the Insurance Brokerage Business has not yet been enacted, nor have the market conduct guidelines been published. The proposed Ordinance only deals with insurance brokers. Consideration could be given to supervising, either directly or indirectly (through principals or employees), all persons providing insurance advice, from within the Netherlands Antilles. The government is setting up an independent alternative dispute resolution body, which will enable complaints to be dealt effectively and affordably. Market conduct guidelines should be given more binding status. The proposed National Ordinance on the Insurance Brokerage Business also covers supervision of offshore insurance brokers. Where licensed insurers deal directly with policyholders and prospective policyholders of the general public in jurisdictions without market conduct rules, they are obliged to apply market conduct guidelines of the Netherlands Antilles. The BNA currently handles customer complaints.

Financial reporting (Principle 12)

24. The authorities are broadly observant of this Core Principle. Similar comments apply to this section as contained within Principle 7—liabilities regarding developments in insurance accounting being promulgated by International Accounting Standards Board (IASB). Action should be taken immediately to remedy the current practice of late submission of audited statements. Introduction of the new ARAS reporting system and more aggressive monitoring has led to improved reporting performance by insurance companies.

On-site inspection (Principle 13)

25. The authorities are observant of this Core Principle. BNA has a well established program of on-site inspections and has developed a comprehensive procedures manual. The manual has been finalized and it is the intention to update this periodically. The BNA keeps to the standards of the U.S. based Society of Financial Examiners and several of the staff of the bank are Certified Financial Examiners. The BNA should extend its on-site inspections to insurance brokers, paying special attention to AML, and market conduct aspects. The BNA should follow through with more structured meetings with external auditors. The BNA has field examination procedures for captives and professional reinsurers and will resume its inspection program, i.e., its field examinations of captives and professional reinsurers, not only when a captive or reinsurer fails to submit requested financial information.

Sanctions (Principle 14)

26. The authorities are observant of this principle. The legislation contains a full menu of enforcement actions, including powers to issue binding directions. The BNA should consider including within the legislation, different, specific types of directions that may be used, as well as keeping an all-encompassing power. In addition, the bank should be able to impose a range of civil money penalties (not criminal fines) against individuals and the insurer/intermediary.

Cross border business operations (Principle 15)

27. The authorities are broadly observant of this Core Principle. All insurers operating in the Netherlands Antilles, including subsidiaries and branches of overseas insurers, need to be licensed although incidental cross-border business is permitted on a direct provision of services basis. The legislation enables the minister of finance to prohibit or impose rules on specific inwards cross-border business, if the actions of the insurer are not thought to be in the interests of local policyholders. In addition, the BNA can require brokers by law to submit annual details of all insurers with whom business has been placed. The BNA has become more proactive in consulting with overseas insurance supervisors. The legislation should be changed so that a licensed insurer needs to seek specific approval in order to operate cross-border. Home supervisors of branch offices established in the Netherlands Antilles are required to officially communicate with the BNA when planning an examination of or visit to the branch. Whenever the BNA, as a home supervisor, wants to conduct an examination of a branch office in another jurisdiction, the home supervisor is contacted and a joint examination arranged. Thus far, the BNA has conducted joint examinations with the Aruban and Netherlands authorities.

Coordination and cooperation (Principle 16)

28. The authorities are broadly observant of this principle. The BNA should expedite the remaining planned MoU’s (taking into account the requirements of the IAIS Core Principle 16) with other relevant jurisdictions and implement legislative changes to ensure that reciprocity is not mandatory when providing information to other authorities.

Confidentiality (Principle 17)

29. The authorities are observant of this principle. The insurance legislation requires confidentiality and there is a gateway under which the bank can share information with other insurance supervisors. As already recommended in CP 2 and CP 16, this gateway needs to be much broader in nature and not subject to reciprocity.

Anti-money laundering

30. The IAIS does not yet have a separate core principle against ML. Currently Antillean AML legislation and regulation covers ML through life insurance companies or brokers. Training is being provided to the sector. Revised AML/CFT guidelines for all insurance companies were introduced by the BNA in June 2003. The BNA has on-site procedures in place to test whether the recommendations made in the guidelines are adopted and properly implemented by the industry. On-site visitations to verify compliance were started by the BNA in March 2003.

31. The authorities have drawn up a plan of recommended actions to address the issues raised in the paragraphs above and in the detailed assessment, as well as concerns of their own in the action plan outlined in Table 7 below.

Table 5.

Detailed Assessment of Observance of the IAIS Insurance Core Principles

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Table 6.

Recommended Action Plan to Improve Observance of IAIS Insurance Core Principles

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Table 7.

Detailed Assessment—Legal Requirements for Supervision and Regulation

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Financial intermediary is, for instance, anyone who renders financial services by virtue of his profession or in the ordinary course of his business. This includes, inter alia, the following: banks; life insurance companies, including agents, subagents, and brokers; MTs; and CSPs, such as trust companies or fiduciaries regulated under the CSP Ordinance, casinos, and internet gambling.

Financial services are, for instance: custody of securities, money, precious metals, or other valuables; the opening of an account on which a balance may be kept in securities, money, precious metals, or other valuables; the renting of a safe deposit box; performing payments, selling, brokering, or paying out under a life insurance contract; crediting or debiting of an account, and the providing of other services to be designated by national decree.

Nonlife insurers, agents, subagents, brokers, captives, and professional reinsurers are currently not covered in the AML framework in the Netherlands Antilles. However, agents and brokers will soon become subject to BNA supervision. Draft legislation to this effect has been submitted to parliament. MTs are licensed and supervised by the BNA under the Foreign Exchange Ordinance and the MT Admission Requirements. Foreign exchange houses (bureaux de change) are not permitted by policy of the BNA. Lawyers, notaries, accountants, consultants, real estate agents, and dealers in high-end goods, such as antiques, jewelry, and auctioneers, are not currently covered under the AML framework, although the Antillean authorities are closely following the discussion within the FATF and waiting for the revision of the FATF 40 recommendations. The Describe procedures for monitoring and recording crossborder movements of large amounts of cash Describe factors which influence the use of cash in transactions recommendations on this topic were finalized in February 2003. Also with regard to CSPs, new FATF guidance is awaited, after which the Antillean AML framework will be adapted.

The UTRC is the FIU in the Netherlands Antilles.

The key elements are outlined in FATF 40 4–7; UNML Articles 1–10, Article 17, Articles 19–23, Articles 28–48, Articles 53–55, and Articles 56–79, and UNMC Article 21 through Article 33 (Attachment I).

The Supervisory Board has indicated that it does not expect to begin on-site inspections of CSPs before January 2003 at the earliest.

C. Detailed Assessment of Observance of the IAIS Insurance Core Principles

Recommended action plan

Authorities’ response to the assessments

32. The comments of the authorities to the recommendations have been incorporated in the action plan in Table 6.

III. Assessment Of Rules and Policies Against AML/CFT

A. Information and Methodology Used for the Assessment

33. The assessment was performed in April 2002, based on study of the AML/CFT laws and regulations of the Netherlands Antilles, as detailed in Attachment I. Also, discussions were held with the Deputy Director of the BNA for Policy and International Relations, the Head of International Relations, the Heads of the Banking and Insurance Supervision Departments of BNA, Head and staff of the Unusual Transactions Reporting Center (UTRC), the Attorney General of the Netherlands Antilles, and the Head of the Customs Service. As agreed with the authorities, the February 2002 draft AML/CFT Methodology was used as the basis for the assessment. Since the assessment was performed, a new methodology and criterion-by-criterion assessment worksheet was developed and agreed on between the IMF, World Bank, and the FATF. These materials were not available at the time of the missions. The AML/CFT assessment has been updated through July 2003, in consultation with the authorities, to take into account recent developments of relevance to the assessment, including the issuance in June 2003 of new AML/CFT Guidelines for Banks and insurance companies. 2

IV. Assessing the AML/CFT in Prudentially Regulated Sectors

A. Module 1—AML/CFT in the Banking Sector

Table 8.

Detailed Assessment of Compliance with AML/CFT Requirements for Banking Supervision

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B. Module 2—AML/CFT in the Insurance Sector

Table 9.

Detailed Assessment of AML/CFT Elements for Insurance Supervision

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