Front Matter Page

© 2004 International Monetary Fund

November 2004

IMF Country Report No. 04/373

Belize: 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 Belize 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 Belize’s request for technical assistance. It is based on the information available at the time of its completion. The views expressed in these documents are those of the staff team and do not necessarily reflect the views of the government of Belize or the Executive Board of the IMF.

The policy of publication of staff reports and other documents by the IMF allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.

International Monetary Fund

Washington, D.C.

Front Matter Page

Assessment of the Supervision and Regulation of the Financial Sector

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Review of Financial Sector Regulation and Supervision

BELIZE

August 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. Introduction and Financial System Overview

• • A. Background

  • B. Financial Institutions and Markets

  • C. Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)Background

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

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

  • F. Cross-Border Cooperation and Information-Sharing

  • G. Key Observations and Recommendations

• II. Observance of Financial System Standards and Codes: Reports on Observance of Standards And Codes (ROSCs)

• • A. Summary of the Basel Core Principles Assessment

  • B. Summary of the IAIS Insurance Core Principles Assessment

  • C. Summary of the Anti-Money Laundering and Combating the Finance of Terrorism (AML/CFT) Assessment

• Tables

• 1. Financial Structure

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

• 3. Recommended Action Plan to Improve Observance of IAIS Insurance Core Principles—Domestic Insurance

• 4. Recommended Action Plan to Improve Observance of IAIS Insurance Core Principles—International Insurance

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

• 6. Other Recommended Actions

• Boxes

• 1. Recent Legislative and Regulatory Initiatives

Glossary

Preface

At the request of the Belize authorities an IMF mission conducted a Module 2 Offshore Financial Center Assessment of Belize during August 4–15, 2003. The mission assessed observance by Belize of:

• (a) the Financial Action Task Force 40 Recommendations for Anti-Money Laundering plus 8 Special Recommendations on Combating the Financing of Terrorism, based on the Methodology for Assessing Compliance with Anti-Money Laundering and Combating the Financing of Terrorism Standards (AML/CFT) October 2002 version;

• (b) the Basel Core Principles for Effective Banking Supervision (BCP); and

• (c) the Insurance Core Principles of the International Association of Insurance Supervisors (IAIS).

This report updates an OFC assessment undertaken in September 2001 and extends that assessment to include a comprehensive AML/CFT assessment using the common methodology adopted by the Fund/Bank and the FATF in the fall of 2002. The analysis and recommendations in this report reflect the situation as of the time of the on-site visit in August 2003. Subsequent to the mission the authorities developed a broad work program, which is still on-going, to address most of the recommendations in this report.

The mission consisted of Mr. John Abbott (Mission Chief, MFD); Ms. Joy Smallwood (Consulting Counsel, LEG); and Messrs. Joseph Courtright (Consultant, Banking Supervision, MFD); Peter Kruschel (Consultant, Banking, MFD); Martin Roberts (Consultant, Insurance, MFD); Richard Walker (Consultant, AML/CFT Financial Sector, MFD); and Ms. Maria Tramuttola (Administrative Assistant, IMF/MFD). An independent AML/CFT expert, not under the supervision of the IMF. Mr. Russell Ursala of the Caribbean Financial Action Task Force, evaluated the law enforcement sections of the AML/CFT methodology.

Members of the mission met with Mr. Ralph Fonseca, Minister of Finance and Home Affairs; Mr. Jorge Auil, Governor, Central Bank; Mr. Sidney Campbell, Deputy Governor of the Central Bank and Chairman of the International Financial Services Commission; Mr. Keith Arnold, Director of the Financial Intelligence Unit; Mr. Gian Gandhi, Director General, International Financial Services Commission and Legal Counsel, Finance and Home Affairs Ministry; Ms. Neri Matus, Financial Supervision Department, CBB; Ms. Alma Gomez, Acting Supervisor of Insurance; and Mr. Kirk Anderson, Director of Public Prosecutions, as well as a number of other financial and law enforcement officials. In addition, the mission had extensive discussions with representatives of the financial sector, including financial service providers. The members of the mission wish to express their gratitude to the Belizean authorities and the staff of all the institutions for their hospitality, cooperation, and openness in sharing insights and information.

Executive Summary

The financial sector of Belize, both domestic and offshore, is small. At the end of 2002 assets of the domestic banking system totaled approximately US$628 million and the international banks held additional assets of US$148 million. There were five domestic banks and seven international banks.¹ Domestic insurance assets totaled approximately US$45 million at the end of 2001. Since the 1990s, official policy has fostered development of offshore financial activities. To date, formation of international business corporations (IBCs) and trusts have been the main lines of such international business. Over a span of thirteen years, a cumulative total of about 30,000 IBCs have been registered. After strike offs and dissolutions, 18,000 remain active. International insurance and mutual funds are authorized activities but it is only this year that the first licenses for these functions have been granted. Tax exemption, low registration costs, and a flexible trust law that facilitates asset protection trusts are among the advantages Belize offers as an offshore financial center.

A variety of actions have been taken in the last three years, particularly after the events of September 11, 2001, to strengthen financial supervision and improve the AML/CFT regime. These include the creation of an FIU (Financial Intelligence Unit) in late-2002 with broad powers to investigate and prosecute financial crime and to serve as the central coordinator for domestic and cross-border efforts against financial crime. Legislation has also been passed to implement UN conventions with respect to terrorist financing. The International Banking Act was amended to better align regulatory requirements with those of domestic banks and with international standards. Further legislative initiatives are underway to update the provisions for supervision of domestic banking and domestic insurance.

The assessment found that banking supervision complies with or is largely compliant with most of the Basel Core Principles. Under current arrangements the Minister retains a good deal of discretionary authority with respect to banking supervision, but this situation is likely to be modified if a draft bill, now under discussion, becomes law. Retention of qualified staff is a continuous problem with the result that the intensity of banking supervision varies. With the addition of more international banks and other mergers and expansions, the corporate structures of banks are becoming more complex, requiring greater attention of cross-border and consolidated supervision issues.

Legislation for the supervision of domestic insurance is outdated and is being revised. Because of staff constraints, the insurance supervisor has limited ability to put forward a comprehensive program of on-site and off-site supervision. Still, close monitoring and active dialogue seem to be providing an adequate level of oversight even though the processes fall short of many of the international standards for insurance supervision.

The authorities have been careful to develop basic licensing requirements before allowing international insurance to proceed. A few licenses have recently been granted but business is only beginning. Arrangements for the on-going, prudential supervision of these activities have, until now, been deferred. The mission offered a number of suggestions for upgrading supervision of international insurance to a level that would satisfy international standards.

With the establishment of the FIU, the AML/CFT regime has been considerably strengthened. The FIU Act makes the director of the FIU the supervisor authority for implementing the Money Laundering Prevention Act and puts the FIU at the center of government efforts to deal with financial crime. Because of the large number of agencies involved, close coordination will be required to make the new FIU regime fully effective. Not surprisingly some teething problems have been encountered in the early months of operation. While many of the elements of a robust AML/CFT regime are now in place, the mission made a number of specific recommendations with respect to law, regulation, and operations that would further strengthen the overall regime.

AML/CFT awareness is generally high both in the government and in the private sector. While identified cases of money laundering within Belize have been few, several elements of the Belize financial structure pose special vulnerabilities to money laundering that will require continuing vigilance and, perhaps, some tightening up of practices. Issues arise particularly with respect to the heavy reliance of the trust and company service provider sector on overseas introductions, where verification of beneficial owners is particularly difficult. Belize trust structures are attractive to parties wishing to put assets out of reach of legitimate claimants. Also, Belize has commercial free zones where cash transactions are prominent and controls are difficult to enforce, and also casa de cambio exchange operations, where monitoring of cash transactions is also difficult. The authorities are aware of these vulnerabilities and have taken specific steps to mitigate some risks.

The supervisory regime in Belize consists of a variety of agencies having responsibility for sub sectors. As a result, prudential supervision is uneven, with important institutions little supervised. As well, there are gaps in the regime for monitoring compliance with AML/CFT requirements. None of the supervisory agencies has the critical mass necessary to comply fully with international standards. The financial system is continuing to evolve and will become more complex as new services and products and financial structures are introduced. A common theme of the separate assessments is that additional resources and skills are needed if Belize is to be able to satisfy international standards. As the government moves to meet these standards, the mission believes it would be most cost effective to simultaneously address the issue of various supervisors and move toward a more streamlined system. A single financial supervisor is one option, but the mission has also included suggestions for intermediate steps on the path to a more streamlined and cost effective system of financial regulation. The mission believes it would be useful for the authorities to undertake a feasibility study to consider merger of the separate domestic and international insurance functions into a single body. Merger could address resources problems identified in this assessment but a feasibility study would also afford an opportunity to review and improve issues relating to independence and as appropriate, consistency of supervisory standards, guidelines, processes and decisions.

Key Recommendations

Key Recommendations

Issue	Recommendation
Banking
Operational independence of the supervisor	The authorities should consider amending the legislation to remove the Minister of Finance’s power to approve or withdraw licenses, to approve significant enforcement actions and to approve selection of most CBB employees. These measures would remove the potential for intrusion by the Minister on the operational independence of the CBB. (Subsequently, amendments to the BFIA and IBA were proposed for consideration.)
On-site and off-site banking supervision	The CBB should consider an increase in the number and breadth of expertise of their banking supervision staff, introduction of a comprehensive examination manual, which, among other things, would include the adoption of a more formalized system of working papers for onsite examinations. (Training and technical assistance is being undertaken to address these recommendations.)
Consolidated supervision	In its capacity as both a home and a host supervision and drawing on the tools of consolidated supervision, the CBB should develop procedures to ensure that the common ownership structure of some international banks does not undermine effective supervision and that consolidated supervision is, in general, effective. (Subsequently, measures were taken to consolidate one bank as a subsidiary of a foreign bank, to enter into an MOU with the home country supervisor of another commonly-owed bank, and to formalize CBB policy that international banks must have a bank parent.)
Insurance
Developing on-going supervision for international insurance	The International Supervisor of Insurance (ISO) should, as a matter of urgency, acquire the resources necessary to understand and assess potentially complex insurance operations, the viability of their business plans, and the adequacy of their resources, having regard for the nature of business written. He should also develop the capacity to carry out on-site inspections.
Broadening guidance given to domestic insurance	Guidance notes should be issued to the domestic insurance industry dealing with corporate governance and internal controls, particularly with respect to standards for monitoring underwriting risks, claims, compliance with the law, fair treatment of customers and AML requirements.
Developing on-site supervision	The Supervisor of Insurance should develop a fully structured on on-site program, including a comprehensive inspection manual which covers all major areas of insurance practices.
Resources	At least two experienced staff should be hired to allow more intensive supervision, including through on-site inspections and through more system analysis and evaluation of companies activities and financial reports. Staff training should be expanded, particularly in the areas of reinsurance and insurance risk analysis.
AML/CFT
Strengthening AML/CFT legal framework	Substantial AML/CFT legislation is in place but specific details should be filled in including: signing and ratifying the Palermo convention, introducing authority for a broader range of sanctions, broadening asset freezing and forfeiture authority, providing explicitly for an analytical function for the FIU, and considering adoption of a proceeds of crime law, a mutual assistance law, and adopting an “all serious crimes” approach to predicate offences.
Skills development	More and continuous training should be provided to supervisory, administrative, investigative, prosecutorial and judicial authority for enforcing the relatively new ML/FT laws of Belize. The analytic capabilities of the FIU should be enhanced.
Improving coordination	The FIU should step up its coordinating efforts in order to establish clearer processes and policies between the different entities (e.g., between the Central Bank and the FIU, between the FIU and the DPP’s office, between the FIU and BPD) involved in enforcing ML and FT laws and regulation.
Improving the framework for use of a eligible introducers	Consideration should be given to amending the framework for introduced business, to remove the option in which verification documents can be retained by an eligible introducer.
Facilitating exchanges of information	Gateways for information flow should be extended so that information on banking, insurance, mutual funds, managers, administrators and any other information can be transmitted to other regulatory bodies pursuant to international standards for the investigation and prosecution of economic crime.
Ensuring comprehensive compliance monitoring	The capacity should be developed to monitor and ensure compliance with the preventive measures required of credit unions, casas de cambio, and for entities and service providers licensed by the IFSC, regardless of whether this activity is carried out by the FIU or by the individual licensing/professional body. To comply with the June 2003 revised FATF Forty Recommendations, this capacity should also extend to the preventive measures required of lawyers and accountants.
Guidance notes	As soon as possible, the FIU, in conjunction with the various supervisory agencies, should issue updated AML/CFT guidance notes appropriate for the entire financial system and, as necessary, supplemented by guidance tailored to individual sectors of the financial community.

View Table

Key Recommendations

Issue	Recommendation
Banking
Operational independence of the supervisor	The authorities should consider amending the legislation to remove the Minister of Finance’s power to approve or withdraw licenses, to approve significant enforcement actions and to approve selection of most CBB employees. These measures would remove the potential for intrusion by the Minister on the operational independence of the CBB. (Subsequently, amendments to the BFIA and IBA were proposed for consideration.)
On-site and off-site banking supervision	The CBB should consider an increase in the number and breadth of expertise of their banking supervision staff, introduction of a comprehensive examination manual, which, among other things, would include the adoption of a more formalized system of working papers for onsite examinations. (Training and technical assistance is being undertaken to address these recommendations.)
Consolidated supervision	In its capacity as both a home and a host supervision and drawing on the tools of consolidated supervision, the CBB should develop procedures to ensure that the common ownership structure of some international banks does not undermine effective supervision and that consolidated supervision is, in general, effective. (Subsequently, measures were taken to consolidate one bank as a subsidiary of a foreign bank, to enter into an MOU with the home country supervisor of another commonly-owed bank, and to formalize CBB policy that international banks must have a bank parent.)
Insurance
Developing on-going supervision for international insurance	The International Supervisor of Insurance (ISO) should, as a matter of urgency, acquire the resources necessary to understand and assess potentially complex insurance operations, the viability of their business plans, and the adequacy of their resources, having regard for the nature of business written. He should also develop the capacity to carry out on-site inspections.
Broadening guidance given to domestic insurance	Guidance notes should be issued to the domestic insurance industry dealing with corporate governance and internal controls, particularly with respect to standards for monitoring underwriting risks, claims, compliance with the law, fair treatment of customers and AML requirements.
Developing on-site supervision	The Supervisor of Insurance should develop a fully structured on on-site program, including a comprehensive inspection manual which covers all major areas of insurance practices.
Resources	At least two experienced staff should be hired to allow more intensive supervision, including through on-site inspections and through more system analysis and evaluation of companies activities and financial reports. Staff training should be expanded, particularly in the areas of reinsurance and insurance risk analysis.
AML/CFT
Strengthening AML/CFT legal framework	Substantial AML/CFT legislation is in place but specific details should be filled in including: signing and ratifying the Palermo convention, introducing authority for a broader range of sanctions, broadening asset freezing and forfeiture authority, providing explicitly for an analytical function for the FIU, and considering adoption of a proceeds of crime law, a mutual assistance law, and adopting an “all serious crimes” approach to predicate offences.
Skills development	More and continuous training should be provided to supervisory, administrative, investigative, prosecutorial and judicial authority for enforcing the relatively new ML/FT laws of Belize. The analytic capabilities of the FIU should be enhanced.
Improving coordination	The FIU should step up its coordinating efforts in order to establish clearer processes and policies between the different entities (e.g., between the Central Bank and the FIU, between the FIU and the DPP’s office, between the FIU and BPD) involved in enforcing ML and FT laws and regulation.
Improving the framework for use of a eligible introducers	Consideration should be given to amending the framework for introduced business, to remove the option in which verification documents can be retained by an eligible introducer.
Facilitating exchanges of information	Gateways for information flow should be extended so that information on banking, insurance, mutual funds, managers, administrators and any other information can be transmitted to other regulatory bodies pursuant to international standards for the investigation and prosecution of economic crime.
Ensuring comprehensive compliance monitoring	The capacity should be developed to monitor and ensure compliance with the preventive measures required of credit unions, casas de cambio, and for entities and service providers licensed by the IFSC, regardless of whether this activity is carried out by the FIU or by the individual licensing/professional body. To comply with the June 2003 revised FATF Forty Recommendations, this capacity should also extend to the preventive measures required of lawyers and accountants.
Guidance notes	As soon as possible, the FIU, in conjunction with the various supervisory agencies, should issue updated AML/CFT guidance notes appropriate for the entire financial system and, as necessary, supplemented by guidance tailored to individual sectors of the financial community.

Subsequent to this assessment, numerous steps were taken to strengthen supervision of banking and domestic insurances, including enactment of proposed insurance legislation. While IMF experts have not had an opportunity to review these measures in detail, they appear to go a long way toward addressing a number of recommendations in this report. Key actions include: (i) enactment of a new Insurance Act for domestic insurance; (ii) adoption of various new banking and insurance regulations; and (iii) additional technical assistance and training to upgrade supervisors’ capacity to conduct off-site monitoring and on-site examination of banks and insurance companies.