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© 2004 International Monetary Fund

December 2004

IMF Country Report No. 04/413

Cook Islands: 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 Cook 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 Cook Islands’ request for technical assistance. It is based on the information available at the time it was completed in October 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 Cook Islands 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

Cook Islands

October 2004

Front Matter Page

“The contents of this report constitute technical advice and recommendations given by the staff of the International Monetary Fund (IMF) to the Cook Islands 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

• II. Financial System Overview

  • A. Background

  • B. Financial Institutions and Markets

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

  • A. Banking

  • B. Anti-Money Laundering and Combating the Financing of Terrorism

  • C. Key Concerns

• IV. Assessment of Observance of the Basel Core Principles for Effective Banking Supervision

  • A. General

  • B. Main findings

• V. Report on Observance of Standards and Codes—FATF Recommendations for Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT)

  • A. Introduction

  • B. Main findings

• Tables

• 1. Recommended Action Plan to Improve Compliance with the Basel Core Principles

• 2. Authorities Action Plan

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

Glossary

Preface

The Offshore Financial Center Assessment Report for the Cook Islands assesses supervision in the banking sector on the basis of the Basel Committee’s Core Principles for Effective Banking Supervision and the regime for the anti-money laundering and combating the financing of terrorism (AML/CFT) based on the October 2002 AML/CFT Methodology.

The assessments were carried out during a mission from February 16–27, 2004 whose members included Mr. Ian Carrington (Mission Chief), Mr. Peter Csonka (Senior Counsel, LEG), Ms. Desiree Cherebin and Mr. Joel Shapiro (Consultants, Banking Supervision), Mr. Steven Gilbert (Consultant, AML/CFT) and Claudia Mariel (Mission Assistant). An independent AML/CFT expert, not under the supervision of the IMF, Detective Senior Inspector Simon Leung Chin-keung of the Hong Kong Police Force, evaluated the law enforcement sections of the methodology. Ms. Judy Lau of the Pacific Financial Technical Assistance Centre (PFTAC) joined the mission as an observer.

The members of the mission met with the Prime Minister, The Honorable Dr. Robert Woonton, the NCCT Working Group, the Financial Services Commission, the Financial Intelligence Unit, the Solicitor General’s Office, the Ministry of Justice, the Ministry of Foreign Affairs, the Police, and the Customs Department. The mission also met with the New Zealand High Commissioner, representatives of various financial institutions, auditors, trustees, and the Law Society.

The members of the mission wish to express their gratitude to the Cook Islands authorities and the staff of all the institutions that they visited and with whom they worked during their stay for their cooperation, and openness in sharing insights and information. The feedback provided by the authorities during all meetings was particularly useful in strengthening the report.

Executive Summary

Offshore financial activity commenced in the Cook Islands (CI) in 1981 with the enactment of several laws, which provided, as a basic inducement, for all registered offshore entities to be exempt from all forms of tax. The legislation also imposed strict confidentiality provisions relating to the incorporation, ownership, and activities of such entities.

There are three domestic banking operations in the CI, including branches of the ANZ and Westpac from Australia and the local Bank of the Cook Islands. Until recently, the Cook Islands offered three categories of license for offshore banking activity.

Trustee companies play a pivotal role in the CI offshore sector. They provide trust and company formation and administration services. The law requires that the incorporation of international companies must be undertaken by trustee companies and any offshore institutions that do not have a physical presence in the islands must operate through one of these entities. They also act as introducers of business to many of the institutions operating in the offshore sector.

In response to its listing under the FATF’s NCCT initiative, the Cook Islands has taken a number of measures to strengthen its financial sector regulation. New legislation was passed for the regulation of banking activity and a Financial Supervisory Commission (FSC) was established. A suite of anti-money laundering legislation was enacted in May 2003 with work ongoing in respect of legislation for combating the financing of terrorism.

The new Banking Act and FSC Act provide a good basis for sound financial sector regulation. They provide the basic framework for authorization and effective supervision of licensed entities. The major challenges facing the FSC include the training and retention of appropriately qualified personnel and the development of an adequate range of regulations, guidance notes, and general supervisory tools.

Key Recommendations

Key Recommendations

Issue	Comment
BCP
Resources	The Commission should explore creative ways under which senior staff can be attracted from the Cook Islands Diaspora, especially in New Zealand, as well as locally.
Independence	The Commissioner should not be in a position where routine operational issues are presented to the Board prior to or concurrently with action taken. The Board should be involved intimately with policy matters, but not in the day-to-day operations of the Commission.
Licensing	A comprehensive list of licensed financial institutions should be published in a manner that is readily accessible to the public, indicating that any other institutions purporting to be licensed with the Commission are operating in contravention of existing law. In the event the Commission becomes aware that an institution is conducting a banking business without a license, it should post warning notices, and where practicable, take legal action against the institution.
On-site and Off-site supervision	The FSC should establish a comprehensive training program for all supervision staff. In addition, the Commission must issue prudential returns in a number of critical areas of banking activity and risk management to ensure that all licensed financial institutions adopt international best practice and are advised as to the nature of policy and practice that the Commission expects. Supervisory tools, such as an examination manual and examination report template, also must be developed, together with evaluation tools for such areas as credit, market, and liquidity risk.
AML/CFT
International Treaties	The Convention for the Suppression of the Financing of Terrorism should be ratified. The Vienna and Palermo Conventions should be signed.
Financing of Terrorism	FT should be criminalized as a matter of priority.
Monitoring Compliance	The FSC should train its staff and develop appropriate methodologies to undertake its monitoring responsibilities under the FTRA. The FIU should be adequately resourced to undertake its compliance function under the FTRA.
Guidance Notes	Revised guidance notes that are consistent with the new AML legislation should be issued to industry.
Trustee Companies / International Companies	The FSC needs to develop an effective mechanism to undertake meaningful supervisory surveillance of trustee companies and the Registrar of Companies should ensure that the beneficial owners of ICs are identified, verified, and this information is kept updated.

View Table

Key Recommendations

Issue	Comment
BCP
Resources	The Commission should explore creative ways under which senior staff can be attracted from the Cook Islands Diaspora, especially in New Zealand, as well as locally.
Independence	The Commissioner should not be in a position where routine operational issues are presented to the Board prior to or concurrently with action taken. The Board should be involved intimately with policy matters, but not in the day-to-day operations of the Commission.
Licensing	A comprehensive list of licensed financial institutions should be published in a manner that is readily accessible to the public, indicating that any other institutions purporting to be licensed with the Commission are operating in contravention of existing law. In the event the Commission becomes aware that an institution is conducting a banking business without a license, it should post warning notices, and where practicable, take legal action against the institution.
On-site and Off-site supervision	The FSC should establish a comprehensive training program for all supervision staff. In addition, the Commission must issue prudential returns in a number of critical areas of banking activity and risk management to ensure that all licensed financial institutions adopt international best practice and are advised as to the nature of policy and practice that the Commission expects. Supervisory tools, such as an examination manual and examination report template, also must be developed, together with evaluation tools for such areas as credit, market, and liquidity risk.
AML/CFT
International Treaties	The Convention for the Suppression of the Financing of Terrorism should be ratified. The Vienna and Palermo Conventions should be signed.
Financing of Terrorism	FT should be criminalized as a matter of priority.
Monitoring Compliance	The FSC should train its staff and develop appropriate methodologies to undertake its monitoring responsibilities under the FTRA. The FIU should be adequately resourced to undertake its compliance function under the FTRA.
Guidance Notes	Revised guidance notes that are consistent with the new AML legislation should be issued to industry.
Trustee Companies / International Companies	The FSC needs to develop an effective mechanism to undertake meaningful supervisory surveillance of trustee companies and the Registrar of Companies should ensure that the beneficial owners of ICs are identified, verified, and this information is kept updated.