Back Matter

Appendix I. Reports on the Observance of Standards and Codes

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

General

38. This assessment of the Basel Core Principles for Effective Banking Supervision (BCP) was carried out in March 2006 as part of a Module 2 assessment of the regulation and supervision of the Gibraltar financial sector at the request of the Gibraltar government.14 The Gibraltar FSC and its staff cooperated fully with the assessment and their assistance is gratefully acknowledged.

39. The assessment was based on the law applicable to the supervision of banks by the FSC, principally the Financial Services Commission Ordinance, 1992 (FSCO) and the Banking Ordinance, 1992 and on Administrative Notices, Guidance Notes, Newsletters, and other written material supplied by the Commissioner and his staff. The assessors also read the report of a previous BCP assessment carried out as part of the first Module 2 assessment in 2001 as well as the statutory review published in January 2005. This review assessed regulation and supervision in terms of compliance with the European Union (EU) legislation and the extent to which FSC practices match those of the U.K. supervisory authorities as required by the FSCO. The FSC staff also prepared a self-assessment of compliance with the BCP. The assessors met the Chief Minister, the Director of the Finance Centre, bankers, and external auditors as well as many of the staff of the FSC.

40. The assessment of observance of each of the Core Principles followed a qualitative approach and is based on the Core Principles Methodology document of October 1999. The assessment method consisted of examining the degree of observance of each of a principle’s essential criteria and, where the assessors judged necessary, of the additional criteria, as well.

41. A separate IMF team assessed Gibraltar’s compliance with the FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT). Their assessment, based on the latest version of the methodology, amplifies the assessment of CP 15 which is based on the 1999 methodology of the Basel Committee.

Institutional and macroprudential setting, market structure—overview

42. The banking sector consists of 18 banks with total assets of £8.4 billion as of end– 2006. Most of the banks are subsidiaries or branches of banks from other European countries, dominated by the United Kingdom with eight subsidiaries/branches in Gibraltar. There is only one bank which is not foreign-bank-owned and its shareholders are in the investment business in a major European financial centre. No licensing distinction is made between banks conducting offshore and onshore business. The majority of business in the small local market is done by two banking groups. A major portion of offshore banking business is providing private banking services, mainly asset management to Swiss based customers and to the expatriate community in Spain and Portugal. This includes residential mortgages to clients purchasing property in the region. Another important component of offshore banking are services provided to nonresident trusts and companies which benefit from the exemption from Gibraltar’s relatively high corporate tax rate of 35 percent.15

43. The principal risks are reputational risk, both for the Gibraltar authorities and for the banks, as the bulk of the assets managed are off the balance sheet with the investment risk carried by the client. Credit risk is largely limited to residential mortgage lending and is heightened by the recent rapid rise in prices both in Southern Spain and in Gibraltar itself. Banks claim they are protected in the former by low loan/value ratios (typically 60–70 percent) and by the fact that banks normally manage substantial asset portfolios for borrowers. The price risk may be more acute in the small domestic market where competition is more intense and has led to higher loan value ratios at least for recent lending. No bank has a recognized trading book in Gibraltar and most treasury functions are carried out at head office which also typically manages liquidity. Thus market risks and liquidity risk are low. Investment advice is normally also based on head office analysis or services provided by specialist investment firms.

44. Gibraltar banks have a competitive advantage over banks in other small financial centers in being able to provide services throughout the EU using the so-called “passport” arrangements. Although Spanish and Portuguese banks could compete with Gibraltar banks for business of expatriates who reside in these countries they appear not to do so. Most expatriates in Spain and Portugal who are offshore clients of Gibraltar banks have accounts with local Spanish and Portuguese banks for money transmission and general banking services, but these local banks do not as yet offer significant competition for asset management and other private banking services. This business is therefore profitable and expanding for the Gibraltar banks. More typical offshore business for tax exempt companies and trusts with non-resident owners and beneficiaries is normally introduced by local law firms and other service providers. While the tax exemption is due to be phased out in order to comply with EU state aid rules, the business is believed to be able to survive if the new unified rate of corporate tax were not more than 10–15 percent.16

45. The FSC is a unified regulatory and supervisory authority for all financial services. The FSC supervises activity of banks, insurance companies, investment firms, collective investment schemes, and trust and company service providers. The FSCO requires that, since Gibraltar is considered as a part of the United Kingdom and, therefore, a constituent of the EU under the U.K. accession treaty, Gibraltar must ensure both that supervision complies with EU Directives, and that regulation and supervision in areas subject to EU supervisory legislative requirements match the standard of regulation and supervision in the United Kingdom. The statutory review mentioned above was designed to verify that the FSC met these obligations.

46. Under the FSCO the Commissioner is appointed by the Governor subject to the approval of the U.K. Secretary of State for Foreign and Commonwealth Affairs. The other members of the Commission are appointed in the same way but after consultation with the Commissioner.

General preconditions for effective banking supervision

47. The preconditions for effective supervision are in place. As a member of the European Union since 1973, EU directives have been adopted and implemented in financial legislation. In addition all except one of the banks are branches or subsidiaries of major international banking groups subject to consolidated supervision by their home supervisory authority.

48. International Financial Reporting Standards (IFRS) were adopted for all EU listed companies effective January 2005. However some subsidiaries of listed companies still continue to use older accounting standards even though the consolidated accounts of the group to which they belong use IFRS. Limited liability companies are required to submit audited financial statements to the Registrar of Companies and are publicly available.

49. Company law and accounting and auditing arrangements are generally based on EU requirements and U.K. law and practice. Gibraltar’s financial system and indeed its economy are small and there is little scope for differing from the U.K. model. Judicial system is good and banks do not have difficulty in enforcing security on the rare occasions when they need to. Credit culture is also reported as strong with the incidence of default, especially in the local market, reported as being exceptionally low.

Main findings

50. The assessment revealed a high standard of compliance with the Basel Core Principles and the risk-based approach to supervision is well designed and implemented. The principle findings of the assessment are as follows:

  • Objectives, Autonomy, Powers, and Resources (CP 1). The FSC supervises all financial institutions in Gibraltar and has established supervisory objectives and principle for good supervision and has publicized these. The FSC is effectively independent from political and commercial pressure in its operations, although it is partly dependent on Government subventions and cannot fix fees payable to it which are the FSC’s main source of income. The legal framework is based on EU requirements and is up to date. The FSC has sufficient powers and authority to ensure compliance with laws and ensure the safety and soundness of the financial system. Supervisors are protected from litigation although there is no formal indemnification of any costs involved in staff defending litigation. The FSC can and does share information with other supervisory authorities especially home supervisors of foreign banks in Gibraltar.

  • Licensing and Structure (CPs 2–5). Only authorized banks may take deposits in Gibraltar and the licensing process is thorough. The effectiveness of the system for approving directors, managers, and key staff will be enhanced by the adoption of the proposed ‘approved persons’ regime. The FSC has sufficient powers to ensure that banks are owned only by reputable shareholders and nearly all the banks are in fact part of major international banking groups.

  • Prudential Regulations and Requirements (CPs 6–15). Prudential requirements are based on EU minimum requirements and U.K. prudential rules as the FSC is required to ensure its standards match those of the United Kingdom. The risk-based supervision system introduced in 2001, but recently enhanced, is well designed. It recognizes the particular attributes of banking business in Gibraltar and the risks involved. Credit risk is low and usually well secured and there is little market and liquidity risk as these are taken in head offices. Credit concentrations are low.

  • Methods of Ongoing Supervision (CPs16–20). The FSC has been relying less on the use of reporting accountants and has supplemented its off-site supervision with a structured system of on-site work by FSC staff. The relatively infrequent nature of this work reflects the low risk business in the banking system. However, contact with bank management is frequent and ordered. The reporting system is comprehensive and is validated through reliance on internal and external audit as well as FSC staff visits. The FSC has powers to undertake consolidated supervision but has not needed to use them so far.

  • Information Requirement (CP 21). Accounting standards are high and most banks belong to groups subject to IFRS standards. External auditors practice to International Standards for Auditing and belong to large international firms.

  • Formal Powers of Supervisors (CP 22). Although the FSC has no powers to levy civil money penalties it has a wide range of other powers and has not experienced any difficulty in achieving compliance with supervisory requirements.

  • Cross-Border Banking (CPs 23–25). The banks in Gibraltar have no offices in other jurisdictions. All the banks have foreign owners and the FSC has adequate powers to exchange information with home supervisory authorities. In some cases the FSC has signed formal MOUs but is not prevented from co-operating in other circumstances. A Court of Appeal case in 2003 criticized internal processes used regarding disclosure in a particular instance. However, the Court confirmed the FSC’s powers of co-operation. The internal processes have now been improved. A proposed new co– operation ordinance should help by consolidating and simplifying existing powers.

Table 2.

Recommended Action Plan to Improve Compliance of the Basel Core Principles

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Authorities’ response

51. The FSC welcomes the IMF’s assessment of its compliance against the BCP and thanks them for their skill and diligence in conducting the review. The assessment validates the hard work that the FSC has been conducting, particularly over the past years, in the area of banking supervision. The FSC is very proud with the team’s assessment of the individual core principles but is particularly so in relation to the Risk Assessment Framework methodology designed and implemented by its staff and deployed across all of its supervisory functions.

Summary Assessment of Observance of the IAIS Insurance Core Principles

General

52. This assessment of the observance of the core principles of the International Association of Insurance Supervisors (IAIS) in Gibraltar was done as part of a Module 2 assessment in the context of the International Monetary Fund’s (IMF) offshore financial center assessment program. The assessment was conducted during a mission to Gibraltar during March 6–17, 2006, and thus reflects the practices and circumstances at that time.17

53. The purpose of this assessment is to measure the application of the IAIS insurance core principles adopted in 2003 to the insurance industry in Gibraltar. It is also to ensure that the legislation in operation provides the supervisory authority with the powers of enforcement sufficient to regulate the industry to the IAIS standards. Information was provided by supervised insurance managers, brokers, agents and auditors in addition to that provided by the insurance supervision staff. Information was gathered from members of the insurance industry and auditors in the private sector. Considerable assistance was provided by the FSC which is the supervisory authority. There were no limiting factors in any of the discussions.

54. Guidance notes have been issued relating to the majority of the reporting functions to be carried out by licensed insurers and intermediaries. These were reviewed and sample files were tested for both the application process financial returns and of-site monitoring.

Institutional and macroprudential setting—overview

55. The insurance market in the domestic sector in Gibraltar is small and there are only two locally incorporated insurance companies together with one agent of a European Union (EU) member state operating in this sector. The majority of the licensed insurers are “open market insurers” operating in the United Kingdom with head office facilities provided by independent insurance managers. There are also a small number with an operational office facility. Foreign establishments operating in Gibraltar are all EU based and therefore covered by the EU directive on freedom of establishment. In the insurance supervision department there is an operational staff of four, including the head of insurance supervision, with many years of insurance experience, and the insurance manager who is an accountant and been with the FSC for a considerable time. The other two regulators have been recruited within the past two years and are undertaking a structured training program.

Main findings

56. The insurance industry has been growing during the past year and this shows no signs of slowing with new applications and inquiries up on last year at this time. There are presently 50 active insurers; an increase of over 100 percent since 2002. The domestic market is small with two local insurers although there are branches of EU companies. The majority of Gibraltar licensed companies provide insurance to other EU countries mainly the United Kingdom. Growth is attributed to the ability of Gibraltar based companies to “passport” into other EU countries under the EU single market legislation. There are eleven substantial single parent captive insurers also licensed.

57. All EU directives issued have been incorporated into law. Currently a proposed “Approved Persons Regime” intended to strengthen the corporate governance principle is awaiting consideration by the Gibraltar Legislative Assembly. A recent review was undertaken to compare the Gibraltar regulation and supervision with U.K. standards. The main recommendation was related to Capital adequacy and Solvency. Whilst the FSC is keeping this area under review, the Capital Adequacy requirement in Gibraltar already exceeds the minimum requirement of the EU directive on this issue.

58. Gibraltar benefits considerably as an offshore center by membership of the EU. The facility for insurance companies to establish in Gibraltar and operate in other EU member states is the main source of growth of insurers. The benefits include a more efficient application process, and accessibility of the supervisor and Commissioner for decision making. It is also considered that operating costs are also a factor. The infrastructure of the industry whilst small is effective. The effective use of sanctions and custodial management in recent years has been shown by the experienced management of the Commission.

59. The senior members of the insurance supervisory authority are experienced regulators and have specific skills in insurance and financial reporting. However with a fast growing regulatory portfolio attention must continue to be given to training and to increase the number of regulators. It is unlikely that the existing team will be able to complete the cycle of on-site inspections in the immediate future.

Organization of supervisor

60. The FSC has established policy and objectives which are effectively considered in all aspects of supervision. The legislation clearly defining insurance supervision objectives is in place and reporting processes are provided by the issue of guidelines for each reporting function and the initial application process. The supervisory authority is independent and has adequate powers of intervention and enforcement which have been used when required. The structure however is defined in relation to the supervision of insurance companies and intermediaries by the insurance supervisory authority, and intermediaries by the investment division. The senior members of the division are experienced and skilled but staff numbers will need to be increased. The supervisory authority conducts its functions in a transparent manner and publishes rules and procedures and annual report on its web site. The supervisors can share information with other supervisors having taken confidentiality into consideration.

Licensing and changes in control

61. The requirements for licensing are clearly set out in guidelines issued by the authority. Risk managements systems, reinsurance programs, internal controls, IT systems policies and underwriting and claims guidelines must be included in a business plan. Detailed checks on beneficial owners, senior managers and controllers are required and take place before approval is considered. The supervisors are totally committed to detail and scrutiny of applications and equally for changes in control. The supervisory authority ensures compliance with all criteria in ICP 6. To facilitate these controls the FSC is in the process of introducing an “Approved Persons Regime” this year. All changes in control of companies are treated in exactly the same way as that of a new application.

Corporate governance and internal controls

62. Whilst the insurance supervisory authority considers that the Guideline on Criteria for Sound and Prudent Management and newsletter issued in 1998 are sufficient for compliance with international standards, there is now draft legislation currently with the government covering an Approved Persons Regime which will incorporate Corporate Governance principles into Law so establishing best practice in this area. In addition Corporate Governance was of particularly focus in the initial on-site inspection program. The self assessment questionnaire and aide-mémoire provided are clear guidance to the supervisory requirements. The scope of on-site inspections programmed for the current year have been increased to be compliant with various ICP’s, which depend on verification of practical application. Similar comments apply to internal controls. The supervisor requires detailed information regarding controls, systems and operational management relating to underwriting procedures claims management reinsurance and risk management at the time of application however the absence of verification increases the risk of non observance in practice.

Market conduct

63. The domestic market in Gibraltar is small in relative standards. General insurance is concentrated in motor and personal lines supervised by the insurance supervisory division of the FSC. Intermediaries, predominantly involved in life insurance and related business, are supervised by the investment division of the FSC as conduct of business requirements are covered by the wider rules governing investment business. The Association of Gibraltar Insurers and Managers represents the industry but as yet they have not yet produced a Code of Conduct.

Monitoring, inspections, and sanctions

64. The requirements for the submission of financial, statistical and other reporting statements are set out in the Insurance Company Ordinance and the Insurance Accounts and Statements Regulations. Guidelines and Valuation of Assets and Liabilities Regulations all apply. The returns are closely scrutinized by the Supervisors and action is taken when required. The reporting time for annual accounts is at present six months after year end and the U.K. reviewers recommended shortening this period. This is being considered by the FSC. Additional and more frequent reporting is required from newly licensed insurers during the first two years of operation. As a follow up to off-site monitoring supervisors are required to carry out an on site investigation. The FSC has recently commenced such inspections undertaken on a risk-based approach, but a complete review of insurance companies will take some time. Inspections of five insurance managers were carried out in 2005 and a further nine were undertaken in 2006. Detailed self Assessment questionnaires have been produced as have aide-mémoires to assist in the proposed on-site inspection. While the initial on-site inspections focused on Corporate Governance the program has now been extended to include a wide range of management risks. All of the criteria for preventative and corrective measures are covered by the Insurance Companies Ordinance. There have been instances where appropriate enforcement procedures have been taken.

Cross border cooperation and confidentiality

65. Sufficient gateways exist to permit the insurance supervisory authority to share information with other supervisors either informally or by agreement. Safeguards apply to ensure that confidentiality from the other supervisors must be agreed and in place.

Table 3.

Recommended Action Plan to Improve Observance of IAIS Insurance Core Principles

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Authorities’ response

66. The FSC welcome the findings of the IMF assessment of our compliance with IAIS standards. We appreciate the skill and attention given in conducting the review and have already actioned the recommendations made, which we fully accept. Whilst we are naturally delighted that our high level of compliance with the standards has been recognized, we consider that such standards are always subject to further development and we therefore remain committed to applying new standards as and when they evolve.

Financial Action Task Force Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism

Introduction

67. This Report on the Observance of Standards and Codes for the FATF 40 Recommendations 2003 for Anti-Money Laundering (AML) and the 9 Special Recommendations on Combating the Financing of Terrorism (CFT) was prepared by a team composed of IMF staff and using the AML/CFT Methodology 2004.18 The report provides a summary of the level of observance with the Financial Action Task Force (FATF) 40+9 recommendations and provides recommendations to strengthen observance.

Information and methodology used for the assessment

68. In preparing the detailed assessment, the assessment team reviewed the institutional framework; the relevant AML/CFT laws, regulations, guidelines and other requirements, and the regulatory and other systems in place to deter and detect money laundering (ML) and the financing of terrorism (FT)—through financial institutions and designated nonfinancial businesses and professions (DNFBPs); and examined the capacity, implementation, and effectiveness of these systems. The assessment is based on the information available at the time of the on-site visit from March 1 to 17, 2006 and immediately thereafter.

Main findings
General

69. Gibraltar authorities have done good work to implement improvements to their AML/CFT regime to keep abreast of evolving standards in AML/CFT. Though relatively small in absolute terms, Gibraltar’s financial center is important to Gibraltar’s overall economy, and Gibraltarians universally place a high priority on maintaining its reputation as a well regulated center. Gibraltar has welcomed multiple external reviews of its system by the Offshore Group of Banking Supervisors (OGBS), the IMF, and the United Kingdom. Gibraltar authorities take a practical approach to implementing AML/CFT controls, and they have focused much of their resources and attention on providing effective international cooperation.

70. The principal AML risk to Gibraltar is lodged in its professional sector (lawyers, accountants and TCSPs), which is likely to be involved—wittingly or not—in the layering and integration of proceeds of crime. There is also some risk to Gibraltar at the placement stage, in connection with drug trafficking, migrant smuggling, and organized crime in southern Spain. Most money laundering cases involving Gibraltar arise out of investigations into international fraud schemes. Traditional organized crime and drug related cases, though important, comprise a minority of criminal investigations that touch Gibraltar’s financial center.

71. Gibraltar needs to take a number of steps to move its legal and regulatory regime forward to reflect the revised FATF 40 plus 9 Recommendations. The money laundering offense is split between two different statutes that provide authorities different powers depending on whether the predicate offense is related to drug trafficking or to another crime. Under current judicial practice, for a ML prosecution to proceed, the government must prove the connection between a specific drug trafficking offense or another serious crime and the ML offense itself. This hampers prosecutors’ ability to bring charges for ML and creates an incentive to focus on the predicate offense alone. Mutual legal assistance is available but full cooperation is limited by the fact that legal assistance to countries outside the EU during the investigative stage prior to formal commencement of “proceedings” is available only in drug-related cases. The assessment report contains recommendations to address these deficiencies. In addition, the Financial Services Commission’s Anti-Money Laundering Guidance Notes need to be updated, inter alia, to reflect risks associated with terrorist financing; some of the key provisions currently in the Guidance Notes need to be reflected in law or regulation; and bureaux de change and non-bank money transmitters need to be supervised for AML/CFT compliance.

Legal systems and related institutional measures

72. The Gibraltar legal framework for money laundering is divided into two fundamental statutes—the Drug Trafficking Ordinance and the Criminal Justice Ordinance. These statutes, along with a terrorism ordinance, articulate criminal prohibitions against money laundering from a wide range of offenses and against various types of support to terrorists. These statutes also require financial institutions and others to report suspicious transactions in line with the FATF Recommendations. After the decision by the House of Lords in Montilla (2005), which required proof that the predicate offense was either drug trafficking or another serious crime, and adverse local rulings in two significant cases in Gibraltar, however, the Attorney General has concluded that he cannot go forward with domestic money laundering prosecutions without clear and convincing proof of the underlying offense. Since most predicates occur abroad, the Attorney General has not been able to pursue effectively in Gibraltar cases that have been brought to his attention.

73. Prosecutors’ powers could be enhanced by consolidating the provisions of the CJO and the DTOO into a single statute that extends powers currently available to authorities only in drug-related money laundering cases. The money laundering risk in Gibraltar is lodged principally in the professional sector (lawyers, accountants and TCSPs), and a number of Gibraltarian professionals have been implicated in foreign fraud prosecutions. With consolidated authorities, Gibraltar authorities would be better positioned to follow up on credible suspicions or intelligence and aggressively pursue cases of money laundering by professional advisors if and when they arise. A consolidation of the two offenses would be appropriate so that there is one offense, which then would have a series of indictable proceeds-generating predicate offenses. This would obviate the need for prosecutors to prove the predicate offense between criminal conduct and drugs. Given the two money laundering cases from Gibraltar that were overturned on appeal, it may also be advisable to arrange for a training session for the bench and bar on international developments in the criminal law of money laundering.

74. Gibraltar has implemented the terrorism orders issued by the United Kingdom promptly after September 11, 2001. This has included implementing targeted freeze action against two separate terrorist financing suspects. In addition, Gibraltar has enacted its own domestic Terrorism Ordinance 2005, which gives authorities broad powers to prosecute suspected supporters of terrorism and to confiscate their assets.

75. Like the Gibraltar criminal prohibition on money laundering, the domestic confiscation regime is split between drugs-related and nondrug-related schemes. The authorities for drugs-related confiscation are very broad and include reversals of the burden of proof, the ability to enforce external confiscation orders, and the ability to seize cash suspected of being proceeds of drug trafficking. Conversely, in cases involving other criminal proceeds, the authorities have more limited powers. This split causes practical difficulties for the authorities. For example, when suspect cash is detected at the border, authorities are not able to detain it unless they can prove that it represents the proceeds of a specific offense. Similarly, after a conviction on a nondrug-related, proceeds generating crime, the government—not the defendant—bears the burden of proving that the defendant’s property is derived from illicit proceeds.

76. Gibraltar has a small police-style FIU embedded in its joint police/customs Gibraltar Coordinating Centre for Criminal Intelligence and Drugs (GCID). The FIU is a member of the Egmont Group and functions effectively within the Gibraltar system. The FIU would benefit, however, from a clearer public explanation of its authority and functions, especially with respect to potential STRs related to terrorism. The government should also consider, in light of the questionable legal basis for the practice of freezing accounts on the basis of “nonconsent” letters, whether to promulgate explicit freezing authority to the GFIU and/or GCID.

Preventive measures—financial institutions

77. The authorities in Gibraltar have established a robust, risk-based regulatory and supervisory framework for financial institutions for AML. Since the last assessment in 2001, there has been continued progress in the systems and controls implemented in the financial industry. The FSC has taken the lead in this area. It has issued the key document for AML compliance, namely the Anti-Money Laundering Guidance Notes. These Guidance Notes require customer due diligence, ongoing monitoring, designation of a Money Laundering Reporting Officer, and reporting of suspicious transactions. The Guidance Notes will be further strengthened when they are extended to better capture considerations related to the financing of terrorism. In addition to issuing the Guidance Notes, the FSC conducts on-site inspections and off-site analysis, it can compel production of any record to assist in its supervisory efforts, and it can impose sanctions in the case of noncompliance with the standards.

78. The FSC is responsible for supervising banks and building societies, investment businesses, insurance companies, and controlled activities, which include investment services, company management, professional trusteeship, insurance management and insurance intermediation. Outside of its supervisory scope and responsibilities is the Gibraltar Savings bank, the only state-bank, bureaux de change, and (nonbank) money transmitters. The Gibraltar Savings Bank is subject to reasonable oversight and regulation by the Treasury and supported by the government’s auditors, who review controls and systems, as well as the accounts.

79. The current weaknesses in Gibraltar’s supervisory and regulatory structure stem from the limited and ineffective oversight of bureaux de change and the complete lack of oversight of its single money transmission agent. The bureaux de change are licensed by a government committee, the Bureaux de Change Committee, headed by the Financial and Development Secretary. The bureaux de change are subject to the Anti-Money Laundering Guidance Notes issued by the FSC. A single customs investigating officer provides the only oversight of bureaux de change. But he has no remit to check for compliance and very limited powers to sanction. The Bureaux de Change Committee can suspend or cancel a license, but it cannot impose conditions or directions that would ensure corrective action of identified deficiencies. These weaknesses were identified during an AML review conducted by the Offshore Group of Banking Supervision (OGBS) in 2001, and three bureaux de change were closed in connection with a money-laundering investigation in the United Kingdom in 1998, yet authorities still have not addressed the continued risk of money laundering through the bureaux de change. There is currently only one money transmitter in Gibraltar that is outside the banking industry. As a stand-alone entity, this business is not subject to licensing or registration and is not regulated or supervised.

80. The government of Gibraltar recognizes the issues and risks associated with the bureaux de change and the money transmission agent. A draft Money Services Business Ordinance has been developed, but not finalized. Bureaux de change and money transmitters would be captured under this new Ordinance and subject to oversight by a government committee. The current proposal is that the FSC commissioner would head this Committee and this seems reasonable, because the FSC has demonstrated that it has the skills, abilities, and resources to provide appropriate oversight of the rest of the financial system.

Preventive measures—designated nonfinancial businesses and professions and nonprofit organizations

81. Gibraltar has been a pioneer in establishing a strong AML control environment for trust and company service providers, but this is not matched for other DNFBPs. The TCSPs are licensed, regulated, and supervised by the FSC and are subject to regular inspections and significant regulatory requirements. The only other DNFBP that is subject to oversight is the internet based gambling industry, but that oversight regime is limited and in the process of transition to an entirely new system. The new system, which is being developed in response to the new Gambling Ordinance 2005, will comprise a commissioner to take significant decisions vis-à-vis the gambling sector, a regulatory team and an ombudsman. Currently, both TCSPs and the internet based gambling sector are subject to the Anti-Money Laundering Guidance Notes, but only the TCSP are actually supervised against them.

82. The remainder of the DNFBPs, including lawyers, notaries, accountants, high value goods dealers, and real estate agents are subject to the Criminal Justice Ordinance and thus to STR requirements. However, no further rules or regulations on AML/CFT have been promulgated in Gibraltar for DNFBPs, although the Government of Gibraltar has issued non enforceable guidance for the high value goods dealers. In addition, there is no oversight by competent authorities of these industries to ensure that systems and controls are in place to combat money laundering and the financing of terrorism. Lawyers are required by local law to comply with English AML regulations, but there is no local monitoring of compliance with these requirements.

83. Overall, the Charities Ordinance provides a solid framework for the supervision of charities by the Charities Board (the “Board”). The requirements for registration of charities with the Board, after an appropriate application and disclosure of material information by the applicant, indicate that the Board is fulfilling its gatekeeper role with regard to the registration of charities. The blanket exception granted to religious charities under Section 6(4) of the Charities Ordinance should be reviewed. Adequate legal provisions are in place for ongoing supervision of, investigation of and intervention regarding charities to prevent abuse. In practice, all charities are required to file annual audited accounts with the Supreme Court registry and these accounts are reviewed by the Board. Should clandestine diversion of funds be discovered, adequate legal provisions exist for the Board to undertake immediate and effective actions to halt terrorist financing.

Legal persons and arrangements

84. Gibraltar has been a pioneer in the supervision and regulation of professional trusteeship and company service providers. Only persons licensed under the Financial Services Ordinance can form and manage companies in Gibraltar, and they are subject to the full panoply of preventive measures and oversight on the same terms as banks and other traditional financial service providers. The FSC has applied its risk-based supervisory system to the fiduciary services industry, and the industry appears generally to be compliant. The government should repeal legislation allowing share warrants to bearer, as it promised to do from years ago in negotiations with the OECD, and ensure that Companies House’s data base is searchable by all relevant fields.

National and international cooperation

85. The United Kingdom has not extended the Vienna, Palermo, or International Convention on Financing of Terrorism to Gibraltar. The Gibraltar government, however, has legislated a number of key provisions that mirror some of those in the conventions. The mission recommends that the United Kingdom move swiftly to extend the provisions of these important conventions to Gibraltar.

86. Gibraltar authorities are to be commended for the resources they have devoted to international cooperation on money laundering and terrorist financing cases. As a member of the EU, they are able to provide full cooperation at the investigative stage to other EU member states. Last year, they enacted legislation that extends the same privileges to non-EU member states, provided such states agree to reciprocity. Further, recently published draft legislation would extend such privileges automatically to all states that have ratified the UN Transnational Organized Crime Convention. The draft legislation would also solve another limitation in Gibraltar’s current law, namely that in nondrug-related money laundering cases where foreign states are not permitted to obtain restraint orders or register and enforce their confiscation orders in Gibraltar.

87. Financial intelligence unit. Since being admitted to the Egmont Group in 2004, the GFIU regularly shares information with other FIUs through the Egmont secure web system. It has responded to every request it has received, and initiated requests, as well. In several cases, the GFIU has been able to contribute to overseas investigations by taking the initiative to cooperate closely with other Egmont Group members.

88. The FSC regularly shares information with other international competent authorities. In the case of the Queen (on the application of a Gibraltar company, X, Y, and Z and other respondents) (2003), the FSC was challenged on legal authority to provide information to a foreign supervisor. The court found that, in order for the commissioner to share information with foreign counterparts, he must satisfy himself that the requesting body performs a function similar to his own, the disclosure is necessary to assist the requesting body, and it is in the interests of the public of Gibraltar that he should disclose it to the requesting body. The mission was advised by several foreign supervisors that the FSC has in fact shared information.

Ratings

89. The table below sets out the ratings of compliance for each of the FATF 40+9 Recommendations and the factors underlying the ratings. The rating of compliance vis-à-vis the FATF Recommendations should be made according to the four levels of compliance mentioned in the 2004 Methodology: (compliant (C), largely compliant (LC), partially compliant (PC), non-compliant (NC)), or could, in exceptional cases, be marked as not applicable (NA).

Table 4.

Ratings of Compliance with FATF Recommendations

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Recommendations

90. The table below summarizes recommended actions in areas related to the FATF 40+9 Recommendations.

Table 5.

Recommended Action Plan to Improve the AML/CFT System

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Authorities’ response

91. The Government welcomes the recognition given by the IMF to the efforts of the Gibraltar financial services industry and the regulator to ensuring that strong preventative and deterrent measures against the threats of money laundering and terrorist financing are effective. This has enabled both the industry and the Gibraltar FSC to apply an AML/CFT regime that addresses the real risks facing a small international financial services centre.

92. The Government has recognized that in order for these measures to continue to be effective, the regulatory requirements here, as elsewhere, always need to develop and has already embarked on a major revision to the framework and methodologies for systems of control operated by the industry. These changes when combined with the legislative amendments, to be implemented by the Government of Gibraltar to give effect to the 3rd Money Laundering Directive, will ensure that Gibraltar’s AML/CFT regime for the regulated financial services sector will continue to be at the forefront of international best practice.

1

In 2003 the IMF Executive Board agreed that the IMF should conduct periodic assessments (every 4–5 years) to monitor progress as well as ensure that good supervisory practice has been maintained. See PIN No. 03/13 8 at http://www.imf.org for a summary of the Executive Board discussion.

2

The last IMF assessment addressed AML issues mainly via the BCP and ICP assessments. A mutual evaluation of the AML regime, based on the then-current FATF Recommendations, was conducted by the Offshore Group of Banking Supervisors (OGB S) in 2001, prior to the development of an agreed methodology.

3

Broadly, state aid rules aim to ensure that that government interventions do not distort competition and do not provide unfair advantage to select enterprises over their competitors (see http://ec.europa.eu/comm/competition/state_aid/overview/). In the case of Gibraltar the exempt company regime could be inconsistent with EU state aid rules.

4

In this context a package of reforms has been submitted to the EU for approval, and the EU’s response is expected by end–2006. The main features of this tax package include: abolition of the current corporate tax regime and replacing it with: a profit tax on financial service providers; a payroll tax; a business property occupation tax; annual company registration fee; and profit tax on utility companies.

5

Under the EU’s “passporting” provision, institutions (banks, insurance companies, and investment firms) incorporated in Gibraltar can provide cross-border financial services to clients in European Economic Area (EEA) states and vice-versa. Separate agreements on passporting banking, insurance, and investment services to the United Kingdom have been reached.

6

Review of the Supervisory Activities of the Gibraltar Financial Services Commission and the Financial Services Commissioner, January 2005 (see http://www.fsc.gi/review/downloads.htm).

7

Spread betting is more akin to gambling than investing. It allows the investor to speculate, for example, on the movement of stock price index. For instance a firm may quote a high and low position (spread) of the stock market index and the investor can bet if the index will end higher or lower.

8

Investment in such funds are limited to high net worth individuals or bodies (such as corporate, trustee of a trust, etc.) with a minimum net worth/assets of Euro 1 million or a participant who invests a minimum of Euro 100,000.

9

See “Gibraltar: Assessment of the Regulation and Supervision of Financial Services, October 2001” at http://www.imf.org/External/NP/ofca/2001/eng/gbr/103101.pdf.

10

The FSC has voluntarily published self-assessments against the IMF Code of Good Practices on Transparency in Monetary and Financial Policies (see http://www.fsc.gi/imf/imftransparency.htm) and Combined Code of Corporate Governance (see http://www.fsc.gi/fsc/combinedcode.htm).

11

Since the assessment new legislation has been submitted to Parliament that will transfer the responsibility of appointing the Commissioner to the Gibraltar Government and make the Commission responsible for the powers currently vested in the Commissioner. In addition the new Act will also provide for the separation of the role of Chairman and Commissioner (who will become the Chief Executive Officer). The statutory reviews will continue under the new Act (but under the direction of the Gibraltar Government) which will require that they occur at least every four years. The Commission will also have direct fee raising and rule making powers (subject to ministerial consent).

12

Money laundering is generally regarded as a dynamic, three-stage process involving “placement,” “layering,” and “integration”. Placement refers to the introduction of illegal proceeds into the financial system (e.g., through a bank deposit); layering refers to the process of separating the criminal proceeds from their source through layers of transactions designed to disguise the audit trail and to foil potential pursuit by law enforcement agencies; integration refers to the process of making the funds available for use in legitimate commerce or investment.

13

Since the assessment legislation to amend the Financial Services (Investment and Fiduciary Services) Act 1989 has been drafted that would make the FSC responsible for the licensing and supervision of bureaux de change and money transmission services.

14

The assessment was undertaken by Peter Hayward (consultant, formerly Bank of England and IMF) and Jorge Mogrovejo (consultant, Superintendency of Banks and Insurance, Peru).

15

Some banks also benefit from this exemption but in many cases the benefit is offset by group tax arrangements in the home country.

16

A more damaging threat, regarded locally as extremely unlikely to materialize, arises from a case before the European Court of Justice, which could result in requiring Gibraltar to replicate completely the U.K. tax system.

17

The assessment was conducted by William McCullough (consultant to the IMF).

18

The mission comprised Mr. Joseph Myers (team leader), Ms. Joy Smallwood, and Mr. Andrew Gors (all LEG), and Ms. Tanya Smith (MCM).

19

These factors are only required to be set out when the rating is less than compliant.

20

The TCSP category of the DNFBP sector is subject to the same AMLGN requirements as Financial Institutions. The recommendations on standards in Sections 2.2, 2.3, 2.5 and 2.6 therefore apply. Similarly, licenses for all internet casinos require compliance with the FSC issued AMLGNs. The sole land based casino is currently not subject to the higher requirements detailed in the AMLGNs.

Gibraltar: Assessment of Financial Sector Supervision and Regulation including Reports on the Observance of Standards and Codes on the following topics: Banking Supervision, Insurance Supervision, and Anti-Money Laundering and Combating the Financing of Terrorism
Author: International Monetary Fund