Key Findings

1. There has not been much change in the AML/CFT regime since the AML legislation and Guidance Notes (GNs) were brought into force in 1998 and the last IMF assessment in 2003. Apart from a few changes to the Proceeds of Crime Act (POCA) and the GNs, the only significant new legislation enacted was the Anti-Terrorism (Financial and Other Measures) Act 2004 (ATFA). New draft GNs, prepared soon after the last IMF mission, are still to be finalized and implemented. The current AML/CFT regime has, therefore, not kept pace with changes in the FATF Recommendations, and the authorities have been slow in implementing a number of key recommendations from the last IMF assessment, particularly with respect to the reporting entities in the financial and non-financial sectors. At the time of the mission, several pieces of new legislation were under consideration by Parliament to address a number of weaknesses in the regime as described below.

2. The lack of sufficient reforms to the AML/CFT regime has also limited Bermuda’s ability to apply risk-sensitive approaches to controls in the reporting entities sector permitted under the FATF Recommendations. In Bermuda’s case, the application of risk-based approaches seems particularly relevant not only to the insurance sector, but also to other types of financial and non-financial activities. The AML Regulations and GNs contain exemptions or a reduction in the application of customer due diligence (CDD), but lower risk has not been proven in all cases, and some are clearly inappropriate. Implementation of the recently passed legislation (post mission), and proposed draft Regulations and GNs can address some of the identified weaknesses in the preventive regime and, as contemplated, can provide for a more risk-based approach to compliance and supervision.

Legal Systems and Related Institutional Measures

3. The criminalization of ML and FT is generally comprehensive, with offenses applying to both natural and legal persons, and to the requisite predicate offenses. However, it is difficult to assess effectiveness of the legal framework given that there has been only one prosecution for ML in the last five years, as well as limited ML investigations. With respect to FT, there have been no prosecutions, investigations, or SARs filed.

4. Under current law, protections from civil liability, but not criminal liability, only apply to those who file ML-related SARs. In addition, regulated institutions who file FT-related SARs are not explicitly protected from either civil or criminal liability. The tipping-off offense is narrowly focused on investigations, rather than explicitly prohibiting disclosures relating to a SAR being filed or the contents of the SAR.

5. The Bermuda Monetary Authority (BMA) has a wide array of formal sanctioning powers available to it, but has never imposed them against a financial institution (FI) for a deficiency or violation of AML/CFT requirements. The practice has been for the BMA to apply moral suasion and less formal approaches to enforcement of compliance with these and other requirements, generally through the issue of warning letters, and these have been used only in a few cases.

6. The legal framework for investigation and prosecution of ML is well-developed, and law enforcement and prosecutorial staff are highly motivated and professional. However, the staffing and budgetary (e.g. for training) constraints in the office of the DPP and the FIU may have contributed to a low number of ML investigations, limiting their ability to carry out their AML/CFT tasks effectively. There have been no ML prosecutions in the last three years despite the relatively large number of SARs. In practice, only a small number of SARs that are analyzed are fully investigated. The number of vacant positions in the DPP’s office should be filled, and efforts made to retain professional staff. The recruitment policy should therefore be revisited to ensure the adequacy and continuity of staff responsible for AML/CFT issues. Investigating and prosecuting AML/CFT cases should be made a priority by the law enforcement authorities, including the provision of adequate funding and staffing.

7. Bermuda’s FIU should be more adequately funded, staffed, and provided with additional technical resources, including, for instance, expertise in forensic accounting. The FIU is part of the Bermuda Police Service and is a member of the Egmont Group. All police officers within the FIU have training in basic financial investigations, and most have been trained in areas such as confiscations, money laundering, and advanced financial investigative techniques. However, the current volume of work impacts the effectiveness of the FIU in undertaking timely analysis and investigation. The number of staff positions allocated to the FIU is insufficient, and assigning non-ML/FT duties to its police officers places further strain on available resources. The sufficiency and continuity of FIU staff should be reviewed, including during the planned transition from a police-based to an administrative FIU over the next 12 months. In this regard, there will be a need for adequate staff during the transitional period to avoid operational gaps, and to efficiently manage the transfer of the intelligence-related tasks of the new FIU.

8. At the time of the mission, three important draft laws were under consideration which were later enacted in June 2007. These are amendments to the Proceeds of Crime Act (POCA), the Criminal Justice International Cooperation (Bermuda Act), and the Financial Intelligence Agency Act (FIA Act) to establish an administrative FIU. Once implemented, these new laws will address a number of the weaknesses in the AML/CFT legal framework identified by the mission.

Preventive Measures—Financial Institutions

9. The scope of the AML regulatory framework does not address CFT issues, and does not cover key areas of the financial sector, including life insurance business, and certain elements of the investment/mutual funds sector. The lack of coverage in these areas constitutes an important deficiency in Bermuda’s AML/CFT regime, particularly in light of its role in the international financial system, even though life insurance does not account for the largest share of this sector. The POC Regulations and GNs remain practically unchanged since the last IMF assessment mission in 2003; this in spite of the weaknesses previously identified, a major upgrade of the international AML/CFT standards in 2003, and continued growth in the financial services industry. At the time of the mission, the authorities had prepared new draft Regulations and were contemplating amending the GNs, pending passage of proposed new legislation that was enacted subsequent to the mission in June 2007.

10. The regulatory framework for FIs lacks basic customer due diligence (CDD) requirements, and risk-based approaches to compliance and supervision are underdeveloped. CDD requirements are narrowly focused on customer identification, and there are no provisions for complying with key CFT recommendations such as those for wire transfers. These and other deficiencies do not facilitate effective implementation, supervision, and enforcement. In addition, the GNs do not provide sufficient guidance for purposes of implementing broad-based CDD, and contain a number of customer identification provisions that could be detrimental to compliance. A key challenge also lies in the ability of FIs headquartered in Bermuda to implement and monitor their global operations. Increased attention should be given to the management of cross-border ML/FT risks, especially those associated with business relationships and transactions introduced through local and foreign intermediaries. In addition, compliance with recordkeeping requirements can be strengthened, including those for beneficiary clients and business relationships established before the AML/CFT legislation was introduced.

11. A key strength of Bermuda’s supervisory regime is the integrated nature of financial sector supervision by the BMA and the professionalism of its staff. The BMA has a relatively strict licensing regime, which has contributed to the stability of its financial sector. Nonetheless, AML/CFT supervision is still developing, particularly with respect to onsite inspections. While the BMA continues to improve its supervisory systems and processes, enhanced capacity, skills, and resources are required to strengthen the AML/CFT supervision, particularly onsite inspections in key industries, namely the insurance and investments services sectors. The BMA also faces practical constraints in its ability to effectively conduct ongoing consolidated AML/CFT supervision, especially in the insurance sector, and on a cross-border basis. This will require careful resource management and increased collaboration with other key players, such as external auditors and overseas regulators. The conduct of sector-specific ML/FT risk assessments should be considered to better manage the supervisory process, identify supervisory priorities, and allocate resources more efficiently.

12. There is good cooperation between the BMA and the financial sectors, but the absence of specific sanctions for AML/CFT breaches limits the effectiveness of the BMA’s compliance oversight regime. To this end, more focused risk-based AML/CFT inspections should be conducted and where necessary enforcement action taken. The BMA has started to develop more broad-based onsite supervisory programs, which should be expedited across all sectors. Following a risk-based approach, the BMA should place increased attention to its onsite review procedures for compliance with CDD requirements for beneficiaries, including more rigorous enforcement of such requirements for accounts in existence when the AML regime was introduced in 1998.

Preventive Measures—Designated Non-Financial Businesses and Professions

13. A comprehensive AML/CFT framework for DNFBPs was only beginning to be put in place at the time of the mission. Only trust service providers were subject to AML/CFT preventive measures, including for monitoring compliance with these requirements. Other relevant DNFBPs are subject to the general requirement to report suspicious activities that applies to all citizens but, in the absence of an effective system of preventive measures and compliance oversight, these requirements are not being effectively implemented. It is rare that DNFBPs, other than trust services businesses, file SARs, even though, as mentioned above, there is a general obligation on all persons to report.

14. Lawyers, accountants, trust service providers, and company service providers are key gateways to the highly sophisticated and internationally active financial sector of Bermuda, but the ML vulnerabilities of these sectors have not been closely analyzed. Although there is little analysis to back this up, the risks of ML and FT through these sectors are generally perceived by the professions to be low. Regulation and supervision of the trust service business (TSBs) mitigate against these risks through trust operations. In addition, relatively strict requirements and procedures for the incorporation of Bermudian companies also reduce the potential for ML/FT in this sector.

15. Local drug traffickers utilize the proceeds of drug trafficking to facilitate further drug shipments, as well as to acquire assets. Investigations related to possible confiscation orders frequently find that drug traffickers have used their proceeds to invest in local property, generally at the lower to middle end of the market, and frequently through the use of nominees. Car purchases are also a common use of the proceeds of drug trafficking. Access by non-residents to the Bermuda property market is tightly restricted, which may limit the attractiveness of this sector for international money launderers.

16. Plans are well advanced to bring lawyers and accountants in public practice, as well as corporate service providers, within the AML/CFT preventive regime, but supervisory arrangements are not yet agreed. These plans include amendments to the POCA, which are now moving toward approval by the legislature, and draft amendments to the POC Regulations, which should include lawyers, accountants, and corporate services providers under the preventive regime. The provisions under consideration fall short of FATF standards in several respects, particularly in regard to the scope of activities of lawyers and accountants that would be subject to AML/CFT requirements. Subsequent to the mission, on June 22, 2007, the POCA was amended to bring lawyers and accountants under the preventive measures regime. As amended, the scope of activities of lawyers and accountants that are subject to AML/CFT is narrower than under the FATF Recommendations.

Legal Persons and Arrangements and Non-Profit Organizations

17. Bermuda is not a significant jurisdiction for the incorporation of companies, and there are a range of controls to mitigate the risk that legal entities and trust arrangements will be misused for illicit purposes. Incorporation of companies in Bermuda requires that ultimate beneficial ownership be established twice before registration is accepted; once by the party submitting the application (who would normally be a lawyer), and again, independently, by the authorities. Companies are required to maintain a register of shareholders which is accessible to the public. With respect to trusts, any person offering trust services as a business is required to be licensed and supervised by the BMA as a financial institution. TSBs are required to establish the identity of parties to a trust including settlors and ultimate beneficiaries. Law enforcement can gain full access to such CDD information and can share it with foreign authorities.

18. In the NPO sector, charities are required to register if they are to raise money from the public. Ongoing oversight of charities is light, but compliance with legal requirements appears to be good. Most funds raised in Bermuda are applied in Bermuda and the vulnerability of the sector to ML and FT appears to be low. However, no risk assessment has been undertaken and AML/CFT is not a focus of the oversight of the charities sector.

National and International Cooperation

19. In regards to domestic cooperation, the National Anti-ML Committee (NAMLC) brings together key ministries and departments and fills, in practice, the AML/CFT policy formulation role in Bermuda. NAMLC’s main legal mandate is, however, to advise the Minister of Finance and to issue industry guidance on AML issues, not to coordinate the formulation and implementation of AML/CFT policy. In practice, there is also a lack of conventional cooperation mechanisms among governmental institutions on AML/CFT issues generally, which has resulted in a fragmented informal approach. This situation may have contributed to the slow pace of legal and institutional reforms since the last IMF assessment in 2003.

20. With respect to international cooperation, there is an adequate and comprehensive legal and institutional framework that is largely consistent with international standards.

Other Issues

21. The Suppression of the Financing of Terrorism (SFT) and Palermo Conventions have not been extended to Bermuda by the United Kingdom. While this is not entirely within the power of Bermuda to address, it is a situation that should be remedied without delay.

22. Bermuda does not have a declaration or disclosure system in place for the physical cross-border transportation of cash and bearer instruments. While the authorities have plans to implement such a system, it should, inter alia, provide for the declaration of both incoming and outgoing transfers.