Introduction

Regulatory initiatives, expanded supervision, and increased staffing have strengthened Bermuda’s insurance supervisory regime since 2003. Taking account of the recommendations of the 2003 OFC assessment, the authorities introduced a phased program to update legislation and supervisory practices. The BMA has significantly enhanced its risk–based approach that is aligned with the diversified range of insurance entities domiciled in Bermuda. The updated framework has a high level of observance of the IAIS core principles, but implementation of the reforms is in transition. The BMA’s vision is to become a regulatory leader before 2010. Strong commitment to sound regulation by the industry contributes to this vision, but has to be constantly balanced with preserving regulatory independence and effectiveness.

Executive Summary

This assessment benchmarks Bermuda’s regulatory regime against the IAIS core principles based on the 2003 IAIS methodology. The assessment was conducted from June 11–22, 2007²⁵.

This ROSC covers commercial direct insurers and reinsurers classified as Classes 3, 4, and long–term under the Bermudian regime (commercial insurers). Comments on Class 3 insurers apply to long–term insurers unless stated otherwise. Captive insurers holding Class 1 and 2 licenses are covered in a separate factual update.

Information and methodology used for assessment

The assessments are based solely on the laws, regulations, and other supervisory requirements and practices that are in place at the time of assessment. In particular, the BMA is finalizing a risk–based solvency regime that will be complemented by enhanced regulatory reporting. These ongoing regulatory initiatives are noted by way of additional comments. The assessment was facilitated by meetings with industry bodies and insurers that were coordinated by the BMA, as well as by technical discussions with, and briefings by the authority.

Institutional and market structure—overview

The BMA has had authority for regulating, supervising, and inspecting virtually all of Bermuda’s regulated financial sector, including insurance, since 2002 under the BMA Act, 1969. An Insurance Advisory Committee (IAC) established under the IA advises the MOF on insurance matters. The non–executive chairman chairs the Non–Executive Directors Committee which provides an independent check on the performance of the board and the BMA.

Bermuda is a significant player in the global insurance marketwith over 1,400 registered (re)insurance companies, 92 percent (1,312) of which were active at end–2005. They comprise 1,135 general, 100 composite, 77 long–term insurers, and 19 domestic insurers. Composite insurers are permitted to write both general and long–term insurance provided the long–term is incidental and limited. The general insurers are licensed in four classes:

• Class 1—pure captives;

• Class 2—multi–owner pure captives and those deriving up to 20 percent of net premiums from unrelated parties;

• Class 3—insurers not included in Classes 1, 2, or 4;

• Class 4—insurers with minimum capital of B$100 million underwriting direct excess liability insurance and/or property catastrophe.

Gross written premiums in 2005 totaled B$100.7 billion of which 87 percent were written by commercial insurers. Average net risk retention rates were 94 and 87 percent of GWP for long–term and “mixed” insurers respectively.²⁶ Direct insurers and reinsurers retained about 88 and 90 percent of GWP respectively. The Bermuda insurance market strengthened its capital base in 2006, with a net capital inflow following hurricanes Katrina, Rita, and Wilma. Their investment is relatively liquid with 52 percent of total assets in quoted bonds and equities at end–2005, and 9.3 percent in cash and deposits.

Main findings

The insurance regulatory and supervisory regime demonstrates a high level of observance of the IAIS standards, as described below:

(i)Conditions for effective insurance supervision (ICP1)—the Bermuda financial sector policy is supported by an efficient financial market structure, including specialized skills, and facilitated by easy access to U.S. financial markets.

(ii)The supervisory system (ICPs 2–5)—The BMA is a fully empowered insurance regulator with extensive operational and financial autonomy. It continues recruitment to effectively execute its enhanced supervisory framework. The relationship with industry should be constantly reviewed to preserve regulatory independence. The BMA has started implementation of its risk–focused supervisory framework with Class 4 insurers. The framework bases supervisory attention on assigned company ratings that take account of the impact and probability of risky events. Enhanced regulatory reporting will complement this risk–focused approach. While the licensing categories are broadly risk–based, Class 3s are a mix of entities, and the classification could be reviewed. Cooperation and information sharing are satisfactory and the BMA is encouraged to make routine and formalize some arrangements.

(iii)The supervised entities (ICPs 6–10)—the licensing process is systematic and efficient and the BMA has recently made arrangements to ensure home–host consultation on the licensing of cross–border establishments. The BMA has clear criteria and guidance for vetting owners and key management and for approving changes in control, but should acquire the power to approve the transfer of insurance portfolios. The corporate framework in place is supported by a formalized on–site inspection program.

(iv)Ongoing supervision (ICPs 11–17)—The BMA has made significant progress in strengthening regulatory reporting and off–site monitoring. Early formulation and implementation of a regime for group supervision of Bermuda–based insurance groups would help reduce regulatory risks. A formal on–site inspections program was introduced in 2006. Its active market analysis will be strengthened by enhanced regulatory reporting and the ongoing increase in resources. Intervention powers and sanctions are well–defined. Winding up and exits have been administered without disruption but the BMA should consider clarifying the priority of policyholders’ claims in composite insurers and those insurers with non–insurer business in the same legal entity. The BMA should clarity the conditions under which insurers are allowed to encumber assets held for the benefit of policyholders.

(v)Prudential requirements (ICPs 18–22)—The current solvency regime sets a minimum capital and surplus based on class of licence, subject to two other criteria based on net written premiums or net reserves with floors. Class 4 insurers must hold a minimum of B$100 million. At the time of the assessment the regime did not address double or multiple gearing of capital, but the BMA is consulting Class 4 insurers on a risk–based solvency regime. The BMA has provided guidance to insurers on its expectations for their risk management systems whose practical assessment is facilitated by ongoing inspections. Disclosure requirements should be established for derivatives and similar commitments, and the BMA is advised to issue guidance on the basis and adequacy of technical provisions.

(vi)Markets and consumers (ICPs 24–27)—The regulatory requirements for intermediaries are appropriate for the small domestic market. Insurance fraud is not an issue and is effectively covered under the criminal code and proceeds of crime regulation. The BMA should plan to implement the IAIS supervisory standard on public disclosures to facilitate market discipline.

(vii)AML/CFT (ICP28)—not assessed. Table 5 outlines these findings on a principle–by principle basis.

Table 5.

Summary of Observance of the Insurance Core Principles

Table 5.

Summary of Observance of the Insurance Core Principles

Insurance Core Principle	Comments
ICP1—conditions for effective insurance supervision	Bermuda has a progressive financial sector policy supported by efficient financial market infrastructure. The Bermudian insurance industry continues to attract skilled professionals, locally and abroad. Easy access to the mature financial markets in the U.S. facilitates effective asset–liability management by insurers.
ICP2—Supervisory objectives	The principal objectives of the authority and ID are clear. The BMA’s multiple mandates, including fostering close relations with financial institutions, have to be constantly balanced to ensure its independence and effectiveness.
ICP3—Supervisory authority	The authority has extensive operational and financial autonomy. It is fully empowered to administer and enforce the IA. It has drawn up a comprehensive plan to recruit regulatory staff to implement the enhanced supervisory framework. At the time of assessment, the BMA was actively recruiting to complete its recruitment plan. Strong commitment from industry players contributes positively to the BMA vision to be a regulatory leader. Nonetheless, the authority’s relationship with the industry should be constantly reviewed with the view to preserving regulatory independence and credibility.
ICP4—Supervisory process	The BMA has implemented significant enhancements to its risk–focused supervisory framework. Implementation has started with class 4 insurers and will be progressively rolled out to Class 3 and long–term insurers based on their composite risk ratings. The BMA is designing enhanced regulatory reporting to complement the enhanced supervisory framework and the proposed risk–based solvency regime. While the current licensing categories are broadly risk–based, Class 3 insurers are a mix of entities with varying risk profiles. Going forward and after the BMA has gained experience with the risk–based supervisory framework, there are merits in reviewing the relevance of the Class 3 category as their composite risk ratings provide more granularity.
ICP 5—Supervisory cooperation and information sharing	The IA provides clear grounds and power to the authority to cooperate and exchange information domestically and with foreign regulators. The authority is encouraged to execute routine arrangements to alert host supervisors of material supervisory developments in Bermuda and to formalize the informal exchanges with state insurance regulators in the U.S.
ICP6—Licensing	The licensing process is systematic and efficient, enabling the authority to reach decisions in a timely manner. The BMA has established robust criteria for vetting the applications. In view of the international nature of insurers domiciled in Bermuda, the authority has recently introduced arrangements to liaise with relevant overseas authorities where licensing applications relate to branches or subsidiaries of foreign regulated insurers.
ICP7—Suitability of persons	The BMA has established clear criteria and guidance for vetting the suitability of significant owners, senior management, and key functionaries.
ICP8—Changes in control and portfolio transfers	While the BMA has strengthened the criteria and requirements for approving changes in control, it does not require that insurers obtain its approval for portfolio transfers. To safeguard the interests of the policyholders of both the transferee and transferor, the authority should at least be notified of portfolio transfers and be given veto power on such transfers.
ICP9—Corporate governance	The corporate governance framework is in place, supported by a formalized on–site inspections program, including assessment of the adequacy and actual implementation of insurers’ corporate governance. The on–site program will be progressively implemented in Class 3 and long–term insurers. The BMA is advised to provide formal guidance to insurers on its expectations with regard to the remuneration policy for directors and senior management.
ICP 10—Internal controls	The BMA’s guidance on risk management and internal controls sets out its expectations of insurers in these areas clearly. The on–site inspections program has started in Class 4 in 2006 and will be progressively implemented in Class 3 and long–term insurers. This will help the BMA have a better understanding of insurers’ internal controls. In line with international best practices, the BMA is advised to require loss reserve specialists and the approved actuary to have a direct reporting relationship to the board of directors.
ICP 11—Market analysis	Given the international operations of Bermudian insurers, the BMA is actively monitoring and analyzing available information to identify current and emerging trends in the global insurance markets. Its market analysis will be strengthened by enhanced regulatory reporting and the planned increase in resources.
ICP 12—Reporting to supervisors and off–site monitoring	The BMA has made significant progress in strengthening its regulatory reporting and off–site monitoring. It should continue to push forward its proposal to enhance the comprehensiveness of reporting by insurers. The BMA should give due consideration to a) improving the timeliness of reporting by introducing quarterly reporting that would focus on key indicators and appropriate management reports; b) requiring insurers to submit information about their financial condition and performance on both a solo and a group–wide basis; and c) clarifying that all insurers must maintain proper books of accounts in Bermuda.
ICP13—On–site inspection	The BMA conducts on–site inspections as part of its risk–based supervisory regime introduced in 2006. This program will be progressively extended to Class 3 and long–term insurers.
ICP 14—Preventive and corrective measures	The IA empowers the BMA to take a range of proportionate intervention powers with clearly defined triggers and conditions. The BMA takes a measured approach to assessing the severity of the concerns and works with the insurers to take appropriate remedial measures.
ICP15—Enforcement or sanctions	The BMA has wide ranging powers to enforce the IA and impose sanctions for breaches of the IA, or to address serious regulatory concerns.
ICP16—Winding–up or exit from the market	Winding–up and exits have been administered without disruptions to the market. Nonetheless, the BMA should give due consideration to clarifying the priority of policyholders’ claims for grandfathered composite insurers and insurers allowed to undertake non–insurance related business within the same legal entity. The BMA should also formulate a clear policy stance on insurers’ credit facilities and the conditions under which they are allowed to encumber/pledge assets held for the benefit of policyholders.
ICP17—Group–wide supervision	Recognizing the significant number of large Bermuda–based insurance groups, early formulation and implementation of a pragmatic and effective regime for group supervision helps to reduce regulatory risks to the BMA.
ICP18—Risk assessment and management	The BMA has provided guidance to insurers on its expectations on their risk assessment and management. On–going inspections of Class 4 insurers facilitate practical assessment of their risk management frameworks, and this will be extended to Class 3 and long–term insurers. The BMA is advised to consider formulating a regulatory stance on functions outsourced by an insurer, including powers to inspect third party service providers.
ICP 19—Insurance activity	While the BMA requires insurers to evaluate and manage their underwriting risks, there is scope for clearer guidance on adequacy of reinsurance arrangements as well as treatment of reinsurance recoverables.
ICP20—Liabilities	The BMA relies on the LRS or approved actuary to opine on insurers’ technical provisions. In this regard, the authority is advised to work closely with the relevant professional associations to issue guidance on the basis and adequacy of technical provisions. Valuation of the amounts recoverable under reinsurance arrangements should be clarified.
ICP2 1—Investments	The BMA has outlined the standard expected of insurers’ investment management and risk management. It should consider establishing clear guidance on asset–liability management, concentration risks and asset valuation as part of its risk–based capital framework.
ICP22—Derivatives and similar commitments	The regulatory requirements for insurers to adopt sound and prudent policies and processes for derivative activities are in place. To allow monitoring of insurers’ exposures, the BMA should establish disclosure requirements for derivatives and similar commitments.
ICP23—Capital adequacy and solvency	The current solvency regime is factor–based with an enhanced threshold of B$100 million for Class 4 insurers. It does not address inflation of capital (through double or multiple gearing or intra–group transactions) and suitable forms of capital resources. The BMA is currently consulting Class 4 insurers on a risk–based solvency regime.
ICP24—Intermediaries	The BMA’s requirements are appropriate for Bermuda’s small domestic market and close proximity, which effectively reduces the role of intermediaries at the retail level.
ICP25—Consumer protection	The current regime for consumer protection is adequate for the retail segment accounts for a negligible 0.1 percent of total NWP of the industry.
ICP26—Information, disclosure and transparency towards markets	To facilitate market discipline, the BMA should formulate plans to implement the IAIS supervisory standards on public disclosures.
ICP27—Fraud	Insurance fraud is effectively covered under the Criminal Code and the Proceeds of Crime Regulations. The BMA’s review of insurers’ risk management and internal controls helps to identify and manage fraud risks.
ICP28—Anti–money–laundering, combating the financing of terrorism	Not assessed.

View Table

Table 5.

Summary of Observance of the Insurance Core Principles

Insurance Core Principle	Comments
ICP1—conditions for effective insurance supervision	Bermuda has a progressive financial sector policy supported by efficient financial market infrastructure. The Bermudian insurance industry continues to attract skilled professionals, locally and abroad. Easy access to the mature financial markets in the U.S. facilitates effective asset–liability management by insurers.
ICP2—Supervisory objectives	The principal objectives of the authority and ID are clear. The BMA’s multiple mandates, including fostering close relations with financial institutions, have to be constantly balanced to ensure its independence and effectiveness.
ICP3—Supervisory authority	The authority has extensive operational and financial autonomy. It is fully empowered to administer and enforce the IA. It has drawn up a comprehensive plan to recruit regulatory staff to implement the enhanced supervisory framework. At the time of assessment, the BMA was actively recruiting to complete its recruitment plan. Strong commitment from industry players contributes positively to the BMA vision to be a regulatory leader. Nonetheless, the authority’s relationship with the industry should be constantly reviewed with the view to preserving regulatory independence and credibility.
ICP4—Supervisory process	The BMA has implemented significant enhancements to its risk–focused supervisory framework. Implementation has started with class 4 insurers and will be progressively rolled out to Class 3 and long–term insurers based on their composite risk ratings. The BMA is designing enhanced regulatory reporting to complement the enhanced supervisory framework and the proposed risk–based solvency regime. While the current licensing categories are broadly risk–based, Class 3 insurers are a mix of entities with varying risk profiles. Going forward and after the BMA has gained experience with the risk–based supervisory framework, there are merits in reviewing the relevance of the Class 3 category as their composite risk ratings provide more granularity.
ICP 5—Supervisory cooperation and information sharing	The IA provides clear grounds and power to the authority to cooperate and exchange information domestically and with foreign regulators. The authority is encouraged to execute routine arrangements to alert host supervisors of material supervisory developments in Bermuda and to formalize the informal exchanges with state insurance regulators in the U.S.
ICP6—Licensing	The licensing process is systematic and efficient, enabling the authority to reach decisions in a timely manner. The BMA has established robust criteria for vetting the applications. In view of the international nature of insurers domiciled in Bermuda, the authority has recently introduced arrangements to liaise with relevant overseas authorities where licensing applications relate to branches or subsidiaries of foreign regulated insurers.
ICP7—Suitability of persons	The BMA has established clear criteria and guidance for vetting the suitability of significant owners, senior management, and key functionaries.
ICP8—Changes in control and portfolio transfers	While the BMA has strengthened the criteria and requirements for approving changes in control, it does not require that insurers obtain its approval for portfolio transfers. To safeguard the interests of the policyholders of both the transferee and transferor, the authority should at least be notified of portfolio transfers and be given veto power on such transfers.
ICP9—Corporate governance	The corporate governance framework is in place, supported by a formalized on–site inspections program, including assessment of the adequacy and actual implementation of insurers’ corporate governance. The on–site program will be progressively implemented in Class 3 and long–term insurers. The BMA is advised to provide formal guidance to insurers on its expectations with regard to the remuneration policy for directors and senior management.
ICP 10—Internal controls	The BMA’s guidance on risk management and internal controls sets out its expectations of insurers in these areas clearly. The on–site inspections program has started in Class 4 in 2006 and will be progressively implemented in Class 3 and long–term insurers. This will help the BMA have a better understanding of insurers’ internal controls. In line with international best practices, the BMA is advised to require loss reserve specialists and the approved actuary to have a direct reporting relationship to the board of directors.
ICP 11—Market analysis	Given the international operations of Bermudian insurers, the BMA is actively monitoring and analyzing available information to identify current and emerging trends in the global insurance markets. Its market analysis will be strengthened by enhanced regulatory reporting and the planned increase in resources.
ICP 12—Reporting to supervisors and off–site monitoring	The BMA has made significant progress in strengthening its regulatory reporting and off–site monitoring. It should continue to push forward its proposal to enhance the comprehensiveness of reporting by insurers. The BMA should give due consideration to a) improving the timeliness of reporting by introducing quarterly reporting that would focus on key indicators and appropriate management reports; b) requiring insurers to submit information about their financial condition and performance on both a solo and a group–wide basis; and c) clarifying that all insurers must maintain proper books of accounts in Bermuda.
ICP13—On–site inspection	The BMA conducts on–site inspections as part of its risk–based supervisory regime introduced in 2006. This program will be progressively extended to Class 3 and long–term insurers.
ICP 14—Preventive and corrective measures	The IA empowers the BMA to take a range of proportionate intervention powers with clearly defined triggers and conditions. The BMA takes a measured approach to assessing the severity of the concerns and works with the insurers to take appropriate remedial measures.
ICP15—Enforcement or sanctions	The BMA has wide ranging powers to enforce the IA and impose sanctions for breaches of the IA, or to address serious regulatory concerns.
ICP16—Winding–up or exit from the market	Winding–up and exits have been administered without disruptions to the market. Nonetheless, the BMA should give due consideration to clarifying the priority of policyholders’ claims for grandfathered composite insurers and insurers allowed to undertake non–insurance related business within the same legal entity. The BMA should also formulate a clear policy stance on insurers’ credit facilities and the conditions under which they are allowed to encumber/pledge assets held for the benefit of policyholders.
ICP17—Group–wide supervision	Recognizing the significant number of large Bermuda–based insurance groups, early formulation and implementation of a pragmatic and effective regime for group supervision helps to reduce regulatory risks to the BMA.
ICP18—Risk assessment and management	The BMA has provided guidance to insurers on its expectations on their risk assessment and management. On–going inspections of Class 4 insurers facilitate practical assessment of their risk management frameworks, and this will be extended to Class 3 and long–term insurers. The BMA is advised to consider formulating a regulatory stance on functions outsourced by an insurer, including powers to inspect third party service providers.
ICP 19—Insurance activity	While the BMA requires insurers to evaluate and manage their underwriting risks, there is scope for clearer guidance on adequacy of reinsurance arrangements as well as treatment of reinsurance recoverables.
ICP20—Liabilities	The BMA relies on the LRS or approved actuary to opine on insurers’ technical provisions. In this regard, the authority is advised to work closely with the relevant professional associations to issue guidance on the basis and adequacy of technical provisions. Valuation of the amounts recoverable under reinsurance arrangements should be clarified.
ICP2 1—Investments	The BMA has outlined the standard expected of insurers’ investment management and risk management. It should consider establishing clear guidance on asset–liability management, concentration risks and asset valuation as part of its risk–based capital framework.
ICP22—Derivatives and similar commitments	The regulatory requirements for insurers to adopt sound and prudent policies and processes for derivative activities are in place. To allow monitoring of insurers’ exposures, the BMA should establish disclosure requirements for derivatives and similar commitments.
ICP23—Capital adequacy and solvency	The current solvency regime is factor–based with an enhanced threshold of B$100 million for Class 4 insurers. It does not address inflation of capital (through double or multiple gearing or intra–group transactions) and suitable forms of capital resources. The BMA is currently consulting Class 4 insurers on a risk–based solvency regime.
ICP24—Intermediaries	The BMA’s requirements are appropriate for Bermuda’s small domestic market and close proximity, which effectively reduces the role of intermediaries at the retail level.
ICP25—Consumer protection	The current regime for consumer protection is adequate for the retail segment accounts for a negligible 0.1 percent of total NWP of the industry.
ICP26—Information, disclosure and transparency towards markets	To facilitate market discipline, the BMA should formulate plans to implement the IAIS supervisory standards on public disclosures.
ICP27—Fraud	Insurance fraud is effectively covered under the Criminal Code and the Proceeds of Crime Regulations. The BMA’s review of insurers’ risk management and internal controls helps to identify and manage fraud risks.
ICP28—Anti–money–laundering, combating the financing of terrorism	Not assessed.

Table 2.

Recommended Action Plan to Improve Observance of the Insurance Core Principles

Table 2.

Recommended Action Plan to Improve Observance of the Insurance Core Principles

Principle	Recommended Action
ICP 3—Supervisory Authority.	Consider: a) public disclosure of information about problem or failed insurers, including supervisory actions taken without compromising confidentiality considerations; and b) strengthening measures to ensure that, where supervisory functions are outsourced, potential conflict of interests is minimized.
ICP4—Supervisory process.	Review the relevance of Class 3 category after the BMA has gained experience with the risk–based supervisory framework, that provides greater granularity.
ICP5—Supervisory cooperation and information sharing.	Implement routine arrangements to alert host supervisors of material supervisory developments in Bermuda, formalize the informal exchanges with state insurance regulators in the U.S. and consider joint inspections with foreign regulators.
ICP 8—Changes in control and portfolio transfers.	Require insurers to notify portfolio transfers subject to the BMA’s veto power on such transfers.
ICP 9—Corporate governance.	Provide formal guidance to insurers on its expectations with regard to the remuneration policy for directors and senior management.
ICP 10—Internal controls.	Require loss reserve specialists to have a direct reporting relationship to the board of directors.
ICP 12—Reporting to supervisors and off–site monitoring.	Consider: a) improving the timeliness of reporting by introducing quarterly reporting focusing on key indicators, on unaudited basis; b) requiring insurers to submit information about their financial condition and performance on both a solo and a group–wide basis; and c) clarifying that all insurers must maintain proper books of accounts in Bermuda.
ICP 16—Winding–up or exit from the market.	Clarify the priority of policyholders’ claims for grandfathered composite insurers and insurers allowed to undertake non–insurance related business within the same legal entity. Formulate a clear policy stance on insurers’ credit facilities and encumbrances of assets held for the benefit of policyholders.
ICP 17—Group–wide supervision.	Formulation and implementation of a pragmatic and effective regime for group supervision.
ICP 18—Risk assessment and management.	The BMA is advised to consider formulating its regulatory stance on functions outsourced by an insurer, including powers to inspect third party service providers.
ICP 19—Insurance activity.	Clearer guidance on adequacy of reinsurance arrangements as well as treatment of reinsurance recoverables.
ICP20—Liabilities.	Work closely with the relevant professional associations to issue guidance on the basis and adequacy of technical provisions and clarify valuation of the amounts recoverable under reinsurance arrangements.
ICP21—Investments.	Establish clear guidance on asset–liability management, concentration risks and asset valuation as part of its risk–based capital framework.
ICP22—Derivatives and similar commitments.	Establish disclosure requirements for derivatives and similar commitments.
ICP26—Information, disclosure and transparency towards markets.	To facilitate market discipline, the BMA should formulate plans to implement the IAIS supervisory standards on public disclosures.

View Table

Table 2.

Recommended Action Plan to Improve Observance of the Insurance Core Principles

Principle	Recommended Action
ICP 3—Supervisory Authority.	Consider: a) public disclosure of information about problem or failed insurers, including supervisory actions taken without compromising confidentiality considerations; and b) strengthening measures to ensure that, where supervisory functions are outsourced, potential conflict of interests is minimized.
ICP4—Supervisory process.	Review the relevance of Class 3 category after the BMA has gained experience with the risk–based supervisory framework, that provides greater granularity.
ICP5—Supervisory cooperation and information sharing.	Implement routine arrangements to alert host supervisors of material supervisory developments in Bermuda, formalize the informal exchanges with state insurance regulators in the U.S. and consider joint inspections with foreign regulators.
ICP 8—Changes in control and portfolio transfers.	Require insurers to notify portfolio transfers subject to the BMA’s veto power on such transfers.
ICP 9—Corporate governance.	Provide formal guidance to insurers on its expectations with regard to the remuneration policy for directors and senior management.
ICP 10—Internal controls.	Require loss reserve specialists to have a direct reporting relationship to the board of directors.
ICP 12—Reporting to supervisors and off–site monitoring.	Consider: a) improving the timeliness of reporting by introducing quarterly reporting focusing on key indicators, on unaudited basis; b) requiring insurers to submit information about their financial condition and performance on both a solo and a group–wide basis; and c) clarifying that all insurers must maintain proper books of accounts in Bermuda.
ICP 16—Winding–up or exit from the market.	Clarify the priority of policyholders’ claims for grandfathered composite insurers and insurers allowed to undertake non–insurance related business within the same legal entity. Formulate a clear policy stance on insurers’ credit facilities and encumbrances of assets held for the benefit of policyholders.
ICP 17—Group–wide supervision.	Formulation and implementation of a pragmatic and effective regime for group supervision.
ICP 18—Risk assessment and management.	The BMA is advised to consider formulating its regulatory stance on functions outsourced by an insurer, including powers to inspect third party service providers.
ICP 19—Insurance activity.	Clearer guidance on adequacy of reinsurance arrangements as well as treatment of reinsurance recoverables.
ICP20—Liabilities.	Work closely with the relevant professional associations to issue guidance on the basis and adequacy of technical provisions and clarify valuation of the amounts recoverable under reinsurance arrangements.
ICP21—Investments.	Establish clear guidance on asset–liability management, concentration risks and asset valuation as part of its risk–based capital framework.
ICP22—Derivatives and similar commitments.	Establish disclosure requirements for derivatives and similar commitments.
ICP26—Information, disclosure and transparency towards markets.	To facilitate market discipline, the BMA should formulate plans to implement the IAIS supervisory standards on public disclosures.

Authorities’ Response to the Assessment

The Authority is pleased that the IMF Assessment has recognized the effectiveness of the regulatory framework put in place in Bermuda, and the significant work that has been undertaken since the last IMF Review in 2003.

At the same time, in anticipation of the new international standards as a result of initiatives such as Solvency II, Bermuda has moved swiftly to even further develop and enhance a number of aspects of its regulatory regime, consistent with the requirements of these new standards. This process is already well advanced, with numerous changes already introduced and others expected to be implemented during the first part of 2009. Certain amendments to the Insurance Act 1978 have been enacted, in particular underpinning the ability of the Authority to clarify aspects of the regulatory requirements and standards through codes of conduct to the industry. Moreover, the Authority has taken a number of steps to further enhance the effectiveness of its insurance regime including: significant increases in qualified technical staff; extending the risk–based model and further enhancement of the on–site elements of the regulatory regime to all classes, including the captives. Through these and other initiatives currently in train, the Authority is confident that it will continue to maintain a high degree of compliance with the relevant international standards.

More specifically, the Authority has been in a period of significant growth in staffing resources and has targeted further increases in supervisory and other resources for the remainder of 2008. These efforts have meant we have increased the size of our insurance and banking, trust and investment supervisory teams; have developed an independent risk and policy unit; have set up a dedicated insurance run–off team and have created an in–house actuarial unit. The Authority is making a significant investment in learning & development in its staff with a multi–tier program of core, intermediate, and specialist training, and sponsored study and accreditation.

The Authority values maintaining a strong working relationship with its external stakeholders in the various segments of the insurance industry. We will shortly publish a statement of policy on our approach to consultation with industry to set out a transparent framework for engaging with stakeholders on legislative and regulatory change. In our supervisory operations, our increased resources and enhanced on–site risk assessment and solvency frameworks allow the Authority to engage in a challenging dialogue with individual firms.

Since the IMF assessment mission, the Authority has made further progress in the roll–out of its supervisory program for insurance, including further on–site assessment, enhanced solvency standards, and specialist risk reviews. Our 2008–09 Business Plan sets out the Authority’s road–map to implement the remaining elements of the framework.

The Authority’s existing risk–based framework allows it to assess group governance, controls and risk management arrangements as part of its solo supervisory monitoring. The Authority’s 2008–2009 Business Plan sets out our intention to publish a discussion paper on insurance group supervision in the first quarter of 2009 and to move to implement a group supervision framework by 2011. In the meantime, the Authority is hosting a number of supervisory colleges to facilitate supervisory co–operation on our largest insurance companies.

Following the IMF assessment mission, the Authority has introduced a requirement for Class 4 insurance companies to publish their GAAP accounts. The Authority will consult on extending this requirement to the largest Class 3 companies and on further types of disclosure. The Authority is also in the process of reviewing and considering the appropriateness of other risk disclosures to enhance transparency.

In addition to building specialist risk capabilities, the Authority required Class 4 insurers to file the new risk–based capital model (Bermuda Capital Solvency Requirement) for the 2007 year–end. The model was accompanied by substantial risk and forward looking disclosures. Class 4 insurers were also required to file prescribed stress and scenario tests. Further, the Authority has designed an in–house system independent of the Bermuda Capital Solvency Requirement to evaluate the robustness of both the capital model and insurers’ ability to sustain catastrophic losses at varying levels. More comprehensive legislation with respect to the risk–based solvency regime was passed in July 2008. The legislation makes provision for the internal models of Class 4 insurers to be approved for the calculation of regulatory capital requirements upon satisfying certain criteria.

The legislation also subdivides the existing heterogeneous Class 3 sector into three separate classes (captives, small commercial and large commercial) to enhance the risk–based approach applied to the Authority’s insurance register.

Introduction

53. This report on the Observance of Standards and Codes (ROSC) for the FATF 40 Recommendations for Anti–Money Laundering (AML) and 9 Special Recommendations Combating the Financing of Terrorism (CFT) was prepared by the International Monetary Fund (IMF). The report provides a summary of the AML/CFT measures in place in Bermuda, the level of compliance with the FATF 40+9 Recommendations, and contains recommendations on how the AML/CFT system could be strengthened. The assessment is based on the information available at the time of the mission from May 7–23, 2007 and was conducted using the 2004 Assessment Methodology. The Detailed Assessment Report (DAR) on which this ROSC is based was adopted by the Caribbean Financial Action Task Force (CFATF) on November 23, 2007. The views expressed in this document, as well as in the detailed assessment report (DAR), are those of the IMF mission team²⁷ and do not necessarily reflect the views of the Government of Bermuda or the Executive Board of the IMF.

Key Findings

54.There has not been much change in Bermuda’s AML/CFT regime since the AML legislation and guidance notes (GNs) came into force in 1998, and the last IMF assessment in 2003. Apart from a few changes to the 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 assessment, are still to be finalized and implemented. Therefore, the current AML/CFT regime has 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 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.

55.The lack of sufficient reforms to the AML/CFT regime has also limited Bermuda’s ability to apply risk–sensitive approaches to preventive measures for financial institutions (FIs), as permitted under the FATF Recommendations. In Bermuda’s case, the application of risk–based approaches seems particularly relevant, not only with respect to insurance—which is the most significant sector—but also in other types of financial and non–financial activities. The AML Regulations and GNs contain exemptions or simplified customer due diligence (CDD) provisions, but lower risk has not been proven in all cases. Furthermore, some of the exemptions are clearly inappropriate. Implementation of the recently passed legislation (post–mission), proposed regulations, and GNs will 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

56.The criminalization of money laundering (ML) and the financing of terrorism (FT) are 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, no criminal investigations relating to terrorist activities, their financing, or the provision of support to them have been referred to the courts in Bermuda and there have been no FT–related suspicious activity reports (SAR) filed.

57.Under current law, protections from civil liability, but not explicitly from criminal liability, apply only 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.

58.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 constraints in the office of the Director of Public Prosecutions (DPP) and the Financial Intelligence Unit (FIU) may have contributed to a low number of ML investigations, limiting their ability to carry out their AML/CFT tasks effectively. In practice, only a small number of SARs that are analyzed are fully investigated.

59.Following Parliament’s recent enactment of the Financial Intelligence Agency Act 2007 (the FIA Act which is still to be put into effect), a new administrative agency (the FIA) is in the process of being organized to take on the responsibilities of the current FIU that is part of the Bermuda police. To prevent an interruption in transfer of responsibilities, the BMA should provide for a suitable period of transition where the FIU remains tasked with financial intelligence functions until the FIA is fully operational. 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 investigations. In this regard, the FIU should be sufficiently staffed and provided with additional technical resources—including expertise in forensic accounting—during the transitional period to avoid operational gaps and to efficiently manage the transfer of the intelligence–related tasks to the FIA.

60.At the time of the mission, three important draft laws were under consideration that were enacted in June 2007. These are amendments to the POCA, the Criminal Justice International Cooperation (Bermuda Act), and the FIA Act. 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

61.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 POCA Regulations and GNs remain practically unchanged since the last IMF assessment mission in 2003, despite 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 BMA had prepared draft new regulations and was contemplating amending the GNs, pending passage of proposed new legislation that was to be passed subsequent to the mission.

62.The regulatory framework for FIs lacks basic 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 (which are non–enforceable) 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 and 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 for beneficiary clients and business relationships established before the AML/CFT legislation was introduced.

63.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 on–site inspections. While the BMA continues to improve its supervisory systems and processes, enhanced capacity, skills, and resources are required to strengthen AML/CFT supervision, particularly on–site 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 and FT risk assessments should be considered to better manage the supervisory process, identify supervisory priorities, and more efficiently allocate resources.

64.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 on–site supervisory programs, which should be expedited across all sectors. Following a risk–based approach, the BMA should enhance the focus of its on–site procedures to reviewing compliance with CDD requirements for beneficial customers, including more rigorous enforcement of such requirements for accounts in existence when the AML regime was introduced in 1998.

65.The BMA has a wide array of formal sanctioning powers available to it but has never imposed them against a 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.

D. Preventive Measures—Designated Non–Financial Businesses and Professions (DNFBP)

66.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 in the course of their business or profession. However, 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.

67.The ML and FT vulnerabilities related to activities of lawyers, accountants, trust service providers, and company service providers have not been closely analyzed, although they are key gateways to the highly sophisticated and internationally active financial sector of Bermuda. 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 (TSB) mitigate against these risks in trust operations. In addition, relatively strict requirements and procedures for the incorporation of Bermudian companies also reduce the potential for ML and FT in this sector.

68.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 nonresidents to the Bermuda property market is tightly restricted which may limit the attractiveness of this sector for international money launderers.

69.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 that were enacted by the legislature subsequent to the mission, and draft amendments to the POC Regulations which should include lawyers and accountants under the preventive regime. The provisions being adopted 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. The scope of activities of lawyers and accountants that are subject to AML/CFT preventive measures is narrower than called for under the FATF Recommendations.

E. Other Issues

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

74.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.

Table 6.

Summary Table of Observance and Key Recommendations²⁸

^1/Compliant (C): the Recommendation is fully observed with respect to all essential criteria.

Largely compliant (LC): there are only minor shortcomings, with a large majority of the essential criteria being fully met.

Partially compliant (PC): the country has taken some substantive action and complies with some of the essential criteria.

Non–compliant (NC): there are major shortcomings, with a large majority of the essential criteria not being met.

Not applicable (NA): a requirement or part of a requirement does not apply, due to the structural, legal or institutional features of a country.

Table 6.

Summary Table of Observance and Key Recommendations²⁸

FATF 40+9 Recommendations1/		Key Assessor Recommendations
	I. Legal System and Related Institutional Measures
Criminalization of Money Laundering		Increase investigations and prosecutions in order to maintain an effective AML/CFT framework, particularly given that there has only been one prosecution of ML in the last five years and limited numbers of ML investigations. Fines under POCA with respect to summary convictions and certain convictions on indictment should be substantially increased.
R.1	LC
R. 2	LC
Criminalization of Terrorist Financing		Amend the ATFA’s definition of terrorism to include/cover (i) the acts covered by the nine conventions referred to in the SFT Convention; (ii) acts taken against international organizations; (iii) a reference to the financing of terrorist organizations; and (iv) extra–territorial acts relating to terrorist organizations.
SR.II	PC
Confiscation, freezing, and seizing of proceeds of crime		Explicitly provide in legislation that, for the purposes of confiscation of the benefits of ML offenses, the proceeds that are the basis of the offense may include any payments received by the defendant at any time in connection with the ML offense carried out by him or by another person. With respect to the voiding of contracts, explicitly provide the authorities with the means to prevent actions to hinder the recovery of property subject to confiscation.
R.3	PC
Freezing of funds used for terrorist financing		Issue guidance to the financial services community concerning affirmative obligations to freeze assets of persons listed by the UNSCR 1267 Committee and the EU. Develop and publish procedures for delisting requests and the unfreezing of funds associated with FT.
SR.III	PC
The Financial Intelligence Unit and its functions		The new FIA should be established and made operational, and provided with sufficient staff to enable an increased number of ML/FT–related investigations. Maintain the level of experience and skills in financial investigations unit of the Commercial Crime Department.
R.26	LC
Law enforcement, prosecution and other competent authorities		Investigating and prosecuting ML/FT cases should be made a higher priority by law enforcement authorities, with sufficient resources allocated reflecting that priority.
R. 27	LC
R.28	C
Cross Border Declaration or disclosure		Implement the currency declaration system now being considered by the authorities to include both outgoing and not just incoming transportation of currency as currently planned; Substantially increase the scale of civil money fines and criminal penalties for customs violations; Ensure sufficient information–sharing between Customs and other law enforcement authorities; Consider: (i) granting the Customs Department with explicit legal authority to seize, detain, and confiscate currency in the event of a false declaration; and (ii) developing a procedure to notify other customs agencies of search and detention reports relating to precious metals and stones other than gold.
SR IX	NC
2. Preventive Measures: Financial Institutions
Risk of money laundering or terrorist financing		Conduct a systemic review of ML and FT risks, particularly in the financial and DNFBP sectors, including in the life, annuity/investment, and captive components of the insurance sector.
Customer due diligence, including enhanced or reduced measures		Extend the AML/CFT requirements to key sectors of the economy including life insurance business and expand its coverage in the investments (mutual funds) sector. Extend the CDD requirements beyond customer identification, explicitly cover CFT issues, and reduce the CDD threshold for wire transfers to US/BD$ 1,000. Require FIs to conduct enhanced CDD and monitoring for higher risk business (including for politically exposed persons and respondent banks) and require regular updating of CDD information. Require FIs to address risks associated with non–face–to–face business relationships or transactions, and to implement measures to prevent misuse of technological developments that could facilitate ML/FT.
R.5	NC
R.6	NC
R.7	NC
R.8	NC
Third parties and introduced business		Enhance CDD and documentation requirements for FIs when relying on third parties, particularly when they are based in other countries.
R.9	NC
Financial institution secrecy or confidentiality		Consider amending the five regulatory acts and the BMA Act to provide gateways for disclosures to the FIA.
R.4	NC
Record keeping and wire transfer rules		Explicitly include AML/CFT recordkeeping requirements in the regulatory laws and require in the Guidance Notes the need to retain transaction records beyond details of securities and investments transactions. Reduce the minimum recordkeeping threshold for wire transfers to the equivalent of US$1,000, and require that full originator information be obtained and retained for the minimum period in accordance with SR VII. Include lack of complete originator information as a basis for determining whether a suspicious activity report is filed with the FIU.
R. 10	LC
SR.VII	NC
Monitoring of transactions and relationships		Require FIs to monitor and record information on complex, unusually large, or unusual patterns of transactions that have no apparent economic or lawful purpose. Require FIs to pay special attention to relationships/transactions with persons from countries that which do not sufficiently apply the FATF Recommendations.
R.11	NC
R.21	NC
Suspicious transaction reports and other reporting		Extend explicit protection against criminal liability for filing SARs. Extend the “tipping–off” offense to explicitly cover any information about a SAR filing and the contents, and limit the scope of the exemption granted to lawyers. Develop guidance for FIs and DNFBP relating to latest industry–specific typologies and additional preventive measures.
R.13	PC
R.14	PC
R.19	C
R.25	PC
SR.IV	PC
Internal controls, compliance, audit and foreign branches		Explicitly require FIs to implement comprehensive AML/CFT policies, procedures, and controls, including for the full range CDD and recordkeeping requirements (See R. 5 and R. 10). Expand the role of the AML/CFT compliance function beyond suspicious activity reporting and require internal audit to cover AML/CFT issues. Expand the scope of the staff training requirements and include employee screening requirements for AML/CFT purposes. Require implementation of AML/CFT measures in overseas branches and subsidiaries, including the need to inform the Bermudian authorities when their overseas operations cannot observe appropriate AML/CFT measures in the host countries.
R.15	PC
R. 22	NC
Shell banks		Introduce an explicit prohibition on the licensing of shell banks and explicitly require banking entities to maintain a significant presence in Bermuda.
R.18	LC
Supervisory and oversight system–competent authorities and SROs		Enact legislation for civil money penalties and conservatorship powers to be applied by the BMA, and increase fines with respect to summary convictions and certain convictions on indictment. Review the effectiveness of enforcement and sanctioning practice for AML/CFT. Implement comprehensive risk–based AML/CFT off–site and on–site supervision processes, including on a consolidated basis across all sectors. Enhance the on–site review of the sufficiency and quality of SAR reporting systems, and consider expanding the role of external auditors for AML/CFT purposes. Expedite the licensing/registration process for money services firm (s) and review regulatory provisions for agents/subagents of remittance firms. Conduct a systemic review to ascertain the existence of financial activities covered by the FATF Recommendations not subject to the current AML/CFT regime, e.g. leasing operations. Update the GNs for relevance to the FATF Recommendations and the current needs of industry. Establish an explicit mandate for the BMA to monitor, enforce and sanction for compliance with the AML/CFT legal obligations.
R. 17	PC
R.23	NC
R.25	PC
Money value transfer services		Require money transfer services, when licensed, to maintain a list of their agents.
SR.VI	PC
3. Preventive Measures: Nonfinancial Business and Professions
Customer due diligence and record–keeping		Require lawyers, accountants, company service providers, dealers in precious metals and stones including jewelers, and real estate agents to implement appropriate AML/CFT programs consistent with the FATF Recommendations. Provide adequate powers for the designated supervisor to review and enforce AML/CFT requirements for DNFBPs irrespective of any SRO arrangements. Familiarize DNFBPs with their responsibilities and obligations under proposed new AML/CFT laws and regulations.
R. 12	NC
Suspicious transaction reporting		Ensure that the SAR reporting requirement conforms to the applicable FATF Recommendations., including for legal professionals. Revise relevant legislation with respect to tipping off prohibitions for lawyers, in order to protect the confidentiality of SAR information. Apply the preventive measures under the FATF Recommendations. to DNFBPs including the need to have policies, procedures, and controls to monitor and report suspicious transactions.
R.16	NC
Regulation, supervision, monitoring, and sanctions		Implement effective supervisory arrangements for DNFBPs, including powers for the supervisors to monitor and sanction, and adequate resources to carry out the supervisory function. Introduce updated guidance for all DNFBPs.
R.24	NC
R.25	PC
Other designated nonfinancial businesses and professions		None
R.20	C	Require money transfer services, when licensed, to maintain a list of their agents.
4. Legal Persons and Arrangements and Nonprofit Organizations
Legal Persons–Access to beneficial ownership and control information		None.
R.33	C
Legal Arrangements–Access to beneficial ownership and control information		None.
R. 34	C
Nonprofit organizations		Review applicable laws and regulations related to NPOs to help prevent their use for financing of terrorism. Establish recordkeeping requirements for NPOs in line with SR VIII 3.4. Implement measures to enable effective investigation and access to information on NPOs, as called for in SR VIII.4
SR. VIII	PC
5. National and International Cooperation
National cooperation and coordination		Appoint a national AML/CFT coordinator and energize the policy development role of the NAMLC. Develop and implement systematic mechanisms for coordination among and between all the relevant AML/CFT agencies and departments.
R.31	PC
The Conventions and UNSC Resolutions		Request that the U.K. extends the SFT and Palermo Conventions to Bermuda.
R.35	PC
SR.I	PC
Mutual Legal Assistance		Amend the relevant statute (s) to provide for external confiscation requests relating to instrumentalities used in a commission of an ML, FT, or other predicate offenses. Arrangements for coordinating seizure and confiscation actions with other countries should be formalized. Improve collection of information on mutual legal assistance and international requests for co–operation.
R.36	LC
R.37	C
R.38	LC
SR.V	C
Extradition		Consider developing procedures facilitating expeditious action be taken or establishing precise timelines for response to MLA requests, including for extradition. Review resources available at AGC and Police/FIU to ensure that MLA requests are acted upon in as efficient a manner as possible. Improve collection of information on extradition requests.
R.39	LC
R.37	C
Other Forms of Cooperation		Improve collection of data on formal requests to the FIU for assistance, including type of request and whether such assistance was granted. Consider developing procedures or precise guidelines to facilitate expeditious responses to requests for cooperation.
R.40	C
6. Other Issues
Resources and Statistics		Increase training for all agencies and at all levels, including typologies, analysis and international standards, as well as in fundamentals such as investigating and prosecuting white collar crime cases, managing complex cases, and criminal procedure. Establish the FIA with adequate funding, staff and technical resources, particularly in terms of analytical expertise such as forensic accounting/auditing. Enhance training for BMA staff to facilitate the identification of deficiencies relating to AML/CFT requirements for FIs, including, but not limited to internal controls, CDD, SARs filings, recordkeeping, MLRO qualifications. and operations. Increased specialization and focus on AML/CFT supervision in the insurance and mutual fund sectors should be given priority. The BMA should enhance its staff capacity to undertake more comprehensive AML/CFT supervision, including for the conduct of effective consolidated supervision whether as home or host supervisor. Integrate use of available statistics and information in reviewing the effectiveness of AML/CFT systems on a regular basis.
R.30	PC
R.32	PC

^1/Compliant (C): the Recommendation is fully observed with respect to all essential criteria.

Largely compliant (LC): there are only minor shortcomings, with a large majority of the essential criteria being fully met.

Partially compliant (PC): the country has taken some substantive action and complies with some of the essential criteria.

Non–compliant (NC): there are major shortcomings, with a large majority of the essential criteria not being met.

Not applicable (NA): a requirement or part of a requirement does not apply, due to the structural, legal or institutional features of a country.

View Table

Table 6.

Summary Table of Observance and Key Recommendations²⁸

FATF 40+9 Recommendations1/		Key Assessor Recommendations
	I. Legal System and Related Institutional Measures
Criminalization of Money Laundering		Increase investigations and prosecutions in order to maintain an effective AML/CFT framework, particularly given that there has only been one prosecution of ML in the last five years and limited numbers of ML investigations. Fines under POCA with respect to summary convictions and certain convictions on indictment should be substantially increased.
R.1	LC
R. 2	LC
Criminalization of Terrorist Financing		Amend the ATFA’s definition of terrorism to include/cover (i) the acts covered by the nine conventions referred to in the SFT Convention; (ii) acts taken against international organizations; (iii) a reference to the financing of terrorist organizations; and (iv) extra–territorial acts relating to terrorist organizations.
SR.II	PC
Confiscation, freezing, and seizing of proceeds of crime		Explicitly provide in legislation that, for the purposes of confiscation of the benefits of ML offenses, the proceeds that are the basis of the offense may include any payments received by the defendant at any time in connection with the ML offense carried out by him or by another person. With respect to the voiding of contracts, explicitly provide the authorities with the means to prevent actions to hinder the recovery of property subject to confiscation.
R.3	PC
Freezing of funds used for terrorist financing		Issue guidance to the financial services community concerning affirmative obligations to freeze assets of persons listed by the UNSCR 1267 Committee and the EU. Develop and publish procedures for delisting requests and the unfreezing of funds associated with FT.
SR.III	PC
The Financial Intelligence Unit and its functions		The new FIA should be established and made operational, and provided with sufficient staff to enable an increased number of ML/FT–related investigations. Maintain the level of experience and skills in financial investigations unit of the Commercial Crime Department.
R.26	LC
Law enforcement, prosecution and other competent authorities		Investigating and prosecuting ML/FT cases should be made a higher priority by law enforcement authorities, with sufficient resources allocated reflecting that priority.
R. 27	LC
R.28	C
Cross Border Declaration or disclosure		Implement the currency declaration system now being considered by the authorities to include both outgoing and not just incoming transportation of currency as currently planned; Substantially increase the scale of civil money fines and criminal penalties for customs violations; Ensure sufficient information–sharing between Customs and other law enforcement authorities; Consider: (i) granting the Customs Department with explicit legal authority to seize, detain, and confiscate currency in the event of a false declaration; and (ii) developing a procedure to notify other customs agencies of search and detention reports relating to precious metals and stones other than gold.
SR IX	NC
2. Preventive Measures: Financial Institutions
Risk of money laundering or terrorist financing		Conduct a systemic review of ML and FT risks, particularly in the financial and DNFBP sectors, including in the life, annuity/investment, and captive components of the insurance sector.
Customer due diligence, including enhanced or reduced measures		Extend the AML/CFT requirements to key sectors of the economy including life insurance business and expand its coverage in the investments (mutual funds) sector. Extend the CDD requirements beyond customer identification, explicitly cover CFT issues, and reduce the CDD threshold for wire transfers to US/BD$ 1,000. Require FIs to conduct enhanced CDD and monitoring for higher risk business (including for politically exposed persons and respondent banks) and require regular updating of CDD information. Require FIs to address risks associated with non–face–to–face business relationships or transactions, and to implement measures to prevent misuse of technological developments that could facilitate ML/FT.
R.5	NC
R.6	NC
R.7	NC
R.8	NC
Third parties and introduced business		Enhance CDD and documentation requirements for FIs when relying on third parties, particularly when they are based in other countries.
R.9	NC
Financial institution secrecy or confidentiality		Consider amending the five regulatory acts and the BMA Act to provide gateways for disclosures to the FIA.
R.4	NC
Record keeping and wire transfer rules		Explicitly include AML/CFT recordkeeping requirements in the regulatory laws and require in the Guidance Notes the need to retain transaction records beyond details of securities and investments transactions. Reduce the minimum recordkeeping threshold for wire transfers to the equivalent of US$1,000, and require that full originator information be obtained and retained for the minimum period in accordance with SR VII. Include lack of complete originator information as a basis for determining whether a suspicious activity report is filed with the FIU.
R. 10	LC
SR.VII	NC
Monitoring of transactions and relationships		Require FIs to monitor and record information on complex, unusually large, or unusual patterns of transactions that have no apparent economic or lawful purpose. Require FIs to pay special attention to relationships/transactions with persons from countries that which do not sufficiently apply the FATF Recommendations.
R.11	NC
R.21	NC
Suspicious transaction reports and other reporting		Extend explicit protection against criminal liability for filing SARs. Extend the “tipping–off” offense to explicitly cover any information about a SAR filing and the contents, and limit the scope of the exemption granted to lawyers. Develop guidance for FIs and DNFBP relating to latest industry–specific typologies and additional preventive measures.
R.13	PC
R.14	PC
R.19	C
R.25	PC
SR.IV	PC
Internal controls, compliance, audit and foreign branches		Explicitly require FIs to implement comprehensive AML/CFT policies, procedures, and controls, including for the full range CDD and recordkeeping requirements (See R. 5 and R. 10). Expand the role of the AML/CFT compliance function beyond suspicious activity reporting and require internal audit to cover AML/CFT issues. Expand the scope of the staff training requirements and include employee screening requirements for AML/CFT purposes. Require implementation of AML/CFT measures in overseas branches and subsidiaries, including the need to inform the Bermudian authorities when their overseas operations cannot observe appropriate AML/CFT measures in the host countries.
R.15	PC
R. 22	NC
Shell banks		Introduce an explicit prohibition on the licensing of shell banks and explicitly require banking entities to maintain a significant presence in Bermuda.
R.18	LC
Supervisory and oversight system–competent authorities and SROs		Enact legislation for civil money penalties and conservatorship powers to be applied by the BMA, and increase fines with respect to summary convictions and certain convictions on indictment. Review the effectiveness of enforcement and sanctioning practice for AML/CFT. Implement comprehensive risk–based AML/CFT off–site and on–site supervision processes, including on a consolidated basis across all sectors. Enhance the on–site review of the sufficiency and quality of SAR reporting systems, and consider expanding the role of external auditors for AML/CFT purposes. Expedite the licensing/registration process for money services firm (s) and review regulatory provisions for agents/subagents of remittance firms. Conduct a systemic review to ascertain the existence of financial activities covered by the FATF Recommendations not subject to the current AML/CFT regime, e.g. leasing operations. Update the GNs for relevance to the FATF Recommendations and the current needs of industry. Establish an explicit mandate for the BMA to monitor, enforce and sanction for compliance with the AML/CFT legal obligations.
R. 17	PC
R.23	NC
R.25	PC
Money value transfer services		Require money transfer services, when licensed, to maintain a list of their agents.
SR.VI	PC
3. Preventive Measures: Nonfinancial Business and Professions
Customer due diligence and record–keeping		Require lawyers, accountants, company service providers, dealers in precious metals and stones including jewelers, and real estate agents to implement appropriate AML/CFT programs consistent with the FATF Recommendations. Provide adequate powers for the designated supervisor to review and enforce AML/CFT requirements for DNFBPs irrespective of any SRO arrangements. Familiarize DNFBPs with their responsibilities and obligations under proposed new AML/CFT laws and regulations.
R. 12	NC
Suspicious transaction reporting		Ensure that the SAR reporting requirement conforms to the applicable FATF Recommendations., including for legal professionals. Revise relevant legislation with respect to tipping off prohibitions for lawyers, in order to protect the confidentiality of SAR information. Apply the preventive measures under the FATF Recommendations. to DNFBPs including the need to have policies, procedures, and controls to monitor and report suspicious transactions.
R.16	NC
Regulation, supervision, monitoring, and sanctions		Implement effective supervisory arrangements for DNFBPs, including powers for the supervisors to monitor and sanction, and adequate resources to carry out the supervisory function. Introduce updated guidance for all DNFBPs.
R.24	NC
R.25	PC
Other designated nonfinancial businesses and professions		None
R.20	C	Require money transfer services, when licensed, to maintain a list of their agents.
4. Legal Persons and Arrangements and Nonprofit Organizations
Legal Persons–Access to beneficial ownership and control information		None.
R.33	C
Legal Arrangements–Access to beneficial ownership and control information		None.
R. 34	C
Nonprofit organizations		Review applicable laws and regulations related to NPOs to help prevent their use for financing of terrorism. Establish recordkeeping requirements for NPOs in line with SR VIII 3.4. Implement measures to enable effective investigation and access to information on NPOs, as called for in SR VIII.4
SR. VIII	PC
5. National and International Cooperation
National cooperation and coordination		Appoint a national AML/CFT coordinator and energize the policy development role of the NAMLC. Develop and implement systematic mechanisms for coordination among and between all the relevant AML/CFT agencies and departments.
R.31	PC
The Conventions and UNSC Resolutions		Request that the U.K. extends the SFT and Palermo Conventions to Bermuda.
R.35	PC
SR.I	PC
Mutual Legal Assistance		Amend the relevant statute (s) to provide for external confiscation requests relating to instrumentalities used in a commission of an ML, FT, or other predicate offenses. Arrangements for coordinating seizure and confiscation actions with other countries should be formalized. Improve collection of information on mutual legal assistance and international requests for co–operation.
R.36	LC
R.37	C
R.38	LC
SR.V	C
Extradition		Consider developing procedures facilitating expeditious action be taken or establishing precise timelines for response to MLA requests, including for extradition. Review resources available at AGC and Police/FIU to ensure that MLA requests are acted upon in as efficient a manner as possible. Improve collection of information on extradition requests.
R.39	LC
R.37	C
Other Forms of Cooperation		Improve collection of data on formal requests to the FIU for assistance, including type of request and whether such assistance was granted. Consider developing procedures or precise guidelines to facilitate expeditious responses to requests for cooperation.
R.40	C
6. Other Issues
Resources and Statistics		Increase training for all agencies and at all levels, including typologies, analysis and international standards, as well as in fundamentals such as investigating and prosecuting white collar crime cases, managing complex cases, and criminal procedure. Establish the FIA with adequate funding, staff and technical resources, particularly in terms of analytical expertise such as forensic accounting/auditing. Enhance training for BMA staff to facilitate the identification of deficiencies relating to AML/CFT requirements for FIs, including, but not limited to internal controls, CDD, SARs filings, recordkeeping, MLRO qualifications. and operations. Increased specialization and focus on AML/CFT supervision in the insurance and mutual fund sectors should be given priority. The BMA should enhance its staff capacity to undertake more comprehensive AML/CFT supervision, including for the conduct of effective consolidated supervision whether as home or host supervisor. Integrate use of available statistics and information in reviewing the effectiveness of AML/CFT systems on a regular basis.
R.30	PC
R.32	PC

^1/Compliant (C): the Recommendation is fully observed with respect to all essential criteria.

Largely compliant (LC): there are only minor shortcomings, with a large majority of the essential criteria being fully met.

Partially compliant (PC): the country has taken some substantive action and complies with some of the essential criteria.

Non–compliant (NC): there are major shortcomings, with a large majority of the essential criteria not being met.

Not applicable (NA): a requirement or part of a requirement does not apply, due to the structural, legal or institutional features of a country.

Authorities’ Response

The Government of Bermuda is committed to completing the process of updating Bermuda’s AML/CFT regime to reflect the most recent developments in financial crime and the revised international standards from the FATF.

Accordingly, the Bermuda authorities welcome the IMF assessment and would like to thank the assessors for their professionalism and diligence throughout the mission. We note the assessors’ full recognition of both the robustness of the arrangements developed and applied in Bermuda over many years, and of the very substantial steps already taken by the authorities to further develop our regimes to reflect the revised FATF recommendations.

Bermuda has long had a reputation as one of the world’s premier centers for international business and financial services, and our regulation, business practices and legal framework have long provided significant impediments to illicit, unethical, and sharp business dealings.

Equally, the authorities recognize the need to enhance and accelerate Bermuda’s current efforts to strengthen the existing AML/CFT regime including the visible reflection of the standards in business systems and processes in the financial sector. The government intends to use the recommendations arising from the report to provide a roadmap for the various enhancements to the AML/CFT regime in Bermuda in both the public and private sectors. Some of the required changes are already in place and many are at an advanced stage of implementation. Still others are currently the subject of further consultation among those concerned, both in the public and private sectors, as we move through the ‘to do’ list in a risk–prioritized manner. It may be helpful to highlight just a few of the important changes on which the Bermuda authorities have been focusing during 2007:

(1)Three important laws were approved by the Bermuda Legislature in June 2007. These related to amendments to the POCA, the Criminal Justice International Cooperation Act, and a new FIA Act, providing for the establishment of a new autonomous administrative body that will function as a clearing house for SARs. Implementation and effective application of this new legislation will address a number of the specific recommendations made by the assessors for enhancement of our AML/CFT legal framework;

(2)Revised regulations under the POCA were already at an advanced stage of development at the time of the assessment visit. These modified regulations were intended to implement the significant number of aspects of the revised FATF Recommendations which are required to be undertaken by financial institutions and Designated Non–Financial Businesses and Professions through legislation or other enforceable means. Currently these regulations are being further enhanced with a view to achieving an even greater measure of compliance with the final assessors’ recommendations;

(3)Authorities have approved the establishment of a National AML/CFT Coordinator to supplement the NAMLC, reflecting an important recommendation of the assessors with a view to ensuring the most effective liaison between all the relevant agencies and providing enhanced impetus to our efforts; and

(4) The Government of Bermuda has developed a detailed plan of action to address outstanding issues in this critical area. The additional private and public sector reforms when fully implemented will ensure that Bermuda’s financial sector meets its obligations while maintaining Bermuda’s competitive position in the provision of premier financial services to the global community.