Offshore Financial Centers - The Assessment Program - A Progress Report and the Future of the Program

Offshore Financial Centers - The Assessment Program - A Progress Report and the Future of the Program

Abstract

Offshore Financial Centers - The Assessment Program - A Progress Report and the Future of the Program

Executive Summary

Since the offshore financial center (OFC) program started in June 2000, it has addressed two broad concerns about potential risks posed to other financial systems by activities undertaken in offshore centers—adequacy of supervision and data availability. This paper reports on the first round of OFC assessments, now almost complete, and presents proposals for going forward.

The OFC assessment program has focused primarily on assessing implementation of financial supervision, regulation, and integrity standards in OFCs. The assessments found that, following significant reforms, initiated in part in response to the OFC program, larger, wealthier jurisdictions meet high supervisory standards while many developing country jurisdictions must continue to make a considerable effort to improve their supervision. Technical assistance has been provided to help authorities address assessment recommendations.

Assessment results, as well as a May 2003-roundtable discussion among standard setters and onshore and offshore supervisors, confirm the benefits of the program in promoting stronger supervisory and financial integrity standards. The assessment results and the roundtable conclusions support the following proposals for the future of the assessment program:

  • regular monitoring of OFCs through offsite analysis, and risk-focused and periodic assessment missions;

  • enhancing the transparency of OFC supervisory systems and activities by reclassifying assessments as staff reports;

  • providing technical assistance in collaboration with bilateral and multilateral donors to strengthen supervisory and regulatory systems; and

  • collaborating with the standard setters and supervisors to strengthen standards and exchanges of information.

In addition to the contributions of the Fund, onshore and offshore supervisors will continue to have the key responsibilities for ensuring the adequacy of the supervisory and regulatory regimes governing financial institutions in OFCs.

I. Introduction

1. The offshore financial center (OFC) program was initiated in June 2000 by the Executive Board in the context of the Fund’s responsibility to help members identify and reduce vulnerabilities stemming from weaknesses in their financial systems (BUFF/00/98). Directors noted that only limited evidence was available thus far on the direct risks posed by OFCs for the global financial systems. However, Directors considered that where standards of financial supervision are inadequate and comprehensive risk analysis is hampered by a lack of reliable data on the activities of OFCs, there can be potential risk for financial stability. They noted that the OFC assessments would build on the financial system work undertaken by the Fund. Directors agreed that once experience was gained, it would be important for the Executive Board to revisit the subject of OFCs with a view to ensuring that the Fund’s role evolves in a manner consistent with its mandate, expertise, and resources. This paper reports on the progress of the first round of OFC assessments, which is now almost complete, and presents proposals for going forward. The paper does not review the statistical component of the program.1

2. The paper is organized as follows. The next section provides some background to the OFC program. Section III describes the design and results of the assessment program and analyzes assessment findings. Section IV discusses the issues and proposals with regard to the future role of the Fund vis-à-vis OFCs. Section V outlines the resource implications of taking the program forward. The final section presents issues for Directors’ consideration.

II. Background on OFC Program

3. The Fund embarked on an OFC program in June 2000 in response to concerns about potential risks posed to other financial systems by activities undertaken in offshore centers. Two broad concerns were to be addressed—adequacy of supervision and data availability. Inadequate supervision could encourage regulatory arbitrage and facilitate fraudulent activities, including money laundering. Moreover, weak supervision could impede effective consolidated supervision by the home countries of financial institutions with operations in those OFCs. Second, analysis of cross-border risks is hindered by the lack of information about the range and level of activities conducted in the OFCs.

4. These concerns are material because the volume of financial transactions booked in OFCs is substantial. For example, the Bank for International Settlements’ (BIS) locational banking statistics show that reporting jurisdictions recorded $2.8 trillion in claims on (assets located in) OFCs at end-2002 (see Appendix I), representing 20.9 percent of total cross-border claims, and $2.5 trillion at end-2001. The IMF’s Coordinated Portfolio Investment Survey (CPIS) data show $1.8 trillion in cross-border investment claims (equity and debt securities, excluding securities that comprise direct investment) against OFCs at end-2001, representing 14 percent of total cross-border holdings of securities reported in the survey. For banking, a more useful measure of risk exposure is provided by the BIS consolidated banking statistics which net out intragroup lending, and also identify ultimate risk. The consolidated banking statistics show net claims on OFCs of $1.8 trillion at end-2002, which reduces to $1.7 trillion in claims on OFCs on an ultimate risk basis (or 5.3 percent of world output).2 The reduction in consolidated claims reflects the fact that the business in OFCs is largely conducted by the affiliates of banks headquartered elsewhere.

5. Activities in OFCs are centered around international banking, asset, and risk management aimed mainly at large corporate entities and high net worth individuals. Financial services encompass banking, mainly in the form of interbank transactions and private banking, collective investment schemes, including both hedge funds and publicly marketed funds and, more generally, asset management by both banks and investment firms. Incorporation of special purpose vehicles and the establishment of trusts play important roles in structured financing arrangements and securitization, as well as in wealth and estate management for individuals. Insurance facilities for, in the main, corporate clients are also significant with reinsurance and captive insurance as major specialties of offshore markets.

6. Concerns about the risks posed by OFCs gave rise to other international initiatives in 2000, including by the Financial Stability Forum (FSF), the Financial Action Task Force on Money Laundering (FATF), and the Organization of Economic Cooperation and Development (OECD). The FSF report on offshore centers highlighted potential prudential and market integrity concerns arising from impediments to effective supervision and cooperation.3 Based on discussions with market participants, and selected supervisors, and a survey of onshore and offshore supervisors, the FSF classified 42 OFCs into three groups by perceived level of supervisory standard. The FATF reviewed available information on some jurisdictions’ AML measures and identified 12 OFCs as “noncooperative countries and territories” (NCCTs).4 The OECD’s “harmful tax practices” initiative identified 31 OFC jurisdictions that met the OECD tax haven criteria.5 These initiatives relied on blacklisting to spur reforms.

A. Risks Posed by OFCs

7. The major risks OFCs could pose for the international financial system are associated with prudential and financial integrity concerns. Both concerns stem from OFCs’ links to major “onshore” financial centers where onbalance sheet and offbalance sheet positions in OFCs are generally invested.

8. The institutions most likely to generate stability concerns are banks that have a large presence in offshore markets. Firstly, as a result of their potential susceptibility to runs and their role in the payments system, banks are the most common source of prudentially-caused instability. Secondly, globally important banks are usually present in most major OFCs. Conglomerates are a related potential source of risk—their nonbank affiliates in OFCs, carrying out asset management, for example, could transmit risk through the banking subsidiaries located onshore. Where nonbank intermediary activity is significant, it can also raise concerns, e.g., hedge funds located offshore, and where onshore insurance companies rely on offshore reinsurance.

9. OFCs are a potential conduit for the proceeds of crime to gain access to, and to be laundered through, global financial markets. Characteristics such as the anonymity of financial transactions, opaqueness of the operations of offshore corporations, and legal protections in OFCs have helped to make the centers vulnerable to financial abuse—money laundering, fraud, and tax evasion. Financial abuse in an OFC can have negative effects on both the international financial system and the jurisdiction itself. Financial centers that do not put arrangements in place to deter fraud and money laundering, harm their reputation. They also risk being deprived of financial relations with major institutions and markets, and losing their clientele. Even with increasing customer due diligence, the association of OFCs with secrecy may serve to attract less principled players.

10. Concerns about possible risks posed by OFCs are exacerbated by the lack of information about their operations. Lack of information on OFC activities restricts our ability to fully understand global financial flows and analyze their potential stability effects. OFCs’ competitive positions reflect, inter alia, innovation in financial instruments and operations, and information about innovative activities can be proprietary and is not broadly disseminated. However, lack of information about OFC operations in itself creates stability concerns onshore.

B. Response to the Risks

11. Where financial institutions are headquartered onshore, the potential prudential risk in OFC operations can be mitigated through effective consolidated supervision by home country supervisors supported by good host supervision. Banks, in the large majority of OFCs, are affiliates of banks from industrial and emerging markets. Minimum standards for global consolidated supervision were developed in 1992 in response to the 1991 Bank of Credit and Commerce (BCCI) failure, demonstrating the role standards implementation is expected to play. But the 2002 review of Basel Core Principles compliance6 continues to identify consolidated supervision and global consolidated supervision as areas of concern in over half and one-third, respectively, of the 60 countries assessed. Weaknesses in consolidated supervision have also been recognized as a concern in addressing risks in financial conglomerates, including those that have nonbanking subsidiaries in offshore centers.

12. In view of these identified weaknesses, effective supervision requires a coordinated approach involving both onshore and offshore monitoring and the supervisors of different sectors. Ways to reduce potential risk include effective information exchange among onshore and offshore supervisors and across sectors, as well as a clear delineation of supervisory responsibilities.7

13. Money laundering is an international problem, and, to be effective, the international standards against money laundering and terrorist financing need to be applied worldwide, especially in large financial centers. Working with the FATF and other bodies, the Fund and the Bank have developed a comprehensive methodology to assess AML/CFT regimes and together with the FATF and FATF-style regional bodies (FSRBs) have been applying this methodology to identify vulnerabilities in AML/CFT regimes in jurisdictions assessed under the FSAP or OFC programs.

14. Additional guidance for the oversight of OFC activity has recently been provided, or is being developed, by standard setters. For example, the Basel Committee on Banking Supervision provided guidance for the licensing and supervision of shell banks, booking branches, and parallel banks. The revised FATF 40 Recommendations approved by FATF in June 2003 contain explicit provisions for trust and company service providers (TCSPs) and for third-party participation in customer identification, an important feature of the TCSP business. The IAIS issued principles for the supervision of reinsurance (including captive reinsurance) in 2002. IOSCO has developed a multilateral MOU covering a wide range of regulatory assistance.

15. Technical assistance for upgrading supervisory systems has been increased to address the risks in OFCs. Since 2001, both multilateral and bilateral donors with close ties to vulnerable regions have increased their technical assistance in collaboration with the Fund. Such technical assistance has included both general advice on supervision and specific advice on OFC supervisory issues.

16. Concerns about lack of information on OFC activities have been addressed through onsite visits and data initiatives. A considerable effort has been made to persuade OFCs to participate in the IMF’s CPIS, which supplements the BIS’s international banking statistics. Together, these databases provide a substantial tool for assessing the importance of OFCs in international banking and securities markets, and for examining cross-border issues.8 The OFCs could do more themselves to disseminate information on their financial activities through the provision of statistics and descriptive material in Annual Reports and on their websites.

III. The OFC Assessment Program

A. Design of the Program

17. The program has two broad components: assessment and technical assistance. The assessments were designed to complete, through a step-by-step process, reviews of observance of supervisory and integrity standards and financial vulnerabilities. Standards assessments were to be carried out through the Module 2 assessments, and reviews of vulnerabilities and potential cross-border risks were to be covered in the context of more comprehensive Module 3 or FSAP assessments (Appendix II). Assessments were to be voluntary and sufficiently flexible to accommodate for each jurisdiction’s specific situation.9

18. Assessment of most OFCs potentially falls within the scope of Fund work relevant to surveillance; but the program was designed to be voluntary, operating outside the terms of the Fund’s formal surveillance mandate. The Financial System Stability Assessment (FSSAs), derived from FSAP findings and Article IV consultations, is the main tool for identifying financial system vulnerabilities, contributing to the bilateral Article IV surveillance of member countries. With the consent of a Fund member, the FSSA can also be used to assess dependent territories of members.10 In the event, a broader approach was adopted for the OFC program, allowing all participating jurisdictions, including nonmembers, 11 to select among a set of uniform assessment options. These options included FSAPs which are conducted jointly with the World Bank (Appendix II).12

19. The program also envisaged the possibility of visits to home country authorities of offshore establishments to review, inter alia, the effectiveness of consolidated supervision. Accordingly, visits to home country supervisors were undertaken as part of the assessments for a number of OFCs. In addition, FSAPs in countries with important bank representation in OFCs examined the home country consolidated supervision. These findings are also reflected as appropriate (see below).

20. Reports are generally finalized and published on the Fund’s website within 9–12 months of the assessment missions; but, the post-mission (report revision) stage has sometimes proven to be more protracted. Authorities, mindful of reputation risk, have provided feedback only after addressing some weaknesses identified during the assessment mission in order to ensure that the report reflect their actions. In some instances, this has resulted in delay as jurisdictions have had to enact legislative changes. Most OFC jurisdictions are expected to agree to publish as they view publication as an important element in maintaining their reputations as financial centers.

21. Technical assistance was viewed as making an important contribution to the improvement of supervisory standards in OFCs and of consolidated supervision onshore. It could be provided at any stage in the assessment process, including for the completion of the initial assisted self-assessment (Module 1 assessments).

B. Results of the Program

22. Forty-four jurisdictions were contacted in the context of the assessments. While there is no widely agreed definition of an OFC,13 nor a definitive list of offshore jurisdictions, the jurisdictions contacted were those known to have significant cross-border business addressed to nonresidents or with offshore financial legislation. Jurisdictions that had recently participated in the FSAP were not contacted for assessment.

23. Forty-one of the 44 jurisdictions contacted have had, or will have by end-2003, staff-led Module 2 assessments or assessments under the FSAP (Appendix III, Tables 1 and 2).14 The large majority of jurisdictions have had Module 2 assessments (i.e., that evaluated compliance with supervisory standards). The response from jurisdictions has been broadly positive. In line with the Board’s directive in BUFF/01/176, the pace of assessments accelerated in 2002, and 22 assessments were undertaken compared with nine in 2001. As a result, the current phase of the program is near a very satisfactory completion. Assessment status is summarized below (for details see Appendix III).

Summary Status of OFC Assessments

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Includes both jurisdictions that have requested publication and staff estimates.

C. Assessment Findings

24. This section provides the results of the findings on compliance with standards assessed in banking supervision and AML/CFT, as well as, where appropriate, insurance and securities regulation.15 These findings reflect assessments in virtually all important OFCs, with one exception scheduled for later in 2003, and the other, which is presently underway. The detailed results are provided in Appendix IV. A brief description of the technical assistance to OFCs is also provided.16

25. In general, OFC assessments have identified supervisory deficiencies that are similar to those in the overall population of countries that have been assessed by the Fund in its financial sector work. They include shortcomings in the independence of the regulator and constraints on both the level and quantity of technical supervisory skills. The increasing complexity of financial instruments and structures, including rules governing AML/CFT, are further increasing the pressure on supervisory capacity in many OFCs. Weakness in onsite and offsite inspections is a general theme of the assessments in banking, insurance, and AML/CFT in many OFCs. These inspections are the backbone of supervision and several of the noncompliant jurisdictions have begun implementation of an upgrading exercise which will need to be monitored.

26. Larger, wealthier jurisdictions generally meet very high supervisory standards while the developing countries with OFCs must make a considerable effort to improve their supervision. Many of the wealthier jurisdictions, concerned about reputation risks, implemented significant reforms to strengthen their supervisory or regulatory systems ahead, or as a result, of the initial OFC assessments, and before finalization of the assessment reports. Significant shortcomings against international standards were identified in poorer jurisdictions, and lacking resources, several have responded in part by reducing their offshore activities (Appendix V provides examples of actions taken by jurisdictions as a response to the assessments).

Banking supervision

27. Compliance with the 25 Basel Core Principles (BCP) was found to be quite strong in the majority of jurisdictions. Two thirds (20) of the assessed OFCs satisfy over 21 BCPs (Table 3).

28. Eleven of these OFCs are advanced economies whose supervision compares favorably with that of other advanced economies assessed to date. As noted above, these jurisdictions have made major, and generally successful efforts to improve their supervision. All of the 11 high-income OFCs meet the licensing, money laundering, global consolidated supervision, and host country supervision principles, and most comply with the supervision of foreign bank establishments, these being the principles judged most relevant to their reputations as financial centers. Shortcomings in compliance with standards were found in areas such as oversight of banks’ market and other risk controls; but, in view of the type of businesses undertaken, assessors judged the shortcomings of limited materiality to the jurisdictions’ banking business.

29. One third of the assessed OFCs complied with fewer than 15 BCPs, and these are mainly poorer jurisdictions. Areas requiring strengthening were (Tables 4 and 5):

  • onsite and offsite supervision where more formal procedures and training were required;

  • supervisors’ monitoring of banks’ risk-management systems; and

  • operational independence of, and resources allocated to the supervisor.

30. Concerning home country consolidated supervision, FSAP results show that advanced economies are largely compliant with the BCPs related to cross-border consolidated supervision (including licensing, the supervision of banks’ country-risk management, consolidated supervision of the banking group, supervision of the overall operations of the international banking group, and supervision of the local operations of foreign banks). However, shortcomings in consolidated supervision were identified in many assessments of emerging-market economies.

Insurance supervision

31. Insurance has proved an important area of offshore innovation, and supervisory standards are still evolving in some categories. Insurance facilities such as captive insurance, protected cell companies, producer-owned reinsurance companies, and general reinsurance, all have large or even their major operations in offshore locations.17

32. The generally high rates of compliance seen for the banking sector are not found in insurance supervision which in OFCs, as more generally, lags behind banking supervision. The assessments of insurance are conducted against the IAIS Principles. These principles, however, apply imperfectly to some OFC activity e.g., reinsurance and captive insurance.18 Standards for reinsurance supervision are in the process of adoption by the IAIS. Nevertheless, 80 percent of the 19 jurisdictions assessed were observant of the current principles most important to offshore business—licensing, cross-border business operations, and coordination and cooperation. The most widespread weaknesses were found in the following (Tables 6 and 7):

  • onsite inspections, which were affected by inadequate staffing and insufficiently detailed examinations; and

  • internal controls supervision, which was impeded by a lack of guidelines and onsite inspections.

Securities regulation and supervision

33. Securities regulation and supervision is reasonably effective but has some notable shortcomings. Securities regulation was assessed against the IOSCO Objectives and Principles in only the 15 advanced and middle-income OFCs with significant securities activity. The important principles in OFC securities business are those addressing information sharing and cooperation, market intermediation, and collective investment schemes. About two-thirds of jurisdictions had implemented the principles related to information sharing and cooperation, as well as the entry, prudential, and management principles for market intermediary regulation (Tables 8 and 9). Collective investment scheme regulation was well implemented in about 80 percent of the concerned OFCs. Shortcomings were noted in the following areas:

  • lack of an effective compliance program;

  • inadequate supervisory powers arising from limited legislation and a lack of resources; and

  • insufficient provisions for market intermediary failure—there was no contingency plan and inadequate regulatory powers.

Anti-money laundering and combating the financing of terrorism

34. Most of the 13 jurisdictions assessed using the October 2002 methodology had a developed AML/CFT framework, although shortcomings in implementation and in laws addressing the financing of terrorism were noted.19 In some cases, strengthened anti-money laundering measures require improved regulation and better supervision, including more staff and systems for effective compliance monitoring. The main areas that require strengthening are (Tables 10 and 11):

  • attention to unusual transactions, transactions with risky countries, and supervision of implementation of AML measures;

  • procedures to verify the identity and background of customers; and

  • consistent establishment and implementation of AML/CFT laws and regulation across all sectors.

35. Compliance with recommendations against terrorist financing was weaker than those against money laundering, in part, because shortfalls in legal measures to deal with terrorist financing affected all areas. Work was required on:

  • increased assistance in international efforts against terrorist financing through removing, for example, impediments in their extradition legislation; and

  • ratification of the 1999 United Nations International Convention for the Suppression of the Financing of Terrorism and implementation of Security Council resolutions to prevent terrorist financing.

Technical assistance

36. Technical assistance has been provided to help authorities address assessment recommendations. Technical assistance has been provided to 19 jurisdictions and has addressed chiefly banking and AML/CFT regulation and supervision. Key areas include resolution frameworks for problem banks to help jurisdictions exit from offshore banking; enhancing bank supervision inter alia through training; upgrading bank regulations; strengthening the AML/CFT regime; and assistance to conduct self-assessments. Where TA has focused on legislative drafting, the Legal Department has taken the lead. In many cases, TA has been provided on a regional basis through technical assistance centers that have been established by the Fund in partnership with bilateral donors and other international institutions, or in the form of workshops in cooperation with bilateral and multilateral agencies. A few (lower income) jurisdictions have also received TA in the form of long-term resident experts to help build their supervisory capacity.

IV. Going Forward

37. The Board Decision of 2000 (BUFF/00/98) requested that the staff revisit the subject of OFCs to consider how the role of the Fund should evolve consistent with its mandate, expertise, and resources. This section examines how the program could evolve. Section V discusses the resource costs and implications.

38. Actions in anticipation of, and in response to the assessments, as well as a May-2003 roundtable discussion among standard setters and onshore and offshore supervisors,20 confirm the effectiveness of the program in upgrading supervisory and financial integrity standards. Assessment results and the roundtable discussions identified the maintenance and/or upgrading of compliance with international supervisory and integrity standards; enhancing cooperation and information sharing between OFCs and the onshore jurisdictions; and improving information dissemination by OFCs as priorities for future OFC work. While onshore and offshore supervisors have primary responsibility for ensuring effective supervision and regulation in OFCs, participants in the roundtable affirmed the important role that the Fund has played in conducting assessments and providing technical assistance, and supported making the OFC program an integral part of the work of the Fund.

39. Accordingly, and given the priorities indicated for OFC work, staff proposes that the Fund’s role would involve the following four elements elaborated below:

  • regular monitoring of OFCs through offsite analysis, and risk-focused and periodic assessment missions;

  • improving the transparency of OFC supervisory systems and activities;

  • providing technical assistance in collaboration with bilateral and multilateral donors to strengthen supervisory and regulatory systems; and

  • collaborating with the standard setters and the onshore and offshore supervisors to strengthen standards and exchanges of information.

These elements draw on key areas of Fund expertise and experience, as well as on existing initiatives.

A. Monitoring OFCs

40. Monitoring of OFCs’ activities and their compliance with supervisory and integrity standards would become a standard component of the financial work of the Fund. The major elements of the monitoring program would be:

  • Development and maintenance of information on the main activities in OFCs and their significance to the international financial system. Staff would maintain and update a list of jurisdictions classified by their size and type of cross-border financial activity. This would help identify jurisdictions for assessment and updates (see below). Factual classifications of jurisdictions by size and activities would also help to avoid negative connotations from inclusion on an “OFC list.”

  • Immediate priority would be given to completing the current round of assessments and to updating AML/CFT assessments. Staff would propose updating AML/CFT assessments of jurisdictions that received assessments prior to the current comprehensive methodology.21

  • Risk-focused22 assessments of jurisdictions tied to issues of specific concern. Risk-focused assessments and monitoring visits could target jurisdictions identified as having weak supervisory or AML/CFT regimes, and address concerns related to the evolution of new instruments or practices. They could also be triggered, for example, by significant increases in capital flows observed through offsite monitoring. Such assessments or visits would be coordinated with Article IV missions, where relevant.

  • Periodic Module 2 assessments of all OFCs not subject to FSAPs to update findings on compliance with international supervisory and financial integrity standards. These would focus on a jurisdiction’s most significant sectors, consistent with the ROSC process, and the selectivity and streamlining agreed by the Board in the FSAP context (BUFF/03/43 and BUFF/03/42, respectively). Periodic assessments could be scheduled approximately every four years for jurisdictions not covered by Article IV consultations and FSAP assessments, and could include Module 3 assessments (i.e., comprehensive vulnerability assessments) at the jurisdiction’s request.

  • Close coordination with the FSAP program to identify weaknesses in consolidated supervision. Both OFC assessments and FSAPs would pay particular attention to verifying the adequacy of home supervision, and to strengthening consolidated supervision.

  • Assessments of OFCs would continue to be voluntary, with the support of members to ensure the success of the program. Voluntary participation has rarely proved a difficulty. In the case of members, issues can be taken up if necessary in the context of Article IV surveillance. Member countries that have important bilateral, especially financial, links with the OFCs have supported and encouraged both member and nonmember OFC jurisdictions to participate in the assessments, and such bilateral support would continue to be critical for the success of the program.

  • The OFC initiative would continue for the time being as a separate program from the FSAP. This has the following advantages. It would continue to allow for a focused program drawing on the synergies involved in assessing a group of jurisdictions that raise common concerns for the international financial system. Many OFCs are nonmembers, or the dependent territories of members, which do not have Article IV consultations. Monitoring on a more frequent cycle than the roughly ten-year cycle foreseen for comprehensive FSAPs (SM/03/77) is warranted by the continuing concerns about OFCs’ compliance with supervisory standards. In addition, the main products of the program, the Module 2 or Module 3 assessments, add value compared to stand-alone ROSCs by providing an overview of the supervisory arrangements and prioritized recommendations for strengthening these arrangements that take account of the overall business activity in the jurisdiction. OFCs have raised a concern about the consequences to their reputations of maintaining a separate OFC program. Staff would address this concern by modifying the classification of jurisdictions (i.e., to focus on factual descriptions of jurisdictions’ size and activities as outlined above). Future evaluations of the OFC and FSAP programs would review the relationship between the programs.

B. Promoting Transparency in OFC Activities

41. Improving transparency in OFC activities helps market discipline and provides incentives for OFCs to meet international supervisory and integrity standards. Publication of the assessment report on the Fund’s website informs the market and external supervisors about the state of supervision in the jurisdiction assessed, allowing them to make better-informed financial and supervisory decisions. The following procedures could help improve transparency in the findings of OFC assessments during the next phase of assessment:

  • To enhance transparency, staff would propose to reclassify the Module 2 main reports as staff reports.23 Under current technical assistance procedures, Module 2 main reports and summary assessments of compliance with standards can be made available to the Board for information with the approval of the jurisdiction. As staff reports, all Module 2 main reports would be circulated to the Board, including the ROSCs. They would be subject to a policy of voluntary publication, as are FSSA reports and ROSCs. Summaries of any stand-alone assessments of codes and standards prepared, for example the updated AML/CFT assessments, would also be circulated to the Board in the form of ROSCs. Reports on other technical assistance provided to the jurisdiction, e.g., to prepare for assessments, would continue to be handled under the standard technical assistance guidelines.

  • Staff would provide, for Board information and subsequent posting on the Fund’s website, periodic updates of the number and types of assessments carried out. These periodic updates would replace the current six-monthly progress reports to the Board on the OFC program.

  • Staff would work with OFCs to improve information dissemination by the jurisdictions themselves. Jurisdictions acknowledge that the lack of information is a source of international disquiet. They have asked the Fund to assist them in their dissemination efforts.

C. Strengthening Technical Assistance

42. In lower-income jurisdictions, extended technical assistance, in collaboration with bilateral and multilateral donors, will be needed to build the necessary institutional capacity for effective supervision. Technical assistance by the Fund would need to be judiciously extended. The one third of jurisdictions that have weak supervisory arrangements are, in the main, countries with low income and few resources. Staff is examining how best to address supervisory and regulatory requirements in small jurisdictions, including, whether there is scope for possible outsourcing of these functions with bilateral assistance from members with important financial links to the jurisdiction. In cases where jurisdictions conclude that the costs of achieving the internationally required supervisory standards exceed the benefits, if requested, staff would provide technical assistance to advise on the process for winding up. Bilateral and multilateral TA programs will continue to form a major component of technical assistance to OFCs.24

D. Collaboration with Standard Setters and the Role of Onshore and Offshore Supervisors

43. The success of the OFC program would continue to rely on close collaboration with the standards setters and the onshore and offshore supervisors. Key elements include:

  • The continuing development of relevant standards and best practices by the standard setters. Going forward, staff would continue to identify areas from its assessments that may require further guidance from the standard setters.

  • Strengthening information sharing arrangements. The Fund with its broad constituency could facilitate discussions on how to strengthen information exchange in collaboration with the standard setters and onshore and offshore supervisors. The work would focus initially on identifying the major impediments to effective information exchange and possible solutions.25

  • Future roundtables. Continuation on a 12-month cycle of roundtable discussion among onshore and offshore supervisors and standard setters would contribute to the goal of strengthened cooperation.

44. Notwithstanding the contributions of the Fund, onshore and offshore supervisors will continue to have the key responsibility for upgrading supervisory and integrity standards in OFCs. Onshore supervisors have key responsibilities for:

  • Enhancing their home country consolidated supervision, especially in emerging markets.

  • Incorporating the findings of the OFC program into their work, e.g., by giving special attention to the operational and money laundering risks of banks engaged with counterparts in OFCs that do not have adequate AML/CFT provisions in place.

  • Cooperating with the offshore supervisors to develop effective lines for communication.

Offshore supervisors have the key responsibilities to upgrade their supervisory and regulatory systems to meet the international standards and to cooperate with onshore supervisors.

V. Resource Implications

45. The cost of the OFC program to MFD in FY2003 is estimated at approximately $3.4 million (Table 12). This represents approximately 7 percent of MFD’s total budget in FY2003.26 This total is comprised of costs related to assessments (excluding FSAPs), technical assistance, policy work, and overhead with assessments and technical assistance comprising approximately 90 percent of the total costs. The average cost per Module 2 assessment is estimated at about $150,000, including costs associated with time spent at headquarters related to the assessments.

46. The cost of the OFC program in FY2004 is expected to decline relative to FY2003. This reflects a drop in expert costs related to a smaller number of assessments compared with the previous year, given the near completion of the original round of assessments—only 3 Module 2 assessments are planned for FY2004 compared with 14 in FY2003. Some of this decrease in assessments will be offset by an increase in technical assistance—technical assistance missions are expected to increase to 12 in FY2004 from 5 in FY2003. In addition, other elements of the work plan include: (a) the completion of the outstanding OFC assessments; (b) update of AML/CFT assessments in jurisdictions assessed prior to adoption of the comprehensive methodology; and (c) development of information on main OFC activities.

47. In the steady state, if the monitoring of OFCs becomes a regular component of Fund work, the annual resource needs are projected at about the average of costs in FY2003 and FY2004. Staff proposes to rebalance its use of resources by reducing the number of annual full assessments (in which supervision in all significant sectors is assessed) compared to FY2003 while introducing offsite monitoring of OFC activities combined with risk focused assessments (in which issues of specific concern are addressed) that are less resource intensive compared to full assessment missions. Provision of technical assistance will focus on poorer jurisdictions, and staff will encourage them to seek more bilateral support.

VI. Issues for Discussion

48. In considering how the OFC program should evolve, Executive Directors may wish to comment on the proposals outlined by staff in paragraphs 40–44:

  • Do Directors support making the monitoring of OFCs an integral part of the work of the Fund? Do Directors agree with the proposed approach as outlined in paragraph 40?

  • Do Directors agree with the proposals to increase transparency of assessment results and jurisdictions as outlined in paragraph 41?

  • Do Directors support continued technical assistance to OFCs as described in paragraph 42?

  • Do Directors agree with the proposals on collaboration with standard setters and onshore and offshore supervisors and the critical responsibilities of onshore and offshore supervisors outlined in paragraphs 43–44?