Offshore Financial Centers - The Assessment Program - A Progress Report

Offshore Financial Centers - The Assessment Program - A Progress Report


Offshore Financial Centers - The Assessment Program - A Progress Report

Executive Summary

The first phase of the OFC assessment program is now virtually complete. Forty-one of the 44 jurisdictions contacted at the inception of the program have been assessed. Of the remaining three jurisdictions, one is to be assessed under the FSAP in 2005, and two are receiving technical assistance.

All but one jurisdiction has published or indicated their intention to publish their assessment reports. An additional 17 reports have been published since the last update in March 2004.

Compliance with standards in OFCs is, on average, better than in other jurisdictions assessed under the FSAP, reflecting in part the higher average income levels of the OFCs. Results on cooperation and information sharing principles, which play a key role in cross-border supervision, show a similar pattern. Nevertheless, deficiencies remain including inadequate onsite inspections, inability to address cooperation on terrorist financing, need to expand mutual legal assistance treaties, and lack of formal agreements to share information.

Progress has been made in implementing the four broad program elements approved by the Board in November 2003.

  • Regular monitoring: Staff are in the process of contacting jurisdictions for the next round of assessments and, thus far, assessments have been scheduled for two jurisdictions in 2005 and for one in early 2006. Monitoring of developments in financial centers will be facilitated with the implementation of the Information Framework that has been developed by staff in consultation with jurisdictions.

  • Transparency: The Information Framework will also provide a common template that jurisdictions can use in their dissemination efforts. Broad participation will be key to the success of this initiative, and Executive Directors may wish to encourage jurisdictions to participate.

  • Technical assistance: In 2004, eighteen jurisdictions have received TA in various areas, including AML/CFT legislation and supervision, banking, insurance, and securities supervision, and statistics.

  • Collaboration with standard setters and onshore and offshore supervisors: In July 2004, MFD hosted a two-day conference which identified major approaches and impediments to cross-border cooperation and information exchange. The participants strongly encouraged wide dissemination of information on contact persons and arrangements for information exchange, and a stocktaking of current practices. The proceedings of this conference will be published in FY 2006.

I. Introduction

1. This report is the latest in the series of periodic updates on the offshore financial center (OFC) assessment program requested by the Board (see BUFF/03/196).

2. The paper is structured as follows. Section II summarizes the status and results of the first, and the planning for the second, round of assessments. Section III describes the work to implement the other components of the program. Appendix I summarizes the status of the assessments and assessment findings, jurisdiction by jurisdiction. Appendices II to IV and a supplement provide supporting information.

II. Completing the First Phase

A. Status of First Round of Assessments

3. The first phase of the OFC assessment program is now virtually complete with only one jurisdiction remaining to be assessed. Forty-one of the 44 jurisdictions contacted at the inception of the program have been assessed either through a Module 2 assessment1 or under the Financial Sector Assessment Program (FSAP). Of the remaining three jurisdictions, one is to be assessed under the FSAP in 2005, and two were scheduled to receive technical assistance (TA) in lieu of assessments (Table 1). Of these two jurisdictions, one received technical assistance in 2004, while the other is scheduled for 2005. Since the last status report of March 2004, 13 additional reports have been completed.

Table 1.

Summary Status of Contacted Jurisdictions First Phase of the OFC Program

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4. Almost all jurisdictions have published their assessment reports. Since the last update to the Board, an additional 17 jurisdictions have published their reports, bringing the total of published reports to 38. As a result, reports of all but three of the assessments undertaken have been published. Two of these are expected to publish, and one jurisdiction is still considering publication.

5. The main findings of the assessments as detailed in the previous progress report2 are that compliance with standards is positively correlated with the level of income. Compliance levels for OFCs are, on average, better than in other jurisdictions assessed under the FSAP3, reflecting in part the higher average income levels of the OFCs. Supervisory deficiencies were most frequently found to result from inadequate resources and skills (see Appendix I).4 Jurisdictions with low levels of income have a much lower rate of compliance with all the assessed standards than wealthier jurisdictions. Such jurisdictions often have low volumes of financial activity and many of the poorer jurisdictions have eliminated or are phasing out their OFC activities.

B. Findings on Cooperation and Information Exchange

6. Directors have noted the key role that information sharing arrangements play in effective cross-border supervision. The results for cooperation and information sharing principles in the first round of assessments are consistent with the general finding that, on average, OFCs meet supervisory standards superior to those of other jurisdictions though with deficiencies in lower income jurisdictions. 5 Over 80 percent of jurisdictions were assessed to meet the standards for cooperation and information exchange in banking and insurance, however, implementation of the securities and AML/CFT cooperation-related principles and recommendations was weaker (see Appendix II). The areas most requiring attention were the following:

  • In the banking sector, the inability or failure to carry out adequate onsite inspections and the resulting defects in host and consolidated supervision were the most common shortcomings. Others included a lack of mechanisms to share information, and excessive confidentiality provisions, particularly with regard to individual customers.

  • With respect to AML/CFT, shortcomings in about one third of jurisdictions assessed mainly related to their inability to address cooperation on terrorist financing because they had not yet defined terrorism as a criminal offence, or had difficulties in extraditing for terrorist financing offenses. The other major shortcoming arose from the need to enhance mutual legal assistance laws or expand the range of mutual legal assistance treaties.

  • In the securities sector, partial implementation (in about 40 percent of jurisdictions assessed) resulted mainly from the lack of formal agreements to share information either among domestic supervisors or cross-border. As a result, assessments recommended that formal agreements such as MOUs be negotiated with key overseas counterparts. Other impediments to information exchange arose from the need to seek authorization or a court order to share information, particularly if customer related.

  • In the insurance sector, only four of the jurisdictions assessed were noncompliant with the cooperation and information sharing principles. Three of these had no legal gateway provisions to share information, although cooperation may have taken place on an informal basis. In addition, two jurisdictions had overall ineffective supervision.

III. Progress with Second Phase of the Program

7. In November 2003, Directors agreed that the second phase of the OFC program should incorporate four broad elements:

  • Regular monitoring of OFCs' activities and compliance with supervisory standards;

  • Improved transparency of OFC supervisory systems and activities;

  • Technical assistance in collaboration with bilateral and multilateral donors;

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

This section describes the progress to date in implementing these elements.

A. Monitoring

8. Directors agreed that it would be appropriate to continue periodic monitoring of OFCs’ compliance with relevant international regulatory standards. Module 2 assessments every 4–5 years were generally considered appropriate, focusing mainly on those jurisdictions that are not covered by FSAPs, but it was also noted that the program should be sufficiently flexible to allow for more frequent targeted assessments to address areas of immediate concern (“risk-focused” assessments).6 Participation in the second round of assessments remains voluntary. Staff has commenced its contacts with jurisdictions for second round assessments. While the number of assessments will be lower in FY2005 than originally planned, in some cases assessments were postponed to allow for the delivery of TA (see Section C). The first assessments are scheduled for Cyprus in March 2005 and Panama later in 2005. Gibraltar has agreed to an assessment in early 2006 (see Table 5, Appendix III). Staff is in the process of contacting other jurisdictions and plans to undertake five Module 2 or risk-focused assessments in financial year 2006. Staff is updating a list of jurisdictions classified by the size and type of cross-border activity. Some jurisdictions with insignificant cross-border activity will be subject to off-site monitoring only, and additional jurisdictions are being considered for assessment (see Table 5).

9. During the second round of assessments, priority will be given to assessing (1) progress in addressing weaknesses identified in the first round of assessments; (2) relevant areas not previously assessed; and (3) cooperation and information sharing arrangements. Reports will identify shortcomings noted in earlier assessments and the actions taken by the authorities to address these shortcomings. Assessments for banking supervision and AML/CFT would be updated, as would, were there is significant activity, those for insurance and securities supervision. Assessments will take account of revisions in the standards. The FATF Recommendations were revised in 2003 and a ninth Special Recommendation on Terrorist Financing added in 2004, and the IAIS Core Principles were revised in October, 2003 to include, in particular, the supervision of reinsurance. IOSCO has developed an assessment methodology whose use has only recently started. The Basel Core Principles are also in the process of revision. More intensive offsite monitoring of activities will take place through the information framework described in Section III.B.

10. The assessments will also give significantly increased attention to cooperation and information exchange. While cooperation and information sharing have always been a major concern in the international and offshore financial center context, its smooth functioning is of increasing importance (See Section D). Going forward, therefore, reports on jurisdictions with international and offshore financial centers (IOFCs) will include a dedicated section bringing together the implications for cooperation and information exchange in each of the sectoral assessments.

B. Transparency and Monitoring of OFC Activities and Supervision

11. At the November 2003 Board meeting, Directors supported transparency through circulation of the Module 2 main report to the Board, and staff’s working with OFCs to improve information dissemination. The monitoring of OFC activities and compliance through, inter alia, maintenance of information on the main activities in OFCs was also endorsed. In response, the staff has developed an Information Framework to provide (1) a common template that jurisdictions can use in their minimum dissemination efforts, and (2) a tool for the Fund to monitor developments offsite.

12. The information framework consists of data on structural and activity indicators. The data cover the banking and insurance industries and collective investment schemes, as well as information on the number of company and trust service providers, and two statistical indicators of financial sector contributions to the economy. A description of the framework can be found in the supplement to this Board paper and will be published on the Fund’s website (see Supplement 1). It also requests that IMF assessment reports and basic laws and regulations be disseminated. Optional data consists of a small subset of the financial soundness indicators (FSIs) that the Fund has asked a number of jurisdictions to supply in June 2006 under the Coordination Compilation Exercise for FSIs, and additional data on insurance.

13. The information framework has been developed in close consultation with offshore and onshore supervisors. Drafts of the framework were circulated for comments to offshore and international financial centers in March and July 2004, and a revised version of the framework was presented at the second annual IMF roundtable for offshore and onshore supervisors and standard setters in November 2004. In particular, in response to comments, the revised version made the FSI elements optional; it also allowed for the possibility that, where financial activity in the banking, insurance, and securities sectors is below a threshold level, jurisdictions could choose to submit only a subset of data to the Fund.

14. Participants at the roundtable agreed to phase in implementation of the proposed framework on a pilot basis. While the representatives from the offshore and international financial centers emphasized their willingness to cooperate, several participants underlined the need for a level playing field among designated offshore centers and major jurisdictions. Staff has compared the data recommended for dissemination in the framework to that published by a sample of advanced economies. Most of the information requested for dissemination as part of the Information Framework pilot is already made publicly available by the advanced financial centers not monitored in the program.7

15. Participants also noted the technical difficulties in implementing the framework. Staff further revised the framework to clarify the modalities, the definitions, and the instructions for the compilation of the data, and will arrange a workshop in spring 2005 to address data compilation and technical issues in implementing the framework.

16. The final version of the Information Framework was forwarded in December 2004 to the 46 jurisdictions in Tables 2 and 3 inviting their participation. Jurisdictions were requested to confirm their participation by end-January 2005. Twenty seven jurisdictions have responded so far. Twenty-three have indicated an interest in participation, although three of these questioned their classification as OFCs, or noted that their offshore activities had been, or were being, phased out. One jurisdiction reserved the right to withdraw if similar transparency proved unavailable for major jurisdictions, and another agreed conditional on participation by a significant number of jurisdictions. Three jurisdictions have declined to participate either because they participate in other Fund initiatives, or because their data are already available from other sources. One jurisdiction indicated that it would take part only if all other international financial centers and neighboring countries did so. Staff will have an opportunity to discuss these issues with the jurisdictions at the third annual roundtable planned for autumn 2005.

17. Participants were also invited to provide initial responses, which could be partial, by June 2005, for end 2004 data, with full implementation aimed for mid 2006, for end 2005 data. The FSI component of the framework follows the schedule for implementation of the FSI Coordinated Compilation Exercise. The progress with implementing the pilot will be reviewed at the roundtable. Staff will follow up with jurisdictions to encourage participation. Executive Directors are also requested to encourage jurisdictions to participate.

C. Technical Assistance in Collaboration with Bilateral and Multilateral Donors

18. Directors have indicated that TA should focus on those OFCs that have the resources and commitment to benefit most, or that experience the greatest shortcomings in complying with international standards. Technical assistance has concentrated on the smaller jurisdictions facing the most significant supervisory challenges, with particular emphasis on AML/CFT, as well as basic banking supervision. Particular areas of concern and statistical issues have also been addressed in a small number of larger jurisdictions.8

19. Technical assistance has been delivered to a range of OFCs. Eight larger jurisdictions received TA in specialized areas, including securities supervision, corporate governance of financial institutions, regional training of trainers for AML/CFT, and statistics. Ten smaller jurisdictions in Africa, the Caribbean, and the Pacific received TA in AML/CFT legislation and supervision, banking supervision, insurance supervision, financial intelligence unit (FIU) formation and operation, and the training of criminal justice officials. In response to both a need demonstrated by the assessments, and requests from jurisdictions, specialized training for AML/CFT supervision in the insurance sector has been developed and is being delivered through regional workshops. A stock-taking of AML/CFT TA delivered to the Pacific island countries is currently underway and will be used for planning future delivery.9

20. As part of STA’s ongoing work to improve the statistics available on cross-border positions, specifically for the Coordinated Portfolio Investment Survey (CPIS), staff has visited three jurisdictions with significant cross-border activity to help improve data collection and compilation for the CPIS. In addition, STA hosted a regional workshop attended by 11 jurisdictions. Both annual data on the cross-border holdings of securities by OFCs and data reported by partner countries on the portfolio investment liabilities of OFCs are included in the CPIS database on the IMF’s external website. Work is continuing to improve the coverage of the CPIS with respect to holdings of securities by mutual funds resident in Caribbean OFCs.

21. Going forward, apart from following up on specific assessment results, staff expects to provide TA to strengthen AML/CFT regimes. In addition, TA in insurance supervision, an area with significant shortcomings, has been requested by the jurisdictions. MFD and STA will be working together to assist jurisdictions in providing the data required by the Information Framework. Specialized technical assistance on information sharing issues is also planned. STA will also be increasing their TA on mutual fund statistics in the more advanced financial centers.

D. Collaboration to Improve Cooperation and Information Exchange

22. The fourth element of the current phase of the OFC program approved in November 2003 was collaboration with standard setters and onshore and offshore supervisors to strengthen standards and exchanges of information.

23. Staff surveyed 74 supervisory agencies and FIUs in 2004. The survey aimed to document the volume and types of information commonly shared among supervisors and FIUs and to provide an indication of the obstacles to information exchange encountered by supervisors, as well as to elicit their views on how cooperation could be improved.

24. A two-day conference on cross-border cooperation and information exchange was hosted by the Monetary and Financial Systems Department in July 2004. The conference brought together supervisors from 18 international and offshore financial centers as well supervisors from 9 major home jurisdictions and representatives of the standard setters from the four areas assessed in the OFC program—the Basel Committee, FATF, IOSCO, and IAIS as well as from the Egmont Group of financial intelligence units. Participants discussed both sectoral arrangements for information exchange and the cross- sectoral or diagonal arrangements (see Appendix IV for conclusions). Conferees encouraged the Fund to take stock of existing arrangements and impediments. Proceedings of the conference will be published in FY2006.

25. Cooperation and information sharing initiatives launched by IOSCO and FATF are being followed by staff. 10 IOSCO is documenting jurisdictions with whom IOSCO members have experienced difficulties in information exchange. IOSCO will undertake a confidential dialogue with the identified jurisdictions with a view to assisting them in meeting the IOSCO principles of information exchange. FATF has asked members to document repeated country-specific problems arising from requests for international cooperation. These cases were discussed by the February 2005 FATF plenary meeting. FATF, as well as the relevant FATF-style regional bodies, will contact the identified jurisdictions and report back to the next FATF plenary.

E. Other Issues

Roundtable Consultations

26. Consistent with Board guidance, a second roundtable for onshore and offshore supervisors and standard setters was held in November, 2004. The meeting, hosted by the BIS in Basel, discussed the Information Framework, cooperation and information exchange, and the enhancement of regulatory regimes. The follow-up roundtable is planned for Autumn 2005 in Asia.

Proposed FSF initiative on monitoring OFCs

27. The Financial Stability Forum (FSF), whose initial 2000 listing of IOFCs predated the Fund’s program, has indicated its intention to continue to monitor OFCs. The exact modalities will be discussed at the FSF meeting in March 2005.