The continuing impact of international assessments on financial centres

1
The continuing impact of international
assessments on financial centres

• Oxford Symposium
• 5th September 2005
• Marcus Killick

2
International Assessments

• Financial Stability Forum
• IMF
• Financial Action Task Force
• Other International Standard Setting Bodies

3
Part 1

• The Financial Stability Forum (FSF)

4
Background to FSF

• Established through a G-7 meeting in 1999 to
  promote international financial stability through
  information exchange and international
  co-operation in financial supervision and
  surveillance.
• The FSF aims to co-ordinate the efforts of its
  Members in order to promote international
  financial stability, improve the functioning of
  markets, and reduce systemic risk.
• Three initial working parties were created, one
  of which was to look at Offshore Financial
  Centres

5
Report of the Working Group on Offshore Financial
Centres (OFCs) (5 April 2000)

• This report was produced under the terms of
  reference for the Working Group created to
  consider OFCs
• The OFC working Group were asked to
• Consider the uses of OFCs and the possible role
  they have had or could play in posing threats to
  the stability of the financial system
• Evaluate the adherence of OFCs with
  internationally accepted standards and good
  practices, and
• Make recommendations , including to enhance
  problematic OFCs observance of international
  standards

6
Methodology

• A core element of the methodology was a survey
  which was sent to the supervisors in major
  financial centres and the supervisors in
  financial centres with significant offshore
  activities
• As such the report paid significant attention to
  external perceptions
• Meeting with major internationally active
  financial institutions together with regulators
  and other relevant groups. There were no on-site
  visits to the jurisdictions themselves
• Emphasis on other jurisdictions views the centres
  being assessed rather then objective testing

7
Overall Findings

• The report was designed for assisting in the
  setting of priorities and in encouraging OFCs to
  take appropriate steps to improve the quality of
  supervision and degree of co-operation
• It was not designed for identifying OFCs for
  sanctions or other punitive action
• Offshore financial activities are not inimical to
  global financial activity provided they are well
  supervised and supervisory authorities
  co-operate, however
• OFCs that are unwilling or unable to adhere to
  international standards create a potential
  systemic risk

8
Specific concerns(These did not relate to every
OFC under review)

• The level of cross border co-operation on
  information exchange
• The quality of underlying supervision
• The lack of due diligence when financial
  institutions are formed
• The lack of availability of timely information on
  beneficial ownership
• The lack of comprehensive and timely dataon OFCs
  financial activities impedes effective monitoring
  and analysis of capital movements.

9
Jurisdictional classes

• Following the survey the jurisdictions reviewed
  were grouped into three categories reflecting
  their perceived quality of supervision and
  perceived degree of co-operation
• The categorisation did not constitute judgements
  about any jurisdictions adherence to
  international standards nor that the
  categorisation applies to all sectors of the
  financial system within the OFC

10
Jurisdictional classes

• Group I jurisdictions would be generally
  perceived as having legal infrastructures and
  supervisory practices and/or a level of resources
  devoted to supervision and co-operation relative
  to the size of their financial activities, and/or
  a level of co-operation that is largely of a good
  quality and better than that in other OFCs
• Group II jurisdictions would be generally
  perceived as having legal infrastructures and
  supervisory practices and/or a level of resources
  devoted to supervision and co-operation relative
  to the size of their financial activities, and/or
  a level of co-operation that is largely of a
  higher quality than Group III but lower than
  Group I
• Group III jurisdictions would be generally
  perceived as having legal infrastructures and
  supervisory practices and/or a level of resources
  devoted to supervision and co-operation relative
  to the size of their financial activities, and/or
  a level of co-operation that is largely of a
  lower quality than Group I.

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Group I and II Jurisdictions

• Group 1
• Dublin
• Guernsey
• Hong Kong SAR
• Isle of Man
• Jersey
• Luxembourg
• Singapore
• Switzerland

• Group II
• Andorra
• Bahrain
• Barbados
• Bermuda
• Gibraltar
• Labuan (Malaysia)
• Macau SAR
• Malta
• Monaco

12
Group III Jurisdictions

• Anguilla
• Antigua and Barbuda
• Aruba
• Belize
• British Virgin Islands
• Cayman Islands
• Cook Islands
• Costa Rica
• Cyprus
• Lebanon
• Liechtenstein 
• Marshall Islands

• Mauritius
• Nauru
• Netherlands Antilles
• Niue
• Panama
• St Kitts and Nevis St Lucia
• St Vincent and the Grenadines
• Samoa
• Seychelles
• The Bahamas
• Turks and Caicos
• Vanuatu

13
Recommendations

• Included
• That the IMF take responsibility for developing,
  organising and carrying out a process for
  assessing OFCs adherence to relevant
  international standards
• That a survey of banking, insurance and
  securities supervision and degree of co-operation
  is
• That the IMF undertake the assessment recommended
  by FSF

14
Current Position

• The FSF has announced that the 2000 list has
  served its purpose and is no longer operative
  (Press release of 11th March 2005)
• the FSF has stated that it is committed to a
  process, based on objective criteria and due
  process, to promote further improvements in OFCs.
  Such a process will include a set of initiatives
  by its members at both international and national
  levels and appropriate steps by the FSF
• This multi-tiered process will encompass
• Actions by standard setting bodies
• IMF Assessments
• Initiatives by National Authorities
• Provision of Technical Assistance, and
• Work of the FSF itself
• The FSF will review the position again in 2007

15
Part 2

• International Monetary Fund

16
Background

• The FSF initial 2000 listing of OFCs led to an
  IMF assessment programme of OFCs, which commended
  in 2001,
• The programme consisted of an initial fact
  finding questionnaire followed by an on site
  visit.
• Jurisdictions have been assessed either through a
  Module 2 assessment or under the Financial Sector
  Assessment Program (FSAP)
• Of the 42 assessments 25 have been under Module 2
  and 15 have (or will be done under FSAP)

17
Module 2 Assessments

• A Module 2 assessment evaluates the compliance of
  supervisory and regulatory systems with
  international standards in the banking sector,
  and, if significant, in the insurance and
  securities sectors. It also assesses the
  effectiveness of the anti-money laundering and
  combating the financing of terrorism regime.
• Standards of the Basel Committee on Banking
  Supervision (BCBS), the International Association
  of Insurance Supervisors (IAIS), the
  International Organization of Securities
  Commissions (IOSCO), and the Financial Action
  Task Force (FATF) Recommendations are the
  yardsticks used.

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Jurisdictions assessed under Module 2

• Aruba
• Cyprus
• Gibraltar
• Macao
• Panama
• Andorra
• Anguilla
• Bahamas
• British Virgin islands
• Guernsey
• Jersey
• Isle of Man
• Liechtenstein
• Labuan

• Marshall islands
• Monaco
• Montserrat
• Netherlands Antilles
• Palau
• Samoa
• Seychelles
• Vanuatu
• Belize
• Bermuda
• Cayman Islands
• Turks and caicos islands
• Cook islands

19
FSAP Assessments

• Assessments under the FSAP, in addition to
  evaluating observance of relevant financial
  sector standards and codes, consider risks to
  macroeconomic stability stemming from the
  financial sector and the capacity of the sector
  to absorb macroeconomic shocks

20
Jurisdictions assessed under FSAP

• Ireland
• Lebanon
• Costa Rica
• Luxembourg
• Switzerland
• Barbados
• Hong Kong
• Malta

• Mauritius
• Singapore
• Dominica
• Grenada
• St Kitts and Nevis
• St Lucia
• St Vincent and the Grenadines
• Antigua and barbuda

21
Current position

• As at March 2005, The first phase of the OFC
  assessment program was virtually complete.
  Forty-one of the 44 jurisdictions contacted at
  the inception of the program had been assessed.
• Of the remaining three Bahrain remains to be
  addressed whilst Nieu and Nauru are receiving
  technical assistance
• All but one jurisdiction has published or
  indicated their intention to publish their
  assessment reports.

22
Findings

• Compliance with standards in OFCs is, on average,
  better than in other jurisdictions assessed under
  the FSAP,
• For example 50 percent of offshore jurisdictions
  comply with every principle and recommendation
  directly concerned with cooperation and
  information exchange as opposed to 47 percent of
  other assessed jurisdictions.
• Deficiencies tend to be in the lower income
  jurisdictions.
• Supervisory deficiencies were most frequently
  found to result from inadequate resources and
  skills
• Deficiencies which also 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.

23
Next steps

• In November 2003, the IMF determined 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.

24
Next Steps (Cont)

• The IMF has determined that that it would be
  appropriate to continue periodic monitoring of
  OFCs compliance with relevant international
  regulatory standards. Module 2 assessments every
  45 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).
• Participation in the second round of assessments
  remains voluntary.. (FSF considers jurisdictions
  will be incentivised as participation will draw
  attention to their willingness to cooperate).

25
The next round of reviews

• Cyprus and Panama have already been through the
  second round of assessments
• Gibraltar has agreed to an assessment in early
  2006
• These are concentrating on addressing the
  recommendations made in the first round.
• Some jurisdictions with insignificant
  cross-border activity will be subject to off-site
  monitoring only, and additional jurisdictions are
  being considered for assessment (Brunei, Cubai,
  Botswana, San Marino and Uruguay
• During the second round of assessments, priority
  will be given to assessing weaknesses identified
  in the first round of assessments relevant areas
  not previously assessed and cooperation and
  information sharing arrangements.
• Assessments will take account of revisions in
  international standards. For instance 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.
• The assessments will also give significantly
  increased attention to cooperation and
  information exchange. 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

26
Technical Assistance (TA)

• TA forms a key part of the IMF programme
• IMF consider 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.
• TA 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

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Part 3

• The Financial Action Task Force

28
What is the FATF?

• Intergovernmental body, established by the G-7
  Summit in 1989
• Purpose is to develop and promote policies to
  combat money laundering
• Has developed a set of forty recommendations
  designed to achieve the above
• Original focus was on drug money but this has
  grown to cover the proceeds of all serious
  criminal offences
• FATF have established 40 recommendations (last
  reviewed in 2003) which form the international
  standard in the fight against money laundering
• Following 9/11 Special Recommendations (now
  nine) were added to counter the financing of
  terrorism
• The FATF also produces an annual typologies
  report looking at new money laundering techniques
  and ways to counter them.( (for 2004/05 these
  included Alternative remittance systems, wire
  transfers and terrorist financing techniques)
• FATF has no per se power to enforce its
  recommendations, however recommendation 21 allows
  it to seek its members take countermeasures
  against jurisdictions identified as posing a
  particular money laundering or terrorist threat.

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FATF and Offshore

• FATF had become increasingly concerned as to the
  use of offshore centres in the laundering of
  criminal proceeds
• Concern centres around
• Offshore financial institutions and their
  regulation
• Offshore companies
• Inadequate anti money laundering legislation
• Lack of information sharing and other
  co-operation (eg because of bank secrecy laws)
• Ability of persons to operate with effective
  anonymity
• FATF therefore agreed on a process of identifying
  non-cooperative jurisdictions with a view to
  taking action against them to encourage them into
  compliance

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Report on non-cooperative countries and
territories (NCCTs) February 2000

• Identified detrimental rules and practices that
  exist in noncooperative countries and
  territories
• Establishment of 25 criteria against which the
  jurisdictions are to be measured. Criteria based
  on FATFs 40 Recommendations
• Identification of possible non-cooperative
  jurisdictions. Focus on those whose character or
  size present the greatest risk to undermining
  existing anti money laundering regimes

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Review to identify NCCTs- Methodology

• Gathering of relevant laws and regulations,
  mutual evaluation reports, related progress
  reports and self assessment surveys
• Analysis of the above with respect to the 25
  criteria
• A draft report was then sent to the relevant
  jurisdiction for review and comment
• Specific further questions were directed to any
  jurisdictions where considered necessary for
  clarification of any issues
• Open face to face discussions then took place
  with the jurisdictions and FATF and
• Draft reports produced.
• Reports were then discussed with the respective
  juisdictions
• Finalised reports were discussed at FATF Plenary
  session

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Findings

• June report summarised findings on 29
  jurisdictions
• Some summaries (ie those who were being placed on
  the blacklist) detailed the criteria which the
  jurisdiction met (meeting a criteria meant the
  jurisdiction was non-cooperative in that area).
  Others (ie those of jurisdictions who were not on
  the blacklist )simply made a generalised comment
• All reviewed jurisdictions had some areas for
  improvement
• Further jurisdictions added in a follow up review
  in 2001.
• Since 2001, the FATF has not reviewed any new
  jurisdictions under the NCCT process.
• Of the 23 jurisdictions designated as NCCTs in
  2000 and 2001, only three remain.( Myanmar,
  Nauru, and Nigeria)

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Areas identified as being of particular concern

• The practice of some jurisdictions of allowing
  indirect reporting of suspicious transactions
• The use of introducers
• Difficulty in establishing beneficial ownership
  of some legal entities
• The lower verification and disclosure
  requirements imposed on International Business
  Companies
• The lack of application of the know your customer
  rules to clients in existence prior to the
  requirements coming into force

34
Further action

• In accordance with FATF Recommendation 21 FATF
  recommended that financial institutions should
  give special attention to business relationships
  and transactions from blacklisted jurisdictions.
• The FATF has also introduced a tour de table
  mechanism where members and observers will be
  able to raise issues and present cases where
  international cooperation has been difficult.
• FATF has offered technical assistance to those on
  the blacklist to help them improve their
  legislation, rules and practices

35
Current position

• In 2004 the FATF in conjunction with others
  produced a AML/CFT methodology designed to
  provide a common benchmark against which a
  jurisdictions compliance with 409
  recommendations can be assessed.
• The FATF started a third round of mutual
  evaluations for its members in January 2005
• The FATF is promoting increased transparency and
  co-operation through the open distribution of the
  reports to all FATF members and observers and the
  discussion of the reports in open session in the
  FATF Plenary
• To ensure global consistency, the FATF has agreed
  similar or common processes, documents and
  procedures with all the bodies and organisations
  that produce assessment reports based on the FATF
  Recommendations and the 2004 AML/CFT Methodology.
• The IMF in its latest review of OFTs will use
  the AML/CFT methodology. This will help overcome
  concerns that jurisdictions were not all being
  measured to the same standard.

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Part 4

• Other International Standard setting bodies

37
International Organisation of Securities
Commissions (IOSCO)

• IOSCO was established in 1983 from the
  transformation of its ancestor inter-American
  regional association (created in 1974) into
  aainternational cooperative body
• Its membership stands at 181 members and is still
  growing rapidly. The Organization's members
  regulate more than 90 of the world's securities
  markets
• IOSCO has established its Objectives and
  Principles of Securities Regulation which sets
  out 30 principles of securities1 regulation,
  which are based upon three objectives of
  securities regulation.
• These are
• The protection of investors
• Ensuring that markets are fair, efficient and
  transparent
• The reduction of systemic risk.
• These objectives and principles form the
  benchmark against which IMF assess OFCs
  compliance with international standards of
  investment, mutual funds and securities
  regulation.

38
IOSCO- Mutual Memoranda of Understanding

• IOSCO has expanded its efforts in relation to the
  signing of Multilateral MOU by all IOSCO members.
• Giving the commitment to sign the MMOU will also
  trigger a IOSCO assessment to verify the
  jurisdictions readiness. It is anticipated that
  the process from commitment to acceptance will
  take anytime between nine to eighteen months.
• Problems with jurisdictions will be dealt with
  confidentially between the two parties until such
  time as IOSCO believes there to be a need to
  escalate the process and at which stage it may
  decide to blow the whistle to FSF.
• Target date for all IOSCO members to have signed
  the MMOU is 2010.

39
Basel Committee on Banking Supervision (BCBS)

• RCBS was established at the end of 1974.
  Countries are represented by their central bank
  and also by the authority with formal
  responsibility for the prudential supervision of
  banking business where this is not the central
  bank.
• BCBS formulates broad supervisory standards and
  guidelines and recommends statements of best
  practice in the expectation that individual
  authorities will take steps to implement them
  through detailed arrangements - statutory or
  otherwise - which are best suited to their own
  national systems
• in 1997 BCBS developed a set of "Core Principles
  for Effective Banking Supervision", which
  provides a comprehensive blueprint for an
  effective supervisory system. To facilitate
  implementation and assessment, BCBS in October
  1999 developed the "Core Principles Methodology".
  
• These Core principles form the benchmark against
  which IMF assess OFCs compliance with
  international standards of banking supervision

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Basel Committee - Developments

• A review of the Basel Core Principles is
  presently underway and well advanced. The
  offshore perspective is being catered for
  through the involvement of Hong Kong. There will
  still be 25 principles with a number of the
  existing principles being collapsed into one
  another making way for some new ones.
• The assessment methodology for the revised
  methodology will also be published and will still
  contain essential and additional criteria. The
  final document is expected in Summer 2006.
• The Committee has also worked on revising its
  Corporate Governance paper in light of the OECD
  paper on the issue and this was issued for public
  consultation in July 2005.

41
International Association of Insurance
Supervisors (IAIS)

• Established in 1994, the International
  Association of Insurance Supervisors (IAIS)
  represents insurance supervisory authorities of
  some 180 jurisdictions. It was formed to
• Promote cooperation among insurance supervisory
  authorities
• Set international standards for insurance
  supervision and regulation
• Provide training to members
• Coordinate work with regulators in the other
  financial sectors and international financial
  institutions.
• The IAIS issues global insurance principles,
  standards and guidance
• These standards represent the global benchmark
  against which the IMF assesses insurance
  regulation in the OFCs