Review of Financial Regulation in the Caribbean Overseas Territories and Bermuda

Review of Financial Regulation in the Caribbean Overseas Territories and Bermuda — Bermuda

2 Methodology

The UK Government White Paper "Partnership for Progress and Prosperity: Britain and the Overseas Territories" ("the White Paper")[1] was presented to the UK Parliament in March 1999.

The White Paper recognised that the international financial service industry has grown dramatically in recent decades and that a significant number of the Overseas Territories have developed successful offshore financial sectors and so diversified their economies. The White Paper further commented that it was essential for the future of the financial services sector that the Overseas Territories reputation for honest administration and probity be preserved and enhanced.

The White Paper stated that development of sizeable financial sectors brings risk of abuse and that as markets develop and techniques for laundering money, fraud, tax evasion and regulatory abuse evolve so financial regulatory systems must improve, be updated and be responsive to ever tighter international standards.

The White Paper further stated that the Caribbean Overseas Territories in particular are a potential target for money launderers because of their offshore financial business, their proximity to major drug producing and consuming countries and, in some cases, their inadequate standard of regulation and strict confidentiality rules. The White Paper also stated that the Territories are also at risk from attempted fraud and that failure to tighten regulation could affect the stability of and confidence in financial markets. The White Paper emphasised the importance of the Overseas Territories meeting accepted international standards. To assess progress made in this area, it required an in-depth independent review to be undertaken by regulatory experts. This review was also to make recommendations as to how to deal with any issues outstanding.

2.1.2 Development of the review process

Following the publication of the White Paper, a Steering Committee was formed. This Committee comprised representatives of the Foreign and Commonwealth Office ("FCO"), the Treasury, the Financial Services Authority and the Governments of the Overseas Territories.

The Steering Committee approved the Terms of Reference ("TOR") for this review, together with Guidance Notes on international standards and good practice relating to the areas under review. We understand that the guidance on accepted international standards in financial regulation ("the Guidance Notes") contained within the TOR was arrived at following a process of detailed consultation and discussion between representatives of the Overseas Territories, the FCO, HM Treasury and the UK Financial Services Authority. These are attached in Appendix 1.

The Guidance Notes represent good practice. The Overseas Territories have therefore chosen to be assessed against standards which, in a number of areas (such as company and trust service provision), are not applied in a number of major centres. This approach demonstrates the commitment of the Overseas Territories in seeking to ensure that financial regulation in these jurisdictions will eventually meet high standards. As such they are providing a powerful role model to other offshore centres.

The Guidance Notes do not prescribe how particular standards should be achieved; rather, the Overseas Territories are left to decide for themselves how best to achieve the standards laid down in them.

On 20 December 1999 we were appointed by the FCO, acting on behalf of the Steering Committee, to undertake the review of financial regulation referred to above.

The review covers Anguilla, Bermuda, the British Virgin Islands ("BVI"), the Cayman Islands, Montserrat and the Turks & Caicos Islands ("TCI") (referred to collectively as the Overseas Territories). The White Paper covers a wider number of locations (such as Gibraltar) but this review is restricted to these six Overseas Territories.

The purpose of the review has been to assess the Overseas Territories' performance against international standards and good practice, and to make recommendations for improvement where any territory falls below those standards.

2.2 Scope of the review

The scope of the review was as follows:

In relation to the regulation of financial services activity

List separately the type and composition of offshore financial services business in each Overseas Territory.

Ascertain what legislation, regulations, rules, guidance, systems and procedures (statutory or otherwise) govern the regulation and supervision of the:

- Banking sector
- Insurance sector
- Securities sector (including mutual funds and stock exchanges).

Assess the monitoring, supervision and regulation of activity as well as the enforcement of rules, regulations and laws.

Evaluate to what extent arrangements in the Overseas Territories meet the standards advocated by the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors (IAIS) and the International Organisation of Securities Commissions (IOSCO).

Consider the adequacy of the system of supervision relative to the objectives of Overseas Territories' financial services regulation.

Comment on the existence and adequacy of depositor and investor protection schemes.

Determine whether further action is required by any territory in order to meet the standards set out in the Guidance Notes and prioritise recommendations.

In relation to the regulation of companies, partnerships and trusts

Ascertain the means available to regulators and law enforcement agencies to obtain details about the beneficial ownership of assets controlled by companies, partnerships and trusts.

Detail the type of information available on the activities of companies, partnerships and trusts.

Determine whether the regulatory mechanisms in place are sufficient to meet international standards.

Consider whether further action is required by any Overseas Territory to meet the standards required and prioritise recommendations.

In respect of independent regulatory authorities

Evaluate to what extent regulatory authorities comply with accepted international standards advocated principally by Basel, IOSCO, the Offshore Group of Banking Supervisors (OGBS) and IAIS.

In particular, evaluate whether regulatory authorities are accountable, independent and free from business and political influence and properly staffed and budgeted for with an independent source of income.

Determine whether the relevant authority is detached from the marketing of financial services and, where this is not so, assess any impact this may have on the ability of the regulatory authority to regulate the sector objectively.

Assess to what extent each regulatory authority possesses the necessary powers and uses them effectively to: set standards, rules, guidance and to make proposals for legislation relating to all financial activity under its control; grant, suspend, and withdraw licences; monitor, supervise, investigate and regulate activity; co-operate with requests for assistance from foreign authorities; enforce rules, regulations and laws by taking enforcement action; and the extent to which they can liaise with law enforcement authorities in the sharing of information.

Consider which activities fall under the responsibility of the regulatory authority and whether the regulatory net covers all financial activities.

Consider what legal advice is available to the authority and its effectiveness in helping the Overseas Territory's government to regulate the sectors.

In relation to international co-operation

Evaluate the legislation, framework, systems, procedures (statutory or otherwise), rules, regulations, guidance and safeguards for the ability of the Overseas Territory's law enforcement and regulatory authorities to co-operate with requests for assistance from foreign authorities.

Ascertain what legal advice is available to regulatory and law enforcement authorities in the Overseas Territory, and determine effectiveness in helping the Overseas Territory's government to co-operate in these areas.

Determine whether further action is required by any territory in any of these areas, and the relative priority of such action.

Consider whether there are effective "gateways" provisions in place concerning co-operation between regulatory authorities as well as the Overseas Territory's powers to obtain information, including by compulsion, the ability of foreign authorities to take voluntary testimony from the Overseas Territory's residents and the Overseas Territory's ability to safeguard the confidentiality of information provided by foreign counterparts. In addition, determine whether there are any provisions governing conditions under which information may be passed to overseas jurisdictions and whether effective memoranda of understanding exist (where required to underpin co-operation).

Assess the extent to which the Overseas Territory's law enforcement authorities can obtain evidence on behalf of their foreign counterparts and exercise other available mutual legal assistance powers, stating the mechanisms and the Overseas Territory's authorities involved.

Assess the Overseas Territory's ability to assist foreign authorities in tracing, freezing and confiscating proceeds even if the underlying conduct takes place outside the Overseas Territory.

Assess the effectiveness of mutual legal assistance treaties with the USA where applicable and provide the basic volume of requests for assistance made and received.

Assess powers to assist foreign law enforcement authorities in investigating all crimes before criminal proceedings have been instituted.

Assess the ability to safeguard the confidentiality of information provided to Overseas Territory's law enforcement authorities.

Assess whether effective memoranda of understanding exist, where required, to underpin co-operation.

Evaluate whether there is effective co-operation between law enforcement authorities and financial regulators both domestically and abroad.

Consider the ability of the Overseas Territories' regulatory and law enforcement authorities to determine the beneficial ownership of companies, trusts and partnerships.

In relation to measures to combat money laundering

Establish what legislation, framework, systems and procedures (statutory or otherwise) exist in the Overseas Territories to combat money laundering and types of offences caught by the legislation.

Determine which, if any, fiscal offences committed in the jurisdiction or overseas constitute a predicate offence for the purposes of money laundering.

Evaluate the effectiveness and adequacy of those arrangements in terms of how they meet the applicable international standards.

Provide specific consideration to the offences considered predicate for the purposes of money laundering legislation.

Consider whether the Overseas Territories' have regulatory legislation in addition to the principal money laundering offences and, if not, whether guidelines and/or codes of practice exist (statutory or otherwise).

Consider the Overseas Territories' systems for reporting suspicious transactions and identifying customers, the institutions obliged to report, how reports are dealt with and within what timeframe.

Consider how this information is disseminated and shared with foreign counterparts.

Evaluate the ability of financial intelligence units or their equivalent to deal with suspicious transactions.

Determine to what extent the Attorney-General's Chambers and judiciary are resourced and capable of handling the volume and types of cases necessary to enforce the money laundering laws.

2.3 Project governance

2.3.1 The Steering Committee

The Steering Committee played a key role in setting the parameters for and guiding the conduct of the review by its involvement in:

agreeing the TOR and benchmark standards to be applied by the review team prior to its appointment;

offering guidance over the detailed review process through a series of Steering Committee meetings which took place at key stages in the review process; and

agreeing the format and reviewing the content of this report and providing comment as appropriate.

The responsibility for the opinions expressed, is however, a matter for KPMG.

2.3.2 The Strategic Team

In undertaking the review, KPMG utilised a Strategic Team composed of former senior regulators from a number of different jurisdictions, as well as its own partners and staff. The involvement of these individuals enabled the assessment better to take into account how the standards are implemented in practice on an international basis.

Members of the Strategic Team have had significant involvement in the setting of international standards as well as their implementation. The team included a former Chairman of IOSCO's Technical Committee, the Director of Regulation at Lloyd's of London, a former Deputy Director of the United States Securities and Exchange Commission of International Affairs, a former executive Director of the Hong Kong Securities and Futures Commission and the former Chief Executive of the Isle of Man Financial Supervision Commission.

The external members of the Strategic Team provided advice and guidance to KPMG, particularly during the early stages of the project and through the initial drafting of this report. The role of the external members of the Strategic Team was advisory, however, and the analysis and recommendations in this report are the responsibility of KPMG.

2.3.3 Responsibility for this report

This report has been prepared by the UK firm of KPMG. Although we have associated firms in the Overseas Territories, they have not been involved in the preparation of this report, nor should any responsibility for any of the opinions in this report be attributed to them.

2.4 Approach to the review

2.4.1 Structure of the report

The individual sections of the report are generally divided into a number of parts, as follows:

an introduction, giving a broad outline of the international standards and/or good practice against which our assessment is made;

a description of the nature and scale of the activity in the jurisdiction;

a factual assessment produced in conjunction with the Overseas Territory which has been formally confirmed by them as accurate; and

a section covering the issues arising from our analysis, together with recommendations we consider appropriate to remedy any deficiencies identified.

2.4.2 Benchmarks

In determining the appropriate international standards and good practice we have, as instructed in the TOR, used the Guidance Notes.

In the areas of banking, insurance, securities/investments and stock exchanges there are established international standards by which compliance can be assessed. Similarly, with respect to anti-money laundering measures, the recommendations of the Financial Action Task Force and the Caribbean Financial Action Task Force provide benchmarks.

However, in other areas, such as the provision of company and trust services, there are no internationally accepted standards. The Guidance Notes have instead been based upon what has been agreed as good practice.

In accordance with the TOR we have, in conducting this review, taken due notice of the recommendations made in the recent Home Office report on the Review of Financial Regulations in the Crown Dependencies. However, the terms of reference for the two reviews are substantially different in that benchmark standards were not defined in the Home Office review and hence there was no requirement to make an assessment against them.

Accordingly, in framing our recommendations we have assessed compliance with the benchmark standards set out in the TOR.

2.4.3 Phases of the review

2.4.3.1 Legislative review

At the outset of the review the Overseas Territories provided us with copies of relevant legislation and regulations.

2.4.3.2 Pre-visit questionnaires

Prior to commencing our on-site reviews, we prepared a pre-visit questionnaire for completion by each of the Overseas Territories. The questionnaire covered the areas required by the TOR. A draft questionnaire was reviewed by the Steering Committee and their comments were incorporated prior to issue. Comments were also invited and received from other parties with experience in relevant areas, for example the FATF in respect of money laundering.

Following this consultation the questionnaire was issued and responses received from the Overseas Territories. These responses were analysed by us prior to the commencement of the on-site review.

2.4.3.3 On-site review programme

The analysis of questionnaire responses was used to prepare a work programme for the on-site review. This mechanism was important in ensuring that the on-site stage of the work was completed to a consistent standard across all the Overseas Territories.

2.4.3.4 On-site review

The on-site review was undertaken in March and April 2000. It comprised in excess of twenty-six man weeks in the Overseas Territories. A total of eight staff, together with two members of the Strategic Team, were deployed across the Overseas Territories. Each consultant was allocated a specific area for review in line with their sector specialism. Work was conducted in line with the on-site review programmes outlined above, adjusted where necessary for issues identified on-site.

2.4.3.5 Meetings with third parties

As part of the review process we had extensive discussions and meetings with third parties (in the UK, the Overseas Territories and elsewhere) who had experience of, or an interest in, the jurisdictions under review. These third party discussions were particularly pertinent in the areas of international co-operation and anti-money laundering measures.

Meetings with the third parties referred to above included:

The United States Securities and Exchange Commission ("SEC");

The United States Department of Justice ("DoJ");

Representatives of the Overseas Territories;

The United States Federal Reserve;

The White Collar Criminal Investigation Team ("WCCIT");

The Overseas Territories Regional Criminal Intelligence System ("OTRCIS");

The Financial Services Authority ("FSA");

The National Criminal Intelligence Service ("NCIS"); and

The Ontario Securities Commission ("OSC").

2.4.3.6 Findings from previous reviews

Our review also considered the results of previous reviews of sectors of the various Overseas Territories. These included:

the 1992/3 Bank of England "Report on the arrangements for the supervision of offshore banks", covering Anguilla, the BVI, Montserrat and the TCI;

the CFATF mutual evaluation of Bermuda, the BVI, the Cayman Islands and the TCI; and

the 1993 Sullivan Reports on the regulation of insurance in Anguilla, the BVI, the Cayman Islands, Montserrat and the TCI.

In addition to the above, we have used other information sources including promotional and advisory material issued by the Overseas Territories and others.

2.4.3.7 Reporting

Whilst we have sought to give due credit for regulatory achievement wherever possible, it should be noted that our reports are phrased on an exceptions basis. We have identified issues and made recommendations in those areas where we consider they are required. The nature of our issues and recommendations tend to reflect the stage of regulatory development reached by the jurisdiction in question.

Those jurisdictions with more mature financial sectors and better developed regulation have tended to generate more detailed recommendations.

In those jurisdictions where we have identified a more significant lack of basic regulatory structures, our recommendations are, necessarily, focused on the major issues to be addressed. There will inevitably be many subsidiary issues which will need to be considered following action on those which are more fundamental. It is impossible to anticipate these until those more significant issues have been addressed.

2.4.3.8 Confirmation of factual accuracy and discussion of findings

Following the on-site reviews, we issued initial draft reports in May 2000. We then visited each of the Overseas Territories over a two-week period at the end of May.

This second visit was designed to give the Overseas Territories the opportunity to comment on findings and confirm the factual accuracy of the initial draft reports. Comments received during the course of this visit were confirmed (where they related to issues of factual accuracy) and considered. Our draft reports were adjusted where the review team considered this to be appropriate.

Following these second on-site visits, further draft reports were prepared. These were issued on 17 July. They were also discussed with the Overseas Territories who (along with the Steering Committee) were again given an opportunity to comment. Written as well as oral comments were received from the Overseas Territories and others; all have been carefully considered.

The Overseas Territories have provided formal written confirmation of the factual accuracy of the relevant parts of our reports.

2.4.4 Regulatory arbitrage

Regulatory arbitrage is the selection of a jurisdiction of operation on the basis of the regulatory legislation and structure in place. Regulatory arbitrage tends to result in persons who, for their own reasons, wish to avoid regulation selecting less regulated jurisdictions. Consequently, less regulated jurisdictions often become a target for money launderers and fraudsters.

All the jurisdictions have expressed a commitment to achieve the required international standards in financial services regulation envisaged by the White Paper. We consider that it should be recognised that other offshore centres, not being part of the Caribbean Overseas Territories and Bermuda, who also provide financial services and who may be regarded as competitors of the Overseas Territories, may not share the same level of commitment.

To prevent the possibility of regulatory arbitrage, even on a short term basis, the adoption of international standards should be seen as a global issue and not simply one of relevance to the Overseas Territories. Therefore, other jurisdictions should be encouraged to ensure that they introduce similar improvements and thereby facilitate a level playing field between jurisdictions.

The work of groups such as the Financial Stability Forum in raising global standards will be of importance in this area and should continue to receive strong support from both the UK and the Overseas Territories.

2.4.5 Scope limitations and other related matters

Our terms of reference do not provide for us to verify all the factual matters in this report, which would be a major and time consuming task. Instead, as agreed with the Steering Committee and set out in the TOR, we asked the Overseas Territories to provide us with information (including copies of relevant legislation) and to check various drafts of our reports for factual accuracy. This they have done. It should be appreciated that any further information not provided to us might alter our conclusions.

In a number of instances, sector information (for example total funds under management and analyses of a jurisdiction's main sources of business) is not collated by the jurisdiction and therefore was not available to us. In other cases available information is dated.

There was also, on occasion, a lack of available statistical information, particularly in relation to co-operation provided by the Overseas Territories to other jurisdictions. It appears that either this information is not available in a format that is retrievable to provide the statistics necessary, or it is not kept at all. The absence of such information has made certain comments on the level of co-operation provided by the Overseas Territories impossible to verify or refute. Recommendations to resolve this matter have been made in the report.

This report has been prepared for the sole purposes of a review of Financial Regulation in the Caribbean Overseas Territories and Bermuda for the Steering Committee comprising representations from the Foreign and Commonwealth Office, HM Treasury, Financial Services Authority and Governments of Bermuda, Cayman Islands and Anguilla ("the client"). It has been designed to meet the agreed requirement of the client and particular features of the engagement of KPMG determined by the client's needs at the time. This report should not therefore be regarded as suitable to be used or relied on by any person or organisation other than the client or for any other purpose or in any other context. Any person or organisation other than the client who chooses to rely on this report will do so at its own risk. KPMG will accept no responsibility or liability in respect of this report to any third party.

2.4.6 Timescale

Whilst we have noted areas where we consider action is required as a priority we have not set out specific timescales. We consider that the precise timescales are best determined bilaterally between the individual Overseas Territories and the Foreign and Commonwealth Office.

2.4.7 Acknowledgements

We are most grateful for the significant amount of time spent by representatives of the Overseas Territories, Her Majesty's Government and the other organisations whom we met.

1 Command 4264. HMSO £12. Back



*We welcome your comments on this site.*	Prepared 27 October 2000