• the regulator should be able to take appropriate enforcement action, including disciplinary action, for example by revoking a TSP's licence, as well as to pursue civil and criminal sanctions;

• TSPs should have in place effective anti-money laundering measures, including "know your customer", record keeping and staff training procedures;

• law enforcement and regulatory authorities should be able to ascertain, quickly and efficiently, the settlor, beneficiaries, protector and the custodian (where applicable) of a trust and to obtain a copy of the trust instrument;

• law enforcement and regulatory authorities should be able to access financial information relevant to the activities of trusts administered by a TSP; and

• trustees should be held accountable to the beneficiaries and settlor, and the protector, where applicable, by preparing regular accounts, where appropriate.

As indicated in the section on trusts, the most practical and effective way of deterring the abuse of trusts and ensuring that relevant information is available to law enforcement authorities is through the regulation of TSPs. Therefore, we consider that ensuring compliance with the above international and good practice standards should be a priority for each OT.

Our assessment of the regulation of TSPs in Bermuda and our recommendations concerning enhancements is set out below.

• minimum capital requirement for licensee (in First Schedule);

• duties of licensee;

• investigation of affairs of a trust company and other enforcement powers;

• winding-up of trust companies; and

• ongoing supervision of licensees.

Under Section 11 of the TCA, a licensed trust company is required to keep its own company accounts segregated from the trust accounts. It is not clear that this section actually obliges a trust company to keep trust accounts.

Under Sections 13 and 14 of the TCA, a licensed trust company is required to prepare financial statements each year and to have them audited.

13.3.2  Rules and Regulations

No rules and regulations have been made under the Trust Companies Act. Indeed, the Act does not provide any regulation making powers.

The Proceeds of Crime (Money Laundering) Regulations apply to trust companies and to any other person carrying on trust business.

13.3.3  Guidance

Schedule 1 of the Trust Companies Act sets out minimum criteria for a trust company licence and includes a requirement that the company has adequate insurance. The BMA has issued Guidelines on what insurance cover it considers is adequate within the meaning of the Schedule. Broadly, this can be summarised as follows:

(a)  fidelity insurance, minimum BD$1,000,000 (required);


(b)  trust real property insured to cost of replacement (required);


(c)  errors and omissions, minimum BD$1,000,000 (required); and


(d)  loss of property, forgery, electronic and computer crime, buildings and office contents, computer damage, business interruption, political risk and directors and officers liability (all desirable).

The BMA has not issued any other general guidance to trust companies.

The Guidance Notes on the Prevention of Money Laundering apply to trust companies.

13.3.4  Supervision - systems and procedures

13.3.4.1  Regulatory resources

Day-to-day supervision of trust companies is undertaken by the BMA.

13.3.4.2  Application process

Application for a trust company licence is made to the Minister via the BMA. The licensing process is as follows:

(a)  Application is made to the BMA, which undertakes an examination of the application and vets the beneficial owners of the proposed trust company and its intended management.


(b)  The BMA undertakes such further enquiries and investigations as it considers necessary and passes the application to the Minister with a recommendation.


(c)  The Minister may undertake his own enquiries and will then grant or refuse the licence.

The Minister may not grant a licence to a company unless he is satisfied that the company satisfies the minimum criteria set out in the First Schedule to the TCA. This provides that:

• the objects and powers of the company permit it to carry on trust business;

• the company has a paid up share capital of BD$250,000;

• the company has adequate insurance;

• the company has premises adequate for its business; and

• the company has sufficient personnel with adequate knowledge, skill and experience.

All trust licences we examined were subject to the same conditions, including a condition that the prior permission of the BMA be obtained before any change in beneficial ownership or directors and management (termed "top executive" in the TCA).

Only the Minister can cancel a licence once granted.

13.3.4.3  Ongoing supervision

Regular ongoing supervision of licensed trust companies comprises the following:

(a)  Every licensed trust company is required to provide the BMA on an annual basis with


  (i)  the company's audited financial statements;


  (ii)  a certificate of management in the form provided in Schedule 2 to the TCA; and


  (iii)  an approved auditors' report in the form provided in Schedule 3 to the TCA.


(b)  The BMA holds a prudential meeting at its offices at least once each year with the senior management of each licensed trust company. These meetings are not specifically provided for by the TCA.

There is no on-site supervision.

13.3.5  

Enforcement - systems and procedures

Although the TCA gives the BMA the duty to supervise trust companies, the powers of enforcement are principally vested in the Minister. The main powers of enforcement provided under the TCA are as follows:

(a)  Under Section 15 of the TCA, the Minister has the power to appoint an inspector to investigate and report on the affairs of a trust company.


(b)  Under Section 16, the BMA has the power to require an officer, employee or agent of a trust company to provide it with information concerning the trust company (although not information relating to a particular trust).


(c)  Under Section 17, in certain limited circumstances, an inspector or an officer of the BMA may apply to the Supreme Court for an order that information concerning a particular trust is disclosed.


(d)  Under Section 18, the Minister may direct the BMA to petition the Court for the winding-up of a trust company on the grounds that it is in breach of the Act, or a condition of its licence. There is no power for the Minister to apply to the Court under the TCA for the winding-up of a trust company on the public interest ground.


(e)  Under Section 19, the Minister may give directions to a trust company where he considers that it is carrying on business in detriment of the public interest, its creditors or members.


(f)  Under Section 20, the Minister may on certain grounds cancel a trust company licence.


(g)  Under Section 21, the Minister may on certain grounds vary a trust company licence.

• even if the Code of Conduct is amended to cover trust business, we consider that it is more appropriate for the BMA to regulate all trust service providers to ensure a consistent approach; and

• the BMA as the primary regulator of trust business should have access to relevant information in respect of all trust business.

In conclusion, therefore, we consider that there are very strong arguments in favour of bringing lawyers under the BMA's regulatory scope in respect of their trust business.

We understand the rationale put forward for excluding trust companies that act in relation to a limited number of connected family trusts. However, the BMA currently has no means of ascertaining the nature or extent of the business carried on by private trust companies and, more importantly, has no powers of enforcement available in respect of private trust companies. Furthermore, by permitting private trust companies to use the word "trust" in their company name, albeit limited by the word "private" we consider that third parties could reasonably hold the view that such a company is regulated.

On balance, we consider that private trust companies should be subject to regulation under the Trust Companies Act. We accept that, provided the BMA retains adequate powers of enforcement, such companies could be subject to a "lighter" regulatory touch (including, possibly, lower capitalisation requirements). We do not see it as our role to draw the line; this is a matter for the BMA to consider further.

We therefore recommend that private trust companies be brought within the scope of the legislation, the aim of which should be to:

• enable the BMA, through returns, to monitor the nature and extent of the business carried on by private trust companies;

• ensure that private trust companies are subject to certain fundamental obligations, for example the segregation of trust accounts; and

• provide the BMA with sufficient enforcement powers.

We recommend that the TCA should be amended to permit the BMA to impose a higher level of capitalisation than the minimum specified.

Finally, we recommend that individuals and partnerships including lawyers carrying on trust service provision (for example acting as trustee) should be regulated. Unlike with the IBA, where exempted persons are not subject to the anti-money laundering regulations, all those doing trust business, whether licensed or not, are already subject to the POC regulations.

13.4.3  Regulatory supervision

13.4.3.1  Joint responsibility for licensing and regulation

It is in our view unsatisfactory for the licensing of trust companies and the supervisory powers to vest in different persons or bodies. It is also unsatisfactory that the BMA as the body charged with ongoing supervision is not given the necessary powers of enforcement.

We consequently recommend that the BMA should be made the licensing authority for trust companies and should have all enforcement powers vested in it.

13.4.3.2  Application Procedure

We consider that the Trust Companies Act makes inadequate provision with regard to the application process. The First Schedule sets out minimum criteria for the issue of a licence. Apart from that, the TCA is vague in requiring an application to be accompanied by "such information and documents as the Minister may require" and to be made "in such manner as the Minister may direct". The BMA has issued guidance on what it considers to be adequate insurance but otherwise no forms or formal procedures have been prescribed by the Minister.

Furthermore, essential elements of the application procedure are missing. For example, there is no requirement that the applicant, shareholders, beneficial owners, directors and managers meet the "fit and proper" criteria.

This requirement should also include that all licence holders are subject to "four eyes" control.

We recommend that the TCA should be amended, perhaps to mirror the Bank and Deposit Companies Act, to provide for a robust application process.

13.4.3.3  Ongoing supervision, enforcement and restrictions on licensees

The BMA does not currently undertake regular on-site inspections of licensed trust companies. We consider that, in this respect, ongoing supervision fails to accord with good practice.

We note that the effect of Section 17 of the Trust Companies Act is to prevent the BMA from having access to client files without a Court Order, which can only be granted if the material sought is, or contains, evidence of drug trafficking or money laundering, stealing or other dishonesty affecting trust property or a contravention of a law pertaining to an international agreement binding on Bermuda. In the circumstances, the BMA will not be able to undertake effective on-site inspections of trust companies as it will not be able to check the business undertaken by the licensee.

In this regard, we consider that the legislation fails to meet good practice standards.

The Trust Companies Act falls short of good practice in a number of other areas. For example:

• there is no obligation to seek the permission of the BMA for a change in beneficial ownership although conditions are currently used to create such obligations;

• there is no power to require a higher level of capitalisation than the minimum;

• there are no regular or triggered reporting requirements;

• the Act contains no regulation making powers;

• the BMA does not have the power to "police the perimeter"; and

• the enforcement powers are inadequate.

Although the auditor of a trust company must provide the BMA with a report as in the form of Schedule 3, we consider that this is not sufficient. We suggest that auditors should be required to sign a much more robust report on compliance with the provisions of the Act and upon certain other prescribed matters.

13.4.3.4  Code of practice

We consider that the most appropriate method of meeting good practice standards set out in the Guidance Notes in respect of knowing the identity of the settlor, beneficiaries, protector and custodian is via the regulation and supervision of the service provider.

To facilitate the meeting of these standards, we consider that the regulatory environment should include an enforceable code of practice.

This code of practice should include requirements relating to:

• knowing the identity of the settlor, protector and custodian on an ongoing basis;

• knowing, where possible, the identity of the beneficiaries;

• verifying, so far as is possible, the source of trust assets to ensure they are not of illegal origin;

• ensuring that those who undertake trust work are appropriately trained and competent;

• the delegation of any services provided, including provision of powers of attorney;

• the conduct of trustees provided by licence holders;

• the segregation of trust money and assets; and

• the maintenance of books and records including a copy of the trust deed and other documents relating to the trust.

Where areas in the code are adequately covered by any anti-money laundering regulations then the code may simply make adherence to those regulations a requirement under the code of practice so providing regulatory enforcement powers.

13.4.4  Beneficial ownership

The TOR require us to ascertain the means available to regulators and law enforcement agencies to obtain details of the beneficial ownership of trust assets. We consider that the trust service provider should primarily be concerned with the source of the assets settled into trust. This will require the trust service provider to carry out due diligence to verify the identity of the settlor, protector, custodian and any co-trustees. The trust service provider should keep in Bermuda the following:

• a copy of the trust deed and any memorandum of wishes;

• details of the settlor and the source of all assets settled into the trust;

• the identity of the protector and any custodians and co-trustees;

• the identity of any known beneficiaries;

• minutes of all decisions taken by the trustees; and

• trust accounts or, at the very least, records which would enable trust accounts to be drawn up.

The above will then be available to law enforcement agencies and the regulator in the event of a criminal investigation taking place and will allow Bermuda to comply with international standards.

Requirements concerning this could either be introduced via regulation or form part of the anti-money laundering regulations and guidance notes.

13.4.5  Good practice guidelines

The BMA has not issued good practice guidelines to the industry, although BALT is considering adopting the ITCA standards when developed. We are of the opinion that the BMA should consider issuing good practice guidelines following consultation with the industry.

13.4.6  Capitalisations

We note that whilst the TCA provides for a minimum level of capital the BMA is not given power, where circumstances justify it to require an applicant or a licensee to maintain a higher level. We recommend that such a power is created.