Public Information Notice No. 08/82

Public Information Notice: IMF Executive Board Integrates the Offshore Financial Center Assessment Program with the FSAP

July 9, 2008

On May 30, 2008, the Executive Board of the International Monetary Fund (IMF) agreed to integrate the offshore financial center (OFC) assessment program with the Financial Sector Assessment Program (FSAP).¹ The OFC program, inaugurated in 2000, has helped to strengthen regulation and supervision, and to improve compliance with supervisory standards in offshore jurisdictions. The integration of the program with the FSAP aims to (i) facilitate a more uniform and risk-based approach to financial sector surveillance and improve coordination of Fund analysis across jurisdictions; (ii) provide for a better allocation of Fund resources, with a specific focus on the small number of OFCs that account for the overwhelming volume of offshore activity and could be expected to pose major financial system risks; and (iii) eliminate the need to maintain a potentially discriminatory list of OFC jurisdictions.

Background

The OFC program began in 2000.² Of the forty-four jurisdictions that were initially contacted, 42 were assessed and two jurisdictions received technical assistance in lieu of assessment. The first phase of assessment was completed in 2005. Typically, the assessments reviewed a jurisdiction's compliance with supervisory standards in banking, and with the anti-money laundering and combating the financing of terrorism (AML/CFT) , and where applicable also assessed compliance with supervisory and regulatory standards in the insurance and securities sectors. Adherence to all four international standards among OFCs was broadly comparable or better, on average, than other countries, reflecting the higher than average incomes of OFC jurisdictions. All but one jurisdiction assessed in the first phase published the results of their assessments.

In 2003, the Executive Board reviewed the program and decided that monitoring of OFC activities and their compliance with supervisory standards should be a standard component of the financial sector work of the Fund.³ Assessments were to be conducted on a 4-5 year cycle and second-phase assessments began in 2005. A total of 14 second-phase assessments have been completed, three more are underway,and ten have thus far published their reports.

Second-phase assessments have focused on (i) progress in addressing weaknesses identified in previous assessments; (ii) issues of cross-border cooperation; and (iii) relevant areas not covered in previous assessments. Although the sample of completed assessments is presently limited, the results of the second-phase of assessments suggest improvement in compliance with supervisory standards in the banking, insurance, and securities sectors. Progress has also been achieved on prudential cross-border cooperation and information exchange issues.⁴

OFCs' compliance with the 2003 Financial Action Task Force (FATF) 40+9 Recommendations for AML/CFT remain a source of concern. While the assessments, based on a sample of 21 OFCs, show that compliance is generally comparable to that of non-OFC jurisdictions, relatively low compliance was shown in certain key areas such as customer identification, the monitoring of transactions, and international cooperation.

In 2004, the Fund initiated a data collection exercise with OFCs. It was intended to help jurisdictions in their data dissemination efforts and to provide the Fund with information for its ongoing monitoring of financial developments in these centers. Twenty eight jurisdictions are contributing data to the initiative and another seven are planning to participate. The initiative is providing useful information on the size and scope of activities conducted in offshore jurisdictions.⁵ The majority of offshore transactions are conducted in relatively few centers, although there are a large number of centers with low volumes of activity.

Executive Board Assessment

Executive Directors welcomed the opportunity to review the experience with the offshore financial center (OFC) program and consider the integration of the OFC program into the Financial Sector Assessment Program (FSAP).

Directors welcomed the progress made in implementing the four elements of the OFC program agreed in 2003: (i) monitoring of activities and compliance with international standards; (ii) enhancing transparency; (iii) technical assistance; and (iv) cooperation with standard setters and other agencies. They were encouraged that the reassessments (although based on a small sample and to be interpreted with caution) indicated improvements in compliance with prudential standards, as well as progress on prudential cross-border cooperation and information exchange. Given the scope for further improvements, in particular in lower- and middle-income OFCs, Directors encouraged OFCs to further enhance work in these areas.

Directors observed that, to varying degrees, some weaknesses remain in the regulatory frameworks of OFCs for anti-money laundering and combating the financing of terrorism (AML/CFT). Although compliance with the standard is generally comparable with that of non-OFC jurisdictions, Directors pointed to low compliance in areas that pose risks for both OFCs and the jurisdictions with which they interact. They encouraged OFCs to take early and effective actions to address these issues.

Directors welcomed that most OFC jurisdictions had published their assessment reports and many were detailed assessments. and encouraged all jurisdictions to publish their reports. Directors also commended the 28 jurisdictions that have submitted data as part of the Information Framework Initiative, and encouraged the remaining jurisdictions to submit their data.

Against this background, most Directors supported the integration of the OFC program with the FSAP, although it was emphasized that integration should not result in a less rigorous assessment of OFCs. Directors noted that integration of the two programs would permit a more risk-focused approach to assessments, and would eliminate the need for the Fund to maintain a separate list of OFCs, which has become increasingly difficult to justify in the face of financial globalization. Directors saw as a positive aspect of the integration that a broader range of issues would be covered under the FSAP compared with OFC assessments, which would strengthen the Fund's financial sector surveillance and contribute to a more effective oversight of the global financial system. Directors noted that analysis should be tailored to the risk profile of each jurisdiction, including by focusing on cross-border issues as appropriate.

Directors were of the view that integration would also permit a more effective prioritization and use of resources. In particular, decisions on which jurisdictions would be assessed would be taken based on the same criteria used in the FSAP. Directors generally concurred to assess the nine or ten OFCs that account for the overwhelming volume of activity about every 5-7 years, and that smaller jurisdictions should be assessed less frequently. However, Directors stressed that the frequency of such FSAP assessments should be considered in a flexible manner so as to respond to changing risks and circumstances and taking into account information collected through continuous monitoring (or the non-provision of information).

Directors stressed that the integration of the OFC program with the FSAP should not lead to a diminished focus by the Fund on OFCs' compliance with international standards. The assessments under the OFC program and the FSAP have led to significant improvements in the quality of supervision in OFCs. Directors called on the staff to work to maintain this momentum, including by working closely with international bodies, such as the FSF and standard setters. Directors noted that, in addition to Article IV consultations, member countries could also be monitored outside the assessment cycle. Other jurisdictions will continue to be monitored by the staff, including through the Information Framework Initiative. Directors encouraged jurisdictions to continue to work with the Fund to improve data collection, compilation, and dissemination.

Directors noted that, as part of the global arrangements for AML/CFT assessments involving the IMF, World Bank, FATF and FATF-Style Regional Bodies, attention will continue to be paid to money laundering and financing of terrorism vulnerabilities posed by OFCs. The integration of the programs would not affect the scope or cycle of AML/CFT assessments or the range of jurisdictions to be assessed, either in the context of an FSAP or on a stand-alone basis.

Directors noted that, under the integrated program, the publication policy would continue to be voluntary and would be guided by the policies determined under the FSAP. They also noted that participation in the Information Framework Initiative would contribute to transparency.

Directors agreed that all OFC assessments would be undertaken as part of the FSAP starting in FY2010. Jurisdictions scheduled to be assessed under the second-phase of the OFC program prior to FY2010 could receive a Module 2 assessment or FSAP. Directors also agreed that those jurisdictions that have already been assessed under the OFC program would be treated as FSAP updates under the FSAP.

Directors agreed that, as the FSAP is currently available only to members, its coverage would be extended to encompass the four non-member jurisdictions presently covered by the OFC program. They noted that the Board would continue to have the option to request discussion of non-member assessments and to invite non-member representatives to attend the Board meeting. Some Directors suggested that consideration be given to having those non-members contribute financially to cover the Fund's administrative expenses in such exercises. Directors also agreed that technical assistance would continue to be provided to help strengthen supervision of the financial sector and address money laundering and financing of terrorism risks, including in those non-members, while recognizing the need for prioritization within the context of a tighter resource envelope.

¹ For more information on the FSAP see http://www.imf.org/external/np/fsap/fsap.asp#cp.

² See IMF Board Reviews Issues Surrounding Work on Offshore Financial Center (News Brief No. 00/62 July 26, 2000) at http://www.imf.org/external/np/sec/nb/2000/nb0062.htm.

³ See IMF Executive Board Reviews the Assessment Program on Offshore Financial Centers (Public Information Notice (PIN) No. 03/138 November 24, 2003) at http://www.imf.org/external/np/sec/pn/2003/pn03138.htm.

⁴ See Offshore Financial Centers-Report on the Assessment Program and Proposal for Integration with the Financial Sector Assessment Program, 2008 at http://www.imf.org/external/np/pp/eng/2008/050808.pdf.

⁵ See Offshore Financial Centers-Report on the Assessment Program and Proposal for Integration with the Financial Sector Assessment Program-Supplementary Information, 2008 at http://www.imf.org/external/np/pp/eng/2008/050808a.pdf.