Bermuda Anti-Money Laundering & Counter-Terrorist Financing Measures PDF

Anti-money laundering and counter-terrorist financing measures Bermuda Mutual Evaluation Report January 2020 2│ Table of Contents Executive Summary.............................................................................................................................. 6 Key Findings........................................................................................................................................ 6 Risks and General Situation................................................................................................................. 8 Overall Level of Compliance and Effectiveness.................................................................................. 8 Priority Actions.................................................................................................................................. 13 Effectiveness & Technical Compliance Ratings................................................................................ 14 MUTUAL EVALUATION REPORT................................................................................................ 15 Preface............................................................................................................................................... 15 1. ML/TF RISKS AND CONTEXT................................................................................................... 16 1.1. ML/TF Risks and Scoping of Higher Risk Issues....................................................................... 16 1.1.1. Overview of ML/TF Risks................................................................................................... 16 1.1.2. Country’s Risk Assessment & Scoping of Higher Risk Issues............................................ 17 1.2. Materiality................................................................................................................................... 20 1.3. Structural Elements..................................................................................................................... 21 1.4. Background and Other Contextual Factors................................................................................. 21 1.4.1. AML/CFT strategy............................................................................................................... 21 1.4.2. Legal & institutional framework.......................................................................................... 22 1.4.3. Financial sector and DNFBPs.............................................................................................. 24 1.4.4. Preventive measures............................................................................................................. 27 1.4.5. Legal persons and arrangements.......................................................................................... 27 1.4.6. Supervisory arrangements.................................................................................................... 28 1.4.7. International cooperation...................................................................................................... 29 2. NATIONAL AML/CFT POLICIES AND COORDINATION................................................... 30 2.1. Key Findings and Recommended Actions.................................................................................. 30 2.2. Immediate Outcome 1 (Risk, Policy and Coordination)............................................................. 31 2.2.1. Country’s understanding of its ML/TF risks........................................................................ 31 2.2.2. National policies to address identified ML/TF risks............................................................ 34 2.2.3. Exemptions, enhanced and simplified measures.................................................................. 35 2.2.4. Objectives and activities of competent authorities............................................................... 37 2.2.5. National coordination and cooperation................................................................................ 37 2.2.6. Private sector’s awareness of risks....................................................................................... 39 3. LEGAL SYSTEM AND OPERATIONAL ISSUES..................................................................... 40 3.1. Key Findings and Recommended Actions.................................................................................. 40 3.2. Immediate Outcome 6 (Financial Intelligence ML/TF).............................................................. 42 3.2.1. Use of financial intelligence and other information............................................................. 42 3.2.2. STRs received and requested by competent authorities....................................................... 44 3.2.3. Operational needs supported by FIU analysis and dissemination........................................ 45 3.2.4. Cooperation and exchange of information/financial intelligence........................................ 48 3.3. Immediate Outcome 7 (ML investigation and prosecution)....................................................... 50 3.3.1. ML identification and investigation..................................................................................... 50 3.3.2. Consistency of ML investigations and prosecutions with threats and risk profile, and national AML policies........................................................................................................................................... 51 Mutual Evaluation Report of Bermuda │3 3.3.3. Types of ML cases pursued.................................................................................................. 52 3.3.4. Effectiveness, proportionality and dissuasiveness of sanctions........................................... 53 3.3.5. Use of alternative measures.................................................................................................. 53 3.4. Immediate Outcome 8 (Confiscation)......................................................................................... 54 3.4.1. Confiscation of proceeds, instrumentalities and property of equivalent value as a policy objective........................................................................................................................................................ 55 3.4.2. Confiscation of proceeds from foreign and domestic predicates, and process located abroad.56 3.4.3. Confiscation of falsely or undeclared cross-border transaction of currency/BNI................ 60 3.4.4. Consistency of confiscation results with ML/TF risks and national AML/CFT policies and priorities........................................................................................................................................................ 63 4. TERRORIST FINANCING AND FINANCING OF PROLIFERATION................................. 64 4.1. Key Findings and Recommended Actions.................................................................................. 64 4.2. Immediate Outcome 9 (TF investigation and prosecution)........................................................ 66 4.2.1. Prosecution/conviction of types of TF activity consistent with the country’s risk-profile... 66 4.2.2. TF identification and investigation....................................................................................... 66 4.2.3. TF investigation integrated with –and supportive of- national strategies............................ 67 4.2.4. Effectiveness, proportionality and dissuasiveness of sanctions........................................... 68 4.2.5. Alternative measures used where TF conviction is not possible (e.g. disruption)............... 68 4.3. Immediate Outcome 10 (TF preventive measures and financial sanctions)............................... 68 4.3.1. Implementation of targeted financial sanctions for TF without delay.................................. 68 4.3.2. Targeted approach, outreach and oversight of at-risk non-profit organisations................... 70 4.3.3. Deprivation of TF assets and instrumentalities.................................................................... 73 4.3.4. Consistency of measures with overall TF risk profile.......................................................... 73 4.4. Immediate Outcome 11 (PF financial sanctions)........................................................................ 73 4.4.1. Implementation of targeted financial sanctions related to proliferation financing without delay 73 4.4.2. Identification of assets and funds held by designated persons/entities and prohibitions..... 75 4.4.3. FIs and DNFBPs’ understanding of and compliance with obligations................................ 75 4.4.4. Competent authorities ensuring and monitoring compliance............................................... 76 5. PREVENTIVE MEASURES.......................................................................................................... 80 5.1. Key Findings and Recommended Actions.................................................................................. 80 5.2. Immediate Outcome 4 (Preventive Measures)........................................................................... 81 5.2.1. Understanding of ML/TF risks and AML/CFT obligations................................................. 82 5.2.2. Application of risk mitigating measures.............................................................................. 85 5.2.3. Application of Customer Due Diligence (CDD) and record-keeping requirements............ 86 5.2.4. Application of EDD measures.............................................................................................. 87 5.2.5. Reporting obligations and tipping off.................................................................................. 89 5.2.6. Internal controls and legal/regulatory requirements (e.g. financial secrecy) impeding implementation........................................................................................................................................................ 91 6. SUPERVISION................................................................................................................................ 92 6.1. Immediate Outcome 3 (Supervision)......................................................................................... 93 6.1.1. Licensing, registration and controls preventing criminals and associates from entering the market........................................................................................................................................................ 95 6.1.2. Supervisors’ understanding and identification of ML/TF risks......................................... 100 6.1.3. Risk-based supervision of compliance with AML/CFT requirements............................... 103 6.1.4. Remedial actions and effective, proportionate, and dissuasive sanctions.......................... 108 6.1.5. Impact of supervisory actions on compliance.................................................................... 110 6.1.6. Promoting a clear understanding of AML/CFT obligations and ML/TF risks................... 111 Mutual Evaluation Report of Bermuda 4│ 7. LEGAL PERSONS AND ARRANGEMENTS........................................................................... 114 7.1. Immediate Outcome 5 (Legal Persons and Arrangements)...................................................... 115 7.1.1. Public availability of information on the creation and types of legal persons and arrangements 115 7.1.2. Identification, assessment and understanding of ML/TF risks and vulnerabilities of legal entities...................................................................................................................................................... 116 7.1.3. Mitigating measures to prevent the misuse of legal persons and arrangements................. 117 7.1.4. Timely access to adequate, accurate and current basic and beneficial ownership information on legal persons.......................................................................................................................................... 122 7.1.5. Timely access to adequate, accurate and current basic and beneficial ownership information on legal arrangements................................................................................................................................ 126 7.1.6. Effectiveness, proportionality and dissuasiveness of sanctions......................................... 127 8. INTERNATIONAL COOPERATION........................................................................................ 130 8.1. Immediate Outcome 2 (International Cooperation).................................................................. 131 8.1.1. Providing constructive and timely MLA and extradition................................................... 131 8.1.2. Seeking timely legal assistance to pursue domestic ML, associated predicates and TF cases with transnational elements.................................................................................................................. 134 8.1.3. Seeking other forms of international cooperation for AML/CFT purposes....................... 136 8.1.4. Providing other forms international cooperation for AML/CFT purposes......................... 139 8.1.5. International exchange of basic and beneficial ownership information of legal persons and arrangements................................................................................................................................ 142 TECHNICAL COMPLIANCE ANNEX......................................................................................... 145 Recommendation 1 – Assessing risks and applying a risk-based approach............................. 145 Recommendation 2 - National Cooperation and Coordination................................................. 147 Recommendation 3 - Money laundering offence......................................................................... 148 Recommendation 4 - Confiscation and provisional measures................................................... 149 Recommendation 5 - Terrorist financing offence....................................................................... 151 Recommendation 6 - Targeted financial sanctions related to terrorism and terrorist financing153 Recommendation 7 – Targeted financial sanctions related to proliferation............................ 157 Recommendation 8 – Non-profit organisations........................................................................... 159 Recommendation 9 – Financial institution Secrecy Laws.......................................................... 161 Recommendation 10 – Customer due diligence.......................................................................... 162 Recommendation 11 – Record-keeping....................................................................................... 164 Recommendation 12 – Politically exposed persons..................................................................... 165 Recommendation 13 – Correspondent banking.......................................................................... 166 Recommendation 14 – Money or value transfer services........................................................... 167 Recommendation 15 – New technologies..................................................................................... 167 Recommendation 16 – Wire transfers.......................................................................................... 168 Recommendation 17 – Reliance on third parties........................................................................ 171 Recommendation 18 – Internal controls and foreign branches and subsidiaries.................... 172 Recommendation 19 – Higher-risk countries.............................................................................. 173 Recommendation 20 – Reporting of suspicious transaction...................................................... 174 Recommendation 21 – Tipping-off and confidentiality.............................................................. 174 Recommendation 22 – DNFBPs: Customer due diligence......................................................... 175 Recommendation 24 – Transparency and beneficial ownership of legal persons.................... 177 Recommendation 25 – Transparency and beneficial ownership of legal arrangements......... 185 Recommendation 26 – Regulation and supervision of financial institutions............................ 189 Recommendation 27 – Powers of supervisors............................................................................. 191 Recommendation 28 – Regulation and supervision of DNFBPs................................................ 192 Mutual Evaluation Report of Bermuda │5 Recommendation 29 - Financial intelligence units...................................................................... 193 Recommendation 30 – Responsibilities of law enforcement and investigative authorities..... 195 Recommendation 31 - Powers of law enforcement and investigative authorities.................... 195 Recommendation 32 – Cash Couriers.......................................................................................... 196 Recommendation 33 – Statistics................................................................................................... 198 Recommendation 34 – Guidance and feedback.......................................................................... 199 Recommendation 35 – Sanctions.................................................................................................. 199 Recommendation 36 – International instruments....................................................................... 201 Recommendation 37 - Mutual legal assistance............................................................................ 201 Recommendation 38 – Mutual legal assistance: freezing and confiscation.............................. 203 Recommendation 39 – Extradition............................................................................................... 203 Recommendation 40 – Other forms of international cooperation............................................. 204 Summary of Technical Compliance – Key Deficiencies................................................................. 208 Glossary of Acronyms....................................................................................................................... 210 Mutual Evaluation Report of Bermuda 6│ Executive Summary 1. This report provides a summary of the Anti-Money Laundering/Countering Financing of Terrorism (AML/CFT) measures in place in Bermuda as at the date of the on-site visit September 24th – October 5th, 2018. It analyses the level of compliance with the FATF 40 Recommendations and the level of effectiveness of Bermuda’s AML/CFT system and provides recommendations on how the system could be strengthened. Key Findings a) Overall, Bermuda has a high level of understanding of its ML/TF risk. Three National Risks Assessments (NRAs), focusing on ML risks in 2013 (with updates in the 2017 NRA), and on TF risks in 2016 were completed. b) The authorities have understood the salient ML/TF risks facing the jurisdiction through the NRAs, and the Legal Persons Vulnerabilities Assessment, and have also assessed the emerging ML/TF risks posed by emerging industries such as the Casino Gaming and FinTech Business (Digital Asset Business and Initial Coin Offering) industries. c) AML/CFT Supervision measures are robust and most of the regulated financial institutions (FIs) in Bermuda have effectively identified, assessed, managed and mitigated their ML and TF risks both at the institutional and at the client levels. Historically however, the banking, MSB and Regulated Professional Firm (RPF) sectors were not consistently conducting ML/TF business risk assessments that meet the criteria as set out by their respective supervisory authorities and which are completed in accordance with their review cycles. There has been marked improvement over time. d) The National Anti-Money Laundering Committee (NAMLC) has been instrumental in fostering an understanding of ML/TF risks across all sectors and accordingly, equipping each stakeholder with the ability to implement preventative measures that would have the greatest mitigating impact. The major Financial Institutions (FIs), particularly the banks, have adopted the most effective preventative measures by standardizing since 2017 both enterprise and business relationship ML/TF risk assessments, as well as implementing sustained ML/TF training for all relevant personnel. Not all FIs and DNFBPs are at that high standard, however Bermuda continues to do significant work to bring about a high level of compliance across all sectors. e) Whilst the BMA has maintained BO information in relation to the incorporation of legal persons for many decades, and if updated through the Exchange Control regime, shareholder information is subject to further verification and vetting, Bermuda has recently significantly enhanced its beneficial ownership regime with requirements for companies, Limited Liability Companies (LLCs) and partnerships to maintain registries, keep them updated and to file the information with the Bermuda Monetary Authority (BMA). The establishment of the Mutual Evaluation Report of Bermuda │7 Registrar of Companies (ROC) compliance unit in April 2017 addressed for the first time, legislative requirements including those in relation to beneficial ownership being monitored and enforced. Regulated financial institutions, TSPs, CSPs (licensed since 2017) and other DNFBPs are required to conduct CDD on all customers and this includes the requirement to maintain up to date and current BO information and has been appropriately monitored by the relevant supervisors. The beneficial ownership information, which is held, is available to competent authorities (CAs) and for international cooperation. f) Legal persons’ vulnerabilities assessments have been undertaken in relation to ML and the (CAs) understand these. g) Trust Service Providers (TSPs) act as trustees on behalf of approximately 90% of the 317 Private Trust Companies (PTCs) registered in Bermuda and have been subject to licensing and AML/CFT control since 2008. PTCs themselves have been subject to the Country’s Exchange Control regime since inception, by virtue of the TSPs who act as trustees on their behalf. Ten percent (10%) of the PTCs were found to be managing their underlying trusts in-house and the BMA requires them to register under the AML/CFT framework as non-licensed persons (NLPs). h) Despite registration with the FIA’s goAML system, not all real estate companies have put into practice the filing of Suspicious Activity Reports (SARs) during 2017 and 2018 despite the outreach by the SoRE to bring attention to this area. i) The ability to restrain funds to prevent their dissipation is hampered by the fact that restraint orders can only be obtained immediately prior to a charge being laid. The amount of funds restrained and recovered via criminal investigations is low, particularly considering Bermuda’s status as an international financial centre (IFC). j) Bermuda has provided a wide range of international cooperation by both Mutual Legal Assistance (MLA) and other means, however Bermuda has only sought international cooperation to a limited extent in relation to ML related to foreign predicates and cross border ML. k) Financial intelligence is routinely used by CAs in the investigation of ML and TF to identify SARs filed on subjects and associates, banking information and assets and property overseas (through international requests for information). Financial intelligence is sought and obtained by CAs whenever ML/TF is pursued. l) The investigation of ML offences is actively pursued in Bermuda and there have been prosecutions for these offences. The dissuasiveness of sanctions is apparent in that there has been no recidivism of persons who have been convicted for these offences. The investigation of complex ML matters has been demonstrated to some extent, however there is a lag in that this has not yet resulted in corresponding prosecutions due to some being subject to judicial review and others pending charges. m) There have been no prosecutions or convictions for TF matters in Bermuda which is consistent with its TF risk profile. All intelligence and reports of suspected TF are robustly investigated by Bermuda’s law enforcement authorities. There is a National Combatting Terrorist Financing (CTF) Strategy to reduce the risk of terrorism-related offences in Bermuda. The national strategy has informed the CFT policies of competent authorities. There are mechanisms to detect suspected TF but the ability to detect TF by some competent authorities which may feed such information into the Bermuda Police Service (BPS) and the Financial Mutual Evaluation Report of Bermuda 8│ Intelligence Agency (FIA) appears limited. There has been limited targeted training across Immigration, Customs and the FIA in this regard. n) Supervisors monitor for targeted financial sanctions (TFS) compliance and FIs and DNFBPs are aware of their obligations as far as screening against designated person lists. However, there is insufficient activity in terms of ownership and control i.e. in relation to those who do not appear on the lists, and the distinction between TFS for TF and PF has not been adequately addressed. Risks and General Situation 2. Bermuda is the United Kingdom’s oldest overseas dependent territory with a population of just over 63,000 people and an internal self-government system. It comprises an archipelago of 150 islands in the Atlantic Ocean, about 570 miles east southeast of the mid-Atlantic region of the United States. Ten of the islands are linked by bridges and causeways to form the principal mainland which covers an area of approximately 21 square miles. The official language of Bermuda is English, and the Bermuda dollar (BD) is pegged to the US dollar at par. 3. Bermuda’s economy is based primarily on international financial services (particularly catastrophe reinsurance) and tourism. It is the world’s third largest reinsurance market and largest domicile for captive insurance companies. The jurisdiction has completed two ML National Risk Assessments (NRA) in 2013 and 2017 and one TF NRA in 2016. Based the 2017 ML NRA and the 2016 TF NRA, Bermuda’s inherent exposure to ML predominately arises from its economy being largely dominated by international financial businesses. The banking, securities, trust service provider (TSP) and corporate service provider (CSP) sectors were assessed as having high inherent ML risks, while long term direct insurance, money service businesses (MSBs), and the legal profession were assessed as having medium- high inherent ML risks. 4. The 2016 Terrorist Financing Risk Assessment found that most of Bermuda’s sectors were low risk for TF with the notable exceptions being the banking and CSP sectors (both ranked as Medium-Low) and the non-profit organization (NPO) sector ranked as Medium risk for TF. The number of Bermuda’s regulated entities and their supervisors are found in Table 6.1. Overall Level of Compliance and Effectiveness 5. Bermuda underwent its 3rd Round Mutual Evaluation in 2008 and since then, the AML/CFT/PF framework has undergone significant changes which has strengthened the overall regime. 6. There has been significant improvement to the country’s AML/CFT technical compliance status since the last mutual evaluation exercise conducted in 2008. This has been demonstrated by the enactment and amendment of several key pieces of legislation. There has also been the implementation of several policy initiatives. Notable is the amendment of the Proceeds of Crime Act 1997 (through the enactment of the Proceeds of Crime (Miscellaneous) (No. 4) 2018 Act) which formally identified the National Anti-Money Laundering Committee (NAMLC) as the entity responsible for coordinating activities to cyclically identify, assess and understand Bermuda’s ML and TF risks. As previously noted, Bermuda has undertaken three national risk assessment (NRA) exercises. The organization and coordination of these NRAs has been led by the NAMLC and carried out by various working groups. 7. The effectiveness of the measures to mitigate the risks are however limited by the recent implementation of some of the measures, particularly within the DNFBPs sectors. However, it should be noted that there Mutual Evaluation Report of Bermuda │9 were factors that mitigated the inherent risks in these sectors even before they were brought into scope, such as the non-acceptance of cash by most of the dealers in precious metals and stones (DPMS); real estate purchases subject to statutory immigration controls; the vetting of all beneficial owners (BOs) of legal persons by the BMA; a moderate corporate register; the limited number of PTCs not managed by licensed TSPs or CSPs, and the fact that there were only two (2) small unregistered lending institutions. 8. The main technical compliance strengths are in the areas of understanding ML and TF risks at the national and institutional levels, national cooperation and coordination, customer due diligence, record keeping, internal controls, legal persons and arrangements, criminalisation of ML and TF and the responsibilities of law enforcement and investigative authorities. 9. There were amendments to legislation immediately prior to the onsite to address matters such as the enhancement of beneficial ownership requirements and the registration of PTCs as Non-Licensed Persons (NLPs). TSPs act as trustees on behalf of approximately 90% of the 317 PTCs registered in Bermuda and have been subject to licensing and AML/CFT control since 2008. PTCs have been subject to Bermuda’s Exchange Control regime since inception. TSPs who act as trustees on their behalf have also been subject to licensing and AML/CFT control since 2008. Ten percent (10%) of the PTCs were found to be managing their underlying trusts in-house and the BMA requires them to register under the AML/CFT framework as NLPs. These mitigating factors were in place prior to the legislative amendments, however the effectiveness of the actual amendments themselves to further mitigate ML/TF/PF risks could not be determined at this early stage. 10. Despite the solid responsibilities and authority given to law enforcement and investigative authorities, there are low levels of restraint and recovery of funds utilized in illicit activities particularly considering Bermuda’s status as an IFC and its exposure to ML risks. The low restraints are primarily because restraints can only be obtained immediately prior to a charge being laid. Assessment of risk, coordination and policy setting (Chapter 2; IO.1, R.1, 2, 33 & 34) 11. The country has conducted strong assessments of its ML/TF risks and demonstrated a sound understanding of these risks. At the time of the onsite, the 2017 NRA was finalized, disseminated to regulated entities and posted online for access by all interested parties. Where the risk rating of any sector increased between the 2013 and 2017 NRAs, supervisory authorities communicated the increased risk-rating to all stakeholders. Bermuda enjoys a longstanding coordination framework, with domestic coordination by, and information exchanged between, the authorities within NAMLC and its various working groups. Also, there are MOUs between various supervisors and CAs that facilitate cooperation outside the realm of the NAMLC. 12. Closed-end funds are treated as low risk products in practice, although the 2017 NRA concluded that there was a medium inherent vulnerability for this type of product. At the time of the onsite, closed-end funds were not regulated, which was considered when assessing accuracy of its vulnerability rating. However, the regulation of the entire Fund sector is projected to conclude in 2019. Additionally, closed- end funds are viewed as lower risk for ML/TF due to inherent mitigant controls built into the trading processes of these instruments. 13. NAMLC, through its work in the three NRAs, has created Bermuda’s National AML/ CFT Policy, which encompasses ten (10) high level national policy statements that seek to address the three (3) FATF intermediate outcomes. The NRAs are scheduled to be updated every three (3) years. Bermuda Mutual Evaluation Report of Bermuda 10 │ developed a National Action Plan in 2015, which has since been updated regularly as mandated by the Policy. The items stemming from each NRA have been incorporated into the National Action Plan. Financial intelligence, ML investigations, prosecutions and confiscation (Chapter 3; IO.6, 7, 8; R.1, 3, 4, 29–32) 14. As the main source of financial intelligence, the Financial Intelligence Agency (FIA) is equipped with staff with the requisite training to carry out its functions of receipt, analysis and dissemination of financial intelligence, which supports various CAs in the conduct of work regarding ML and TF investigations. Financial intelligence is routinely accessed by the primary law enforcement entity, the Bermuda Police Service (BPS), in the conduct of ML and TF investigations. This access occurs through spontaneous disseminations from the FIA as well as through court orders such as production orders (routinely obtained), customer information orders and monitoring orders. 15. The BPS is the primary CA for the investigation of ML. The BPS has a dedicated unit, the Organised and Economic Crime Department (OECD) which consists of officers specially trained to investigate ML. Investigations of standalone ML, parallel ML investigations, third-party ML and self-laundering investigations have been demonstrated. These investigations have led to prosecutions predominately in the area of drug trafficking and standalone ML. There were two prosecutions of cases involving foreign predicates. There were no investigations of legal persons during the period under review. The investigation of complex ML cases is ongoing and has not yet resulted in prosecutions The period between the investigation of matters and the commencement of prosecution is analysed in IO7. 16. There are a wide range of confiscation powers available to CAs, and their use has been demonstrated. However, the prevention of the dissipation of funds is hampered by the fact that Restraint Orders can only be obtained immediately prior to a charge being laid. There has been a negligible amount of restraints and criminal confiscation proceedings resulting from domestic criminal investigations in relation to property of equivalent value during the period under review. Terrorist and proliferation financing (Chapter 4; IO.9, 10, 11; R. 1, 4, 5–8, 30, 31 & 39.) 17. Although there have been no TF investigations or prosecutions in Bermuda, this corresponds to Bermuda’s medium-low risk assessment in the 2016 TF NRA. There are various detection mechanisms which include intelligence gathering by the FIA, close cooperation with international sources such as Interpol; law enforcement to law enforcement direct contact; and detection at ports of entry. The FIA has received SARs where TF was suspected however upon further examination and analysis, they were not found to be TF matters. With respect to the assessment of the TF risk a comprehensive process was undertaken. The approach considered the controls that have been adopted to detect and counter TF (such as law enforcement efforts, supervisory and regulatory initiatives and international cooperation assistance) as well as factors such as geography, access through various ports and financial flows. A legislative framework is in place for the criminalisation and prosecution of TF matters in Bermuda’s courts. TF specific training was observed to be deficient across some CAs as further described in the discussion of IO.9. 18. Targeted Financial Sanctions (TFS) are implemented without delay and the importance of TFS is understood by FIs and DNFBPs as it relates to screening against those designated persons who appear on the lists. Many FIs and DNFBPs use sophisticated software to conduct screening, however some of the smaller, less material entities only screen once per week and are thus reliant on notification of changes in designations. Such changes are emailed to supervisors with instructions to notify their Mutual Evaluation Report of Bermuda │ 11 supervisees. Some of the Governor’s powers related to TFS were delegated during the period of the onsite visit, and a new Financial Sanctions Implementation Unit (FSIU) was established. 19. The Charities Act came into force in 2014 and the Authorities commenced the registration and supervision of NPOs for CFT compliance in 2015. A subsection of the high risk NPOs were identified and a series of outreach programmes and seminars for NPOs commenced to sensitize the registered NPOs on the risk of being abused. The Registry General entered into an MOU with a registered charity, as part of its work to promote and advocate for an effective and sustainable third sector. Through this agreement the registered charity provides training & education aimed at fostering collaboration and supporting volunteerism. Proliferation Financing (PF) has not yet been developed as a distinct area. A PF working group met for the first time in September 2018. Customs lacks the training and resources to deal with its PF obligations. Preventive measures (Chapter 5; IO.4; R.9–23) 20. Not all FI and DNFBP sectors are of equal risk or weighting in Bermuda. Accordingly, the Assessment Team’s rating of Bermuda’s implementation of preventive measures is aligned with Bermuda’s own weighting of their inherent ML/TF risks, with the focus (both positive and negative) leaning more toward rating the preventive measures that were commensurate with the highest ML/TF risks. The Assessment Team’s views in this regard are set out in the Report and informs the overall conclusions about the implementation of preventive measures. 21. The banking sector which comprises four (4) banks and one (1) credit union, plays a vital role in Bermuda’s economic activity and is considered inherently high-risk overall for ML, and medium-low for TF. Across all sectors, deposit accounts were assessed to have the highest inherent vulnerability because of the number of accounts, and their significant inflows/outflows. Preventive measures commensurate with the ML/TF risks were prevalent in the banks. This includes Boards of Directors demonstrating leadership in this area, senior management ensuring adequacy of resources in the AML/CFT space, ensuring that the budget is in place to facilitate robust and ongoing AML/CFT training for relevant persons and the existence of effective three lines of defence regimes to mitigate ML/TF risks. 22. The three lines of defence comprise the business line that owns the risk and is the first line of defence; the compliance and/or risk management function as the second line of defence ensures that compliance to legislation, regulation and policy is maintained, and the third is the independent audit which provides challenge and tests the controls to ensure that the first and second lines are operating as mandated. Supervision (Chapter 6; IO.3; R.14, R.26–28, 34, 35) 23. All Supervisors have issued AML/CFT Guidance Notes (GNs) to assist their regulated entities to bring about a high level of understanding and compliance with Bermuda’s AML/CFT legal and regulatory framework. More specifically, the GNs interpret the requirements of the relevant Acts and Regulations, including how implementation may be achieved in practice and outline good industry practices in the application of AML/CFT procedures using a proportionate risk-based approach (RBA). 24. The BMA, as the sole financial regulator and the regulator for the TSP and CSP sectors, has demonstrated that it has robust measures in place to effectively identify, assess and understand, ML /TF risks, both at the sectoral and at the enterprise levels. Fitness and propriety vetting are a critical component to the registration and licensing processes of the BMA. Mutual Evaluation Report of Bermuda 12 │ 25. Effective systems and measures to mitigate risks were not as mature in some parts of the DNFBP space such as in the real estate and Dealers in Precious Metals and Stones (DPMS) sectors. This was largely due to the infancy stages of the ML/TF risk-based framework for these sectors. Transparency and beneficial ownership (Chapter 7; IO.5; R.24, 25) 26. The BMA through its roles of vetting upon incorporation, the Controller of Foreign Exchange, as the sole financial regulator and regulator for the TSP and CSP sectors, has a framework in place that permits to a large extent the transparency of legal persons and arrangements as evidenced by the finding that most basic information on legal persons is publicly available and legal persons are required to maintain registers of members and category of shares. Additionally, a registered office is required, which cannot be a P.O. Box. The provision of registered offices as a business requires licensing as a CSP and supervision by the BMA whereby the CDD requirements in relation to beneficial ownership are more than 10% as opposed to other regulated entities where the requirement is more than 25%. Regulated financial institutions, TSPs, CSPs (licensed since 2017) and other DNFBPs are required to conduct CDD on all customers and this includes the requirement to maintain up to date and current BO information and has been appropriately monitored by the relevant supervisors. 27. Bermuda has significantly enhanced its beneficial ownership regime by requiring companies, LLCs and partnerships to maintain beneficial ownership (BO) registers, for which information must also be filed with the BMA. This ensures that BO information is accurate and up-to-date, and that current information is accessible by competent authorities. Private Act companies (unless registered with the ROC), (and overseas companies and overseas partnerships) are not covered by the new legislative requirements. 28. The BMA vets BO upon incorporation as it has done for decades with the definition now being extended to ensure a wider range of beneficial owners are encompassed and if updated through the Exchange Control regime, shareholder information is subject to further verification and vetting, to ensure the information maintained at the BMA is accurate, current and up to date. 29. Since 2017, the ROC was mandated to ensure compliance with the various legislative requirements which include BO registers as well as other legislative requirements. Bermuda has conducted a comprehensive assessment of the ML vulnerabilities of legal persons which are well understood by CAs, FIs and DNFBPs. 30. The issuance of bearer shares has been prohibited for over thirty years. However, there are no provisions regarding the immobilization of bearer share warrants. 31. The only legal arrangements which exist in Bermuda are trusts. Trustees can be licensed TSPs regulated by the BMA, licensed individuals (currently none), private trust companies or individual trustees. Licensed TSPs are subject to the Proceeds of Crime Regulations (POCR) requirements including CDD on beneficial ownership. PTCs were found to hold a large amount of wealth and to be high risk. To mitigate this risk, PTCs were required to register as NLPs with the BMA, which also makes them subject to the POCR requirements. It should be noted that an estimated 90% of PTCs were already subject to some form of regulation. However, the effectiveness of this measure could not be determined as it had not yet been fully implemented. Individual non-professional trustees are required to identify all beneficiaries under the Trustee Act but there is no means of monitoring this requirement. Mutual Evaluation Report of Bermuda │ 13 32. Whilst Bermuda has not yet demonstrated that all the relevant sanctions are proportionate and dissuasive, the penalties applied to supervised entities by the BMA appear to have been dissuasive although limited. International cooperation (Chapter 8; IO.2; R.36–40) 33. Bermuda has a comprehensive legislative framework to allow for international cooperation both by Mutual Legal Assistance Treaties (MLATs) and through other means of cooperation. Whilst a wide range of requests have been responded to, international cooperation to pursue ML in cases with foreign predicates and cross border ML has only been sent out to a limited extent. The extension by the United Kingdom of the Extradition Act 2003 to Bermuda, effective 2017, has streamlined Bermuda’s extradition process. Priority Actions 34. The prioritised recommended actions for Bermuda, based on these findings, are: a) Amend the POCA in relation to the restraint powers to ensure these are available prior to the charging process. b) Increase focus on the recovery of the cross-border movement of the proceeds of crime, as identified by the NRA. Increase outgoing international requests to pursue ML and the proceeds of crime by focusing on cross border ML investigations in line with Bermuda’s risk profile. c) Provide AML and CFT training to the Judiciary. d) Periodic training in CFT measures should be instituted for CAs such as Customs, the Department of Public Prosecutions (DPP), the Financial Intelligence Agency (FIA and the BMA. e) Increase the resources and training available to Customs in relation to ML, TF and PF. f) Ensure that the ROC Compliance Unit is sufficiently resourced to undertake its compliance monitoring mandate, particularly in relation to the beneficial ownership registry requirements. g) AML/CFT Business risk assessments should be conducted by entities in all relevant sectors as set out by their respective supervisory authorities and in accordance with their review cycles. h) Ensure SAR obligations by all sectors are observed, but in particular the real estate and legal sectors. i) There should be an increased focus on the understanding of PF and its implications, which should be the subject of guidance and outreach. j) All FIs and DNFBPs should be able to demonstrate that they have periodically revisited their own risk rating methodologies to ensure continued validity of the framework, particularly when there are changes in legislation and regulations or in their own customer profile and risk appetite. Mutual Evaluation Report of Bermuda 14 │ Effectiveness & Technical Compliance Ratings Effectiveness Ratings1 IO.1 IO.2 IO.3 IO.4 IO.5 IO.6 IO.7 IO.8 IO.9 IO.10 IO.11 HE SE SE ME SE SE ME LE SE SE ME Technical Compliance Ratings2 R.1 R.2 R.3 R.4 R.5 R.6 R.7 R.8 R.9 R.10 C C C LC C LC LC C C C R.11 R.12 R.13 R.14 R.15 R.16 R.17 R.18 R.19 R.20 C LC C C C C C C C C R.21 R.22 R.23 R.24 R.25 R.26 R.27 R.28 R.29 R.30 C C C LC LC LC C C C C R.31 R.32 R.33 R.34 R.35 R.36 R.37 R.38 R.39 R.40 C PC C LC LC C LC LC C C 1 Effectiveness ratings can be either a High- HE, Substantial- SE, Moderate- ME, or Low – LE, level of effectiveness. 2 Technical compliance ratings can be either a C – compliant, LC – largely compliant, PC – partially compliant or NC – non compliant. Mutual Evaluation Report of Bermuda │ 15 MUTUAL EVALUATION REPORT Preface 35. This report summarises the AML/CFT measures in place as at the date of the on-site visit. It analyses the level of compliance with the FATF 40 Recommendations and the level of effectiveness of the AML/CFT system and recommends how the system could be strengthened. 36. This evaluation was based on the 2012 FATF Recommendations and was prepared using the 2013 Methodology. The evaluation was based on information provided by Bermuda, and information obtained by the evaluation team during its on-site visit to Bermuda from September 24th - October 5th, 2018. 37. The evaluation was conducted by an assessment team consisting of: Elisabeth Lees, Office of the Director of Public Prosecutions, Cayman Islands (Legal Expert). Donilia Cuffy, Financial Services Commission, Montserrat, (Financial Expert). Dwayne Baker, Financial Intelligence Agency, Turks and Caicos Islands, (Law Enforcement Expert). Charles Virgill, Central Bank of The Bahamas, (Financial Expert). Dawne Spicer, Executive Director, CFATF Secretariat (Mission Leader) and Joanne Daniel, Deputy Executive Director, CFATF Secretariat (Co-Mission Leader). 38. The report was reviewed by Mrs. Vyana Sharma, Ministry of the Attorney General and Legal Affairs, Trinidad and Tobago, Mr. Matthew Shannon, Canada, the APG Secretariat and the FATF Secretariat. 39. Bermuda previously underwent a FATF Mutual Evaluation in 2007, conducted according to the 2004 FATF Methodology. The May 7th - 23rd, 2007 evaluation and April 2009 - November 2013 Follow-Up Reports have been published and are available at www.cfatf-gafic.org. 40. That Mutual Evaluation concluded that the country was compliant with 9 Recommendations; largely compliant with 10; partially compliant with 16; and non-compliant with 14. Bermuda was rated compliant or largely compliant with 8 of the 16 Core and Key Recommendations. Bermuda was placed in regular follow-up in November 2007 and removed from follow-up in November 2013. Mutual Evaluation Report of Bermuda 16 │ 1. ML/TF RISKS AND CONTEXT 1.1. ML/TF Risks and Scoping of Higher Risk Issues 41. Bermuda is an archipelago of approximately 21 square miles located in the North Atlantic Ocean. It is less than 2 hours by air from gateway North American cities in the North-East and there is direct scheduled air access from Bermuda to the United States of America (USA), United Kingdom (UK) and Canada. Bermuda is an English-speaking country with a population of approximately 64,237 of which 18,532 residents are foreign born and have residency status; 13,110 of these are foreign workers. The population of foreign workers is drawn from many countries, with the UK, Canada, the USA, Azores/Portugal and the Caribbean accounting for the largest percentages. There is a high standard of education and literacy in Bermuda. 42. Bermuda is the UK’s oldest overseas territory with internal self-government that allows for a high degree of control over its own affairs. Issues pertaining to defence and international affairs are collaborative with the UK. The Head of State is the British Monarch, represented on Island by the Governor. Bermuda has a bicameral legislative system, comprising the House of Assembly (36 elected members) and the Senate (11 appointed members). The party in power is the one which holds most seats in the House of Assembly and its leader serves as the Premier of Bermuda. The Senate does not have power to veto or amend any legislative proposals presented by the House of Assembly without the legislative proposal being returned to the House of Assembly to consider the Senate’s suggested amendments and can only defer a proposal for a period of one year. The Cabinet is accountable to the Legislature. The Government is currently comprised of 11 ministries. General elections are usually held every five years, with the most recent being held on July 18th, 2017. Bermuda’s legal system is based on the British model, consisting of codified legislation and English Common Law. The court system is made up of Magistrate Courts, the Supreme Court, a local Court of Appeal, with final appeal to the Privy Council in the UK. 43. Bermuda’s economy is heavily reliant on financial services, and the provision of catastrophe reinsurance. It is the world’s second largest centre for captive reinsurance. Financial services account for approximately 49% of GDP, with tourism a distant second pillar to the economy. Revenue generated by financial services and tourism represented a significant portion of Bermuda’s GDP of BD $4.6 Billion. Bermuda has a fixed exchange rate that is pegged to the US dollar at a rate of 1:1. 1.1.1. Overview of ML/TF Risks 44. Regarding ML/TF risk, the country is exposed to significant inherent ML risks due to the threat of foreign predicates and the cross-border transfer of funds. Exposure to TF risks were assessed as minimal. Bermuda has a relatively low crime rate, and a high standard of living. Notwithstanding, Bermuda’s overall threat rating for ML was increased from “medium” in 2013 to “medium high” in 2017. The National Anti-Money Laundering Committee (NAMLC) attributes this to a better understanding of the threats that exist, such as international tax crime, which has increased the threat levels, rather than an increase in such threats. Mutual Evaluation Report of Bermuda │ 17 45. Bermuda has adopted a risk-based approach (RBA) to AML/CFT risk management, evidenced by its reference in various pieces of legislation and regulations. The country has immediate plans to grow its economy, by the introduction of new industries such as casino gaming and digital assets and to lessen its dependence on the reinsurance and tourism sectors. Bermuda is currently exposed to international ML/TF risks associated with cross-border activity and customers, and to a much lesser extent, to domestic ML/TF risks that arise from local drug trafficking. 46. The main predicate offences for ML are international tax crimes, corruption, fraud, drug trafficking as well as market manipulation and insider trading. The banking sector, securities sector, Private Trust Companies (PTCs and Trust and Corporate Service Providers (TSPs and CSPs) are considered vulnerable for laundering the proceeds of crime. Non-profit organizations (NPOs) and charities are considered more vulnerable to TF abuse when compared to the financial sector. 1.1.2. Country’s Risk Assessment & Scoping of Higher Risk Issues 47. The 2013 NRA was launched in January of that year with a national workshop facilitated by personnel from the World Bank (WB). There was a concerted effort to involve the private sector through representatives from the real estate, legal, accounting, betting, construction, dealers in precious metals and stones as well as other dealers in high value items such as cars, boats and motorcycles. The work done on the non-financial sectors during the 2013 NRA assisted in developing the regulatory framework in those sectors that were not already regulated and in creating an understanding of the need for more focus on potential ML risks. The national findings on ML risk and the sectoral findings on ML vulnerability were shared with all relevant stakeholders and published online. The 2013 NRA led to various actions including the establishment of the post of a National Coordinator as the Head of the Office of NAMLC. 48. A TF risk assessment, undertaken in 2016, found no evidence of terrorism or TF having occurred in Bermuda and so the assessment of sectoral vulnerability was based on potential risk. The sectoral TF vulnerability was assessed as either low or medium-low with only the NPO sector assessed as having a medium rating. Bermuda used international typologies to assess its potential TF vulnerabilities. 49. In 2017, a more detailed updated ML NRA was conducted with high-level support from Cabinet and the Civil Service Executive evidenced by the weekly reports and quarterly presentations to Cabinet by the Chair of the NAMLC. Technical support for this NRA was provided by a consultant familiar with the WB tool. The 2017 NRA consisted of 18 working groups with representatives from government agencies, industry representatives (banking sector and others) and supervisors. 50. The NRA processes undertaken by the jurisdiction were well structured, and the conclusions were reasonable. The onsite interviews confirmed the involvement of a wide range of government agencies, and the private sector in the NRA process. Additionally, the publications of the 2016 and 2017 NRAs and the significant outreach by regulators resulted in a high level of sectoral familiarity with Bermuda’s ML/TF risks. 51. In deciding what issues to prioritise, the Assessment Team reviewed material provided by Bermuda on national ML/TF risks. The NRA report presented areas of higher ML/TF risks, including threats and inherent vulnerabilities. Bermuda’s status as an international financial centre (IFC) with a significant level of international finance and business transacted in and through the jurisdiction along with financial services accounting for approximately 49% of the jurisdiction’s USD 4.6B GDP informed the higher and lower risk issues for the onsite examination. Consideration was also given to the consequential impact of financial flows from predicate offences, sectors and systems within Bermuda which may be Mutual Evaluation Report of Bermuda 18 │ exploited for illicit purposes. The following were assessed as the main contributors to the higher ML/TF risks posed to Bermuda: ▪ Predicate offences (drug trafficking, corruption/bribery, international tax crimes, fraud); ▪ The financial sector (namely banking, insurance, securities); ▪ Money Service Businesses (MSBs), Trust & Corporate Service Providers (TCSPs); and ▪ Beneficial Ownership of corporate structures and potential misuse of legal persons and arrangements. 52. Drug Trafficking: Bermuda’s 2017 NRA assessed drug trafficking as a high ML threat. Law enforcement authorities, supported by annual reports produced by the Department of National Drug Control, have also concluded that the annual average value of the drug market in Bermuda is approximately USD 25M3. 53. Corruption/Bribery: Corruption/bribery was identified as a high ML threat in Bermuda’s 2017 NRA. This rating was supported by the evidence of two civil recovery cases relating to foreign corruption/fraud, which involved the confiscation of over USD35.25M in funds. In addition, the two largest cases currently being investigated by the Organized and Economic Crime Department (OECD) of the Bermuda Police Service (BPS) relate to critical incidents of corruption4. 54. International Tax Crimes: International tax crimes were assessed to represent a high ML threat, with an estimation that the undetected proceeds of foreign tax crimes would likely exceed USD10M. 55. Fraud: Fraud represents a high ML threat in Bermuda. International fraud, while probably representing a significantly fewer number of cases than domestic fraud, poses a more significant threat for ML because of the much higher value of proceeds involved and the actual use of the financial system in Bermuda to launder those proceeds. Domestic fraud is of a lower value and of less threat. 56. Banking sector: Bermuda’s banking sector was assessed as having an inherently high ML risk with approximately USD$23B in assets as at year-end 2016 and considerable exposure to international businesses. Ninety-six percent (96%) of the overall financial sector market are clients from countries worldwide while 4% of the market, representing 64,237 persons of which 18,532 are foreign workers5 is domestic. The Bermuda deposit-taking sector consists of 4 banks and 1 credit union with some banks offering tailored services (cash management, letters of credit, treasury, custody and investment services) to other sectors for example, insurers6. The provision of financial services to persons and legal entities operating in other sectors within Bermuda, therefore increases the ML/TF exposure of the banking sector. 57. Securities7: Bermuda’s securities sector comprises investment businesses, fund administrators and investment funds. The sector maintains a substantial level of foreign investments holdings and offers a diverse range of products primarily to an international client base many of whom are high net worth individuals. Bermuda had 567 registered funds at year end 2016 with net asset value of approximately USD137.15B. However, suspicious activity reporting in the sector is relatively low. Bermuda has USD156B in assets under administration as reported by the 31 fund administrator licensees at the end 3 National Risk Assessment of Bermuda, page 35 (based on estimated detection rate of 20%) 4 Government of Bermuda – Submission on Effectiveness submission for Immediate Outcome (IO)1, page 20. 5 Government of Bermuda – Submissions on Effectiveness May 2018 p. 95 6 Government of Bermuda – Submissions on Effectiveness May 2018 p. 96 7 Government of Bermuda – Submissions on Effectiveness May 2018 p. 96 Mutual Evaluation Report of Bermuda │ 19 of 2015.8 The international nature of the funds and associated investors may make it harder to determine the source of funds, which may increase the exposure to ML. 58. Insurance Sector: At the end of 2016, total assets in Bermuda’s financial sector amounted to USD791.57B with 20% (approximately USD158.3B) of assets held by entities subject to the AML/CFT Regulations9. With total assets of USD632B in 2016 and more than 1,200 insurance entities, the insurance industry in Bermuda accounts for approximately 80% of the total assets in the financial services sector, with 99% of the insurance sector comprising non-life insurance and reinsurance entities. The assessors examined the non-life insurance and reinsurance subsectors, particularly due to the sheer size of the latter in Bermuda. Bermuda conducted a comprehensive and targeted ML/TF risk analysis of the sectors, the rigour and results of which were considered and accepted by the assessors. Based on the analysis of factors which included the risks, threats and vulnerabilities of the products, distribution channels, and geographical implantations, the assessors are satisfied that the activities within the reinsurance sector in Bermuda are low risks and do not fall within the definition of financial institutions as set out in the FATF Recommendations. 59. Beneficial ownership of corporate structures and the misuse of legal persons and arrangements: Of its register of approximately 17,000 legal entities, Bermuda has 10,704 legal persons classified as ‘Exempted Companies,10 which have been deemed to have an inherent high ML/TF vulnerability11. These Exempted Companies include 329 Segregated Account Companies (SAC)12, of which 279 are regulated entities and 50 are unregulated entities. During the onsite visit it was determined that 48 of these unregulated entities in fact had AML/CFT regulated SAC representatives who were subject to CDD requirements, thus leaving just two SACs without such regulation (a church and an investment pool). The prominence of Bermuda’s financial sector and its international exposure increases the vulnerability of the jurisdiction to misuse of legal persons and legal arrangements for ML/TF. The onsite accordingly focused on the verification process in relation to beneficial ownership (BO) information at the stage of incorporation, changes to BO as well as the monitoring and supervision of these legal persons and legal arrangements. 60. DNFBPs - TCSPs: The TCSPs (Trust and Corporate Service Providers) have been assessed as having high inherent ML risk, given the global reach of each sector. Trusts administered by TSPs have high value asset transfers and high-net-worth customers some of whom are resident and non-resident PEPs, while CSPs facilitate complex international financial transactions and manage many companies. 61. Money services businesses (MSBs): There are only two money remittance firms licensed and operating in Bermuda, which cater largely to non-Bermudian foreign workers remitting funds abroad, and to 8 Bermuda NRA Public report page 51 9 The insurance subsectors which fall outside the AML/ATF Regulations (i.e. non-life and reinsurance sectors) accounted for approximately 80% of the total assets in the financial sector in Bermuda. 10 Exempted companies operate internationally and have the majority ownership attributed to foreigners, which in turn creates a greater potential for involvement in the layering and integration stages in the money laundering process thereby increasing the ML/TF vulnerability for exempted companies. (Bermuda Effectiveness submission for IO5, paragraph 5.2.12). 11 Government of Bermuda – Submissions on Effectiveness May 2018 p. 264 12 Segregated accounts and separate accounts are set up by persons to have independence from the general account and in some cases are managed by third parties. For this reason, there may be AML /ATF risks as the beneficial owners are separate from the owners of the company and may not be vetted in accordance with the AML/ATF legislation in Bermuda. (Source: Bermuda Monetary Authority May 2018 Consultative Paper on Segregated and Separate Accounts Retrievedfrom:http://www.bma.bm/document-centre/consultation-papers/AMLATF%20II/CP%20- %20Segregated%20Accounts%20Companies%20and%20AML%20ATF%20Risks.pdf Mutual Evaluation Report of Bermuda 20 │ tourists. In 2016, an approximate total value of USD235M (184,732 transactions13) was transferred by this sector, representing inflows and outflows. Terrorist Financing: 62. TF was determined to be a medium-low risk. Bermuda has no known incidents of TF or attempts relative to same. However, TF risk was included in the scoping of issues for consideration during the onsite visit due to the volume of international financial flows into and out of the jurisdiction and the increased sophistication of financing models and sources of international terrorist organisations. Emerging Risks and Sectors 63. Virtual currencies/cryptocurrencies/crypto assets were identified as having inherent ML/TF risks. Given the very recent amendments to the Banks and Deposit Companies Act (BDCA) which allows for the creation of fintech banks and amendments to the Companies and Limited Liability Company (Initial Coin Offering) Amendment Act, 2018 (the “ICO Act”), which seeks to create a framework for the regulation of initial coin offerings; this area was scoped. 64. There is political will in Bermuda to introduce Casino Gaming and Digital Asset Business to the Bermudan market. In this regard, the Bermuda Casino Gaming Commission (BCGC) and the BMA have been identified as the respective supervisors of these two sectors. At the time of the onsite, only one provisional licence had been issued for Casino Gaming (the commencement of the stage in the licensing process known as the suitability phase). There were no licences issued for Digital Assets operators, although Bermuda’s preparedness is far advanced in anticipation of both. 65. The Gaming Provisional licence does not permit the licence holder to begin casino activities. It is simply a first step to acknowledge that an application is pending. The provisional licence holder is being assessed for suitability during this phase and a full casino licence will be granted if this assessment proves favourable. During this period, the applicant is welcome to apply for the full licence, although all application fees are non-refundable. EDD measures are enacted on the Source of Funds (SOF) and the source of wealth of the applicant. Fit and proper assessments are conducted on the ultimate BO, all members of executive management and the Board of Directors. 66. Digital Asset Business will require FinTech banks with restricted licenses to be introduced into the Bermudan economy. An Assessment and Licensing Committee was established, consisting of senior management from the supervisory, policy and information technology departments within the BMA and chaired by a managing director responsible for supervising Digital Asset Business (DAB). This Committee’s responsibility is to review and assess applications weekly and decide whether to approve, defer or decline same and to consider AML/CFT considerations as well. 1.2. Materiality 67. Bermuda is a significant international financial services centre. Its economy is based primarily on international financial services (particularly catastrophe reinsurance) and tourism. It is the world’s second largest centre for captive reinsurance and financial services account for approximately 49% of GDP. 68. At the end of 2016, total assets in Bermuda’s financial sector amounted to USD791.57B with 20% (approximately USD158.3B) of assets held by entities subject to the AML/CFT Regulations. A breakdown of the financial services industry is as follows: The insurance sector is the largest financial 13Government of Bermuda Effectiveness Submission, page 96 Mutual Evaluation Report of Bermuda │ 21 sub-sector in Bermuda and has significant international influence. In 2016, the insurance sector’s USD632B in assets accounted for approximately 72% of Bermuda’s total assets, and 28% of Bermuda’s total GDP. 69. Bermuda’s Securities sector comprised investment businesses, fund administrators and investment funds 567 registered fund entities at year end 2016 with net asset value approximately USD137.15B. The securities sector is also very significant, and its USD144B in net asset value accounts for 19% of the country’s total financial services sector assets, making securities second only to insurance in Bermuda’s financial industry. 70. Bermuda’s Banking sector comprised USD23B in assets as at year-end 2016. Bermuda has five deposit- taking entities – four banks and a credit union, with combined assets of USD23B. Income totalled USD795M for the sector in 2016, which constituted 13% of national GDP. 71. Bermuda has over 50 years of experience in the trust business. As at 2016 there were 28 licensed trust businesses in the jurisdiction. There are three broad categories of trust; licensed trust companies, private trust companies and the unsupervised private individual trustees (who act in a non-professional capacity for friends and family members and do not have “clients”). 72. Company formation is moderate with a register of less than 17,000 legal entities. There is a wide spectrum of DNFBPs in Bermuda. Bermuda’s corporate registry has approximately 17,000 registered entities, of which approximately 1,300 are AML/CFT regulated FIs. 1.3. Structural Elements 73. Most of the key structural elements required for a sound AML/CFT system exist in Bermuda. The country exhibits political and institutional stability with competent regulatory capacity. Competent authorities such as investigative bodies namely the Bermuda Police Service (BPS) (and to a lesser extent Customs), the Director of Public Prosecutions (DPP), Mutual Legal Assistance – the Attorney General’s Chambers (AGC), an independent Judiciary and the national AML/CFT coordinator - NAMLC provide a robust framework. There is also strong political commitment to support the necessary AML/CFT systems in Bermuda. 1.4. Background and Other Contextual Factors 74. Bermuda is considered mature in terms of its financial services industry and is recognised as an IFC. It has attracted talented professionals globally and developed its local talent to support this industry. International business activity is dominated by the international reinsurance market which accounts for 26% of GDP; real estate and the rental sector 17%; business services such as professional services: computer, accounting and legal services 9%, with the other major industries being education, health and social services, wholesale, retail trade, repair services, construction and quarrying. An institutional framework exists for implementation of Bermuda’s AML/CFT regime with the NAMLC and BMA (the country’s lead supervisor) at the forefront of these activities as coordinator and supervisor respectively. 1.4.1. AML/CFT strategy 75. In 2016 Cabinet initially approved the summary report of the 2013 ML NRA, along with the 2016 – 2018 National Action Plan, which was developed as a result of the findings of the 2013 NRA. This National Action Plan delineated actions and strategies to enhance Bermuda’s AML/CFT regime and working collaboratively, NAMLC agencies began to execute these actions over the ensuing years. The 2016 TF NRA and the 2017 update to the ML NRA were both action items in the initial version of the Mutual Evaluation Report of Bermuda 22 │ action plan. At the end of each of the 2016 and 2017 NRAs, further proposed action items were developed and subsequently approved by Cabinet respectively. These resulting action items iteratively updated the original National Action Plan, which was treated as a living document and updated as the national programme progressed. 1.4.2. Legal & institutional framework 76. Bermuda has criminalised ML in accordance with the 1988 United Nations Vienna Convention and the Palermo (2000) Convention. Preventive measures to be taken by AML/CFT regulated FIs and regulated DNFBPs are contained mainly in the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing) Regulations (POCR). The Proceeds of Crime (Anti-money Laundering and Anti-Terrorist Financing Supervisory and Enforcement Act 2008 (SEA) establishes the supervisory framework whereby supervisory authorities monitor for compliance under the Proceeds of Crime Act 1997 (POCA) and the Anti-Terrorism (Financial and other Measures) Act 2004 (ATA). Criminal justice measures are found mainly in the POCA, the ATA 2004 and the Criminal Code Act 1904. 77. Bermuda’s AML/CFT institutional framework is comprised of the following Committees, CAs and other bodies: a. The National Anti-Money Laundering Committee (NAMLC) was established by s. 49 of the POCA and advises the Minister of Legal Affairs and the Minister of Finance in relation to AML, CFT and APF. It also coordinates activities to identify, assess and understand Bermuda’s ML/TF risks and takes the necessary steps to ensure that such risk assessments are kept up to date. The Committee has 14 statutory members consisting of a Chairperson, the Solicitor General (SG), the Commissioner of Police (COP), the Director of the FIA, the DPP, the CEO of the Bermuda Monetary Authority (BMA), the Collector of Customs, the National Coordinator, the Financial Secretary, the Permanent Secretary for the Ministry of Legal Affairs (MOLA), the Registrar General, the Registrar of Companies (ROC), the Superintendent of Real Estate (same person as the Registrar of Companies), the Executive Director of the BCGC. Through its mandate, NAMLC advises on the development of a national plan of action, which includes recommendations on effective mechanisms to enable competent authorities to coordinate with each other on the development and implementation of polices and activities to combat ML/TF/PF and activities to identify, assess and understand ML/TF risks. b. The Ministry of Finance (MOF) has administrative responsibility for the office of NAMLC, the ROC and the Office of the Tax Commissioner and overall responsibility for providing a framework for the financial management and control of Government activities and national finances. Through the Treaty Unit the MOF meets Bermuda’s international obligations regarding the exchange of tax information. c. The Ministry of Legal Affairs (MOLA) has portfolio responsibility for the Attorney General’s Chambers (AGC), the Judiciary, the Department of Court Services, the DPP and the Legal Aid Office. The Minister is the Enforcement Authority for civil asset recovery matters under Part IIIA of the POCA. The Ministry holds the overarching responsibility for upholding the Bermuda Constitution, the continuance of the legal system of Bermuda and providing legal services to the Government and all other Ministries and Government Departments. The Minister also has portfolio responsibility for AML/CFT matters and has recently become the delegated authority for overseeing the TFS regime, with the establishment of the Financial Sanctions Implementation Unit (FSIU). d. The Attorney General’s Chambers (AGC). The Attorney General is the primary legal advisor to the Government, responsible for among other matters, providing mutual legal Mutual Evaluation Report of Bermuda │ 23 assistance by responding to foreign requests and requesting assistance in criminal matters, which includes ML/TF. The AGC prosecutes civil actions on behalf of MOLA, which is the designated enforcement authority for civil asset recovery matters. e. The Financial Intelligence Agency (FIA) was established in November 2008 by the Financial Intelligence Agency Act, 2007 as an independent agency authorised to receive, gather, store, analyse and disseminate information relating to ML, suspected proceeds of crime and potential TF. The FIA receives this information in the form of suspicious activity reports (SARs). Separate and distinct from these functions are those of the Supervisory Unit of the FIA which supervises dealers in high value goods, including dealers in precious metals and precious stones. f. The Bermuda Police Service (BPS) is responsible for detecting and investigating criminal matters. The Organised and Economic Crime Department (OECD) specialises in offences which may contain elements of ML/TF. The POCA places obligations on the BPS to investigate, trace and confiscate the proceeds of criminal conduct. g. The Customs Department was established under the Customs Department Act, 1952. It is one of the Government’s two principal collectors of revenue and has responsibilities for immigration and customs control at all ports of entry to Bermuda. This function entails the interdiction of drugs and other contraband, monitoring cross-border transportation of currency and other negotiable instruments, facilitating legitimate trade; and assessing and collecting revenue. h. The Department of Public Prosecutions (DPP) was established by s. 71A of the Bermuda Constitution Order 1968, to institute, conduct and supervise prosecutions and related proceedings. The Director makes prosecutorial decisions on behalf of the public on a professional basis, independent of political influence or control. The Director’s prosecuting role is also independent of the BPS and other investigative agencies. The Department has responsibility for prosecuting all proceeds of crime offences and acting in relation to confiscation of the proceeds of criminal conduct. i. The Bermuda Monetary Authority (BMA) was established by the Bermuda Monetary Authority Act 1969. Its overarching responsibility is to regulate Bermuda's financial services sector and entities in the banking, credit unions, insurance, securities, TSPs, MSBs and most recently, CSPs sectors. j. The Superintendent of Real Estate (SoRE) was designated as the AML/CFT supervisory authority for the real estate sector in Bermuda pursuant to the 2008 POCA and POCR. Currently, there are approximately 55 brokers and 196 agents under their supervision. k. The Registrar of Companies (ROC) was established in 1970 and the ability to appoint a Registrar was established by s. 3 of the Companies Act 1981. The Department is responsible for maintaining a registry of all legal persons formed or registered in Bermuda under the Corporate Act, including: Companies Act 1981; Partnerships Act 1902; and Limited Liability Company Act 2017 (i.e. companies, partnerships, and limited liability companies), the Limited Partnership Act, 1883 and the Exempted Partnership Act, 1992. The Department is also responsible for revenue collection, company winding-ups/strike-offs and insolvency. Mutual Evaluation Report of Bermuda 24 │ l. The Bermuda Casino Gaming Commission (BCGC) was established in 2015 by the Casino Gaming Act 2014 to regulate casino gaming in anticipation of the development of this industry in Bermuda. m. The Registry General: The framework for oversight of charities was updated with the enactment of the Charities Act 2014 which formally appointed the Registrar General as the supervisory authority for registered charities and allowed for a focus on TF matters. As at the date of assessment, the Registry was responsible for the supervision of 391 Charities. n. The Office of the NAMLC was established in 2009 as a unit within the MOLA, to provide secretariat support to the Committee and to play a key role in the coordination functions of the Committee. In October 2017, the Office was moved to the Ministry of Finance. o. The Barristers and Accountants AML/ATF Board (the Board) is a statutory Board established jointly by the Chartered Professional Accountants of Bermuda (CPA Bermuda) and the Bermuda Bar Association, pursuant to s. 8A of the Chartered Professional Accountants of Bermuda Act 1973 and s. 25A of the Bermuda Bar Act 1974. The legal and accounting sectors are therefore self-regulating. The Board commenced its supervisory activities in 2013 and is responsible for the regulation of law and accounting firms which provide ‘specified activities’ as defined in the POCA. At March 2018 there were 23 legal and 6 accounting regulated professional firms under the Board’s remit. 1.4.3. Financial sector and DNFBPs 78. The combined assets of Bermuda’s deposit taking entities is approximately USD23B. Income totalled USD 795M for the sector in 2016, which constituted 13% of GDP. The corporate registry has less than 17,000 registered entities, approximately 1,300 of which are AML/CFT regulated financial institutions. Both the insurance and securities sectors have significant international influence, USD 632B in assets (2016) and USD144B (2016) in assets respectively. In terms of the analysis in IO.3 and IO.4, more weight was given primarily to banks due to the heavy inflows and outflows of international transactions, as well as the large number of international businesses in Bermuda which conduct their banking with the banks in Bermuda. Bermuda is also the world’s second largest centre for captive reinsurance. This sub-sector does not fall within the definition of financial institutions as set out in the FATF Recommendations. 79. In relation to other DNFBPs, at the time of the onsite there were two dealers in precious metals and stones (DPMS), twenty-three law firms/attorneys and 5 accounting firms/accountants, 251 real estate brokers/agents, over 300 NPOs/Charities and no casinos. DNFBPs are all regulated and subject to the AML/CFT framework, Laws and Guidance Notes (GNs) issued by the BMA, the SoRE, the Board and the FIA. Mutual Evaluation Report of Bermuda │ 25 Table 1.1 Entities that comprise the Financial and DNFBP sectors14 Sector Number of Regulated Entities in Sector (Dec 2017) Insurance 15 1,485 Securities 892 Real Estate 53 Banking (including 1 credit union) 5 Law Firms (registered with the AML/CFT 23 Board) Trust Service Providers 28 Corporate Service Providers 62 Money Service Businesses 2 Accounting Firms (registered with the AML/CFT 6 Board) Dealers in precious metals and stones and 2 other high value goods (DiHVGs) Gaming (Casinos) 0 Non-Bank Lending Entities 0 Other financials (Bermuda Stock Exchange) 1 80. Regarding the DNFPB sub-sectors, in descending order of weighting, the assessment team assigned greater weighting to the effectiveness findings in relation to the following: TSPs, CSPs, real estate companies, regulated professional firms (RPFs), PTCs and DPMS. 81. The weighting and assessment of the relevant sectors were commensurate with the sectors’ sizes and contributions to Bermuda’s GDP with one notable exception – the insurance sector. While the insurance sector is the largest contributor to GDP in Bermuda, as noted previously this is a direct result of the fact that Bermuda has the second largest reinsurance business in the world. Reinsurance is not assessed by the NRA as a high-risk product does not fall within the definition of financial institutions as set out in the FATF Recommendations, however, they are subject to targeted financial sanction requirements in Bermuda and required to file SARs when appropriate. Long-term direct (LTD) insurance is considered inherently high risk but is not considered to be large in terms of context and represents as at December 2017 only 53 licensees, and less than 1% of the insurance market. Nevertheless, LTD insurance entities have been under the regulations for a number of years and all insurance managers underwriting any LTD insurance were brought under the regulations in 2017. The sector has multiple industry groups that meet to discuss AML/CFT and other insurance issues. The BMA has found them to be largely compliant in 2017 regarding the content and quality of their business risk assessments that encompasses AML/CFT requirements. Sector representatives interviewed during the onsite were found to have a sound understanding of their AML/CFT risks and have attributed their most prevalent ML/TF risks in the international long term, direct insurance market and the challenge of conducting the proper due diligence for international policy holders. 82. The securities sector is considered inherently high risk. Along with the banking sector, the securities sector is considered to have the highest inherent risk to the country for ML, with a predominantly 14 The Assessment of Bermuda’s National Money Laundering and Terrorist Financing Risk Report 15 The higher risk long term direct insurance which is included in the FATF standards comprise only 1% of the insurance sector (Effectiveness Submission). Mutual Evaluation Report of Bermuda 26 │ international client base and substantial foreign policy holdings. The investment funds in Bermuda had a total net asset value of approximately USD144B. The last onsite reviews conducted by the BMA found the sector to be compliant in its business risk assessments that incorporates ML/TF risks. 83. The real estate sector is the largest contributor to Bermuda’s GDP (after insurance and securities) and comprises 251 brokers/agents. However, the most significant threat for ML in Bermuda originates from foreign predicates, and Bermuda’s real estate market poses significant challenges for foreigners to enter due to statutory immigration controls. This restriction on foreigners entering the market has had a mitigating effect on the ML risks for the sector. 84. As at the end of 2016, the 4 banks (totalling 13 branches) had total assets of USD23B; 93% and 96% of the deposit and loan account holders respectively, reside in Bermuda. The three sub-sectors of Bermuda’s banking are the retail and business banking for local residents (high inherent ML risk due to the sheer size of this sub-sector), corporate and transaction banking for international companies domiciled in Bermuda (high inherent ML risk due to its international nature and transaction volume), and wealth management/private banking for high net worth individuals (high inherent ML risk due to the complexity of products and services and the culture of confidentiality). TF risks were assessed by the NAMLC as medium-low. The banks have had business risk assessments consistently in place over the last several years, with more recent enhancements considering the risks in the Bermuda market. The two largest banks account for most bank deposits, have multiple foreign regulators who insist on them having a “sophisticated understanding of the ML/TF risks facing them.16” In the interviews with sector representatives, the Assessors were comfortable that in general, this sophisticated understanding of ML/TF risks was present within the banks. 85. The other sectors such as the TSPs are considered inherently high risk due to their international nature and high net worth clientele. However, the risks in this sector have been greatly mitigated by the fact that PTCs are now regulated by the BMA. Most Bermudian CSPs are owned or controlled by regulated law firms, accounting firms or FIs which mitigates the ML risks accordingly. The final review of beneficial owners and, where applicable controllers of all client entities must still be approved by the BMA at incorporation, and prior to changes to the share register being made although this is not always the case, see IO.517. 86. The MSB sector is inherently high risk due to the transient, one-off nature of the customers. In 2016 this sector handled approximately USD444M in transactions, the majority constituting outgoing transactions to the Philippines, Jamaica, USA and Portugal. The risk is somewhat mitigated by the average outgoing transactions which is less than USD400 on average. As at the time of the onsite, there were only two

Bermuda Anti-Money Laundering & Counter-Terrorist Financing Measures PDF

Document Details

Tags

Related

Summary

Full Transcript

Upgrade to continue