Assessment of the Supervision and Regulation of the Financial Sector

This paper presents an assessment of Financial Sector Supervision and Regulation for Bermuda. The Bermudian authorities have made impressive progress in developing and implementing a risk-focused approach to supervision across the range of their sectoral supervisory responsibilities. Full rollout of the risk-based regulatory system to all market segments is, however, required for achievement of comprehensive oversight of the market. To support the introduction of a formal risk-based supervisory system, the banking department has been restructured.


This paper presents an assessment of Financial Sector Supervision and Regulation for Bermuda. The Bermudian authorities have made impressive progress in developing and implementing a risk-focused approach to supervision across the range of their sectoral supervisory responsibilities. Full rollout of the risk-based regulatory system to all market segments is, however, required for achievement of comprehensive oversight of the market. To support the introduction of a formal risk-based supervisory system, the banking department has been restructured.

I. Introduction

1. An update of the 2003 offshore financial center (OFC) Module 2 assessment of financial regulation and supervision in Bermuda was carried out in the periods May 7–23 and June 12–22, 2007within the framework of the OFC Assessment Program approved by the Executive Board of the Fund in November, 2003. Consultations with the authorities continued between September 2007 and May 2008.

2. This report briefly describes the developments in the financial system and regulatory and supervisory arrangements in Bermuda since 2003; provides an update on how the relevant recommendations from the 2003 assessment have been implemented; and summarizes the results of the detailed assessments. Detailed assessments were carried out of the supervision of commercial insurers—on the basis of the International Association of Insurance Supervisors (IAIS) Insurance Core Principles, and of the AML/CFT regime—on the basis of the AML/CFT methodology of 2004, as updated in June 2006, for assessing compliance with the Financial Action’s Task Force 40+9 Recommendations. ROSCs based on the detailed assessments of insurance supervision and the AML/CFT regime are annexed. The 2003 assessment of banking supervision was factually updated, taking account of the revised Basel Core Principles (BCP).

3. The 2003 assessment had found that supervision was well–developed in banking, key areas of securities regulation, and for AML/CFT (based on the then–current standard), but noted some deficiencies in insurance supervision.

4. Bermuda is both the third largest reinsurance center after London and New York, and the second largest captive insurance domicile after the U.S.1 The assessment update gave most attention to the insurance sector, focusing in particular on the systemically important features of the Bermuda market. Commercial insurers are globally active and supervisory standards to cover them have been agreed by supervisors internationally. The detailed IAIS assessment covered the commercial sector, with stress testing of a sample of such companies to complement the assessment. However, exposure to captives is dominated by related parties, and there is as yet no agreement on the extent of oversight required in the captive insurance sector.2 To reflect this situation, a review of captive supervision was carried out. The extensive changes in the AML/CFT standard since 2003 dictated a detailed assessment of that regime.

II. Political And Economic Background

5.Bermuda is a self–governing British Overseas Territory. The governor, appointed by and representing the British monarch, has responsibility for external affairs, defense, internal security, and the police. The legislature has two chambers—the upper house of 11 appointed members and a 36–member house of assembly elected for a 5–year term. The last elections were held in 2003. Bermuda’s legal system is based on English common law, the doctrines of equity, and Bermuda statute law dating from 1612. The judicial branch is headed by the Chief Justice and the courts comprise magistrates’ courts, the supreme court, and a court of appeal. In 2006, a commercial court was established as part of the supreme court and supreme court rules were updated.

6.Bermuda is one of the wealthiest jurisdictions in the world with per capita GDP of over US$ 75,000 in nominal terms in 2005, largely as a result of its international financial center.3 The center contributed over half of real GDP, and almost 30 percent of employment in 2006. In 2008, the population is projected to be 64,200. Bermuda issues its own currency at par with the U.S. dollar and has a consumption–based taxation system with a payroll tax of up to 12.5 percent (on employment income), inheritance tax, and various stamp duties, but no taxes on unearned income or capital gains.

7.Economic growth also reflects Bermuda’s status as a global reinsurance and direct insurance center. In 2006, real growth accelerated to 5.4 percent from an average of 3.9 percent in the previous three years, with growth of 19, 4, and 19 percent respectively in the financial intermediation, business activities, and international business activities industries. This growth reflected the inflow of catastrophe reinsurance capital following the 2005 hurricane season. Output from hotels and restaurants grew by 10 percent.4 Inflation as measured by the consumer price index was 3.8 percent in 2007.

III. Financial System Overview

8.Bermuda is a major international financial center, mainly due to its importance as an operating base for the international insurance and reinsurance industry, and to a lesser extent for collective investment schemes. The banking sector is small and focuses on serving the international business sector. There is one stock exchange that lists domestic companies and mutual funds as well as cross–lists international companies. Trading volume in the exchange is very thin.

A. Banking

9.There are four licensed banks in Bermuda, two of which are locally–controlled—Bank of N.T. Butterfield and Son, Ltd., and Capital G. Bank Ltd.; the third, Bank of Bermuda, was purchased by HSBC—the U.K.–based banking group—in 2004, and the fourth, Bermuda Commercial Bank is controlled by a Cura$000E7;ao bank. Consolidated total assets of banks and the single deposit company5 amounted on average to $22 billion during 2003–2006, or four times the country’s GDP.6

10.Most banks have focused their operations on serving the growing international business sectorby offering investment, trustee, and financial management services, since the growth potential for retail banking is limited by the small size of the population. An indirect indication of the reliance of banks on commercial operations targeted to the international business, particularly the insurance sector, and business overseas, is the share of their foreign assets in their combined consolidated balance sheet. At the end of 2007, the BMA reported that foreign assets accounted for 80 percent ($19.4 billion) of the total combined balance sheet of Bermuda banks and deposit companies (Table 2).

Table 2.

Bermuda Financial Sector

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Source: Bermuda Monetary Authority (BMA), and BMA, Annual Reports, 2003 to 2006.

Includes companies holding both general and composite business licenses. Since the insurance companies have different financial years, comparable aggregate data is not yet available for 2007.

11.Certain indicators suggest low risk in the banking sector. Capital adequacy in the consolidated banking sector appears adequate. The capital to risk–weighted assets ratio was 17.1 percent at end–2007 (16.8 percent at March 2008), well above the 10 percent minimum ratio required by the BMA, and up from around 15 percent at end–2005. Liquidity, as measured by the loan–deposit ratio, deteriorated to 35 percent at end–2007 from 24 percent at end–2004.7 The liquidity position of the banks, however, is still considered comfortable by rating agencies.

B. Securities Markets

Collective Investment Schemes

12.Bermuda has a large and active investment fund and investment funds services sector. The jurisdiction hosts a number of multinational financial services organizations, and is home to a large number of hedge funds, investment managers, and portfolio managers as well as internationally–active fund administrators.

13.The number of collective investment schemes (CIS) in Bermuda increased substantially during 2002–2006, favored in part by the absence of income or capital gains taxes for CIS, and reflecting the growth of the hedge fund industry.8 There were 1,303 schemes with a net asset value of $249 billion in 2007, up from 912 schemes with a net asset value of $68 billion in 2002. The schemes manage a total of 2,162 portfolios for 1,679 funds (mutual funds, umbrella funds, sub–funds, segregated accounts, and segregated account companies) and 483 trusts (unit trusts, umbrella trusts, and sub–trusts).

Stock Exchange

14.Bermuda has a stock exchange with a limited number of full–service brokerage firms. The Bermuda Stock Exchange (BSX) is a fully electronic offshore securities market that serves as a domestic market for local companies and domestic CIS, and as a venue for recording trades in internationally–listed companies. As of end–2007, there were 543 securities listed in the BSX, including 361 CIS and 37 international companies cross–listed on onshore exchanges. The total market capitalization of the BSX was $350 billion at end–2007, and $391.3 billion at March 2008, up from $150 billion in 2002.

15.The vast bulk of trading volume on the exchange takes place in international issues—the domestic market was less than one percent of market capitalization in 2007. The annual trading volume in domestic equity securities was relatively thin in 2006 at $121 million but up by two–thirds compared with 2005, and in 2007 it rose by one–third to $165 million. The number of trading members in the BSX declined to 11 in 2007 from 16 in 2002. All trading members must be Bermuda–domiciled companies. The BSX also operates a clearing and settlement system and a depository. All systems are fully automated.

C. Insurance

16.With more than 1,400 registered (re)insurers, Bermuda is a significant player in the global insurance market. The Bermudian market is diversified and sophisticated. In 2006, Bermuda accounted for 12 of the top 40 global reinsurers rated by Standard and Poor’s, and 15 of the top 35 reinsurers rated by AM Best in 2004. The total number of registered insurers was 1,480 at end–2007. About 92 percent or 1,312 of the 1,421 registered insurers in 2005 were actively conducting business. They included 1,135 general insurers, 100 composite insurers, 77 long–term insurers, and 19 insurers that write domestic business. Composite insurers write a combination of general and long–term business provided that their long–term insurance business is incidental and limited9.Box 1 provides a brief history of the development of the industry.

Development of the Bermuda Market, in Brief

Bermuda’s insurance market began in 1947 when the founder of the American Insurance Group (AIG) based the international business of his insurance company in Bermuda. In the 1960s, Bermuda was a pioneering domicile for captive insurance companies. Bermuda remains the second largest domicile, after the U.S., for captive companies.

In the mid 1980s, when there was a shortage of coverage and high prices for excess liability insurance (additional coverage when limits on underlying policy are exceeded), the reinsurance companies Ace Ltd and XL Capital Ltd (earlier Exel) were formed for the sole purpose of providing excess liability. These later offered directors’ and officers’ liability, as did one insurer established for this purpose, and eventually diversified their lines of business. In 1988 Centre Re was formed to provide the innovative structured reinsurance (“arrangements that transfer limited risk relative to aggregate premiums that could be charged under the contract”, IAIS). These companies, formed to serve the U.S. market, chose to incorporate in Bermuda because of the timeliness with which incorporation was possible and the absence of income tax. Proximity to the New York markets and association with the U.K. would also have enhanced Bermuda as a location.

Following the loss of capacity in the U.S. market after the 1992 Hurricane Andrew, eight property catastrophe reinsurers entered the market. In the late 1990s, Arrow Re (Goldman Sachs) and Lehman Re (Lehman Brothers) were formed to facilitate reinsurance access to capital markets. These were followed by financial guarantee companies that provide guarantees for debt securities.

In addition to the initial important sources of attraction described above, the concentration of professional insurance skills in Bermuda now appear to be of dominant importance in attracting both firms and their customers. The concentration of insurance skills creates economies of scale for risk managers and others seeking corporate insurance. Major new influxes of capital followed September 11, 2001—whose insured losses resulted in lower capacity—and the 2005 hurricanes Katrina, Rita, and Wilma. The latter wave also included the innovation of sidecars. Sidecar structures allow a reinsurer to manage the underwriting risk of a book of business in an entity that is financed through the issuance of debt and equity to the market. Sidecars permit additional capital without the need to establish a new company. Several were closed in 2007 as the need for additional capacity has declined.


17.Bermuda legislation categorizes general insurers in four classes(see Table 3):

  • Class 1: single–parent captives insuring only the risks of its owners or affiliates of the owners, or pure captives;

  • Class 2: multi–owner pure captives and captive insurers deriving up to 20 percent of their net premiums from unrelated parties10;

  • Class 3: insurers not included in Classes 1, 2, or 4, including “captives” with more than 20 percent of their net premiums from unrelated parties; and

  • Class 4: insurers with minimum capital and surplus of $100 million underwriting direct excess liability and/or property catastrophe reinsurance risk.

18.Measured in terms of gross written premium (GWP), the Bermudian insurance market has more than doubled from 2001 to 2006, and it continues to attract a diverse range of start–ups and innovative insurance arrangements. The attractiveness of Bermuda for the insurance sector is evidenced by the record number of 82 new insurers that were established in Bermuda in 2006, a three–year high. In particular, the bulk of new capital attracted into the global reinsurance industry by the higher premiums resulting from the 2005 hurricane season flowed into Bermuda (see Box 1).

19.Ownership in the Bermuda insurance sector is geographically diverse but dominated by U.S. companies, which owned 60 percent of the 589 active commercial insurers at end–2005. Bermudian–owned and European–owned insurers represented 18 percent and 14 percent of the market, respectively. Around one in three commercial insurers were publicly–listed companies, of which two–thirds were listed in U.S. exchanges. The insurance sector accounted for 7.6 percent of the total employment of 38,947 in Bermuda. Insurance density (premiums per head) in the domestic market was $6,072.

20.Table 4 indicates the high degree of concentration in the insurance industry. GWPs in 2006 totaled $115.8 billion, of which almost 90 percent was written by commercial insurers.11 The top ten of the commercial insurers in each of the Classes 3, 4, and long–term together, had a share of two–thirds of total market GWP, and the top 10 of the Class 4 and long–term companies had 70 percent and 98 percent of GWP in their classes, respectively.

Table 3.

Bermuda: Insurance Sector

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Source: Bermuda Monetary Authority (BMA), and BMA, Annual Reports, 2003 to 2006.

Includes companies holding both general and composite business licenses.

Table 4:

Analysis of Gross Written Premiums in 2006

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Source: Bermuda Monetary Authority

21.GWP is diversified by the insurance line of business, and risk retention is generally high. Based on a survey covering two–thirds of the industry, in 2005 long–term insurers wrote 34 percent of GWP, “mixed” insurers1226 percent, and reinsurers 16 percent. Retention rates13 are high, almost 95 percent for long–term insurers and nearly 90 percent for mixed insurers. Direct insurers and reinsurers retained about 88 and 80 percent of their GWP respectively. While GWP (and hence exposure) sourced from North America declined from 62 percent in 200¾ to 57 percent in 2005, GWP from Europe rose from 6.7 percent (2003) to 19.4 percent. Global business represented 20.4 percent of industry GWP in 2005. 14

22.Overall, the Bermuda insurance market strengthened its capital base in 2006.15 While profitability of Bermudian reinsurers was hit by their combined 30 percent share of the insured losses from hurricanes Katrina, Rita, and Wilma (KRW), there has been a net–capital inflow. Hedge funds have been among the recent investors in the reinsurance industry, taking advantage of an innovative short–term risk transfer mechanism (sidecar) to help fill the depleted capacity caused by the hurricane losses in 2005 (see Box 1). The dominant players are the Class 4 insurers which accounted for 36 percent of the total capital and surplus at end 2006. They supply 40 percent of the property catastrophe reinsurance capacity to the U.S. market. Collectively, they settled $17 billion of claims arising from the 2005 hurricane season.

23.The investment profile of the industry is relatively liquid. Fifty two percent of the total assets as at end–2005 were in quoted bonds and equities, and 9.3 percent in cash and deposits. Investment and advances to affiliates represented 53 percent and 14 percent of the assets of direct insurers and composite insurers, respectively.16 In contrast, reinsurers and long–term insurers held 5 percent and 2.6 percent respectively, in intra–group balances. In 2006, quoted investments of commercial insurers were 50 percent of assets, investment in affiliates 23 percent, and cash and time deposits 8 percent.17

24.Going forward, the main strategic concern of commercial insurers is the tradeoff between gaining/retaining market share by lowering rates, and reduced profitability. As property/casualty insurance rates have fallen in the absence of major claims since 2005, competitive pressures have increased. Greater portfolio diversification has been driven by credit rating considerations18 and potential over–capacity, the latter due partly to added pressure from state–funded capacity for catastrophe risks in the U.S. Some sidecars that have provided additional capacity to reinsurers, such as those funded by highly leveraged investors, have disappeared. Standard and Poor’s noted that the depth and breadth of senior management of the class of 2006 start–ups are noticeably weaker than previous cohorts, as technical expertise may be spread thin by the high number of start–ups since 2001. Furthermore, their strong focus on property and other catastrophe–exposed lines of business could pose a challenge if volatility risk continues to increase as experienced during recent years.

D. Regulatory Framework, Oversight, and Market Integrity Arrangements

25.Bermuda’s single regulator, the BMA, supervises the insurance, banks, trust and investment businesses, collective investment schemes, the BSX, and the credit union. It also issues the Bermudian dollar.

26. The regulatory framework is based on the following legislation:

  • Bermuda Monetary Authority Act, 1969, last amended in 2006;

  • Banks and Deposit Companies Act, 1999;

  • Insurance Act, 1978, last amended 2006;

  • Investment Business Act, 2003;

  • Trusts (Regulation of Trust Business) Act, 2001; and

  • Investment Funds Act, 2006.

27.The BMA board is responsible for the policy and strategy of the BMA and the general administration of its affairs and business. The Board has 12 members, 3 of whom are executives appointed by the BMA subject to approval by the Minister of Finance (MOF). The minister appoints non–executive members. To enhance independence, board members are appointed for terms ranging from three to five years, and can only be removed from office for legislated reasons. The BMA’s non–executive chairman chairs the Non–Executive Directors’ (NED) Committee to provide an independent check on the performance of the executive members of the board. In 2006, the board instituted a number of reforms to its processes, restructuring the audit committee to an audit and risk management committee, and instituting a board code of conduct and conflict of interest policy, inter alia.

28. At the time of the assessment mission, the supervision ofinsurancewas carried out by the Insurance Department (ID) of the BMA, headed by the Supervisor of Insurance. All supervisory units now report to the Deputy CEO, a post created in 2007–08. Under recent legislative change, the BMA appoints executive members of the board, though these appointments do not have effect until approved by the minister. The staff of the ID stood at 50 persons at the time of the assessment, up from about 17 in 2003, and professional staff reached 45 by end–2007. An Insurance Advisory Committee (IAC), established under the Insurance Act 1978 (the IA) advises the minister on insurance matters. A number of professional bodies and self–regulatory industry associations complement the regulatory regime.

29.Banking supervision and securities regulationis the responsibility of the Banking, Trust and Investment Department (BTI) that is under a director who reports to the Deputy CEO of the BMA. The department was restructured in 2006. The Investment Funds Act of 2006 (IFA) came into effect in March 2007. The act seeks to align the regulation of CIS with the level of sophistication of their investors, and defines three types of funds: Standard, Institutional, and Administered Funds. Most of the CIS target sophisticated and/or institutional investors, and accordingly, regulations for these schemes focus mainly on the proper disclosure of information to investors. Private funds, open to a maximum of 20 investors, are excluded from the act.

30.The main pieces of legislation governing money laundering and the financing of terrorism are the Proceeds of Crime Act 1997 (POCA), and the Proceeds of Crime (Money Laundering) Regulations 1998, and The Anti–Terrorism (Financial and Other Measures) Act 2004 (The ATFA) respectively. Important amendments to the POCA, the Criminal Justice International Cooperation (Bermuda Act), and the Financial Intelligence Agency Act (FIA Act) were enacted in July 2007. The FIA Act (which was still to be put into effect in January 2008) establishes a new administrative agency (the FIA) that is being organized to take on the responsibilities of the current financial intelligence unit (FIU), part of the Bermuda police. The National Anti–Money Laundering Committee (NAMLC) brings together key ministries and departments and fills, in practice, the AML/CFT policy formulation function. NAMLC’s main legal mandate is, however, to advise the MOF and to issue industry guidance on AML issues.

E. Findings of Earlier Assessments

31.The 2003 assessment found that the regulatory and supervisory framework was well–developed in banking, key areas of securities regulation, and for AML/CFT (based on the then–standard and methodology). Some deficiencies were noted in insurance supervision—the ample powers of the BMA had not been fully realized. Annex III describes the actions taken in response to the 2003 assessments of banking and insurance supervision, and securities regulation.

32.As described below, the BMA has made extensive reforms to all areas of supervision, with the exception of the AML/CFT regimesince 2003, with particularly radical improvement in insurance supervision.

IV. Strengths And Vulnerabilities IN The Financial System

A. Progress in the implementation of financial standards and follow–up on 2007/08 market disturbances


33.The BMA has addressed most of the recommended actions in the 2003 report. In 2006, a major restructuring of the BTI was undertaken to support the introduction of a more formal risk–based supervisory framework and the required expertise was hired. Higher–risk institutions are identified through a standardized analysis and greater attention paid to these. An appropriate system has also been introduced to define a capital charge where there is material market risk.19 This is the first step toward putting in place the new Basel II capital adequacy framework that the BMA intends to implement in 2009. Credit evaluation and policy has also been strengthened through a policy paper that sets out the BMA’s enhanced responses in cases of large exposure, connected lending, and other risks. Policy papers also address operational and other risks. On–and off–site supervision have also been strengthened.

34.In addition to addressing the 2003 recommendations, the BMA has upgraded its policy framework to comply with the 2006 revised BCPs. The increased standard of supervision will require continuous attention to resources. In addition, the mission recommends:

  • reviewing the scope and frequency of on–site examinations;

  • enhanced country exposure reporting; and

  • more direct intervention tools in the event of impending bank failure.

35.The two Bermudian banks holding some sub–prime related assets in their investment portfolios have suffered mark–to–market declines in value, resulting in stepped–up scrutiny from the BMA. The assets are higher rated tranches of asset–backed credits, representing 10 to 15 percent of their investment portfolios, and are held–to–maturity investments. As a result, the banks and their auditors are of the view that there has not been permanent value impairment. The BMA is reviewing portfolio details on a monthly basis, and holding meetings with management to monitor portfolio management.


36.In insurance, the BMA has instituted a strongly risk–focused supervisory approach in line with the diversified range of insurers in Bermuda. Supervisory scope and intensity is determined by an assessment of the likely scale of impact of a risk, as well as of its likelihood.

37.There is a high level of observance of the IAIS core principles. The ID’s goal of becoming a leading international regulator has resulted in a well–designed process of staff, systems, and framework upgrading that is proceeding expeditiously. Taking account of the 2003 assessment recommendations, the IA has been amended several times and initial guidance was introduced. The 2006 Amendment Act revised the framework to introduce more detailed licensing criteria, and required the BMA to publish a Statement of Principles and introduce a code of conduct. It also introduced a detailed regime for oversight of insurance controllers. Annex I provides the Report on the Observance of Standards and Codes (ROSC) for the IAIS insurance core principles assessment of the supervision on commercial insurers.

38.Implementation of a risk–focused framework, that assigns risk factors to the companies, has been started. Insurers are ranked by risk likelihood and impact. A riskier categorization results in increased supervisory focus including on–site inspection. The framework will also include a risk–based solvency regime. The licensing function has also been revamped with strengthened criteria, and enhanced regulatory reporting will be introduced.

39.Oversight of Classes 1 and 2, predominantly captives, is supported through the insurance manager infrastructure.20 These managers are licensed and integrated into the supervisory process. Management services give the supervisor a means of monitoring and inspecting numerous small companies by providing a focal control point representative of the management of the captives.

40.Effective and comprehensive implementation of the risk–based regulatory system will depend on:

  • continuous review of regulatory resources;

  • preservation of regulatory independence;

  • high transparency and disclosure to enhance recognition and support supervision; and

  • risk rating Class 3 companies to allow for the granular tailoring of supervisory stance currently available for Class 4.

41.The sub–prime–related exposures are affecting or could affect Bermudian companies mainly through four principal channels: investment in structured products, financial guarantee portfolios, liquidity positions, and potential claims on professional and executive liability insurance. The conservative investments of many Bermuda–based insurers have limited their direct exposure.21 Nevertheless, asset valuation uncertainty is affecting insurers (for example, AIG was downgraded and life reinsurer Scottish Re bought out). Fitch notes that, while Bermudian insurers place a higher proportion of invested assets in MBS and ABS than do U.S. insurers, the credit quality of their MBS and ABS remained high despite recent pressure.22 It would appear that exposure has been greatest for shareholders in financial guarantors who insured structured products, with the financial guarantee industry under considerable stress; for example, XL has been downgraded in part because of its exposure to a bond insurer. Exposures to loss from executive and professional liability are not yet known but these are reported to be reserved.23

42.The BMA has taken a proactive approach to the sub–prime crisis. It conducted two surveys in August and November 2007 to assess investment and underwriting exposure to sub–prime risk, and evaluate insurers’ risk management programs. The studies analyzed the four main areas of potential exposure and conducted stress tests, concluding that there is no systemic stress to the Bermuda market. A few companies were identified for enhanced supervision and monitoring. This work has been shared with related home or host supervisors in other jurisdictions and discussed at IAIS meetings. A guidance note on reserving practices for financial guarantee insurers has been issued for consultation.


43.The BMA has improved its ability to oversee CIS. New legislation provides full powers of information–gathering and inspection, as well as fund and prospectus rules. A dedicated investment funds team with additional experienced staff has been established and Fund administrator licensing has begun.

44.Other upgrades in securities regulation cover market intermediation and clearing and settlement. The BMA staff’s technical skills have been upgraded through recruitment and training, and clearer rules and guidance for inspection of investment providers have been put in place. Through the Investment Business Act, 2003, the BMA now has the authority to license clearance and settlement systems (currently only provided by the BSX). In addition, the offences of market manipulation and insider dealing were introduced by 2004 legislation.

Anti–money Laundering and Combating the Financing of Terrorism

45.The AML/CFT regime has not been much changed since the AML legislation of 1998 and the 2003 IMF assessment. Apart from the 2004 ATFA Act and some changes to the POCA, revisions to the guidance notes resulting from recommendations of the 2003 assessment are still in draft. Therefore, Bermuda has not kept pace with the FATF Recommendations and has not been able to introduce the risk–sensitive approaches to financial institution oversight permitted under the FATF 40+9.24 The regulatory framework does not address CFT issues, and customer due–diligence requirements are narrowly focused on customer identification. Enhanced capacity and resources are required to strengthen AML/CFT supervision in key industries. The new laws, POCA, the Bermuda Act, and the FIA Act address a number of the weaknesses in the AML/CFT legal framework identified by the mission. Annex II provides the ROSC for the assessment of the implementation of the FATF Recommendations for AML/CFT.

B. Stress Test Results for Class 4 and Long–Term Issuers

46.Ten of the 41 Class 4 and long–term insurers used their internal models to calculate the impact of various shocks, but these did not affect their ability to meet regulatory requirements. Results were reported in terms of the reporting requirements of the BMA, viz. change in capital and surplus, minimum regulatory premium ratio, and minimum regulatory loss reserves ratio. All of the companies employed a combination of proprietary and in–house models to analyze their risk exposures. The scenarios included three natural catastrophe events, two pandemic events, and worst–case scenarios that each firm in the sample was asked to specify for itself. The catastrophic events were found to have a high negative effect on companies’ capital, with the most severe impact resulting from the worst–case scenarios, only two of which included economic (in addition to natural catastrophe) events. No companies in the sample fell below the regulatory requirements, demonstrating the strong balance sheets of the companies.

47.Due to time constraints faced by the BMA and tested companies, the stress tests only covered a subset of the risk factors considered necessary to obtain an overall risk profile. However, more comprehensive assessment of risks would be obtained by use of a wider variety of stress tests (including financial market effects, and stresses on assets for example), and employment of economic valuation rather than accounting data. The single company that combined economic recession and catastrophic events in its worst–case scenario had a worse outturn than the others, suggesting that future stress testing could usefully focus on examining the effects of combining extreme events to obtain more insight into possible vulnerabilities. The BMA should also devote resources to understanding the companies’ models to learn the strengths and weaknesses of their risk analyses.

C. Cross–border Cooperation and Information Exchange

48.The BMA does not require a formal agreement or memorandum of understanding (MOU) to provide assistance to other supervisors. However, it has been willing to enter into bilateral MOUs where other authorities prefer to document mutual commitments by this means. The BMA has the ability to share confidential information with foreign supervisory authorities under “gateway” provisions in its regulatory laws. It also has specific powers to compel the production of information from licensed persons where the information is not required for its supervisory purposes, but only in order to assist a third country supervisor.

49.In relation to compulsory power, the BMAA, 1969, (Sections 30A to 30C) provides powers for assisting foreign regulatory authorities. The BMA is, however, required to take account of certain matters prior to providing the requested information. These include the likelihood of reciprocity, whether the requesting foreign regulatory authority has legislation and requirements similar to those of Bermuda law protecting the confidentiality of information provided to it, public interest, the nature and seriousness of the issue, and whether the requesting authorities will meet costs if required to do so.

50.There are also sectoral provisions for cooperation and information exchange. Section 52B (2) of the IA provides for assistance to be given to requesting authorities exercising similar regulatory functions without requiring strict reciprocity. In addition, there are two MOUs specifically covering insurance, and the BMA has applied to be a signatory of the IAIS’s multilateral MOU. The 2003 IOSCO assessment had found that the BMA had fully implemented the IOSCO standard on cooperation. In addition, in 2007 the BMA signed IOSCO’s Multilateral MOU. The guidance on consolidated supervision in the banking sector has been revised in line with the 2006 BCP.

51.As a regulator in an important home jurisdiction for insurance, while existing provisions are adequate, enhanced cooperation would be valuable. The mission recommends that the BMA implement routine arrangements to alert host supervisors of material developments, formalize exchanges with state insurance supervisors in the U.S. and the U.K. FSA, and consider joint inspections.

52.Bermuda has a comprehensive legal and institutional framework for international cooperation that is largely consistent with international standards for AML/CFT purposes, but there is a need to strengthen cooperation mechanisms among governmental institutions for AML/CFT.

Annex I. Report on the Observance of Standards and Codes (ROSC) for the IAIS Insurance Core Principles


Regulatory initiatives, expanded supervision, and increased staffing have strengthened Bermuda’s insurance supervisory regime since 2003. Taking account of the recommendations of the 2003 OFC assessment, the authorities introduced a phased program to update legislation and supervisory practices. The BMA has significantly enhanced its risk–based approach that is aligned with the diversified range of insurance entities domiciled in Bermuda. The updated framework has a high level of observance of the IAIS core principles, but implementation of the reforms is in transition. The BMA’s vision is to become a regulatory leader before 2010. Strong commitment to sound regulation by the industry contributes to this vision, but has to be constantly balanced with preserving regulatory independence and effectiveness.

Executive Summary

This assessment benchmarks Bermuda’s regulatory regime against the IAIS core principles based on the 2003 IAIS methodology. The assessment was conducted from June 11–22, 200725.

This ROSC covers commercial direct insurers and reinsurers classified as Classes 3, 4, and long–term under the Bermudian regime (commercial insurers). Comments on Class 3 insurers apply to long–term insurers unless stated otherwise. Captive insurers holding Class 1 and 2 licenses are covered in a separate factual update.

Information and methodology used for assessment

The assessments are based solely on the laws, regulations, and other supervisory requirements and practices that are in place at the time of assessment. In particular, the BMA is finalizing a risk–based solvency regime that will be complemented by enhanced regulatory reporting. These ongoing regulatory initiatives are noted by way of additional comments. The assessment was facilitated by meetings with industry bodies and insurers that were coordinated by the BMA, as well as by technical discussions with, and briefings by the authority.

Institutional and market structure—overview

The BMA has had authority for regulating, supervising, and inspecting virtually all of Bermuda’s regulated financial sector, including insurance, since 2002 under the BMA Act, 1969. An Insurance Advisory Committee (IAC) established under the IA advises the MOF on insurance matters. The non–executive chairman chairs the Non–Executive Directors Committee which provides an independent check on the performance of the board and the BMA.

Bermuda is a significant player in the global insurance marketwith over 1,400 registered (re)insurance companies, 92 percent (1,312) of which were active at end–2005. They comprise 1,135 general, 100 composite, 77 long–term insurers, and 19 domestic insurers. Composite insurers are permitted to write both general and long–term insurance provided the long–term is incidental and limited. The general insurers are licensed in four classes:

  • Class 1—pure captives;

  • Class 2—multi–owner pure captives and those deriving up to 20 percent of net premiums from unrelated parties;

  • Class 3—insurers not included in Classes 1, 2, or 4;

  • Class 4—insurers with minimum capital of B$100 million underwriting direct excess liability insurance and/or property catastrophe.

Gross written premiums in 2005 totaled B$100.7 billion of which 87 percent were written by commercial insurers. Average net risk retention rates were 94 and 87 percent of GWP for long–term and “mixed” insurers respectively.26 Direct insurers and reinsurers retained about 88 and 90 percent of GWP respectively. The Bermuda insurance market strengthened its capital base in 2006, with a net capital inflow following hurricanes Katrina, Rita, and Wilma. Their investment is relatively liquid with 52 percent of total assets in quoted bonds and equities at end–2005, and 9.3 percent in cash and deposits.

Main findings

The insurance regulatory and supervisory regime demonstrates a high level of observance of the IAIS standards, as described below:

(i)Conditions for effective insurance supervision (ICP1)—the Bermuda financial sector policy is supported by an efficient financial market structure, including specialized skills, and facilitated by easy access to U.S. financial markets.

(ii)The supervisory system (ICPs 2–5)—The BMA is a fully empowered insurance regulator with extensive operational and financial autonomy. It continues recruitment to effectively execute its enhanced supervisory framework. The relationship with industry should be constantly reviewed to preserve regulatory independence. The BMA has started implementation of its risk–focused supervisory framework with Class 4 insurers. The framework bases supervisory attention on assigned company ratings that take account of the impact and probability of risky events. Enhanced regulatory reporting will complement this risk–focused approach. While the licensing categories are broadly risk–based, Class 3s are a mix of entities, and the classification could be reviewed. Cooperation and information sharing are satisfactory and the BMA is encouraged to make routine and formalize some arrangements.

(iii)The supervised entities (ICPs 6–10)—the licensing process is systematic and efficient and the BMA has recently made arrangements to ensure home–host consultation on the licensing of cross–border establishments. The BMA has clear criteria and guidance for vetting owners and key management and for approving changes in control, but should acquire the power to approve the transfer of insurance portfolios. The corporate framework in place is supported by a formalized on–site inspection program.

(iv)Ongoing supervision (ICPs 11–17)—The BMA has made significant progress in strengthening regulatory reporting and off–site monitoring. Early formulation and implementation of a regime for group supervision of Bermuda–based insurance groups would help reduce regulatory risks. A formal on–site inspections program was introduced in 2006. Its active market analysis will be strengthened by enhanced regulatory reporting and the ongoing increase in resources. Intervention powers and sanctions are well–defined. Winding up and exits have been administered without disruption but the BMA should consider clarifying the priority of policyholders’ claims in composite insurers and those insurers with non–insurer business in the same legal entity. The BMA should clarity the conditions under which insurers are allowed to encumber assets held for the benefit of policyholders.

(v)Prudential requirements (ICPs 18–22)—The current solvency regime sets a minimum capital and surplus based on class of licence, subject to two other criteria based on net written premiums or net reserves with floors. Class 4 insurers must hold a minimum of B$100 million. At the time of the assessment the regime did not address double or multiple gearing of capital, but the BMA is consulting Class 4 insurers on a risk–based solvency regime. The BMA has provided guidance to insurers on its expectations for their risk management systems whose practical assessment is facilitated by ongoing inspections. Disclosure requirements should be established for derivatives and similar commitments, and the BMA is advised to issue guidance on the basis and adequacy of technical provisions.

(vi)Markets and consumers (ICPs 24–27)—The regulatory requirements for intermediaries are appropriate for the small domestic market. Insurance fraud is not an issue and is effectively covered under the criminal code and proceeds of crime regulation. The BMA should plan to implement the IAIS supervisory standard on public disclosures to facilitate market discipline.

(vii)AML/CFT (ICP28)—not assessed. Table 5 outlines these findings on a principle–by principle basis.

Table 5.

Summary of Observance of the Insurance Core Principles

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Table 2.

Recommended Action Plan to Improve Observance of the Insurance Core Principles

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Authorities’ Response to the Assessment

The Authority is pleased that the IMF Assessment has recognized the effectiveness of the regulatory framework put in place in Bermuda, and the significant work that has been undertaken since the last IMF Review in 2003.

At the same time, in anticipation of the new international standards as a result of initiatives such as Solvency II, Bermuda has moved swiftly to even further develop and enhance a number of aspects of its regulatory regime, consistent with the requirements of these new standards. This process is already well advanced, with numerous changes already introduced and others expected to be implemented during the first part of 2009. Certain amendments to the Insurance Act 1978 have been enacted, in particular underpinning the ability of the Authority to clarify aspects of the regulatory requirements and standards through codes of conduct to the industry. Moreover, the Authority has taken a number of steps to further enhance the effectiveness of its insurance regime including: significant increases in qualified technical staff; extending the risk–based model and further enhancement of the on–site elements of the regulatory regime to all classes, including the captives. Through these and other initiatives currently in train, the Authority is confident that it will continue to maintain a high degree of compliance with the relevant international standards.

More specifically, the Authority has been in a period of significant growth in staffing resources and has targeted further increases in supervisory and other resources for the remainder of 2008. These efforts have meant we have increased the size of our insurance and banking, trust and investment supervisory teams; have developed an independent risk and policy unit; have set up a dedicated insurance run–off team and have created an in–house actuarial unit. The Authority is making a significant investment in learning & development in its staff with a multi–tier program of core, intermediate, and specialist training, and sponsored study and accreditation.

The Authority values maintaining a strong working relationship with its external stakeholders in the various segments of the insurance industry. We will shortly publish a statement of policy on our approach to consultation with industry to set out a transparent framework for engaging with stakeholders on legislative and regulatory change. In our supervisory operations, our increased resources and enhanced on–site risk assessment and solvency frameworks allow the Authority to engage in a challenging dialogue with individual firms.

Since the IMF assessment mission, the Authority has made further progress in the roll–out of its supervisory program for insurance, including further on–site assessment, enhanced solvency standards, and specialist risk reviews. Our 2008–09 Business Plan sets out the Authority’s road–map to implement the remaining elements of the framework.

The Authority’s existing risk–based framework allows it to assess group governance, controls and risk management arrangements as part of its solo supervisory monitoring. The Authority’s 2008–2009 Business Plan sets out our intention to publish a discussion paper on insurance group supervision in the first quarter of 2009 and to move to implement a group supervision framework by 2011. In the meantime, the Authority is hosting a number of supervisory colleges to facilitate supervisory co–operation on our largest insurance companies.

Following the IMF assessment mission, the Authority has introduced a requirement for Class 4 insurance companies to publish their GAAP accounts. The Authority will consult on extending this requirement to the largest Class 3 companies and on further types of disclosure. The Authority is also in the process of reviewing and considering the appropriateness of other risk disclosures to enhance transparency.

In addition to building specialist risk capabilities, the Authority required Class 4 insurers to file the new risk–based capital model (Bermuda Capital Solvency Requirement) for the 2007 year–end. The model was accompanied by substantial risk and forward looking disclosures. Class 4 insurers were also required to file prescribed stress and scenario tests. Further, the Authority has designed an in–house system independent of the Bermuda Capital Solvency Requirement to evaluate the robustness of both the capital model and insurers’ ability to sustain catastrophic losses at varying levels. More comprehensive legislation with respect to the risk–based solvency regime was passed in July 2008. The legislation makes provision for the internal models of Class 4 insurers to be approved for the calculation of regulatory capital requirements upon satisfying certain criteria.

The legislation also subdivides the existing heterogeneous Class 3 sector into three separate classes (captives, small commercial and large commercial) to enhance the risk–based approach applied to the Authority’s insurance register.

Annex II: ROSC for the FATF’s Recommendations for AML/CFT

Bermuda: Report on Observance of Standards and Codes—FATF Recommendations for Anti–Money Laundering and Combating the Financing of Terrorism (AML/CFT)


53. This report on the Observance of Standards and Codes (ROSC) for the FATF 40 Recommendations for Anti–Money Laundering (AML) and 9 Special Recommendations Combating the Financing of Terrorism (CFT) was prepared by the International Monetary Fund (IMF). The report provides a summary of the AML/CFT measures in place in Bermuda, the level of compliance with the FATF 40+9 Recommendations, and contains recommendations on how the AML/CFT system could be strengthened. The assessment is based on the information available at the time of the mission from May 7–23, 2007 and was conducted using the 2004 Assessment Methodology. The Detailed Assessment Report (DAR) on which this ROSC is based was adopted by the Caribbean Financial Action Task Force (CFATF) on November 23, 2007. The views expressed in this document, as well as in the detailed assessment report (DAR), are those of the IMF mission team27 and do not necessarily reflect the views of the Government of Bermuda or the Executive Board of the IMF.

Key Findings

54.There has not been much change in Bermuda’s AML/CFT regime since the AML legislation and guidance notes (GNs) came into force in 1998, and the last IMF assessment in 2003. Apart from a few changes to the POCA and the GNs, the only significant new legislation enacted was the Anti–Terrorism (Financial and Other Measures) Act 2004 (ATFA). New draft GNs, prepared soon after the last IMF assessment, are still to be finalized and implemented. Therefore, the current AML/CFT regime has not kept pace with changes in the FATF Recommendations, and the authorities have been slow in implementing a number of key recommendations from the last IMF assessment, particularly with respect to the financial and non–financial sectors. At the time of the mission, several pieces of new legislation were under consideration by parliament to address a number of weaknesses in the regime as described below.

55.The lack of sufficient reforms to the AML/CFT regime has also limited Bermuda’s ability to apply risk–sensitive approaches to preventive measures for financial institutions (FIs), as permitted under the FATF Recommendations. In Bermuda’s case, the application of risk–based approaches seems particularly relevant, not only with respect to insurance—which is the most significant sector—but also in other types of financial and non–financial activities. The AML Regulations and GNs contain exemptions or simplified customer due diligence (CDD) provisions, but lower risk has not been proven in all cases. Furthermore, some of the exemptions are clearly inappropriate. Implementation of the recently passed legislation (post–mission), proposed regulations, and GNs will address some of the identified weaknesses in the preventive regime and, as contemplated, can provide for a more risk–based approach to compliance and supervision.

Legal Systems and Related Institutional Measures

56.The criminalization of money laundering (ML) and the financing of terrorism (FT) are generally comprehensive, with offenses applying to both natural and legal persons, and to the requisite predicate offenses. However, it is difficult to assess effectiveness of the legal framework given that there has been only one prosecution for ML in the last five years, as well as limited ML investigations. With respect to FT, no criminal investigations relating to terrorist activities, their financing, or the provision of support to them have been referred to the courts in Bermuda and there have been no FT–related suspicious activity reports (SAR) filed.

57.Under current law, protections from civil liability, but not explicitly from criminal liability, apply only to those who file ML–related SARs. In addition, regulated institutions who file FT–related SARs are not explicitly protected from either civil or criminal liability. The tipping–off offense is narrowly focused on investigations, rather than explicitly prohibiting disclosures relating to a SAR being filed or the contents of the SAR.

58.The legal framework for investigation and prosecution of ML is well–developed, and law enforcement and prosecutorial staff are highly motivated and professional. However, the staffing constraints in the office of the Director of Public Prosecutions (DPP) and the Financial Intelligence Unit (FIU) may have contributed to a low number of ML investigations, limiting their ability to carry out their AML/CFT tasks effectively. In practice, only a small number of SARs that are analyzed are fully investigated.

59.Following Parliament’s recent enactment of the Financial Intelligence Agency Act 2007 (the FIA Act which is still to be put into effect), a new administrative agency (the FIA) is in the process of being organized to take on the responsibilities of the current FIU that is part of the Bermuda police. To prevent an interruption in transfer of responsibilities, the BMA should provide for a suitable period of transition where the FIU remains tasked with financial intelligence functions until the FIA is fully operational. All police officers within the FIU have training in basic financial investigations, and most have been trained in areas such as confiscations, money laundering, and advanced financial investigative techniques. However, the current volume of work impacts the effectiveness of the FIU in undertaking timely analysis and investigations. In this regard, the FIU should be sufficiently staffed and provided with additional technical resources—including expertise in forensic accounting—during the transitional period to avoid operational gaps and to efficiently manage the transfer of the intelligence–related tasks to the FIA.

60.At the time of the mission, three important draft laws were under consideration that were enacted in June 2007. These are amendments to the POCA, the Criminal Justice International Cooperation (Bermuda Act), and the FIA Act. Once implemented, these new laws will address a number of the weaknesses in the AML/CFT legal framework identified by the mission.

Preventive Measures—Financial Institutions

61.The scope of the AML regulatory framework does not address CFT issues, and does not cover key areas of the financial sector, including life insurance business and certain elements of the investment/mutual funds sector. The lack of coverage in these areas constitutes an important deficiency in Bermuda’s AML/CFT regime, particularly in light of its role in the international financial system, even though life insurance does not account for the largest share of this sector. The POCA Regulations and GNs remain practically unchanged since the last IMF assessment mission in 2003, despite the weaknesses previously identified, a major upgrade of the international AML/CFT standards in 2003, and continued growth in the financial services industry. At the time of the mission, the BMA had prepared draft new regulations and was contemplating amending the GNs, pending passage of proposed new legislation that was to be passed subsequent to the mission.

62.The regulatory framework for FIs lacks basic CDD requirements, and risk–based approaches to compliance and supervision are underdeveloped.CDD requirements are narrowly focused on customer identification, and there are no provisions for complying with key CFT recommendations such as those for wire transfers. These and other deficiencies do not facilitate effective implementation, supervision, and enforcement. In addition, the GNs (which are non–enforceable) do not provide sufficient guidance for purposes of implementing broad–based CDD, and contain a number of customer identification provisions that could be detrimental to compliance. A key challenge also lies in the ability of FIs headquartered in Bermuda to implement and monitor their global operations. Increased attention should be given to the management of cross–border ML and FT risks, especially those associated with business relationships and transactions introduced through local and foreign intermediaries. In addition, compliance with recordkeeping requirements can be strengthened, including for beneficiary clients and business relationships established before the AML/CFT legislation was introduced.

63.A key strength of Bermuda’s supervisory regime is the integrated nature of financial sector supervision by the BMA and the professionalism of its staff. The BMA has a relatively strict licensing regime, which has contributed to the stability of its financial sector. Nonetheless, AML/CFT supervision is still developing particularly with respect to on–site inspections. While the BMA continues to improve its supervisory systems and processes, enhanced capacity, skills, and resources are required to strengthen AML/CFT supervision, particularly on–site inspections in key industries, namely the insurance and investments services sectors. The BMA also faces practical constraints in its ability to effectively conduct ongoing consolidated AML/CFT supervision, especially in the insurance sector and on a cross–border basis. This will require careful resource management and increased collaboration with other key players such as external auditors and overseas regulators. The conduct of sector–specific ML and FT risk assessments should be considered to better manage the supervisory process, identify supervisory priorities, and more efficiently allocate resources.

64.There is good cooperation between the BMA and the financial sectors, but the absence of specific sanctions for AML/CFT breaches limits the effectiveness of the BMA’s compliance oversight regime. To this end, more focused risk–based AML/CFT inspections should be conducted and, where necessary, enforcement action taken. The BMA has started to develop more broad–based on–site supervisory programs, which should be expedited across all sectors. Following a risk–based approach, the BMA should enhance the focus of its on–site procedures to reviewing compliance with CDD requirements for beneficial customers, including more rigorous enforcement of such requirements for accounts in existence when the AML regime was introduced in 1998.

65.The BMA has a wide array of formal sanctioning powers available to it but has never imposed them against a FI for a deficiency or violation of AML/CFT requirements. The practice has been for the BMA to apply moral suasion and less formal approaches to enforcement of compliance with these and other requirements, generally through the issue of warning letters, and these have been used only in a few cases.

D. Preventive Measures—Designated Non–Financial Businesses and Professions (DNFBP)

66.A comprehensive AML/CFT framework for DNFBPs was only beginning to be put in place at the time of the mission. Only trust service providers were subject to AML/CFT preventive measures including for monitoring compliance with these requirements. Other relevant DNFBPs are subject to the general requirement to report suspicious activities that applies to all citizens in the course of their business or profession. However, in the absence of an effective system of preventive measures and compliance oversight, these requirements are not being effectively implemented. It is rare that DNFBPs, other than trust services businesses, file SARs even though, as mentioned above, there is a general obligation on all persons to report.

67.The ML and FT vulnerabilities related to activities of lawyers, accountants, trust service providers, and company service providers have not been closely analyzed, although they are key gateways to the highly sophisticated and internationally active financial sector of Bermuda. Although there is little analysis to back this up, the risks of ML and FT through these sectors are generally perceived by the professions to be low. Regulation and supervision of the trust service business (TSB) mitigate against these risks in trust operations. In addition, relatively strict requirements and procedures for the incorporation of Bermudian companies also reduce the potential for ML and FT in this sector.

68.Local drug traffickers utilize the proceeds of drug trafficking to facilitate further drug shipments, as well as to acquire assets. Investigations related to possible confiscation orders frequently find that drug traffickers have used their proceeds to invest in local property, generally at the lower to middle end of the market, and frequently through the use of nominees. Car purchases are also a common use of the proceeds of drug trafficking. Access by nonresidents to the Bermuda property market is tightly restricted which may limit the attractiveness of this sector for international money launderers.

69.Plans are well–advanced to bring lawyers and accountants in public practice, as well as corporate service providers, within the AML/CFT preventive regime, but supervisory arrangements are not yet agreed. These plans include amendments to the POCA that were enacted by the legislature subsequent to the mission, and draft amendments to the POC Regulations which should include lawyers and accountants under the preventive regime. The provisions being adopted fall short of FATF standards in several respects, particularly in regard to the scope of activities of lawyers and accountants that would be subject to AML/CFT requirements. The scope of activities of lawyers and accountants that are subject to AML/CFT preventive measures is narrower than called for under the FATF Recommendations.

Legal Persons and Arrangements & Non–Profit Organizations (NPOs)

70.Bermuda is not a significant jurisdiction for the incorporation of companies, and there are a range of controls to mitigate the risk that legal entities and trust arrangements will be misused for illicit purposes. Incorporation of Bermuda companies requires that ultimate beneficial ownership be established twice before registration is accepted; once by the party submitting the application (who would normally be a lawyer), and again independently by the authorities. Companies are required to maintain a register of shareholders that is accessible to the public. With respect to trusts, any person offering trust services as a business is required to be licensed and supervised by the BMA as an FI. TSBs are required to establish the identity of parties to a trust relationship including settlors and ultimate beneficiaries. Law enforcement can gain full access to such CDD information and can share it with foreign authorities.

71.Ongoing oversight of charities is light but compliance with legal requirements appears to be good. In the NPO sector, charities are required to register if they are to raise money from the public. Most funds raised in Bermuda are applied in Bermuda and the vulnerability of the sector to ML and FT appears to be low. However, no risk assessment has been undertaken and AML/CFT is not a focus in the oversight of the charities sector.

National and International Co–operation

72.Bermuda has a comprehensive legal and institutional framework for international cooperation that is largely consistent with international standards, but there is a lack of conventional national cooperation mechanisms among governmental institutions on AML/CFT. The National Anti–Money Laundering Committee (NAMLC) brings together key ministries and departments, and fills in practice, the AML/CFT policy formulation role in Bermuda. NAMLC’s main legal mandate is, however, to advise the MOF and to issue industry guidance on AML issues, not to coordinate the formulation and implementation of AML/CFT policy. This situation may have contributed to the slow pace of legal and institutional reforms since the last IMF assessment in 2003.

E. Other Issues

73.The Suppression of the Financing of Terrorism (SFT) and Palermo Conventions have not been extended to Bermuda by the U.K. While this is not entirely within the power of Bermuda to address, it is a situation that should be remedied without delay.

74.Bermuda does not have a declaration or disclosure system in place for the physical cross–border transportation of cash and bearer instruments. While the authorities have plans to implement such a system, it should, inter alia, provide for the declaration of both incoming and outgoing transfers.

Table 6.

Summary Table of Observance and Key Recommendations28

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Compliant (C): the Recommendation is fully observed with respect to all essential criteria.

Largely compliant (LC): there are only minor shortcomings, with a large majority of the essential criteria being fully met.

Partially compliant (PC): the country has taken some substantive action and complies with some of the essential criteria.

Non–compliant (NC): there are major shortcomings, with a large majority of the essential criteria not being met.

Not applicable (NA): a requirement or part of a requirement does not apply, due to the structural, legal or institutional features of a country.

Authorities’ Response

The Government of Bermuda is committed to completing the process of updating Bermuda’s AML/CFT regime to reflect the most recent developments in financial crime and the revised international standards from the FATF.

Accordingly, the Bermuda authorities welcome the IMF assessment and would like to thank the assessors for their professionalism and diligence throughout the mission. We note the assessors’ full recognition of both the robustness of the arrangements developed and applied in Bermuda over many years, and of the very substantial steps already taken by the authorities to further develop our regimes to reflect the revised FATF recommendations.

Bermuda has long had a reputation as one of the world’s premier centers for international business and financial services, and our regulation, business practices and legal framework have long provided significant impediments to illicit, unethical, and sharp business dealings.

Equally, the authorities recognize the need to enhance and accelerate Bermuda’s current efforts to strengthen the existing AML/CFT regime including the visible reflection of the standards in business systems and processes in the financial sector. The government intends to use the recommendations arising from the report to provide a roadmap for the various enhancements to the AML/CFT regime in Bermuda in both the public and private sectors. Some of the required changes are already in place and many are at an advanced stage of implementation. Still others are currently the subject of further consultation among those concerned, both in the public and private sectors, as we move through the ‘to do’ list in a risk–prioritized manner. It may be helpful to highlight just a few of the important changes on which the Bermuda authorities have been focusing during 2007:

(1)Three important laws were approved by the Bermuda Legislature in June 2007. These related to amendments to the POCA, the Criminal Justice International Cooperation Act, and a new FIA Act, providing for the establishment of a new autonomous administrative body that will function as a clearing house for SARs. Implementation and effective application of this new legislation will address a number of the specific recommendations made by the assessors for enhancement of our AML/CFT legal framework;

(2)Revised regulations under the POCA were already at an advanced stage of development at the time of the assessment visit. These modified regulations were intended to implement the significant number of aspects of the revised FATF Recommendations which are required to be undertaken by financial institutions and Designated Non–Financial Businesses and Professions through legislation or other enforceable means. Currently these regulations are being further enhanced with a view to achieving an even greater measure of compliance with the final assessors’ recommendations;

(3)Authorities have approved the establishment of a National AML/CFT Coordinator to supplement the NAMLC, reflecting an important recommendation of the assessors with a view to ensuring the most effective liaison between all the relevant agencies and providing enhanced impetus to our efforts; and

(4) The Government of Bermuda has developed a detailed plan of action to address outstanding issues in this critical area. The additional private and public sector reforms when fully implemented will ensure that Bermuda’s financial sector meets its obligations while maintaining Bermuda’s competitive position in the provision of premier financial services to the global community.

Annex III: Actions in Response to the Recommendations of the 2003 Assessments

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Annex IV. Authorities’ Responses to Key Recommendations

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Captive insurance is defined by the IAIS as “an insurance or reinsurance entity created and owned, directly or indirectly, by one or more industrial, commercial or financial entities, the purpose of which is to provide insurance or reinsurance cover for risks of the entity or entities to which it belongs, or for entities connected to those entities and only a small part if any of its risk exposure is related to providing insurance or reinsurance to other parties”.


See IAIS, Issues Paper on the Regulation and Supervision of Captive Insurance Companies, October 2006.


See CIA World Factbook at and, Statistics.


See, Statistics


Firms with a deposit company licence can accept only term deposits and make only mortgage–secured loans.


All figures in Bermudian dollars, unless otherwise specified. The Bermudian dollar is at par with the U.S.


In the absence of deposit insurance and a lender of last resort, banks traditionally maintain high liquidity.


The legal term for CIS in Bermuda is investment fund.


Composite insurers are included in the data reported under Classes 1 to 4 insurers.


“Unrelated parties” are policyholders of a captive who are not associated by ownership with the owner of the captive.


Commercial insurers are Classes 3, 4, and long–term insurers and reinsurers.


“Mixed” insurers are direct insurers writing more than 10 percent of reinsurance within a portfolio, or vice versa.


That is, the companies retain a large proportion of the insured risk on their own books, rather than reinsuring or ceding it.


Global business is that where premiums cover bundled cross–regional risks.


Bermuda Insurance Update–Howling Winds of Change(2007 Vol. 1)


The high intra–group balance for direct insurers was distorted by one insurer who accounted investment outsourced to a subsidiary as a loan due from the subsidiary. Given the high proportion reported as intra–group balance, approval had to be obtained from the BMA to meet the minimum relevant asset requirement. All insurers have to maintain at least 75% of their relevant liabilities in the form of eligible relevant assets.


The information for 2005 comes from a survey which distinguished between direct insurers and reinsurers. The data for 2006 represents 63 percent of the commercial market.


Greater diversification is seen as increasing resilience.


Material risk of loss on on–and off–balance sheet positions due to market price changes.


An insurance manager is “a person who, not being an employee of any insurer, holds himself out as manager in relation to one of more insurers, whether or not the functions performed by him as such go beyond the keeping of insurance business accounts and records.” (IA)


See Guy Carpenter and Company, LLCManaging Prosperity: 2008 Bermuda Update Report, May 2008.The companies referred to in their reports are 25 insurance holding Bermuda–domiciled companies that they analyze on a regular basis.


See Fitch Ratings,Bermuda Market Overview, March 3, 2008


SeeBenfield Bermuda Quarterly, March 2008. These exposures, usually referred to as director and officers’ liability and errors and omissions, could arise, for example, from claims on the companies that created structured products.


New legislation (in draft at the time of the AML/CFT assessment mission) was passed in June 2007.


The assessment was conducted by Henning Göbel and Su Hoong Chang.


“Mixed” insurers write more than 10 percent of reinsurance within an insurance portfolio or vice–versa.


The mission team comprised Manuel Vazquez, Antonio Hyman Bouchereau (both IMF), Ross Delston, and John Abboth (both consultants).


More comprehensive recommendations are provided in the DAR.

Bermuda: Assessment of the Supervision and Regulation of the Financial Sector
Author: International Monetary Fund