Front Matter

Front Matter Page

© 2009 International monetary fund

September 2009

IMF Country Report No. 09/278

Isle of Man: Financial Sector Assessment Program Update—Detailed Assessment of Observance of AML/CFT

This Detailed Assessment of Observance of AML/CFT Report on the Isle of Man was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed in August 2009. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of the Isle of Man or the Executive Board of the IMF.

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Front Matter Page

Isle of Man

Detailed Assessment Report on Anti-Money Laundering and Combating the Financing of Terrorism

August 5, 2009

International Monetary Fund

Legal Department

Contents

  • Acronyms

  • Preface

  • Executive Summary

  • 1. General

    • 1.1. General Information on the Isle of Man

    • 1.2. General Situation of Money Laundering and Financing of Terrorism

    • 1.3. Overview of the Financial Sector

    • 1.4. Overview of the DNFBP Sector

    • 1.5. Overview of commercial laws and mechanisms governing legal persons and arrangements

    • 1.6. Overview of strategy to prevent money laundering and terrorist financing

  • 2. Legal System and Related Institutional Measures

    • 2.1. Criminalization of Money Laundering (R.I & 2)

      • 2.1.1. Description and Analysis

      • 2.1.2. Recommendations and Comments

      • 2.1.3. Compliance with Recommendations 1 & 2

    • 2.2. Criminalization of Terrorist Financing (SR.II)

      • 2.2.1. Description and Analysis

      • 2.2.2. Recommendations and Comments

      • 2.2.3. Compliance with Special Recommendation II

    • 2.3. Confiscation, freezing and seizing of proceeds of crime (R.3)

      • 2.3.1. Description and Analysis

      • 2.3.2. Recommendations and Comments

      • 2.3.3. Compliance with Recommendation 3

    • 2.4. Freezing of funds used for terrorist financing (SR.III)

      • 2.4.1. Description and Analysis

      • 2.4.2. Recommendations and Comments

      • 2.4.3. Compliance with Special Recommendation III

    • 2.5. The Financial Intelligence Unit and its Functions (R.26)

      • 2.5.1. Description and Analysis

      • 2.5.2. Recommendations and Comments

      • 2.5.3. Compliance with Recommendation 26

    • 2.6. Law enforcement, prosecution and other competent authorities—the framework for the investigation and prosecution of offenses, and for confiscation and freezing (R.27, & 28)

      • 2.6.1. Description and Analysis

      • 2.6.2. Recommendations and Comments

      • 2.6.3. Compliance with Recommendations 27 & 28

    • 2.7. Cross Border Declaration or Disclosure (SR.IX)

      • 2.7.1. Description and Analysis

      • 2.7.2. Recommendations and Comments

      • 2.7.3. Compliance with Special Recommendation IX

  • 3. Preventive Measures — Financial Institutions

    • 3.1. Risk of money laundering or terrorist financing

    • 3.2. Customer due diligence, including enhanced or reduced measures (R.5 to 8)

      • 3.2.1. Description and Analysis

      • 3.2.2. Recommendations and Comments

      • 3.2.3. Compliance with Recommendations 5 to 8

    • 3.3. Third Parties And Introduced Business (R.9)

      • 3.3.1. Description and Analysis

      • 3.3.2. Recommendations and Comments

      • 3.3.3. Compliance with Recommendation 9

    • 3.4. Financial Institution Secrecy or Confidentiality (R.4)

      • 3.4.1. Description and Analysis

      • 3.4.2. Recommendations and Comments

      • 3.4.3. Compliance with Recommendation 4

    • 3.5. Record keeping and wire transfer rules (R.10 & SR.VII)

      • 3.5.1. Description and Analysis

      • 3.5.2. Recommendations and Comments

      • 3.5.3. Compliance with Recommendation 10 and Special Recommendation VII 148

    • 3.6. Monitoring of Transactions and Relationships (R. 11 & 21)

      • 3.6.1. Description and Analysis

      • 3.6.2. Recommendations and Comments

      • 3.6.3. Compliance with Recommendations 11 & 21

    • 3.7. Suspicious Transaction Reports and Other Reporting (R.13-14, 19, 25 & SR.IV)

      • 3.7.1. Description and Analysis

      • 3.7.2. Recommendations and Comments

      • 3.7.3. Compliance with Recommendations 13, 14, 19 and 25 (criteria 25.2), and Special Recommendation IV

    • 3.8. Internal Controls, Compliance, Audit and Foreign Branches (R.15 & 22)

      • 3.8.1. Description and Analysis

      • 3.8.2. Recommendations and Comments

      • 3.8.3. Compliance with Recommendations 15 & 22

    • 3.9. Shell Banks (R.18)

      • 3.9.1. Description and Analysis

      • 3.9.2. Recommendations and Comments

      • 3.9.3. Compliance with Recommendation 18

    • 3.10. The Supervisory and Oversight System—Competent Authorities and SROs. Role, Functions, Duties, and Powers (Including Sanctions) (R. 23, 29, 17 & 25)

      • 3.10.1. Description and Analysis

      • 3.10.2. Recommendations and Comments

      • 3.10.3. Compliance with Recommendations 17, 23, 25 & 29

    • 3.11. Money or Value Transfer Services (SR.VI)

      • 3.11.1. Description and Analysis (summary)

      • 3.11.2. Recommendations and Comments

      • 3.11.3. Compliance with Special Recommendation VI

  • 4. Preventive Measures—Designated Non-Financial Businesses and Professions

    • 4.1. Customer Due Diligence and Record-keeping (R.12)

      • 4.1.1. Description and Analysis

      • 4.1.2. Recommendations and Comments

      • 4.1.3. Compliance with Recommendation 12

    • 4.2. Suspicious Transaction Reporting (R.16)

      • 4.2.1. Description and Analysis

      • 4.2.2. Recommendations and Comments

      • 4.2.3. Compliance with Recommendation 16

    • 4.3. Regulation, Supervision, and Monitoring (R.24-25)

      • 4.3.1. Description and Analysis

      • 4.3.2. Recommendations and Comments

      • 4.3.3. Compliance with Recommendations 24 & 25 (criteria 25.1, DNFBP)

    • 4.4. Other Non-Financial Businesses and Professions—Modern-Secure Transaction Techniques (R.20)

      • 4.4.1. Description and Analysis

      • 4.4.2. Recommendations and Comments

      • 4.4.3. Compliance with Recommendation 20

  • 5. Legal Persons and Arrangements & Non-Profit Organizations

    • 5.1. Legal Persons—Access to Beneficial Ownership and Control Information (R.33). 211

      • 5.1.1. Description and Analysis

      • 5.1.2. Recommendations and Comments

      • 5.1.3. Compliance with Recommendations 33

    • 5.2. Legal Arrangements—Access to Beneficial Ownership and Control Information (R.34)

      • 5.2.1. Description and Analysis

      • 5.2.2. Recommendations and Comments

      • 5.2.3. Compliance with Recommendations 34

    • 5.3. Non-Profit Organizations (SR.VIII)

      • 5.3.1. Description and Analysis

      • 5.3.2. Recommendations and Comments

      • 5.3.3. Compliance with Special Recommendation VIII

  • 6. National and International Co-Operation

    • 6.1. National Co-Operation and Coordination (R.31 & R. 32)

      • 6.1.1. Description and Analysis

      • 6.1.2. Recommendations and Comments

      • 6.1.3. Compliance with Recommendation 31

    • 6.2. The Conventions and UN Special Resolutions (R.35 & SRI)

      • 6.2.1. Description and Analysis

      • 6.2.2. Recommendations and Comments

      • 6.2.3. Compliance with Recommendation 35 and Special Recommendation I

    • 6.3. Mutual Legal Assistance (R.36-38, SRV)

      • 6.3.1. Description and Analysis

      • 6.3.2. Recommendations and Comments

      • 6.3.3. Compliance with Recommendations 36 to 38 and Special Recommendation V

    • 6.4. Extradition (R.37, 39, SR.V)

      • 6.4.1. Description and Analysis

      • 6.4.2. Recommendations and Comments

      • 6.4.3. Compliance with Recommendations 37 & 39, and Special Recommendation V

    • 6.5. Other Forms of International Co-Operation (R.40 & SRV)

      • 6.5.1. Description and Analysis

      • 6.5.2. Recommendations and Comments

      • 6.5.3. Compliance with Recommendation 40 and Special Recommendation V

  • 7. Other Issues

    • 7.1. Resources and Statistics

    • 7.2. Other relevant AML/CFT Measures or Issues

    • 7.3. General Framework for AML/CFT System (see also section 1.1).

  • Tables

  • 1. Ratings of Compliance with FATF Recommendations

  • 2. Recommended Action Plan to Improve the AML/CFT System

  • Statistical Tables

  • Statistical Table 1. Structure of Financial Sector

  • Statistical Table 2. Financial Activity by Type of Financial Institution

  • Annexes

  • Annex 1. Authorities’ Response to the Assessment

  • Annex 2. Details of All Bodies Met During the On-Site Visit

  • Annex 3. List of All Laws, Regulations, and Other Material Received

  • Annex 4. Copies of Key Laws, Regulations and Other Measures

Acronyms

AG

Attorney General

AML/CFT

Anti-Money Laundering and Combating the Financing of Terrorism

AML Code 2007

Criminal Justice (Money Laundering) Code 2007

AML Code 2008

Criminal Justice (Money Laundering) Code 2008

ATCA 2003

Anti Terrorism Crime Act, 2003

BCP

Basel Core Principles

CC

Criminal Code

CDD

Customer Due Diligence

CEMA

Customs and Excise Management Act 1986

CJA 1990

Criminal Justice Act 1990

CLA 1981

Criminal Law Act 1981

1931 Companies

Companies incorporated pursuant to the Companies Acts 1931-2004

2006 Companies

Companies incorporated pursuant to the Companies Act 2006

CPC

Criminal Procedure Code

CSP

Corporate Service Provider

DHA

Department of Home Affairs

DNFBP

Designated Non-Financial Businesses and Professions

DTA 1996

Drug Trafficking Act 1996

DTU

Drug Trafficking Unit

EC

European Community

EU

European Union

FATF

Financial Action Task Force

FCU

Financial Crime Unit (the IOM FIU)

FI

Financial institution

FIU

Financial Intelligence Unit

FSA 2008

Financial Services Act 2008

FSAP

Financial Sector Assessment Program

FSC

Financial Supervision Commission

FSRB

FATF-style Regional Body

FT

Financing of terrorism

GBP

Great Britain Pound

GSC

Gambling Supervision Commission

IA 1986

Insurance Act 1986

IA 2008

Insurance Act 2008

IAIS

International Association of Insurance Supervisors

IAMLR

Insurance (Anti-Money Laundering) Regulation 2008

IGN

Guidance Notes on Anti-Money Laundering and Preventing the Financing of Terrorism for insurers (Long Term Business) 2008

IOM

Isle of Man

IPA

Insurance and Pensions Authority

JAMLAG

Joint Anti-Money Laundering Advisory Group

KYC

Know your customer/client

LEG

Legal Department of the IMF

LLC

Limited Liability Company

MEF

Ministry of Economy and Finance

MFA

Ministry of Foreign Affairs

MFD

Monetary and Financial Systems Department of the IMF

MOU

Memorandum of Understanding

ML

Money laundering

MLA

Mutual legal assistance

MLRO

Money Laundering Reporting Officer

MMOU

IOSCO Multilateral Memorandum of Understanding

MVT

Money or value transfer

NPO

Nonprofit organization

OFAC

US Office of Foreign Assets Control

OG Code 2008

On-line Gambling Code 2008

OGR 2008

On-line Gambling Regulations 2008

PEP

Politically-exposed person

POCA 2008

Proceeds of Crimes Act 2008

PPPA 1998

Police Powers and Procedures Act 1998

PTC

Private Trust Company

ROSC

Report on Observance of Standards and Codes

SRO

Self-regulatory organization

STR

Suspicious Transaction Report

The 1991 Act

Criminal Justice Act 1991

The Regulation

EC Regulation 1889/2005 of the European Parliament and of the Council of 26 October 2005

TSP

Trust Service Provider

UK

United Kingdom of Great Britain and Northern Ireland

UN

United Nations Organization

UNSCR

United Nations Security Council Resolution

VAT

Value Added Tax

Preface

This assessment of the anti-money laundering (AML) and combating the financing of terrorism (CFT) regime of the Isle of Man (IOM) is based on the Forty Recommendations 2003 and the Nine Special Recommendations on Terrorist Financing 2001 of the Financial Action Task Force (FATF), and was prepared using the AML/CFT assessment Methodology 2004, as updated in February 2008. The assessment team considered all the materials supplied by the authorities, the information obtained on site during their mission from September 3–18, 2008, and other verifiable information subsequently provided by the authorities. During the mission, the assessment team met with officials and representatives of all relevant government agencies and the private sector. A list of the bodies met is set out in Annex 2 to the detailed assessment report.

The assessment was conducted by a team of assessors composed of staff of the International Monetary Fund (IMF) and experts acting under the supervision of the IMF. The evaluation team consisted of: Terence Donovan (LEG, team leader) and the following LEG consultants: Mr. Jean-Manuel Clemmer (Banque de France); Ms. Gabriele Dunker; Ms. Lisa Kelaart-Courtney; and Mr. Boudewijn Verhelst (Deputy Head of Belgian FIU). The assessors reviewed the institutional framework, the relevant AML/CFT laws, regulations, guidelines and other requirements, and the regulatory and other systems in place to deter and punish money laundering (ML) and the financing of terrorism (FT) through financial institutions and Designated Non-Financial Businesses and Professions (DNFBP). The assessors also examined the capacity, implementation, and effectiveness of all these systems.

This report provides a summary of the AML/CFT measures in place in the IOM at the time of the mission or shortly thereafter. It describes and analyzes those measures, sets out the IOM’s levels of compliance with the FATF 40+9 Recommendations (see Table 1) and provides recommendations on how certain aspects of the system could be strengthened (see Table 2). The findings and data in the report have been updated to late-2008. The report also notes, mainly by way of footnote, some further significant developments which occurred prior to its finalization in August 2009.

The assessors would like to express their gratitude to the IOM authorities for their cooperation, hospitality, and the high standard of organization and support throughout the assessment mission.

Executive Summary

Background and Key Findings

1. The Isle of Man (IOM) is an international financial center of some significance based in particular on the provision of banking and insurance-related products to nonresidents; funds business has been a growing sector and the IOM has also licensed some online gambling businesses. For the resident population on the island of over 80,000 and with GDP of GBP 1.6 billion1, the financial services sector represents the single largest component of the economy (36 percent of GDP). The IOM has its own legal system and jurisprudence based on the principles of English common law. Standards of governance and transparency appear to be high. Much of the financial services business in the IOM is, directly or indirectly, UK-related and the IOM financial institutions, many of which are subsidiaries of UK banks, are substantial providers of liquidity to the UK money markets.

2. The IOM is recognized for the expertise developed in a range of international financial products. Other key reasons for the growth in recent years in the IOM’s financial services sector include the legal system (which is similar to that in the UK), the stable political and regulatory systems, and the competitive tax regime. In that regard, the IOM authorities are placing increasing emphasis on international cooperation, including through working closely with the relevant OECD initiative and entering into tax information exchange agreements (TIEAs), of which 17 have been signed with other jurisdictions.

3. While the IOM government has not published an AML/CFT strategy, as such, a political commitment has been given by the IOM authorities, in correspondence with the FATF and in public statements, to adhere to the principles of the FATF Recommendations. The authorities informed the assessors that the IOM attaches the highest importance to having a robust and enforceable regime for the prevention of money laundering and for countering the financing of terrorism. It is significant that, in addition to the stated objectives of the Financial Crime Unit (FCU)—the IOM financial intelligence unit (FIU)—both of the main supervisory authorities (the Financial Supervision Commission (FSC) and the Insurance and Pensions Authority (IPA)) have been assigned legislative objectives related to the reduction in financial crime.

4. The IOM has substantially updated its AML/CFT legal provisions from 2007 to late-2008 to reflect the FATF Recommendations and to parallel the implementation in EU member states of the Third Money Laundering Directive. Relevant new legislation includes the Proceeds of Crime Act 2008 (POCA 2008), the revised AML Code of December 20082, the Insurance Act 2008 (IA 2008), the Insurance (Anti-Money Laundering) Regulations 2008, and insurance binding guidance notes3 issued by the IPA, and the Financial Services Act 2008 (FSA 2008), FSC Rule Book Part 94, and also the relevant guidance in the FSC’s Handbook 2008.

5. While the IOM is a low-crime jurisdiction, some characteristics of the financial system point to an increased potential of abuse for ML or FT purposes, as more than 90 percent of the business, often established through introducers, is conducted on a non face-to-face basis for nonresidents, and services provided include private banking and the use of legal persons and arrangements such as trusts, which have the potential to create an additional challenge in fulfilling the requirement to identify accurately the customer and the ultimate beneficial owner. The IOM’s relevant legislation, regulation, and guidance are drafted with this in mind.

6. The IOM is broadly compliant with most aspects of the FATF Recommendations, having upgraded its AML/CFT requirements significantly, particularly in the second half of 2008.

7. Money laundering is criminalized broadly in line with the international standard and many, albeit not all, technical aspects of the Vienna and Palermo Conventions are complied with. All categories of predicate offences listed in the international standard are covered. While the statutory sanctions for ML-related offences are, in a formal sense, comprehensive, dissuasive, and proportionate, the sentences actually imposed by the courts appear rather low. At the time of the assessment, the IOM reported no convictions for autonomous money laundering with few domestic investigations or prosecutions. Financing of terrorism (FT) is criminalized under IOM law but the definition of the offence needs to be broadened. There were no convictions for FT-related offences.

8. Although a few deficiencies are identified in this report, the IOM’s legal framework underpinning the seizure and confiscation system related to proceeds of crime is generally solid and comprehensive. The IOM should, however, develop case law on stand-alone money laundering confiscation and address the low effectiveness of the current asset recovery measures. The implementation by the IOM of UNSCRs 1267 and 1373, as well as the 2001 and 2002 EC Regulations, follows that of the UK, as all UK lists become automatically incorporated in the IOM freezing regime. Although the bulk of the international criteria are covered, the system needs to be completed with adequate measures, most importantly in the area of protection of the basic interests and rights of persons affected by the listings.

9. The Financial Crime Unit (FCU), in acting as the FIU, is performing its role adequately and receives a reasonable flow of suspicious transaction reports (STRs). It is a joint police/customs unit supported by civilian personnel and its specific remit as a receiving and processing agency for ML and FT-related disclosures is formalized in the AML Code 2008. Within the FCU, there is a clear separation between the intelligence and the investigative side of the handling of the reports. However, the low number of STRs that result in domestic investigations, and ultimately in a prosecution, raises an effectiveness issue that needs to be addressed, though this is in part explained by the cross-border nature of many of the reported suspicions. Additional resources are being provided to the FCU.

10. The IOM has recently formally adopted a risk-based approach to the application of AML/CFT measures, following the enactment of the FSA 2008. Licenseholders are required to conduct a risk assessment of their businesses and customers and to tailor customer due diligence (CDD) procedures accordingly, with enhanced CDD required where higher risks are identified.

11. With the significant upgrading of requirements, particularly between August and mid-December 2008, the IOM has brought its AML/CFT preventive measures largely into compliance with the FATF Recommendations. Most of the provisions were updated, where necessary, either before or shortly after the assessors’ on-site visit, for both financial institutions under FSC supervision and insurers authorized by the IPA. In many cases (though not all), the assessors were already in a position to observe the level of effectiveness of implementation of the new measures as financial institutions had already introduced them. The recently-enhanced requirements include significant strengthening in areas such as the requirements for business with politically exposed persons (PEPs) and for reliance on non-resident introduced business. Previous potential contradictions between parallel pieces of secondary legislation were also largely eliminated. However, there are instances where the available concessions go beyond a reasonable interpretation of the FATF Recommendations (e.g., some fiduciary deposits). IOM financial institutions are generally well supervised for AML/CFT purposes. The range of available administrative sanctions, while broad, could be enhanced. The quality of implementation of AML/CFT measures in financial institutions appeared generally good, if somewhat variable. The authorities plan additional AML/CFT on-site inspections, particularly for the banking and insurance sectors, to test compliance with the updated requirements.

12. CDD obligations for DNFBPs largely mirror those for financial institutions. TSPs and CSPs conduct substantial cross-border and non face-to-face business and, being considered particularly vulnerable, are closely supervised by the FSC. The on-line gaming sector’s entire business, while small, is subject to inherent challenges in relation to CDD. The Department of Home Affairs (DHA), having overall AML/CFT responsibility for the remaining DNFBPs was, at the time of the assessment, seeking to supplement the AML/CFT control structures in place for most lawyers with suitable arrangements for accountants and dealers in precious metals and stones. A firm legal basis for the DHA’s role was awaited and implementation of measures for DNFBPs (other than TSPs, CSPs, and most lawyers) were still being developed.

13. The company registration system is well developed and operates within the structures of the FSC. Trusts have long been recognized under IOM law but are not subject to a registration system. The IOM relies on its FSC-licensed TSPs and CSPs to obtain, verify, and retain records of the beneficial ownership and control of legal persons and arrangements and the FSC has devoted considerable resources to improving AML/CFT compliance standards of the CSPs and TSPs.

14. As a British Crown Dependency, the IOM is not empowered to sign or ratify international conventions on its own behalf but, following a request by the IOM Government, the UK may extend the ratification of any convention to the IOM. The Vienna Convention was extended to the IOM in 1993. However, extension of the Palermo Convention has not yet been requested as IOM law does not yet comply with all its provisions. The UK extended ratification of the UN Convention for the Suppression of the Financing of Terrorism to the IOM in 2008.

15. The range of mutual legal assistance that can be provided by the IOM is broad. MLA requests are frequent and make up a substantial part of the workload of the Attorney General’s (AG) Chambers and the FCU and are dealt with constructively and efficiently. Despite the unduly restrictive “designated” countries rule in place at the time of the assessment, there have been no refusals on record since 2004. Overall, the IOM authorities take their responsibilities in the area of international cooperation seriously, including in the FIU (applying Egmont Group principles) and in the financial supervisory area, most notably under the terms of the IOSCO multilateral MOU. Domestic coordination and cooperation is well developed, particularly through the initiatives of the Joint AML Advisory Group, through which all relevant authorities are represented, and through extensive consultation with the financial institutions and other businesses subject to supervision for AML/CFT purposes.

Legal Systems and Related Institutional Measures

16. The IOM has taken a three strand approach to criminalizing money laundering, differentiating between drug trafficking, terrorism, and other predicate offenses. Through those three offenses, money laundering is criminalized broadly in line with the international standard and many, albeit not all, technical aspects of the Vienna and Palermo Conventions are complied with. All categories of predicate offences listed in the international standard are covered. One shortcoming identified by the assessors is the fact that for the offense of “acquisition, possession or use”, IOM law provides for a defense of “giving adequate consideration”, regardless of whether or not the perpetrator acted with the knowledge that the property was obtained through the commission of a predicate offense. The defense may potentially be abused by money launderers to avoid criminal liability. Furthermore, the purpose requirements for the various acts constituting money laundering are slightly narrower under IOM law than provided for in the Vienna and Palermo Conventions and the money laundering provision applicable to terrorism-related predicate offenses does not cover all material elements of money laundering provisions of the two Conventions.

17. All three money laundering offenses extend to any type of property that represents the proceeds of crime. Self laundering is criminalized for all acts constituting money laundering except the “acquisition, possession and use”. All ancillary offences are criminalized in line with the international standard. The mens rea requirement varies depending on the money laundering offences applicable in the specific case. However, at a minimum and with respect to all three money laundering offenses, a person may be held criminally liable if he acted intentionally and with the knowledge that the property involved stems from a criminal source. Based on an English common law principle, intent may be inferred from objective factual circumstances. Criminal liability extends to legal persons.

18. While the statutory sanctions for money laundering are, in the formal sense, comprehensive, dissuasive, and proportionate, the sentences actually imposed by the courts appear rather low. At the time of the on-site visit, the IOM did not have any convictions for autonomous money laundering and the overall number of investigations and prosecutions further supports the conclusion that money laundering is not yet dealt with as a stand-alone offence.

19. While financing of terrorism is criminalized under IOM law, the definition of the offence needs to be amended to fully cover all elements under the International Convention for the Suppression of the Financing of Terrorism. In particular, the definition of “terrorism” should be extended to cover all terrorism offenses as defined in the nine Conventions and Protocols listed in the Annex to the FT Convention. It is unclear whether the terrorism financing offense would extend to situations where the funding of individual terrorist or terrorist organizations related to living or other private expenses. At the time of the on-site visit, there had been no prosecutions or convictions for terrorist financing.

20. The IOM legal framework underpinning the seizure and confiscation system related to proceeds of crime is generally solid and comprehensive. The (similar) relevant provisions of CJA 1990 and DTA 1996 and, since October 22, 2008, POCA 2008 adequately provide for a value-based confiscation regime capturing any benefit that the offender may have gained as a result of his criminal conduct. The benefit assessment procedure followed by the court is quite detailed and takes into account all factors necessary to come to a fair estimation. The provisions of ATCA 2003 also appropriately focus on the deprivation of the assets related to FT. However, some issues need to be addressed, particularly the low effective asset recovery, the impact of the noted lacunae in the scope of criminalization of ML and FT and that the “corpus delicti” confiscation of the assets laundered is untested and its application doubtful. Equivalent value seizure appears not to be fully covered in all circumstances and the issue identified in the IMF’s 2002/03 assessment of nonavailability in the IOM of confiscation of assets of equivalent value in connection with FT remains unresolved.

21. The implementation by the IOM of UNSCRs 1267 and 1373, as well as the 2001 and 2002 EC Regulations, follows that of the UK. All UK lists become automatically incorporated in the IOM freezing regime. The IOM has little or no input in the decisions taken in this context in respect of designations, delisting, and unfreezing. Although this has not yet been used in practice, the IOM has its own listing and freezing provisions in ATCA 2003 Part VII. However, the ATCA 2003 provisions are insufficient to ensure a comprehensive, preventive, pre-investigative approach as required by the international standards. The Orders implementing the relevant UN Resolutions and the EC Regulations, together with the already-existing legal infrastructure, complete the freezing regime to a large extent. However, some issues, mostly of a formal nature, still need to be addressed.

22. The FCU, an active member of the Egmont Group since 2000, acts as the FIU for the IOM. It is a joint police/customs unit supported by civilian personnel. It is operationally independent and its specific remit as a receiving and processing agency for ML and FT-related disclosures by the regulated and associated sector is formalized in the AML Code 2008. The FCU is structured such that its financial intelligence unit operates separately from its investigative law enforcement unit. The statistics spanning the period 2004-2008 show reasonable reporting levels by the financial sector. However, a weakness identified is that the FIU does not have powers of direct or indirect access to financial and other additional information in following up on STRs submitted to it.

23. The number of STRs resulting in an investigation (six in two years) is low and only two prosecutions have been instituted in cases that originated with an STR. While the nature of much of the financial services business conducted in the IOM, involving funds received from abroad on behalf of nonresidents, can make it difficult to prosecute money laundering cases locally and more efficient to transfer cases to other jurisdictions in which the predicate offense may have occurred or the funds or accused persons are located, the assessors consider it important that the IOM seeks also to develop its own case law in this area. This is an effectiveness issue to be addressed for the system as a whole.

24. With regard to the cross-border physical transportation of currency, the IOM opted for a declaration system, in line with the regime in force at the external borders of the EU, which imposes an obligation on persons importing into or exporting from the IOM cash and bearer-negotiable instruments of more than EUR10,000 to make a report to Customs and Excise. However, the controls do not extend to cash transportation by mail between the UK and the IOM.

Preventive Measures—Financial Institutions

25. Coverage of preventive measures in the IOM includes all of the main financial businesses covered by the FATF definition of “financial institution”. The main legislative foundation for customer due diligence (CDD) and other AML/CFT preventive measures in the IOM is the CJA 1990, Section 17 of which defines ML offences, tipping-off offences, and the offence of not reporting suspicious transactions. Section 17F provides the DHA with the power to issue Codes (as secondary legislation) to prevent and detect money laundering, as described in the Act, the open-ended scope of which has been interpreted by the authorities to provide a basis to include FT. As the Codes were subject to a parliamentary approval process, the authorities’ interpretation was accepted for purposes of this assessment but the assessors recommended that the opportunity be sought by the authorities to provide a more explicit legal basis in primary legislation. The AML Code 2008 applies to all financial and nonfinancial entities to which the FATF Recommendations relate and includes extensive provisions on CDD largely in line with the international standard.

26. A very significant part of the business covered by the CJA 1990 is within the regulatory ambit of the FSC pursuant to the FSA 2008, which includes among the regulatory objectives of the FSC ‘the reduction of financial crime’ and under which the FSC issued a Rule Book (as secondary legislation), Part 9 of which provides in detail for CDD for all FSC licenseholders, including CSPs and TSPs. With the updating of the AML Code to mirror most of the provisions of the Rule Book, the previous inconsistencies have been largely eliminated.

27. Insurance business is subject to IPA authorization and supervision. While covered by the AML Code 2008 in the same manner as FSC licenseholders, insurance businesses are also subject to a set of insurance-related AML/CFT requirements, which were updated shortly before this assessment. Much of the insurance legislation was superseded by the Insurance Act 2008 (IA 2008) which came into effect on December 1, 2008, to consolidate most of the previous legislative provisions. The IA 2008 specifies as a regulatory objective of the IPA ‘the reduction in… financial crime’. The IPA issued AML/CFT regulations (as secondary legislation) using its powers under the Act and a set of guidance notes which are specified by the Act as binding and, as such, were accepted for purposes of this assessment as other enforceable means.

28. With the significant upgrading of requirements, particularly between August and mid-December 2008, the IOM has brought its AML/CFT preventive measures largely into compliance with the FATF Recommendations, as summarized in the following outline. while anonymous accounts and accounts in fictitious names are not prohibited in primary legislation in the IOM, they are effectively prohibited in secondary legislation, in either a direct or indirect manner. Pursuant to AML Code 2008 paragraph 6, identification procedures apply to new business relationships and include an obligation to identify (and to take reasonable steps to verify) the customer and beneficial owners, in line with the international standard. Appropriate requirements have been introduced in relation to legal persons, parties to legal arrangements, and persons acting on behalf of others. The latest amendments to the Code have also limited the previous scope regarding the timing of the completion of initial CDD. The requirements for the application of CDD to occasional transactions are in line with the FATF Recommendations.

29. The authorities have provided for certain exceptions and concessions in the application of CDD measures, some of which represent an over-generous interpretation of the FATF standard which, in a case where a customer is acting on behalf of another person, expressly calls for a requirement to be in place to take reasonable measures to verify the identity of that other person. In certain limited circumstances, the operation of ‘fiduciary deposits’ by IOM financial institutions is exempted from such a requirement, which practice the assessors could not reconcile with the FATF Recommendations. There is also extensive reliance on third parties to conduct all or part of the CDD on behalf of financial institutions. However, the requirements in this regard were strengthened considerably as part of the amendments introduced in the AML Code 2008, bringing them largely into compliance with the international standard.

30. The quality of implementation of AML/CFT measures by financial institutions was found to be mainly of a high standard. In meetings with financial institutions (as well as in some cases their auditors and legal advisors), the assessors found a very high level of awareness of AML/CFT risks and requirements. It was evident that many of the institutions had been closely involved in supporting the development of the latest CDD measures. Most indicated that they apply CDD measures using the permitted risk-based approach. However, it appeared to the assessors that, in some cases, the risk-based approach was being offered as an explanation for less than full compliance with some aspects of the IOM requirements and it is recommended that the regulatory authorities include testing in this regard as part of the on-site visit program. It was not evident to the assessors in all cases that the financial institutions were taking fully into account the increased risk of dealing on such a scale with nonresident non face-to-face business, and the assessors noted an uneven level of controls in practice in some institutions when relying on third parties to have properly conducted CDD measures.

31. With effect from December 18, 2008, AML Code 2008 introduced requirements in line with Recommendation 6 for PEP-related business. The term PEP is defined in detail in AML Code 2008 Paragraph 2 to include an extensive range of nonresident officials and those holding other relevant positions, together with their close relatives and associates. This amendment mirrors the requirements already in place for all entities subject to FSC and IPA-issued requirements, and the assessors found a high level of awareness and compliance by financial institutions with the requirements for PEPs.

32. AML Code 2008 Paragraph 23 introduced a requirement that relevant persons maintain appropriate procedures and controls to prevent the misuse of technological developments, in line with one of the key provisions of Recommendation 8. However, neither the requirements nor the guidance refer to any particular types of technological risks such as internet banking, the use of credit/debit cards as part of account relationships, particularly to nonresidents on a non face-to-face basis; security of computer systems, particularly if customer-accessible, to address the risk of fraud, phishing, or other improper access to customer information. The development of additional guidance was recommended. The assessors welcomed the introduction in the AML Code 2008 of a requirement for adequate measures to compensate for any risk arising as a result of dealing with an applicant for business otherwise than face-to-face.

33. Much of the financial business in the IOM is conducted on a non face-to-face basis for nonresidents. IOM banking, insurance, and other financial services products are marketed globally, including through business introducers. The potentially long distribution chain may increase the exposure of IOM financial institutions to misuse for ML and FT purposes, including through layering and structuring, as they are remote from the customer and face an additional challenge in identifying with confidence the ultimate beneficial owner(s) or controller(s). The IOM authorities have developed a protocol to accommodate the use of business introducers by IOM entities subject to the AML Code 2008. Additionally, they have provided for a defined class of introducer (generally known as ‘Eligible Introducer’), by availing of the provisions of FATF Recommendation 9 in order to eliminate duplication of effort and documentation in cases that meet a set of conditions set out in secondary legislation and developed further in guidance. The assessors found that a range of approaches is employed by financial institutions in determining whether and, if so, the extent to which they place reliance on the Eligible Introducers to conduct CDD on their behalf—some place full reliance while others are very selective. It is an area on which regulatory authorities should continue to focus particular attention as part of their onsite inspection programs.

34. There are clear requirements in secondary legislation for ongoing due diligence and reporting of suspicious transactions to the FCU, supported by detailed guidance, for their respective supervised institutions, in the FSC’s Handbook and the Insurance Guidance Notes (IGN) issued by the IPA. However, the scope of the protection for STR reporting is not sufficient to include all categories of person or circumstances in the international standard and is not limited to good faith reporting. Record keeping requirements have been brought fully into line with the FATF Recommendations. There are no secrecy provisions in legislation to inhibit implementation of AML/CFT requirements, although the assessors recommended the introduction (as planned) of an explicit exclusion from the common law duty of confidentiality to permit financial institutions to exchange information for AML/CFT purposes. Requirements for ongoing due diligence are well developed and comprehensive. However, a more formal approach is needed to support the application of enhanced measures, including countermeasures where warranted, in relation to jurisdictions that do not or inadequately comply with the FATF Recommendations.5 There are comprehensive requirements, supported by detailed guidance, for the implementation of adequate AML/CFT internal policies, procedures, and controls, with the exception that there is no requirement to maintain an adequately resourced independent audit function dealing with AML/CFT, having due regard to the size and nature of the business.

35. With regard to wire transfers, the IOM opted to implement European Regulation 1781/2006 on Wire Transfers, with appropriate modifications, by means of Orders by the Council of Ministers which constitute secondary legislation. The UK has obtained from EU member states a derogation for the UK to establish agreements with Jersey, Guernsey, and the IOM so that the reduced information requirement can apply to payments passing between the UK and these associated territories (effectively treating them as domestic transfers). Informal funds transfer systems do not appear to be relevant in the IOM context.

36. There is no explicit prohibition on the establishment of a shell bank in the IOM. However, a license issued by the FSC pursuant to FSA 2008 Section 7 is required in order to conduct any activity regulated by that Act and a license may not be issued under Section 7 unless the FSC is satisfied that the applicant is managed and controlled in the IOM. This requirement is developed further in the FSC’s General Licensing Policy. For the most part, IOM financial institutions are subject to adequate AML/CFT regulation and supervision, although in some significant areas (banking, insurance) there is a need for additional AML/CFT on-site supervision.

37. In terms of the legal framework, the AML Code 2008, as secondary legislation, is a substantial improvement on the previous AML Code 2007 and moves the IOM much closer to compliance with the detailed provisions of the FATF Recommendations and makes the Code largely consistent with the FSC Rule Book 2008. The Rule Book is supplemented by the substantial guidance contained in the FSC Handbook 2008, which is not regarded as enforceable in its own right. For IPA-regulated insurers, the provisions contained in the IA 2008 and the IAMLR 2008 apply. IAMLR 2008 is supplemented by IGN 2008, which have been accepted as enforceable for purposes of this assessment; however the guidance notes apply only to insurers undertaking long-term insurance business. Regulation and supervision of money-services business in the IOM was transferred with effect from August 1, 2008, from the registration system previously operated by Customs and Excise to the regulation and supervision of the FSC. However, full application by the FSC of AML/CFT measures for money-services businesses did not come into effect until January 1, 2009 and, as such is beyond the scope of this assessment.

38. All IOM financial institutions have a designated regulatory authority for AML/CFT purposes. Statutory fit and proper tests are applied to all license applicants, owners, controllers, directors, and key managers with respect to IOM financial institutions, to ensure their integrity and propriety, in compliance with the international standard. FSC supervision is implemented in accordance with the FSC’s published Supervisory Approach (most recently updated in July 2009) which calls for an on-site visit cycle of between one and three years, according to the impact and risk rating of the license holder or group. For banks, the FSC has been conducting risk-assessment focus visits, many of which included AML/CFT-related analysis and file sampling. A round of AML/CFT-themed focus visits is planned for 2009/10 to check compliance with the latest revised requirements. For the IPA, the number of on-site AML/CFT inspections has been limited by resource constraints and additional inspections are envisaged from 2009 onwards.

39. The range of sanctions at the FSC’s and IPA’s disposal is broad and is complemented by the criminalization of AML/CFT breaches pursuant to the AML Code 2008. Moreover, when serious breaches are identified, the action on the licenseholder would usually be accompanied by ‘fit and proper’ directions. A limitation that needs to be addressed for the FSC is that it must issue regulations in order to extend the application of its power of financial penalty to new areas, and has yet to do so in the AML/CFT area.

40. While the level of effectiveness of implementation of the AML/CFT requirements is difficult to assess in practice, the assessors found across all financial institutions interviewed a high level of awareness of AML/CFT risks, typologies, and international and IOM requirements. It was clear that many of those interviewed had been closely involved in the recent updating and development of the AML/CFT system.

Preventive Measures—Designated Non-Financial Businesses and Professions

41. CDD obligations for DNFBPs are largely the same as those for financial institutions and are subject to the same strengths and weaknesses. The CSP and TSP sector forms an integral part of the financial services industry of the IOM. It comprises legal professionals and accountants providing both services; all company formation agents; trust service providers who are not legal professionals; and business address and business service providers. The authorities advised that there are approximately 22,000 trusts and 42,000 companies managed or administered in or from the IOM by TSPs and CSPs, respectively. TSPs and CSPs conduct a great deal of cross-border and non face-to-face business and should, therefore, be considered particularly vulnerable from an AML/CFT perspective. However, TSPs and CSPs are authorized and actively supervised by the FSC, with particular focus on AML/CFT compliance.

42. The on-line gaming sector’s entire business is subject to inherent challenges in relation to CDD as all business is conducted on a non face-to-face basis, with identification and verification via electronic means. The IOM has authorized one terrestrial casino and 11 on-line casinos, offering a variety of gambling options. The casinos are licensed and supervised by the Gambling Supervision Commission (GSC).

43. The legal profession in the IOM consists of advocates (licensed to practice law) and registered legal practitioners (persons registered in a number of prescribed jurisdictions). Both advocates and legal practitioners are subject to the obligations set forth in the AML Code 2008 but only the former are under the ambit of the IOM Law Society. The latter are not subject to any supervision with respect to compliance with IOM law, a matter which the authorities indicated they are in the course of addressing. The IOM accounting profession is subject to the provisions of the AML Code 2008 and accountants are registered by the DHA. However, at the time of the assessment, the DHA was still in negotiations with the accountancy bodies to agree a basis for an ongoing AML/CFT compliance program. The assessors recommended that an appropriate arrangement be put in place as quickly as possible. Real Estate Agents and Dealers in precious stones and precious metals are also subject to the provisions of the AML Code 2008. The DHA has also been working to develop appropriate measures for other nonfinancial businesses and the assessors recommended that its program of awareness raising should be continued.

44. Implementation of AML/CFT measures for DNFBPs (other than TSPs, CSPs, and most lawyers) was still being developed at the time of the on-site visit. Overall, the DNFBPs interviewed by the assessors seemed to be well informed about their obligations with respect to CDD and record keeping requirements. The FSC devotes substantial resources with a view to improving AML/CFT compliance of TSPs and CSPs. Some advocates noted that, as they would not necessarily complete all initial CDD measures at the outset of a business relationship, the contracted matters would, in some cases, be completed before CDD was complete and the client would never be fully identified: this weakness needs to be addressed.

Legal Persons and Arrangements & Non-Profit Organizations

45. The IOM has three sets of laws governing legal persons, namely the Companies Act 1931-2004, the Companies Act 2006, and the Limited Liabilities Companies Act 1996. While the first two Acts allow for the incorporation of a wide range of corporate entities, including Companies Limited by Shares, Companies Limited by Guarantee, Companies Limited by Guarantee and having a Share Capital, Unlimited Companies, and Protected Cell Companies, the latter provides for and regulates the incorporation of Limited Liability Companies. Trusts have been recognized under IOM law for many years and the trust concept is well established. The Trustee Act 1961 and its subsequent amendments are the main pieces of legislation governing such legal arrangements. In addition, the common law principles of trust law and equity are applied and recognized by the courts in the IOM insofar as they are not contrary to statutory law or local precedent. As of June 30, 2008, about 31,000 companies and close to 23,000 trusts were set up under IOM law.

46. The IOM primarily relies on its licensed CSPs and TSPs to obtain, verify, and retain records of the beneficial ownership and control of legal persons. All IOM legal entities that are incorporated under the Companies Act 2006 must utilize the services of and provide the Companies Registry with the name and address of the respective corporate service provider. Companies incorporated under the Companies Act 1931-2004, the Limited Liabilities Companies Act 1996 as well as legal arrangements are not required to utilize licensed CSPs and TSPs but may choose to do so. It is estimated that 70 percent of all companies registered in the IOM utilize the services of licensed CSP. The number of trusts administered by licensed TSP is unknown. Although the Companies Registry maintains and administers some information regarding the management and administration of companies, its main role with respect to beneficial ownership information is to link an entity with a specific IOM CSP and thus allow the competent authorities to locate beneficial ownership information. Trusts are not registered in the IOM.

47. CSPs and TSPs are obliged to identify in all cases the natural person who ultimately owns or controls a customer or a person on whose behalf a transaction is being conducted as well as any person who exercises ultimate effective control over a legal person, and to take reasonable steps to verify the identity of those persons based on reliable information. for those companies or legal arrangements not utilizing the services of licensed CSPs and TSPs, no formal measures are in place to ensure that beneficial ownership information is obtained, verified, and maintained. Persons providing director services, nominee shareholders, protectors/enforcers, and letters of wishes are permitted and frequently used for trusts under IOM law.

48. IOM charitable bodies are registered with the General Registry, which has undertaken a desktop review of registered charities’ objectives and mandates. Although no vulnerabilities to abuse for FT purposes were identified, the assessors recommended that the authorities proceed with their planned review of the sector.

National and International Co-operation

49. Cooperation and coordination between the domestic authorities is well organized and effective, particularly through the initiatives of the Joint AML Advisory Group, through which all relevant authorities are represented, and through extensive consultation with the financial institutions and other businesses subject to supervision for AML/CFT purposes.

50. The IOM is a British Crown Dependency and as such is not empowered to sign or ratify international conventions on its own behalf. Rather, the UK is responsible for the IOM’s international affairs and, following a request by the IOM Government, may extend the ratification of any convention to the IOM. As a general principle, the IOM seeks to have extended to it all conventions ratified by the UK. However, such extension is only requested after IOM legislation has been determined to be in compliance with any given convention. Whereas the UK’s ratification of the Vienna Convention has been extended to the IOM on December 2, 1993, extension of the Palermo Convention has not yet been requested as IOM law does not yet comply with all its provisions. The UK has extended ratification of the UN Convention for the Suppression of the Financing of Terrorism to the IOM on September 25, 2008. Additionally, ten out of the other 15 international conventions and protocols relating to the fight against terrorism have been extended. However, not all of the convention’s provisions have been implemented.

51. There is no overarching legislation regulating the mutual legal assistance (MLA) practice of the IOM. In providing such assistance, the judicial authorities use the domestic provisions contained in the CJA 1990, CJA 1991, DTA 1996, and ATCA 2003, as appropriate. Most provisions apply to criminal activity both in and outside the IOM and the range of mutual legal assistance that can be provided according to the relevant Acts is quite broad and include the following measures: collection, production, search, and seizure of information and documents. The fact that the MLA request may contain fiscal aspects, both formally and in practice, does not constitute grounds for refusal.

52. The legal framework for extradition is comprehensive and compliant with the international standards. In the absence of precedents, only the formal provisions can be assessed.

53. Providing international cooperation to foreign counterparts is a very important part of the FIU assignment in an offshore jurisdiction like the IOM. The FCU/FIU is quite active in the Egmont network of FIUs. Although not required, in some instances the cooperation is underpinned by bilateral MOUs. Information requests from a counterpart FIU are complied with to the greatest extent within the boundary of use for intelligence purposes. The FIU to FIU cooperation is governed by the Egmont principles of information exchange. Besides direct bilateral contacts, the police use the international communication network of Interpol. Assistance to other police authorities is routinely granted, as long as it does not involve coercive measures. Customs and Excise is able to co-operate with a large number of foreign countries in customs-related matters under mutual assistance agreements between those countries and the EU. Cooperation with countries outside the scope of these agreements is conducted on a case-by-case basis.

54. Both the FSC and IPA are empowered (under the FSA 2008 and Insurance Act 2008, respectively) to enter into MOUs. The FSC has entered into a range of MOUs and is a full signatory to the IOSCO Multilateral Memorandum of Understanding (MMOU). The IPA is a signatory to a number of MOUs. Both the FSC and IPA are empowered to provide information to supervisory counterparts both spontaneously and on request. The scope of the powers includes all relevant information held by the supervisory authorities. There are no secrecy provisions in the IOM that would restrict the capacity of the supervisory authorities to share confidential information with foreign counterparts, where warranted and appropriate.

55. Detailed statistics on international requests for intelligence/assistance are kept by the FCU, including the number of spontaneous referrals. No distinction is made in the statistics, however, between police and FIU originated requests. It would give a clearer picture if the statistics would reflect that distinction. Statistics for various forms of international cooperation are also maintained by the supervisory authorities. Many of the information exchanges arise under the IOSCO MMOU, including those related to insider dealing. Information requests in conducting ‘Fit and proper’ tests represent another common application of international cooperation.

Other Issues

56. While the relevant authorities are generally well resourced, the regulatory authorities would benefit from additional resources to sustain an appropriate level of AML/CFT onsite inspection work, particularly for banks and insurance businesses. Some additional resources are also needed by the GSC and DHA to carry out their respective AML/CFT responsibilities. The authorities have approved additional resources for the FCU.

57. Relevant statistics are well maintained in most areas, including by the regulatory authorities. However, comprehensive statistics are not maintained on seizures and confiscations.

1

2005/6

2

Which is secondary legislation and qualifies as a ‘regulation’ for purposes of this assessment.

3

Which qualify as “other enforceable means” for purposes of this assessment.

4

As footnote 2

5

This matter was addressed subsequent to the assessment with the coming into force in July 2009 of the Terrorism (Finance) Act 2009.