The International Monetary Fund (IMF) announced today an agreement by its Executive Board to integrate the **Offshore Financial Centre (OFC)** assessment program with the **Financial Sector Assessment Program (FSAP).**
The IMF says its OFC program, inaugurated in 2000, has helped to strengthen regulation and supervision, and to improve compliance with supervisory standards in offshore jurisdictions. The integration of the program with the FSAP aims to (i) facilitate a more uniform and risk-based approach to financial sector surveillance and improve coordination of Fund analysis across jurisdictions; (ii) provide for a better allocation of Fund resources, with a specific focus on the small number of OFCs that account for the overwhelming volume of offshore activity and could be expected to pose major financial system risks; and (iii) eliminate the need to maintain a potentially discriminatory list of OFC jurisdictions.
The IMF introduced its OFC program in 2000. Typically, the program’s assessments reviewed a jurisdiction’s compliance with supervisory standards in banking, and with the anti-money laundering and combating the financing of terrorism (AML/CFT); where applicable, it also assessed compliance with supervisory and regulatory standards in the insurance and securities sectors. The IMF has reported that adherence to all four international standards among OFCs was broadly comparable or better, on average, than other countries.
In 2003, monitoring of OFC activities and their compliance with supervisory standards became a standard component of the financial sector work of the Fund, with assessments targetted to be conducted on a 4-5 year cycle. Subsequently second-phase assessments began in 2005, and have focused on (i) progress in addressing weaknesses identified in previous assessments; (ii) issues of cross-border cooperation; and (iii) relevant areas not covered in previous assessments. Results to date, according to the IMF, suggest improvement in compliance with supervisory standards in the banking, insurance, and securities sectors. Progress has also been achieved on prudential cross-border cooperation and information exchange issues. Nevertheless, the IMF reports that OFCs’ compliance with the Financial Action Task Force (FATF) 40+9 Recommendations for AML/CFT remain a source of concern. Based on a sample of 21 OFCs, assessments show that while compliance is generally comparable to that of non-OFC jurisdictions, relatively low compliance was shown in certain key areas such as customer identification, the monitoring of transactions, and international cooperation.
The IMF emphasizes that integration of the OFC program with the FSAP should not result in a less rigorous assessment of OFCs. Directors noted that integration of the two programs would permit a more risk-focused approach to assessments, and would eliminate the need for the Fund to maintain a separate list of OFCs, which has become increasingly difficult to justify in the face of financial globalization.
• a broader range of issues would be covered under the FSAP compared with OFC assessments, which would strengthen the Fund’s financial sector surveillance and contribute to a more effective oversight of the global financial system.
• analysis should be tailored to the risk profile of each jurisdiction, including a focus on cross-border issues as appropriate.
• integration would permit a more effective prioritization and use of resources. In particular, decisions on which jurisdictions would be assessed would be taken based on the same criteria used in the FSAP. Specifically, Directors generally agreed to assess the nine or ten OFCs that account for the overwhelming volume of activity about every 5-7 years, and that smaller jurisdictions should be assessed less frequently. *(However, Directors stressed that the frequency of such FSAP assessments should be considered in a flexible manner so as to respond to changing risks and circumstances and taking into account information collected through continuous monitoring (or the non-provision of information).*
• integration should not lead to a diminished focus by the Fund on OFCs’ compliance with international standards. The assessments under the OFC program and the FSAP have led to significant improvements in the quality of supervision in OFCs. *(Directors called on the staff to work to maintain this momentum, including by working closely with international bodies, such as the FSF and standard setters.)*
• in addition to Article IV consultations, member countries could also be monitored outside the assessment cycle. Other jurisdictions will continue to be monitored by the staff, including through the Information Framework Initiative. Directors encouraged jurisdictions to continue to work with the Fund to improve data collection, compilation, and dissemination.
The data collection exercise referenced above was initiated by the IMF in 2004. It was intended to help jurisdictions in their data dissemination efforts and to provide the Fund with information for its ongoing monitoring of financial developments in the OFCs. The IMF says the initiative is providing useful information on the size and scope of activities conducted in offshore jurisdictions, noting that the majority of offshore transactions are conducted in relatively few centers, although there are a large number of centers with low volumes of activity.
All OFC assessments undertaken as part of the FSAP willstart in FY2010. Jurisdictions scheduled to be assessed under the second-phase of the OFC program prior to FY2010 could receive a Module 2 assessment or FSAP. IMF Directors have agreed that those jurisdictions that have already been assessed under the OFC program would be treated as FSAP updates under the FSAP.
As the FSAP currently is available only to IMF members, its coverage would be extended to encompass non-member jurisdictions presently covered by the OFC program. The Executive Board will continue to have the option to request discussion of non-member assessments and to invite non-member representatives to attend the Board meeting.
IMF Directors note that, as part of the global arrangements for AML/CFT assessments involving the IMF, World Bank, FATF and FATF-Style Regional Bodies, attention will continue to be paid to money laundering and financing of terrorism vulnerabilities posed by OFCs. The integration of the programs would not affect the scope or cycle of AML/CFT assessments or the range of jurisdictions to be assessed, either in the context of an FSAP or on a stand-alone basis.