Bermuda has made great strides in strengthening its oversight of the financial sector over the last five years, according to a report released yesterday by the International Monetary Fund (IMF).

But the Island needs to do more on anti-money laundering and combating the financing of terrorism, the report says.

The international body recognised Bermuda for being "a globally important reinsurance centre and the second largest captive insurance domicile after the US" and pointed out that since its last report in 2003, it has made "significant progress" on its insurance supervision, banking regulatory framework and securities regulation and also beefed up the staffing and powers of the Bermuda Monetary Authority (BMA).

"At the time of the assessment missions, recommendations of the 2003 assessment had been taken into account or implemented in all areas but anti-money laundering and combating the financing of terrorism (AML/CFT)," the report said.

The report praises Bermuda for supervision of insurance and banking and for taking a proactive role in monitoring firms affected by the sub-prime crisis.

"Unsurprisingly, some insurance companies have been adversely impacted," the report said. "However, the authorities have taken a proactive stance in assessing both the risks and the companies' risk management. Such exposure is not anticipated to be a systemic threat."

But the Island is failing to keep pace on terrorism and money laundering prevention. The report said: "The AML/CFT regime requires significant updating to keep pace with the Financial Action Task Force (FATF) recommendations, implement the recommendations of the 2003 assessment and to implement a risk-sensitive approach to preventive measures for financial institutions."

The report noted that Bermuda's legal framework for dealing with problems in these areas is largely untested — while money laundering is criminal there has only been one prosecution for it in the last five years and there have been no investigations of terrorism financing or terrorism related suspicious activity reports.

The IMF also found that vulnerabilities of the system with relation to "activities of lawyers, accountants, trust service providers and company service providers have not been closely analysed".

And the report said local drug traffickers use the proceeds of crime to finance their ongoing drug shipments as well as to acquire assets such as low to mid market properties and cars, but this may not be attractive to international money launderers due to the Island's strict property purchase restrictions on foreigners.

Other than strengthening the anti-money laundering framework, the report also recommends that Bermuda move to fully roll out "the risk based regulatory system to all market segments", noting that it is now in place for the larger Class 4 insurers, "the most strategically important market segment" but not across the board.

In 2003, Bermuda insurers and reinsurers made up a "largely self-supervised system", the report said. "The current Bermuda insurance regulatory system is, in contrast, based on risk sensitive supervision. Insurers are ranked by risk likelihood and impact with riskier categorisations attracting increased supervisory attention."

The report goes on urge full roll out, however, particularly to the Class 3 insurers, for which it notes appropriate legislation was passed in July 2008. The BMA plans to introduce supervision to the entire insurance group by 2011, it adds, and that transparency of the sector has also improved with Class 4 insurers being required to publish their GAAP accounts.

The largely positive IMF report was welcomed yesterday by Finance Minister Paula Cox, the BMA and the Association of Bermuda Insurers and Reinsurers (ABIR). "We have made it clear to international bodies that we have measured and understand the risks and have responsibly adopted those standards which we think are appropriate," said Minister Cox.

She added that since the time when the report was being compiled — May and June of 2007 — the Island has already taken steps to improve anti-money laundering efforts.

"Bermuda has a comprehensive legal and institutional framework for international co-operation that is largely consistent with international standards for AML/CFT," she said. "The IMF's 2007 Report provided valuable recommendations to assist Bermuda in its ongoing efforts to strengthen its anti-money laundering and combating the financing of terrorism regime. Such efforts have resulted in an agreed plan of action comprising of legislative, regulatory and operational initiatives."

BMA CEO Matthew Elderfield said the report was a "solid vote of confidence in Bermuda regulation".

"It is pleasing to see, for example, that for our leading market, Bermuda is formally recognised as being highly observant of international standards," he said. "The IMF acknowledges that Bermuda is a leading insurance jurisdiction and has the regulation to match."

And he said, the BMA has already pushed forward with further enhancements since the assessment visits were made. Speaking for insurers and reinsurers, ABIR president Brad Kading commended Government, the BMA and its leadership. "This evaluation is a critical step in demonstrating Bermuda's ability to meet its goal of being the 'gold standard' of international regulatory domiciles," he said.

He added: "In the coming years, Bermuda's key large global insurers, as represented by ABIR, will face critical market access issues in key US and European markets tied to findings of regulatory equivalency. "The excellent IMF assessment means Bermuda has reached one milestone along the path to regulatory equivalence and eventual mutual recognition."