Inspections Procedures Manual Final Revised June 2011 Guides/fsc... · FSC Compliance Inspection...

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FSC Compliance Inspection Procedures Manual 2010 1 June 2011

Transcript of Inspections Procedures Manual Final Revised June 2011 Guides/fsc... · FSC Compliance Inspection...

  • FSC Compliance Inspection Procedures Manual 2010 1

    June 2011

  • FSC Compliance Inspection Procedures Manual 2010 2

    TableofContentsIntroduction............................................................................................................................9

    PARTI....................................................................................................................................11

    Purpose,ObjectivesandTypesofComplianceInspectionandRelatedMatters.....................11

    PurposeoftheProceduresManual..........................................................................................11

    OrganisationoftheProceduresManual...................................................................................11

    SupportingLegislation..............................................................................................................12

    ObjectivesofOnsiteInspections..............................................................................................14

    TypesofOnsiteInspections......................................................................................................15

    FullScopeInspection................................................................................................................16

    FollowupInspection................................................................................................................17

    PARTII...................................................................................................................................18

    PhasesoftheInspectionProcess...........................................................................................18

    General......................................................................................................................................18

    PreOnsiteInspectionPlanningandAnalysis...........................................................................19

    AnalysisofPreinspectionMaterial..........................................................................................21

    InspectionPlan..........................................................................................................................23

    ConsiderationsreInspectionPlan............................................................................................24

    WorkingPaperstobeFactoredintotheInspectionPlan.........................................................25

    Objectives..................................................................................................................................25

    FinalPreinspectionPreparation..............................................................................................26

    PARTIII..................................................................................................................................28

    TheOnsiteInspectionPhase..................................................................................................28

    ConductofInspectionTeam.....................................................................................................28

    HoldingManagementMeetings...............................................................................................29

    UseofKReview(andSuccessorProgramme)..........................................................................31

    UseofInspectionSpreadsheets................................................................................................32

    InspectionsinRelationtoManagement...................................................................................32

    ConductingFileReviews...........................................................................................................32

    ConductingInterviews..............................................................................................................33

    AnalysisinRelationtotheLicenseesActivities.......................................................................33

    ControlsandSystems................................................................................................................34

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    InternalTestingandManagementReports..............................................................................36

    SafekeepingofClientsMoney.................................................................................................36

    ContractsofEmployment.........................................................................................................37

    TrainingandCompetence.........................................................................................................38

    ComplaintsHandling.................................................................................................................38

    DisasterRecovery.....................................................................................................................39

    PoliciesandProcedures............................................................................................................40

    AntiMoneyLaundering/CounteringtheFinancingofTerrorism(AML/CFT)..........................40

    InternalTesting.........................................................................................................................41

    Identificationprocedures(newandcontinuingbusinessrelationshipsandoneofftransactions).............................................................................................................................41

    Identificationprocedures(introducedpersons).......................................................................42

    Identificationprocedures.........................................................................................................43

    Suspicioustransactionsprocedures.........................................................................................43

    Riskassessment........................................................................................................................44

    Records,recordkeepingandretrieval.....................................................................................44

    Registers....................................................................................................................................45

    Overseasinterests.....................................................................................................................45

    Staffrecruitment.......................................................................................................................45

    Staffeducationandtraining.....................................................................................................45

    Offencesandpenalties(understandingof)..............................................................................46

    Clientfilereview.......................................................................................................................46

    CloseoutMeeting.....................................................................................................................48

    PostonsiteInspectionPreparingtheInspectionReport.......................................................49

    PostinspectionMonitoring......................................................................................................50

    ObjectivesinRelationtoInspectionReport.............................................................................50

    ConsiderationsRelevanttoInspectionReport.........................................................................51

    RequirementsinRelationtoInspectionReport.......................................................................51

    PARTIV.................................................................................................................................53

    AssessingCreditRisk:Banking...............................................................................................53

    CreditRisk.............................................................................................................................53

    ObjectivesinReviewingCreditRisk..........................................................................................53

    CreditRiskManagement..........................................................................................................54

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    CreditPolicies............................................................................................................................55

    EvaluatingCreditProposals......................................................................................................56

    Documentation.........................................................................................................................57

    Collection..................................................................................................................................58

    PortfolioManagementandControl..........................................................................................58

    InspectionEssentials.................................................................................................................60

    OtherAssetsRisk......................................................................................................................63

    ObjectivesinReviewingBanksOtherAssets...........................................................................63

    RelevantConsiderations...........................................................................................................64

    InspectionEssentials.................................................................................................................64

    PARTV..................................................................................................................................66

    Liquidity:Banking..................................................................................................................66

    LiquidityRisk.............................................................................................................................66

    ObjectivesinEvaluatingManagementofBanksLiquidity.......................................................66

    RelevantConsiderations...........................................................................................................66

    LiquidityManagement..............................................................................................................67

    AssetManagement...................................................................................................................67

    LiabilityManagement...............................................................................................................68

    OtherSourcesofLiquidity........................................................................................................69

    LiquidityPolicy..........................................................................................................................70

    LiquidityControl........................................................................................................................71

    InspectionEssentials.................................................................................................................72

    PARTVI.................................................................................................................................74

    MarketRisk:Banking.............................................................................................................74

    MarketRisk...............................................................................................................................74

    RelevantConsiderations...........................................................................................................74

    InterestRateRisk......................................................................................................................75

    ObjectivesinRelationtoInterestRateRisk..............................................................................75

    InterestRateRiskManagement...............................................................................................75

    InterestRateRiskPolicies.........................................................................................................76

    InterestRateRiskLimits............................................................................................................76

    MeasurementofInterestRateRisk..........................................................................................76

    ControlofInterestRateRisk.....................................................................................................77

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    InspectionEssentials.................................................................................................................78

    PARTVII................................................................................................................................80

    FOREIGNEXCHANGERISK:BANKING.....................................................................................80

    ForeignExchangeRisk...............................................................................................................80

    ObjectiveinRelationtoForeignExchangeRisk........................................................................80

    OperationsintheForeignExchangeMarket............................................................................80

    ForeignExchangeRiskManagement........................................................................................81

    ForeignExchangeRiskManagementPolicies...........................................................................81

    ForeignExchangeRiskLimits....................................................................................................82

    MeasurementofForeignExchangeRisk..................................................................................82

    ControlofForeignExchangeActivities.....................................................................................83

    IndependentAudits..................................................................................................................83

    InspectionEssentials.................................................................................................................84

    PARTVIII...............................................................................................................................86

    OperatingRisks:Banking.......................................................................................................86

    OperatingRisks.........................................................................................................................86

    Management.............................................................................................................................86

    ObjectivesofEvaluatingManagement.....................................................................................86

    TheBoardofDirectors..............................................................................................................87

    OperatingManagement...........................................................................................................89

    InspectionEssentials.................................................................................................................91

    PARTIX..................................................................................................................................95

    OffBalanceSheetRisks:Banking...........................................................................................95

    OffBalanceSheetRisks............................................................................................................95

    ObjectivesinRelationtoOffbalanceSheet.............................................................................95

    RelevantConsiderations...........................................................................................................95

    Guarantees................................................................................................................................96

    LettersOfCredit........................................................................................................................96

    CommitmentstoGrantLoans...................................................................................................97

    FutureandForwardContracts..................................................................................................97

    Litigation...................................................................................................................................97

    OtherOffbalanceSheetItems.................................................................................................98

    InspectionEssentials.................................................................................................................98

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    PARTX.................................................................................................................................100

    SolvencyRisks/CapitalAdequacyRequirements:AllLicensees............................................100

    SolvencyRisk...........................................................................................................................100

    CapitalAdequacy....................................................................................................................100

    ObjectivesinReviewingCapitalAdequacy............................................................................100

    RelevantConsiderations.........................................................................................................101

    InspectionEssentials...............................................................................................................102

    PARTXI................................................................................................................................103

    MiscellaneousMatters:AllLicensees(AsReferenced).........................................................103

    EARNINGS(BANKINGONLY)...................................................................................................103

    ObjectivesinAnalysingEarnings............................................................................................103

    RelevantConsiderations.........................................................................................................103

    InspectionEssentials...............................................................................................................104

    INFORMATIONSYSTEMS(ALLLICENSEES)............................................................................106

    ObjectivesinRelationtoInformationTechnology.................................................................106

    RelevantConsiderations.........................................................................................................106

    InspectionEssentials...............................................................................................................106

    ACCOUNTINGPOLICIES(ALLLICENSEES)...............................................................................107

    ObjectivesinRelationtoAccountingPolicies.........................................................................107

    RelevantConsiderations.........................................................................................................108

    InspectionEssentials...............................................................................................................108

    COMPLIANCE(ALLLICENSEES)...............................................................................................109

    ObjectivesInRelationtoCompliance.....................................................................................109

    RelevantConsiderations.........................................................................................................109

    InspectionEssentials...............................................................................................................109

    INTERNALCONTROLS(ALLLICENSEES)..................................................................................110

    ObjectivesinRelationtoInternalControls...........................................................................110

    RelevantConsiderations.........................................................................................................111

    InspectionEssentials...............................................................................................................112

    INTERNALAUDITORS(BANKING)..........................................................................................112

    ObjectivesinRelationtoInternalAuditor..............................................................................112

    RelevantConsiderations.........................................................................................................113

    InspectionEssentials...............................................................................................................114

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    DIVIDENDPOLICY(BANKING).................................................................................................115

    ObjectivesinRelationtoDividendPolicy...............................................................................115

    InspectionEssentials...............................................................................................................115

    PROVISIONSFORCREDITLOSSES(BANKING).........................................................................116

    ObjectivesinRelationtoLoanLossProvisions.......................................................................116

    RelevantConsiderations.........................................................................................................116

    InspectionEssentials...............................................................................................................118

    INDEPENDENTINSPECTORS....................................................................................................119

    APPENDIX3A.......................................................................................................................131

    PreInPreInspectionQuestionnaire(Banking):...................................................................131

    APPENDIX4C.......................................................................................................................182

    APPENDIX5A.......................................................................................................................186

    APPENDIX5B.......................................................................................................................193

    APPENDIX6A.......................................................................................................................196

    APPENDIX6B.......................................................................................................................198

    APPENDIX7A.......................................................................................................................199

    APPENDIX7B.......................................................................................................................205

    APPENDIX7C.......................................................................................................................208

    APPENDIX7D.......................................................................................................................211

    APPENDIX7E.......................................................................................................................220

    APPENDIX7F.......................................................................................................................224

    APPENDIX7G.......................................................................................................................228

    APPENDIX7H.......................................................................................................................233

    APPENDIX7I........................................................................................................................243

    APPENDIX8.........................................................................................................................248

    APPENDIX9.........................................................................................................................251

    APPENDIX10.......................................................................................................................255

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    TABLEOFCONTENTS

    GlossaryofTerms

    AIMA AlternativeInvestmentManagersAssociationAMLR AntimoneyLaunderingRegulationsAML/CFT AntimoneyLaundering/CounteringtheFinancingofTerrorismAMLRO AntimoneyLaunderingReportingOfficerAMLTFCOPAntimoneyLaunderingandTerroristFinancingCodeofPracticeBCBS BaselCommitteeonBankingSupervisionCDD CustomerDueDiligenceEC EnforcementCommitteeFSB FinancialStabilityBoardFSC FinancialServicesCommissionIAIS InternationalAssociationofInsuranceSupervisorsIOSCO InternationalOrganisationofSecuritiesCommissionsLSC LicensingandSupervisoryCommitteeOGBS OffshoreGroupofBankingSupervisorsPCCA ProceedsofCriminalConductAct

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    IntroductionTheBritishVirgin IslandsFinancialServicesCommission (theCommission) isresponsible forlicensing,regulatingandsupervisingthefinancialservicesindustryintheVirginIslands.Oneofthekeycomponentstoensuringthattheindustryisprudentlyregulatedandsupervisedistheconductofinspections,bothonsiteandoffsite.Themaingoaloftheonsiteinspectionregimeis toeffectivelymonitor theentities licensedunder the regulatory legislationwitha view toidentifyingthesystemicrisksinherentintheiroperationandtheconsequentialimpact(s)onthejurisdiction and then seek to address the systemic risks in a timelymanner.At present theCommission conducts onsite inspections on licensed banks, fiduciary services businessproviders, fund administrators and fund managers, insurers and insurance managers andinsolvency practitioners.1 This process entails, in appropriate cases, the sampling of specificmatterswithintheportfoliosoflicensedentities.2. Historically,theCommissiondevotedmostofitstimetodetailedauditandverificationprocedures.However,asaresultoftheimprovedqualityofinternalcontrolsandinternalandexternalauditprograms,especiallyas itrelatestobanks,theCommission isnowabletocarryoutamoreimportantfunction:theevaluationoftheriskprofileandconditionofthe licensedentities.3. ThisProceduresManualplacesparticularemphasisontheevaluationofthepoliciesandprocedures of licensees and their level of compliance with current laws, including theestablishedpolicies,guidelines,practicedirectionsandcodes issuedby theCommission.ThisenablestheCommissiontomakeanevaluationofthelicenseesabilitytomanageavarietyofrisksassociatedwiththeirbusinessesandrecommendand/orrequirerelevantremedialaction.Generally,theseriskswouldrelate(asappropriatehavingregardtothetypeandnatureofthelicenseesbusiness)toresourcerequirements,managementcontrolandaccountability,credit,interestrates,foreignexchange,liquidity,operationsandsolvency.4. It is theCommissionsbelief that it canplay an important role in the regulation andsupervisionofitslicenseesbyencouragingthemtodevelopwrittenpoliciesandproceduresinallareasoftheirbusinesses, inadditiontoensuringfullcompliancewithcurrent lawsandtheestablishedprocessesandproceduresoftheCommission.Thisrequiresacriticalevaluationofthe licensees compliance culture during an inspection process and providing appropriaterecommendations to correct identified deficiencies thereby avoiding potentially dangeroussituations fromarising.TheCommissionalsocontributes to thesoundnessof its licenseesbyencouragingthemtofollowbestpracticesinallaspectsoftheiroperations.5. Individualregulators,whetheractingaloneorcollectivelyduringinspections,functionasofficialrepresentativesoftheCommissionandhaveanobligationtoconducttheirbusinessinamanner that instills and enhances trust and confidence. It is important, therefore, that

    1 ThisManuals Procedure does not cover the inspection of insolvency practitioners which is dealt with in aseparatemanualsprocedure.

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    regulators engage in direct and honest dialogue with licensees being inspected and anyinformation obtained by the regulators during that process ismaintained confidentially andmustnotbedivulgedsaveinaccordancewithlaw.6. Accordingly,everyregulatorandCommissionstaffinnonregulatoryDivisionswhomaybe tasked with assisting in inspections and writing inspection reports must familiarizehimself/herselfwith thisProceduresManual.Anydeviation from theestablishedprocedureshereinmustbeforgoodreasoninaspecifiedcontextandaftertheapprovaloftheInspectionCoordinatorortheDirectorofthesubjectmatterconcernedhasbeenobtained.

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    PARTIPurpose,ObjectivesandTypesofComplianceInspectionandRelatedMatters

    PurposeoftheProceduresManual7. The purpose of this ProceduresManual is toprovide theCommissions staffwith aneffectivetoolwithwhichtocarryouttheironsiteinspection2functions.TheProceduresManualprovides guidance in planning and conducting inspections. The objective in this regard is toensuretheconsistentapplicationofagreeduponprocedurestherebyenhancingthequalityoftheonsite inspectionsundertakenby theCommission.TheProceduresManualalsoachievesanotheroftheCommissionsaimsprovidingausefultoolintrainingregulatorsandothersintheproperconductofonsiteinspections.

    OrganisationoftheProceduresManual8. TheProceduresManualcontainsdifferentsectionsthatrelatetothevariousaspectsoftheonsite inspectionprocess.Thesesectionscontainthe inspectionobjectivesandsuggestedprocedurestoachievetheobjectives.Theobjectivescontainadescriptionofthegoalsthatareof primary interest to theCommission. They are important in determining the scope of theinspectionofspecificareasofaregulatedactivity.Inthiscontextandinrelationtothepersonthatisoristobethesubjectofinspection,whereverthetermslicenseeandlicenceholderare used in the ProceduresManual, they are to be construed tomean the same thing: thepersonlicensedbytheCommissioninaccordancewiththerelevantregulatorylegislation.9. Furthermore,theProceduresManualincludesprocessesandproceduresthat,inspecificcircumstances, regulators should adhere to. These guide the regulators to accomplish thetargetobjectivesforeachareaofinterestthatisthesubjectofaspecificinspection.10. While the Procedures Manual is of general application to all regulated activitiessupervisedbytheCommission(saveasspecificallystatedotherwise),itisrecognizedthatsomeoftheprovisionsoftheProceduresmaynotapplytoeveryregulatedactivity.Theestablishedprocessesandproceduresshould,insuchcircumstances,beappropriatelymodifiedtoachievethe desired objective forwhich a licensee is inspected and also ensure consistency in theapproachadoptedwith respect to theareas inspected.Whereconsiderednecessary, specificreference ismade in relation to specific areas of regulated activity and the processes andprocedures inrespect thereofspecificallyoutlined. Inanycaseofdoubt,referenceshouldbemadetotheInspectionsCoordinatorforguidance.

    2ThetermonsiteinspectionisusedinthisProceduresManualastheprocessofonsiteinspectionisconsideredtheprimarysupervisorymechanismof theFinancialServicesCommission forestablishingcompliance.However,the ProceduresManual apply generally to all compliance inspections inwhatever form undertaken (includingoffsiteinspections)andinthiscasereferenceshouldbemadetoparagraph10.

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    11. SpecificPartsareprovidedwithrespecttobankingbusiness,andevery inspectionofalicenseethatisabankmusttakeaccountofthosePartsthatrelatetobanks,inadditiontotheothergeneralapplicableParts.12. TheProceduresManualiseffectivelyaworkingtoolratherthanareferencedocument.No two licensees are necessarily alike, especially with regard to nature, size, volume ofoperations,organisational structureand typesof services rendered.Therefore the regulatorsandotherCommission staff involved in theconductofonsite inspectionsmustappropriatelydraw on professional experience and judgment in the application of the provisions of thisProceduresManualand,whereconsiderednecessaryinanyparticularcaseorcircumstance,tomodify theapplicationof theProcedures,with liberty toseekappropriateguidance from theInspectionsCoordinator.13. Generally,theProceduresManualprovidesspecificguidance

    (a) concerningthedeterminationofthescopeofgeneralandspecialinspections;

    (b) indeterminingtheprocedurestobeusedintheinspectionofspecificriskareasofalicensee;

    (c) with regard to the evaluation of written policies, practices, processes andprocedures,degreeofcompliancewith thosepolicies,practices,processesandprocedures,andtheadequacyofthesystemofinternalcontrols;

    (d) withrespecttotheevaluationofthequalityoftheworkperformedbyinternalandexternalauditors;

    (e) inrelationtotheevaluationoftheperformanceofmanagementanddirectors;

    (f) withrespecttotheformulationofobjectivecriteriaforevaluatingthecondition

    andqualityofalicenseeanditsmanagement;and

    (g) on the adoption of appropriate processeswith respect to identified areas ofinterestinrelationtotheinspectionofbanks.

    SupportingLegislation14. Section 35(2) of the Financial Services Commission Act, 2001 provides that TheCommissionmay,forthepurposesoftheprudentialsupervisionofafinancialservicesbusinesscarriedoninorfromwithintheTerritory,

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    (a) inspectthepremisesandbusiness,whether inoroutsidetheTerritory, includingthesystemsandcontrols,ofarelevantperson;

    (b) inspecttheassets,includingcash,belongingtoorinthepossessionorcontrolof

    arelevantperson;(c) examine andmake copies of documents belonging to or in the possession or

    controlofarelevantpersonthatintheopinionoftheCommission,relatetothecarryingonoffinancialservicesbusinessbytherelevantperson;and

    (d) seek information and explanations from the officers, employees, agents and

    representativesofrelevantperson,whetherverballyorinwriting,andwhetherinpreparationfor,duringorafteracomplianceinspection.

    Arelevantpersonreferstoalicensee,formerlicenseeorsubsidiaryorholdingcompanyofalicensee or former licensee, of the Commission. The inspection or examination by theCommissionof a licensee essentially relates to the supervisionof financial servicesbusinessthat is carried on in or fromwithin the Territory; this process includes themonitoring andassessingofcompliancewithapplicablefinancialservices legislationandtheFinancialServicesCommissionAct,2001,theRegulatoryCodeandanyrelevantguidelinesordirective issuedbytheCommission.15. The inspection further relates to monitoring and assessing compliance with therequirementsandobligationsoutlinedintheAntimoneyLaunderingRegulations,2008,(AMLR)AntimoneyLaunderingandTerroristFinancingCodeofPractice,2008(theCode)andotherenactments and guidelines relative to money laundering or the financing of terrorism. Inparticular,section8(1)oftheCodeprovidesthatItisthedutyoftheCommissiontomonitorcompliancebyitslicenseesandotherpersonswhoaresubjecttocompliancemeasureswiththisCodeandanyotherenactment(includinganyothercodeandanyguidelines)relatingtomoneylaunderingandterroristfinancingasmaybeprescribedbythisCodeoranyotherenactment.Further,section9of theCodeprovides thatAspartof itsprudential inspectionofanentitythat itregulates,theCommission isexpectedtoreviewtheentitysriskassessmentonmoneylaundering and terrorist financing, including the entitys policies, processes, procedures andcontrolsystems..16. The legislativeremitoutlinedaboveeffectivelyaccordwiththeregulatory,supervisoryandcompliancefunctionsoftheCommissionasoutlined insection4oftheFinancialServicesCommission Act, 2001 and all regulators and other Commission staff concerned withinspections are required to familiarize themselves with the requirements and obligationsoutlined inthatsectionaspartoftheprocessofensuringefficientandeffective inspectionoflicensees.

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    ObjectivesofOnsiteInspections17. Theonsite inspectionrepresentsthe factfindingpartoftheCommissionssupervisoryfunctions. Itcomprisesthe inspectionwork, including interviewswithmanagementand juniorstaff,anda reviewandevaluationof records,proceduresandprocesses,of licensees. Italsoincludes holding discussionswith the external auditors of licensees (where applicable) andengaging inconcludingmeetingswithseniormanagementtooutlinethe initialfindingsoftheinspections. It istherefore important inthiscontextthatan inspectionofa licensee iscarriedoutseriouslyandobjectively.18. The objectives of an inspectionmay be varied, depending on the area of regulatedactivitythat isbeing inspected.However,an inspectiongenerally ispremisedonthefollowingobjectives:

    (a) tounderstandthe licenseesbusiness,environmentandoperationswithaviewtoascertainingwhetherthereareanyrisksinherentinitslineofbusinessand,ifanyrisksare identified,whetherappropriatemeasuresare inplacetoproperlydeal with those risks and indeed those risks are adequately addressed andmitigated;3

    (b) to establish whether, having regard to the nature, size and complexity of alicenseeand/ora licenseesbusiness,the licenseeposesaspecificsystemicriskto the financial services industry and/or the reputation of the Territory; inparticular,wherean inspection identifiesa licenseeasaproblem,thismustbereported immediatelytotheManagingDirectorwithsuchrecommendationsasmaybeconsiderednecessary;

    (c) toreviewthelicenseesmanagement,internalcontrols,internaltesting,training,

    accounting practices, investor services, valuation services and AML/CFTprocessesandprocedures;

    (d) to establish the level of adherence by the licensee to the relevant financial

    services legislation, Financial Services Commission Act, 2001, regulations,RegulatoryCodeandanyguidelines,practicedirectionsanddirectivesissuedbytheCommission,includingadherencetoapplicableinternationalbestpractices;

    (e) to establishwhether the licensee continues to be fit and proper4 and,where

    deficienciesareidentified,tomakesuchrecommendationsasareappropriate;

    3Seeparagraph3forsomeoftherisksthatareinherentinalicenseesbusiness.4ForguidanceontheCommissionsfitandpropercriteria,pleaserefertoSchedule1AoftheRegulatoryCode,2009asamendedin2010.

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    (f) toestablishandproperlyevaluatethesoundnessandcontinuedviabilityofthelicensee;

    (g) toidentifymattersthatrequirepolicyorotherconsiderationbytheCommission

    with respect to any specific financial services business, including the need toreviewanycurrentpolicy,practiceorfinancialserviceslegislation;and

    (h) to communicate, at the end of the inspection, the initial findings of theinspection to the licensee and, where considered appropriate, to makeappropriate recommendations to the licensee to assist in addressing theproblems identified in the inspection; this constitutes the closingoutmeetingbetweentheinspectingteamandthelicensee.

    19. At the end of an inspection, the inspection teammay,where possible, provide thelicenseewithadraftoutlineinspectionreportregardingitsfindingsandrecommendations.Thiswillnotconstitutethereport;itissimplyanoutlinewhichgivesthelicenseeaheadstartontheinspection findings andmay thereforebe in an abbreviated formuntil such time as the fullreportispreparedandmadeavailabletothelicensee.Thisarrangementmaynotbepossibleineveryinspectionduringaninspectioncycle.Itisamattersolelyfortheinspectionteam,underthe guidance of the inspection team leader, to determine. In any case, the full reportmaydeviate fromanymattercontained in theoutline if the inspection team leader,upon furtherreview, forms the view that there is justification for doing so (this is expected to be theexceptionratherthantherule).

    20. TheresultsofaninspectionenabletheCommissiontoevaluatealicenseesassessment,managementofrisksandcompliancecultureandwhetherthelicenseecontinuestobefitandpropertocontinuetobelicensedbytheCommission.

    TypesofOnsiteInspections21. Generally,anonsiteinspectionofalicenseemaycomprisea

    fullscopeinspection;

    themedorlimitedinspection;or

    followupinspection.22. TheCommissionmakesadeterminationatanearlystageastowhichtypeofinspectionshouldbeundertakeninrelationtoalicensee.Variousfactorsaretakenintoaccountinmakingsuchadecisionandtheseinclude(althoughnotlimitedto)thefollowing:

    (a) whetherthelicenseehaseverbeeninspected;

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    (b) whether,havingregardtothenature,sizeandcomplexityofthelicenseeand/orthe type of financial services business it carries out, the licensee is of low,mediumorhighrisk;

    (c) whetherthelicenseeisconsideredtobeofsystemicimportancetothefinancial

    system, domestically or globally, and poses or has the potential to pose asystemicriskthereto;

    (d) havingundergone an inspectionpreviously, the licenseehadexhibited serious

    deficiencieswhichrequiredremedialaction;

    (e) wherethelicenseegenerallyhasapoorcomplianceculturewhichmaygiverisetoquestionsregardingitsfitnessandpropriety;

    (f) whetherenforcementactionhadbeentakenagainstthe licenseewhich, inthe

    Commissions opinion, raises concerns regarding the licensees ability orwillingness to comply with relevant financial services legislation and/orestablishedpolicies,guidelines,codesorpracticedirectionsoranydirectiveoftheCommission;

    (g) whereanimportantspecificissuearisesinrelationtoalicenseewhichwarrants

    aninspection;and(h) wherethepublicinterestdictatestheneedforaninspection.

    FullScopeInspection23. Afullscopeinspectionentailsareviewofthefulloperationsandlinesofbusinessofthelicensee.Itiscarriedoutonacasebycasebasisandisdesignedtobeacomprehensivereviewprocess in respect of a licensee. Appendix 2 provides a sample full scope inspectionquestionnaire based on a previous such inspection. It is expected, however, that anysubsequent full scope inspectionwouldbe suitably tailored in termsof theobjectives tobeachievedandmaythereforenecessarilydeviatefromthesamplefullscopequestionnaire.ThemedorLimitedScopeInspection24. Athemedorlimitedscopeinspectioninvolvesareviewofaparticularlineofbusinessorareviewofaparticularfunctioncarriedoutbythe licensee.TheCommissionwouldnormallyhaveidentifiedinadvancethespecificareas/subjectmattersitwishestoinspectwithregardtoalicensee.

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    FollowupInspection25. A followup inspection is carried out to ascertain the progress of the licensee inimplementingcorrectiveactionsmandatedbytheCommission following theconclusionofanonsiteinspectionandsubmissionofafinalreport.ThisprocessenablestheCommissiontogetanoverallunderstandingofthelicenseescomplianceculture.

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    PARTIIPhasesoftheInspectionProcess26. Theinspectionprocessisdividedintofourphasesasfollows:

    preonsiteinspectionplanningandanalysis;

    onsiteinspection;

    postonsiteinspection(reporting);and

    postinspectionmonitoring.

    General27. Theprocessesandproceduresforconductingeachofthesephasesareoutlined intheappropriate sections of this ProceduresManual5. An understanding of the licensee (whichincludes individual licensees such as insolvency practitioners) and its environment includeshaving a firm grasp of its activities and associated risks, the involvement of the board ofdirectorsandtheroleofauditors(whereapplicable).Italsoinvolvesanindepthknowledgeoftrendsintherelevantindustrywithrespecttowhichalicenseeistobeinspected.Theobjectivealso encompasses assessments of the appropriateness of reliance on internal and externalaudits,theadequacyofmanagementcontrolsandthequalityofmanagement.28. Theobjectiveofdetectingsolvencyorcapitaladequacyrequirementproblemsinvolvesfocusingonmaterialityandonareasofgreatestrisk.This includesanassessmentoftherisksinherent inthe licenseesactivitiesaswellastherisks intheeconomy.Italso involves(whereapplicable) analysing the financial statements for signsof adevelopingpotential for risksorproblems.29. Withregardtocomplianceproblems,thisinvolvesreviewingthelicenseesactivitiesforcompliance with applicable financial services legislation, regulations and other supervisoryrules.Ofparticularimportanceforbanks,forinstance,wouldbecompliancerequirementsthatare solvency based loan size, concentration and capital adequacy.All problems should bedocumentedandhandledinamannerconsistentwiththeirmateriality.30. Theobjectiveofgatheringinformationonpolicymattersinvolvescollectinginformationthat may be used as the basis for recommending changes to relevant financial serviceslegislation, regulations and industry guidelines. It includes relevant information relating tocurrent policy issues and to regulatory provisions that are difficult to administer, that are

    5 The onsite inspection, postonsite inspection andmonitoring are covered under Part III of the ProceduresManual.

  • FSC Compliance Inspection Procedures Manual 2010 19

    causing licensees tomake bad decisions or that are being interpreted in differentways asindicatedbyunusualactivities.31. Inadditiontodetectingproblems,theCommissionhastheobligationtoalso facilitatethe resolution of the problems identified in an inspection. This involves developingrecommendationsforcorrectiveactionandfollowinguponsuchrecommendationstoensurethattheyarecompliedwithbythelicensee.

    PreOnsiteInspectionPlanningandAnalysisGeneral32. Thepreinspectionplanning and analysisphase consistsof four stagespreparatorywork,analysis, inspectionplanandplanapproval.Each stage contributes to theobjectiveofconducting the inspection inanefficientandeffectivemanner. It is theCommissionspolicythat the conduct of an inspection should not be disruptive to a licensees business. Thuswhenever possible, the Commission will conduct joint inspections where a licensee holdsmultiplecategoriesoflicences.33. Inthisregard,theCommissionrequires,atthebeginningofevery inspectioncycle,thevariousDivisions toput forth theirproposed inspection schedulesbasedon their inputsandvariables.Theproposal issubmittedtotheInspectionsCoordinatorwhohastheresponsibilityofputtingtogetheranappropriatematrixfortheinspectioncycle.Thematrixmustbepreparedon thebasisofwhat is realistic and achievable in a given inspection cycle,payingparticularattentiontolicenseesthatareconsideredhighriskorsufficientlysignificantastoposesystemicrisks or those that are known to have a deficient compliance culture. The InspectionsCoordinator then submits thematrix, alongwith any necessary report, to the EnforcementCommitteewhich takes the final decision on the scope and content of thematrix for theinspectioncycleconcerned.34. TheInspectionsUnit(underthesupervisionoftheInspectionsCoordinator)hasthedutyof determining in any particular case whether the element of surprise is essential for asuccessfulinspectionorwhethertonotifythelicensee.Noticecanresultinasignificantsavingintimeandstaffresources.Therefore,thegeneralprincipleisthattheInspectionsUnitshouldalwaysnotify licenseesof aproposed inspection,unless it is intended to conduct a surpriseinspection.6

    6A surprise inspection isnormally foundedongood reason, suchaswhere the licenseehasapoorcomplianceculture,whereacomplaintofaseriousnaturehasbeenreceived,wheregivingadvancenoticemightdefeattheobjectiveofaspecificinspectionorleadtothedissipationofvaluablepotentialinformation,etc.

  • FSC Compliance Inspection Procedures Manual 2010 20

    35. Theobjectives inthepreparatorystageofan inspectionaretwofold:firstly,toobtainrelevantinformationsothattheregulatorscanconductameaningfulanalysisofthelicenseesoperations;andsecondly,toproviderelevantinputintotheinspectionplan.PreparatoryWork(InformationGathering)36. Inordertocommencethe inspectionprocess,theCommissionmustensurethat ithasthe informationnecessary togainan initialunderstandingof theoperationsof the licensee.This isachieved throughareviewof the licensees file(s)andarequest from the licensee forvariousdocumentsbywayofanoticeof inspection letter(attachedasAppendix1)7.Includedasanattachmenttothenoticeofinspectionletterarepreinspectionquestionnaires(attachedasAppendices3A,3B,3C,3D,3Eand3F for the relevantsectors).Thisprocess isessentiallygeared towards ascertaining the general profile of the licensee and its mandate, anunderstanding of the licensees group structure and the risks relative to the licensee withrespecttoAML/CFTandtheprocedures inplacetomitigatethoserisksandthedetailsofthelicensees financial resources, insurance coverage, training procedures and pending courtproceedings.Thenoticeofinspectionletteroutlinesthedetailedinformationrequiredfromthelicensee for inspection purposes; this information is complemented and enhanced by theresponsestothepreinspectionquestionnaires.37. It should be noted that in relation to licensed banks, there are regularmonitoringreports that include informationonoverall credit losses, includingwriteoffs,provisions andreserves.Theregulatorsshouldthereforehaveintheirfilesthebanks

    (a) balance sheetand income statement information for the threeprevious years(consolidated);

    (b) previousinspectionreports;and(c) thelatestexternalauditorsmanagementletter.

    38. There are at least two major methods of organising the inspection of banks. Onemethodisbytheuseofananalysisoftheadequacyofthebankscapital,assets,management,earningsandliquidity.ThisisknownbytheacronymtheCAMELapproach.Anothermethodis touse the riskanalysisapproach. Toa largeextentbothmethods lookatmuch thesamethingsinthebank.

    7 Itshouldbenotedthat inadditiontothe informationrequestedof licensedbanks inthepreinspection letter,theBFSDreceivesregularmonitoringreportsthatincludeinformationonoverallcreditlosses,includingwriteoffs,provisionsandreserves.Theregulatorsshouldthereforehaveinandmakereferencetotheirfilesforinformationon(a)balancesheetand incomestatement informationforthethreepreviousyears(consolidated);(b)previousinspectionreports;and(c)thelatestexternalauditorsmanagementletter.

  • FSC Compliance Inspection Procedures Manual 2010 21

    39. The CAMEL approach focuses on balance sheet and income statement soundness.However, in recentyearssystemic riskhas takenacentrestageandhas increasinglybeenofconcerntosupervisors.It istherefore importantthatanoverall inspectionprocessforabank,includingthepreonsiteinspectionplanandanalysis,takesintoaccountanysystemicrisksthatmaybeinherentinabank40. TheriskanalysisapproachincorporatesallofthemajorCAMELconsiderations.Insomerespectstheriskanalysisapproach isforward looking. Thethrust istodeterminewhetherornotabank iseffectively identifyingandmanagingthevariousrisks. Thismeansthatthebankmustfirstofallhaveaclearsetofpoliciesregardingriskabsorption,reduction,andtransfer.Itshouldalsohaveinplace,systemsfortheidentification,analysis,measurementandmonitoringofallmajorrisks.NoticeofInspectionletter41. Thenoticeofinspectionlettershouldbesenttothelicenseeatleastsixweekspriortothe date onwhich onsite inspection is supposed to begin. The letter should set a specificdeadlineforthesubmissionoftheinformationrequested.Thisshouldbeattheminimumtwoweeksbeforethecommencementoftheinspectioninordertoallowfortheinspectionteamtoadequatelyreviewtheinformationsubmitted.42. The notice of inspection letter should be reviewed and updated regularly by eachDivisiontoensurethattheinformationrequestedforanyparticularinspectionwillbestassistinconductingtheinspectionofthelicenseeconcerned.RecordKeeping43. Afteralltheinformationasdetailedabovehasbeenreceived,anindependentonsitefileshouldbecreatedforthelicenseetobeinspected.Theonsitefileshouldcontainalldocuments,notes,etc.relevanttotheonsite inspectionandshouldnotbecommingledwiththestandardoffsitefilemaintainedbytheInspectionsUnitortheDivisioninrespectofthelicensee.

    AnalysisofPreinspectionMaterial44. ThegoaloftheCommissioninrequestingandreviewingtheinformationdetailedaboveis togetapreliminaryunderstandingof the licenseeand itsactivities,sizeof thebusinessaswellasthenature,typeandvolumeofservicesprovided.45. Additionally, the Commission reviews the documents with a view to assessing theinternalcontrolsofthelicenseeandmoregenerallytoassesswhethertheinformationprovidedby the licensee accordswith the records of the Commission; this includes establishing thecomplianceprofileof the licensee in relation to theFinancialServicesCommissionAct,2010,applicable financial services legislation, regulations and codes, guidelines,practicedirections

  • FSC Compliance Inspection Procedures Manual 2010 22

    anddirectives issuedbytheCommission.This isachievedbywayofpopulatingthe inspectionmodulewhichcomprisesseriesofquestionsthatareansweredbasedonthefindingsofthefilereviewaswellasthesubmissionsofthelicensee.46. Ananalysisofthecorporatestructureofalicenseeinvolvesbecomingfamiliarwiththeownership (shareholding) structure including, where appropriate, the parent company,subsidiaries and affiliates; thismust necessarily include an evaluation of themanagementstructure,theregulatoryenvironment,businessactivities,keyfinancialstatisticsortrends,etc.It also requires an understanding of the various relationshipswith connected parties of thelicenseethatpermitstheidentificationofanyrisksthatthelicenseeissubjecttobecauseofitscorporatestructure.47. Regulators should therefore analyse the management structure, including theresponsibilities, reporting lines andprofilesof seniormanagement and the composition andresponsibility of the board of directors and related committees (where applicable). Thisprovidesinsightaboutwhethertheindividualsmeetthe"fitandproper"testandtheirabilitytomanageandcontrolthelicenseesbusinessandrisks.48. The analysis of the regulatory structure involves being familiar with the regulatoryenvironmentunderwhichthelicenseeisoperating,andanyrestrictionsimposedthereunder.49. Ananalysisofthebusinessactivitiesofthelicenseewillidentifytheareasofsignificantorpotentialbusiness riskand theirmateriality to the licensee. A reviewof services that thelicenseeofferscanindicatenewordiscontinuedservices,whichcaninfluencethescopeoftheinspection.50. Withrespecttoalicenseethatisabank,theobjectivesofperformingananalysiswouldentailtheneedto

    (a) review, understand and explain all significant matters in the financialstatements;

    (b) obtainexplanations forall significantdifferencesbetween items in thecurrentfinancialstatementsandthoseofpriorperiods;

    (c) identifytherisksandriskareasinthebankandthematerialityoftheserisks;and

    (d) assist the regulators in focusing on issues of a solvency, policy or compliancenature.

    It is importantalso inthisregardtoassesstheperformanceofabankcomparedwith itsownstrategic plans. Such a review should include the bank's profitability, capital, liquidity andassetsandthekey indicatorsandratiosassociatedwiththeseareas. Mostofthe information

  • FSC Compliance Inspection Procedures Manual 2010 23

    requiredtoperformthisanalysis isavailable fromtheoffsitemonitoringbytheBankingandFiduciaryServicesDivisionthroughthereceiptofstatutoryreturns.51. Furthermore, in relation to a bank, an assessment of thework of the internal andexternal auditors by the Commission establishes the basis and degree of reliance that theCommission canplaceon them.Thisassessment complements theanalysisof thebank. It isimportantthereforetonotethattheobjectivesofassessingtheinternalandexternalauditorsworkaretoobtain

    (a) anunderstandingoftheirrole,responsibilityandcompetence;and

    (b) informationthatcontributestotheidentificationofsignificantorpotentialrisksinthebank.

    Consequently,everyeffortshouldbemadetoreview(whereapplicable)theexternalauditorswork(includingmanagementletterand,wherepossible,workingpapers)beforethebeginningoftheonsiteinspection.Areviewoftheinternalauditorswork(includinghis/herreports)canbedoneatanearlystageoftheonsiteinspection.52. The findingscomingoutofthis initialanalysiswhencompiled,help in formulatingtheinspectionplanand thus theapproach tobe takenby theCommissionwhenconducting theonsiteinspection.

    InspectionPlan53. Planningwill have an influence on the quality of the inspection. Thorough planningmakesiteasiertofulfillthepurposeoftheinspectionandreducestheamountoftimerequiredfor the inspection. The inspection team leader should therefore prepare a planningmemorandumsometimebeforetheinspectionbegins.Objectives54. Theinspectionplanhasthefollowingobjectives:

    (a) todeterminetheoverallobjectivesoftheexamination;and

    (b) todeterminethescopeoftheexamination,theprocedurestobeutilisedandtheextentoftesting;

    (c) to document the various issues, concerns and risk areas that have beenidentifiedduringthemonitoringphaseandthepreparatoryworkfortheonsiteinspection;

    (d) todirectandorganisetheonsiteworkoftheregulators;

  • FSC Compliance Inspection Procedures Manual 2010 24

    (e) todeterminepersonnelrequirements;and(f) todevelopandcommunicateformalplanstopromoteefficiencythroughoutthe

    inspectionprocess.ConsiderationsreInspectionPlan55. The inspection plan should ensure that regulators are familiar with the inspectionprocessrequirementsandwiththelicenseebeforetheyconducttheonsiteinspectionwork.56. In preparing the inspection plan, the regulators should identify the licenseesshortcomings (ifany)andriskprofileandassessthedegreeofrelianceonotherparties. Theriskprofileincludesidentifyingrisks(andriskareas)withinorinrelationtothelicenseeandthematerialityoftheserisks.Thefunctionoftheplanistofocustheinspectiononissues,orrisks,ofasolvency,complianceorpolicynaturethataffectthelicensee.Suchrisksmaybematerial,eitherindividuallyorcollectively,tothelicenseeortotheCommission.57. The identified shortcomings, riskprofileand theassessmentof reliance influence thescopeoftheonsiteinspection.Asaresult,theregulatorsmaydecidenottoreviewsomeareasof the licensee thatareofminimalornoconcern; theymay inspectotherareas toa limitedextentandsubjectotherstoextensiveinspection.58. The information required in developing the inspection plan may be obtained fromvarioussources.Thesewouldincludethepreviousinspectionreportinrespectofthelicensee,periodic monitoring reports, file material, information gathering process outlined in subparagraphs36and37aboveandresponsesreceivedtothepreinspectionquestionnaires.59. Whereapplicable,the inspectionplanshould includeasummaryoftheanalysisofthelicenseeandtheareasidentifiedforinspectionundertheapplicableriskcriteria.Ifnecessary,itshouldalsoincludeanindicationoftheresourcesrequiredtocompletetheinspection.60. It is essential to draw up a list of the various areas the inspecting team intends toinspect,inanapprovedformat,basedonthelicenseesriskprofileandidentifiedshortcomings.The list should also include any other areas requiring investigation. In particular, as regardsbanks,theinspectingteamshouldaspartoftheplanningphase,arrangetoreviewtheworkoftheinternalandexternalauditors.Thiswilldeterminethedegreeofreliancethatcanbeplacedontheirworkandtoidentifyissuesthattheregulatorsshouldaddressduringtheonsitephase.61. The inspectionplanshould indicatethenumber,andtheresponsibilities,ofregulatorsrequired to conduct theonsitework,andanestimateof the time required to complete theonsitework. It should containan inspection schedule, includinga tentative scheduleof themanagement interviewsandaconcludingorclosingoutmeeting. Ifthepreliminaryscheduleindicatesthatitwillnotbepossibletocompletetheinspectionasoriginallycontemplated,the

  • FSC Compliance Inspection Procedures Manual 2010 25

    regulatorsshoulddiscussthecircumstanceswiththeInspectionsCoordinator.Theallocationofstaff and the budgeting of the time for each phase of an inspection require carefulconsideration.Theallocationof regulatorsand timedependson the scopeof the inspectionand the quality and accessibility of relevant records. It also depends on the degree of cooperation by the licensee'smanagement, having regard to the history of cooperation theCommissionhashadwiththelicensee.62. Theuseofatimeandplanningsummaryisausefultoolforimprovedstaffplanningandcontrol.Theregulatorsshouldorganisethesummaryonabasisconsistentwiththestructureofthesectionscontainedintheinspectionplan.Itshouldspecifywhichprocedurestheregulatorswillperformandprovide foracomparisonofactualandbudgetedhours.The regulatorscanestimatebudgetedhoursbasedon thepreceding inspection,andmodifiedbychanges in thescope or other changed conditions identified in the preinspection phase.When assigninginspectionfunctions,theInspectionsCoordinatorshouldtake intoaccounttheorganisationofthelicenseeandtheinterrelationshipsbetweenthesectionsoftheinspectionplan.

    WorkingPaperstobeFactoredintotheInspectionPlan63. Clear and wellorganised working papers are important. They not only reflect theprocedures followed during the inspection, but constitute the most significant supportdocumentation for the conclusions reached during the inspection. They include inspectionprocedures, programmes, documentation provided by the licensee, copies of memoranda,boardofdirectorsandcommitteeminutes,andorganisationalcharts.

    Objectives64. Theobjectivesofhavinggoodworkingpapersareto

    (a) provide written support of the findings and conclusions reached during theinspectionandcontainedintheinspectionreport;and

    (b) assistinplanning,directingandcoordinatingtheinspectionandtheworktobe

    performedbytheregulators.65. Accordingly, it is importantthat indesigningworkingpapers,consideration isgiventothefollowingquestions

    (a) whatobjectivewilltheworkingpaperssatisfy?(b) will theyaid theregulators inefficientlyconducting theanalysisorreviewofa

    particulararea,operationoractivityofthelicensee?

  • FSC Compliance Inspection Procedures Manual 2010 26

    (c) willtheyadequatelydocumentandsupporttheregulatorsfindings?(d) cantheybedesignedforuseinsubsequentinspections?(e) willtheyprovidealltherequiredinformation?(f) istheformateasytomanage,understand,followandcomplete?(g) aretheydesignedtofacilitatereview?(h) dotheyassistinevaluatingtheworkperformed?(i) dotheyavoidduplicationofinformation?

    66. As the initial step in thepreparationofworkingpapers, the regulators should reviewthosepreparedduringthepreviousinspection.Thiswouldindicatepermanentinformationandotherinformationrelevanttothecurrentinspection.67. Sometimes licenseesstaffmaypreparedocumentsthattheregulatorsuseasworkingpapers.Theregulatorsmustensurethattheyobtaincompleteandusefulinformation.68. Awidelyusedmethodofworkpaperorganisationsegregatesthecompletedpapersintotwofiles,analysisandpermanent.Theanalysisfilecontainsworkingpapersthatdocumenttheproceduresandsupporttheconclusions.Thepermanentfilesshouldconsistofworkingpapersofcontinuinginterest.Theseinclude

    (a) abriefhistoryofthelicensee;

    (b) thelicenseesorganisationalchart;(c) acopyofthelicenseesbylaws;(d) thelicenseeswrittenpoliciesforthevariousareasofoperation;and(e) a listofnamesand titlesofkeyexecutives,directorsandcommitteemembers

    (whereapplicable)ofthelicensee.69. Theregulatorsshouldreviewtheworkingpaperstodeterminethatthe inspectionhasachieved the intended scopeand that thepapers containadequateevidence to support theconclusionsandopinionsinthereport.

    FinalPreinspectionPreparation

  • FSC Compliance Inspection Procedures Manual 2010 27

    70. TheInspectionsCoordinatorwouldnormallyserveastheinspectionteamleaderanditis his/her responsibility to make contact with the licensee8 at least a week prior to theinspectiontoreconfirmthedateofcommencementoftheonsite inspection. Indoingso,theinspection team leadershouldconfirm theestimated timeof themanagementmeetingwiththe licenseeand indicatetothe licenseethenames,ranksandnumberof individualsthatwillbe attending on behalf of the Commission and adding such other information outlined inparagraph61aboveasmaybeconsiderednecessary.71. The inspectionteamshouldcreatea listofallthe filesandsupportingdocumentationthat itwillneed to reviewduring the courseof theonsite inspection.The team should alsocreate a tentative schedule detailing the dates on which various aspects of the onsiteinspectionwillbecarriedout (i.e. filereviews, interviews,etc.).Therelevant filereviewsthatmayberelieduponduringan inspectionprocess inrelationto insurancebusiness, investmentbusiness,bankingbusinessand insolvencyservicesbusinessesareoutlined inAppendices4A,4Band4C(insurance),5Aand5B(investmentbusiness),6(banking)and7AI(insolvency).9PlanApproval72. Once the inspection plan is formulated, it should be submitted by the InspectionsCoordinator to the Enforcement Committee for consideration and approval. Where theexigencies of an inspection plan warrant it, the Inspections Coordinator may submit theinspectionplan in respectof anyplanned inspection to theManagingDirector for approval.However,theinspectionplanmustsubsequentlybepresentedtotheEnforcementCommitteefor ratification, citing the exigencies that warranted advance approval of the plan by theManagingDirector.

    8Thisresponsibilitymay,withtheapprovalofthe InspectionsCoordinator,beperformedbyanymemberoftheinspectionteamoranymemberwithintheInspectionsUnit.9The file reviewmatterswith respect tobankingbusiness areoutlined in the relevant applicablePartsof thisProceduresManual.

  • FSC Compliance Inspection Procedures Manual 2010 28

    PARTIIITheOnsiteInspectionPhase73. This stage of the inspection process requires that the inspection team be physicallypresentonsiteatthe licenseetoconductthe inspection.Havingpreviouslycommunicatedthecommencement date of the inspection to the licensee, the inspection teams arrival at thelicenseespremisesshouldnotcomeasasurprise.

    ConductofInspectionTeam74. The inspection team should at all times conduct itself in a professionalmanner andwithinthelimitsoftheapplicablelaws.Itisessentialinthisrespectthattheteamiscognizantand au faitwith its duties and responsibilities aswell aswhat is required of it during theinspectionprocess.ThepersonsconstitutingtheinspectionteamshouldbemindfulatalltimesthattheyrepresenttheCommissionandshouldconductthemselvesinamannerasnottobringtheCommissionintodisrepute.Itisessential,inparticular,thattheteammembersarealwayspunctualandkeepcloselytotheinspectionplanaspossible.Accordingly,everymemberoftheinspectionteamshouldfamiliarizehimself/herselfwiththeCommissionsCodeofConductfortheConductofComplianceInspections.1075. Planning and preparation are key elements to attaining optimum levels ofprofessionalism.Inthisregard,prudencedictatesthatpriortoconductingtheonsiteinspection,theinspectionteamleadershouldensurethatteammembersareassignedspecificfunctionsasameansoffacilitatingthe inspectionandavoidingduplicationofefforts.Additionally,specificindividual(s)shouldbeappointed forthepurposeofcommunicatingwiththe licenseeonanyissue in thenatureofa requestwhich is consideredessential to the inspectionprocess;anyrequestmademustbereasonableinthecontextoftheparticularinspection.Accountmustalsobetakenofanypracticalissuesrelatingtoavailabilityofinformationandthetimeframewithinwhichtheinformationisrequiredorobtainable.Norequestmustbemadeofalicenseewhichhas no nexus or only has a remote and insignificant nexus with a subject matter of theinspection.Inaddition,whentakingcopiesofdocuments,theinspectionteammustadvisethelicenseethatthe informationcollectedwillbemaintainedandtreatedconfidentiallyandmaybedivulgedonly in accordancewith theparametersoutlined in sections 49 and 49Aof theFinancialServicesCommissionAct,2001. Incircumstanceswhereadocumentcontainshighly

    10ThisdocumentisexpectedtobefinalisedandpublishednolaterthanJune,2011.

  • FSC Compliance Inspection Procedures Manual 2010 29

    sensitiveinformationwhichisnotconsideredrelevanttoasubjectmatteroftheinspection,theinspectionteammaypermitthesensitiveinformationtoberedacted.

    HoldingManagementMeetings76. Themanagementmeeting is the forum thatmarks the commencementof theonsiteinspectionprocessand itsetsthegroundworkandtoneforthe inspectionprocess.Whilethemembershipofthe inspectionteammayattendthemanagementmeeting,which isheldwiththe seniormanagers11 of the licensee, it is expected that only the seniormembers of theinspection team12will take a lead in the discussions. However,where the inspection teamleaderor the leaderof the licenseeconsiders itappropriate forapersonof junior rank fromhis/her team or entity to participate in the discussion, thismay be permitted by the teamleaderorleaderofthelicensee,asthecasemaybe.77. It is important from theoutsetof themanagementmeeting that the inspection teamleaderand/oradirectorordeputydirectorresponsibleforthedirectsupervisionofthelicenseetoleadtheintroductionandcommunicatethefollowing:

    (a) introducethemembersoftheinspectionteam;(b) providerelevantdisclaimers;

    (c) provide a brief overview and history of the Commissions onsite inspection

    regime;(d) setouttheinspectionteamsmissioninconductingtheonsiteinspection;

    (e) provide an explanation of the Commissions process in conducting the onsite

    inspection;(f) setouttheestimatedtimeallottedfortheonsiteinspection;

    (g) indicatethemaximumnumberofteammembersthatwillbeinthelicenseeata

    given time aswell as disclose the fact that additionalmembers not currentlypresent at themeetingmay also be conducting various phases of the onsiteinspectionprocess;

    (h) indicatetothelicenseethattheintentoftheCommissionisnottobedisruptivetothelicenseesoperations;

    11Foradefinitionofseniormanagers,pleaserefertosection4oftheRegulatoryCode,2009.12TheseniormembersoftheinspectionteamwouldordinarilycomprisetheInspectionsCoordinator,directors,deputydirectorsandseniorregulators.

  • FSC Compliance Inspection Procedures Manual 2010 30

    (i) giveanoverviewoftheareasthatwillbecoveredduringtheonsite inspection

    (management,controlsandsystems,businessprocesses,corporategovernance,training,AML/CFT,etc.);

    (j) giveanoverviewofhowtheinspectionprocessistobeconducted(FileReviews,Interviews etc), without prejudice to a change in the process where theinspectionteamconsidersthattobeappropriateinanyparticularcircumstance;

    (k) requirethelicenseetoidentifysomebodywithinthelicenseewhowouldbeoncalltoanswerquestionsduringtheinspectionprocess;

    (l) requestthelicenseetoprovideadesignatedareawithinthelicenseespremisesfor the purpose of enabling the inspection team to conduct its reviews(thisshouldpreferablybeaquietandprivatearea(suchasaBoardroomorseparateoffice)secludedfromtheemployeesofthelicensee;

    (m) indicatetothe licenseethat itshouldmakeavailablerequesteddocumentationattimesallottedbytheinspectionteam;

    (n) giveanoverviewofhowthe interviewprocessworksandwhotheCommissionwillbeinterviewing(i.e.departmenthead(s),midlevelemployee(s),frontofficeandotherjuniorstaff,etc.);

    (o) givethelicenseealistofthefilesaswellassupportingdocumentationthatwillberequiredforreviewduringtheonsiteinspectionprocess;

    (p) provide the licenseewithacopyofthetentativescheduleforcarryingoutthevarious phases of the onsite inspection, noting at the same time that theschedule is subject to review as considered necessary during the onsiteinspectionprocess;

    (q) indicatethatattheendoftheonsiteinspectiontheinspectionteamwillconducta concluding/closeoutmeetingwith the licenseewhere the inspection teamspreliminaryfindingswillbesetout;

    (r) indicate that the draft onsite inspection report should be provided to thelicenseewithinaperiodnotexceedingsixweeksfollowingtheconclusionoftheonsiteinspection;

    (s) indicatethespecificsofthereportregardingtheratingsystem,factualrenditionof the report, the processes the report goes through, providing correctivemeasures and possible timeframes for effecting such measures, followupprocess and the applicable enforcement process; indicate that once the draftreport isprovided to the licensee, the licenseewillbegivenaspecifiedperiod

  • FSC Compliance Inspection Procedures Manual 2010 31

    (normally not exceeding two weeks) within which to provide comments onmattersof factonly; failure toprovide commentswithin the stipulatedperiodwouldbe taken as acceptanceby the licenseeof the factual renditions in thedraftreport;and

    (t) indicate that theCommission, upon receiptof the comments,would considerandfactorthem,whereconsideredappropriate,intothefinalreportforreferralto the Enforcement Committee for approval and any necessary decision inaccordancewith theprovisionsof theFinancialServicesCommissionAct,2001andanyapplicablefinancialserviceslegislationandguidelinesandproceduresoftheCommission.

    It isessentialtotheefficientandeffectiveconductofan inspectionthatthe licensee lendsasmuch cooperation to the inspection team as possible. This should also be appropriatelycommunicatedtothelicenseefromtheoutsetofthemanagementmeeting.

    UseofKReview(andSuccessorProgramme)78. TheinspectionteamcurrentlyutilizestheelectronicplatformofKReview13toassistitinconductingonsiteinspections.KReviewisprimarilyatoolwhosepurposeisto

    (a) serveasadatabasewhereinallinformationonthelicenseeismaintained;

    (b) serve as a database for the basic questions generally posed to the licenseeduringtheonsiteinspectionprocess;and

    (c) provideagenericreportofthefindingsonthelicenseefollowingtheconclusion

    oftheinspectionprocess.79. ItshouldbenotedthattheinitialreportgeneratedbyKReviewisnotthefinalreportastheinitialreportmaybesubjecttoreviewsandamendmentsonthebasisoftheactualfindingsof the inspection team. Further, the report provided by KReview does not cover the fullspectrumoftheonsiteinspectionandtherearemanythingsthatmayneedtobeaddedbytheinspectionteambeforethereportcanbefinalized.Itisthereforeessentialthattheinspectionteam properly records its findings as the inspection process is underway to contrast suchfindings to the initial report generated by KReview. The application of sound judgment isparamountandmustbeadheredto.

    13ThecurrentKReviewisbeingreviewedtotakeintoaccountnewdevelopmentswithintheTerritorysAML/CFTregime andother related legislativedevelopments.The reviewmay indeed result in the adoptionof anewordifferentsoftwareprogrammeoranenhancedKReview.Whateverhappens, theneworenhancedprogrammewillbeappliedaccordinglyintheinspectionprocessand,wherenecessary,theprovisionshereinwillbemodifiedappropriately.

  • FSC Compliance Inspection Procedures Manual 2010 32

    80. Theonsite inspectionprocess isprimarilyguidedby industrybestpractices issuedbybodiessuchas theBCBS, IOSCO, IAIS,AIMA,OGBS (on trustandcorporateserviceproviders)andFSBaswellasenacted legislationandguidelines,codes,practicedirectionsanddirectivesissued by the Commission from time to time.Accordingly,where a particular component isguidedbyindustrybestpractice,theCommissionprovidesdetailsoftheprincipleandalsothemechanismstoanalyse,assessandestablishratingsbasedontheinspectionteamsfindings.

    UseofInspectionSpreadsheets81. In some cases, the Commissionmay utilize established spreadsheetswith respect tocertainsectorsof the financialservices industry inrelation toan inspection. Insuchcases,KReview is used only as a guide and question bank to buttress the spreadsheet.14 Thespreadsheet(whichisplacedontheNDriveoftheCommissionsITsystem)ispopulatedinthesamemannerasKReviewandupdatedastheonsiteinspectionprogresses.

    InspectionsinRelationtoManagement82. It is important that the inspection is, amongst othermatters, focused on issues ofcorporategovernance.Theseniormanagementof the licenseeshouldbe involvedorat leastaware of the daytoday operations of the licensee and their functions should be clearlydesignatedasrequiredbytheAntimoneyLaunderingandTerroristFinancingCodeofPractice,2008 (section 14) and RegulatoryCode, 2009 (Division 3 of Part III).15 There should also bedocumentation evidencing the decisionmaking process for material decisions as well asevidencethattheappropriateindividualsareinvolvedinthedecisionmakingprocess.Internalcontrols and systems (whether in the form of proceduresmanuals or other form) shouldnormallyestablishthemanner inwhichthe licenseesdecisionmakingprocessworks;amerestatement attesting to the existence of such a process would not suffice. It is thereforeimportantthatthe inspectionteamseekstoestablishthroughmanifestedevidencetheactualexistenceofsuchaprocess.

    ConductingFileReviews83. An onsite inspection necessarily involves a review of the licensees files to establishcertainparameters thatare requiredby law, rules,guidelinesandbestpractice.Thisprocessentailsreviewingthelicenseesgoverningdocuments,including

    14ThisiscurrentlythecasewiththeinspectionsconcerningtheInvestmentBusinessDivision.15 The Regulatory Code, 2009 does not apply to insolvency practitioners, but the corporate governancerequirementsshouldbeappliedwithnecessarymodification.

  • FSC Compliance Inspection Procedures Manual 2010 33

    (a) minutesofitsBoardofDirectorsmeetings;(b) minutes of themeetings of any other existing high level committee (such as

    audit,remuneration,risk,etc.);(c) businessplan,whereapplicable;and

    (d) overall compliance with applicable laws, rules, best practice and guidelines,

    codes,practicedirectionsanddirectivesissuedbytheCommissionfromtimetotime.

    ConductingInterviews84. The interview process is designed to obtain new or additional information or seekclarification or establish knowledge from the licensees senior management and otheremployees. The processmay vary, depending on the licensee and its nature of business, inaddition to other factors. The interviews must relate to matters relevant to the onsiteinspectionandmustnotdelveintoextraneousissues.Withrespecttodirectors,forinstance,itwouldberelevanttoinquire

    (a) howmuch of their time is allotted to the affairs of the licenceholder on aweeklyorotherperiodicbasis;

    (b) intotheiractualdutiesandresponsibilitieswithrespecttothelicenceholderon

    adaytodaybasis.(i.e.reviewofsubordinateswork,rolesasregardsdecisionmaking,internalmanagementresponsibilitiesandhowtheseareeffected,etc.);and

    (c) into their knowledge of the licensees regulatory and other reporting

    requirementsunder the laws (i.e. roleof the licensee in relation to suspiciousactivityreporting,statutorynotificationstotheCommissionundertheFinancialServicesCommissionAct,2001andotherrelevant financialservices legislation,etc.).

    AnalysisinRelationtotheLicenseesActivities85. During the inspection process, it is important that the inspection team carries out aproperanalysisofissuesconcerningthefunctionsofthelicenseesandtheirseniormanagers.Inthisrespect,theymustseekto

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    (a) ascertain if the specific responsibilitiesofeachof thedirectorsof the licenseeareclearlysetoutinanyofficialdocument;

    (b) reviewdocuments toascertain if thedirectorsof the licenseearecarryingoutduties thatare consistentwith theirmandateand their levelsof competence;ascertainonaverage,howfrequentlytheboardofdirectorsmeetingsareheld;

    (c) review theminutes to qualitatively ascertain the degree towhich substantive

    strategic/material business matters are being discussed (i.e. is the boardreviewingandapprovingmanagementreports,divisionalstrategicplans,etc.?);

    (d) document the percentage of the total board of directors that actually attendmeetings;

    (e) determinewhethertheboardand itscommittees (whereapplicable)do in fact

    obtainregularinformationfrommanagementaboutallaspectsofthelicenseesprudentialoperations;

    (f) reviewfilesfordocumentationevidencingthatwhendirectorsareabsentfrommeetingstheyaresubsequentlyprovidedwiththeminutesofthemeetings;and

    (g) review files to confirm that the Commission has approved all relevantdirectors/officers/shareholders and other persons of the licensee that requireapprovalfromtheCommission.

    86. In relation to the review of the boardminutes, the purposewould essentially be todetermine the extent of the involvement of the board in the activities of the licensee;determinetheextenttowhichtheboarddirectsorapprovestheactivitiesofmanagement;andensurethattheboardunderstandsandcarryouttheirresponsibilities.

    ControlsandSystems87. Alicenseeshouldensurethatitsinternalcontrolsandsystemsareadequateforthesize,nature and complexity of its activities. Systems of controlmust be such as to enable thelicenseetodischargeproperlythedutiesimposeduponit.Theinspectionteammustthereforecarryoutthefollowing:General

    (a) ascertain if the licensee has a procedures manual and, if so, whether eachemployeehastosignadeclarationattestingacknowledgmentoftheprocedures;

    (b) review files to ascertain whether Commissions four eyes principle is beingadheredtobythe licensee intheprovisionof itsdaytodayfunctions(thiscan

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    be evidenced by dual signatories on letters or other forms of evidence ofdeliberationbetweenemployeesonamatter);

    (c) ascertain ifemployeesof the licenseeare carryingout functions that theyare

    adequatelyqualifiedtocarryout;

    (d) ascertain whether or not the licensees professional indemnity insurance isadequate;

    (e) ascertainwhetherornotthelicenseehasanypoliciesguardingagainstconflicts

    ofinterest;

    (f) ascertainwhetherornot the licenseehasanydocumentorpoliciesaddressingsuccessionplanning;

    Agreements

    (a) ensurethatthelicenseehasagreementsinplacewithothercompanieswithinitsgroup aswell as externallywhere there are duties and functions being subdelegated;

    (b) inthecaseofmutualfunds,reviewtheadministration/managementagreementsbetween the licenseeand their respective funds toascertainwhether theyareconsistentwiththefunctionsactuallybeingcarriedoutbythelicensee;

    (c) inthecaseofmutualfunds,reviewtheadministration/managementagreementstoascertainresponsibilityforvaluingthefund;

    (d) inthecaseofmutualfunds,reviewtheadministration/managementagreementtoascertainifitspecificallysetsoutwhoisresponsibleforcarryingoutAML/CFTCDDmeasuresonunderlyinginvestors;

    (e) in instanceswhere the licenseedelegatesAML/CFTCDD functions,ensure thattheyhavemechanisms inplacetotestwhetherthe functionsarebeingcarriedout and, if so, whether they actually carry out these tests. Additionally, theinspection team should assess whether the licensee has written into theseagreementssanctionsfornoncompliance.

    Checklists

    (a) reviewthelicenseeschecklistswithaviewtoascertainingtheiradequacyaswellas the frequency at which they are utilized in the provision of particularfunctions;

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    (b) review various functions of the licensee to ascertain whether or not thechecklistsarebeingadministeredinaconsistentandcomprehensivemanner;

    RecordKeeping

    (a) reviewthelicenseesfileswithaviewtodeterminingwhetherornotitsrecordsarekeptinasatisfactorymanner;and

    (b) ascertainifeachclientofthelicenseehasashareregister,registerofmembers,etc.

    InternalTestingandManagementReports88. A licenseeshouldhavearrangements inplace toassess, throughaprocessof internalauditandtheproductionofmanagementreports,theeffectivenessofitsinternalcontrolsandprocedures,aswellasitsbusinessoperations.Inthisregard,theinspectionteamshould

    (a) ascertainwhetherornotthelicenseehasconductedanyinternalaudits;

    (b) reviewallinternalauditreportsandascertainwhatrecommendationshavebeenimplementedaswellasthestatusoftherecommendationsnotimplemented;

    (c) conductareviewofanyweekly/monthlyorotherperiodicreportsprovidedbydepartmenthead(s),seniormanagersorotherstothedirectorsofthe licensee;and

    (d) ascertainwhether or not anyweekly/monthly or other periodic departmentalmeetingsareheldand,ifso,iftheyareminuted.Ifminuted,conductareviewoftheminutestoassesswhatisdiscussed.

    SafekeepingofClientsMoney89. Withrespecttothehandlingofclientsfunds,theinspectionteamshould

    (a) review the clients accounts to ensure that all clients monies are kept inseparateaccountsinthenamesoftheclients;

    (b) ensure that the title of each client bank account operated by the licenseesufficientlydistinguishesthemoniesintheaccountfromthoseofthelicensee;

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    (c) review the clientaccounts toensure that the licensee regularly reconciles thebalance and transactions of each client bank account (as recorded by thelicensee)with thebalanceand transactionsof thataccount (as setouton thestatement or other form of confirmation issued by the bank) currency bycurrency; where any difference arises on reconciliation, the inspection teamshould request that the licensee corrects it as soon as possible, unless thedifferencearisessolelyasaresultoftimingdifferencesbetweentheaccountingsystemsofthebankandofthelicensee;

    (d) ensure that the licensees accounting records contain the followingdocumentationwithrespecttodaytodayentries:

    (i) allmoney(includinginterestandsuchotherpayments)whichispaidinto

    oroutofanyclientbankaccount;

    (ii) allreceiptsandpaymentsofclientsmoneypassedthroughaclientbankaccountidentifyingthepersonstowhomeachsuchreceiptandpaymentoverrelates;and

    (iii) arecordofthebalancesoneachclientbankaccount; (e) ensure, in respect ofwithdrawals/deposits, that the accounting records have

    documentedthefollowing:

    (i) thenameoftheclientconcernedandthedate;

    (ii) the name of the person towhom (or, in the case of a deposit, fromwhom)themoneywaspaidortransferred (or, inthecaseofadeposit,received);and

    (iii) accountingentriescorrespondingtothedateandnameasabove intheaccountheldforeachclientconcerned;

    (f) request, where applicable, that the licensee explains how subscription and

    redemptiondealsarereconciledtobankcash;(g) requestthatthelicenseeexplainshowitdealswithforeigncurrencies;and(h) verifywhetherornotcommissionsandotherfeesareproperlycalculated.

    ContractsofEmployment90. Theinspectionteamshouldascertainthateachemployeehasacontractofemploymentwhichaddressestheirrolesandresponsibilitiesandtherulesofthelicensee;thisshouldinclude

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    ascertainingwhether the requiredundertakings in theAntiMoney LaunderingandTerroristFinancingCodeofPractice,2008arebeingcompliedwith.

    TrainingandCompetence91. A licenseemusthaveadequatearrangements inplace toensure thatonacontinuingbasis its employees are adequately trained and properly supervised (having regard to thenatureoftheirresponsibilities)andarecompetenttodischargethoseresponsibilities.Itshouldbe noted that there is a statutory obligation under theAntimoney Laundering Regulations,2008 and Antimoney La