In 2001, the International Monetary Fund (IMF) released a report on its Financial Sector Assessment Program (FSAP) on Ireland, concluding that Ireland was compliant with all Basel Core Principles (BCPs) for Effective Banking Supervision. Subsequent to this report, in 2003, the banking sector supervisor changed from the Central Bank of Ireland to the Irish Financial Services Regulatory Authority (IFSRA) - a distinct legal entity within the Central Bank and Financial Services Authority of Ireland (CBFSAI). However, a 2006 Update on the FSAP by the IMF notes that the impact of this change in the regulator has been insignificant to the overall banking supervisory process, because the IFSRA is functionally similar to its predecessor. In fact, the 2006 IMF report states that the IFSRA has strengthened banking supervision in several regards such as fit-and-proper testing, and on-and-off site inspections. As in the 2001 report, the IMF's 2006 update also indicates that the main challenge facing banking supervision in Ireland is to maintain the existing high standards in supervision. The 2006 Update and the IMF's 2007 Article IV Consultation report supports the country's transition to Basel II, but it cautions that the IFSRA should closely monitor banks' risk management practices. The one significant recommendation in the 2006 update is to continue to develop the IFSRA's staff resources and expertise, in order to supervise Ireland's increasingly sophisticated financial system.

General Overview

In 2001, the International Monetary Fund (IMF) released its Report on the Observance of Standards and Codes (ROSC) for Ireland based on a Financial Sector Assessment Program (FSAP) conducted in 2000. The 2001 ROSC clearly indicated that Ireland was compliant with all Basel Core Principles (BCPs) for Effective Banking Supervision. However, in 2003, the supervisory regulator in Ireland changed from the Central Bank of Ireland (CBI) to the Irish Financial Services Regulatory Authority (IFSRA), a distinct legal entity within the Central Bank and Financial Services Authority of Ireland (CBFSAI). One of the recommendations of the 2001 ROSC was the introduction of a single regulatory authority, which Ireland achieved through the establishment of the IFSRA. A 2006 FSAP Update by the IMF indicates that the change in regulators has not impacted banking supervision in Ireland in any significant way, because the functions of the IFSRA were earlier performed by its predecessor. Moreover, the update adds that the supervisory responsibilities of the CBFSAI and other financial sector supervisory agencies have been transferred, enhanced, and combined seamlessly into the IFSRA. The Irish authorities claim that this integrated supervisory framework is intended to support better information flow between supervisors and those monitoring systemic risks, and to facilitate coordination among supervisory and monetary authorities, should a problem arise. The IMF observes that this centralization and harmonization of supervisory functions, procedures, and processes have helped reduce the cost of regulation.

The 2006 FSAP update commends the performance of the Irish financial sector since the 2000 FSAP. Financial soundness and market indicators were found to be generally very strong, with a positive outlook. The update does point out several macro-risks and challenges facing the system, however. There is credit risk related to the housing boom and household debt, and a highly unlikely significant slowdown in economic growth could adverse affect banks' non-performing loans. But stress tests conducted for the assessment found the financial system well placed, with the major financial institutions having adequate capital buffers to absorb the impact of such a downturn. The update mentions Ireland's strategy of creating a unified approach to risk with common elements across different sectors where appropriate, but differentiated where necessary. It finds this to be well implemented and states that it is facilitating work prioritization and planning in regulation. Further, the Irish regulatory authorities are implementing Basel II on a priority basis.

The2006 FSAP update discloses that the mission of the IFSRA, which was created as a distinct legal entity within the CBFSAI, was "to help consumers make informed financial decisions in a safe and fair market and to foster sound dynamic financial institutions in Ireland, thereby contributing to financial stability" (p.24). This integrated approach appears to balance the goals of consumer protection, prudential supervision and financial stability. While the update finds the integrated supervision framework positive overall, it did note that continuous upgrading and fine-tuning are required, in keeping with evolving market conditions and international regulatory developments. The update adds that financial institutions have improved their risk-management practices and, overall, the financial system is better placed to identify and manage risks.

The 2006 FSAP update also reviews the effectiveness of the IFSRA as an integrated supervisor for almost three years, and identifies areas where improvements could be made. For instance, it recommends that Ireland continue to monitor and improve efficiency, effectiveness, and consistency of prudential supervision across all sectors regulated by the IFSRA. In addition, Ireland should continue to ensure adequate resources for supervising an increasingly sophisticated financial system with more complex financial products and more leverage by financial institutions, and international regulatory developments such as Basel II, Solvency II, and reinsurance. Ireland should consider upgrading the position of the Prudential Director as regards IFSRA Board membership, on par with the Consumer Director, should establish a more formalized approach to internal information sharing, and should develop a tracking system for supervisory activities to support the planning and exercise of ongoing supervision. Finally, Ireland should consider the development of a legal framework for prudential supervision on a domestic, EU, and global level.

The 2006 FSAP update finds Irish financial institution profitability and capitalization to be very strong, with banking sector profits among the highest in western Europe, despite relatively low net interest margins. This is due, in part, to their heavy reliance on wholesale funding. Major Irish banks also receive upper medium- to high-grade ratings from the international ratings agencies. The annual growth in assets of the banking sector was around 25 percent in 2006, growing twice as fast as the Euro-zone average. Consolidation has given way to reduced concentration, with a decline in the share of the four largest banks in total deposits. However, credit growth remains concentrated in the real estate sector. Competition has increased, leading to significant cost cutting. Further, with international diversification of banks' assets, and property-related foreign assets, the banks are exposed to a downturn in world property prices. Banking system loan-to-deposit ratios show an increasing trend. The 2007 IMF Article IV Consultation report notes that financial regulation and supervision in Ireland have improved and continue to be strengthened with the introduction of a new liquidity management framework for banks. Also, the supervisory framework prioritizes resources across sectors based on risk profile.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The 2006 FSAP update undertaken by the IMF indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. The 2006 report states that the IFSRA remains a distinct component of the CBFSAI, with clearly defined regulatory responsibilities.

The IFSRA website states that the Central Bank and Financial Services Authority of Ireland Act, passed on May 1, 2003, established the IFSRA. Later, the Central Bank and Financial Services Authority of Ireland Act of 2004 created a statutory financial services ombudsman for consumers. Further, the regulatory authority of the IFSRA extends to all Irish financial institutions, including those previously regulated by the CBFSAI, Department of Enterprise, Trade, and Employment, Office of the Director of Consumer Affairs (ODCA) and Registrar of Friendly Societies. The main responsibility of the IFSRA is the regulation of all financial services firms in Ireland and the maintenance of overall financial stability. The IFSRA's additional responsibilities include enabling consumers of regulated firms to make informed decisions on their financial affairs in a secure and fair market, and fostering sound and profitable financial institutions. According to the IFSRA website, banking supervision by the IFSRA encompasses the authorization of banks, their ongoing prudential supervision, and the development of supervisory guidance and requirements for their operation.

1.(2) Operational independence and adequate resources.

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The 2001 IMF ROSC finds Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. Furthermore, the update clearly states that the IFSRA has operational and budgetary autonomy. The IFSRA's 2004 "Progress Reports" mentions that it is functionally independent and has its own independent board and management. It is connected to the CBFSAI to facilitate the free flow of information between the prudential supervision arm of the IFSRA and the financial stability arm of the CBFSAI. The CBFSAI is also linked with the European System of Central Banks.

1.(3) A suitable legal framework for authorization and ongoing supervision.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. According to the IFSRA website, banking supervision by the IFSRA encompasses the authorization of banks, their ongoing prudential supervision, and the development of supervisory guidance and requirements for their operation. Further, prudential supervision involves monitoring the business of banks and as well as their compliance with statutory and non-statutory requirements. The 2004 Annual Report by the IFSRA also mentions that its ongoing supervision function involves the review of annual statements and other prudential returns of regulated financial institutions and their on-site inspections, as well as liaison with other supervisory authorities.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. According to a 2005 Institute of International Bankers (IIB) report, the Central Bank and Financial Services Authority of Ireland Act of 2004 provides the IFSRA with additional powers in relation to financial institutions' reporting to the IFSRA on compliance matters.

1.(5) Legal protection for supervisors.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update undertaken by the IMF indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. According to the 2006 update, Ireland has taken adequate measures to facilitate exchange of information and expertise between different areas of supervision, and also made efforts to achieve a consistent approach in prioritizing supervisory resources across institutions. Further, the supervisory responsibilities of the CBFSAI and other financial sector supervisory agencies have been transferred, enhanced, and combined seamlessly into the IFSRA. The integrated supervisory framework, according to the Irish authorities, is intended to support better information flow between supervisors and those monitoring systemic risks, and to facilitate coordination among supervisory and monetary authorities should a problem arise. The 2006 IMF report observes that this centralization and harmonization of supervisory functions, procedures and processes have also helped reduce the cost of regulation.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. According to the 2001 ROSC, the term "bank" is clearly defined in Irish laws and regulations and its use is limited to licensed and supervised institutions.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. According to the 2001 ROSC, the CBI, the regulator at the time, has the right to set criteria for licensing banks, which are consistent with those applied in ongoing supervision. Irish laws and regulations also clearly define "significant ownership," as well as what types and amounts of acquisitions and investments need the CBI's approval. The criteria, as noted by the ROSC, spell out that new acquisitions and investments should not expose the bank to undue risks or hinder effective supervision. The CBI also required all applicants to provide as part of their licensing application, information on their ownership structure, detailed business plans, financial and capital adequacy projections for the first 5 years of operations, board composition (including background information), organizational structure, details of internal control systems, and details of their core funding.

4. Authority to review and reject transfer of ownership.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. According to the 2001 ROSC, Irish laws and regulations clearly define "significant ownership," as well as what types and amounts of acquisitions and investments need the approval of the CBI, the regulator at the time. The criteria spell out that new acquisitions and investments should not expose the bank to undue risks or hinder effective supervision. Further, the CBI had an independent and "hands on" approach to licensing and supervision. Since the Irish banking sector is not very large, the CBI had the chance to give each interested applicant individual attention during the application process. The CBI required banks to receive prior approval for significant changes to business activities and also reviewed changes in ownership and acquisitions pursuant to the CBI's Licensing and Supervision Requirements and Standards for Credit Institutions.

5. Authority to review major acquisitions and investments.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. According to the 2001 ROSC, Irish laws and regulations clearly define "significant ownership," as well as what types and amounts of acquisitions and investments need the approval of the CBI, the regulator at the time. The criteria spell out that new acquisitions and investments should not expose the bank to undue risks or hinder effective supervision. Further, under the Central Bank Act of 1989, all significant acquisitions of bank stock by another bank or by a non-bank entity required the approval of the CBI. Banks' investments in non-bank entities were not allowed to exceed 15 percent of their own funds in the acquisition of 10 percent or more of any "relevant body corporate" (an institution different than a credit or financial institution) and the total of all such holdings could not exceed 60 percent of own funds. A credit institution could not acquire, directly or indirectly, more than 10 percent of the shares or other interest in another company without the prior written approval of the CBI. Further, the CBI was also authorized to approve hostile acquisitions. However, the IMF notes that in acquisitions of 20 percent or more of total assets of all license holders in Ireland, the CBI needed prior consent of the Minister of Finance to approve or refuse the acquisition. Under the Mergers, Takeovers and Monopolies (Control) Act of 1978, the Minister had to consult with the Minister for Industry and Commerce. Further, the EU's Competition Commission was also required to review such a major acquisition.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. The 2007 IMF review of Ireland's progress since the 2006 FSAP finds that the implementation of the European Union's Capital Requirements Directive (EU CRD) in Ireland could lead to declines in regulatory capital, although the declines would initially be limited by the capital floors imposed by the EU CRD.

The 2006 IMF update and the 2006 IIB report confirm that the IFSRA was at an advanced stage of preparation for implementation of the revised EU CRD, which was to be used within the EU to implement the Basel II capital adequacy framework from January 1, 2007. The IIB report further notes that the implementation infrastructure was being designed around the three pillars of the new framework: minimum capital requirements, supervisory review, and disclosure. Also, the EU CRD Implementation Forum had been established with the Irish Bankers Federation to examine some key strategic issues, especially that of creating a level regulatory playing field, arising from implementation of the EU CRD. The IFSRA was also actively engaged at Committee of European Banking Supervisors level in efforts to ensure consistent application of provisions in the EU. The IMF update also observes that, in preparation for the CRD, the major Irish banks had started upgrading their internal risk-rating models and had appointed working groups dealing with model validation, pillar 2 and prudential reporting, to work closely with the CRD Implementation Forum.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. The 2001 ROSC also affirms that credit institutions were required to have appropriate policies related to the management and control of lending that include credit assessment, credit review, risk management, the monitoring and control of large exposures and prudent provisioning for loan losses. Further, the CBI, the regulator at the time, was authorized to check that the Asset and Liability Committee and Credit Committee of credit institutions operated independently of the business units taking the corresponding risk.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. The 2001 ROSC further notes that the CBI, the regulator at the time, reviewed asset quality information on a monthly basis, including reports on non-performing assets, non-accrual assets, provisions, write-offs and recoveries including on- and off-balance sheet items. Also, the CBI standards required credit institutions to have in place appropriate policies on credit assessment and review, and prudent provisioning for loan losses. Further, supervisory action concerning problem assets included a condition on the license or direction to the Board to curtail loan growth and/or increase bad debt provisions or raise the level of capital to compensate for the higher risk associated with problem assets.

The 2006 IMF update adds that loan-loss provisions in Ireland are low, but still cover more than 85 percent of the non-performing loans. The low provisions (0.03 percent of total loans) on mortgage lending are due to the low default rates of mortgages and considerable house price increases. Additionally, the report warns that the implementation of International Financial Reporting Standards (IFRSs) might result in decreased provisioning due to an incurred loss model. Also, shortfalls of expected losses over impairment provisions will result in a deduction from regulatory capital under the CRD regime.

9. Prudential limits and management information system on concentration of exposure.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. According to the 2001 ROSC, the CBI, the regulator at the time, implemented the EU Directive on the Monitoring and Control of Large Exposures of Credit Institutions (92/121/EEC) in February 1994. Under the Directive, large exposures and sectoral concentrations had to be reported to the CBI quarterly on a consolidated basis. A credit institution was not allowed to incur an exposure to a client or group of connected clients in excess of 25 percent of its own funds. An additional aggregate limit of 800 percent of own funds applied to large exposures. Further, the CBI regulations also imposed limits on large exposures to a single borrower or "closely related" group of borrowers, and more stringent limits to connected parties.

10. Arm's length rule and monitoring for connected lending.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. The 2007 Review by the IMF on Ireland's progress since the 2006 update notes that Ireland's financial system is characterized by a relatively high degree of arm's length transactions.

11. Policies and procedures for country risk and transfer risk.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. According to the 2001 ROSC, the CBI, the regulator at the time, monitored whether a bank's policies and procedures gave due regard to the identification, monitoring and control of country risk, transfer risk, and market risk. Further, credit institutions were required to have in place a comprehensive and updated risk management process to identify, measure, monitor, and control material risks. The ROSC also notes that a vast majority of Irish credit institutions were involved in cross border activities, and so the CBI surveyed and examined those operating in countries experiencing problems, along with the currency and large exposure reports, to identify the magnitude of the exposure and determine if any supervisory action was needed.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. According to the 2001 ROSC, EU Directive 93/6/EEC on market risk was implemented by the CBI, the regulator at the time, in 1995, which also established a separate Risk Policy Unit with specialists for the evaluation of bank models. The 2006 IMF update finds that stress tests conducted on the market risks undertaken by Irish financial institutions showed very small effects, indicating a banking system that was resilient to a range of shocks. Liquidity risk also seemed manageable, with banks having generally appropriate contingent liquidity arrangements to address tightening of access to wholesale markets. It, however, recommends Ireland to strengthen the monitoring of credit risk transfer activities by financial institutions. It also warns that losses would push overall capital adequacy ratio (CAR) down to just over 9 percent.

13. Comprehensive risk management processes.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. According to the 2001 ROSC, the CBI, the regulator at the time, monitored banks' policies and procedures on the identification, monitoring and control of country risk, transfer risk, and market risk. It also ascertained that credit institutions had in place comprehensive and updated risk management processes that identified, measured, monitored and controlled material risks. The CBI's Standards required banks to have comprehensive risk management systems commensurate with the scope, size and complexity of their activities for continuous monitoring of risks. The ROSC also states that the CBI's Standards set a minimum ratio of liquid assets to total borrowing of 25 percent, and that it was to be substituted in the future by a stock and maturity mismatch approach (gap-based).

The IMF's2007 report notes that the key challenge for the financial supervisory authorities in Ireland will be to maintain the soundness of the financial system. Further, since Irish banks could use excess capital to expand into unfamiliar activities, the report warns the IFSRA to continue to carefully monitor banks' risk management practices, including for commercial property lending. The report also supports the IFSRA's prudent approach on the risk weighting of lending to speculative commercial property and residential investment property; as well as its envisaged upgrading of the stress-testing framework. It further informs that the IFSRA is aiming to prioritize supervisory resources across sectors based on risk profile. In this regard the 2006 FSAP Update recommends Ireland to continue to upgrade the CBFSAI's stress testing framework and, given the sizeable cross-border linkages of domestic credit institutions, to consider extending the tests to the banks' foreign exposures. The Update also notes that Ireland had strengthened its analysis of systemic indicators of risks and had made sincere efforts to increase public awareness if risks. The 2006 update adds that the introduction of a risk management system for every institution supervised and a significant increase in staff had resulted in a more sophisticated, efficient, and effective management of ongoing prudential supervision and would facilitate the early identification of any problems.

14. Adequate internal controls.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. According to the 2001 ROSC, the May 1992 "Auditing Guidelines" (for banks in the Republic of Ireland) together with the EU Second Banking Directive (89/646/EEC) set out guidelines and requirements related to internal controls. Under these guidelines, publicly quoted companies are expected to comply with best practice on corporate governance issues. Further, the CBI's Standards require that credit institutions have in place "such committees of directors and management as are necessary to ensure that the business of the credit institution is being managed, conducted and controlled in a prudent manner and in accordance with sound administrative principles." They also require that internal control and reporting arrangements be in place. The 2007 IMF report further states that Ireland performs well in banking sector competition, investor protection, and corporate transparency, and expects it to remain at the forefront of international best practice.

15. Strict "know-your-customer" rules and high ethical and professional standards.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. The IIB's 2006 Global Survey reports that the main findings of the Financial Action Task Force's (FATF) 2006 evaluation were that Ireland generally achieved a high standard in relation to legal measures to criminalize money laundering and terrorist financing, in its institutional and other arrangements, and in international co-operation. The 2007 U.S. Department of State (DoS) report on Ireland also cites the 2006 FATF report, stating that Ireland's money laundering definition met FATF requirements and that Ireland achieved a high standing in anti-money laundering legal structures and international cooperation, although the number of money laundering prosecutions and convictions was low.

The 2007 IMF Report on the 2006 FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism for Ireland notes that the Criminal Justice Act of 1994 (CJA) requires designated bodies in Ireland to conduct Customer Due Diligence (CDD) by taking reasonable measures to identify customers, including legal persons or arrangements, when establishing business relationships or when performing transactions over €13,000. The Act, however, does not require the identity of the beneficial owner to be established and verified. The report also observes that Article 32 of the CJA does not extend to those customers that had existing business relations prior to May 1995, except in cases where it is suspected that a service is connected with the commission of a money laundering offence. The Guidance Notes elaborate the extended CDD measures but do not impose a directly enforceable and adequate sanction.

The 2007 U.S. DoS report notes that banks are required to report suspicious transactions to the Garda (Irish Police) Bureau of Fraud Investigation, Ireland's Financial Intelligence Unit (FIU), without monetary threshold. Further, a 2003 legal requirement mandates designated institutions to file Suspicious Transaction Reports (STRs) with the Revenue (Tax) Department in addition to the FIU. Further, the IFSRA supervises the financial institutions for compliance with money laundering procedures and is obliged to report to the FIU and the Revenue Commissioners suspected breaches of the CJA by those institutions, including suspicion of money laundering and terrorism financing, failure to establish identity of customers, failure to retain evidence of identification, and failure to adopt measures to prevent and detect the commission of a money laundering offense. The Report adds that Ireland intends to implement new legislation to address customer due diligence, and that the Third EU Money Laundering Directive that entered into force in December 2005 must be transposed into Irish law by December 2007.

16. Effective supervisory system consisting of on-site and off-site supervision.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. The 2006 IMF Update also observes that the IFSRA has intensified off-site review and on-site inspections of credit institutions to ensure early identification and solution of problems. It has established a dedicated inspection unit to perform cyclical inspections, theme inspections, and unscheduled and/or unanticipated inspections.

17. Regular contact with bank management and understanding of bank's operations.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. The 2006 Update also observes that the IFSRA has introduced a risk factor rating system for supervised financial institutions, with the objective of achieving a more sophisticated, efficient and effective management of prudential supervision. It notes that the use of the risk factor rating system should result in an increased understanding of the risk profile of the individual financial services providers and highlight areas requiring corrective action. The risk factor rating system enables the IFSRA to recognize trends in the risk profile both of the individual institution and the market and to identify issues of supervisory concern.

18. Analytical reports and statistical returns on solo and consolidated basis.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. According to the 2001 ROSC, "the EU Directive on the Annual and Consolidated Accounts of Credit Institutions (86/635/EEC), implemented in 1992 [established] the proper accounting in banks' financial statements; and the EU Directive on the Consolidated Supervision of Credit Institutions (92/30/EEC), also implemented in 1992, required the CBI, the regulator at the time, to supervise a credit institution and its associated enterprises on a consolidated basis."

The 2006 IMF Update adds that the IFSRA has introduced a risk-factor rating system for supervised financial institutions, with the objective of achieving a more sophisticated, efficient, and effective management of prudential supervision. These ratings have become an integral part of the work of examiners and enable the creation of an "audit trail."The IFSRA website states that the Statistics Department of the CBFSAI compiles and analyzes monetary and financial statistics for the IFSRA. The Monthly Statistics are published on the last working day of the month and include details on private sector credit, deposits and money supply.

19. Independent validation of supervisory information through on-site examination or external auditors.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. According to the 2001 ROSC, the 1989 Act and implementation of the EU Post-BCCI Directive obliged external auditors to report significant matters noted during the course of an audit, such as matters affecting the solvency of the institution; material deficiencies in the financial systems of control; material inaccuracies or omissions in returns of a financial nature made to the CBI, the regulator at the time; any fact or decision that was likely to affect the continuous functioning of the institution; or anything that would lead to a refusal by the auditor to certify the accounts or to the issue of a qualified audit report, to the CBI.

20. Ability to supervise on a consolidated basis.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. According to the 2001 ROSC, the CBI, the regulator at the time, required all financial institutions to submit standardized reports on a comparable basis and related to the same dates and periods as appropriate. Annual accounts were also required to be prepared according to the EU Accounts Directives (86/635/EEC and 89/117/EEC). The CBI's "Notes on Compilation" were based on best accounting and banking practice and standards as set out in Financial Reporting Standards and Accounting Practice Standards.

22. Adequate supervisory measures to ensure timely corrective action.

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The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. The 2006 update adds that the IFSRA has the legal power to take adequate enforcement actions, including an administrative sanctions regime that was established in 2004. However, the IMF notes that there have been no enforcement actions except a few formal inquiries. Further, the IMF finds that the financial services providers rely more on principles, consultation and cooperation and undertake remedial action as soon as possible to avoid IFSRA enforcement.

The IFSRA website states that the Central Bank and Financial Services Authority of Ireland Act 2004 created new enforcement powers for the IFSRA including fining, administrative sanctions and public censure powers whenever financial service providers are found to be non-compliant with legislation or regulatory requirements.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

FC

The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. According to the 2001 ROSC, the CBI, the regulator at the time, had the authority to supervise the overseas activities of locally incorporated banks and to determine whether the management was maintaining proper oversight of the bank's foreign branches, joint ventures, and subsidiaries, especially pertaining to higher risk and geographically remote operations. For significant overseas operations of Irish banks, the CBI had established formal as well as informal arrangements for information sharing on the financial condition and operations of those banks with their host supervisors. Further, the foreign bank branches and subsidiaries were also subject to similar prudential, inspection and regulatory reporting requirements as domestic banks. The ROSC notes that the CBI exercised its power to consult with the relevant foreign supervisor before authorizing cross-border operations by a credit institution under the EU Directive on Coordination of Supervision.

24. International exchange of information with other supervisors.

FC

The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. According to the 2001 ROSC, the CBI, the regulator at the time, established formal as well as informal arrangements for information sharing on the financial condition and operations of overseas Irish banks with their host supervisors. The formal arrangements were established through Memoranda of Understanding (MoUs), which set out the respective duties of home and host supervisors.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

FC

The 2001 IMF ROSC notes Ireland to be compliant with this principle. However, the Irish financial regulator changed from the then CBI to the IFSRA in 2003. The IMF's 2006 FSAP Update indicates that the change in regulator has not had a significant impact on banking supervision in Ireland. According to the 2001 ROSC, subsidiaries of foreign banks and licensed branches from out of the European Economic Area (EEA) were subject to the same requirements and standards as domestic banks. However, this regulation had an important exemption: branches of non-EEA countries were not required to have capital and so own fund requirements did not apply. The CBI, the regulator at the time, did not authorize a bank unless it was satisfied that the home country supervisor of the said bank supervised effectively, and on a consolidated basis. The report adds that the CBI had the authority to share information with a foreign supervisory authority if its powers and responsibilities with regard to the licensing and supervision corresponded with those of the CBI and had obligations in relation to non-disclosure of information which were similar to the obligations imposed on the CBI.