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UK inquiry into Offshore Financial Centres

By: BILL BLEVINS

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Bill Blevins is Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK.

THE UK Government’s inquiry into Offshore Financial Centres (OFCs) has heard from a number of jurisdictions regarding their position as reputable financial centres.

The inquiry is being conducted by the House of Commons Treasury Select Committee on Foreign Affairs which has published its seventh report on Overseas Territories (OTs) and OFCs.

The Committee observed that the UK has strong reasons to ensure that OTs’ financial industries are well regulated. They present serious risks to the UK’s reputation as well as potential financial liabilities, including compensation costs where the UK has direct responsibility and, in the worst case scenario, aid dependency should a sector collapse.

Seven of the OTs currently have financial services industries. The National Audit Office (NAO) found that they all faced a challenge in responding “adequately to growing pressures to reinforce defences against money laundering and terrorist financing”.

Gibraltar

The report stated that although Gibraltar’s financial services industry is not large by international standards, it provides a wide range of services.

For many years, Gibraltar was the object of allegations of financial impropriety — mostly, but not only, from Spain. Its firm rebuttals of these allegations were not helped by the opacity of its system of financial regulation, the report argued. However, in 1989, the government of Gibraltar overhauled its regulatory framework and set up a Financial Services Commission. Gibraltar received very good assessments for compliance from the International Monetary Fund (IMF) in 2001.

Jersey, Guernsey, Isle of Man

The Committee received written evidence from Jersey’s Chief Minister, Senator Frank Walker. Other submissions have been made by the Jersey Financial Services Commission and Jersey Finance Limited.

MPs from the Committee visited Jersey and met with representatives from the financial industry. Chief executive of Jersey Finance Limited, Geoff Cook, said: “In our written submission, we reaffirmed the Island’s standing as a well respected, top tier international finance centre. We show that the services we offer are complementary to those offered in the City of London and that they are no different from those performed in London, New York and other major onshore finance centres.”

Guernsey also responded to the Committee’s investigations and defended the jurisdiction’s reputation as a leading provider of international services. The Policy Council maintained that it had an effective regulatory regime that met or exceeded international standards on financial regulation.

The Isle of Man replied to the inquiry and Committee members visited the island to learn more about its financial position. IoM’s Chief Minister, Tony Brown MHK, commented: “In our submission, and in our meetings with the Committee, the Isle of Man Government has been able to show that the Island is at the forefront of small jurisdictions working with the OECD to improve the exchange of tax information.”

Caribbean Offshore Centres

According to the Committee’s report, Bermuda, the British Virgin Islands (BVI) and the Cayman Islands are the largest financial centres.

BVI’s Financial Services Commission argued that:

“Often the claim is unfairly made that the so-called offshore centres are not properly regulated and are a haven for tax evasion, money laundering and terrorist financing. These claims are mostly made by those in the developed world with whom we are in material competition for business and too often no effort is made to give recognition to the regulatory advances of such jurisdictions as the BVI.”

The BVI government said that with its submission to the inquiry it was attempting to convey the message that the BVI is widely regarded as operating a robust regulatory and supervisory regime in financial services, and has a well-established system of international cooperation – a fact recognised by international organisations, such as the Financial Action Task Force (FATF) and the IMF.

According to the NAO, the BVI is better equipped through its Financial Investigation Agency, established in 2004, to investigate financial crime than some of its fellow UK Overseas Territories.

The Cayman Islands said they had “a very strong compliance culture, underpinned by modern legislation, which complied with international best practice” and emphasised the Cayman Islands Monetary Authority’s (CIMA) independence from government.

During a visit to the Cayman Islands, ministers called for the territory to be listed in the UK Treasury’s list of equivalent jurisdictions for anti-money-laundering. They were also told that the UK’s Financial Services Authority (FSA) had initially objected to CIMA joining the International Organisation of Securities Commissions, but that CIMA now had the support of the FSA and had signed a Memorandum of Understanding with the agency.

In Bermuda, the CEO of the Bermuda Monetary Authority informed the committee about the steps being taken to improve anti-money-laundering standards.

The financial services industries of Anguilla, Montserrat and the Turks and Caicos Islands, for which the UK retains direct responsibility, remain small.

The Committee found that the Governors in the three smaller financial centres had not used their reserve powers fully, and described it as ‘complacent’ for the UK to allow these territories to manage the risk themselves. The report recommended that the Foreign Commonwealth Office (FCO) and UK agencies should bring in more external investigators or prosecutors to bolster capacity until the territories could be self-sufficient in this area.

The Public Accounts Committee noted that the FCO had accepted that standards needed to improve, and had employed a financial services adviser based in the Caribbean, but argued that it was ‘improbable’ that a single specialist was “sufficient to address the scale of the risk”.

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