Are OFCs leading the fight against money laundering?

Author:Alexa Rosdol
Position:Bates Wells and Braithwaite, London, UK
SUMMARY

Purpose – To examine if recent changes to the law and practice of certain offshore financial centres (OFCs) means that some OFCs now have more stringent anti-money laundering measures in place compared to their “onshore” counterparts. To further explore the allegation by some that there is a dual standard in terms of the pressure applied to OFCs on the one hand and “onshore” jurisdictions... (see full summary)

 
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1 Introduction

Historically, it has been argued that offshore financial centres (OFCs) have facilitated money laundering by providing a conduit for the proceeds of crime. Popular culture, international bureaucracies, left-wing interest groups, and politicians from high tax governments have all joined forces to consistently portray OFCs as havens for dirty money where the authorities are either unwilling or unable to implement measures in their islands to assist in the global fight against money laundering ( Mitchell, 2002 ).

This paper will consider if recent changes to the law and practice of certain OFCs means that some OFCs now have more stringent, or at least comparable, anti-money laundering measures in place compared to their “onshore” counterparts. The key issue that will be explored is how OFCs compare to “onshore” jurisdictions and the international standard setters, such as the Organisation for Economic Cooperation and Development (OECD), in the implementation of anti-money laundering measures and denying criminals the fruits of their crimes. It will further be suggested that many of the traditional criticisms aimed at OFCs are now becoming outdated and that the commonly-held perception that certain OFCs are lagging behind onshore jurisdictions in their anti-money laundering efforts needs to be seriously revised. In particular, the assertion will be challenged that OFCs are unwilling or unable to tackle money laundering ( Davies, 2001 ).

The analysis will focus on the Crown Dependencies (Guernsey, Isle of Man, and Jersey), and the British Overseas Territories of Bermuda and the Cayman Islands. The UK will be the main focus for the analysis of “onshore” jurisdictions however there will be considerable reference made to the USA, and Australia. The five selected offshore jurisdictions have been chosen primarily due to their close connection to the UK, and are not necessarily representative of the large number of jurisdictions that provide a variety of offshore services.

Part 1 of this paper will briefly outline the recent growth in the international anti-money laundering movement; and examine the nature, scope and definitional issues associated with money laundering, OFCs and “onshore” jurisdictions. Part 2 will assess the implementation by the selected OFCs and “onshore” jurisdictions of the FATF 40 Recommendations, trust and company services legislation, and the “Know Your Customer” (KYC) requirements. Part 3 will explore further the validity of some of the criticisms levelled at OFCs and the allegation by some that there is a dual standard in terms of the pressure applied to OFCs on the one hand and “onshore” jurisdictions on the other ( Killick, 2004 ). Part 4 will look to the future, drawing some final conclusions on the law and practice of the selected jurisdictions and consider whether the approach of OFCs to money laundering is indeed ahead of the “onshore” jurisdictions.

2 The anti-money laundering movement

The mid-1990s witnessed increasing international efforts to combat money laundering ( Suss et al., 2002 ) with a shift in the attitude of many governments, especially since September 11, 2001, from a non-committal defensive approach to a position where now the threat posed by money laundering is placed firmly on top of government agendas ( Johnson and Desmond Lim, 2002 ). The Financial Action Task Force 40 Recommendations (now revised 40 Recommendations) and the addition of Nine Special Recommendations on Terrorist Financing are considered to be the international standard on money laundering providing a complete set of counter-measures against money laundering.

2. 1 Offshore and “onshore” jurisdictions: what exactly are they

The IMF suggests that the most useful description of OFCs is as:

…centres where the bulk of financial sector transactions on both sides of the balance sheet are with individuals or companies that are not residents of OFCs, where the transactions are initiated elsewhere, and where the majority of the institutions involved are controlled by non-residents ( IMF, 2000a ).

This paper will be guided by this definition of OFCs.

2. 2 Money laundering: definitions and trends

Money laundering is the “process where assets obtained or generated by criminal activity are moved or concealed to obscure their link with the crime” ( IMF, 2000a ). It is a complex problem which leaves no jurisdiction untouched, with the International Monetary Fund (IMF) estimating that the amount of money laundered each year ranging between 2 and 5 percent of the world's gross domestic product or between US$600 billion and $1.5 trillion ( FBI, 2001 ). Although due to the secretive nature of laundering activity, it is impossible to produce reliable estimates of the amount of money laundered each year (FATF, www.fatf-gafi.org, accessed February 9, 2006). According to the US Department of the Treasury, there are some who estimate that the amount laundered is actually more likely to be approximately US$2.8 trillion. Furthermore, some US law-makers believe that half of this amount is being laundered through US banks ( FBI, 2001 ). In the UK, the Home Office estimates that approximately two percent of gross domestic product or approximately £18 billion is dirty money ( Killick, 2003 ). These enormous figures give a sense of the urgent need for both offshore and onshore jurisdictions to effectively combat money laundering.

2.2. 1 Role of OFCs in money laundering

It is undeniable that criminal organisations do make use of OFCs for money laundering, indeed many would argue extensive use and that OFCs were tailor made for money laundering activities ( Blum et al., 1998 ). It is clear that OFCs do provide many potential opportunities to avoid disclosing the origin of assets, with criminals able to take advantage of international business companies (IBCs), shell companies, or the services of some offshore banks. A number of high-profile scandals from the 1990s highlight the risk from offshore operations, including the Meridian International Bank case ( IMF, 2000b ) and the Bank of Credit and Commerce International (BCCI) case that lead to the seizure of more than US$12 billion and a tightening up of regulations by the supervisory authorities ( Blum et al., 1998 ). However, there is a gradual recognition by the international community that a clear distinction exists between well-regulated and under-regulated offshore centres ( Killick, 2003 ) and that not all OFCs offer services that can be easily exploited by criminals ( Blum et al., 1998 ).

3 A comparison of anti-money laundering measures

The Edwards Report (1998) covering the Crown Dependencies and the KPMG Report (2000) covering the Overseas Territories ( IMF, 2000b ) were generally positive about the anti-money laundering standards in the islands but some of the main recommendations included stricter regulations to combat money laundering and greater transparency. At about the same time, the OECD blacklist was published listing the offshore jurisdictions that had harmful tax practices. According to a recent OECD (2000) progress report since the publication of the OECD blacklist, positive changes have occurred in the transparency and exchange of information laws and practices of individual countries. The key question to be explored is how OFCs now compare to onshore jurisdictions and the international standard setters in the following areas?

  • FATF 40 Recommendations;
  • US Department of State: International Narcotics Control Strategy Report (INCSR);
  • Regulation of Trust and Company Service Providers; and
  • KYC requirements.
  • 3. 1 FATF ratings comparison

    The IMF/FATF assessment reports illustrate clearly that it is the OFCs that are actually ahead of the onshore jurisdictions in the implementation of the FATF Recommendations ( FATF, 2005 ; IMF, 2003a, b, c, d, 2004, 2005a, b, c ). The Crown Dependencies have the highest number of FATF requirements that are fully observed (Isle of Man 78 percent, Jersey 81 percent, Guernsey 84 percent), followed by the Overseas Territories (Cayman Islands 65 percent, Bermuda 59 percent) and then the UK (56 percent), USA (31 percent) and Australia (24 percent)1. The USA was found to be largely compliant with 28 of the FATF requirements, whilst Australia was compliant or largely compliant with only just over half of the FATF Recommendations. The only two jurisdictions that received non-compliant ratings were Australia and the USA with ten and four of the requirements, respectively, not being met.

    When interpreting these results it is important though to be mindful of the two year difference between the IMF assessments for the OFCs and for the onshore jurisdictions. For a more up to date picture of the anti-money laundering regimes, it will be necessary to wait for the results of the second phase of the OFC Assessment Program due in the next few years. Although the OFCs are compliant with more of the recommendations than the onshore jurisdictions only Bermuda and the...

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