Will Further Crackdowns in the Offshore Centres Really Assist the Fight Against Money Laundering Post September 11th?

Mondaq
21 November 2002

The confusion inherent in the title of this article characterises the flawed thinking that has surrounded the central issue from inception: the need for high tax jurisdictions to obtain greater and uniform transparency for all cross-border institutional and personal financial transactions with a view to maximising tax revenues collected. No-one supposes in the 21st Century that aiding and abetting cross-border tax evasion is a sensible or sustainable pastime. But the public relation machines that have been used to shape public opinion need now to be reined in. It was one thing to introduce transparency with regard to the proceeds of crime and then to include tax evasion as a crime; it is another to move the goal posts again to include tax avoidance and in maintaining political momentum to poach the otherwise worthy goal of anti-terrorism legislation in the cause. At the least, there should be some pause for mature reflection if we are to avoid a double standard of risible proportions. The onshore jurisdictions, the UK apart, should be given time for their legislation to catch up.

The relationship between money laundering and terrorist funding is merely a new confusion of an overworked and out of control public relations machine. It is hard to see the comparison; money laundering is a process by which (apparently) large sums of money (the so-called "statistics" are anecdotal) pass through one or more accounts or vehicles and are then used for legitimate purpose. Terrorism may well involve something that is quite the opposite; the transfer of small sums of money (apparently very small), possibly legitimately earned, which are passed through accounts or vehicles to be used for a criminal purpose. It is no surprise to some of us to see that the common thread between money laundering, terrorism and tax transparency is the use of the "secrecy" jurisdiction.

This confusion does not stand any scrutiny. To the extent that terrorism is funded by the proceeds of crime the anti-money laundering legislation in jurisdictions like the Cayman Islands, Bermuda and Jersey is and has been for over a decade as good as it gets. The real problem is that it is not uniform enough in terms of the onshore jurisdictions and nor can it ever apply to the underground cash transference networks that operate far outside the reach of FINCEN or any other regulatory body.

Further, if anti-money laundering legislation is the objective, it is hard to understand why so little credit is accorded to those offshore jurisdictions that have acceded to the OECD initiative on tax transparency and applied the new FATF anti-money laundering regulatory regime. Certainly that regime as it now applies in the Cayman Islands, Bermuda and Jersey requires a higher standard of due diligence than exists under the Patriot Act in the United States and in Continental Europe. Not only are all financial professionals and service providers, including lawyers, necessarily, caught in relation to all financial transactions but the Know Your Client and source of funds due diligence must be applied retroactively to every existing client regardless of the date of inception. The Know Your Clients rules required in these offshore jurisdictions insist that all intervening vehicles are drilled through until the identity of each ultimate 10% beneficial owner is obtained. Why then as recently as last week did Senator Carl Levin in the Senate Sub-Committee Hearings on Enron refer to the Cayman Islands as a "secrecy" jurisdiction, notwithstanding that the Cayman Islands were one of the first jurisdictions to enter into the full spectrum anti-money laundering treaty with the United States in 1990 and one of the first to enter into a tax information exchange treaty with the United States following the OECD commitment to tax transparency.

It seems then that absolute transparency with regard to money laundering and terrorist funding is not the objective. So, what are the forces that remain at work thus characterising the offshore jurisdictions, notwithstanding the transparency that far exceeds that of application elsewhere?

Firstly, the offshore jurisdictions remain a victim of the internecine warfare between the US regulatory agencies. No credit is given to the offshore jurisdiction by any other Agency for the fact that the United States Government in its wisdom determined that the Department of Justice was the only Federal agency to have the necessary relevant access with regard to any money laundering activity in the Cayman Islands (and the other similar jurisdictions). This continues not to play well with the competing United States agencies, nor certain US prosecutors who no doubt feel frustrated that their prosecutions lack similar extra territorial reach. The comparatively simple expedient of making a request to the Department of Justice appears not be an available option to them.

Secondly, the European Union nations still require the European Union Savings Directive to be applied and ideally not merely across the European jurisdictions, but globally. Whether it is immediate and spontaneous tax reporting or the application of a withholding tax, the potential for significant damage to the EU economy arises unless the mechanism of choice is universally adopted on a global basis. The offshore jurisdictions simply represent again the soft target and it is highly unlikely that the full faith and credit and indeed positive publicity will be accorded to any such jurisdiction with respect to its anti-money laundering and anti-terrorism legislation whilst that offshore jurisdiction has a more competitive tax rate and is not fully signed up to the European Union rule book.

Thirdly, public opinion needs to be deflected. We are aware that the funding for the September 11th terrorists passed through routine banking channels in the United States. We are aware that Russian interests were able to transfer US$7 billion directly to a bank in Manhattan. We are aware that Mr Abacha transferred US$4 billion from Nigerian Treasury through banks in the City of London. We are also aware that notwithstanding the transparency with regard to money laundering in the Cayman Islands from as far back as 1990, no similar case of money laundering, or anything like it, has been revealed.

The debate and the public relations campaign have become dangerously unbalanced. Clearly, if those responsible for forming the public opinion on these matters are truly intent on co-operation and a globally transparent system, then deliberate disinformation and disingenuity is not a basis on which to forge the necessary relationships. At the least, they should realise that by acceding to the OECD and FATF initiatives, a number of offshore jurisdictions have changed the rules of the game and that, as a result, their standing is necessarily enhanced. This conclusion will be a source of real confusion in the minds of some.