For the offshore community, 2000 has been a year of reckoning.
An alphabet soup of international initiatives has simultaneously focused on the fiscal and regulatory infrastructure in the world's smaller jurisdictions - and in some cases has caught in its net larger countries, such as Russia and Israel. In the process, the offshore jurisdictions have been held to international standards that the countries doing the investigating have not always been able, or even tried, to achieve themselves, bringing forth accusations of a double standard and a secret agenda.
The result has been a haphazard grading of the world's lesser jurisdictions into two classes: those whose financial and regulatory systems meet or will meet “the highest international standards”, the ‘A-list' of international financial service providers, and a second inventory of jurisdictions which must change their ways or face exclusion from the international family of nations. For those in the latter group which are unwilling to mend their ways, the future looks bleak.
There is little doubt that the Cayman Islands will be placed fairly and squarely on the A-list by the time the dust has settled. Cayman's insurance industry is a model for others in terms of the openness and thoroughness of its regulation. The banking sector has become too significant globally to proceed without new rules, and legislative changes have been enacted as part of a tremendous show of willing on the part of the Cayman authorities, even though each succeeding international investigation has come from a slightly different angle.
During the summer, the Cayman Islands Legislative Assembly passed new legislation, designed to improve regulatory access to information and international regulatory co-operation and to bring Cayman's anti-money laundering legislation into compliance with international standards. Among the legislation passed was The Monetary Authority (Amendment) (International Co-operations) Law, 2000; The Banks and Trust Companies (Amendment) (Access to Information) Law, 2000; The Companies Management (Amendment) (Access to Information) Law, 2000; and The Proceeds of Criminal Conduct (Amendment) Money Laundering Regulations Law, 2000. Money Laundering regulations under the latter legislation were gazetted on 7 August 2000.
Not everyone in Cayman thought such legislation entirely necessary, but the legislative activity highlights intentions in Cayman to meet “the highest international standards” in all aspects of its financial regime.
The lack of logic in the international onslaught was highlighted in September, when Richard Armey, the leader of the Republicans in the US Congress during the last administration belatedly realised what had been apparent all along: that the ambitions of the Brussels bureaucrats would not cease when they had brought the smaller nations to account. In their attempt to head off what it calls the “race to the bottom” by which sovereign states set their own tax rates, the OECD will next turn its sights on those onshore jurisdictions whose tax rates are considered “harmful”. Conspicuous among that group is the US.
Armey's howls, expressed in a letter of outrage to Treasury Secretary Lawrence Summers (see p.25), probably rang a little hollow in offshore ears. A hefty tax increase imposed from without would not cripple the US economy as it threatens to do to some offshore jurisdictions, but it would hurt - and, more to the point, it will not happen. Bill Clinton's successor as President of the US, whose identity was not known at the time these words were written, will not stand for the OECD's interference in its internal affairs.
The supposedly unco-ordinated attacks on the offshore community have been draped in moral outrage. The fight against money laundering, for example, is a more persuasive banner than the OECD's defence of European-style taxation.
It has to be said that there are small island communities which have turned a blind eye towards money laundering; Cayman, for many years, has not been one of them. The Government of the Cayman Islands and all its agencies are as heartily opposed to money-laundering practices as anyone in Brussels or anywhere else. More so, in fact, when all Cayman really has to sell - apart from more sensible taxation methods and a more flexible style of regulation - is its reputation. Woe betide the villain who turns up in Grand Cayman with a suitcase full of hundred dollar bills.
The OECD is, in truth, far less interested in closing off the avenues down which laundered money flows than it is in justifying the economic behaviour of the nanny states it represents. Crime does not stop because regulatory authorities say it must. The drugs trade, the money launderer-in-chief, will not die out if the OECD callously bankrupts some islands and persuades others to introduce new legislation.
The hard facts are that European citizens are no more in love with heavy taxation and the administration and projects on which it is wasted than are any other citizens. This we know because European taxpayers have become European tax-dodgers in record numbers, funnelling unrecorded income into the offshore community faster than the member states of the OECD can levy, and fail to collect, new taxes.
It is that very inability to collect taxes from their own citizens that fuels the activities of the onshore tax collectors, not a moral crusade. It may be convenient to bedeck their behaviour in high-sounding phraseology about money-laundering and tax evasion, but the reality behind recent events is far more prosaic.
Canada, among the highest-taxing jurisdictions in the Western hemisphere, estimates that $17bn was laundered through its banks last year, that country's Globe and Mail newspaper reported. Far more money is laundered in London than anyone can accurately estimate. The Austrians, until they were threatened with suspension from the EU earlier this year, permitted the use of savings accounts with bearer passbooks. Tax fraud is endemic in Italy and France, where it is considered something of a national pastime. None of the OECD's actions, nor those of any other agency, has attempted to address these unpalatable facts, except the Austrian situation.
Bullies usually lose in the long run, but often inflict grave damage before being called to account. Not all the agencies whose efforts are analysed on the following page should rightfully be categorised as bullying, but the very nature of the forces arrayed against a handful of small jurisdictions and the threats which accompany their activities, suggest that some deserve the epithet.
The outcome, once the sound and fury have died down, will be that Cayman, Bermuda and perhaps one or two others will emerge as an accepted component of the global economic community, while other small nations will be forced to look elsewhere for their bread and butter. Fairness, in whose name all this one-sided activity has been conducted, will undoubtedly be the biggest loser.
The initiative by the Paris-based Organisation for Economic Co-Operation & Development (OECD) is considered the most important and far-reaching of the international investigations. The Cayman Islands were omitted from a list compiled by the OECD in June 2000 of 35 jurisdictions considered to contribute to harmful tax competition. Along with five other jurisdictions - Bermuda, Cyprus, Malta, Mauritius and San Marino - Cayman promised to enact whatever legislation is considered necessary by the OECD within five years, and not to introduce any other legislation upon which the OECD might frown.
In May 1998, the OECD had published its rationale for addressing harmful tax regimes offshore and begun investigating almost 50 jurisdictions placed on an unpublished list of potential villains, based largely on hearsay. Each jurisdiction was offered the opportunity to meet with, and persuade, the OECD that it belonged on the world's A-list (“Level One”, in OECD parlance) of countries operating transparent tax regimes, prepared to trade information and regulate themselves to the highest international standards.
“The Cayman Islands undertakes to implement such measures (including through any legislative changes) as are necessary for the elimination of those aspects of the Cayman Islands' regimes deemed to be harmful,” Governor PJ Smith wrote to the OECD, in a letter released to the public.
“As a major international financial centre, we are committed to maintaining a well-regulated financial services industry which meets the highest international standards,” said the Hon. George McCarthy, Financial Secretary of the Cayman Islands. “The outcome with the OECD demonstrates what can be achieved through sustained, constructive engagement.”
US Treasury Secretary Summers called the announcements by the six countries an “important milestone” in the international effort to curb the use of offshore subsidiaries, bank accounts and other arrangements to avoid taxes. “In today's global economy, it is vital that we put an end to international tax practices that encourage tax evasion and improper tax avoidance and that distort capital flows,” Summers said.
Daniel Mitchell, a senior fellow at the Washington, DC-based conservative “think-tank” Heritage Foundation, says the Cayman Islands and the five other jurisdictions have made a strategic mistake and should instead have rebuffed what he calls a “cartel” of tax hungry nations.
The letters extracted from Cayman and other jurisdictions by the OECD “were like the confessions made during the Soviet show trials in the 1930s,” Mitchell says. “It's like choosing to become a house slave rather than a field slave, in the hope that you get better treatment. In the end you're still a slave.” The OECD, he says, is in effect attempting to set up a cartel to make smaller nations become their tax collectors. Such moves, in his view, are an attack on the sovereignty of the offshore jurisdictions.
“Surrendering early in the hopes of getting treated better is guaranteeing you're going to lose,” Mitchell says. “I don't think you're going to win through negotiating. The best strategy is to fight back by publicising your views against what is essentially a rebirth of colonialism and imperialism.”
Mitchell, a former advisor to the US Senate Finance Committee, says he has “started a coalition in the US to derail the OECD's pernicious efforts.” His comments predated Armey's letter to Secretary Summers.
Cayman served as president of the Caribbean activities of the Financial Action Task Force on Money Laundering (FATF), a separate OECD initiative, and provided substantial assistance to neighbouring states in the region. Cayman was not exempt, however, from criticism in the FATF's final report.
Cayman met many of the FATF's 40 recommendations on which its report was based, and partially met several others. But “the Cayman Islands does not have any legal requirements for customer identification and record keeping,” the report pointed out. “Even if in the absence of a mandatory requirement, financial institutions were to identify their customers, supervisory authorities cannot, as a matter of law, readily access information regarding the identity of customers. Moreover, the supervisory authority places too much reliance on home country supervisors' assessment of management of bank branches.”
The FATF report acknowledged that the Cayman Islands has criminalised the laundering of the proceeds of all serious crimes and that its system encourages reporting of suspicious transactions (by providing a safe harbour from criminal liability for those who report), but Cayman lacks a mandatory regime for the reporting of suspicious transactions.
FATF noted in its report that Cayman has been a leader in developing anti-money laundering programmes throughout the Caribbean region. Cayman “has demonstrated co-operation on criminal law enforcement matters, and uncovered several serious cases of fraud and money laundering otherwise unknown to authorities in FATF member states. In addition, it has closed several financial institutions on the basis of concerns about money laundering,” the report said. Much of the financial legislation passed this year by Cayman was aimed at further satisfying the requirements of the FATF.
FSF and the G-7
The Financial Stability Forum (FSF), a grouping of financial regulators, finance ministries and central banks, was created in April 1999 by policymakers from the Group of Seven leading industrialised nations, ostensibly to prevent a repeat of the Asian and Russian financial crises.
In late May FSF published a list of onshore and offshore financial centres whose standards of supervision and transparency placed them in three categories, reflecting their perceived quality of supervision and perceived degree of co-operation with international regulators. The groupings were “based on responses of OFC supervisors and the impressions of a wide range of onshore supervisors”. Although the FSF report stated that its findings did not “constitute judgments about any jurisdiction's adherence to international standards” the report was nothing if not judgmental.
Cayman was placed in Group III, the lowest and largest of the three bands into which jurisdictions were categorised.
Financial Secretary McCarthy disagreed with the inclusion of the Caymans in Group III. “The Cayman Islands' financial sector is well regulated, and government is confident that the results of proper assessments, which have been and are being done, will bear this out,” he said. He noted that the FSF categorisations were not meant to be taken as an assessment itself, but as a guide to setting priorities for assessment and pointed out that the FSF itself had acknowledged that its categories were based on perceptions rather than empirical data.
As part of its White Paper entitled “Partnership for Progress” on the future of its remaining Dependent Territories (to be renamed British Overseas Territories in due course), the British Government requested that the six territories with the largest international financial services sectors commission a review of their financial and regulatory systems by international financial services provider KPMG.
The review was to be completed by July 2000, but was delayed for at least two months when the territories rejected the first draft of the report. Although no one would speak on the record prior to the release of the report, the first draft was reportedly more critical of all six jurisdictions than the final report, issued late in October (see page 29).
The United Nations Global Programme against Money Laundering, known as the UN Offshore Forum, is an initiative of the UN Office of Drug Control and Crime Prevention, with an anti-money laundering focus. The forum is looking for a commitment from jurisdictions to minimum performance standards it has set. Its work is ongoing and none of the forum's findings have yet been made public.
The European Union has followed each of these initiatives closely. It is not expected to commission its own separate report unless it remains unsatisfied by the conclusions reached by all the other initiatives. EU member states, particularly the Germans and Belgians, are acknowledged as being among the world's least efficient tax collectors and the organisation views the initiatives as an opportunity to increase its tax yield.
Late in October, in a sweeping tax-evasion probe, the Internal Revenue Service went to court to seek records on US taxpayers with credit card accounts in three offshore banking havens.
Federal court petitions filed against American Express Travel Related Services Co. and MasterCard International covered credit, debit and charge cards at banks in the Bahamas, the Cayman Islands and Antigua and Barbuda.
“We want to get the message across that all income to US citizens is taxable,” said John Buchanan, manager of the IRS trust program. Promoters of offshore accounts, Buchanan argued, advertise everywhere from the internet to airline magazines the message that income can be sheltered because the US Government cannot penetrate some foreign banking secrecy laws. The court did not immediately indicate when it would rule on the question.
Offshore accounts are legal for US taxpayers, providing they file additional forms with the IRS and pay taxes on income earned in the US. The IRS said it expects that tax examinations by 400 newly trained agents could begin next year.