LocalCurrent Commentary
Money Laundering:The Crack Down (Final)
In light of the currentdebate on money laundering, Cayman Net News, as a Public Educationservice, featured a series on that topic.
This is the third and final part of the series which started inour Friday, August 23 issue and which was continued in yesterday'sedition.
Money Laundering and Tax Evasion have been getting increasingattention in diplomatic circles and there is a general beliefthat if you are going to have Globalisation you have to addressthe uneven legislation and low tax/no tax jurisdictions. As such,the efforts of the Organisation for Economic Cooperation and Development(OECD) have taken a large role in the financial crimes reductionefforts.
The OECD groups 30 membercountries in an organisation that provides governments a settingin which to discuss, develop and perfect economic and social policy.They compare experiences; seek answers to common problems andwork to co-ordinate domestic and international policies that increasinglyin today's globalised world must form a web of even practice acrossnations. Their exchanges sometimes lead to agreements to act ina formal way - for example, by establishing legally-binding codesfor free flow of capital and services, agreements to crack downon bribery or to end subsidies for shipbuilding. But more often,their discussion makes for better-informed work within their owngovernments on the spectrum of public policy and clarifies theimpact of national policies on the international community. Andit offers a chance to reflect and exchange perspectives with othercountries similar to their own.
Of the many things OECDdoes, there are two groups of theirs that deserve special mention.The Financial Action Task Force (FATF), which works on money launderingissues and the Taxation and Fiscal Affairs that deals with taxissues. The FATF over a decade ago worked up 40 recommendationsconcerning banking and fiscal policies. Many in the governmentpolicy and banking fields agreed with these policies and manychanges were made in national policy in line with the recommendations.The FATF was the inspiration for a Caribbean version 10 yearsago, the Caribbean Financial Action Task Force (CFATF).
With the advent of internationaldrug smuggling there has been the concomitant problem of moneylaundering. Many Caribbean jurisdictions are vulnerable to bothdrugs and money laundering. It was in recognition of that vulnerabilitythat the CFATF came into being with the Kingston Declaration of1990. So far 19 recommendations have been promulgated by the CFATFto add to the 40 of the FATF.
The Task Force offers assistanceto well over 30 countries in the region, all of which have subscribedto a Memorandum of Understanding (MOU). CFATF has self-assessmentexercises, mutual evaluation exercises and regular meetings, twoor three times a year, looking in particular at typologies inorder to sensitize the region to the vagaries of money laundering,and to the maneuvers of the launderers. CFATF works with the CARICOMSecretariat
CFATF continues to cementits links with other international organisations with the commoncause in the ongoing battle against drugs and money laundering,and have a history of attending their meetings as Observers suchas, CARICOM, the Caribbean Customs Law Enforcement Council, theCommonwealth Secretariat, the European Commission Drugs ControlOffice for the Caribbean, the Inter American Development Bankand OAS/CICAD, the Caribbean Development Bank and the United NationsEconomic Commission for Latin America and the Caribbean.
One approach to the problemsraised by this new kind of corporation would be an internationalagreement not to recognize corporate entities that do not havefull authority to do business in their home jurisdiction. Suchan agreement would bar IBCs from opening bank accounts and engagingin securities and commodities trading. It would deny them theright to own real property outside of the country of incorporationand would deny them the right to do business.
A second, and drastic approachwould be to limit the use of the IBC to regulated financial institutions.For example, many banks currently refuse to open accounts forIBCs that have not been formed by the bank itself. These banksbelieve that under the prevailing due diligence rules they mustknow the beneficial owners of the company. A bank that createsthe corporation will always know its beneficial owner. Thus, itwill always be in a position to respond to official requests inconnection with a criminal investigation.
During a survey of nationaland territorial tax practices in 1998, the OECD identified 47jurisdictions as having tax preferential systems. Of these 35were considered to be Tax Havens, and the 30 total Caribbean membersof CFATF were 22 of these 35.
In general Low/ No/ Nominaleffective tax and one or more of the following criteria: Lackof effective exchange of information; Lack of transparency; or,attraction of investment without substantial activities
A "tax haven"is a jurisdiction that meets he above criteria and either hasa general no / nominal tax system or has preferential regimesthat are so significant and pervasive that the no or nominallytaxed offshore sector dominates the jurisdiction's economy.
OECD List of Tax Havens
The following jurisdictions,were found to meet the tax haven criteria of the 1998 report:Antigua and Barbuda, Dominica, Grenada, St Lucia, St. Christopher& Nevis, St. Vincent and the Grenadines and the territoriesof Anguilla, Montserrat; the additional island of Barbados alsoin the sub region; the Netherlands Antilles and Aruba; the BritishVirgin Islands, US Virgin Islands; and finally the islands inthe Bahamas, and also the Turks & Caicos.
When this blacklist of taxpoachers was announced it was not well received by the Caribbeannations. They felt the OECD was being too preachy and maybe evendictatorial, since the report spoke of sanctions and internationalmeasures to take against offenders. Being put on a list like thatmade smaller, poorer nations feel that the larger nations wereunfairly targeting them. The nations did not want to lose themoney coming in, and the diversification of their agriculturebased economies.
In order to reduce the stingfrom the slap in the face, the OECD worked up a MOU in Nov 2000whereby the "OECD will refrain from including the name ofa Party on any List of Uncooperative Jurisdictions during the[5 year] duration of the MOU, provided that the Party is proceedingin good faith to satisfy the terms of the MOU". Additionallycountries committed to the MOU would not receive sanctions andother international pressures.
Netherlands, Antilles signedthe MOU as well as 2 other non-Caribbean havens. Additionallythe Bahamas and the Cayman Islands had previously signed advancecommitment letters pledging cooperation even though they haveyet to formally sign the MOU. Whether they will continue / complywill be seen.
On the issue of money laundering,the FATF issued the following "Non-cooperating countriesand territories" report. They reviewed the following placesin the wider Caribbean among other jurisdictions in other areas:Antigua and Berbuda; The Bahamas; Belize; Bermuda; British VirginIslands; Cayman Islands; Dominica; St Kitts and Nevis; St Lucia;and St Vincent and the Grenadines. Of these they consider Antiguaand Berbuda; Belize; Bermuda; British Virgin Islands; and St Lucia;as cooperating with international authorities and passing neededlegislation.
The Bahamas had numerousdeficiencies identified but legislation pending in their legislaturewas said to probably address these issues. Their authorities haveindicated they are committed to implementing the CFATF recommendationsof 1997. So this particular non-cooperating jurisdiction is onthe mend.
Cayman Islands was citedfor numerous deficiencies but praised for working in CFATF andworking to reduce money laundering at home and in the Caribbean.They were classified as a non-cooperative territory anyway dueto the criteria of the report looking at the structure of thefinancial industry's international cooperation through CFATF ornot.
Then there is the non-cooperationof the Eastern Caribbean nations. It seems this sub-region haspoor track record on this issue. Note that these nations are allpart of a currency union and have a common central bank the EastCaribbean Central Bank. Also the population and the tax base ismuch smaller so it is expensive to fully train and staff appropriatenational level financial intelligence units. While the OECS nationof Grenada was not mentioned nor reviewed, some other OECS nationsDominica; St. Kitts & Nevis; St. Vincent and the Grenadineswere said to have numerous deficiencies. These were said to benon-cooperating with international authorities and needing additionallegislation.
Additionally while St. Luciawas considered a cooperating jurisdiction, the new law on moneylaundering was questioned as to whether it had conflict of interestand other problems. The FATF urged St. Lucia to remedy these deficienciesand said they would follow up on progress in the matter.
In respect of anti-moneylaundering regulations, the ECCB have not issued any which mayaffect the countries under its jurisdiction. However, it did issuea set of Anti-Money Laundering Guidance Notes for Licensed FinancialInstitutions in May 1995, which apply to all financial institutionssupervised by the ECCB inclusive of some Non Bank Financial Institutions.
Additionally in February1994 the ECCB issued the Basle Committee notes on Prevention ofCriminal Use of the Banking System for the Purpose of Money Launderingand also in June 1997 established a brief Money Laundering PreventionAgreement. It is understood that adherence to the above by thebanks forms part of ECCB's on-site examinations procedures.
After the release of thereport in June 2000, there was a lot of activity, new laws introduced,and reforms passed. Of the nations above, seven Jurisdictionswere said to have enacted legislation and regulations (two inthe Caribbean, Bahamas and the Cayman Islands) and that most ofthe deficiencies were corrected.
It said that the Bahamaspassed several new laws addressing banking supervision, customeridentification, information about ownership of IBCs and channelsfor providing international co-operation at the judicial levelas well as the administrative level through the new FinancialIntelligence Unit.
The Cayman Islands has issuedmoney laundering regulations and enacted laws including thoseamending the Monetary Authority Law and the Proceeds of CriminalConduct Law. Amendments have also been made to its Banks and TrustCompanies Law and the Companies Management Law. The Regulationsaddress customer identification and record keeping for a widerange of financial services. Amendments to certain laws deal withthe power of the financial supervisory authority to monitor compliancewith the Regulations. Other amendments to the Proceeds of CriminalConduct Law concern the sanction for failure to report a suspicioustransaction.
Additionally, four otherjurisdictions had taken steps to enact legislation but a numberof deficiencies still remain. The three in the Caribbean wereDominica; St. Kitts and Nevis; and St. Vincent and the Grenadines.But the Eastern Caribbean nations still have some way to go andsome systemic problems.
The current state of taxevasion and money laundering begs the question as to whether ornot it is globalisation that will bring in the twilight of thenation state and a globalisation not just of the economy but political/diplomatic/governmental.
Some feel that globalisationis too uncertain and messy with too many holes. Others have theopposite view that there is a need for more internationalism notless. Maybe the conspiracy is that for decades money launderingand tax evasion was operating freely with little interference,not the conspiracy that the UN and OECD are others trying to stopit.