Trust and Company Service Providers - The other inconvenient truth Marcus Killick Chairman - Gibraltar Financial Services Commission

Transcription

1 Blurring the onshore/offshore line: A Centre for the Study of Financial Innovation round-table discussion on the convergence of onshore and offshore financial centres, September 26, 2006 at Watermens Hall, 16 St-Mary-at-Hill, London EC3R 8EF, from 12:30-2:15pm. Trust and Company Service Providers - The other inconvenient truth Marcus Killick Chairman - Gibraltar Financial Services Commission Ladies and Gentlemen John mentioned in his speech about the use to which trust and company vehicles can be put in the layering process of money laundering. Let me therefore begin with some recent quotes about the perceived abuse of this area: The competition to attract legal entities to their jurisdiction has created a race to the bottom and a real money laundering threat. "[Criminal investigators ] have found that certain nominee incorporation services (NIS) form corporate entities, open full-service bank accounts for those entities, and act as the registered agent to accept service of legal process on behalf of those entities in a jurisdiction in which the entities have no physical presence. An NIS can accomplish this without ever having to identify beneficial ownership on company formation, registration, or bank account documents. "[Criminal investigators ] believe that [the jurisdiction s] shell companies and bank accounts arranged by certain NIS firms are being used to launder as much as USD 36 billion a year from the former Soviet Union. It is not clear whether these NIS firms are complicit in the money laundering abuse. In 2005 there were 30 requests from Russia and 75 from the Ukraine authorities involving the jurisdiction s shelf companies. These requests typically ask for assistance in identifying individuals associated with the jurisdiction s companies. However, attempts to gather information in response to these requests on the companies are obstructed by the lack of information maintained. These requests often involve serious crimes occurring in other countries but implicate a company in the jurisdiction. For example, in early 2006, one request was seeking information on a corporation allegedly used to smuggle a toxic controlled substance

2 between two Eurasian countries because the name of the corporation was on the foreign customs papers. 1 The FATF 2 recommended TCSP s should be made subject to AML/CFT obligations and appropriate regulatory oversight. In view of the threat clearly identified work on addressing the TCSP issue should have a higher priority than appears to be the case currently. 3 The FATF concluded that some of the conclusions in an assessment of the risks posed by the incorporation arrangements. are very stark, 4 These quotes were mainly taken from a recent money laundering threat assessment and quoted in the jurisdiction s FATF report published earlier this year. You may or may not have read about it, probably not as the jurisdiction is on no blacklist nor will it ever be. It is, of course the USA. According to the FATF, there are currently some 695,000 active entities registered in Delaware (one for every 1.2 residents), including approximately 50% of the corporations publicly traded on the U.S. stock exchanges. New business formations are currently running at about 130,000 per annum. Nevada currently has approximately 280,000 active business entities registered with the Division of Corporations, with 80,000 to 85,000 new registrations each year. Recently the US Government Accountability Office (GAO) commented Federal law enforcement officials are concerned that criminals are increasingly using U.S. shell companies to conceal their identity and illicit activities. Though the magnitude of the problem is difficult to measure, officials said U.S. shell companies are appearing in more investigations in the United States and other countries. 5 Some states specialise in expedited approval of filings. Nevada offers a 24 hour expedited service for an additional $125 above the normal filing fee, a two hour service for an additional $500 and a one hour while you wait service for an extra $1000. There is no other area where the gulf between the regulatory approaches of the so called onshore and offshore world is more apparent than in 1 General Accountability Office Report to the Permanent Subcommittee on investigations, Committee on Homeland Security and Governmental Affairs, US Senate Company Formations Minimal Ownership Information is Collected and Available (March 2006) 2 Third mutual evaluation report on anti-money laundering and Combating the financing of terrorism- United States of America (23 rd June 2006) 3 Page 226 Para 992 ibid 4 Page 237 Para 1024 ibid 5 General Accountability Office Report to the Permanent Subcommittee on investigations, Committee on Homeland Security and Governmental Affairs, US Senate Company Formations Minimal Ownership Information is Collected and Available (March 2006)

3 respect of the regulation of trust and company service providers. Yet the two directly compete. Delaware and the BVI, the Isle of Man and Wyoming. For years the offshore world has been subjected to pressure on its TCSP sector. Some had already legislated to bring this activity within the regulatory net, others did so following this pressure. Such changes come at a price. A recent report to the Commonwealth Secretariat 6 estimated that it cost Barbados $45 million in direct costs to meet the new regulatory requirements. This also covered a number of required improvements outside the TCSP area but is indicative that there are real economic costs to meeting international expectations. I am not claiming abuse does not occur offshore, far from it. A number of offshore service providers assisted, knowingly or otherwise in abuse in the past. There is however, a lack of evidence that the abuse of company and trust structures is any greater in those "offshore" centres than it is onshore.. The Organisation for Economic Co-operation and Development (OECD) has stated, Almost every economic crime involves the misuse of corporate entities. The UK Joint Money Laundering Steering Group Guidance Notes described them as the most likely vehicles for money laundering. The latest United Kingdom Threat Assessment of Serious and Organised Crime produced by the Serious Organised Crime Agency (SOCA) states Property purchases, cash rich businesses and front companies are the most frequently identified methods for laundering money in the UK. Yet the move to regulate this activity has been exclusively an offshore one. International standards in respect of TCSPs do not exist in the same way as they do for financial businesses and there is no TCSP equivalent to the International Organisation of Securities Commissions (IOSCO) or International Association of Insurance Supervisors (IAIS). The Offshore Group of Banking Supervisors (OGBS)have produced a paper on best practice for TCSPs but this has not progressed into an international standard. One would expect that, with this clear inequality in approach,, even if onshore jurisdictions chose not to follow the offshore lead, they would at least be more circumspect in their criticisms. Unfortunately not. As recently as August this year a report from the US Senate Permanent Subcommittee on Investigations produced a 360 word report entitled Tax Haven Abuses, The Enablers, The Tools and Secrecy. The word Delaware got 15 mentions, Cayman 140. The Isle of Man got 161. Whilst 6 Developmental Implications Of Anti Money Laundering and Taxation Regulations (August 2006) Prepared for the Commonwealth Finance Ministers Meeting on the September 2006

4 not a scientific analysis of the report the relative numbers do give an indication of where the committee s focus of attention was. The FATF by the way got three, all footnotes. Similarly the same tired argument is repeated. Page 11 states First and foremost, the offshore industry relies upon jurisdictions that promise secrecy and anonymity to persons doing business in their territories. At least fifty such jurisdictions are operating in the world today So who are these fifty. The number comes from a 2000 report from the US entitled International Narcotics Control Strategy Report 7 The list includes Ireland and four other EU member countries (Cyprus, Hungary, Luxembourg and Malta). Some including Hong Kong and Singapore are members of the Financial Action Task Force. The chart itself does not mention whether individual jurisdictions even have banking secrecy laws, but many, such as the BVI, Gibraltar, Guernsey, Isle of Man and Jersey have never had such laws, but rather rely upon the English common law principle of banking confidentiality. Delaware, Arizona etc were not included on the list. To even the most offshore phobic reader, to describe Ireland as promising secrecy and anonymity to persons doing business is stretching it. Yet the report continues (remember this is still in connection with the fifty): These jurisdictions typically provide several layers of secrecy protections to persons transacting business with their residents. U.S. law enforcement typically is not even aware that an offshore entity or account exists. Once a regulatory or law enforcement agency does become aware of the entity or account, most offshore jurisdictions require a long and cumbersome process in order to gain access to any important information, such as the identities of an offshore corporation s beneficial owners or a trust s grantors and beneficiaries. To support the contention the vast bulk of the report details six case studies (one taking up two thirds of the report. Indeed the report that is not the a relaying of a case study covers a mere 17 pages, including a ten page executive summary. Case studies are, as their name implies, just that. Whilst they can be regarded as illustrative, they may or may not be representative. They could have been chosen at random or to support a particular argument. Yet the report says the evidence is overwhelming 8 7 (March 2000 pages ) - US Department of State Bureau for International Narcotics and Law Enforcement Affairs 8 Page 2

5 The report refers to the 441 offshore entities established by Enron in the Cayman Islands. Yet it does not refer to the fact that Enron itself was incorporated in Oregon, had its head office in Texas and was quoted on the New York, Pacific and Chicago exchanges. It also quotes a 2004 report that US multinational corporations were increasingly attributing their profits to offshore jurisdictions 9. Note this is not illegal, firms have a right if not a duty to their shareholders to arrange their affairs to minimise their tax burden. Jurisdictions, not least the USA, compete on tax. Yet the reference to the report was as an example in a paragraph which commenced The evidence is overwhelming that inaction in combating abuses has resulted in their growing more widespread In a globalised economy, selecting an appropriate jurisdiction is key. If a jurisdiction is not attractive because of high taxation, over regulation, poor infrastructure, political uncertainty etc, businesses will go elsewhere. The choice is a return to protectionism and exchange controls. To single out one area, namely offshore as somehow bad, is wholly inappropriate. In the last 18 months the London Stock exchange has attracted 152 international companies onto its markets. Over the same period The New York Stock Exchange and Nasdaq have attracted a combined total of 54. Banks in the UK openly market products designed to reduce an individuals tax bill. No one thinks twice about it. There is no difference between this and tax planning using offshore centres. Provided it is done legally, cries of abuse are misfounded and mischievous. It is time for the offshore community to say clearly This is what competition is about. So long as it is legal and done correctly, get over it. What is unfair however, is to place competitors at a disadvantageous position particularly using threats of sanctions where there are no reasonable causes to do so. Unsurprisingly none of the report recommendations were directed at the US offshore jurisdictions. Bearing in mind neither Nevada or Wyoming collect corporate income tax information to share with the IRS 10 and action against jurisdictions which do not cooperate with the US tax authorities is a recommendation, such an omission is, on its face inconsistent. The GAO report submitted to the Committee three months earlier, which so criticised the US, got a mention in three footnotes. 9 Data shows dramatic shift of profits to Tax havens Tax Notes 13/09/04) 10 Table 2 U.S. Money Laundering Threat Assessment December 2005

6 So is the USA a unique case and is the rest of onshore coming to terms with the abuse of their trust and company sectors On the face of it there is some movement. Within the EU the third money laundering directive will impose additional obligations. and TCSPs here are already subject to AML regulations (but no current supervision).. Article 36 of the Directive states Member States shall provide that currency exchange offices and trust and company service providers shall be licensed or registered and casinos be licensed in order to operate their business legally. Member States shall require competent authorities to refuse licensing or registration of the entities if they are not satisfied that the persons who effectively direct or will direct the business of such entities or the beneficial owners of such entities are fit and proper persons. Article 39 of the Directive states When registering or licensing a currency exchange office, a trust and company service provider or a casino nationally, competent authorities should ensure that the persons who effectively direct or will direct the business of such entities and the beneficial owners of such entities are fit and proper persons. The criteria for determining whether or not a person is fit and proper should be established in conformity with national law. As a minimum, such criteria should reflect the need to protect such entities from being misused by their managers or beneficial owners for criminal purposes. In their consultation on the Directive the Treasury make three key proposals regarding TCSPs: 1. In Treasury proposes that HMRC will take on the role of monitor of TCSP's. The basis for this is their existing knowledge of the AML regulations and the fact they already cover money service businesses 2. Under Legal and accountancy professionals already supervised by certain professional bodies do not need to be also subject to additional monitoring and a fit and proper test by HMRC. 3. In the Treasury states that its preference in assessing "fitness and propriety" is limited to a set of negative criteria. Whilst the paper notes that other jurisdictions, such as Jersey, have full authorisation and supervision, the Government considers that the

7 additional benefits of a more holistic approach are not proportionate to the risks, My overall impression is that the UK wishes to do the barest minimum to meet the requirements of the directive. This approach is misguided as the chance to improve the quality of an important business sector will have been lost. I also believe that will perpetuate an unlevel playing field between the UK and its Dependent Territories. For the UK to now fail to at least match what has been put in place in its dependencies sends an entirely wrong message and smacks of hypocrisy. So is there a need for standards offshore that onshore does not require. In my view, absolutely not, as the GAO themselves have stated 11 Using U.S. shell companies for such activities can be appealing because of the perceived legitimacy of U.S. companies in international commerce. It is because of this that the need is as great if not greater. Yet currently company formation agents in the USA are not overseen and the information about them not verified 12. Agents are not required to collect ownership information. Whilst agents are responsible for ensuring they do not do business with a person or entity listed on the US Specially Designated Nationals and Blocked Persons (SDN) list, so are all US persons, both individuals and entities. They are not, however defined as financial institutions under the BSA 13 and are therefore not subject to AML requirements. Yet, as the offshore experience has shown, regulation will not kill the sector. Indeed some argue that it instils a degree of professionalism. The number of incorporations in regulated jurisdictions has generally fallen yet firms still thrive. Some of this has been down to the move to higher value added services where the existence of regulation that is fit for purpose actually encourages clients who have nothing to hide. However, either an effective regulatory regime is needed everywhere or nowhere. So should the UK be creating an effective structure or should the dependencies be dismantling theirs? The answer lies in the extent of abuse. There is clear evidence that there is significant global abuse. There is also evidence that those jurisdictions which have implemented an effective regulatory regime have deterred abuse from their jurisdiction Is there a blurring between on and offshore, no not even close. It remains do as I say not as I do, or am ever likely to do. It is the only playing field that is not merely unlevel but requires a base camp at one end and 11 Page 1 General Accountability Office Report to the Permanent Subcommittee on investigations, Committee on Homeland Security and Governmental Affairs, US Senate Company Formations Minimal Ownership Information is Collected and Available (March 2006) 12 Page 24 ibid 13 Bank Secrecy Act 1970

8 oxygen to reach the other. 22% of Delaware s revenue is alleged to come from the company formation business. It is unlikely the US will shift its position unless a terrorist outrage has a Delaware company connection or similar. The UK has a great chance to show a lead in this area. Instead it will send precisely the wrong message and will simply encourage those who wish to lower the bar in those centres which have taken the lead to date. They will have been given wonderful ammunition and will be able to use arguments such as lack of benefit compared to cost (HM Treasury s own words) and on grounds of competitive disadvantage. Is there a conspiracy? I have always believed that the only successful conspiracy involves just two people one of whom is dead, yet there are those who do. After all up to 30%of Americans already believe the moon landings were faked (Helped recently by NASA s revelation that they have lost not just one but the original footage of ALL six Apollo landings). No, there is no conspiracy, what you have instead is a powerful cocktail of prejudice, hypocrisy, ignorance and self interest. Tax competition is OK if it is me but not if it is you Offshore has to apply higher standards because it is offshore It is this we must continue to rail against Thank you