PREAMBLE: REVIEW OF FINANCIAL REGULATION IN THE CARIBBEAN OVERSEAS TERRITORIES AND BERMUDA

The Overseas Territories' White Paper proposes establishing a renewed contract between the UK and the Overseas Territories (OTs). A modern and effective partnership should be built upon the foundations of responsibilities on both sides, coupled with the UK assisting the OTs where necessary, and the OTs exercising control over their own lives in a responsible way.

The UK is pledged to look after the OTs' interests internationally. This goes hand in hand with the OTs meeting accepted international standards, and playing a responsible role in the international community. In the area of offshore financial services, some of the OTs are significant players in their own right. The business conducted in offshore centres is often linked intrinsically with activities regulated in other countries, including the UK and our key international partners. The quality of regulation in the OTs has an indirect or direct effect on people, firms, and markets in other countries, as well as the international financial system.

The Terms of Reference provide for an in­depth independent review by experts to assess progress made in the regulation of the offshore sector, and to make further recommendations on how to deal with outstanding issues. HMG circulated Guidance Notes to Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Montserrat and Turks and Caicos Islands which indicate accepted international standards and good practice in financial regulation. Following consultation with these OTS, the Guidance Notes and Terms of Reference for the review of financial regulation in the OTs have been revised.

2 September 1999

PURPOSE OF THE REVIEW

­ To assess Overseas Territories' (OTs) performance against international standards and good practice as set out broadly in the Guidance Notes[3].

­ To make recommendations for improvement where the OTs fall below these standards.

REGULATION OF FINANCIAL ACTIVITY

The review should list separately the type and composition of offshore financial services business in each OT ie. Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Montserrat and Turks and Caicos Islands. It should ascertain what legislation, regulations, rules, guidance, systems, and procedures (statutory or otherwise) govern the regulation and supervision of the:

- banking sector;


- insurance sector;


- securities sector, including mutual funds and stock exchanges.

This assessment should cover the monitoring, supervision, and regulation of activity, as well as the enforcement of rules, regulation and laws.

The review should evaluate to what extent arrangements in the OTs meet standards advocated by the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors (IAIS) and the International Organisation of Securities Commissions (IOSCO). References to relevant standards provided by these bodies are broadly set out in the Guidance Note covering this section. The review should consider the adequacy of the system of supervision relative to the objectives of an OT's financial services regulation. It should comment on the existence and adequacy of depositor and investment protection schemes. The review should determine whether further action is required by any territory in order to meet the standards broadly set out in the relevant Guidance Note, and prioritise recommendations.

REGULATION OF COMPANIES, PARTNERSHIPS, TRUSTS

The review should supply a breakdown of the type and composition of the company, partnership, and trust sectors in each OT, including company and trust service providers and formation agents, the involvement of professionals (accountants and lawyers), and the scale of activity. It should determine and assess the legislation, framework, systems, rules, regulations, guidance and procedures in place which provide for the regulation of activity in these sectors. The review should establish whether these arrangements conform to good practice and standards outlined in the relevant Guidance Note, which in turn refers to the principles set out in: the Basel Committee on Banking Supervision; International organisation of Securities Commissions (IOSCO); the Financial Action Task Force 40 Recommendations; Caribbean Financial Action Task Force Aruba Recommendations, the International Accounting Standards Committee, the G22 report on Transparency and Accountability (October 1998), IMF Guide to Progress in Strengthening the Global Financial Architecture (April 1999) and the OECD Principles of Corporate Governance.

The review should evaluate the appropriateness of the regulatory measures in place, including the monitoring, supervision, and regulation of activity, as well as the enforcement of rules, regulations, and laws.

Furthermore, it should ascertain the means available to regulators and law enforcement agencies to obtain details about the beneficial ownership of assets controlled by companies, partnerships and trusts. The review should detail the type of information available on the activities of company, partnership and trust. It should determine whether the mechanisms in place are sufficient. The review should also consider whether further action is required by any territory to meet the standards broadly set out in the Guidance Note, and prioritise recommendations.

INDEPENDENT REGULATORY AUTHORITIES

The review should evaluate to what extent regulatory authorities comply with accepted international standards advocated, principally, by Basel, IOSCO, OGBS and IAIS.

In particular, the review should evaluate whether regulatory authorities are accountable, independent and free from business and political influence, and properly staffed and budgeted for, with an independent source of income. It should determine whether the authority is detached from the marketing of financial services and where this is not so any impact this may have on the ability of the regulatory authority to regulate the sector objectively. The review should assess to what extent each regulatory authority possesses the necessary powers and uses them effectively to: set standards, rules, guidance, and to make proposals for legislation relating to all financial activity under its control; grant, suspend, and withdraw licences; monitor, supervise, investigate and regulate activity; co­operate with requests for assistance from foreign authorities and; enforce rules, regulations, laws by taking enforcement action, and the extent to which they can liaise with law enforcement authorities in the sharing of information. The review should consider which activities fall under the responsibility of the regulatory authority, and whether the regulatory net covers all financial activities. it should comment on the resources available to the authority, both for the purpose of recruitment, training and retention of staff and its infrastructure, such as the use of technology.

The review should consider what legal advice is available to the authority and its effectiveness in helping the OT government to regulate the sectors.

INTERNATIONAL CO­OPERATION

The review should evaluate the legislation, framework, systems, procedures (statutory or otherwise), rules, regulations, guidance and safeguards for the ability of OT law enforcement and regulatory authorities to co­operate with requests for assistance from foreign authorities. The necessary requirements are broadly set out in the relevant Guidance Note. The review should ascertain what legal advice is available to OT regulatory and law enforcement authorities and its effectiveness in helping the OT government to co-operate in these areas. The review should determine whether further action is required by any territory in any of these areas, and the relative priority of such action.

Co­operation between regulatory authorities

The review should consider whether there are effective 'Gateways' provisions in place; OTs' powers to obtain information, including by compulsion; ability of foreign authorities to take voluntary testimony from OT residents; an OT's ability to safeguard the confidentiality of information provided by foreign counterparts; provisions governing conditions under which information may be passed to overseas jurisdictions; whether effective Memoranda of Understanding exist, where required to underpin co­operation.

Co­operation between law enforcement authorities

The review should assess the extent of co­operation to which OT law enforcement authorities can obtain evidence on behalf of their foreign counterparts, and exercising other available mutual legal assistance powers, stating the mechanisms and OT authorities involved; an OT's ability to assist foreign authorities in tracing, freezing and confiscating proceeds in accordance with the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime (November 1990), even if the underlying conduct takes place outside the OT; the effectiveness of Mutual Legal Assistance Treaties with the USA where applicable, and the provision of basic statistics on the volume of requests for assistance made and received; powers to assist foreign law enforcement authorities in investigating all crimes before criminal proceedings have been instituted; ability to safeguard the confidentiality of information provided to OT authorities; whether effective Memoranda of Understanding exist, where required to underpin co-operation.

Co­operation between regulatory and law enforcement authorities

The review should evaluate whether there is effective co­operation

between law enforcement authorities and financial regulators, both domestically and abroad, as specified by the G7 key 10 principles. It should also consider the ability of OT regulatory and law enforcement authorities to determine the beneficial ownership of companies, trusts and partnerships.

MEASURES TO COMBAT MONEY LAUNDERING

The review should establish what legislation, framework, systems and procedures (statutory or otherwise) exist in the OT to combat money laundering, and types of offences caught by the legislation. It should determine which, if any, fiscal offences committed in the jurisdiction or overseas constitute a predicate offence for the purposes of money laundering.

The review should evaluate the effectiveness and adequacy of these arrangements, in terms of how they meet the standards broadly set out in the relevant Guidance Note, which in turn refers to: 1988 UN Drugs Convention; FATF 40 Recommendations, Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime (November 1990), and CFATF Aruba Recommendations. Furthermore, it should consider to what extent the OTs apply standards set out by the EC Money Laundering Directive (June 1991), the standards on which UK anti-money laundering legislation is based.

Specific consideration should be given to those offences considered predicate for the purposes of money laundering legislation; whether OTs have regulatory legislation in addition to the principle money laundering offences, and if not, whether guidelines and/or Codes of Practice exist (statutory or otherwise); their systems for reporting suspicious transactions and identifying customers; the institutions obliged to report; how reports are dealt with; and within what timeframe. The review should consider how this information is disseminated and shared with foreign counterparts. It should evaluate ability of Financial Intelligence Units (FIUs), or equivalents, to deal with suspicious transactions ie. whether staff have been properly trained and capable of conducting financial investigations and analysis; the resources at their disposal; feedback to the financial institutions.

The review should determine to what extent the Attorney­General's Chambers and judiciary are resourced and capable of handling the volume and types of cases necessary to enforce the money laundering laws. This not only relates to the prosecution of cases but the provision of assistance to foreign jurisdictions in pursuance of money laundering legislation.

FORMAT OF REPORT AND TIMESCALE

FCO, HM Treasury and OT representatives will wish to agree with KPMG the precise format of the report during Phase 1 of the workplan.

KPMG should provide written monthly reports to the Steering Committee (in electronic form) and attend Committee meetings at least during Phases 1, 2 and 5 (dates to be agreed).

10 December 1999

INTRODUCTION

1.  The White Paper on Britain and the Overseas Territories states that the Overseas Territories (OTs) should seek to implement "legislation for the effective regulation of the offshore sector which fully meets accepted international standards". In many cases the OTs have already implemented some of the standards, but no attempt is made here to analyse individual territories' performance to date. Such an analysis is the objective of the independent review foreseen in the White Paper, and to attempt it in the context of this paper would result in a superficial and incomplete impression of where matters stand. Instead, the purpose of this paper is to provide an overview of the framework within which international standards relating to the regulation of banking, insurance and securities business are established, and to offer an outline of the broad standards that have evolved. The paper is not intended to act as a substitute for the study of the detailed documents published by the respective standard­setting organisations, primarily the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors (IAIS) and the International Organisation of Securities Commissions (IOSCO). References to these documents can be found in the following text and, specifically, in publications available on the respective websites. The following are also key documents:

Core Principles for Effective Banking Supervision	Basel Committee	Sept 1997
The Supervision of Cross­Border Banking	Basel Committee	Oct 1996
Insurance Principles, Standards and Guidance Papers	IAIS	Oct 1998
Objectives and Principles of Securities Regulation	IOSCO	Sept 1998

THE OBJECTIVES OF SUPERVISION

2.  The objectives of financial services supervision fall into four broad categories:

• to secure the appropriate degree of protection for consumers of financial services;
  

• to maintain confidence in the financial system;
  

• to promote public understanding of the financial system; and
  

• to reduce the scope for financial crime.
  

4.  Preservation of confidence in the financial system has at its core the need to mitigate the risk of systemic failure, or of the system falling into disrepute. This will not necessarily be focused on the narrow issue of whether individual depositors or investors are threatened with the loss of money, but on whether the system as a whole might be under threat from the failure of one or more institution. There are circumstances in which individual financial institutions can and should be allowed to fail without fear of a threat to the system, even though there might be losses for the customers of those institutions.

5.  The rising tide of financial crime has increasingly posed threats to the integrity of financial systems. This impacts upon both the financial stability of institutions and upon the reputation of individual jurisdictions. Although financial services supervisors are not expected to police the wider criminal laws, it is clearly important for the supervisors to play their part in reducing the exposure of the financial services sector to criminal abuse, and in tackling financial crime and regulatory abuse. This requires OT regulatory authorities to have appropriate investigative powers and specialist enforcement branches, and to co­operate fully with the authorities in other jurisdictions. The responsibility for investigating individual cases of money laundering should, however, fall to OT law enforcement authorities.

THE SUPERVISORY FRAMEWORK

6.  Perhaps the single most important aspect that underpins the integrity of the financial services sector is a long­term political commitment to effective regulation and supervision. Without such commitment the regulators will always be starved of the tools needed to achieve an effective result.

7.  Fundamental to this process is a willingness to enact comprehensive regulatory legislation, to develop the associated regulations, rules and guidance, and to keep this structure under review to ensure that it stays abreast of trends both in the financial services industry itself, and in the development of regulatory practices. While the individual techniques of supervision and enforcement may vary in order to address the respective distinctive features of the offshore and domestic sectors, the fundamental standards applied to the offshore sector should not differ from those expected for the domestic market. With regard to the offshore sector, it is essential that due regard is paid to the regulatory implications in tandem with any moves taken to facilitate the development of business. Moreover, there should be no attempt to encourage "regulatory arbitrage" by seeking to offer a lighter regulatory regime than exists in competitor jurisdictions.

8.  A central part of the legal framework must be provision for an effective, operationally independent and accountable regulatory authority with the appropriate powers to fulfil the objectives identified in section 2. However, legal form alone is not sufficient to provide the basis for an effective regulatory system. There needs also to be an allocation of resources in line with the structure, scale and complexity of the financial services sector. This involves an acceptance of the need to invest in the staff and infrastructure of the regulatory authority in order to ensure that it has appropriate skills and tools to meet the tasks expected of it. It has also to be recognised that there can be no formalistic approach to the funding of the regulatory regime, based, for example, on the direct benefit derived by government from the financial services sector. The price to pay must be what it takes to deliver an internationally acceptable standard of supervision. By entering the offshore market a jurisdiction has to accept that not only does it have a duty to preserve the reputation and standing of its own financial system, but that it also assumes a wider responsibility to the international community to help ensure the integrity of the global market.

THE DEVELOPMENT OF INTERNATIONAL STANDARDS

9.  The increasing internationalisation of financial services in the past decade has led to a drive to establish some common minimum standards of supervision. The application of these standards is seen as particularly important in financial centres with a high proportion of international business, since the failure of supervision there may have far wider implications than simply for the local market.

10.  Standards for the supervision of the banking sector have been developed over many years under the auspices of the Basel Committee on Banking Supervision which promulgated the first Basel Concordat in 1975. In recent years there has been a rapid increase in publications emanating from Basel, many of which are intended to represent accepted international standards. Although the Basel Committee is an organisation whose membership comprises the G10 countries, it has a number of "regional" affiliates, not least of all the Offshore Group of Banking Supervisors, which have been closely involved in the development of the standards in recent years. The list of publications produced by the Basel Committee is available on the website of the Bank for International Settlements (www.bis.org). In the context of this paper the most significant of the documents are The Core Principles for Effective Banking Supervision (published in September 1997), which delivers 25 basic principles, and The Supervision of Cross­Border Banking (published in October 1996), which contains 29 recommendations.

11.  In the insurance sector standards are increasingly being established by the International Association of Insurance Supervisors (IAIS). The IAIS was established in 1992 and has membership of about 100 jurisdictions, including several offshore centres. Until 1996 it had no standard­setting powers, but since that time has produced a number of standards and guidance papers. These are consolidated within the Insurance Principles, Standards and Guidance Papers published in October 1998. The IAIS standards focus on particular supervisory issues, describing the best or most prudent practices, while the guidance papers are designed to assist regulators to raise the effectiveness of supervision. The IAIS is in the process of developing a website which should be available shortly.

12.  The primary international standards body in the securities sector is the International Organisation of Securities Commissions (IOSCO). Like the Basel Committee, IOSCO has been working over many years and published its first Resolution on the Regulation of Securities Markets in 1983. Unlike Basel, its membership is big (over 90 countries) and includes a large number of emerging markets and offshore centres. IOSCO's by­laws include clear objectives, with which all members are expected to comply. They include the requirements for members to co­operate, to promote high standards of regulation, to apply the standards rigorously, to establish effective surveillance and enforcement, to maintain just, efficient and sound markets, and to exchange information. In September 1998 IOSCO published its Objectives and Principles of Securities Regulation which sets out the 30 Core Principles of securities regulation. In addition, IOSCO has over the years produced a substantial range of other documents which represent commitments by the membership, guidance or standards, and which are available on its website (www.iosco.org).

13.  Although membership of these standard­setting organisations, or their affiliates, has been open to offshore centres, acceptance of, and compliance with the principles that the organisations espouse are essential pre­conditions for membership.

OVERVIEW OF THE COMMON PRINCIPLES

14.  It has to be reiterated that the documents referred to in this paper are essential reading, and it is not the intention of this paper to provide a substitute summary. However, in considering the structure of the overall regulatory regimes required in the OTs it is important to identify the common themes that underpin the regulation of all three sectors. This section seeks to highlight these themes. However, it is important to appreciate that, while there are common characteristics of the regulation of the different sectors of the financial services industry, different skills and processes will be required to effect proper regulation of each sector. The reference documents address these differences.

A.  General Principles

a)  Regulation should be vested in a properly constituted authority which should be operationally independent from political and commercial interference in the exercise of its functions. However, it should also be openly accountable in the exercise of its powers (see also the separate paper on Independent Regulatory Authorities).


b)  The regulatory authority should have a clear, adequate, achievable and consistent framework of responsibilities, objectives and powers set by legislation, and it should adopt processes which are fair, consistent, transparent to the public, and demonstrably geared towards achieving the objectives.


c)  The regulatory authority should have adequate funding to enable it to acquire the resources (staffing, technology, infrastructure etc) to fulfil its responsibilities. The funding should be available in such form that it does not compromise the authority's independence from both political and commercial pressures.


d)  The regulatory authority should have due regard to the need to compete with the commercial sector for skilled staff, and should structure its terms and conditions of employment accordingly. It should also ensure that its staff receives ongoing training.


e)  The system of supervision should involve both off­site surveillance and on­site examination. This requires the regulatory authority to have the powers not only to set the scope, content and frequency of routine reporting by regulated institutions, but also to have access, whenever it considers it appropriate, to the books, records, accounts and other documents maintained by the institutions. There should be no secrecy barriers to limit the regulators' access to information.


f)  The regulatory laws should establish proper licensing standards and criteria, and the regulatory authority should adopt effective procedures to ensure that applications are reviewed in a thorough and consistent manner. As a minimum this should require the implementation of comprehensive due diligence procedures in relation to controllers, directors and managers of prospective licensees, and a detailed analysis of an applicant's business plan, internal controls, projected financial condition and likely ability to comply with established prudential standards.


g)  The regulatory laws should provide for notification of any intended change in ownership or control of a regulated institution, and for such changes to be subject to prior approval by the regulatory authority.


h)  The regulatory authority should have the powers to implement and enforce prudential standards both generally across the entire sector, and specifically in relation to individual institutions. For example, this requires that the authority adopt and enforce suitable standards for capital adequacy, solvency, liquidity, risk concentration, asset valuation etc, taking account of accepted international standards and guidelines.


i)  The regulatory authority should require institutions to maintain minimum standards of corporate governance, internal controls and operational conduct with the aim of protecting the interests of clients, ensuring proper management of risk, and accepting primary responsibility for these matters. Careful attention should be paid, for example, to the role and responsibilities of the board of directors, the arrangements for delegating authority and responsibility, the separation of duties, the safeguarding of assets and the procedures for internal audit.


j)  Regulated institutions should be required to maintain proper books, records and accounts.


k)  There should be procedures for dealing with the failure of a market intermediary in order to minimise damage and loss to financial consumers and to contain systemic risk.


1)  The regulatory authority should be vested with comprehensive and credible inspection, investigation, surveillance, and enforcement powers, including


  •  powers to take action to ensure compliance with regulatory requirements;


  •  powers to impose administrative sanctions for non­compliance;


  •  powers to initiate or refer matters for criminal prosecution; and


  •  powers to suspend or revoke authorisation to conduct business.


m)  Regulated institutions should be subject to independent external audit in accordance with international accounting standards, and should be required to disclose to the public information regarding their activities and financial position that is comprehensive and not misleading. This information should be sufficient for financial consumers and market participants to assess the risk inherent in individual institutions.


n)  The establishment of trading systems, including securities exchanges, should be subject to regulatory authorisation and oversight. Trading should be supervised in a way which ensures that the integrity of the market is maintained. There should be fair and equitable rules which strike an appropriate balance between the demands of different market participants.


o)  Market regulation should promote the transparency of trading, be designed to detect and deter manipulation and other unfair trading practices, and aim to ensure the proper management of large exposures, default risk, and market disruption.


p)  Systems for clearing and settlement of securities transactions should be subject to regulatory oversight and be designed to ensure that they are fair, effective and efficient, and reduce systemic risk.


q)  The regulatory system should set appropriate standards for the eligibility and regulation of collective investment schemes; provide for rules governing their legal form and structure, and for the segregation and protection of client assets; require disclosure necessary for evaluating the suitability of a scheme for particular investors; and ensure that there is a proper and transparent basis for the pricing and redemption of units.


r)  The regulatory authority should have the powers and procedures to ensure that regulated institutions take action to protect themselves against criminal misuse, and that they maintain appropriate systems to comply with anti­money laundering regulations.

B.  Cross-Border Issues

a)  The regulatory laws and supervisory policy and procedures of a jurisdiction should seek to ensure that no institution operating across national boundaries escapes supervision, and that the supervision should be effective. In this context attention should be paid not only to corporate structures that might frustrate effective consolidated supervision (e.g. parallel-owned entities), but also to arrangements where the physical location of the licensee's mind and management differs from that of the regulator (e.g. shell branches).


b)  The creation of a cross­border establishment in the regulated sector should be subject to prior consultation and agreement between the home and host regulators. This is essential not only to ensure proper assessment of the application, but also to enable both parties to agree the necessary procedures for ongoing supervision of the institution.


c)  The regulatory authority should be empowered to collect both public and non­public regulatory information, and to share this in accordance with international principles with domestic authorities and foreign counterparts. Co­operation in the exchange of such information involves exchanges of a routine nature and the provision of assistance in an enforcement investigation, as well as in the event of the emergence of serious problems (see also the separate paper on International Co­operation).


d)  The regulatory authority should have the powers to assist an overseas regulator in the fulfilment of its functions. This may involve assistance in obtaining information or records, but will also extend to the use of investigative or compulsory powers on behalf of the overseas regulators. Secrecy or confidentiality provisions in the law of a jurisdiction should not be used as a means of impeding such assistance.


e)  There should be no barriers to prevent a home country regulator from undertaking such procedures, and having access to such information in the host country as it considers necessary to undertake the effective consolidated supervision of an international financial services group.

THE FUTURE DEVELOPMENT OF STANDARDS

15.  The rate of development of internationally recognised and accepted regulatory standards has accelerated in recent years, and further announcements should now be expected on a regular basis. Therefore, it is important to appreciate that compliance with international standards is not a static or "one­off" process, but will require regular updating of laws, policies and procedures. With this in mind, regulatory authorities in the OTs should continue to monitor international developments, particularly where they participate in or are affected by the work of one or more of the key international standard­setters mentioned above. They should, in particular, be prepared to recommend changes in legislation where appropriate, and to implement new procedures to ensure that compliance is kept up to date. This applies in all three of the main sectors referred to in this paper.

IMPLEMENTATION

16.  Standard­setting is not, by itself, enough. It needs to be accompanied by active monitoring of compliance with these standards, and the commissioning of the independent review of the OTs must be seen in the wider context. The G7 report on International Financial Architecture, agreed at Cologne, said:

"With considerable progress already having been made in the development of standards and codes of good practice, the key challenge now facing the international community is to encourage implementation."

17.  The standard­setting regulatory bodies ­ the Basel Committee, IOSCO and IAIS ­ are now working increasingly closely with the IMF and the World Bank. In the field of banking supervision, for example, the Basel Committee, the IMF and the World Bank, working with selected supervisors around the world, have developed a Core Principles Methodology text which provides detailed guidance to the IMF and World Bank for their assessments of compliance. It is expected that such assessments will be made for an increasing number of countries and territories around the world; and that the results of such assessments will be used by regulators (see for instance the Basel Committee's consultative paper on a New Capital Adequacy Framework) and by the Washington institutions (as a precondition in the IMF's new Contingency Credit Line).

18.  An IOSCO Implementation Committee, in which the IMF, World Bank and the regional development banks participate, has been set up to oversee the implementation by IOSCO members of the 30 Core Principles. Co­operation between IOSCO and the international financial institutions is at the heart of this process.

1.  There are legitimate reasons for using company and trust vehicles. However, the White Paper "Partnership for Prosperity" (Appendix 2, paragraph 4) states "We shall also press Overseas Territory governments to introduce legislation to improve regulation of company formation and management because, for example, in the absence of proper regulation, complex company structures can be used to disguise the proceeds of crime and other regulatory abuse as well as providing limited liability." The White Paper continues "Company formation agents and company managers need to be required by law to hold key information about the companies for which they have responsibility and to disclose that information to a regulator on request. This will ensure a properly documented paper trail for criminal and regulatory investigations."

2.  This paper considers the issues of company and trust regulation relevant to the regulation of the financial system. The paper does not set out a blue-print for Company and Trust Law and regulation as a whole - that would be outside the scope of the Review, and constitute a major undertaking in its own right. The two sectors - companies and trusts - fulfil very different purposes, and their regulatory regimes have evolved in different ways, to meet different objectives. Nevertheless, in respect of their potential as vehicles for abuse, the issues raised by the trust and company sector are similar, and for this reason, this paper treats them in parallel. But the Review may wish to consider them as distinct sectors.

4.  The opportunities for companies and trusts to be used for criminal purposes cannot be removed. Effective regulation can help reduce the scope for criminal abuse of such vehicles. There is no single international group of company and trust regulators. Nevertheless, the regulatory principles established by other international bodies in relation to other financial sectors apply equally well to the company and trust sectors:

   The principle that financial institutions should know their customers (established by - among others - the Basle and IOSCO standards) applies with particular relevance to situations in which the ownership of assets may be obscured through company and trust vehicles;

   FATF Recommendation 11 requires financial institutions "to take reasonable measures to obtain information about the true identity of the persons on whose behalf an account is opened or a transaction conducted if there are any doubts as to whether these clients or customers are acting on their own behalf, for example, in the case of domiciliary companies (i.e. institutions, corporations, foundations, trusts etc. that do not conduct any commercial or manufacturing business or any other form of commercial operation in the country where their registered office is located)". The interpretative note to this recommendation states "a bank or other financial institution should know the identity of its customers, even if these are represented by lawyers....accordingly, recommendation 11 also applies to the situation where an attorney is acting as an intermediary for financial services". This accepted international standard implies that financial institutions should be able to delve beneath a corporate or trust structure, to establish the true beneficial owner and other relevant parties, and not simply the name of a lawyer acting as an intermediary.

   The FATF's Recommendation 25 states "Countries should take notice of the potential for abuse of shell corporations by money launderers and should consider whether additional measures are required to prevent unlawful use of such entities";

   International standards on accounting, disclosure and auditing practice; covering timeliness in the provision of financial information, completeness, consistency, risk management, audit and control. The relevant standards include those set by the International Accounting Standards Committee; the G22 report on transparency and accountability, October 1998; and the IMF Guide to Progress in Strengthening the Global Financial Architecture, April 1999). These standards are particularly relevant when there are obligations to third parties arising;

   Standards of corporate governance, reflected in the OECD Principles of Corporate Governance, which OECD members, in co-operation with the World Bank and IMF, are committed to promoting amongst non-member countries;

   The Home Office report on "Financial Regulation in the Crown Dependencies" (The "Edwards Report") makes specific recommendations, based on the internationally accepted principles outlined above, for the company and trust sectors of the Isle of Man, Guernsey and Jersey.

5.  Satisfying these principles implies the following;

(i)  Beneficial ownership.

   It should be possible for law enforcement and regulatory authorities to ascertain, quickly and efficiently, and in advance of formal proceedings, the true owner of assets held by a company or trust, and the source and nature of financial transactions. It is essential to be able to trace the ultimate individual beneficial ownership of companies and to get beyond elaborate structures in which companies are owned by layers of other companies and/or trusts, which obscures the ultimate owner.

   In the company sector, this would involve the OT authorities having the means to identify company directors and the beneficial ownership of shares, eg where nominees exist. Effective custody arrangements would need to be in place in relation to bearer shares. In the trust sector, OT authorities should have the means to be able to identify the settlor, the beneficiaries, the trustees, the protector, and the custodian, where applicable, and should be able to obtain a copy of the trust instrument. This would help identify 'sham' trusts, for example. OT authorities should have the means to obtain up-to-date information, and to obtain such information in relation to companies and trusts which might be established in other jurisdictions, yet which might be managed or move to the OT concerned.

(ii)  Anti-money laundering systems.

   Intermediaries providing corporate or trust services should have in place effective anti-money laundering measures, including "know your customer", record keeping, and staff training requirements. Suspicious transactions involving companies and trusts should be disclosed to a Financial Intelligence Units. (More details on anti-money laundering standards are set out in the 'Money Laundering Guidance Note').

(iii)  Transparency of financial arrangements.

   Basic financial information relevant to the activities of companies and trusts should be available, quickly and efficiently, and in advance of formal proceedings, to law enforcement and regulatory authorities. Ideally, such information in the company sector should also be available to customers, shareholders, suppliers and lenders, where appropriate. In the trust sector, trustees should ideally be held accountable to the beneficiaries by preparing regular accounts, where appropriate, which might also be available to the settlor and protector where applicable.

   The Review will wish to consider in which circumstances it would be appropriate to require accounts to be produced, in which circumstances such accounts should be made public, in which circumstances abbreviated accounts might be acceptable, and in which circumstances the requirement to produce accounts should not be applied. The latter might apply where single asset holding vehicles exist with no third party involvement.

(iv)  Obligations on directors, trustees, and company and trust service providers.

   Measures should be in place to ensure that directors and trustees fulfil their "due diligence" obligations effectively, and to prevent nominees from assigning their responsibilities to others through general powers of attorney, and being used as a cover for criminal activities and regulatory breaches. More generally, those who provide corporate and trust services should be licensed, and subject to effective regulation. The "four eyes" principle should apply. The codes which apply to company and trust managers should be complementary, for example to avoid a situation in which inter-linking ownership of company and trust vehicles can be used to obscure beneficial ownership. OT authorities should be able to identify the true directors and owners of a company, and the settlors, beneficiaries, trustees, protectors, and custodians of a trust. The rules, regulations, and laws relating to insolvency and bankruptcy should also be examined by the Review, to ensure that these may not be abused, eg for the purpose of defrauding shareholders.

(v)  Investigative and enforcement powers.

   OT authorities should be able to apply full investigative powers to those (eg directors, beneficial owners, settlors, beneficiaries, trustees, nominees) who are suspected of criminal activity. This extends to applying the compulsory powers referred to in the paper on 'International Co-operation'. OT authorities should be able to identify the links which may exist between companies and trusts. OT authorities should launch appropriate investigations in the face of bankruptcy and insolvency. More generally, the regulation of company and trust service providers and formation agents needs to be accompanied by effective and independent enforcement powers, including the power to monitor and supervise licensed formation agents and service providers, to inspect their activities, to investigate potential breaches of rules, regulations, and laws, and to take appropriate enforcement action. The latter would include the ability and willingness to take disciplinary action (eg remove licences) as well as to pursue civil and criminal sanctions.

(vi)  Removal of impediments to asset tracing and seizure.

   Trust and company arrangements should not be able to be used to frustrate the due process of law in attempts to trace and seize assets.

INTRODUCTION

1.  The White Paper on Britain and the Overseas Territories explains that one of the "key components of the regulatory package we wish to see in place by the end of 1999" is "the establishment of independent regulatory authorities meeting accepted international standards". The Financial regulation checklist appended to the White Paper provides further detail on what this amounts to.

2.  Four publicly available papers provide more specific details on what the international community expects from a regulatory authority. These documents are (i) "Objectives and Principles of Securities Regulation" by the International Organisation of Securities Commissions; (ii) "Core Principles for Effective Banking Supervision" by the Basle Committee on Banking Supervision; (ii) "The Supervision of Cross-Border Banking" by the Basle Committee on Banking Supervision and the Offshore Group of Banking Supervisors; (iv) "Insurance Principles, Standards and Guidance Papers" by the International Association of Insurance Supervisors.

KEY FEATURES

(i)  Independence

3.  Independence is required in order to generate confidence, in particular that all market participants will be treated objectively and fairly, and that rules and regulations will be applied uniformly in such a way as to protect investors and promote orderly market activity. These objectives will not be satisfied unless the regulatory authority is clearly seen to act independently, and to have sole responsibility for regulating market activity.

4.  The concept of independence does not imply that regulatory authorities are unaccountable. Instead, it implies that their day to day operations should be free from political or commercial control and influence. These executive operations include all the regulator's key functions, such as (a) deciding to issue, suspend, and withdraw licences; (b) supervising and inspecting the activities of licence holders, including issuing rules and regulations; (c) undertaking investigations; (d) taking enforcement action, and; (e) co-operating with overseas authorities. The regulatory authority should have the necessary powers and ability to regulate all licensed activity.

5.  Proper independence requires the regulatory authority to exist as a stand-alone body, rather than as eg a separate unit within the Finance Ministry. Independent regulatory authorities are typically established by statute, which sets out the authority's powers and responsibilities. Those working in the authority, including senior management, should not have any external commercial or political interests or responsibilities (including unpaid directorships). The regulatory authority should not be required to secure OT government approval before exercising its executive powers.

6.  Independence extends to the authority's functions. The regulatory authority should not be charged with any political or commercial responsibilities. In particular, the authority should not seek to market its jurisdiction as a place for business to locate. All such hard selling and marketing should be undertaken by a separate body which is not connected in any way with the regulatory authority (again, members of staff should not work in both bodies). Such separate promotional bodies should not be funded by the regulatory authority. Essentially, the job of selling the merits of doing business in a particular OT should be left either to OT governments or to the private sector. It would, however, be open to the regulatory authority to provide information about the regulatory regime in the jurisdiction to potential inward investors.

7.  Independence extends to the way in which the authority is resourced. Regulatory authorities should be self-supporting and have their own source of income, independent from Government control. This is often raised through licence fees or another form of industry levy. Where these fees currently account for a large proportion of OT government income, the authority would return any excess income to the government.

8.  Independence does not imply isolation. The regulatory authority should consult both the industry and the OT government before seeking to make any changes to broad regulatory policy, and before seeking to make changes which have national policy implications, or which have significant implications for the industry. These implications can properly include considerations of internal and external competitiveness, within the parameters of relevant international standards.

(ii)  Accountability

9.  Independent regulatory authorities are subject to a number of checks and balances, which in turn ensure that they are held accountable for their actions. In particular;

  (a)  Statutory objectives. The objectives of the authority should be laid down by statute drawn up by the OT Government. These objectives should reflect the need to satisfy internationally accepted standards of regulation.


  (b)  Appointments. The authority should operate under a properly constituted board or Commission, which holds a mix of relevant expertise. All board/Commission members should be appointed on the basis of that expertise by the OT Government, or by the Governor in consultation with the OT Government (eg where the Governor retains responsibility for the offshore sector). All key policy decisions should be approved by the board.


  (c)  Legislation. Legislation covering financial regulation as a whole will often need to be amended or introduced in order to make any significant changes to the regulatory regime. Regulatory authorities do not normally have the power to make such legislation, and will need the support of those who do if significant changes are to be made to the regulatory regime.


  (d)  Annual report. The authority should produce an annual report available to the public explaining its operations over the past year, how its objectives have been tackled, how resources have been allocated, and how it intends to tackle its objectives in future. This would include publishing a set of audited accounts and possibly a Statement of Principles. The annual report should identify where problems have been encountered in meeting international standards, and how the authority intends to deal with these problems. OT Governments should question the authority in relation to its annual report.

(iii)  Functions and powers

10.  The documents mentioned in paragraph 2 provide full detail on the types of function expected of a regulatory authority. For the purposes of this paper, it is worth noting simply that the regulatory authority should have sole responsibility and powers in the following areas. These functions relate to the regulation of activity;

  (a)  Licensing. The regulatory authority should have sole responsibility for issuing, suspending, and withdrawing licences. This extends to having the powers and ability to investigate whether persons are 'fit and proper' to work for a licensed firm.


  (b)  Determining how licensed firms and persons should conduct business. The regulatory authority should have sole responsibility for setting conduct of business rules and regulations, and providing guidance for market practitioners. Where legislation is required, the authority should be able to make proposals to OT governments.


  (c)  Supervising and monitoring licensed activity. The regulatory authority should monitor all licensed activity. This would involve establishing regular (eg quarterly) reporting systems plus a programme of regular and 'surprise' inspections. The regulatory authority should not require the prior approval of any external body before conducting such inspections.


  (d)  Investigating. The regulatory authority should conduct in-depth investigations into suspected breaches of rules, regulations, and laws. The regulatory authority should have the power to compel the production of information from both licensed and unlicensed firms and persons, in the ways outlined in the paper on 'International Co-operation'. In particular, the regulatory authority should not pursue criminal investigations outside the regulatory function - the law enforcement authorities should be responsible for leading those investigations.


  (e)  Taking enforcement action. The regulatory authority should have the powers to take appropriate enforcement action in response to breaches of rules, regulations, and laws. This would include the ability to suspend and withdraw licences, the ability to issue directions, and the ability to levy fines. Where criminal activity is encountered, lead responsibility for taking enforcement action would normally fall to the law enforcement authorities in conjunction with the prosecuting authorities.


  (f)  Co-operating with other authorities. Where serious breaches are encountered, the regulatory authority would be expected to co-operate fully with other authorities within the OT, such as prosecuting and law enforcement authorities. This would essentially involve the regulatory authority handing over information it had obtained before it became clear that criminal activity was at hand, rather than the regulatory authority undertaking any criminal investigations. OT authorities should also co-operate fully with authorities based overseas, in the ways outlined in the paper on 'International Co-operation'.

(iv)  Resources

11.  The regulatory authority should be properly resourced in order to meet these responsibilities effectively, and a certain critical mass is required. This includes having access to legal and accountancy advice from sources which do not suffer from a conflict of interest. Regulatory authorities should have their own source of stable ring-fenced income, independent from Government or other political control and influence. This income is often raised from the industry in some way.

12.  As stated in the paper 'The Supervision of the Banking, Insurance, and Securities Sectors', resources should be allocated 'in line with the structure, scale, and complexity of activity. The funding of the regulatory regime should not be based on the direct benefit derived by the OT Government from the financial services sector. The price to pay must be what it takes to deliver an internationally acceptable standard of supervision'.

(v)  Liabilities

13.  Regulatory authorities are normally subject to statutory immunity from prosecution, in order to allow them to conduct their regulatory functions more effectively. Other jurisdictions are more likely to recognise this immunity if the regulatory authority matches up to international standards, in the ways outlined above. The converse is also true.

14.  Properly resourced regulatory authorities which perform their functions in the ways envisaged by the documents mentioned in paragraph 2 are also much less likely to get into the sorts of situation where their actions might be subject to legal challenge. For example, the regulatory authority should be able to demonstrate that any problems did not arise as a result of substandard regulation.

INTRODUCTION

1.  By their very nature, offshore centres conduct business which is linked with that in other financial centres. For this reason, it is important that offshore centres cooperate fully with requests for assistance from authorities in other jurisdictions. This includes both regulatory and law enforcement authorities. The types of assistance referred to in this paper do not include co-operation relating to fiscal matters.

2.  The White Paper on Britain and the Overseas Territories explains that one of "the key components of the regulatory package we wish to see in place by the end of 1999" is "powers to ensure that, whatever the secrecy laws, regulators and law enforcement in those Overseas Territories with financial sectors can cooperate properly with their overseas counterparts, including on investigation and enforcement matters".

3.  Assistance should extend to;

  (i)  Regulatory authorities sharing confidential regulatory information held on file or obtainable from licensed bodies.


  (ii)  Regulatory authorities obtaining information by compulsion from unlicensed bodies, and obtaining client information by compulsion from licensed bodies (where clients refuse to disclose this information voluntarily).


  (iii)  All such exchanges of information between regulatory authorities to take place under cover of a bilateral Memorandum of Understanding signed by each party, setting out the terms and conditions of assistance, including that the confidentiality of information provided must be safeguarded.


  (iv)  Law enforcement authorities providing assistance to their foreign counterparts covering all financial crimes (not just those related to money laundering or drugs-related offences), extending to investigative assistance before court proceedings have been issued, and providing for evidence to be obtained on their behalf.


(v)  OT regulatory authorities allowing information disclosed to a foreign regulatory authority to be disclosed in turn by them to a foreign law enforcement authority, but only with the OT's prior consent, which may extend to placing conditions on how that information might be used.

GATEWAYS: A PRECONDITION FOR INFORMATION EXCHANGE

4.  Where confidential information is exchanged with a foreign authority, or between different authorities within the same jurisdiction, confidentiality should be safeguarded. Confidential information should only be exchanged where provided for in law. Confidential information should only be passed to bona fide authorities which can safeguard its confidentiality, and these safeguards should be established in law. Similarly, legislation in Overseas Territories should provide OT authorities with the power to safeguard the confidentiality of information they may have received from foreign authorities.

5.  All Overseas Territories should have in place statutory 'gateways' which enable confidential information to be exchanged with foreign authorities. This would include all forms of information of interest to the authorities, including information relating to individuals, bank accounts, trusts, and companies. 'Gateways' legislation should override any secrecy and confidentiality provisions in OT law, to the extent that it should allow confidential information from all sources to be passed to a foreign authority, as long as that authority could in turn safeguard its confidentiality.

6.  It is possible that foreign regulatory authorities might be compelled by Court order in their country to disclose confidential information obtained from an OT authority. In these circumstances, the OT authority's prior consent should be sought before any confidential information is disclosed to the Court. If such consent is not forthcoming, the Court should be made aware by the foreign authority that any compulsion to disclose may damage relations between regulatory authorities, to the detriment of future regulatory co-operation, and that this would not be in the public interest.

CO-OPERATION BETWEEN REGULATORY AUTHORITIES

(i) Types of co-operation

7.  Gateways per se do not provide for adequate co-operation. They simply allow confidential information to be exchanged. Gateways need to be supplemented by powers which enable OT authorities to obtain information (either for their own purposes, or on behalf of foreign authorities), and subsequently to exchange this with foreign authorities.

(i)  Supervisory information

8.  OT regulatory authorities should be able to obtain, in the course of their normal duties, information relating to the supervision of licensed firms and persons. OT regulatory authorities should be able to exchange this information with their foreign counterparts.

(ii)  Voluntary testimony

9.  Representatives from a foreign regulatory authority should be allowed to visit an OT with the consent of the OT regulator, and take testimony from individuals and firms who voluntarily consent to being questioned by a foreign regulatory authority. Before approving a request to take voluntary testimony, the OT regulator should be satisfied (i) that the request comes from a bona fide foreign regulatory authority, and relates to their regulatory responsibilities, (ii) that the request relates to a specific line of investigation, and (iii) that the confidentiality of any information provided will be safeguarded.

(iii)  'Compulsory' powers

10.  These are powers enabling an OT regulatory authority to compel the production of information from both regulated and unregulated firms and persons. OT regulators should be able to exercise these powers in order to satisfy a request for assistance made by a foreign regulatory authority, even where an offence has not been committed in the OT. Following discussions at the past three Attorney Generals' Conferences, a draft Model Ordinance providing for compulsory powers is now well developed (attached at Annex B).

11.  Annex A provides more details on how these powers would operate in practice. Because individuals and firms are compelled to provide information, there are tight constraints and conditions on the use of these powers, and OT regulatory authorities would have discretion in deciding whether to use them on behalf of an overseas authority. It is worth noting here that;

(i)  Compulsory powers should only be used in certain specific circumstances. Incoming requests for information, which will require the use of OT compulsory powers to obtain it, should be vetted by the regulatory authority's lawyers (or an OT Magistrate/Court) within a specific time frame, in order to verify that compulsory powers may be used. Information obtained by compulsion may also be vetted by the regulatory authority's lawyers before final disclosure to a foreign authority;


(ii)  Information obtained by compulsion should not be used as evidence against the provider in any subsequent criminal proceedings. The OTs will wish to decide whether to preclude it being used as criminal evidence against third parties;


(iii)  Compulsory powers are used only at the very early stages of an investigation, when the investigator does not know whether criminal activity is at hand. Compulsory powers should no longer be used if/when it becomes clear that only criminal activity is involved, and hence that the investigation should be taken forward by the law enforcement authorities (once a suitable request for assistance has been made through other channels);


(iv)  Strict terms and conditions on the use of compulsory powers should ensure that they cannot be abused to go on 'fishing trips', that the Overseas Territories retain discretion over their usage, and that they should not be used when it would be more appropriate to go though other channels (eg Mutual Legal Assistance Treaties (MLATs)).

12.  Subject to these conditions, information obtained by compulsion may be disclosed to the law enforcement authorities, who as a result may seek to obtain criminal evidence (via other channels). Information obtained by compulsion may help indicate where criminal evidence may be obtained, ie may lay the ground for further requests for assistance via other channels by foreign law enforcement authorities.

13.  In summary, these powers are used to uncover facts during the very early stages of an investigation, before it is clear what has taken place, in order to gain a picture of what happened. When it has become clear what happened, the authorities may choose whether to take no action, whether to take disciplinary action, whether to consider civil proceedings, or whether to consider criminal proceedings. Criminal evidence would need to be obtained via other channels (ie agreements between law enforcement authorities) in order to pursue a criminal prosecution. In the UK's experience, compulsory powers are rarely used on behalf of a foreign authority (about ten times per year).

(ii)  Memoranda of Understanding

14.  It is common practice between regulatory authorities for the terms and conditions of information exchange and investigative assistance to be set out in a Memorandum of Understanding signed between the authorities which will be co-operating with each other. Memoranda of Understanding usually require requests for assistance to be framed in terms of the specific activities which are being investigated by the foreign jurisdiction - eg they can prevent authorities going on 'fishing trips' in another jurisdiction.

15.  Memoranda of Understanding should only provide for the exchange of confidential information when the foreign regulatory authority has demonstrated that they will be able to safeguard the confidentiality of information provided by the OT regulator. Memoranda of Understanding should specify explicitly how confidentiality will be safeguarded, and should set out the terms and conditions of onward disclosure, eg to a foreign law enforcement authority. It is common to allow a foreign regulatory authority to disclose information obtained (eg from an OT regulator) to another foreign authority, but only with the consent of the OT regulator in this example. Memoranda of Understanding should specify what terms and conditions apply to the use of compulsory powers, and this may include specifying how information provided may be used.

16.  Memoranda of Understanding are not legally binding documents, nor are they any form of legislation. They are simply an agreement between two regulatory authorities. For this reason, they tend to be tailored to the degree and nature of assistance available in each jurisdiction. Separate MoUs tend to apply to each sector (ie banking, securities, and insurance), although eg an MoU in the securities field would still provide for the exchange of information on bank account details (where this was connected to a breach of regulations or laws concerning securities).

17.  Further precise details on international standards relating to Memoranda of Understanding are set out in publications by the Basle Committee, IOSCO, and the IAIS. The IAIS paper 'Insurance Principles, Standards, and Guidance Papers' includes in an Annex a model MoU in the field of insurance. IOSCO have published separate guidance titled 'Principles for Memoranda of Understanding'.

18.  An Overseas Territory regulatory authority may still exchange information with a foreign authority if a Memorandum of Understanding is not in place. The terms and conditions of such exchange would need to be agreed on a case by case basis. Memoranda of Understanding essentially provide a framework which allows information to be exchanged without the terms and conditions of such exchange having to be negotiated on each separate occasion. Memoranda of Understanding are therefore more relevant between jurisdictions which exchange regulatory information regularly.

CO-OPERATION BETWEEN LAW ENFORCEMENT AUTHORITIES

(i)  Types of co-operation

19.  Assistance should be available to foreign law enforcement authorities in relation to all forms of financial crime, rather than just drugs-related offences or money laundering. This would include fraud, insider-dealing, and market manipulation. An OT should be able to provide assistance even though the activity under investigation might not be a criminal offence in that OT. In these circumstances, OT law enforcement authorities will wish to consider whether there is a good reason to provide assistance, or whether it would be in the public interest not to provide assistance.

20.  OT law enforcement authorities should be able to provide investigative assistance, and should be able to obtain evidence on behalf of their foreign counterparts. As with regulatory co-operation, assistance should be provided in response to specific requests. Investigative assistance should be made available before court proceedings have been issued, and ideally without the prior need for a Treaty to exist between the countries in question.

21.  These objectives would be satisfied if the Overseas Territories were to adopt measures equivalent to those in the UK's Criminal Justice (International Co-operation) Act 1990, which provides for UK authorities to co-operate with judicial and prosecuting authorities in other countries in criminal proceedings and investigations. Many OTs have already introduced equivalent legislation. It is for OTs to decide whether they wish to satisfy the objectives specified here by adopting equivalent legislation or by choosing other means. It is worth noting here that assistance should be available to all bona fide foreign law enforcement authorities with genuine requests.

22.  It is not common for Memoranda of Understanding to be signed between law enforcement authorities, if only because the types of co-operation required are often provided for by international Treaties. Nevertheless, there is nothing to prevent Memoranda of Understanding from being adopted, especially if OT law enforcement authorities wish to adopt bilateral agreements specifying exactly how assistance might be provided.

23.  Memoranda of Understanding are generally easier and quicker to devise and modify than bilateral Treaties. For this reason, an OT is unlikely to be able to co-operate effectively in the ways envisaged with a wide range of countries over a wide range of areas if it seeks to negotiate, sign, and manage a set of bilateral Treaties with all foreign law enforcement authorities which seek assistance.

(ii)  Seizing assets

24.  International co-operation should extend to tracing, freezing, and confiscating the proceeds of crime, and their value, on behalf of overseas authorities. Powers to trace assets for authorities in other jurisdictions should be exercisable regardless of banking secrecy and, preferably, on an agency to agency basis as well as through central authority channels. Powers to restrain and confiscate assets which represent the proceeds of crime should be on an all crimes basis, as envisaged in the 1990 Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds from Crime.

25.  No assets should be immune from seizure, either by virtue of OT laws or other arrangements providing for asset protection, or by virtue of arrangements (eg in trust instruments) which require assets to 'flee' to another jurisdiction when there is a chance that they might be seized. These arrangements for asset seizure should apply to all financial crimes, ie not just drugs-related crimes or money-laundering, even though a crime may not have been committed in an OT.

CO-OPERATION BETWEEN DIFFERENT TYPES OF AUTHORITY

26.  The G7 have recently adopted a set of ten principles concerning the extent to which regulatory and law enforcement authorities should work with each other, including when different types of authority are based in different jurisdictions. In general, different types of authority (regulatory and law enforcement) should be able to exchange information with each other and to provide each other with investigative assistance, subject to specific terms and conditions set out in Memoranda of Understanding. This does not imply that regulatory authorities should take on the role of 'international tax policemen'.

27.   In practice, an OT regulatory authority would assist a foreign law enforcement authority by passing information to a foreign regulatory authority, and allowing them (with prior consent) to disclose this to a law enforcement authority in their jurisdiction. Domestic regulatory authorities do not tend to deal directly with foreign law enforcement authorities. If this arrangement is to work effectively, there need to be effective gateways and working relations between regulatory and law enforcement authorities in the same jurisdiction.

28.  This should not, however, prevent OT regulatory authorities from dealing directly with foreign regulatory authorities which also happen to possess certain law enforcement and prosecuting responsibilities. In this instance, the Memorandum of Understanding between respective regulatory authorities would need to specify clearly how any information disclosed might be used.

ANNEX A:  COMPULSORY POWERS (OR INVESTIGATIVE POWERS)

A1.  Compulsory powers are powers enabling an OT regulatory authority to compel the production of information from both regulated and unregulated firms and persons. In the context of regulatory co-operation, OT regulators should be able to exercise these powers in order to satisfy a request for assistance made by a foreign regulatory authority, even where an offence has not been committed in the OT.

A2.  Compulsory powers may be used to obtain information from both licensed and unlicensed firms and persons. This includes ordinary members of the public as well as all financial institutions, companies, and trusts. Compulsory powers may be used to obtain all types of information, including details of beneficial ownership, personal bank details, and personal telephone records.

A3.  Compulsory powers override all other secrecy and confidentiality provisions in law - ie they may be used to obtain information from bank accounts, companies, and trusts, even if other laws declare that all such information should not be disclosed. Confidential information would only be disclosed to a foreign regulatory authority if they could safeguard its confidentiality.

Use of compulsory powers

A4.  These wide-ranging powers are used at the very early stages of an investigation to gain an understanding of what happened - ie which activities took place where, and who was involved with what. Compulsory powers are used infrequently, as regulatory authorities normally have a clear understanding of what happened, especially where 'know your customer' guidance is actively implemented and licensed firms and persons are willing to assist the authorities.

A5.  Compulsory powers are used to undertake fact finding investigations, rather than to obtain criminal evidence. Information obtained by compulsion may be used by the regulator to take disciplinary or civil action. Because information is obtained by compulsion, it cannot be used as evidence in criminal proceedings against the provider.

A6.  Furthermore, the 'rules of evidence' which exist in most countries normally prescribe how evidence may be obtained, and this tends to involve questioning under police caution: ie the very nature of compulsory powers normally prevents any information obtained from being used as evidence in criminal proceedings. OT regulatory authorities may in addition wish to specify in Memoranda of Understanding signed with foreign counterparts that information obtained by compulsion cannot be used as evidence in criminal proceedings.

A7.  Compulsory powers should not be used to provide assistance to a foreign regulatory authority if it would be more appropriate to use other channels (eg Mutual Legal Assistance Treaties (MLATs)). It is for the requested authority to determine the appropriate channels in line with commitments entered into in any MoUs or Treaties. In practice, compulsory powers should only be used when it remains possible that civil action may be taken as a result of the investigation at hand. As soon as it becomes clear during the investigation that the authorities are faced with only criminal activity, compulsory powers should no be longer used. At this stage, the law enforcement authorities should be left to pursue a criminal investigation (and overseas law enforcement authorities should seek assistance via other channels).

A8.  Within this framework, compulsory powers can still be used to assist law enforcement authorities, but only at the very early stages of an inquiry, when it remains unclear what happened, and hence whether civil or criminal sanctions (or none) would be appropriate. Information obtained by compulsion essentially lays the ground for criminal investigations undertaken by law enforcement authorities, should it transpire that criminal activity is at hand. Compulsory powers would be used before a foreign law enforcement authority is in a position to make a request for assistance from an OT law enforcement authority (eg via MLAT).

A9.  In this limited sense, the use of compulsory powers may lead to criminal prosecutions. In practice, an OT regulatory authority would not deal directly with a foreign law enforcement authority. Instead, OT regulatory authorities would deal with their foreign counterparts, and then allow (with prior consent) their foreign counterparts to disclose information received to foreign law enforcement authorities.

Who investigates?

A10.  Investigations are usually undertaken by the domestic regulatory authority on behalf of the overseas regulator. It is normal for these powers to be vested with the head of the regulatory authority, although an alternative may be to vest them with the Governor or Minister of Finance (depending on who is ultimately responsible for regulation of the offshore sector).

A11.  Whoever holds these powers may authorise an officer of his or any other competent person to exercise them. If an OT so wishes, it is possible for an OT regulator to allow an overseas regulator to operate as an authorised agent of theirs and use these powers directly. The decision on who to appoint is normally made on a case by case basis.

A12.  Payment of the costs of exercising these powers can be made a condition for providing assistance. This normally happens when the balance of requests tends to be one-sided, rather than domestic and overseas authorities seeking broadly equivalent assistance from each other.

Constraints and discretion in exercising compulsory powers

A13.  The exercise of investigative powers after a request is not inevitable, nor is the disclosure of information obtained by their exercise. The powers can only be used to assist an overseas authority having specified regulatory functions, and then only for the purposes of those functions. Assistance should be provided when there is a good reason to do so (this hurdle is normally relatively easy to satisfy).

A14.  The information which is obtained through the exercise of investigative powers can be disclosed only if a gateway exists. If there are concerns about how the confidentiality of the information provided will be safeguarded once in the hands of the overseas regulator, or if, as a result of the investigation, doubts have arisen about the authenticity of the overseas regulator's claim to need the information for its regulatory functions, the OT regulatory authority should discuss its concerns with the foreign regulatory authority before disclosing any information.

A15.  Assistance should be provided in response to individual requests, which should specify what information is sought and the purpose for which it is sought, including details of the laws, rules or regulations which it is alleged have been breached and of the conduct which gives rise to the breach. The draft model OT Compulsory Powers Ordinance (attached) requires that the following factors be taken into account when deciding whether to exercise compulsory powers on behalf of a foreign authority;

Whether corresponding assistance would be given to the OT;


Whether the inquiries relate to a breach of law which has no parallel in the OT (although assistance may still be provided in these circumstances, if there is a good reason to do so);


The seriousness of the matter in question, the importance to the investigation of exercising compulsory powers, and whether assistance could be obtained by other means (eg MLATs);


Whether it is in the public interest to provide assistance.

A16.  Each request for assistance should be vetted by the OT regulatory authority to ensure that it is made by a foreign authority which has the necessary functions and that the request is made for the purpose of its regulatory functions. The requesting authority must demonstrate that a substantial line of enquiry is being pursued - its request should not be a "fishing trip" for information. In practice, the OT regulatory authority would also vet all information obtained by compulsion, to ensure that information disclosed to a foreign authority relates to the specific request made. This vetting would normally be undertaken by the OT regulatory authority's legal advisers. The draft model OT Compulsory Powers Ordinance also provides for an OT Magistrate or Court to approve the use of compulsion, within a short time frame. Under the draft model OT Compulsory Powers Ordinance, it is a criminal offence not to provide information under the exercise of compulsory powers.

ANNEX B:  DRAFT COMPULSORY POWERS MODEL ORDINANCE

A Bill entitled:

An Ordinance to make provision for assisting overseas regulatory authorities to obtain information:

ENACTED BY the Legislature of [the Caribbean Overseas Territory] as follows:

1.  This Ordinance may be cited as the ******** Ordinance, 1998.

2.  In this Ordinance:

    "competent authority" means any authority specified in [the Schedule to this Ordinance] [ an Order made by the Governor];

    ["Director" means the Director of Financial Services;]

    "foreign regulatory authority" means an authority which, in a country or territory outside [the Caribbean Overseas Territory], exercises functions corresponding to any functions of a competent authority under any Ordinance, or exercises any function [prescribed for the purposes of this section by an Order made by the Governor, being a function] which in the opinion of the Governor relates to companies or financial services;

    "Governor" means the Governor in Council;

    "regulatory functions" means functions of a competent authority under any Ordinance or any functions corresponding to such functions, and any other functions relating to companies or financial services, not being the functions of assessing, imposing or collecting taxes.

3.  (1)  Subject to subsection (2), the powers conferred by section 4 are exercisable by the [Director] for the purpose of assisting a foreign regulatory authority which has requested assistance in connection with inquiries being carried out by it or on its behalf.

(2) The [Director] shall not exercise the powers conferred by section 4 unless he is satisfied that the assistance requested by the foreign regulatory authority is for the purposes of its regulatory functions.

[(2A)  The [Director] may decline to exercise the powers conferred by section 4 unless he is satisfied that information furnished pursuant to the exercise of those powers will not be used in any criminal proceedings against the person furnishing it (other than proceedings for an offence under section 7 or for an offence of perjury, or for any like offence).]

(3)  In deciding whether to exercise those powers, the [Director] may take into account, in particular:

    (a)  whether corresponding assistance would be given in the relevant country or territory to an authority exercising regulatory functions in [the Caribbean Overseas Territory];


    (b)  whether the inquiries relate to the possible breach of a law, or other requirement, which has no close parallel in [the Caribbean Overseas Territory] or involves the assertion of a jurisdiction not recognised by the [the Caribbean Overseas Territory];


    (c)  the nature and seriousness of the matter to which the inquiries relate, the importance to the inquiries of the information sought in [the Caribbean Overseas Territory] and whether the assistance could be obtained by other means;


    (d)  whether it is otherwise appropriate in the public interest to give the assistance sought.

[(4)  For the purposes of subsection (3)(a), the [Director] may require the foreign regulatory authority requesting assistance to give a written undertaking, in such form as the [Director] may determine, to provide corresponding assistance to an authority exercising regulatory functions in [the Caribbean Overseas Territory].

(5)  Where a foreign regulatory authority fails to comply with a requirement made under subsection (4), the [Director] may refuse to provide the assistance sought.]

(6)   The [Director] may decline to exercise the powers conferred by section 4 unless the foreign regulatory authority undertakes to make such contributions towards the costs of their exercise as the [Director] considers appropriate.

(7)  In subsection (3)(a), "relevant country or territory" means the country or territory from which the request for assistance is made.

4.  (1)  Where in accordance with section 3 the [Director] is satisfied that assistance should be provided pursuant to a request by a foreign regulatory authority, he may in writing direct any person -

    (a)  to furnish him with information with respect to any matter relevant to the inquiries to which the request relates;


    (b)  to produce any documents relevant to those inquiries; or


    (c)  to give him such assistance in connection with those inquiries as the [Director] may specify.

[(3) The [Director] may examine a person on oath and may administer an oath accordingly.]

[(3A)  Where a person fails to comply with a direction given under subsection (1) within three days from the date of the direction or such longer period as the [Director] may permit, the [Director] may apply to [a Magistrate] [the court] for an order requiring the person to comply with the direction.

(3B)  Where pursuant to a direction given under subsection (1) the [Director] considers it necessary to examine a person on oath, [the Director] may apply to [a Magistrate] [the court] to have that person examined by [the Magistrate] [the court] and the results thereof transmitted to the [Director].

(3C)  [A Magistrate] [the court] shall process an application under subsection (3A) or (3B)  within seven days and, in the case of subsection (3B), [he] [it] shall transmit the results of the examination to the [Director] within a reasonable period not exceeding fourteen days.]

   (4)  Where documents are produced pursuant to this section the [Director] may take copies or extracts from them.

(5)  A person shall not under this section be required to disclose information or produce a document which he would be entitled to refuse to disclose or produce on grounds of legal professional privilege in proceedings, except that a [lawyer] [barrister or solicitor] may be required to furnish the name and address of his client.

(6)  Where a person claims a lien on a document, its production under this section is without prejudice to his lien.

(7)  In this section "documents" includes information recorded in any form; and, in relation to information recorded otherwise than in legible form, the power to require its production includes power to require the production of a copy of it in legible form.

5.  (1)  The [Director] may:

      (a)  [seek the assistance of the Commissioner of Police in the exercise of his powers under this Ordinance; or]

      (b)  authorise an officer of his or any other competent person to exercise any of those powers.

(2) No such assistance shall be sought or authority granted except for the purpose of investigating -

  (a)    the affairs, or any aspect of the affairs, of a person specified by the [Director]; or,


   (b)    a subject matter specified by the [Director];

being a person who, or a subject matter which, is the subject of the inquiries being carried out by or on behalf of the foreign regulatory authority.

(3)  No person shall be bound to comply with a requirement imposed by a person exercising powers by virtue of an authority granted under this section unless he has, if required, produced evidence of his authority.

(4)  Where the [Director] seeks assistance or grants an authority under subsection (1), the assistance or authority shall be provided or executed in such manner as the Director may determine; and where the Director grants such an authority to a person other than one of his officers, that person shall make a report to the [Director] in such manner as he may require on the exercise of that authority and the results of exercising it.

6.  (1)  No information which

      (a)  is supplied by a foreign regulatory authority in connection with a request for assistance, or


      (b)  is obtained by virtue of the exercise of powers under this Ordinance, shall, except as permitted by subsection (2), be disclosed for any purpose by the primary recipient, or by any person obtaining the information directly or indirectly from him, without the consent of the person from whom the primary recipient obtained the information and, if different, the person to whom it relates.

    (2)  Information to which subsection (1) applies may be disclosed:

  (a)  to any person with a view to the institution of, or otherwise for the purpose of:

      (i)  criminal proceedings;


      (ii)  disciplinary proceedings relating to the exercise by a barrister, solicitor, auditor, accountant, valuer or actuary of his professional duties;


      (iii)  disciplinary proceedings relating to the discharge by a public [servant] [officer] of his duties;


(b)  for the purpose of carrying out any duty imposed under any law in force in [the Caribbean Overseas Territory] or by any international agreement to which [the Caribbean Overseas Territory] is a party;


    [(c)  on the order of a court of competent jurisdiction for the purposes of any criminal or civil proceedings;]


    (d)  for the purpose of enabling or assisting a competent authority to discharge any of its functions under any Ordinance;


    (e)  to the [Governor/Attorney General/public officer approved by the Director] [in the public interest];


    (f)  if the information is or has been made available to the public from other sources;


    (g)  in the form of a summary or collection of information framed in such a way as not to enable the identity of any person to whom the information relates to be ascertained;


    (h)  to a foreign regulatory authority for the purpose of its regulatory functions.


    (3)  In subsection (1) "the primary recipient" means, as the case may be -


    (a)  the [Director];


    (b)  any person authorised under section 5; or


  [(c)  the Commissioner of Police or any of his officers.]

7.  (1)  A person who

      (a)  without reasonable excuse, refuses or fails to comply with any [direction given by the [Director]] [order of [a Magistrate] [the court]] under section 3;


      (b)  intentionally furnishes false information in purported compliance with any such [direction] [order];


      (c)  with intent to avoid the provision of this Ordinance, destroys, mutilates, defaces, secretes or removes any document;


      (d)  otherwise wilfully obstructs any inquiry to which a request from a foreign regulatory authority relates; or


      (e)  contravenes section 6;




    commits an offence.


  (2)  A person who commits an offence under this section is liable .....

8.  No suit shall lie against the [Director] or any person acting under his authority for anything done by him, in good faith, in the exercise of any power or the performance of any function under this Ordinance.

9.  This Ordinance shall come into [force] [operation] on such date as the Governor may by proclamation appoint.

INTRODUCTION

1.  Money laundering is the process by which the proceeds of crime are converted into assets which appear to have a legitimate origin, so that they can be retained permanently or recycled into further criminal enterprises. It is, in effect, the interface between the illegal business sector and the financial sector. Estimates of the size of the phenomenon are hard to come by, but it is generally agreed that it could be in the region of 5% of GDP of the average country.

2.   The activity is one of considerable concern for many reasons. If the proceeds of crime are allowed to be lodged unhindered in financial institutions, criminals can gain influence over the institutions and, perhaps eventually control them. Where criminal proceeds are used to buy legitimate businesses, competitors find themselves unable to compete and are driven out of business. Unchecked, money laundering can destabilise financial institutions, sectors and, in certain cases, entire economies. Economic crime can damage financial markets and, thus, the reputation and health of a nation as a whole. It is the concern generated by these implications that have galvanised the international community into making concerted efforts to tackle money laundering.

3.   These efforts are highlighted by the following initiatives:

* the 1988 UN Drugs Convention ­ requires parties to criminalise drug money laundering;

* the Financial Action Task Force (FATF) ­ set up in July 1989 by the G7 specifically to develop and promote policies to combat money laundering.

* the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime ­ November 1990;

* the EC Money Laundering Directive of June 1991 ­ requires Member States to prevent the use of their financial systems for money laundering;

* the Caribbean Financial Action Task Force (CFATF) ­ the first regional body to follow the FATF.

4.   The White Paper on Britain and the Overseas Territories (Partnership for Progress and Prosperity) noted that the Caribbean Overseas Territories are, in particular, a potential target for money launderers. The OTs should, therefore, have in place comprehensive measures to combat money laundering.

5.   The White Paper checklist acknowledged, however, that this is an area in which the OTs have already made good progress. Most have now introduced "all­crimes money laundering legislation". This legislation must, however, be enforced and reviewed regularly. To their credit, all of the OTs are members of the Caribbean Financial Action Task Force and either have, or will shortly undergo, mutual evaluations.

6.   The following guidance explains what HMG means by "comprehensive measures to combat money laundering".

INTERNATIONAL STANDARDS

The FATF 40 Recommendations:

7.   The 40 Recommendations set the basic framework for anti-money laundering efforts and are designed to have universal application. The principles cover the criminal justice system, law enforcement, the financial system and its regulation and international co-operation. The essential components of the 40 Recommendations are as follows:

* Each country should implement a general framework which ratifies the Vienna Convention, and increases multi­lateral co-operation on money laundering cases.

* Each country should criminalise money laundering in relation to serious offences, not merely drug money laundering.

* Countries should also put in place measures to enable the tracing, freezing and seizing of criminal assets and the ultimate confiscation thereof.

* The following should be required of all financial institutions, whether they be bank or non-bank institutions:

# customer identification ­ "know your customer"

# record keeping ­ 5 years

# special attention to complex/unusual/large transactions

# immunity from prosecution if report suspicion in good faith

# internal systems including training and designation of compliance officer

# application of these requirements to foreign branches

* Each country should improve spontaneous or "upon request" international information exchange relating to suspicious transactions. This requirement is subject to strict safeguards necessary to ensure consistency with national and international provisions on privacy and data protection.

* Different definitions and standards between jurisdictions should not affect the ability or willingness of countries to provide each other with mutual legal assistance.

* There should be procedures regarding the use of compulsory measures including the production of records by financial institutions.

OTHER RELEVANT STANDARDS

CFATF additional 19 Recommendations:

8.   In June 1990 representatives of Caribbean and Latin American States formulated a further 19 Recommendations specifically tailored to regional laws and circumstances. These acknowledged the need to devote adequate resources to this area, the need for competent authorities to specialise in it and that improvements would be ' required to legal systems to enhance the regulation and the role of the financial sector and to improve international co-operation. In particular the CFATF Recommendations urged members to:

* consider the practical evidentiary complications of limiting money laundering to only certain predicate crimes.

* criminalise conspiracy and/or aiding or abetting drug trafficking and money laundering offences.

* to consider making money laundering an offence both where the offender knew or ought to have known the origin of the funds.

* to make money laundering an offence no matter where the predicate offence took place.

* to acknowledge that the fact that a financial adviser is an attorney is insufficient reason to invoke attorney­client privilege.

EU Money Laundering Directive:

9.   Although this has no direct impact on the OTs, it is relevant in so far as it informs the UK law. The EU Money Laundering Directive of 10 June 1991 (91/308/EEC) requires Member States to prevent the use of their financial systems for money laundering. The EU suggests three main steps to combat money laundering: criminalise it; take measures to identify laundered proceeds with a view to confiscation; pass laws and establish systems to prevent the proceeds of crime being laundered in the first place.

10.   The Directive also sets out requirements to be placed on the credit and financial institutions (as defined) of the Member States' jurisdictions. This includes customer identification and retention of records, relating to identification and transactions, for a period of five years. The Directive goes on to require Member States to place a requirement on such institutions to inform the authorities about suspected money laundering activity.

The UK law and practice:

11.  The UK implemented the EU Directive by means of the Criminal Justice Act 1993, the Money Laundering Regulations 1993 and earlier legislation. The principal money laundering offences are set out in the Prevention of Terrorism (Temporary Provisions) Act 1989 and the Drug Trafficking Act 1994. The Criminal Justice Act 1988, as amended, contains the money laundering offences relating to the proceeds of crimes other than drug trafficking and terrorism. These are defined as all indictable offences, other than those covered by the 1989 and 1994 Acts, plus the summary offences set out in Schedule 4 to the 1988 Act. The latter include certain lucrative offences relating to sex establishments and the supply of unclassified videos.

12.   The principal money laundering offences have a dual purpose. Firstly, to criminalise and so suppress money laundering activity. Secondly, to encourage the reporting of suspicious transactions to the authorities. In this second respect, the offences help to protect the integrity of financial institutions by deterring criminals from lodging proceeds in them, and also help to provide the police with new investigative leads.

Criminal Justice Act 1988, as amended by the Criminal Justice Act 1993:

13.   The money laundering offences created by this legislation are as follows:

Assisting another to retain the proceeds of crime: to commit this offence, one must know or suspect that the person in question is or has been engaged in crime, or has benefited from it.

Acquiring, Possessing or using another's proceeds of crime: the offence only applies where the launderer acquires, possesses or uses the property for inadequate "consideration,' (payment). Thus, if one pays full value for the property one does not commit the offence. The provision of goods or services which are of assistance in criminal conduct is not regarded as "consideration".

Concealing another person's proceeds of crime: This includes concealing or disguising property; or converting or transferring property or removing it from the jurisdiction. Carrying out these activities must be for the purpose of assisting somebody to avoid prosecution for a relevant offence or the making of a confiscation order against him/her. Unlike the above offences, all that is required here is "reasonable grounds for suspicion". Thus the prosecution need only prove that the person laundering the proceeds should have suspected.

Laundering one's own proceeds: This includes the same activities as concealing another person's proceeds and one must conceal, disguise, convert, transfer or remove property from the jurisdiction for the purpose of avoiding one's own prosecution for a relevant offence or the making of a confiscation order against oneself.

14.  The penalties for all of the above offences are fourteen years imprisonment and an unlimited fine on indictment, and six months imprisonment and a fine not exceeding the statutory maximum on summary conviction (currently £5,000).

15.   The legislation also includes the following offences:

Tipping­off offences: These apply when a money laundering investigation is being, or is about to be, conducted, and where a suspicious transaction report has been made, or a suspicion of money laundering has been disclosed to the authorities. The offence can be committed where one knows or suspects that an investigation is being conducted, or is about to be, or a disclosure has been made.

16.   The penalties for tipping­off are five years imprisonment and an unlimited fine on indictment, and six months imprisonment and a fine not exceeding the statutory maximum on summary conviction.

The Money Laundering Regulations 1993:

17.   Another essential part of the UK's anti­money laundering defences are the Money Laundering Regulations. They require financial institutions to put in place systems to deter money laundering and to assist the authorities to detect money laundering activities. The Regulations apply to:

* all banks, building societies and other credit institutions,

* all individuals and firms authorised to conduct investment business under the Financial Services Act 1986,

* all insurance companies covered by the EC Life Directives, including the life business of Lloyds of London,

* all other undertakings carrying out any of the range of financial activities listed in the annex to the Second Banking Directive (89/646/EEC, SI 1992,3218). This includes bureaux de change and money transmission services.

18.   The Regulations establish criminal offences for those who fail to ensure adequate systems are in place and maintained. Thus, the Regulations require:

* procedures to ensure identification of customers, maintenance of records relating to identification and transactions, or such other procedures of internal control and communication as may be appropriate for the purposes of forestalling and preventing money laundering;

* appropriate measures to be taken from time to time to make employees who handle relevant financial business aware of the procedures and the money laundering statutes;

* provision of training for those employees from time to time in the recognition and handling of transactions which may be money laundering.

19.   Where an offence is committed by a body corporate, partnership or unincorporated association, the directors and managers and certain other people may be guilty of the offence as well. Penalties for contravention of the Regulations are two years imprisonment and an unlimited fine on indictment and a fine not exceeding the statutory maximum on summary conviction.

Money Laundering Guidance Notes:

20.   In addition to the above, the British Bankers Association have produced guidance notes for the industry in association with the Building Societies Association and the law enforcement authorities. Similar guidance notes have also been produced for the insurance and investment business sectors.

COMPLIANCE WITH THESE STANDARDS

21.   With regard to the OTs, we have encouraged the OTs to put in place measures equivalent to those in the UK. Most have now implemented the primary legislation. However, work on the essential supporting measures still needs to be completed.

Regulations:

22.   Many OTs have opted to implement voluntary codes of practice rather than an equivalent to the UK Money Laundering Regulations 1993 (the Regulations). To be effective these need to be placed on a statutory footing providing for criminal offences in the event that monitoring and reporting systems are not created and maintained.

23.   Effective operation of the anti­money laundering legislation relies on the vigilance of financial institutions and the reporting of suspicious transactions. While the requirement to put in place monitoring and reporting systems is voluntary, the risk of commercial interest frustrating the intent is concrete. Placing these requirements on a mandatory footing would enable the OTs to ensure that the supporting mechanisms for their money laundering defences could be enforced. It would also send a clear signal to the financial sector that "all money is not simply money", and that certain types of financial activity were unacceptable.

Resources and enforcement:

24.   It is clear from the above that the creation of anti-money laundering defences requires considerable input of resources on the part of the financial institutions. This, however, is only one part of the equation. There is little point in requiring the financial sector to report suspicious transactions if there is an inadequate ability on the part of law enforcement to respond. This means that OT Governments must devote considerable resources to ensuring that the law enforcement capacity for analysing suspicious transaction reports and, where appropriate, acting on them is sufficient. This will apply not only to reports submitted by institutions operating within the jurisdiction, but also to requests for assistance on money laundering investigations from foreign jurisdictions. It is, therefore, essential that the Financial Investigation and Intelligence Units in the OTs are adequately staffed with trained personnel capable of conducting financial investigations and analysis.

25.   In addition, it will also be necessary to ensure that the Attorney Generals' Chambers and the judiciary in each OT are appropriately resourced and trained to handle the types of cases which may result from enforcement of the money laundering laws. Again, this relates not merely to prosecutions of offences within the OTs, but also to provision of assistance to foreign jurisdictions in pursuance of the anti­money laundering legislation. Where appropriate, HMG is willing to provide assistance on a short term basis. However, it will be for the OTs to ensure that they budget appropriately for these responsibilities in the future.

International co-operation and confiscation:

26.   It goes without saying that a great deal of money laundering involves transactions spanning a number of jurisdictions. The more complex the transactions and the more jurisdictions involved, the harder it is for law enforcement to follow the money trail. The abolition of exchange controls in the late seventies and early eighties, and the rapid improvement in technology means that it is possible instantly to transfer money of any amount or denomination virtually anywhere in the world. Much criminal law is territorially based, and differs from jurisdiction to jurisdiction, so the investigation and prosecution of financial crime and money laundering are very dependent upon mutual legal assistance between states.

27.   The confiscation and money laundering legislation which the OTs have been enacting enables many of them to co­operate in international asset tracing investigations, and in the restraint and confiscation of the proceeds of drug trafficking and other crime. Given the percentage of financial business in the OTs which has its origins in other jurisdictions, it is vital that these provisions for international co­operation are fully implemented and, when implemented, operate effectively. At a time when much attention is being focused internationally on offshore centres, it is in the OTs interests to ensure their reputation for being willing and able to assist in tracing, freezing and confiscating criminal proceeds is second to none.

28.   HMG is mindful of OT concerns that they may invest considerable resources in providing investigative assistance in proceeds of crime cases, only for the assets to be confiscated elsewhere and retained by the confiscating jurisdiction. In our view, international asset sharing ­ from which some OTs have benefited considerably in recent years ­provides the best way to ensure that the costs of international casework is shared equitably among co­operating jurisdictions. we strongly support the sharing of confiscated assets relating to all crimes, including drug trafficking, and are working internationally to promote progress in this area. We are happy to discuss continuing concerns about costs with the OTs, and have asked them whether they would be interested in having the Council of Europe Convention extended to their jurisdictions.

Fiscal offences:

29.   International standards indicate that money laundering should be criminalised in relation to all serious crime, not merely drug trafficking. The principles leave the definition of serious crime to the individual jurisdictions. At the same time, however, they also make it clear that such individual definitions should not affect the ability "or willingness" of countries to provide mutual legal assistance.

30.   In the UK we treat tax evasion as a serious crime so it is caught by our confiscation and money laundering legislation. We are aware that different jurisdictions treat specific tax offences in different ways. Experience suggests that this can create problems where money laundering investigations relate in some way to tax offences.

31.   The "tax issue" can arise in two ways. First, the predicate offence to which the money laundering offence relates is a tax offence. Assume the predicate offence takes place in jurisdiction A and the money laundering offence takes place in jurisdiction B. A problem is created where the latter does not recognise the tax offence in question as a predicate offence to which its money laundering legislation applies. As a result it will not provide co-operation to jurisdiction A in its investigations. Second, the predicate offence may be another serious crime, such as drug trafficking. It is, however, disguised as a tax related problem to ease the process of laundering. Non­recognition of tax offences, or non-cooperation on money laundering cases involving such offences can frustrate all sorts of criminal investigations. In either of these scenarios, the inability to cooperate where tax is, or appears to be, involved creates a loophole in the anti-money laundering defences which criminals will utilise.

32.   Failure to provide adequate coverage for this issue in the anti­money laundering defences has two serious drawbacks. it makes it easier for criminals to get away with tax evasion, which we regard as a serious crime, and it undermines efforts to combat other forms of offending.

33.   There is some concern that the inclusion of tax offences as predicate offences, for the purposes of the money laundering legislation, will place a requirement on financial institutions to know and understand the fiscal regimes in other jurisdictions. This is quite wrong. Under the money laundering offences one is only required to consider whether one has a suspicion of something which would be a crime in one's own jurisdiction. it is also argued that it is difficult or impossible to determine whether a transaction is indeed linked to drug trafficking, tax or any other specific crime. However, the financial institutions and their employees are not expected to investigate suspicions, but to disclose them. As noted above, in the case of the UK, this includes disclosing suspicions of tax evasion. It is worth noting, however, that co­operation on money laundering investigations involving tax offences does not necessarily require such offences to be made predicate. There may be other related offences which fall within the ambit of a jurisdiction's money laundering legislation.

34.   There is also an argument that "there is no such thing as the laundering of money from tax fraud', on the grounds that it involves the concealment of legitimately obtained money. However, the proceeds of tax evasion are still the proceeds of crime.

35.   The UK's confiscation, money laundering and judicial co-operation legislation enables us to trace, freeze and confiscate the proceeds of tax evasion, or any other crime, on behalf of other jurisdictions. Where restraint and confiscation are concerned, the conduct overseas must correspond to an applicable offence in the UK. However, much investigative assistance can be provided without any dual criminality requirement. We can, and do, assist in foreign tax evasion cases, including cases where the conduct is not necessarily an

offence in the UK.

36.   As part of the efforts to combat money laundering, the UK is encouraging others to close loopholes. We would, therefore, encourage the OTs to ensure, in whatever way is most appropriate for the individual jurisdictions, that assistance can be provided in money laundering cases involving, or appearing to involve, tax offences, at least to the extent that the UK itself is able.

4   Clive Briault: The Rationale for a Single National Financial Services Regulator - May 1999 Back