Money-laundering proposals implemented in the wake of the 11 September terrorist attacks have put a huge administrative burden on offshore financial centres and could deter investors
The New York terrorist attacks heralded a new era for money laundering. The achievements of terrorists, using asymmetrical warfare, against the world's great superpower sent a shiver through the Western world.
The degree of sophistication, co-ordination and planning for these attacks was unprecedented. Western intelligence had seriously underestimated the terrorist threat.
In the post-mortem in the weeks following the attacks, one key factor enabling the terrorist action emerged ' money. Al Qaeda proved well funded, using a network of international bank accounts and offshore investments.
Any successful war on terror would therefore involve destroying terrorist funding. Money laundering laws would have to be stricter, more questions would need to be asked of potential clients and the communication between financial services and international policing forces would have to be improved.
The US reacted very quickly to the potential threat, imposing political pressure on offshore centres, especially those with relaxed money laundering legislation. The Financial Action Task Force on Money Laundering (FATF) held an extraordinary meeting on 29-30 October 2001, resulting in the widening of their mission to combat terrorism financing. On 31 October 2001, eight special recommendations on terrorist financing were issued.
These included the criminalisation of terrorist financing and associated laundering, the freezing and confiscation of terrorist assets, reporting suspicious transactions, International cooperation, monitoring of wire transfers and non profits organisations, and careful regulation of those involved in money transfer.
Such stringent recommendations have been deemed essential to combating international terrorism. But just how many offshore centres have adopted the recommendations, and how much progress has there really been in improving money laundering regulation?
Initially, progress seems to have been good. Although not all countries might have put in place all the recommendations of FATF, there are now very few countries that are not co-operating with FATF's money laundering requirements.
On their latest non-co-operative country list (October 2002), there were 11 countries that operated laundering deemed non co-operative by the FATF. These were the Cook Islands, Egypt, Grenada, Guatemala, Indonesia, Myanmar, Nauru, Nigeria, Philippines, St. Vincent & the Grenadines and the Ukraine.
However, since 11 September, eight countries have been taken off the list, including some surprisingly big names.
In June 2002, Hungary, Israel, Lebanon and St Kitts & Nevis were removed from the list, while in October 2002 Dominica, Marshall Islands, Niue and Russia were removed. Particularly notable was the removal of Russia, which had recently introduced significant anti-laundering reforms into its financial services systems.
While the falling into line of such major countries may be considered a huge success, the FATF still recommended that counter-measures be taken against the Ukraine and Nigeria. These counter-measures include enhanced surveillance and the reporting of financial transactions involving these countries.
There has been further success in initial efforts against terrorist financing. FATF introduced a self- assessment programme for countries to assess the strength of their systems against terrorist laundering. Over 120 countries have completed the programme, indicating a global move towards greater laundering provision.
Not everyone is convinced sufficient action has been taken. Raymond Kendall, the Honourary Secretary General of International police organisation Interpol, recently claimed states are putting insufficient resources into combating laundering. More ominously, he suggested that now launderers are within systems, countries many no longer be able to combat them.
This scenario of institutionalised laundering may seem alarmist, but there are increasing worries that the sophistication of launderers makes them uncontrollable. In other words, they will always be one step ahead of those trying to prevent laundering.
Such a scenario now seems a distinct possibility. The vast amounts of money involved in laundering make it an extremely lucrative industry. Conservative estimates from as far back as 1996 indicate that global money laundering could be worth $1.5 trillion. The International Monetary Fund has estimated the aggregate size of money laundering worldwide is between 2%-5% of global GDP.
Small countries frequently do not have the resources to combat such a vast industry. Equally, certain commentators have suggested many countries do not have the will, especially if they are third world or subsistence economies, where black or grey market income may be necessary for survival. It is worth considering however, that such countries are rarely prime targets for money launderers. Financial stability is a key consideration for launderers ' the ultimate aim is to return laundered money to the criminal. Laundering through financially unstable regions may lead to the money not being returned at all, or ending up in other criminal hands.
This itself creates an interesting situation ' many of the countries that are not compliant with money laundering rules are not financially stable. Therefore, it could be considered that despite non-compliance they do not pose such a significant threat, since their risky economic systems may put off potential launders.
Attention for regulation has therefore centred on the offshore financial centres, where there is greater financial stability and relatively relaxed regulation. These include the British Islands (Channel Islands and Isle of Man), Dublin, Luxembourg and less reputable dependencies such as the British Virgin Islands, Bahamas and the Cayman Islands.
However, while some countries may have previously had less than salubrious reputations, there are very positive signs from these offshore centres.
The Cayman Islands, for example, was taken off the FATF blacklist in 2001. They have since introduced an ambitious financial inspection programme, requiring the identification of pre-existing accounts by the end of 2002 and requiring banks to maintain a physical presence.
Co-operation with International Financial Intelligence Units (FIU) and regulators has also meant it has been viewed positively post-11 September.
The Bahamas has also made progress, establishing a FIU and introducing inspections (over 160 on site inspections were carried out in the year to April 2002). Banks have been forced to maintain a physical presence and 99 have had their license revoked.
It has also formed an international co-operation unit and has joined the Egmont Group, an international body whose objective is to increase international co-operation on financial services intelligence to combat money laundering.
In fact, the UK territories in the Caribbean (Cayman Islands, Anguilla, British Virgin Islands, Montserrat, Turks & Caicos and the Bahamas) have all put in place regimes to meet current anti-laundering requirements. They have also all put in place the necessary regimes for information sharing on financial information.
European offshore centres have been even stronger when it comes to money laundering. Luxembourg, for example, is a member of FATF and is also subject to EU money laundering laws.
The legal framework of the money laundering system broadly adheres to FATF best practice.
However, concerns remain as to the low number of money laundering reports that originate from Luxembourg, given its significance as a financial centre.
The FATF has noted that these reports tend to originate from the same banks, with a number of financial institutions never reporting laundering cases.
Ireland is known to have a robust money laundering system that meets FATF requirements. Ireland has a particularly good record at recovering criminal assets through the CAB (Criminal Assets Bureau) and the POCA (Proceeds of Crime Act 1996). New regulations introduced in the 1990s have made it fairly up to date.
The Channel Islands have a good reputation for regulation too ' it was in fact the Guernsey Financial Services Commission that first spotted the potential problems in split capital investment trusts.
While the Isle of Man is considered less robust than the Channel Island, it still adheres to the money laundering stipulations of the FATF. Indeed, the FATF's 2000-2001 report stated that the standards set in the Isle of Man are close to complete adherence to the FATFs 40 recommendations.
With most of the offshore centres adhering to international standards, and adopting FATF's eight recommendations to combat terrorism, it seems offshore investing is keeping up with the post 11 September focus on laundering. This in itself should create confidence and attract new investors.
But such compliance is a double-edged sword. First, the administrative burden of complying with regulations may well make offshore products more expensive, and therefore less competitive. Second, the privacy laws and opaque nature of offshore investing has traditionally been an attraction for clients. The removal of these may well prove unattractive to offshore clients.
It may well be that offshore centres have not fallen foul in this brave new world of international financial services monitoring. However, the cost of such compliance may well be very significant.
Charles Ansdell is corporate communications manager at Inter-Alliance
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