The growing impact of regulation on international private banking is obvious, with the Financial Action Task Force and OECD taking additional measures against the more reluctant jurisdictions
The events of 11 September have had a profound effect on anti-money laundering legislation, which in turn affects international private banking.
While some of the legislation introduced is a direct consequence of the terrorist attacks and the subsequent measures taken by the US Government, the profile of anti-money laundering rules and regulations has now taken centre stage in the fight against international terrorism.
While anti-money laundering regulations have assumed a more prominent role within international private banks over the last 10 years, the impact of 11 September has increased their visibility.
The burning question for international private banking is whether the impact and growth of increased regulation will inhibit private bankers from conducting their business or whether the continued growth in regulation will prevent them from exploiting new markets or clients.
Take, for example, some of the current initiatives involving the regulatory environment: The Financial Active Task Force (FATF) Non Co-operative Countries or Territories List. A FATF spokesman has declared that the FATF initiative triggered significant improvements in anti-money-laundering systems throughout the world. In February of this year, the Crown Dependencies of Guernsey, Jersey and the Isle of Man also announced strong measures to tighten their existing anti-money laundering controls, despite the fact that the three islands already have tough anti-money laundering measures in place, which are close to complete adherence to the FATF's 40 recommendations.
At the end of February, it was announced that Guernsey and Jersey would be removed from the OECD blacklist by agreeing to co-operate with the OECD initiative on improving the transparency of tax systems and establishment of effective exchange of information procedures.
In October 2001, new anti-terrorist measures were also introduced in many jurisdictions. These measures listed individuals and companies that were believed to be associated with the terrorist attacks on the US on 11 September. The measures requested that all companies did not do business with any individuals, companies and countries associated with them.
In addition, financial services companies were asked to exercise a much greater level of caution when considering taking on business from countries that have been seen to support, or may have been associated with, terrorist activities.
If we return to the question of whether increased regulation will have an effect on the growth of private banking, the simple answer is yes. However it would be appropriate to qualify this response, which is not intended as a negative endorsement of regulation.
On the contrary, as a private bank, Investec is in favour of regulation. In the past, however, regulatory development has not been equitable and this has resulted in the creation of an uneven playing field between those jurisdictions that have embraced the major initiatives of the FATF and OECD and those that are reluctant to do so for a number of reasons.
As such, the pace at which global markets and jurisdictions have developed anti-money laundering regulation remains inconsistent. Those very parties that the regulations were designed to constrain have exploited this unevenness. Take, for example, the OECD initiative on harmful taxation.
The Channel Islands have agreed to co-operate with the OECD following months of negotiation and a certain degree of pressure. However, a number of jurisdictions such as Vanuatu and the Bahamas have appeared to decline to co-operate with the OECD initiative on harmful taxation.
While both jurisdictions' reluctance to co-operate with the OECD initiative is not a wholesale rejection of the principle of what the OECD is trying to achieve, they have cited two main reasons:
• Non-OECD jurisdictions are not expected to meet the same standards as those within the OECD.
• Both jurisdictions have also pointed out that the OECD has failed to secure total global support for their initiative and both feel that it is entirely unreasonable for the OECD to ask offshore jurisdictions to change their business environment before their bigger OECD and non-OECD competitors.
One further point that highlights that the existing playing field is far from level is the fact that while 19 offshore jurisdictions have given a commitment to the OECD in respect of its initiative, many have only done so on the understanding that any measures undertaken will also apply to onshore and offshore jurisdictions. This understanding is clearly flawed, as it is extremely unlikely that jurisdictions such as Luxembourg, and Switzerland will agree to an OECD proposal that will have serious repercussions on their respective financial services and banking.
If you examine the additional measures Guernsey and the other Crown Dependencies of Jersey and the Isle of Man will introduce to tighten their existing anti-money laundering controls, you cannot but be impressed by the considerable array of legislation that exists. A brief review of these measures highlights a number of new features that financial services companies will be required to undertake, namely:
• To look beyond their clients (for example, when they are trusts or companies) to establish the principle behind them.
• Ensure that due diligence is done properly, even where the client is referred to them by another institution that claims to have carried out the background checks.
• Embark upon a progressive risk-prioritised programme to bring the records of existing accounts up to current standards (where there are deficiencies in information and documentation held) if the nature of the client or transaction meets certain criteria.
We believe that Guernsey's compliance with the global initiatives of the OECD and FATF should be seen as a business opportunity rather than a threat. By embracing these initiatives, standards will inevitable increase both in terms of the regulatory environment and the professional services of banks, trusts, lawyers, accountants, etc.
In short, by embracing international standards the appeal of Guernsey as a well-regulated business environment should attract potential clients, rather than act as a deterrent to them.
The answer to the second part of the question is slightly more complex. Offshore jurisdictions have always been viewed as highly suspicious by their onshore counterparts; offshore jurisdictions are still referred to in some quarters as tax havens.
Despite supreme efforts by the Crown Dependencies to comply with the international initiatives on money laundering and to be widely recognised as within the first tier of jurisdictions, whether onshore or offshore, and who have developed comprehensive and sophisticated anti-money laundering regulations, these suspicions still persist.
It is this that lies at the centre of the debate about offshore regulation and one where the whole issue of the level playing field is exposed. Time and time again the regulations in Guernsey, Jersey and the Isle of Man are reviewed and generally pass the reviews with flying colours.
It is therefore extremely iniquitous that the islands always have to go the extra mile to convince the onshore community of their commitment to regulation. The same cannot be said of many onshore jurisdictions.
Luxembourg and Switzerland are two onshore jurisdictions that appear to have shown modest appetite to embrace the OECD harmful tax initiative, yet it is the offshore jurisdictions that bear the brunt of criticism for dragging their feet in respect of this initiative.
In conclusion, while it is clear that the raft of regulation will increase, this growth is piecemeal and uneven. The Crown Dependencies are active participants in reviewing and introducing new regulatory initiatives, part of this may be due to the fact that they share the objectives of the regulatory initiatives, partly because of downward pressure placed on them by global regulators or onshore jurisdictions.
However one thing is certain. There is growing recognition by the Crown Dependencies that the adoption of international standards is a strong selling point and one that finds favour among the type of international clientele that private banks are looking to attract.
The real danger for global regulation is that unless a level playing field is established between onshore and offshore jurisdictions, there is a real possibility that this unevenness will continue to be exploited by money launderers, who will use the regulatory weaknesses between jurisdictions to satisfy their needs.
In October, new anti-terrorist measures were introduced in many jurisdictions following the terrorist attacks on the US.
Offshore and onshore jurisdictions need to establish a level playing field in terms of regulatory guidelines to ensure money launderers can no longer take advantage of differences.
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