Global Policy Forum

Exerpt from Financial Havens, Banking Secrecy and Money-Laundering

In some offshore financial centres and bank secrecy jurisdictions serious efforts have been made to minimize the influx of dirty money through more careful regulation. By the same token, in spite of efforts to regulate the offshore banking world, not all jurisdictions are equally regulated. Even in those that are, there is sometimes a large gap between the legal framework and its implementation. Furthermore, when pressure to close the gap between law and implementation is effective in some of the offshore banking havens or bank secrecy jurisdictions, those that are not pressured tend to be the major beneficiaries. As Switzerland has responded to external pressure for more transparency and greater cooperation with foreign law enforcement, for example, dubious money has almost certainly migrated elsewhere. As pointed out in chapter I, these jurisdictions are highly dynamic and are motivated in part by competition for deposits and other forms of business.

All this poses enormous dilemmas both for international supervision and regulation and for the offshore financial centres themselves. The balancing act at the international level is to impose safeguards against and obstacles to illegal activities without at the same time constraining or obstructing legal transactions. So long as there are difficulties in distinguishing between the licit and the illicit, there are real tradeoffs between an approach that over-regulates and one that under-regulates. The balancing act for the offshore financial centres themselves is to attract customers through the provision of banking confidentiality and other kinds of legitimate services that protect money without also acquiring a reputation for "dirty banking".

The competition among offshore financial centres takes place through the provision of sophisticated services, financial mechanisms and tax concessions. Although some jurisdictions are more innovative than others, for the most part the menu of available options is not particularly divergent. Consequently, if there is overly vigorous implementation of "know your customer" rules in one jurisdiction, then this will put the haven at a disadvantage compared to other havens where the formalities and checks on customers are kept to a minimum. The more stringent and scrupulous one is about due diligence and vetting customers, the more likely it is that some customers will take their business to venues that ask fewer questions and present fewer obstacles.

On the other hand, if a haven develops too unsavory a reputation as a home for "dirty money" or a haunt of organized crime and drug traffickers, then not only will legitimate money go elsewhere as respectable companies move their businesses to avoid tarnishing their reputations but so too will more sophisticated criminals who want to avoid any taint by association. The financial centre will also become the target of considerable external pressure to clean up its act. Not surprisingly, therefore, the offshore banking and bank secrecy world is in constant flux that reflects differential responses to the complex balancing acts relating to competitiveness and cleanliness. The optimum competitive position is one in which the centre is neither too stringent in vetting customers nor too obviously indiscriminate in accepting all custom.

As a result, providing a definitive survey of the world of offshore banking and bank secrecy is virtually impossible. This is a dynamic and ever-changing system in which there are constant developments in rules and regulations, in the opportunities offered by individual jurisdictions, in the relative attraction of particular jurisdictions both for licit money and for the proceeds of crime, and in the pressure placed on offshore financial centres by the international community, and especially by the United States, as part of the continuing effort to combat drug trafficking and transnational organized crime.

Moreover, it is a world over which opinions are sharply divided. Some observers argue that the offshore banking sector is losing its distinctiveness and therefore its attractiveness. According to Michael Giles, chairman of international private banking at Merrill Lynch: "In market after market, the whole structure of foreign exchange controls, the whole fear of having your savings and your capital confiscated or eroded by runaway local inflation, is decreasing".42 The implication is that there is a diminishing need for the services of offshore financial centres and bank secrecy jurisdictions. It would be a mistake, however, to underestimate the importance of the offshore financial world.

The Cayman Islands, for example, one of the most important offshore jurisdictions, is generally judged to be the fifth largest financial centre in the world, behind London, New York, Tokyo and Hong Kong. There are over 570 banks licensed in the Cayman Islands, with deposits of over $500 billion. Mutual funds licensed or registered in the Islands, offshore insurers and non-resident and exempted companies are other important dimensions of Cayman financial activities.43

Not surprisingly, therefore, the offshore financial world is clearly seen as one in which important opportunities remain. As a result, it is constantly welcoming new members. Some of the more recent additions to the world of offshore finance have been remote islands in the South Pacific. Perhaps even more surprising has been the attempt by the state of Montana in the United States to become an offshore centre, a development that seems to have encouraged Hawaii to explore a similar option. This trend has created considerable consternation among some specialists. As one money-laundering authority noted: "money gets smuggled out of the United States and goes through various layers of transactions offshore. Then it comes back into the state of Montana, and it looks like it came from the late Mother Teresa's convent. Who in the state of Montana is going to ensure there are safeguards to prevent this?"44

Thus, while there is no universal definition of the term, many expert observers point to a number of jurisdictions as having the requisite characteristics of a financial haven. The countries, territories, cities or areas falling into this category are listed below and shown in the map.

The Caribbean: Anguilla, Antigua, Aruba, Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Costa Rica, Netherlands Antilles, Panama, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Turks and Caicos Islands

Europe: Andorra, Campione, Cyprus, Gibraltar, Guernsey, Ireland (Dublin), Isle of Man, Jersey, Liechtenstein, Luxembourg, Madeira, Malta, Monaco, Sark, Switzerland

Asia and the Pacific: Cook Islands, Hong Kong Special Administrative Region, Labuan, Macao, Marianas, Marshall Islands, Nauru, Niue, Samoa, Singapore, Vanatu.

Middle East: Bahrain, Dubai, Lebanon

Africa: Liberia, Mauritius, Seychelles

Within this world, important and difficult judgements have to be made about how flexible to be. Different jurisdictions have responded in different ways to the dilemmas of competitiveness and cleanliness discussed above.

Bermuda, for example, which hosts about 40 per cent of the world's captive insurance companies, has been extremely cautious and is regarded as one of the more scrupulous jurisdictions that, for the most part, has attracted the right kind of business. Yet even in Bermuda, there are virtually unregulated areas of financial activity such as insurance companies and mutual funds that have the kind of multiple account capabilities that facilitate money-laundering. Moreover, the fact that Bermuda is generally more careful and moves more slowly in the incorporation of companies than some of its competitors is frequently seen as a disadvantage. Some members of the Bermuda offshore community, for example, have expressed concern that it takes five days to incorporate a Bermuda company-significantly longer than some of Bermuda's competitors. There is also anxiety about Caribbean competitors taking spillover work that is of dubious origin but that nevertheless provides them with important advantages.

One of the competitors that has been criticized for lacking discrimination about its customers has been Antigua. United States News and World Report commented in 1996 that no one has extended an invitation to dirty money like Antigua, which has "a virtually unregulated banking industry, no reporting requirements and secrecy laws that punish violations of bank clients" confidentiality. The number of banks there grew by 75 per cent in 1995; anyone with $1 million can open a bank, and many consist of nothing but a brass plate or a room with a fax machine".45 Although the European Union Bank fiasco has led to increased pressure on Antigua to "clean up its act", it is not certain that there have been any fundamental changes.

Another country that apparently wants to develop a rather different image of its offshore activities is Panama. In the past, loose regulations and tight secrecy laws made Panama extremely attractive to those who wanted to hide or launder the proceeds of crime. In 1998, however, there have been reports that Panama, which still has over 100 banks from 30 countries and a bank sector that accounts for 11 per cent of GDP, is addressing fears about lack of supervision. The President of the Panamanian Banking Association wants to transform Panama into a major financial centre "homogenous with London, Zurich, New York or Miami".46 Some steps have been taken in this direction, and Panama has created a financial analysis unit to track money movements. Yet, as one of the cases in chapter III reveals, millions of dollars suspected of being the proceeds of drug trafficking were channeled back to Colombia via Panama during the mid-1990s. Moreover, because the United States dollar is, effectively, the currency of the country, Panama is likely to remain one of the favourite jurisdictions for money launderers attempting to put proceeds of crime into the financial system.

In Europe there is continued controversy over bank secrecy in Switzerland in particular and also in Luxembourg. Yet in Switzerland bank secrecy is not what it was. Pressure from other countries for greater transparency, concerns about the infiltration of Russian organized crime, the passage of new laws against money-laundering, the broadening of criminal laws and thereby the potential scope for the implementation of mutual legal assistance have all placed major dents in bank secrecy. Moreover, Switzerland is taking serious initiatives to combat money-laundering. Yet, there is also a sense in some quarters that the change is being exploited by competitors. According to one banking official, "the assertion that Swiss bank secrecy is no longer as watertight as it once was, or even that it has become full of more holes than Emmenthal cheese, is not new. It is being spread about in the mass media with a malicious undertone by competing foreign financial centres. Paradoxically, they are often the same people who criticize Switzerland because of its apparently rigid protection of secrecy."47 Accompanying this is deep-seated concern that Switzerland's "enormous competitive advantage" in the area of client confidentiality is being eroded, and in the words of one bank official, "the time has come to take a stance and defend in a lucid and resolute manner an asset of which the country may be proud and which it cannot do without".48

Luxembourg, which has over 220 banks in the city and is seventh in the world in terms of assets in foreign currencies, has also been under siege. It was the country which, in effect, brought BCCI to the world. More recently, it has faced criticism from Germany for its policy on taxes and from Belgium on the grounds that Luxembourg's secrecy laws attract dirty money from African dictators.

For those who are concerned that neither Switzerland nor Luxembourg offer the protection they did in the past, Liechtenstein could be an attractive alternative. It is usually described as one of the world's best tax havens, with stricter bank secrecy than in Switzerland, and even as the place Swiss citizens go if they want to hide money. Moreover, Liechtenstein offers a wide range of services including the Anstalt discussed in chapter I. Liechtenstein is also the only continental European country to have trust regulations that bring with them demand for work in the areas of litigation, intellectual property rights and the licensing of patents.49 Other alternatives include Austria, which still has the Sparbuch (bearer savings account book) without customer identification for Austrian citizens, and the Czech Republic, which also offers anonymous passbook accounts.

Another area where competition is keen is the Mediterranean. A few years ago Cyprus appeared to be the offshore financial centre of choice for Russian organized crime, but it has strengthened its regulatory framework and increased its capacity for financial monitoring. Other Mediterranean centres include Malta and Lebanon, which is also moving aggressively to reestablish its pre-eminence and has increased the scope of the activities in which offshore companies are permitted to engage and reduced the already low tax rates on profits of holding companies.

In the Asia and Pacific region, the competition, if anything, is even greater. Labuan, Malaysia's offshore jurisdiction, is implementing a major campaign to attract business. Other participants in the offshore financial business include the Cook Islands, Niue and Vanuatu, all of which are vigorously promoting their offshore financial centres. In 1994 the Government of Niue passed laws covering international business companies and asset protection trusts as well as banking and insurance. The International Business Companies Law was modeled on that developed by the British Virgin Islands, with some additions that point to the market niche: the name of the company can be registered in Chinese script; directors may keep the company records and share register outside Niue; and agents with businesses elsewhere can act as deputy registrars with the authority to incorporate companies. The willingness of Niue to provide charters in any language desired and the limited population base highlights once again the contrast between the lavish provision of financial services, institutions and mechanisms and the meager resources for supervision and oversight.

While some of the smaller jurisdictions have almost certainly attracted dirty money, perhaps the most brazen attempt to enter the offshore financial world at the bottom end of the market was initiated by the Seychelles, which, in the mid-1990s, passed an economic development act offering citizenship, with no questions asked, to those who placed deposits of $10 million or more in the islands. Under pressure from the United States and other members of the international community, the Seychelles backed away from the sale of its sovereignty.

None of this is meant to ignore efforts to establish closer supervision, more effective oversight or greater transparency in the world of offshore financial centres. Some jurisdictions, such as Mauritius, have been very careful in regulating their offshore sectors. There has been a series of measures from the early 1980s when the United States became seized of the issue after a series of Senate hearings illuminated offshore banking and the way it could be exploited by drug traffickers and other criminal organizations. Part of the problem, however, is that the issue of bank secrecy goes well beyond the traditional offshore financial centres and jurisdictions such as Luxembourg and Switzerland. There can perhaps be no definitive listing of jurisdictions that refuse to lift bank secrecy to accommodate criminal investigations, as the situation in this regard is subject to continual change, and judgements about appropriate levels of cooperation with law enforcement agencies will differ. The United States' review of international anti-money-laundering provides some clues as to where bank secrecy is an impediment to criminal investigations.

The State Department's International Narcotics Control Strategy Report, released in March 1998, gives an assessment of whether or not bank secrecy can be lifted to facilitate criminal investigations at the domestic and international levels. The countries that are listed as not having laws mandating banks to cooperate with domestic law enforcement investigations into money-laundering or are unwilling to lift bank secrecy are: Afghanistan, Belarus, Belize, Bolivia, Cuba, El Salvador, Guatemala, Guyana, Haiti, Laos, Lebanon, Morocco, Mozambique, Nauru, South Africa, Thailand and Vanuatu. All of these countries except Belize also lack laws permitting or requiring banks to cooperate with investigations by third-party Governments through sharing records and making available financial data. They are joined in this by the following countries and territories: Albania, Armenia, Azerbaijan, Bulgaria, Cí´te D'Ivoire, Estonia, Gibraltar, Kazakhstan, Kuwait, Kyrgyzstan, Moldova, Nicaragua, Pakistan, Romania, Slovakia, Sri Lanka, Saint Vincent and the Grenadines, Ukraine and Uzbekistan.50

If some of these jurisdictions lack the will to impose greater regulation and to seek greater transparency in financial matters, in the smaller offshore financial centres and bank secrecy jurisdictions, the problem is also one of capacity. There are too few regulators to oversee the transactions and the institutions that are involved in them. Although there might have been some improvements recently, for a long time one bank inspector and one insurance adviser were responsible for regulating a burgeoning companies sector in the British Virgin Islands where the number of new companies incorporated annually greatly exceeded the size of the population.

If at least some offshore financial centres and bank secrecy jurisdictions remain a magnet for money launderers and various other criminals, there are efforts to clean up the situation and movement towards acceptance of norms, laws and regulations. The more important law enforcement and regulatory milestones include the following developments: