Transparency, Regulation and Information Exchange
IFC Forum’s Proposition
Most IFC business is conducted in financial centres in the major countries (such as the Eurobond market in London and tax-free banking for non-residents in the US). So called “tax havens” are simply smaller players in the same game.
Are small IFCs hotbeds of sin and secrecy? It is time for a [fresh/honest] look at these centres. The principal IFCs now share information with onshore tax and law enforcement authorities to combat financial crime and tax evasion, but are they doing enough?
How do large and small IFCs fare in comparative reviews of their standards?
OECD countries host the principal global markets for cross-border financial services activities. This activity includes the Eurobond debt market in London, tax free banking for non-residents in the U.S. and funds management in both London and New York. So called “tax havens” or international financial centres are smaller players in the same game.
Professional probity and high standards of rigorously enforced regulation are the norm in the leading IFCs. The small financial centres have been active participants over the last decade in the debate and implementation of “global” regulatory standards proposed by supranational agencies, including the Financial Action Task Force, the Organisation for Economic Co-operation and Development and the International Monetary Fund.
In the course of initiatives promoted by these agencies the regulatory regimes in IFCs have been examined in detail on an ongoing basis. How do large and small IFCs fare in comparative reviews of their regulatory standards?
Anti-Money Laundering and Terrorist Financing:
Financial Action Task Force
The FATF is an intergovernmental body whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing. The FATF regularly reviews and rates jurisdictions for compliance with its "40 + 9" recommendations designed to protect against money laundering and terrorism. The U.K., for example, was rated in June of 2007 as compliant or largely compliant with respect to 36 recommendations. Based on the most recent ratings available, both Jersey and the Cayman Islands rank higher than the U.K., Jersey being compliant or largely compliant with respect to 44 recommendations. The Cayman Islands is rated as compliant or largely compliant with respect to 38 recommendations. Based on the FATF rating system, these small IFCs are more compliant with the FATF's 40 + 9 recommendations than Canada, Spain, Italy, Norway, Switzerland, Ireland and Australia, to name but a few.
Transparency and Information Exchange:
Organisation for Economic Co-operation and Development
The OECD is an organisation of 30 developed countries, including all members of the G7, sharing a stated commitment to democratic government and the world economy. The OECD is also one of the world's largest and most reliable sources of comparable statistics and economic and social data. Following the G-20 summit in London in April 2009 the OECD was instructed to assess compliance with standards for cross-border exchange of tax information. In response the OECD tabled a report dividing jurisdictions into three categories:
- jurisdictions that have substantially implemented the internationally agreed tax standard (referred to as the “white list”);
- jurisdictions that have committed to the internationally agreed tax standard, but have not yet substantially implemented (referred to as the “grey list”); and
- jurisdictions that have not committed to the internationally agreed tax standard (referred to as the “black list”).
Bermuda, Cayman and Jersey appear on the OECD white list.
Financial Sector Assessment Programs:
International Monetary Fund
The IMF conducts detailed assessments of compliance with international regulatory standards (established by FATF, the International Organisation of Securities Commissions, the International Association of Insurance Supervisors, etc) in both G-20 countries and financial centres in smaller jurisdictions. From as early as 2005 and thereafter IMF has consistently found that “[c]ompliance levels for OFCs [offshore centres] are, on average, better than in other jurisdictions assessed under the Financial Sector Assessment Program.” IMF’s specific findings as respects individual jurisdictions are available here.
Governance and Anti-Corruption Indices:
World Bank
The World Bank has determined that “tax havens” (small financial centres, commonly below one million in population) score highly on cross-country measures of global governance. The measures take account of regulatory quality, voice and accountability, political stability, government effectiveness, rule of law and control of corruption. “Tax havens have a mean governance index of about 0.73, almost one standard deviation higher than for non-havens and substantially higher than the global mean of the measure.”
Big countries may remain commercial successes with lower standards since consumer confidence in such large centres is reflexive. For example, the U.S. hosts one of the largest and most successful financial centres globally, despite "know your customer" standards for formation of tax-free shell companies which are amongst the lowest in the world. In a frank assessment of the U.S. position Senator Carl Levin recently noted the following in introducing a bill for greater corporate transparency in U.S. states:
"The U.S. states generally form [tax-free U.S.] corporations without asking for the identity of the corporation's beneficial owners, and numerous law enforcement problems have resulted when some of these corporations have become involved with money laundering, tax evasion, or other misconduct."
"U.S. corporations involved in misconduct are currently able to hide behind a veil of corporate secrecy. It doesn't make sense that less information is required to form a U.S. corporation than to obtain a drivers license. The United States needs to meet its international anti-money laundering commitments, and that means getting beneficial ownership information for U.S. corporations."
Competitive standards of regulation are essential to attract business particularly in small financial centres. Consumers do not patronise poorly regulated small centres. At the same time centres with uncompetitively harsh regulation are similarly commercial failures; this accounts for reluctance in moving ahead of applied international standards. "Goldilocks" positioning is best – standards which converge on the mean, neither too high or too low. Successful financial centres, large and small, display broadly the following characteristics:
- low corruption;
- efficient government systems;
- competent and trustworthy professionals; and
- co-operative, transparent, well regulated markets.
As is evident, the consensus view of technically informed observers such as those above is that the principal IFCs are already generally regulated as well as or better than their big country counterparts.