The following is part 1 of a paper delivered by Mr. Don Mitchell, CBE, QC, to the Annual Law Conference of the OECS Bar Association in St. Lucia several days ago.
The premise I start with is that Anti-Money Laundering, and Combating the Financing of Terrorism, (AML/CFT) is not the principal financial regulatory issue affecting the Commonwealth Caribbean today.
The real issue is the misinterpretation and misapplication of the regulations by international, regional and local regulators. De-risking, or the dumping by US and Canadian banks of their long-standing relationships with reputable Eastern Caribbean banks, out of an irrational fear that they will be prosecuted for processing money-laundering banking transactions with us, is but an extreme example of the misapplication and abuse of AML/CFT regulation.
Anguilla, like many of our small island Territories, has no income tax, capital gains tax or value added tax. It is a 100% tax-free jurisdiction, so far as personal and corporate income, capital gains and estate taxes, are concerned.
For decades we have had no currency exchange restrictions, while others did and some still do. In Anguilla, one has always been able to open a bank account in EC or US dollars, euros or sterling, or whatever currency you could persuade the bank to accept.
The Anguilla Government raises revenue principally through indirect taxation such as customs duties and licence fees. Everything sold in Anguilla is effectively subject to customs duties, since Anguilla produces little or nothing of what it consumes. If you don’t want to pay the exorbitant duty on Champagne, then buy Bordeaux. Licence fees are entirely voluntary. If you don’t want to pay the exorbitant fee for a gun licence or a dog licence, then don’t own a gun or a dog.
For decades, our lack of income or capital gains tax, and easy access to foreign currency, have proven useful to regional and international entrepreneurs. They incorporate a company in Anguilla to do business in Anguilla and elsewhere, and take advantage of these characteristics.
Licensed company managers manage these companies. A significant portion of the licensees of the Financial Services Commission (FSC) of Anguilla comprises company managers who provide management services to over 20,000 companies of which about 275 are insurance companies, mostly captive insurance companies.
There are some 60 licensed company managers, directly or indirectly supporting the employment of approximately 250 persons in Anguilla. The resulting International Financial Services Industry is the second largest contributor to the Anguilla government’s revenue, and it represents some 25-30% of GDP, if we include the banks.
Additionally, Anguilla is among the top 10 domiciles for captive insurance companies. International Business Companies (IBCs) are cheap to form, and popular among Far Eastern clients. Yet, Anguilla is miniscule in comparison to the financial services industries of the major financial centres of New York, London, Delaware and Wyoming.
In Anguilla, the FSC regulates for AML/CFT compliance under the Proceeds of Crime Act (POCA). POCA derives from the Financial Action Task Force (FATF) formed in 1989. The FSC regulates company managers, insurance companies and intermediaries, investment funds, money services businesses, trust companies, and offshore banks.
Typically, licensees are required to do a business risk assessment; a customer risk assessment; collect identification and verification information on the customer; engage in ongoing risk-based due diligence; and, prepare and enforce an AML/CFT Policies & Procedures Manual.
In 2009, Anguilla was inspected regarding the 3rd Mutual Evaluation Process (MEP) using the previous FATF methodology of 40+9 recommendations. We spent the next 5 years addressing the deficiencies identified in that report, and we successfully exited the 3rd round MEP at the XLII CFATF plenary in November 2015 held in Port-of-Spain.
The 4th round MEP, using the new revised FATF standards, is currently underway around the world, including the CFATF region. According to the CFATF programme, Anguilla’s date for the next MEP inspection visit is the 3rd quarter of 2020. I have no doubt that when our report comes we shall demonstrate 100% compliance with the AML/CFT regime.
While, to a great extent, AML/CFT regulation is a reasonable way to address international criminal activity, the real problem is that the rules aren’t enforced in the US to the same extent as is expected in smaller economies. That is changing, but slowly.
The alphabet soup of OECD, G-20, FATF, CFATF, and the Egmont Group, all claim to be focussed on preventing financial service providers from laundering dirty money, and financing terrorism. Not that any launderer of dirty money needs to come to the West Indies. At any Walmart, he can buy a US$9,999.00 debit card in an anonymous name and spend it anywhere in the world he wants.
New York, London, Taiwan, Hong Kong, and Singapore are widely acknowledged to be the five major money laundering capitals of the financial world. A 12 July 2016 “Reuters Investigates” article claims that Delaware, Wyoming and Nevada are “hotbeds for the formation of anonymous shell companies.” Yet, there is no sign that their banks face de-risking.
With increasing globalisation, the large, oppressively taxed jurisdictions find they are losing their tax dollars to our more competitive tax jurisdictions. While there are some who believe that there is no economic rationale for incorporations in tax-free jurisdictions, other than to evade tax, what the foreign regulators, egged on by some in government and certain lobby groups, really lust for is their missing tax dollars. Foreign lobbyists demand that their governments force us to comply with increasingly complex due-diligence regulation, which they claim is targeted at AML/CFT, but which, in reality, is no more than their attempt to crush their fiscal competitors.
The US and the EU demand that we supply CFT information, but they don’t keep their own houses in order. They don’t acknowledge their own involvement in money laundering and financing of terrorism. They don’t admit their history. The City of London and Wall Street would not be financial centres if it were not for money laundering and financing of terrorism. Their leaders engage in nothing but posturing and constant electioneering. They have never played fair.
The result for us of this confusion of purpose among the international regulators and lobbyists is increasing distress and damage to our financial services industry and economies. The rules are often misinterpreted and misapplied by local regulators in our countries, resulting in further damage to our financial systems and economic growth.
Even the international and regional regulators can misapply their own regulations. In May 2015, the CFATF made an AML/CFT presentation in Anguilla to the FSC’s licensees.
There is a distinct difference between the due diligence required of a bank and that required of a company manager or even an insurance company, for obvious reasons. A bank takes deposits from its customers, and must be subject to a higher standard of regulation. So, to a certain extent, are insurance companies. A company manager, on the other hand, is prohibited by section 19 of the Companies Management Act from receiving funds in trust for its client. And, so its due diligence requirements are less stringent. Now, whilst POCA makes no distinction based on the type of financial services business engaged in, the extent of ongoing monitoring in a bank will in practice be different from that by a company manager, due to the fact that the bank is in the business of intermediating transactions and has a much more active day to day monitoring responsibility.
As the CFATF presentation proceeded, it became evident that they were advising their audience that they were all required to follow the banks’ need to analyse and study financial transactions. Licensed company managers don’t engage in the financial transactions of their clients. This was clearly wrong advice for the audience in question, consisting as it did mainly of company managers.
[To be continued next week.
The original can be read here: https://donmitchellcbeqc.blogspot.com/search/label/Financial%20regulation]
