29 March 2004
There is a stereotype attached to an offshore jurisdiction. It is usually an island with a significant finance industry. That industry is unregulated. It is also a tax haven. Its financial institutions are not too choosy, either about their clients or their sources of money. Complex and opaque trust or nominee structures are encouraged to shelter these assets. There are strict banking secrecy laws. Requests from foreign jurisdictions to obtain evidence in relation to these assets are at best ignored, at worst refused. They are, therefore, a haven for money launderers.
Of course, what constitutes an ‘offshore’ jurisdiction is a matter of perception. To those in France, Switzerland and Germany, the UK is an offshore jurisdiction. Many people would be surprised to learn that some of the characteristics of the stereotype set out at the start of this article are perceived in those countries to apply to the UK.
Certain sections of the tabloid press seem to take the view that the truth should not get in the way of a good story. It can almost be guaranteed that if a criminal money trail ends in Jersey, tabloid articles will seize on Jersey’s “excessive banking secrecy laws” as an angle to the story. Yet those laws are virtually the same as England’s own Common Law in relation to banking confidentiality – a fact conveniently ignored in the press.
In reality there is little popular understanding of the problems that can face the smaller jurisdictions in relation to requests from court prosecutors seeking international cooperation from offshore jurisdictions (officially known as ‘mutual assistance requests’). The two most significant problems are in fact lack of resources and lack of expertise. In many cases the jurisdiction is a low tax area and consequently does not generate the income to put in place a sophisticated police force or law officers department, as public spending is cut to a minimum. Yet as the requested state, the jurisdiction has to bear all the costs associated with the request, which can include litigation. The reality is that sophisticated criminals prey on this lack of resources and expertise.
This selfsame problem of lack of resource carries through into any investigation that the jurisdiction may wish to conduct internally, once the letter of request has brought an issue to its attention. In almost all cases, the conduct generating the illicit funds will have occurred in a foreign jurisdiction. To obtain relevant information and evidence, a letter of request will have to be sent to that country. It may take months, if not years, to obtain the evidence. If it is feasible to try the person who was responsible for depositing the illicit funds, then a formal extradition request will have to be made and the evidence presented to the foreign court. This process again can take months, if not years. Many smaller jurisdictions simply do not have the financial resources for protracted litigation of this type.
It is almost 15 years since the establishment by the 1989 G7 Summit of the Financial Action Task Force on Money Laundering (FATF). This inter-governmental body’s purpose is the development and promotion of policies, domestic and international, to combat money laundering – and it has teeth.
Today, the kitemark of ‘national respectability’ that accreditation by the FATF endows is much in demand; the current keenness of Saudi Arabia to achieve accreditation is a prime example of the wide-ranging influence that the FATF wields. However, achieving FATF compliance can be a huge burden for some jurisdictions, as the standard requires not only the establishment of new legislation, but also diligent policing of the new legal regime. This presents some jurisdictions with a dilemma. On the one hand, jurisdictions will need FATF approval if they are to play on the international stage – indeed, additional due diligence will be required of financial institutions dealing with any jurisdictions deemed by the FATF to be non-cooperative; on the other hand, the financial and administrative burden to legislate and police money laundering to the standard required by the FATF is considerable.
Unfortunately, the failure to take action effectively is frequently presented as yet further evidence of offshore jurisdictions’ assistance to money launderers. Yet the practical burdens are severe. The 40 recommendations set out by the FATF do, however, contain one pragmatic suggestion, which is the concept of asset-sharing, particularly in relation to confiscated funds. This has some attractions for smaller jurisdictions. If a foreign jurisdiction, through mutual legal assistance channels, obtains a freezing order in relation to illicit funds held in the offshore jurisdiction and subsequently a confiscation order is made in the foreign jurisdiction against those funds, in return for assisting in that process a percentage or share of the fund is given to the offshore jurisdiction. This can then be applied to assist in creating the necessary infrastructure and expertise. The disadvantage is that such sharing is ad hoc and not predictable. It depends on agreement being reached.
Offshore jurisdictions could, of course, do more to prevent the perpetuation of the stereotyped image. The requirements of their mutual legal assistance laws should be clearly ascertainable. In jurisdictions such as Jersey there is no problem in this regard – there is the Criminal Justice (International Co-Operation) (Jersey) Law 2001, which sets out the threshold requirements. Some other jurisdictions are more opaque.
This can result in tensions between offshore jurisdictions and states requesting evidence because misunderstandings occur. A failure to appreciate what is required by the law of the particular offshore jurisdiction can lead to a request for assistance being rejected. Sometimes no advice is given as to how the request could be reframed so as to cross the necessary legal threshold. Failure to do so can lead the requesting state to believe that the offshore jurisdiction is simply being obstructive and looking after the interests of money launderers rather than the victims of crime.
Despite the difficulties, it is clear that the FATF has an important role to play in eradicating the stereotyped image of the offshore jurisdiction. Countries wishing to play on the international stage are increasingly feeling the pressure to demonstrate respectability. FATF approval is key to this, and showing that they have effective systems of mutual assistance and extradition will be key to gaining that approval. No one a few years ago would have laid bets that Saudi Arabia would have been prepared to open its doors to an FATF inspection, let alone pass legislation to ensure that its laws comply with the keynote FATF recommendations.
Nearer to home, the Channel Islands and the Isle of Man frequently grant mutual assistance requests to foreign jurisdictions. Jersey in particular in recent years has been proactive in opening its own investigations and supplying evidence to foreign states. It has carried out joint investigations with other jurisdictions, in particular the US. Indeed, it was Jersey that took the lead in the Abacha case, assisting the government of Nigeria to recover $160m (£87.4m) deposited illicitly with one of its financial institutions. It also has a well-regulated financial sector.
Surely it is time to bury the stereotype once and for all and instead focus on what really needs to be done if offshore jurisdictions are to meet the challenge of the heightened expectations of international cooperation now expected of them.
Collingwood Thompson QC is a barrister at 7 Bedford Row and is acting for the Attorney-General of Jersey in the Abacha case