White trash?

The EU’s draft white paper on anti-money laundering competence has drawn fierce criticism for its arbitrary methodology.


White trash? In May the EU published a white paper detailing the countries it considered to have in place anti-money laundering controls the equivalent to the EU’s own. The list, which is still in draft phase, has caused uproar in the ­offshore profession, for while it highlights Russia and Mexico as ­having top-quality controls, other key offshore ­centres have received less palatable reviews.

Jersey, Guernsey and the Isle of Man have been placed by the EU on an ‘intermediate’ list of financial centres that “may” meet compliance regulations. This has angered the three Crown dependencies, which claim they have done everything possible to put their houses in order.

Meanwhile, the EU Committee on the ­Prevention of Money Laundering and Terrorist Financing, which drew up the list, named 13 territories (see box, page 26) as having EU-equivalent money laundering standards.

The white list of approved ;countries allows companies operating in EU states to waive some checks they would normally be required to carry out on financial transactions carried out with companies abroad to ensure they do not involve the proceeds of crime.

The inclusion of the Russian Federation has prompted senior offshore lawyers to question the motives behind the list.

Jersey-based BakerPlatt published its own report in response to the paper, showing that Jersey has been given a high compliance rating by several independent reports, including the International Monetary Fund (IMF).

“Whether the decision was a political one or not, it must be considered unlikely that the decision to omit Jersey was based on a record of compliance with international standards,” the report said.

The IMF’s 2003 assessment of supervision and regulation of the jurisdiction noted that “the financial regulatory and supervisory system of Jersey complies well with ­international standards”.

The IMF also said Jersey had responded positively to the recommendations of an earlier Financial Action Task Force (FATF) on anti-money laundering and that Jersey complied, or largely complied, with every recommendation made by FATF.

Australia and Canada, by contrast, had achieved low levels of compliance (20 and 23 per cent respectively) with the FATF recommendations, yet are included on the white list.

As BakerPlatt chairman Stephen Platt points out: “It makes it difficult for the EU to justify their inclusion on the white list on the grounds of equivalence.”
“It’s politically driven and there’s no good reason why the Crown dependencies are not on the list,” says one senior Guernsey-based partner. “It’s an outrageous statement.”

Maples and Calder managing partner Charles Jennings has also come out in ­defiance of the list. In this Offshore Special Report he highlights the discrepancies between assessment standards of the ­various supervisory committees and warns that EU countries may come across ­significant challenges when trying to assess the anti-money laundering standards in various countries.

Jennings ;writes: ;“Questions ;of ­impartiality, fairness and accuracy aside, EU countries may have to confront a more fundamental, practical concern
in relation to their use of the list. How can members credibly rely on the white list for anti-money laundering equivalence when it includes countries such as Argentina, Brazil, Mexico, the Russian ­Federation and South Africa, which are known to have inferior systems and ­controls? Moreover, how can EU members rely on each other when ­countries such as Greece (12), Finland (20), Iceland (22) and Denmark (24) meet less than half of the FATF recommendations?”

By FATF standards, the Cayman Islands ranks above all these countries and the UK for anti-money laundering controls.

It is worth noting that the white list is still in draft form and currently it is understood that offshore regulatory authorities are working with the EU committee to see what can be done to improve standards further.

One method could be to increase significantly reporting of suspicious financial activity in offshore jurisdictions.

In November 2007, a report by the National Audit Office (NAO), ‘Managing Risk in the Overseas Territories’, said the IMF had reported “that the number of suspicious activity reports appears to be low”.

The NAO added: “Global experience shows that, as tougher requirements are imposed and enforced, and effective awareness programmes implemented, the number of valid suspicious transaction reports rises substantially.”

The most recent figures (for 2005) show that Cayman made 244 reports of suspicious activity, compared with the British Virgin Islands’ (BVI) 101 complaints. ­Nevertheless, this is substantially fewer than the 1,162 complaints made by Jersey, or the 1,652 made by he Isle of Man.

If the EU fails to amend the draft list when it finalises the white paper it will be faced with an international backlash and could reasonably be expected to offer some justifications for its reasoning.

The inclusion of Russia and Mexico, the omissions of Cayman and the BVI and the minimal recommendation on Jersey rightly raises some questions about the ­methodology used by the EU.

Opinion: the dangers of the EU white paper

Charles Jennings (above), joint managing partner, and Martin Livingston, associate, Maples and Calder
Much comment has been made recently about the UK Treasury’s publication of the EU white paper list of countries with anti-money laundering (AML) controls,
supposedly equivalent to the EU standards. Most EU countries, and probably others, will use the list to assess whether they can rely on or apply simplified due diligence for firms or financial institutions based in such jurisdictions. As a result, the list will be quite influential in the placement of deals.
The EU has taken more than a year and a half to produce what can only be regarded as another arbitrary and prejudicial measure to undermine offshore financial centres. Key centres such as the Cayman Islands, Bermuda, the British Virgin Islands and the Crown Dependencies of the Channel Islands and Isle of Man, are no doubt disappointed at their lack of recognition and will be acutely conscious of the bearing these lists have in relation to attracting business. They have cause to be concerned because, at one level, the rationale for their exclusion from the list is inexplicable. On another more cynical level, the rationale is as clear as can be – and has nothing to do with AML.
Over the past five years most ­jurisdictions, including all offshore financial centres, have had their AML laws and ­regulations reviewed by either the Financial Action Task Force (FATF) or the International ­Monetary Fund (IMF), against a common methodology based on FATF ­recommendations together with UN ­principles and sanctions. The FATF is conducting a third round of mutual evaluations and approximately 27 onshore and offshore jurisdictions have been reviewed to date.
As an example, based on a tally of ­compliant and largely compliant ratings, the Cayman Islands is currently ranked fourth out of the 27 jurisdictions reviewed so far, with a score of 38 out of 49. It is a little-known fact that the Cayman Islands has achieved better results in this round of assessments than EU members such as Denmark, Finland, Greece, Ireland, Italy, Portugal, Spain, Sweden and even the UK. Moreover, based on the third round and prior evaluations of other jurisdictions, the Cayman Islands also rates higher than most non-EU countries appearing on the list, including Australia, Canada, Hong Kong and Switzerland.
It is common knowledge that membership of the FATF is conditional upon a ­criterion of strategic importance that ­underlies trade relationships between the members. This would explain the recent intriguing additions to the FATF ­membership list of South Africa, the Russian Federation and China, with India and Korea as observer bodies waiting to be admitted. It has been well documented that these ­countries still have much work to do on AML compliance before they meet the FATF’s recommendations, let alone catch up with other non-FATF member jurisdictions.
The majority of EU member states failed to implement domestically the EU Third Money Laundering Directive by the required implementation date of 15 ­December 2007. The directive extends AML ­regulatory obligations to financial services that have actually been covered in jurisdictions such as the Cayman Islands and the Channel Islands for more than eight years. Once again, the EU finds itself contemplating disciplinary action against those ­members in non-compliance. We await that action with interest.
Questions of impartiality, fairness and accuracy aside, EU countries may have to confront a more fundamental, practical ­concern in relation to their use of the list: how can members credibly rely on the list for AML equivalence when it includes ­countries such as Argentina, Brazil, Mexico, the Russian Federation and South Africa, which are known to have inferior systems and controls?
Moreover, how can EU members rely on it when countries such as Denmark, ­Finland, Greece and Iceland meet fewer than half of the FATF recommendations?
It is no wonder that the UK Treasury has warned on its website that “firms should note that the list does not override the need for them to continue to operate risk-based procedures when dealing with customers based in an equivalent jurisdiction”.
With such an imbalance in the AML ­standards of most of these jurisdictions, any compliance officers worth their salt would pay little credence to the list and apply normal due diligence procedures. Not to do so may expose their firm or financial institution to greater legal, regulatory and reputational risk.
Offshore centres such as the Cayman Islands and the Crown Dependencies are ­justifiably proud of their AML and ­achievements in combating the financing of terrorism in recent times, and not to be included on such lists is frustrating. ­However, given the inherent flaws in ­selection to the list, its application may ­present greater problems for those EU members that choose to use it.
From an AML perspective the white list is capricious and ultimately meaningless. It is high time that the EU drew its conclusions from empirical data and practical research, instead of relying on trade-driven ­influences and outdated stereotypes.