Jersey bows

As one of the most famous offshore financial centres, Jersey is subject to much scrutiny by the regulators. Matthew Thompson reports on how it is coping with all the new laws

The fastest growing area in Jersey today is the regulatory field. We are now seeing the Jersey regulator, the Jersey Financial Services Commission and the States of Jersey Police in the form of the Joint Financial Crimes Unit, exercising their powers in a significant way. The role of the regulator has developed from the entity which completes the process of putting the relevant statutory requirements in place, to the body responsible for policing the statutory framework, underlying orders and codes of practice. Much more is also on the horizon, arising both from external scrutiny of Jersey by international bodies and proposals emanating from the Jersey regulator itself.
While the process of creating a statutory framework in relation to the finance industry in Jersey started as far back as 1967, the regulatory framework was completed by two key pieces of legislation which came into force in 1999 and 2001. The first relevant law was the Proceeds of Crime (Jersey) Law 1999. This legislation was based on the Criminal Justice Act 1993 and brought into force in Jersey obligations to report suspicions of money laundering, carrying a potential sentence of imprisonment of one year or more under Jersey Law.
The second significant statute was the Financial Services (Jersey) Law 1998. This statute started life as the Investment Business Law and, in overall terms, was based on the principles set out in the Finance Services Act 1986. However, with effect from February 2001, it was substantially rewritten and extended to apply to Trust and Company service providers.
The scope of regulation in Jersey, therefore, now goes beyond that existing in the UK. In addition to covering the banking, insurance and investment business sectors, the trust business which has been at the heart of Jersey's success over the past 30 years is now subject to the regulator's control.
The effect of such regulation has been to require every professional trust and company provider on the island to apply for a licence in order to continue with business. While most trust and company businesses now have such licences, the regulator has not completed the process and is starting to exercise its powers to review whether or not particular businesses meet the required standard. For those who have not yet had their licence, some dissatisfaction has been expressed about the length of time the process has taken and whether or not all businesses have had the same treatment from the regulator. What is clear is that the regulator is taking its responsibilities seriously and is scrutinising businesses before a licence application is granted.
One consequence of the approach of the regulators and the Financial Services (Jersey) Law has led to certain amalgamations and takeovers of trust businesses, in order to comply with one essential principle known as the “six eyes principle”. This is an obligation that requires any trust company business to have at least three senior people with appropriate qualifications or experience to be involved on a full-time basis. The days of the sole practitioner, if not already at an end, are certainly numbered.
The regulator has also been seen to exercise its powers in relation to businesses caught up in international issues. Jersey was not left out of the Abacha affair and the regulator has reviewed the extent of Jersey's involvement. Where appropriate Jersey has made it clear and demonstrated that it will exercise sanctions and reviews of the systems of institutions if they are perceived to have fallen short of the required standard. There are cases where individuals have not been deemed to be fit and proper and have accordingly ceased to have a role to play in the finance industry.
There is a danger when commenting on the regulatory perspective that an exercise of powers by the regulator in Jersey produces adverse publicity for the island. What should not be forgotten is that most businesses have been licensed and continue to attract new business. What does exist in Jersey is an effective regulator prepared to take action where appropriate, using the Police and Jersey Law Officers. The first successful prosecution for money laundering has occurred; the island also has a good record of cooperating with other jurisdictions in combating money laundering.
The regulator has also been prepared to take over the management of businesses where the regulator was concerned that the required standards were not being met. Although these are extreme measures, they indicate a willingness to act where appropriate.
The approach in Jersey is also significant in terms of the future. As one of the most well known, if not the leading, offshore financial centres, Jersey is subject to constant scrutiny by international bodies. This month the International Monetary Fund (IMF) is to visit the island. Jersey has also provided one of the co-chairman to the Basel Committee on Banking Supervision and is engaged in an ongoing dialogue with the Financial Action Task Force (FATF) on the 40 recommendations the FATF issued in October 2001 and reviewed in May this year. A significant issue for debate with the FATF is the status of trust and company service providers. This is an important issue of principle for financial services businesses in Jersey and elsewhere and one not without its complexities, especially when dealing with civil law systems to which the concept of a trust is an anathema.
A more practical issue facing both Jersey and the international finance community is the degree to which institutions can rely upon other institutions to provide information about clients. A key aspect for both Jersey and the international community is how far one institution, in relying on information from another financial services business, has to go to verify and review the procedures of the other business. If an entity is licensed in Jersey, or an equivalent country, another entity should be able to rely on information provided by it, so that information can be given to the relevant regulator to police the playing field. It is not for institutions to verify each other.
Earlier this year a position paper entitled 'Overriding Principles for a Revised Know Your Customer Framework' was issued jointly by Guernsey, Jersey and the Isle of Man regulators. While it does not amend the existing guidance notes in Jersey, it has been described as a statement of “future best practice”. This statement has caused confusion and uncertainty and has led to different institutions applying different standards in terms of what 'know-your-customer' (KYC) rules apply. This paper is therefore the subject of keen debate and is linked to how international bodies, such as the FATF, are shaping international standards.
The regulation's future in Jersey will, however, become clearer as the current guidance notes issued under the Proceeds of Crime Law are rewritten. The process has begun and is intended for completion by early next year. The final scope of revised guidance notes will also be shaped by FATF and international standards. The future for all financial centres, including Jersey in a regulatory context, depends on how those international standards are set and how they are implemented in each jurisdiction. At this stage Jersey is committed, in principle, to adhering to international standards on the basis of a level playing field.
What is evident, in terms of a revision of guidance notes, is that much has been learned since 1999 and, in particular, since trust companies became regulated. KYC will be extended, not only to verify identity in terms of names and addresses of a client, but also to maintain an audit trail and understand the commercial rationale of a particular structure. Such changes increase the island's defences against money laundering. The dialogue with Basel, the FATF and other international bodies, as well as the process of reviewing and amending guidance notes, also have the same overriding objective.
The trend for Jersey – in terms of regulation – while increasing, is to underline and reinforce a successful finance industry. Of course, there are issues for debate, which cover maintaining the right balance between effective regulation and international competitiveness. Those who use the island's services, however, can be satisfied that not only will standards be enforced, but they are also being developed and modified in partnership with the regulator and industry. Change will inevitably occur; the key issue for the future is getting that change right.
Matthew Thompson is head of litigation at Ogier Le Masurier