Lighting the way
27 May 2002
In the uncertain times in which we live, the role of offshore centres has come under intense scrutiny. The Organisation for Economic Cooperation and Development (OECD), the EU and the UN are all giving consideration to how offshore centres operate. What is emerging is that for these offshore centres to survive, it is imperative that their armoury of laws regulating financial business is fully stocked and that these laws are seen to be effective.
UK advisers have long since regarded Jersey and Guernsey as jurisdictions of choice when establishing private client and commercial structures. Neither island is complacent. Over recent months both have been augmenting their armoury of laws so that in the eyes of customers and intermediaries, they can remain as preferred jurisdictions in which to do business.
In Jersey, for instance, over the past 15 months or so alone the following laws or initiatives have been introduced:
The Financial Services (Extension) (Jersey) Law 2000 came into force on 2 February 2001, regulating trust company businesses.
The Companies (Amendment No 6) (Jersey) Law 2002, which comes into force in July 2002, will update company law in a material way.
The Criminal Justice (International Cooperation) (Jersey) Law 2001 came into force this year, enabling Jersey to cooperate with other countries in criminal investigations and proceedings.
The Jersey Financial Services Commission (JFSC) has issued a position paper in respect of the revised 'Know Your Customer' framework; the paper foreshadows changes that will be made this year to the Guidance Notes issued under the Proceeds of Crime (Jersey) Law 1999.
The JFSC has issued a policy on outsourcing in respect of financial service businesses. In order to be licensed, businesses must be fit and proper. This policy extends that principle to the activity of outsourcing part of a business' regulated function.
The Financial Services (Extension) (Jersey) Law 2001
Prior to 2 February 2001, only one part of the finance industry was not regulated. On that date, trust companies carrying on business on the island became regulated. The legislation is far-reaching. In essence, it requires trust companies, their shareholders and their directors to be fit and proper. To assist the JFSC in this regard, codes of practice were issued for the purpose of establishing sound principles for the conduct of trust company business. Those codes of practice require that a registered person must conduct their business with integrity, have the highest regard for the interests of customers, organise and control their affairs effectively for the proper performance of their business activities and be able to demonstrate the existence of adequate risk management systems.
A registered person must satisfy the JFSC that they have an adequate management system (known as 'span of control') appropriate to the nature of their business. In practice, this means that a business entitled to hold trust company business assets must be controlled by three appropriately skilled and experienced individuals. Competence is measured by academic qualifications (set out in tables contained in the codes) and length of relevant experience.
There is also a universal requirement that all client-facing employees involved in a trust company business should receive at least 25 hours of continuous professional development each year. Orders under the law have also prescribed requirements for trust company businesses concerning the filing of accounts, auditing, insurance and capital adequacy.
The JFSC outsourcing policy
Allied to the Financial Services Law is the JFSC's policy document on outsourcing, which applies to all financial services businesses, including trust companies. Essentially, it establishes that a financial services business must notify the JFSC before outsourcing any regulated function; it must ensure that a delegatee is fit and proper; it must retain sufficient competence to be able to evaluate the performance of the delegatee; and it must have a written agreement in place with the delegatee enabling the financial services business to terminate the arrangement.
The Companies (Amendment No 6) (Jersey) Law 2001
This law modernises the Companies (Jersey) Law 1991 as amended. In particular, when in force it will permit the incorporation of new forms of company, such as par-value or no-par-value companies, guarantee companies, single member companies and unlimited companies. In addition, it introduces into Jersey legislation the possibility for Jersey companies to merge and introduces redomiciliation provisions, both of foreign bodies corporate to redomicile to Jersey and for Jersey companies to redomicile as foreign bodies corporate.
The Position Paper on the Overriding Principles for a Revised Know Your Customer Framework
The Commissions of Jersey, Guernsey and the Isle of Man issued a joint consultation paper in December 2000 on the 'Know Your Customer' (KYC) framework. Following the consultation process in Jersey, the JFSC has issued the position paper. While the paper is not law, and nor does it represent formal guidance, it is nevertheless an important document because the JFSC clearly regards the principles within it as representing best practice in the KYC field. The main changes that the JFSC wishes to see introduced in the new guidance notes are:
A move away from reliance on acceptable introducers to a position where the burden is placed on financial services businesses to verify identity, and hold the requisite records, themselves.
Financial services businesses to be required to establish the source of clients' funds and even wealth.
The clarification of who the principal of the financial services business is in a business relationship, and the requirement for the business to verify the identity of its principals, ie the beneficiaries of a trust or shareholders owning more than 10 per cent of a company or partnership.
Financial services businesses to be required to verify the identity of the customers it had on its books before the proceeds of crime legislation came into force on 1 July 1999.
The Criminal Justice (International Cooperation) (Jersey) Law 2001
This law provides a framework for the following:
Service of process in respect of overseas criminal proceedings in Jersey.
Service of process in respect of Jersey criminal proceedings in a foreign jurisdiction.
An ability for evidence that may be required for criminal proceedings on the island to be taken overseas.
An ability for evidence that may be required for criminal proceedings outside the island is to be taken in Jersey.
Legislation in the pipeline
In addition to the changes to the Guidance Notes, The Terrorism (Jersey) Law 2002 is likely to be enacted this year, which will allow the island to ratify the UN International Convention for the Suppression of the Financing of Terrorism.
Finally, the JFSC will issue consultation papers concerned with the consolidation of banking legislation, financial services advertising and the beneficial owners of companies.
In order to continue to be pre-eminent in any field, you cannot relax and think the job is done. In the field of offshore financial services, to date Jersey and Guernsey have led the way. Both islands have been able to spread their wings in terms of the range of business they conduct. Jersey leads the field in offshore Western Europe in employee benefit structures, securitisations and capital markets work, while Guernsey has cornered the market in the sphere of captive insurance.
For the islands to remain at the head of the pack, they must constantly update and strengthen their legislation. In Jersey, the island has focused on introducing measures that make it harder for criminals to use the island's finance industry to further their ends, ie the Criminal Justice (International Cooperation) (Jersey) Law 2001, the draft Terrorism (Jersey) Law 2002 and the position paper. Also, it has recognised that those carrying on financial services business in the island must operate within a regulated environment, must achieve minimum standards and must realise that if they fail to meet those standards they will be forced to cease business, ie the Financial Services Extension (Jersey) Law 2001, the codes of practice and the JFSC's policy on outsourcing. Finally, the island recognises the need in terms of its corporate vehicles to offer customers the widest choice, hence the new Companies (Amendment No 6) Law.
The islands will not be complacent. As they face new threats, such as the EU Code of Conduct on Business Taxation, the islands will constantly ask themselves what they need to do next in order to develop and enhance their finance industries, pressing on towards the goal of remaining offshore centres of the highest repute and reputation.
Steve Meiklejohn is a partner at Jersey firm Ogier & Le Masurier
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