The Atlantic/Caribbean region is fighting hard to shake off its reputation as a money-laundering centre, says Richard Newell. Competition and the drive for cleaner markets continue to be the main elements driving the development of offshore centres in the Atlantic/Caribbean region.
The sector is still beset with problems and in the last six months we have seen the collapse of the European Investment Bank, an Antiguan-based operation marketing itself on the Internet, the removal of companies from listing in centres including Bermuda and, in recent, weeks the closure of the First Cayman and Gulf Union banks.
Bermuda's economy remains buoyant, although as Bank of Bermuda senior vice-president Cummings Zuill points out, islanders are aware of the need to diversify the island economy as competition for tourist dollars intensifies.
International business has now become Bermuda's largest source of foreign exchange. Its most high-profile activity of late has been the development of the Bermuda stock exchange listing facility and the exchange trading of insurance contracts.
Bermuda has been active in the drive to reduce the amount of money-laundering practised in the region. Under the auspices of the Caribbean Financial Action Task Force, Bermuda is encouraging all offshore centres to introduce legislation to eradicate money laundering, especially that related to drug money.
The Caymans' recent problems come at a time when it has been making strides to clean up its image. The statement this month from the Cayman Islands Monetary Authority said that due diligence carried out by a prospective purchaser “revealed that First Cayman Bank had been implicated in a fraudulent scheme which cannot be quantified at this time”. The local deposits of First Cayman total $6.2m. As a result of the investigation into First Cayman and Gulf Union Bank, the islands' executive council has revoked the licences of the two banks and has appointed Deloitte & Touche as liquidators.
More encouragingly, the Caymans has set up its Monetary Authority and has supplemented this in the funds management area with codes of conduct imposing due diligence responsibilities on promoters and custodian banks. The closure of First Cayman could be seen as proof that the new systems are working, even though the regulatory system is still in its infancy.
People seeking to establish trusts in the Cayman Islands now have greater planning flexibility. The passing of the Special Trusts (Alternative Regime) Bill in September complements the existing trust framework. Prior to the passing of the Special Trusts Bill, trusts could only be established in the Caymans for individual or corporate beneficiaries or for public charitable purposes. The new legislation extends this principle so that a trust can be established for lawful private purposes, or a combination of persons and purposes.
Among the key features of the law are the provisions which allow a trust its own mechanism for resolving uncertainty regarding its object. It also gives the courts jurisdiction to resolve this uncertainty in the absence of an alternative. The special trusts law will also appeal to settlers who want a trust for persons but who may want the flexibility to give rights of enforcement to non-beneficiairies, and to exclude or qualify beneficiaries' right of enforcement.
According to the Finance and Economic Development department in Grand Cayman, the special trusts law offers definite advantages for high net worth individuals and institutions, with its private and commercial applications and its ability to provide for the overlap in a mixed trust, person and purpose, scenario.
The smaller Caribbean offshore territories have all been active in updating trust and company laws. Those such as the British Virgin Islands (BVI), Anguilla, Turks & Caicos (T&C) and St Vincent & The Grenadines are also attempting to build significant business in mutual funds and insurance. The BVI sent an impressive delegation to London this month including chief minister Ralph O'Neal, Attorney General Dancia Penn QC and head of financial services Robert Mathavious. The main thrust of their message centred on the new anti-money-laundering provisions introduced to match All Crimes Money Laundering rules introduced under UK law. The BVI's new Mutual Fund Law was also trumpeted although this remains to be installed in the statute book and will be lucky to be so before the end of the year. Richard Peters of local law firm Harney Westwood & Riegels puts this down to a belated consultation with the private sector on the basic framework of the legislation.
BVI is anxious to be seen as more than just a centre for the establishment of International Business Companies (IBCs), of which it has more than 200,000. It does not have a significant offshore banking industry, which has been something of a blessing in the avoidance of any major money-laundering scandals.
However, the authorities' confidence in the implementation of anti-money-aundering legislation has some experts scratching their heads in view of the problems of knowing your customer in the context of IBCs. BVI is an ambitious centre with some quality personnel in public and private sectors. It has introduced insurance legislation to rival that of the Caymans and Bermuda. It remains to be seen whether it can build this and the mutual funds business to seriously rival Bermuda and Cayman.
Barbados has majored on the establishment of IBCs, Foreign Sales Corporations, trust and banking. The Ministry of International Trade is conducting a survey among the island's practitioners to prepare for a revamp of the offshore legislation in Barbados. International tax lawyer Lynne Eastmond has just been appointed director of international business. She says the intention of the review is to ensure that Barbados is keeping in touch with developments across the range of offshore services, and that its legislation is technically sound.
T&C is expecting to have a specially tailored mutual funds law ready to show sometime in 1998. Financial Services Commissioner Mike Constantine says there are opportunities for T&C to offer a facility to “sophisticated” investors looking to move from other jurisdictions in the Caribbean.
While many of the centres have moved to implement anti-money-laundering measures, it remains to be seen how effective these will be.
Certainly in the case of Antigua, it has not been the best of times of late. Earlier this year, amid strong allegations that the island was being used as a laundry for Russian Mafia money, the authorities moved to close down five Russian banks. This was followed by the extraordinary events surrounding the misleadingly named European Union Bank (EUB). Nothing at all to do with Brussels – the EUB was just another front for Russian money laundering. It marketed itself as the first offshore bank on the Internet. This summer, EUB went into receivership and its Russian owners were believed to have fled with depositors' cash.
The issue of client confidentiality has been highlighted by moves in the US to repeal the so-called “10 commandments” – the set of criteria which, if met, allow certain US companies to administer business offshore – in a bid to get that business to move back to the US. When the proposal was first announced in May, there was serious concern that centres such as the Caymans and Bermuda would suffer. Now the mood is more optimistic. Banks are able to argue that client confidentiality could be prejudiced by bringing the business directly under US jurisdiction. The employment card played by the US was widely criticised as a smokescreen for the real agenda, which was to get information on US investors with offshore assets. Zuill at Bank of Bermuda says the repeal of the 10 commandments will prove to be less radical than was first thought, but the problem now is to establish what the US principles are for offshore designation.