Swindlers list

Trusts and fraud litigation frequently brings the litigator into contact with the laws of offshore jurisdictions. A troubled family may be in dispute regarding entitlements under an offshore trust, for example, or perhaps the proceeds of a fraud committed in the UK have been transferred into an offshore trust by the fraudster. Over recent years, the international community has brought pressure to bear on offshore regimes to increase regulation, supervision and transparency. But what steps have been taken, and what are their implications?
Offshore jurisdictions are often referred to as offshore financial centres (OFCs). Although it is difficult to formulate a precise definition of OFCs, they share many common characteristics. OFCs are usually segregated from the traditional banking sector of the jurisdiction. They often restrict access to the offshore sector to non-residents, and many conduct financial transactions only in currencies other than the local currency. Some OFCs permit the formation and registration of a bank via the internet, as well as the licensing and registration of shell banks (which, as the name suggests, have no physical presence in their country of incorporation or affiliation with any regulated financial group).
Some OFCs permit the formation of international business corporations (IBCs). These are generally restricted to transacting business outside the jurisdiction in which they are formed and are characterised by rapid low-cost formation, broad powers, little or no taxation and minimal or non-existent reporting requirements. They are used by the honest for legitimate tax reasons and to preserve privacy. Unfortunately, they also attract the dishonest. The use of nominee officers and bearer shares makes them almost impenetrable to those who suspect that an IBC's assets are the proceeds of wrongdoing. Similarly, those wishing to move assets beyond the reach of prying eyes can utilise an offshore asset protection trust, which is a vehicle that may limit the time within which a third party can attack the trust, and which may include a 'flee clause', permitting the funds to be moved to another OFC should the trust be threatened with an inquiry.
The international drive to clamp down on the movement of illicit funds has gathered momentum over recent years. In 1989, the G7 group of countries established the Financial Action Task Force on Money Laundering (FATF) to develop and promote policies to combat money laundering. In 1990, the FATF published 40 recommendations that its members agreed to implement, and all countries were encouraged to adopt them.
In February 2000, the FATF published a list of 25 criteria by which to identify non-cooperating countries and territories (NCCTs). In June 2000, it published its first list of 15 NCCTs. The number of criteria met by these countries varied, from as few as five up to 20 (Caribbean islands St Kitts and Nevis, for example). Nevis, for example, was reported to allow non-residents to own and operate an offshore bank without providing any identification, and maintained bank secrecy laws that prevented access to information about offshore bank account holders, even in some criminal proceedings. This initiative coalesced with attempts of mainland jurisdictions to retrieve 'black money' amassed under what the mainland jurisdictions initially described as “unfair tax competition” from the offshore jurisdictions. As the offshore jurisdictions have pointed out, it is politically more comfortable for mainland governments to focus on problems abroad. But however true that is, world focus has increasingly been on the offshore jurisdictions. For the OFCs, this has meant that structures and processes – a source of their success as financial centres – became a cause of international stigma. As they scrambled to respond to the FATF, they were faced with the conflicting challenges of implementing changes without undermining their own finance industry. As the usefulness of the trust structure has become increasingly recognised in commerce – in securitisations, for example – some offshore jurisdictions have diversified into this area.
The FATF publishes annual reports on the extent to which countries have implemented its recommendations. The picture painted by the 2001 report looks good. The FATF welcomed the fact that four countries, which had been listed in June 2000, were removed from the list as a result of their efforts to address deficiencies identified by the FATF. Most jurisdictions had participated actively and constructively, and the reviews had revealed and stimulated efforts by governments to improve their systems. Nevertheless, of the 13 additional reviews carried out for the June 2001 review, six resulted in an NCCT designation. Three countries had performed so poorly that the FATF recommended the implementation of countermeasures should their performances not improve.
According to the FATF's most recent report, published in June 2002, the picture looks better still. Four NCCTs listed in 2000 and 2001 have been removed from the list (including St Kitts and Nevis) and another 12 are said to have made substantial progress. On the other hand, two new countries (Grenada and the Ukraine) have been added to the list for the first time. Also, in December 2001 the FATF agreed to implement countermeasures against Nauru for its failure to address serious deficiencies in its banking centre. It was said to lack even a basic set of anti-money laundering regulations (such as the criminalisation of money laundering); it also had excessive bank secrecy laws and was home to some 400 shell banks. The FATF has also indicated that Nigeria, which had been unwilling or unable to cooperate with its review, should be subject to countermeasures if its performance does not improve this year.
The FATF has not been alone in monitoring international financial regulation. There have been numerous initiatives, such as the International Monetary Fund Offshore Financial Center Program. This was launched in July 2000 to address potential vulnerabilities in financial systems by identifying gaps in supervision and improving the coverage of statistics on the activities of OFCs in financial markets. It released a progress report in March 2002. In terms of banking supervision, it found weaknesses in anti-money laundering measures, the independence of the regulator and on-site and off-site surveillance. Until recently, insurance supervision had been accorded low priority (although this is now improving) and the jurisdictions have only recently begun to focus on the regulation and supervision of offshore trusts and companies. Moreover, jurisdictions' supervisory capabilities were found to be constrained by high costs and shortages of skilled and experienced staff. On the other hand, it acknowledged that some countries had moved rapidly to correct identified deficiencies by strengthening laws, conducting anti-money laundering training and exiting activity that it was not cost-effective to supervise.
Interestingly, it has been suggested that the USA Patriot Act, signed into law in October 2001, may have an impact on OFCs. By providing an effective lever to motivate OFCs to cooperate with the US, this act may assist in improving transparency in offshore transactions. Although the primary focus of the act is to expand law enforcement powers to apprehend terrorists, its provisions also impact upon those who conduct financial business in the US. Among other things, it gives the US authorities broad discretion to identify foreign jurisdictions, financial institutions and transactions that are of prime money laundering concern. It allows the authorities to require US financial institutions, including banks, investment companies and broker/dealers, to implement special measures towards those areas identified as being of primary money laundering concern. It also requires financial institutions that establish, maintain, administer or manage private banking accounts and correspondent accounts for non-US persons to establish appropriate specific, and where necessary enhanced, due diligence policies, procedures and controls that are reasonably designed to detect and report money laundering through these accounts.
The aim of these provisions is to make it difficult for US financial institutions to do business with foreign banks designated as primary money laundering concerns and thus to deter them from doing so. It has been suggested that a fear of the economic consequences of being so designated by the US might be such that this act will itself provide impetus to OFCs' attempts to satisfy international expectations as to their financial regulation and supervision.
So what does all this mean for the litigator who wishes to understand the environment in which their claim will be made and the standards of professionals (sometimes trustees) who will be involved in it?
On the face of it, there is much to hope for. The prospects for improved regulation, supervision and transparency in the OFCs appear to be good. Each FATF NCCT update report has found significant improvements in the majority of countries it has reviewed, and events have shown that pressure will be applied to truly recalcitrant states. In the future, trustees in all jurisdictions will increasingly comply with internationally imposed standards.
On the other hand, the reality is that legislation and supervision, both in onshore and offshore states, are only as effective as those who manage them. The existence of money laundering legislation and bank regulatory bodies in the OFCs, while satisfying international reviews, may not add up to an environment where aggrieved creditors or the victims of fraud are any more likely to be able to identify or claim back their funds. There is a long lead time in trusts and fraud litigation, both of which account for a substantial proportion of litigation in offshore jurisdictions (a breach of trust may not come to light for many years; it is not uncommon for litigation to commence up to 20 years after the original breach).
Accordingly, it is likely to be some time before practitioners can really assess the extent to which international pressure on offshore banking centres to improve regulation, supervision and transparency has paid off.
Robert Hunter is a partner and Liz Sinclair an associate in Allen & Overy's trust, asset-tracing and fraud group