Draft legislation looks set to leave those trying to launder money between a rock and a hard place. Alan Binnington reports. Alan Binnington is a partner at Jersey law firm Mourant du Feu & Jeune.
Despite often adverse coverage in the press and the occasional protestations of government, offshore finance centres such as Jersey play a useful role in attracting funds for investment in the UK and the European Union.
Indeed, a recent estimate suggests that of the £200bn of funds managed in Jersey some £150bn is invested in and through the City of London. Nevertheless these funds have, in the past, attracted the attention of money launderers. A new piece of legislation is designed to combat that risk.
Jersey has had money laundering legislation in the form of the Drug Trafficking Offences (Jersey) Law for some 10 years and the existence of that law has played a significant role in the successful prosecution of launderers of drug money in other jurisdictions.
In 1997 a cheque for more than US$1m was handed to the Jersey authorities by the US ambassador to London in recognition of the role that Jersey had played in a major drug money laundering investigation.
In the latter part of last year the Jersey authorities promoted draft legislation, known as the Proceeds of Crime (Jersey) Law. Under the 1988 law, there is a duty to report to the police transactions suspected to have emanated from drug trafficking. Under the draft legislation, that duty is extended to reporting suspicions that monies are the proceeds of other criminal conduct.
It is likely that many reports under the 1988 law were made where the origin of the funds in question was not drug trafficking but other criminal conduct for the simple reason that when a suspicion arises it is unlikely that it will be possible to identify the precise criminal conduct involved.
The relevant criminal conduct for the purposes of the draft law is conduct which, if committed in Jersey, would constitute an offence punishable by two or more years' imprisonment. As such, it extends to virtually all serious offences. For that reason it is colloquially known as the All Crimes Money Laundering Legislation.
It is expected that the draft law will be debated by the island's parliament, the States of Jersey, during the first half of this year and will therefore become law towards the end of the year.
The pressure for legislation of this type has come from both within and without the island. The Jersey authorities are keen to demonstrate that Jersey, as a responsible finance centre, has legislation in the field of regulation and anti-money laundering which is no less rigorous than that of those jurisdictions with which it does business.
Additionally, the UK government, through the Home Office, which has responsibility for the island's external affairs, is keen to ensure that Jersey, in common with the other jurisdictions for which it has responsibility, such as Guernsey, the Isle of Man, the Cayman Islands, Gibraltar and Bermuda, has this type of legislation in place.
The draft law has been the subject of extensive consultation with bodies representing all aspects of Jersey's finance industry. When the draft law was first promoted, one of the the industry's principal concerns was its application to revenue offences.
With an increasingly fine line being drawn nowadays between tax avoidance and tax evasion, the industry was concerned that the draft law might overnight turn it into a tax inspector, required to report its clients to the authorities simply because there was a risk that the client might not have declared all his income and assets to the revenue authorities in his home jurisdiction. This fear has proved to be unfounded.
While it is true that the definition of “criminal conduct” in the draft law could encompass revenue offences, the definition makes it clear that it will only do so if, in the course of committing a revenue offence, the taxpayer commits a common law offence such as fraud, false accounting or forgery. In other words, there has to be some additional criminality other than failing to declare income or assets to the revenue authority.
In this respect, the draft law is no different from the equivalent statutory provisions in the UK and the other offshore centres referred to above. In recognising that the legislation has this effect, the Jersey authorities accept that it is inevitable that such legislation will apply to revenue offences, because tax evasion is one of the most frequently cited excuses used by the money launderer to explain a suspicious transaction which is in reality intended to disguise the proceeds of criminal conduct.
Some concern was initially expressed as to the control that the island would be able to exercise over information leaving the jurisdiction and being used, or possibly misused, elsewhere.
Accordingly, the first draft of the law contained reference to a “Reporting Authority” which appeared to be designed to operate as a filter mechanism for reports of suspicious transactions being transmitted outside the island.
At the time of writing it is thought that the revised draft law will do away with this concept and instead contain provisions requiring the consent of various individuals to information being transmitted outside the jurisdiction. In this respect it is likely to be modelled on provisions contained in the equivalent legislation in the Isle of Man.
In addition to creating specific money laundering offences and extending the duty to report suspicious transactions to the proceeds of all crimes, the draft law imposes obligations upon financial service institutions to have in place administrative procedures relating to the identification of customers, the detection of suspicious transactions, the retention of records and the training of staff in money laundering awareness.
Unfortunately, the first draft contained provisions which were likely to prove difficult to apply and accordingly, after the usual consultation process, revised provisions were put forward which are modelled closely on the English Money Laundering Regulations. This approach is likely to be of considerable assistance to those larger institutions in Jersey which are part of UK groups because they will readily be able to adopt compliance procedures formulated by their group to satisfy the local regulations.
For those institutions that do not have this advantage there will nevertheless be the benefit that training materials produced for the purposes of the UK regulatory framework can easily be adapted to deal with the Jersey regulations.
The regime constituted by the draft law follows a familiar pattern: suspicious transactions have to be reported to the police and once a report has been made the funds cannot be dealt with without their consent. Clients nowadays demand, and are entitled to expect, that their instructions to move funds are complied with immediately.
So far, under the 1988 Drug Trafficking Offences Law, the Jersey police have proved themselves able to process reports quickly and thus give their consent to transactions proceeding without causing any delay which might alert clients. If the draft law results in an increase in reports, which would seem likely, it is vital that the Jersey authorities provide the relevant unit of the police with sufficient resources to enable this to continue. It is to be hoped that this need will be recognised when the law is finally passed.
The most significant impact of the new law is likely to be in the non-banking sector. Many banks have already introduced “know your customer” systems and training as a result of the 1988 law. Lawyers, accountants and trust companies have tended to adopt a less formal approach. The advent of a legal requirement to have adequate systems in place to detect money laundering will thus place a duty on all sectors of the industry.
Jersey has been a finance centre for well over 30 years and in that time the nature of its business has changed considerably. There was a time when large cash transactions were commonplace; they are now a thing of the past, although there are, regrettably, still jurisdictions which are willing to accept cash or new business without asking any questions.
No finance centre could ever be immune to use by the money launderer but with the advent of the new law Jersey is playing its part in the worldwide effort to make life difficult for those who wish to disguise and conceal the proceeds of crime.