What price the pursuit of fiscal crime?

John Rhodes believes the British government should think twice before attempting to extend money laundering legislation to fiscal offences in offshore jurisdictions. John Rhodes is a partner at city law firm Macfarlanes.

No-one objects to laws which help to identify and thwart drug barons. But by planning to introduce legislation against money laundering in offshore islands, the Government seems intent on attacking foreign tax evasion to the potential detriment of the islands and the City of London.

The issues should be tackled in a different and more co-ordinated way if the economies of the islands are not to be undermined at no net gain to the UK.

Anti-money laundering legislation was introduced in the Cayman Islands in 1989 and 1996, and in the British Virgin Isles (BVI) and Bermuda in 1997. Draft legislation is under discussion in the Isle of Man, Jersey and Guernsey.

The main topic is whether reporting requirements at the centre of these new laws will extend to foreign tax and exchange control offences, as well as heavy criminal offences such as drug dealing, kidnapping, extortion and fraud.

The position in Cayman and Bermuda is very clear. Cayman law specifically excludes tax offences, while Bermuda law applies to a list of offences and tax is not one of them.

In BVI the result is intended to be the same, in that the relevant criminal offences have to be indictable. At present, tax offences in BVI are not. So as the legislation operates on the "dual criminality" basis, the argument is that BVI law cannot apply to tax offences elsewhere.

The position is complicated by the fact these more distant islands are the responsibility of the Foreign Office, whilst the Home Office runs our relationships with the Isle of Man and the Channel Islands.

Although last August the Foreign Office denied it was putting pressure on Cayman to revise its specific tax exclusion, the rumours continue, and civil servants admit that this is what they would like to see.

Some professionals in the Channel Islands are said to recognise the "political imperative" of including foreign tax offences in their new money laundering laws; and this is taken as evidence that the damage likely to be caused to local economies is minimal.

These offshore jurisdictions all realised long ago that their economies depend on tourism and financial services. The latter has to be properly regulated to have a credible long term future. If this isn't done they risk being cut out of the world's financial markets.

After all, most of their customers want to use them as a base from which to invest elsewhere. This is why the islands accept the need for regulation.

But the UK Government may be pushing too hard in expecting the new legislation to outlaw foreign tax evasion as well as the criminal offences for which it was envisaged.

To question this is not to support universal tax evasion. Any UK professional will be meticulous in the advice given to clients on UK tax. Evading tax here is both professionally and morally unacceptable. But this does not mean such professionals can set themselves up in judgement on the tax morality of other countries, or pretend to be expert on them.

The line between taxation and confiscation can be hard to draw. Who can blame families who have had all their family assets confiscated taking steps to avoid it happening again? This is still recent history in Shanghai, Middle Europe and the former USSR. It may still be happening elsewhere.

We may joke that tax evasion is a national pastime on the continent, but if you have had personal experience of invasion by a foreign power you too might be reluctant to tell any government all there is to know.

So far as can be discovered no other country is yet expecting its bankers and professionals to report suspicion that a new customer may not be up to date with his taxes back home.

This isn't even clearly the law in the UK and the US, let alone any other EU country. So why expect our offshore islands to lead the way? Continuing pressure on this issue will simply result in money being moved elsewhere. If this happens, our markets will lose funds now under management here.

At present $150bn of Jersey's $200bn is invested through London. At worst, the UK might have to provide the islands with financial support as their economies suffer from the withdrawal of business.

Instead, the Government should promote a co-ordinated approach to the problem of tax evasion: firstly persuading other countries to have more rational systems, with lower average rates of tax; then to adopt the same disclosure rules across the board. To succeed, this may have to involve a major amnesty programme.

Only when these rules match up in Liechtenstein, Switzerland, Luxembourg, Monaco and USA and the rest of Europe will it make any sense to impose high moral ground on our offshore islands?

See offshore feature on pages 17-33