18 November, 2007

Regulatory Capacity

Limited Regulatory Capacity Poses Heightened Risk in the Smaller Offshore Centres. We are looking at the UK National Audit Office Report published on 16 November 2007 [link here]. The Report is titled Managing Risk in the Overseas Territories. There was a useful summary of it published in the internet newspaper Caribbean 360 [link here].

At paragraph 1.32 of the Report there is an interesting comment on the failure of Anguilla adequately to perform its regulatory function. There is also useful information on the extent of the industry in Anguilla and the numbers of persons employed in it. The Report reads:

Regardless of the scale of activity in their area, regulators must discharge core responsibilities including keeping abreast with developments in international standards and their application in the local context; support for drafting of legislation and maintaining specialist investigative skills to respond to regulatory breaches and to deal with overseas requests for information.

Regulators in key centres of Bermuda, and the Cayman and British Virgin Islands have, thanks to fees levied on their flourishing financial sectors, achieved major improvements since 2000, with staffing rising to complements of around 100 staff each. The position in Anguilla, Montserrat and the Turks and Caicos Islands is quite different. For example, in Anguilla, there are only about 200 employees in the financial sector as a whole, and the fees from the industry are insufficient to fund a fully fledged regulatory function. At present, Anguilla has just four professional regulators and has fallen behind with important actions. Regulator resources need to be broadly proportionate to the scale and nature of the industry that they regulate, but they also need a minimum critical mass to keep up with international standards. The Department has taken some steps to address limited capacity, by facilitating secondments and sharing of expertise, from Anguilla to the British Virgin Islands, from Gibraltar to Montserrat and from the British Virgin Islands to Jersey and the Isle of Man. It also held or supported various seminars or workshops in 2003 and 2005.

The point being made here, and at Table 7 of the Report, is a crucial one. Anguilla is one of the smaller offshore centres, with only 200 persons employed in the industry compared with over 4,000 in Bermuda, 5,400 in Cayman Islands, and 1,500 in each of the BVI and Gibraltar. The Cayman Islands is not only the world’s fifth largest banking centre, it is home to 80% of the world’s hedge funds. Bermuda is the world’s leader in captive insurance and a major competitor of London and New York in reinsurance. The BVI is the world leader in the provision of offshore companies, with over 600,000 companies on its Register. By comparison, Anguilla has little to boast about. The financial sector as a whole contributes not more than 15% of GDP and 7% of employment in Anguilla, well behind tourism. The sector is not large enough to sustain effective regulation. Yet, without adequate regulation, the industry poses a threat not just to Anguilla’s security and prosperity, but to the UK as well. More rough waters lie ahead.


  1. Several opposition political candidates have been telling us for years that independence would free our offshore sector from the unreasonable restraints placed upon it by the UK, and we could make our own decisions.

    What we learn from the NAO report is that the "international standards" that we find so objectionable are simply the standards of normal international commerce in today's world. Independence would change nothing. Conforming to these standards has become burdensome throughout the world and we have failed to keep up.

  2. The "Regulatory Capacity" post correctly states that the financial services sector is small in relation to the total GDP of Anguilla (15% -- altho' that's not THAT small -- it would be 1 job in SIX, if all sectors were equally labor-intensive).

    The IMPORTANT POINT about financial services is the impact on government revenues. Fees charged for registration of offshore corporations or banking transactions or whatever are a VERY LARGE SHARE of the total costs of the financial services sector, AND these fees go directly to Government's revenue bottom line.

    Therefore, to replace the government revenues from even a small financial services sector is very difficult, and may have a large negative impact on other sectors, such as the environment. Suppose for example you wanted to replace $100,000 in financial services fees to register 100 companies. If you could collect $.50 per tee shirt in import duties and sales (or VAT) taxes, that means you would have to increase total economic activity in tee shirts by 200,000 units to make up for the loss from the Financial Services sector. That's a lot of cruise ship passengers.

    My recommendation would be to hire good back-up auditors from outside, instead of throwing out the "baby" of easy government revenues with the "bathwater" of performing competent audits


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