Foot Report

Foot Report published.  The final report of the independent review of British offshore financial centres by former Bank of England official Michael Foot was published today.  You can download the entire report here.

It had been commissioned by the British Government in December 2008.  His mandate required Mr Foot to work co-operatively with the various governments to identify opportunities and challenges generated by turmoil in the financial markets and the subsequent impact on the world economy.  Readers will recall the news item on the visit of Mr Foot to Anguilla in June of this year as reported in the Anguillian Newspaper.  The final report has been awaited with some trepidation in the Overseas Territories financial centres.

In the event, we need not have worried that he would be unreasonable.  I have had a look at the report, and it contains nothing draconian or unexpected.  In fact, it is so reasonable that some European income tax specialists are complaining that it is too wishy-washy.  I suspect that what has these European tax-them-into-submission crew outraged is that Mr Foot is not insisting that the Overseas Territories implement income tax measures or take any mandatory draconian measures.

He takes aim at US tax havens such as Delaware, low British and European compliance with their own standards, and sloppy work by the FATF. 

He does point out that we are going to have to bump up our taxes to meet the drop in government revenue resulting from the economic downturn, if we are not to reduce the public sector services or personnel.  There is nothing new in this recommendation.  However, he leaves it open to us to decide how we are going to achieve the needed increase in revenue.

All-in-all, I consider it a fair report.

TIEA

Tax Information Exchange Arrangements. The Chief Minister and the Minister of Finance, with assorted public servants and hangers-on, have gone off to London to negotiate an increase in Anguilla’s permissible borrowing facility. For some reason the FCO retains a brake on the borrowing ability of the Overseas Territories. Anguilla is now reaching the uppermost limit of its borrowing, and the government ministers need an increase if they are to maintain the high level of government expenditure they had planned in the immediate period before the general elections due early next year. That negotiation is what they told us the trip to London was about.

Someone has just brought to my attention the following article published on the website of HM Revenue in London. The Chief Minister has signed a Tax Information Exchange Arrangement with the British Government. My correspondent asked me whether it had received much publicity in Anguilla. He enquired if I had any reason to believe that the Bar Association and the Anguilla Financial Services Association were consulted on what impact it would have on Anguilla? The answer to both questions is no, I very much doubt that the Chief Minister consulted with any of the relevant stake holders before he signed this Agreement.

I doubt even the Ministers of government, including the Minister of Finance, had the faintest clue that it was going to be signed.

Revenue probably presented it to him at a briefing, and he would have said, “Okay, just let me sign it while I am over here.”

That is how we run government in Anguilla.

Congo

There are two web pages I want you to read. One is a judgment of the High Court in Anguilla in relation to how the Attorney-General’s Chambers handled the case against Joe Brice. The A-G’s Chambers were representing Niguel Streete. He is the Director of the Anguilla Financial Services Commission. The Commission is the offshore industry watchdog for Anguilla. The judgment is only three pages long. Read it and weep. If you need any explanation for any part of it, let me know. After you have finished reading, tell me which of you would want the A-G’s Chambers representing you in a dog bite case.

The second web page, titled Undue Diligence, belongs to Global Witness. It concerns the case of Denis Christel Sassou Nguesso. He is the son of the President of the Republic of Congo. He stands accused of stealing the oil wealth of the citizens of Congo. He used an Anguillian company, Long Beach, to do some of his embezzlements. [This report is very long. Use the search feature to find the bits that mention Anguilla.]

Global Witness is an international NGO established in 1993. It works to break the links between natural resource exploitation, conflict, poverty, corruption, and human rights abuses worldwide. This is a story of corruption in high places in Congo. My concern is how the events revealed affect Anguilla. The connection with Anguilla is the entities ICS Trust and ICS International. These are Hong Kong based company formation agents. Orient Investments is part of ICS. Orient Investments set up Long Beach in Anguilla. It held the shares in Long Beach in trust for Nguesso.

In addition to being the President’s son, Nguesso is also responsible for marketing Congo’s oil. He opened a bank account at one of Hong Kong’s largest banks. He had some of the proceeds of Congo’s oil sales deposited to it. He had his personal credit card bills paid from it. He stole millions. He squandered the proceeds on designer shopping in Paris and elsewhere. The UK High Court ruled in 2007 that Nguesso and his company were “unsavoury and corrupt”.

Up to now, the story is the usual one of private greed and public loss. An Anguillian company had been set up for the most despicable and corrupt of reasons: the rape and pillage of an impoverished nation’s resources. Anguilla’s connection might appear at most to be peripheral. The real shame comes when we learn that as far back as 2007 Global Witness wrote to Niguel Streete alerting him to this international fraud. We learn that Mr Streete assured Global Witness that he was dealing with the matter. It appears that it took a full year for Mr Streete to do anything at all. The best he could do, after repeated prodding, was to strike Long Beach off the Register of Companies in July 2008. This action is generally accepted as the administrative equivalent of sweeping the dust under the carpet while shutting the stable door after the horse has bolted.

Nguesso’s exploitation of his people by the use of an Anguillian vehicle is a problem. The solution is for the local regulators and industry representatives to vehemently condemn this abuse of our facilities, and then to take whatever action they can to demonstrate that such conduct will not be acceptable.

Has Anguilla signed legislation making corruption elsewhere in the world an offence in Anguilla?

Anguilla’s company management laws make it compulsory for offshore providers to perform due diligence on prospective clients. Has there been a breach of this law? If there has been, what action needs to be taken?

Why did it take a full year from the time Mr Streete was alerted to the fraud for him to take even this lame and ineffectual action?

Does Mr Streete plan any further action against Orient Investments?

Will disciplinary action be brought against ICS if any is justified?

What is the Anguilla Financial Services Association doing to ensure that international bandits are not permitted to mis-use our jurisdiction?

How ready are we to confront and reassure the coming CFATF, and IMF, and Michael Foot’s review visits and assessments that will take place in the next few weeks?

Failure by Mr Streete’s office to proceed diligently and firmly in this matter will most likely result in further serious damage to Anguilla’s reputation.

Does Mr Streete have any other lawyer representing him besides the A-G’s Chambers? If not, I strongly recommend he find one. He needs competent legal advice.

Let me say that I have not researched Orient Investments. I have no idea who the local agent is. She might be my mother, for all I know. For the purposes of this post, it matters not.

And, finally, for any concern that this post will damage Anguilla’s offshore financial services industry, the answer is that the damage has already been done. These publications I refer to are out there in the public domain. It will only take one of our competitors, the financial services sectors of London or New York perhaps, to bring the story to the attention of Reuters or AP.

Armageddon

The EU Savings Tax Directive. I am out of the international financial services business now. I sold the company management part of my law practice in 1998. So, I am really out of touch. But, a recent gloating post by a ‘tax em or hang em’ guru about the coming Armageddon for Anguilla and other BOT financial services centres got under my skin. When that happens, I am compelled by a personal character weakness that I have previously admitted to to say something.

If you want to live in a jurisdiction where you are molly coddled from the cradle to the grave, live in the UK or another European jurisdiction. And, pay the high taxes that go with the safety nets. If you enjoy the freedom of living in one of our frontier societies, such as Anguilla is, are willing to put up with the lack of social services, but bank your total pay package at the end of the month with no deductions, then you live in an offshore financial jurisdiction, such as Anguilla is. You probably make your living providing corporate and other structures for international financial planners who service clients with international business who are taxed in high-tax jurisdictions. In Anguilla, we lead a tax-free life, in a hurricane-prone environment. We do have 5% deducted from our Anguillian salaries for social security payments, but the benefits are so ludicrously small as to be insignificant.

So, back in 1999 when the Europeans dreamed up the EU Savings Taxation Directive, we were not too concerned. Its main purpose was to allow the tax authorities in EU Member States and associated territories to share information about interest payments made to individuals. This was to help ensure savers and investors paid the right amount of tax on their savings income and to counter cross-border tax evasion within the EU. It only applied to individuals, not to trusts and other ‘offshore structures’.

The Directive set up two systems. One was an “information exchange” regime, whereby all participating countries agreed to report interest on savings paid to citizens of other EU Member States to those States’ tax authorities. The other was a “withholding tax” regime, whereby the identity of the recipient of interest is not reported, but a small tax (15%) is paid in the offshore centre and the balance remitted to the EU Members State in a lump sum so that the tax authorities are not informed of the individuals who paid. Countries with a tradition of banking secrecy, eg, Austria, Luxembourg, Belgium, and Switzerland, chose the withholding system. So did the Netherlands Antilles and the BVI. Anguilla and the Cayman Islands opted for the exchange of information regime.

Over the years, negotiations between the offshore tax jurisdictions resulted in an agreeable compromise whereby only interest income earned from certain savings and bonds came within the scope of the Directive. Most income remained safely sheltered so long as you used a jurisdiction like Anguilla. As Charles Hermann of KPMG in Switzerland explains, the Directive was so full of holes that investors simply readjusted their holdings to continue to legally avoid taxation. Furthermore, the Directive had the opposite of the desired effect of bringing investors’ money ‘back home’. Some of the most fearful investors simply placed their money far offshore in safe jurisdictions such as Singapore and Hong Kong.

Now, on 13 November 2008, the EU dropped a bombshell. They have amended the Savings Tax Directive. The intention is to close existing loopholes and better prevent tax evasion. The previous Directive only applied to payments to individuals. Anybody who transferred the money they held on deposit into either a company or a trust immediately avoided the disclosure or tax obligation. Some Swiss banks were bulk buying up to 10,000 BVI and Panamanian companies at a time. Interest payments which are channeled through previously tax-exempted structures will now be caught in the net. Companies, IBCs, corporations, limited liability partnerships, foundations, trusts and the like will all come within the scope of the Directive. Innovative financial products, even life insurance, will not escape.

The impact on West Indian offshore centres, including Anguilla, may well be radical. Local banks will be obliged to look through the company, foundation or trust that is recorded as the legal owner of the account to which the interest is paid and treat the interest as having been paid to the beneficial owner of the organization. They will be obliged to use the information held on their files for anti-money-laundering purposes to identify the real human person who benefits from the structures created in the tax haven location. The ‘reform’ is no doubt intended to kill a substantial part of Anguilla’s international banking business.

The other side of the coin is that the high-tax countries who have created this bomb-shell will not gain one penny extra in tax revenue. What is more likely to happen is that, if they implement the Amended Directive as indicated, the investments presently held in Anguilla and the BVI will soon be heading to Hong Kong and Singapore. Talk about shooting yourself in the foot!

Under Attack

What is Anguilla doing to prepare for the coming assault on our financial services industry? Management Consultancy is a website published in England. It represents the interests of UK accountants, financial managers, and consultants. They have absolutely no interest in Britain’s overseas territories as such. Perhaps, they think, the territories serve some minor purpose when they present business opportunities for their members. Other than that, so far as Management Consultancy is concerned, we can happily sink below the rising tide of global warming.

So, I was not surprised when I read their latest article on the coming Commons Treasury Select Committee investigation into the offshore financial services industry. The article is dismissive of our interests to an extreme. They seem to think that we are responsible for destabilizing the global economy!

Still, it is useful to familiarize yourself with the rhetoric of your opponents. That way, you know in advance what is coming.

The Commons Treasury Select Committee is similar to the Foreign Affairs Committee, whose Seventh Report is presently so much under discussion in Anguilla at the present time among the better informed of our citizens. It is a political committee. Its members consist of Members of Parliament. It is not a committee of bureaucrats. It does not represent the interest of the British Treasury Department. It represents the oversight of the Treasury Department, and Britain’s financial interests, by UK politicians.

So, we learn that the committee plans to call witnesses from the overseas territories as part of its inquiry. Additionally, members of the committee are visiting Jersey and the Isle of Man this week. The Isle of Man government has already announced that it has submitted information to the committee. These UK domestic offshore financial centres have professionals who are well able to represent their country’s interests. They, in consequence, are bound to have their interests taken account of in the final report.

What about us? Will anyone from our private sector attempt to protect our industry. Has AFSA surveyed its members to ascertain what percentage have ‘know your customer’ procedures? Will anyone in the public sector attempt to defend their role and function? What is the Anguilla Financial Services Commission doing to prepare? What briefing papers have the staff in the Ministry of Finance prepared for the assistance of the Minister when he comes to answer questions?

Will we point out that there are at least two reasons why there are so few suspicious activity reports filed in Anguilla? One is that there is, perhaps, not that much suspicious activity in Anguilla to report on. The other is that the UK has done little or nothing to provide us with the resources to upgrade our investigative capacity. The FAC Report contains extensive comment on this criticism of the FCO in its supervisory role.

Or, will Anguilla just sit passively, and wait until it is too late? Then, no doubt, we will blame the foreign oppressor as usual for the damage that our own inactivity has caused.

The two main stories on the home page today relate to fraudulent complicity of UK financial institutions. One is the case against Ernst & Young for failing to detect fraud at the wholesale drug distributor CBI Holding Co. The other is a story about Grant Thornton’s recent international business report. This reveals that only one third of UK companies seriously try to detect fraud, compared with 45% worldwide and 59% in the US. In the UK, only 7% of businesses said they had increased staff involvement in fraud prevention in the past 12 months, one of the lowest rates in the world.

And, they have the impertinence to accuse us!

Treasury

Commons Select Treasury Committee. The Labour Party has been in power in the UK since 1997. Since then, it has restricted the freedom of Anguilla and the other Overseas Territories to offer international financial services, even though we are some of the world's leading tax and asset protection havens. For decades before that, British governments promoted these offshore havens, encouraging their growth and expansion. Now, the UK has forced 'reforms' on us. They have made it clear that the intention is to end financial privacy.

They demand total bank and investment account surveillance.

They have made foreign tax evasion a criminal offence.

They have forced disclosure of previously confidential information about true ownership of international business corporations.

They have imposed the EU savings tax directive.

They are insisting that we sign Tax Information Exchange Agreements with the United States.

They have imposed new 'international standards' against money laundering.

They have demanded that our financial systems become more 'transparent'.

We are obliged to cooperate with foreign law enforcement and tax authorities.

Thus was the Labour Government's policies imposed on us without any chance of appeal on our part.

As a result, we have adopted strict anti-money laundering, and know-your customer rules. It makes opening a bank account in Anguilla a nightmare of bureaucracy and technicalities.

Then, in March 2008, the House of Commons Treasury Select Committee published a report on Financial Stability and Transparency. In it, the Committee indicated that it intended to undertake further work into International Financial Centres in the context of their ongoing scrutiny of financial stability and transparency. They would seek to ascertain what risk, if any, such entities pose to financial stability in the UK.

On 30 April of this year, the Committee announced its inquiry into Offshore Financial Centres and invited interested parties to submit written evidence.

All of the submissions can be found here.

Why are the international financial centres under attack again? I am not entirely sure. It seems likely that we are to be collateral damage arising out of the Northern Rock debacle in the UK. The question then must be asked, what, if anything, are we doing to protect our own interests?

Guernsey is one of our sister financial centres. They have come out fighting in their own defence.

Jersey has been quick to respond to the urgent need to meet with the committee to defend Jersey's interests.

I have not heard of any initiative sponsored by either the Anguilla Financial Services Association or the government of Anguilla. The governor's office has not produced a single release on this inquiry. The Ministry of Finance has not made any response. Are they all being too complacent?

Is AFSA even aware of the serious challenges it faces as a result of this inquiry?

Is this another case where we in Anguilla will ignore all that is published, all that is swirling in the air around us, and then complain later that nobody told us anything, and how abused we are by the foreign oppressors?

Offshore Finance

Treasury Crackdown on International Financial Services. Are the British Overseas Territories being unfairly targeted again? I ask that question because the UK Treasury Department has just announced another investigation into our international financial services industry. You can read all about it for yourself on Parliament's website.

Does this initiative derive from the recent National Audit Office report? If so, we are in for a rough ride. I previously wrote about it here, and here, and here.

I never was able to understand. Why does not parliament similarly investigate British bankers, insurers and money managers? Why investigate us? We are at the bottom of the food chain when it comes to the international financial services industry. I remember Rodney Gallagher once explaining to a meeting of the Anguilla Financial Services Association that the West Indian financial centres could expect, at most, the crumbs that fall from the financial services table. The reason? We are already so well-regulated, so transparent, so small, and far away compared to Jersey, Guernsey, the Isle of Man, Monaco, Lichtenstein and Zürich, that only the smallest share of the business will ever venture out our way.

Now, the jingoistic British press have taken up the cudgel. See the Guardian article here. The headline reads, “Britain's overseas territories open to fraud and money laundering”. Note the suggestion that we are “open”, as in “welcoming”!

This is typical of the English newspapers when the markets are heading down. Blatant protectionism of the City and its outposts in Jersey and the Isle of Man. They don't even consider that it may well be that regulation in Anguilla and the other BOTs is now so tight that no crimes have taken place. Certainly a possibility in a place as small as Anguilla is.

What is the proportion of regulators to employees in the UK? Is it any better than in the BOTs?

Are the regulatory techniques in Anguilla and the other BOTS any different to those employed in the Crown Dependencies of the Channel Islands?

Does any fraudulent scheme, such as the BCCI fraud, that has the smallest link with a BOT in the Caribbean, not have its headquarters in the City or in the Channel Islands?

Does the British banking system not rely on repackaging debt products in offshore centres such as Anguilla and the Isle of Man? Should Anguilla be shut down to ensure that all the City's offshore business goes elsewhere?

They are all in the game, and it is just a question of where it is played. If the principle is that, “We only like offshore if it is our offshore”, then does not Anguilla qualify?

The problem is that these people run the UK, and it appears that we are going to bear the brunt of their own political nervousness over the forthcoming economic downturn. Same as it ever was!

Financial Services

Financial Services Commission. International financial services is one of the areas that are in the Governor's reserved powers. This is found in section 28(2)(a) of the Anguilla Constitution 1982. This area of governance used to be purely local. The Minister of Finance issued offshore banking licences. Then came the BCCI Financial Scandal in 1990.

Some Pakistani bankers operating out of England defrauded thousands of depositors. The Bank of England was accused by the international press of negligence. It had allowed the Overseas Territories to form subsidiary companies used by BCCI in the frauds. The Bank of England pointed out it had no jurisdiction in the Overseas Territories. The FCO asked the local Ministries of Finance to clean up their acts. They did not move quickly enough. They made mistakes. One was to take away Allen Stanford's Montserrat offshore banking licence. He relocated to Antigua. He sued the Montserrat government. The case took years to complete. The court decided that the Montserrat authorities had acted unconstitutionally. Damages were awarded. Meanwhile, the British Government had taken away international financial services from all the BOT Ministries of Finance. They gave it to the Governors to handle. In Anguilla, they did this by The Anguilla Constitution (Amendment) Order 1990, Statutory Instrument 1990/587.

Since those days we have come a long way. Most Governors have placed the administration of financial services in the hands of the Ministers of Finance. It was the regulation of financial services that the Governors retained.

The Governors could not by themselves regulate banking, insurance, trust companies, mutual funds, and the like. They had laws passed setting up Financial Services Commissions. The law in Anguilla is The Financial Services Commission Act, Chapter F28 of the Revised Statutes of Anguilla. The Commission gives out licences, and penalise those companies that do not follow the rules. The Commission carries out the responsibilities of the Governor in the regulation of international financial services. He does not do it personally.

Most persons in the industry consider this system works well. It is preferable to going hat in hand to a Governor to beg for a licence. That is almost as bad as the previous system. In some islands it meant going cash in hand to the Minister to obtain a licence. A Commission of professionally trained persons charged with the responsibility of carrying out the policies of government is far preferable. In theory, the Governor could still resume direct control of the industry. The Constitution has vested him with that power.

It is now time to step up the system to reflect our growning political maturity and ability to govern ourselves. Accordingly, in August 2006, the Constitutional and Electoral Reform Commission presented its Recommendations to Government. The relevant ones read:

“56. Administration of International Financial Services. . . . It was generally agreed by all persons consulted by the Commission, except the Governor’s Office, that there was no longer any justification for this area to remain one of the Governor’s responsibilities. The Commission recommends that responsibility for the administration of international financial services be removed from the Governor’s portfolio.

57. Supervision of International Financial Services. It is generally agreed that Anguilla benefits internationally from the Governor’s power of supervision of the industry. It is to our advantage to be able to claim that the industry is subject to a higher supervision than can be provided locally. The Governor’s power to supervise is in practice carried out by the Financial Services Commission.

58. Constitutional Recognition of the Financial Services Commission. By the Financial Services Commission Act16 the House of Assembly of Anguilla established the Financial Services Commission (FSC) to supervise the financial services industry. The members of the FSC are appointed by the Governor and they report to the Governor. It generally agreed that it is desirable that the Governor’s office continue to be seen to be responsible for this aspect of the industry. The FSC is however not presently recognised under the Constitution. It was generally agreed that the FSC ought to be given constitutional recognition. The Commission recommends that the Constitution be amended to make provision for the FSC and for its governing law.”

We are not speaking about rocket science. This is a relatively simple matter to accomplish constitutionally. There could be a section which reads something like:

“There shall be for Anguilla a Financial Services Commission which shall be established as a body corporate with perpetual succession and a corporate seal and which shall be responsible for the regulation of the international financial services industry and having such specific functions and powers and a board to be appointed by the Governor all as may be set out in a law.”

There are other general provisions that should apply to all Commissions. These would be set out in a section of general applicability in the Constitution It would cover such matters as:

1. protecting Commissions in the exercise of their functions from the direction or control of any other person or authority;

2. enabling a Commission to confer powers and impose duties on any public officer or on any authority of the Government for the purpose of the discharge of its functions;

3. disqualifying from membership any person if he has been a member of, or a candidate for election to, the Assembly;

4. publishing of reports periodically; and

5. security of tenure of members.

The advantages that would accrue to Anguilla from this type of constitutional advance are several and varied. They should also be obvious. Placing the administration of international financial services directly in the hands of our Ministry of Finance will assist in developing tools of good governance in that regulatory authority. Placing the regulation of the industry in the hands of an independent Commission will help to develop professionalism in our institutions.

The crisis has now passed. There is no need for such a draconian solution as that previously selected. The British authorities would do better concentrating on cleaning up the financial frauds, such as BCCI, that are centered in the City of London, not in the BOTs.

Financial Services

Appendix 3: Territory Issues. We are looking at the recently published National Audit Office Report titled “Managing Risk in the Overseas Territories”. Appendix 3 contains what John Bourn, the Comptroller and Auditor General, considers the most significant issues relating to Anguilla. It is always revealing to learn what others think about your performance. The revelations can either make you very angry, or they can encourage you to improve your performance. This is what he writes:

Anguilla’s financial services industry contributes some 15 per cent of GDP, making it the second, albeit minor sector in Anguilla’s economy, after tourism. Regulation of the industry remains the direct responsibility of the Governor under the Constitution, and so any failure could have direct implications as well as wider reputational impact on the UK. The financial services sector is small compared to that in Bermuda, Cayman Islands and the British Virgin Islands; it employs some 200 people and its licence fees are insufficient to finance substantial regulatory capacity. Currently, Anguilla has only four professional regulatory staff, which limits its ability to keep up to date with fast moving international standards and implementing recommendations from previous Reviews of the Sector. For example:

- Recommendations made by UK-appointed consultants in 2000 in respect of companies and credit union legislation have not been implemented.

- Anguilla has not created a separate agency to market its financial services overseas, freeing the regulator from involvement in this potentially conflicting activity.

- An International Monetary Fund Report in 2003 referred to the need to broaden the professional and managerial capacity of the Anguilla Commission, and to the absence of sufficient skilled persons to analyse and investigate suspicious transaction reports.

- There are doubts over the extent of compliance with “know your customer” requirements. The International Monetary Fund’s 2003 review of Anguilla identified difficulties obtaining customer information from overseas sub agents and recommended a tightening of procedures. When the Anguillan Regulator conducted on-site checks in 2004 most agents did not have copies of the code of practice issued by the professional association, and there were numerous instances of deficient or incomplete documentation.

- The Anguillan regulator’s policy towards non-compliance in anti-money-laundering practice has been to encourage raised standards through education, rather than to apply sanctions on the most deficient agents. It is not evident that this has been a successful strategy. Police and Industry sources in Anguilla expressed the view to us that there are still a minority of financial service providers in the Territory which they believed would accept “any business”.

NAO Conclusion: The Department, supported by other UK Departments, needs an integrated approach to addressing regulatory under-capacity in Anguilla, the Turks and Caicos Islands, and Montserrat. Options that can be considered include developing a shared regulatory resource across the three Territories, use of Governors’ powers to raise regulators’ licence income, and more placements of staff from the UK, focusing on industry compliance with anti-money laundering measures.

I thought it quite extraordinary that recommendations made by consultants since the year 2000 had not yet been implemented. The only conclusion can be that there was something quite objectionable in the recommendations. But, as we do not know what they were, we cannot be sure. I was astonished to learn that Anguilla still depends on the regulator to market our financial services overseas. When I was in practice over ten years ago, we urged the Ministry of Finance to bring this arrangement to an end. There is an intrinsic conflict between the functions of a policeman and those of a salesman. Can you picture this imaginary scenario? The regulator attends an offshore marketing conference in Miami and meets a lot of people. He encourages some of the attendees to visit Anguilla and to make it their home base for their offshore services. When he gets back to his office, he finds some of them have applied. He now has to put on his policeman’s hat and tell them that they do not come up to standard, and he has to refuse them! Either that, or he is so embarrassed by the quandary he is in that he approves their licence while doubting that they will perform creditably. What a joke!

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.

Managing Risk

The National Audit Office. This is a UK institution, not Anguillian. The National Audit Office scrutinises public spending on behalf of Parliament. The Comptroller and Auditor General, Sir John Bourn, is an Officer of the House of Commons. He is the head of the National Audit Office, which employs some 850 staff. He, and the National Audit Office, is totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.

The NAO has just published its Report titled, Managing Risk in the Overseas Territories. It can be downloaded or read here: [link]. There is much on Anguilla that should worry us. Most of the concerns relate to the International Financial Services Industry. In its early days, this industry was demeaningly described as “offshore banking”. It is much more than that. It is one of the principal industries enjoyed by the City of London and Manhattan. These are two of the major international financial centres in the world. But, we in the West Indies are players too. Cayman Islands is the fifth largest banking centre in the world. Bermuda is one of the largest reinsurance centres in the world. BVI is the world’s major incorporator of companies. Anguilla has hopes and aspirations of joining this elite group of British Overseas Territories who provide the City of London and Manhattan with its offshore corporate vehicles. There is just one problem. In the past, criminals have used the offshore centres to launder illegally obtained funds. The British government is wary of our efforts to grow the industry. They insist that we put precautions in place to limit the damage that we, and possibly they, can suffer.

When I was a practicing lawyer, I spent a lot of time and money developing a legal practice in this field. I went to the international and regional conferences to hone my skills and to make the necessary contacts. I devoted time to writing and speaking about the importance of the industry for Anguilla. The hope was that we would be able to diversify our economy. We need alternatives to the tourism industry. It is not safe for us to put all our eggs in that one basket. International financial services offered an opportunity for Anguillians who obtained the necessary qualifications and skills to make a good living for themselves and their country.

So, I read the Report with a view to seeing how Anguilla was faring. It is not all good. For example, I found,

3. Capacity limitations in the offshore financial sector have limited Territories’ ability to investigate suspicious activity reports, and, in the case of the Turks and Caicos Islands, Anguilla and Montserrat, resources are below the critical mass necessary to keep up with increasingly sophisticated international standards and products in offshore financial services. The Department, [the FCO] with the support of relevant UK agencies, (Treasury, Financial Services Authority, Serious Organised Crime Agency) should develop a strategy to ensure stronger investigative and prosecution capacity, bolster regulatory standards and support increased legislative drafting capacity.

What is our government going to do to make the necessary improvements? Are we even interested in seeing improvements? Well, now I am retired, I am well out of it and can contribute very little any longer. It is a worry for the new generation of Anguillian professionals. I wish them luck!