President's Message: Practical Due Diligence and Managing Exposure
By: Samuel Lohman, President of the Offshore Institute

The most effective weapon in the fight against money laundering (and one that is constantly referred to at all conventions and in recommendations or treaties) is for the financial provider to ‘know his customer’s identity’ and document it on an ongoing basis. This includes customer account opening declarations, copy of identity documentation, etc.

A number of essential activities for the professional provider can be identified to act reasonable under the present circumstances.

Ascertain the source of the funds and the underlying reason for each transaction

It is necessary to do what is required under the circumstances to verify the source of the assets involved as well as the commercial, estate, tax, etc. planning in the transaction under review. One must realize that all crimes are indictable, not only the ones related to drug dealing. This is a more recent development in the fight against money laundering. In theory, the idea is a good one. However, it does lead to problems in practice, primarily regarding international assistance. This is due to the fact that:

crimes are not defined in the same way in each jurisdiction, and some activities may be considered criminal in certain jurisdictions and not - in others, particularly regarding tax legislation.

Professional Providers included

Money laundering compliance is no longer limited to the banking sector. All financial intermediaries are becoming affected and therefore are responsible under the due diligence and compliance obligations of relevant law and regulation.

Compulsory reporting of suspicious activity Rather than voluntary, or not reporting at all, compulsory reporting of suspicious activity to the criminal authorities is now becoming the rule. Suspicious activity can be defined as a situation in which a ‘red flag’ is raised. In its Recommendations, the FATF lists these ‘red flags’. However, experience is an important tool in the arsenal of spotting incidents that would be money laundering. There are in existence today many novice practitioners who have been schooled in areas of regulation and compliance. In the extreme, the client risks being viewed as the enemy and professional providers view their role as police officers.

Mutual Legal Assistance

The other main developments are the intensification of international cooperation and monitoring of new techniques. The growing uses of mutual legal assistance treaties (as well as informal means) to facilitate the sharing of information amongst Governments relevant to criminal investigations and prosecutions.

Focus on Other Professional Providers

There is a growing focus on accountants and lawyers who work in the international financial service sector.

Key steps to establishing a Compliance Program

Gathering compliance information, including applicable domestic and foreign laws and regulations from relevant governmental agencies, trade and specialized journals, associations, private organizations, lawyers, consultants, etc.

Developing an internal policy and procedures manual that includes standards and procedures to comply with applicable laws and regulations and reduce the prospect of criminal abuse. Procedures should address opening new accounts, monitoring existing accounts, hiring and training employees, information flows, dealing with a governmental representative, and separate audit function to regularly test the program’s effectiveness.

Adapting the program to all areas of operations, considering the jurisdictions, products and customers in and for which the organization is active. Affiliates should develop and adapt ion of the master program to meet specific local needs.

Educating personnel on money laundering controls through steps that effectively communicate standards and procedures to all employees and other agents. These can include training programs or the dissemination of publications or electronic material that explain in practical terms what is required under the relevant laws.

Taking steps to achieve program standards by utilizing monitoring and accounting systems designed to detect criminal or non-compliant conduct by employees and by having in place and publicizing a system whereby employees can report criminal and con-compliant conduct within the organization without fear of retribution.

Enforcing standards consistently through appropriate disciplinary mechanisms, including discipline of individuals responsible for the failure to detect an offence or perform a required duty.

Ensuring that the program is sensitive to traditional notions of fiduciary responsibility to clients, principle / agent relations, confidentiality, secrecy, and the like.

Taking steps to respond to offences that are detected and to prevent similar offences in the future.

Evaluating the need to update or modify the program based on new and existing client account activity, the effectiveness of compliance efforts, and changes in legislative and regulatory developments. Compliance officers should attend relevant conferences and subscribe to relevant periodicals to keep abreast of changes in the laundering control environment.

Samuel M. Lohman (mailto:lohman@lsfa-law.ch)

Articles: Matters of Interest to the International Offshore Financial Intermediary Tax Competiton – Where are we now!
By: E. Bendelow

As many readers will be well aware there are two main organizations that are currently attempting to enforce their will on the various offshore centers around the world. The one with the highest profile is the Organization for Economic Co-operation and Development (“OECD”) but perhaps arguably the more powerful one is the European Union (“EU”).

The story starts back in 1998 when the OECD produced the report called “Harmful Tax Competition: An Emerging Global Issue” (The 1998 Report). This report argued that global capital movements were being distorted by harmful tax competition. This was followed in June 2000 by a report entitled “Addressing Global Tax Co-operation”, which simply, according to the OECD, was trying to promote an international taxation regime of Transparency, Disclosure, Fairness. It should be stated that the OECD’s public position is that it is also seeking to “Identify harmful or preferential regimes in OECD member countries”

Agree the three core principles with associations of countries outside the OECD As will be widely known, the OECD produced a preliminary list of harmful or uncooperative jurisdictions in June 2000 and since that date there has been much discussion and contact between the OECD and the various interested parties.

The latest authorative announcements from the OECD were in January 2001, when Seiichi Kondo, Deputy Secretary General of the OECD, made a speech to the Global Taxation Forum. In his speech Mr Kondo stated that the task of the forum was to ensure fair competition between different national tax regimes in a globalized economy. He goes on to state, rather comfortingly, “We want competition that promises diversity and innovation in tax systems while at the same time leaving countries free to decide both on their rates of tax and their tax structures”. Another interesting quotation from his speech is that “Our watchword is freedom for governments to design their own tax systems and freedom for citizens to prosper in an environment where investment decisions are not distorted by tax considerations”.

There are a number of small problems with the OECD Secretariat’s analysis of international tax competition. Firstly, any economist worth his salt will tell you that competition in any marketplace is good for all participants in that marketplace. After Mrs Thatcher and Ronald Regan led the world in reducing tax rates in the 1980s (ie indulging tax competition!) the world’s economy flourished.

The next key concept is that of democratic accountability. The OECD Secretariat is an un-elected bureaucracy blatantly set up to promote policies that will benefit its members. Its policy of naming and shaming small jurisdictions is in fact an attempt at raw power politics and coercion. And the issue that needs to be closely considered is that of personal freedom and sovereign rights.

The European Union issued in late May 2001 a report entitled “Tax policy in the European Union – Priorities for the years ahead”. In a refreshingly clean break with past thinking, the Commission concludes that differing tax rates can act as a catalyst forcing the EU’s heavily indebted states to control public spending and restore economic dynamism. To say the very least, this approach is extremely controversial when compared to the Commission’s previous comments in relation to tax competition.

The report then goes on to say: “Some reasonable degree of tax competition may be inevitable and may contribute to lower tax pressure”. Indeed the first draft of the report was rumored to have stated that tax competition was actually “healthy” but this was allegedly eliminated on the insistence of France’s socialist commissioner, Pascal Lamy. The commissioner for the Internal Market, Frits Bolkestein, went on at a subsequent press conference to state that the burden of high payroll and social security taxes was a key impediment to job creation and partially accounted for stubbornly high unemployment.

All in all the comments from leading US politicians and Frits Bolkestein should give new comfort to all reasonable tax planners, in that it seems that the OECD by sheer force of economic power will have to re-think its policy on harmful tax competition, whilst there seems to be political movement at the highest level in the EU, which is now regarding tax competition in certain areas as not only acceptable but beneficial!

In summary, therefore, the future looks somewhat more settled for the more reputable offshore centers that can demonstrate they are involved in legitimate tax and estate planning, rather than any form of criminal activity.

For the whole article: contact Mr. Edmond Bendelow (mailto:info@baseltrustjersey.com)

News Flash:

US supports OECD's initiative against harmful tax competition

Last month Paul O'Neill, the US Treasury Secretary, caused widespread debate when he announced that the United States may not support the OECD's initiative against harmful tax competition. In reply, last week, seven former heads of the US Inland Revenue Services stated that such a position was ill-advised and requested Mr O'Neill to review this stance. On Friday, following a meeting of representatives of the OECD centering on the US concerns, John Taylor, undersecretary for international affairs at the US Treasury, announced that the US Treasury was prepared to support the action being taken by the OECD provided that it imposed no restrictions on the way havens structured their tax policies.

This may see the OECD initiative still on track although there may be a modification of views to enable the OECD to demonstrate good faith towards tax havens. This could mean, for example, that sanctions may not be imposed until at least 2003.

FATF Removes Four Countries From Its List

The Financial Action Task Force (FATF), which is effectively a department of the OECD in Paris, was created in 1989. Its existence is reconsidered by the OECD's members every five years and is next due for review in 2004.

The FATF released its annual report for 2000/2001 on Thursday last week, saying that it had removed four countries from its list of "non-cooperative countries or territories" in the fight against international money laundering: Bahamas, Cayman Islands, Liechtenstein and Panama. These countries have made substantial efforts during the last year to conform to the FATF's 'forty recommendations'. Some other countries have been identified as "non-cooperative" and have been added to the list: Egypt, Guatemala, Hungary, Indonesia, Myanmar and Nigeria.

Three countries, previously identified as "non-cooperative", now face countermeasures for failing to improve their defenses against money laundering and will remain on the list: Russia, Philippines and Nauru.

Other countries originally listed last year remain on the list: Cook Islands, Dominica, Israel, Lebanon, Marshall Islands, Niue, St Kitts and Nevis and St Vincent and the Grenadines.

The FATF also fingers un-listed countries that it thinks are not doing enough to control money-laundering. It rates all OECD's members against 28 of its action recommendations. The survey puts the US third from the bottom - being compliant with only 17 of the 28 points – this done in a survey of 29 industrialized nations, with only Canada and Mexico scoring worse. Only nine task force members are fully compliant, including Brazil, Greece and Luxembourg. However the FATF itself says that the survey results should not be taken as a measure of the effectiveness of members' anti money-laundering systems. http://www.oecd.org/fatf/pdf/PR-20010622_en.pdf

Last month Paul O'Neill, the US Treasury Secretary, caused widespread debate when he announced that the United States may not support the OECD's initiative against harmful tax competition. In reply, last week, seven former heads of the US Inland Revenue Services stated that such a position was ill-advised and requested Mr O'Neill to review this stance. On Friday, following a meeting of representatives of the OECD centering on the US concerns, John Taylor, undersecretary for international affairs at the US Treasury, announced that the US Treasury was prepared to support the action being taken by the OECD provided that it imposed no restrictions on the way havens structured their tax policies.

This may see the OECD initiative still on track although there may be a modification of views to enable the OECD to demonstrate good faith towards tax havens. This could mean, for example, that sanctions may not be imposed until at least 2003.

FATF Removes Four Countries From Its List

The Financial Action Task Force (FATF), which is effectively a department of the OECD in Paris, was created in 1989. Its existence is reconsidered by the OECD's members every five years and is next due for review in 2004.

The FATF released its annual report for 2000/2001 on Thursday last week, saying that it had removed four countries from its list of "non-cooperative countries or territories" in the fight against international money laundering: Bahamas, Cayman Islands, Liechtenstein and Panama. These countries have made substantial efforts during the last year to conform to the FATF's 'forty recommendations'. Some other countries have been identified as "non-cooperative" and have been added to the list: Egypt, Guatemala, Hungary, Indonesia, Myanmar and Nigeria.

Three countries, previously identified as "non-cooperative", now face countermeasures for failing to improve their defenses against money laundering and will remain on the list: Russia, Philippines and Nauru.

Other countries originally listed last year remain on the list: Cook Islands, Dominica, Israel, Lebanon, Marshall Islands, Niue, St Kitts and Nevis and St Vincent and the Grenadines.

The FATF also fingers un-listed countries that it thinks are not doing enough to control money-laundering. It rates all OECD's members against 28 of its action recommendations. The survey puts the US third from the bottom - being compliant with only 17 of the 28 points – this done in a survey of 29 industrialized nations, with only Canada and Mexico scoring worse. Only nine task force members are fully compliant, including Brazil, Greece and Luxembourg. However the FATF itself says that the survey results should not be taken as a measure of the effectiveness of members' anti money-laundering systems. http://www.oecd.org/fatf/pdf/PR-20010622_en.pdf

The FATF on Australasia/Oceania

The FATF annual report issued June 22 records the FATF's satisfaction that some jurisdictions, including the Cook Islands, have made substantial progress towards meeting the legislative and organizational framework of the FATF's anti-money laundering requirements. The FATF now looks to those jurisdictions meeting an 'implementation' program. Cook Islands industry representatives point out that on-going consultations have taken place between government and the area FATF representative since the list was first issued, aimed at ensuring that legislative and regulatory provisions reasonably met FATF requirements. Those industry representatives are adamant that the updated Cook Islands legislative, regulatory, and supervisory infrastructure should entitle the jurisdiction to be removed from the list, particularly, they say, when there has never been any evidence produced by the FATF of misuse of the jurisdiction. The FATF report includes Nauru on a new 'watch' list along with the Philippines and Russia. Myanmar (Burma) and Indonesia join the list.

For further info: contact David McNair

OI Membership Activity Reports

The OI Chapter Chairs: The UK Chapter

Ian Le Breton has been the Chairman of the UK Chapter (European Branch) of the Offshore Institute for the last three years. He has written this article in order to give a brief insight into the establishment of the Chapter.

The Offshore Institute UK Chapter - the story so far.

The story goes back a little over three years to January 1998 when a meeting was called in London by then Executive Committee member Nigel Eastaway. Clancy Etienne and I attended that brain storming session and a number of issues were discussed. The framework that we established that day has not changed in the intervening period and it might be useful to consider again our thought process at the time.

Essentially, we were keen to establish a meaningful Chapter that: (i) was seen to add value to the members (ii) was used as a forum to attract new members and (iii) was sustainable in the medium term. I will consider each of these issues in turn.

Adding value to existing members

By definition, the potential membership of the Chapter is defined as being all those paid up members of the Offshore Institute resident in the UK. It was felt from the outset that the best way to be seen to add value was to provide a forum where members could meet on a regular basis in order to exchange ideas, network and generally develop the themes of the Institute. The important questions to be addressed included sustainability, relevance to the membership, and the maintenance of continuing interest - all with an eye to the minimization of costs.

Attraction of new members

We recognized early on that a body such as the Offshore Institute must be a dynamic organization that thrives on new ideas, one that moves and is seen to move with the ever-changing times. In order to achieve these goals, the Institute must constantly seek a broadening in its appeal. New members, and the ideas that they bring are the very lifeblood of such a group. For these reasons, the three of us decided at that initial meeting that we should not restrict ourselves to gatherings of members alone - i.e. guests who are potential new members were to be welcomed from the outset.

Sustainability in the medium term

We were determined from the outset that we were not about to embark on one of those nine-day wonders; projects that result from a good idea but that fall at the first, or second, hurdle. After all, the reputation of the Institute in the UK was at stake. There were a number of issues that we needed to consider:

Format and frequency of meetings

We decided fairly early on that to be meaningful, we should aim to meet once a quarter. That way, even if a member missed a session, he or she would have several opportunities each year to attend. As for format, we settled for a mixed formal/informal setting whereby each meeting benefited from a presentation by a speaker followed by drinks and canapés. From the outset, we decided against purely 'social' gatherings without such presentations in order that the Chapter remained focused and was seen to be meaningful. London was the obvious center given that numerically the majority of UK members lives or works in, or at an easy traveling distance from, the city.

Venue

This was where luck played into our hands. I work in London as a representative of The Royal Bank of Scotland International. Given my role in Business Development, I was able to convince the relevant people within the Bank of the merits of being associated with the UK Chapter and from that day to this, the Bank has fully supported us in our efforts. Naturally the Bank did not wish to dominate the Chapter in any way but it has provided meeting facilities with catering and associated background support to the Chapter free of charge since Day 1. Perhaps this is an appropriate point to express my sincere appreciation, on behalf of the Institute, to John MacGregor, Director of the Bank in London for his support of everything we have sought to do over the last three years.

Speakers

At first we thought that this might be tricky. We had to ensure that we could find a constant supply of speakers from the professional sector who would be willing to prepare and deliver a presentation (for free of course!) to an uncertain number of people - without appearing overtly commercial - that would never do. We needn't have worried. From the off, our speakers have fulfilled all these criteria admirably.

Who does what?

Armed with answers as to What, Where, When and How much will it cost? All we had to do was divide responsibilities (not too difficult when there are only three of you!) and we were all set. Nigel was the driving force behind the UK Chapter concept and he became the Founding Chairman. Clancy took on the role of Honorary Secretary, which position he continues to fulfill today. I took on the hands-on organization of the meetings that are held at 1 Fleet Street, where my own office is located.

Establishment of the UK Chapter – and beyond

The first meeting was held in the spring of 1998 with nearly 20 attendees. As it was an immediate success, we have followed on a quarterly basis ever since - we now have more than a dozen fantastic sessions behind us. A detailed discussion of the meetings held so far is outside the scope of this initial article on how we came into being. Suffice to say that our meetings regularly attract close to 40 people - a special 'one off' last year was attended by 80! The format is unchanged: tea and coffee is served from 5.30 p.m. giving members and guests time to introduce themselves. The formal part begins just after 6 p.m. with any Institute notices etc. following which the speaker is introduced. The speaker normally presents for 45 minutes, followed by a Q&A session. Drinks and canapés are then served for a further hour or so. It has to be acknowledged here that this informal gathering often goes on for much longer at one of the bars in the neighborhood!

And long may the Chapter continue. Late last year, Nigel handed over the chairmanship to me, although he remains very actively involved as a Committee Member. I am ably assisted by the Deputy Chairman, Geoff Newman and the other Committee members: Simon Denton, Martin Flint, Eduardo Gonzalez, Bob Maas, and Martin Shaw.

I began writing this article with the aim of helping others who may be considering how to establish new Chapters. I must say though, that what works well for us here in London, may not be appropriate everywhere. Neither do I make the claim that we have all the answers. All of us are proud of the longevity of the Chapter and the interest generated but new ideas are always welcome and I am more than happy to debate these issues at any time.

President Sam Lohman is a firm believer in the Chapter concept going forward. I am proud of the part we have played in London and I look forward to seeing the establishment of many more groups across the world.

I hope that other Chapters may be able to develop some of these ideas. For my part, I am always delighted to receive suggestions from others.

Ian Le Breton
Chairman UK Chapter