REVIEW OF FINANCIAL REGULATION IN THE
CROWN DEPENDENCIES
A REPORT
COMMISSIONED BY THE HOME SECRETARY
AND PREPARED BY ANDREW EDWARDS
IN CO-OPERATION WITH THE ISLAND AUTHORITIES
Contents
SUMMARY AND MAIN RECOMMENDATIONS
PART I GENERAL ASSESSMENT
PART 2 THE JERSEY FINANCE CENTRE
PART 3 THE GUERNSEY FINANCE CENTRE
PART 4 THE ISLE OF MAN FINANCE CENTRE
REVIEW OF FINANCIAL REGULATION IN THE
CROWN DEPENDENCIES
PART I
By Andrew Edwards
SUMMARY AND MAIN RECOMMENDATIONS
MAIN REPORT
1 INTRODUCTION
2 THE ISLANDS’ FINANCE INDUSTRIES
3 THE ISLANDS’ REPUTATIONS
4 OBJECTIVES
5 SOME ASPECTS OF GOVERNMENT
6 FINANCIAL REGULATION:
OBJECTIVES, STRUCTURES AND COVERAGE
7 BANKS*
8 INVESTMENT AND SECURITIES BUSINESS*
9 INSURANCE*
10 COMPANIES
11 DIRECTORS AND PARTNERSHIPS
12 TRUSTS AND TRUSTEES*
13 COMPANY, TRUST AND INVESTMENT SERVICE PRO VIDERS*
14 FINANCIAL CRIME AND MONEY LAUNDERING:
POLICY, LEGISLATION AND ACHIEVEMENTS
15 PRACTICALITIES
16 RESOURCES AND STRUCTURES
7 INTERNATIONAL STANDARDS*
18 CONCLUSION*
* to follow
REVIEW OF FINANCIAL REGULATION IN THE
CROWN DEPENDENCIES
PART I
By Andrew Edwards
SUMMARY AND MAIN RECOMMENDATIONS
I Introduction
The Home Secretary commissioned me in January 1998 to review with the authorities in Jersey, Guernsey and the Isle
of Man
the regulation of their international finance centres, the pursuit of financial crime and co-operation with other
Jurisdictions. The
accompanying Report presents the outcome of the review.
Part I presents my assessment. This reflects extensive discussion with the authorities and others in the Islands,
in London and in
other financial centres. It also draws on professional advice from Mr Richard Chalmers, Professor David Hayton,
Mr Guy
Sears and Mr Munro Sutherland. To all of these I am most grateful.
Parts II, III and IV, prepared by the Island authorities in consultation with me, are professional prospectuses
for the
international finance centres of each Island. I hope that the Island authorities will update these each year and
that other offshore
centres may be willing to prepare similar prospectuses.
2 The Islands’ finance centres
The development of the Islands’ international finance centres in recent decades has been a remarkable success story.
Their
businesses include banking, investment, insurance, company and Trust business. Customers are now truly international.
The Islands’ success has depended importantly on internal self-government. This has enabled them, like other offshore
centres,
to offer customers tax and other advantages that the large centres cannot readily emulate.
Compared with other offshore centres, they have developed reputations for stability, integrity, professionalism,
competence and
good regulation. Their links with the UK and Europe have enabled them to be seen as “Offshore UK” or “Offshore
Europe”.
The finance centres have brought prosperity to the Islands. In Jersey and Guernsey, GDP per head is now well above
that in
the UK. The Islands’ economies now depend heavily on them.
Offshore centres generally are sometimes criticised for maintaining tax regimes that induce businesses to desert
onshore
jurisdictions and deprive them of tax revenues. These issues lie outside the scope of this Report
The critics also sometimes object to secrecy, poor regulation and poor co-operation in offshore centres. Such criticisms,
if
applied to the Crown Dependencies, would mostly in my opinion be quite wide of the mark.
3 The Islands’ reputations
The professional people I consulted mostly put the Islands in the top division of offshore centres. Many of them
commended
their standards of regulation, the absence of corruption, and their co-operation with other Jurisdictions, especially
in the pursuit
of drug-trafficking.
Some raised concerns as well. So too did some of the Islands’ people and customers who wrote to me, in response
to my
general invitation, about the Review.
The main concerns related to conflicts of interest, customer disputes, and the activities of certain companies,
company Directors
and professional firms in the Islands. There were fears that Island activities were facilitating tax evasion and
other forms of
financial crime. Officials outside the Islands, while mostly complimentary, felt that the authorities could sometimes
have
co-operated better in the pursuit of crime.
Similar concerns would, I suspect, have been raised about any other finance centre. But I have considered them
carefully. The
Report’s conclusions take account of them.
4 Objectives
The Islands have a firm objective to be, or to remain, the best governed, best regulated and most responsible of
offshore
centres as well as the most successful. It is clearly in the best interests of the Islands, the UK and the international
community
that the Islands should set, and deliver, high standards in this way.
5 Some aspects of government
The Islands score highly on political stability. For many centuries, they have been dependencies of the British
Crown, without
ever being part of the UK. Their political systems have been maintained, with limited changes, over many centuries.
When the
UK joined the European Union in 1973, the Islands decided to remain outside.
In Jersey and Guernsey, the legislature and the executive are closely intertwined. In my opinion, this has not
been a problem for
the international finance centres.
The Islands have impressive arsenals of financial, company and criminal legislation, mostly similar to, but not
identical with, UK
statute law. The common law systems resemble English common law, precedents from which are considered persuasive.
The Islands’ judicial and prosecution systems have shown themselves well able to deal with international finance
centre
business. In all the Islands, the First Court of Appeal consists of the Chief Island Judge and QCs from the UK.
The final Court
of Appeal is the Judicial Committee of the Privy Council in London.
In Jersey and Guernsey, the Chief Justices serve as Speakers of the Parliaments and as first citizens and spokesmen
for the
Islands. Some correspondents argued for separating these roles so as to put beyond doubt, in the perception as
well as the
reality, the independence of the judiciary from the legislature. This is beyond the scope of my Report.
The Attorney Generals act as public prosecutors and as legal advisers to the Island’s parliaments. They oversee
or advise on
law drafting as well. The Islands need to ensure that they have enough resources for these tasks.
The Islands have well-developed rules, [?written down and publicly available], to combat corruption and conflicts
of interest (a
serious problem in many offshore centres). Local critics are indefatigable in attacking anyone thought to have
committed such
abuses. Chapter 5 suggests three elements that the rules for members of Parliament and Public Bodies should preferably
include
where they do not do so already. These concern withdrawal from meetings and the acceptance of Directorships and
other paid
positions.
6 Financial regulation
All the Island Parliaments have accepted that high standards of regulation are both obligatory and in the Islands’
own best
interests. Their broad approach has been, rightly in my view, to follow UK styles of regulation, with adjustments
for particular
needs and risks of centres serving mainly non-resident customers; and to comply wherever possible with international
and EU
standards.
The Island Parliaments set the overall policy and legislative framework for financial regulation. But they have
established
independent Financial Services or Supervision Commissions (FSCs) to advise on and implement the regulatory regimes.
The Isle of Man’s FSC dates from 1983. The regulation of Insurance and Pensions was hived off in 1986 to a separate
Authority. The Guernsey FSC dates from 1988. In Jersey, the Parliament’s Finance and Economics Committee acted
until this
year as Regulator. But Jersey, too, now has an independent FSC.
In my opinion, the Islands are right to have independent regulatory authorities. There are strong arguments, especially
in small
jurisdictions, for having one authority rather than two. This authority should preferably be responsible for company
registrations
policy as well.
In all the Islands, the Parliaments approve appointments to the Boards of the regulatory authorities and can give
them written
directions of a general nature. In the last resort, they can remove the Boards. The statutes should preferably
specify the
circumstances in which they may do so.
The Islands appoint senior politicians as Chairmen of these Boards. I have no reason to think that this has caused
problems in
practice. But the Islands would in my view do better to have professional regulatory Boards without political participation.
These Boards should preferably include members able to represent the interests customers, especially non-residents,
as well as
people with relevant professional background, and one or two experienced people from outside the islands.
The Boards should be non-executive. Wherever possible they should delegate decisions on individual cases to the
professional
staff within agreed guidelines.
The professional structures in all the isalnds should preferably include a senior staff mmeber at director level
with experience of
supervising investment as well as senior staff for banking and insurance supervision; a senior staff member to
oversee the new
regulation of Trust and Company services providers; an an enforcement unit, as in the Isle of Man, responsible
for policing the
perimeter of unlicensed business.
The Island authorities all accept an absolute obligation to resource their regulatory bodies adequately. In my
assessement, the
Jersey FSC needs about 13 extra staff and the Guernsey and Isle of Man about 10 each. In addition about 3 extra
staff are
needed in each Island to strenghten company regulation. Staff quality and experience are all-important. A mixture
of
hone-grown staff and staff from outside is best.
The terms of reference fo the regulatory bodies should preferably include the following objectives:
? to protect customers, non-residents as well asa resident, through effective licensing and supervisions designed
to ensure
solvency and good conduct of business and to prevent fraud;
? to prevent and combat use of the Islands’ facilities for money laundering and other forms of financial crime;
? to co-operate with overseas authorities to these ends;
? to enhance the reputation of the Islands as finance centres;
? to advise the Island’s Parliaments on the development of regulatory policy and legislation; and possibly
? to have regard to the economic interests of the Islands.
The actual terms of reference of the Islands FSCs’ follow this model fairly closely. The inclusion in Jersey and
Guernesy (but
not the Isle of Man) of the economic interests objective needs careful handling. It is reasonable that the FSCs
should have
regard to the Islands’ economic interests. But the regulators’ primary duties must be to protect the interests
of customers and
prevent abuses. And they should never allo their impartiality to be compromised. They should not engage in hrad
selling or
aggressive promotion or marketing of the Islands’ facilities and industries.
The FSCs should preferably have prosecution powers, as in the Isle of Man. They should have powers to “name and
shame”
errant licence holders and those who operate without a license. There is also a case for powers to fine.
The Guernsey and Isle of Man regulators have made a special point of good co-operation with regulatroy authorities
overseas
in pursuit of crime or regulatory breaches. Their legislation provides the necessary powers. The Isle of Man authorities
might
wish, however, to drop the requirement for approval by the Chief Minister before any information relating to individual
customers can be passed.
The Jersey authorities have a more cauti6us approach to co-operation. The new Investment Business Law restricts
the
information that can be passed to overseas regulators. I hope that they will repeal this restriction.
The legislation in all the Islands makes breach of the statutory confidentiality provisions a strict liability
criminal offence. This
seems excessive. It would better provide, as in the UK for a defence of due diligence.
Only the Isle of Man has customer compensation schemes in place to protect depositors, investors and policyholders
if the
providing institutions should fail. In my opinion, the Jersey and Guernsey authorities too should consider introducing
these.
None of the Islands has financial services ombudsman schemes for dealing with
customer disputes. In my opinion, the authorities in all the Islands should consider introducing such ombudsmen
(or a joint
ombudsman) as well.
The Jersey authorities have introduced good arrangements for training local staff for C work in the finance industries.
The other
Islands may wish to do something similar.
7 Banks
The FSCs in all the Islands have a policy to promote international banking sectors of high quality regulated to
international
standards. Most Island banks are subsidiaries or branches of the world’s major banks. Regulation is based on the
Basle
Committee’s core principles and, wit~i certain variations, UK practices. Each of the Islands has up to date banking
laws that
provide the necessary legal framework.
In all the Islands, the FSCs exercise a careful quality control when licensing new banks. For the most part, they
license banks
only on the basis that their home supervisors will exercise consolidated supervision to the best international
standards. The
FSCs can then act as “host” rather than “home” supervisors. In Jersey and the Isle of Man, the FSCs undertake some
“home”
supervision for banks with subsidiaries outside the Islands. The Guernsey FSC does not license such banks.
The FSCs follow the traditional UK approach to on-going supervision, based on off-site analysis of monthly and
quarterly
prudential and statistical returns and prudential meetings, mostly annual, with the banks’ senior managements.
They have close
links with the banks’ auditors, internal and external, both of whom have an obligation to “whistle-blow” to the
FSCs.
The FSCs have made a start on on-site inspections, which form a key component in the Basle Committee’s Core Principles.
But they do not have the resources to implement full programmes. They recognise that they will need to implement
such
programmes promptly, with help as necessary from reporting accountants, if fulll compliance with the Basle Committee
principles is to be achieved
The FSCs also accept the need to base supervision more closely on risk assessments for individual banks. Only in
Guernsey is
there at present any risk-based differentiation in capital requirements.
In all the Islands (apart from a small anomaly in Guernsey), banks have to obtain the FSC’s permission before taking
on
individual risk exposures above 25 per cent of capital. The main such exposures are to parent banks. There may
be scope for
limit ing the risks from these exposures through asset sale and repurchase arrangements.
The FSCs in all the Islands obtain full maturity analyses of assets and liabilities for each bank. There is a case
for more
structured monitoring and application of standard liquidity guidelities in all the Islands, as in Guernsey.
The recent Jersey case involving Bank Cantrade confirms how right the authorities there have been to establish
an independent
FSC, bring in a new Investment business Law and launch a programme of on-site inspections. The FSCs in all the
Islands
should consider introducing Island Rules of Business Conduct throughout the finance sector and a confidential reporting
line for
regulatory breaches and crimes.
A recent Guernsey case, involving unlicensed deposit-taking by a fraudster, underlines the importance of having
pro-active and
well-resourced enforcement units with effective powers of investigation, as in the Isle of Man, in all the Islands’
FSCs.
The BCCI saga, which affected the Isle of Man as well as other branches, underlines the importance of initial vetting
for
licences. It has also confirmed the benefits of a Depositors’ Compensation Scheme.
The FSCs seem understaffed for the tasks of banking supervision, especially on-site inspections. The Jersey’and
Isle of Man
banking teams seem each to need an extra two professional staff and the Guernsey team an extra one.
8 Investment and securities business
The FSCs in all the Islands have a policy to regulate investment business to the highest international standards.
All are associate
members of IOSCO.
Jersey and Guernsey have licensed and regulated collective investment schemes, both open-ended and closed-ended,
for over
10 years. They are now extending regulation to the other forms of investment business, including investment managers,
investment advisers and stockbrokers. The Isle of Man has regulated all such business since 1991.
In Guernsey and the Isle of Man, the Codes of Conduct which supplement the legislation have the status of rules
and the FSCs
have power to enforce them. In Jersey, the Codes will not be similarly enforceable. In my opinion they should be.
The FSCs license and regulate institutions providing collective investment schemes along broadly UK lines, though
with some
differences. The UK Treasury has granted “designated territory” status to all three Islands. This enables the Islands’
industries
to market “recognised” open-ended schemes to the general public in the UK.
The issue of licences is carefully controlled. Licence criteria include the usual “fit and proper” assessments.
Significant numbers
of applications are refused. Permits are also issued for individual schemes. “Recognised” schemes have to meet
UK-style
requirements. For “non-recognised” schemes, closed-ended schemes and debt issues, the requirements are lighter
and less
prescriptive.
The Jersey law explicitly does not apply to investment products offered to informed persons not exceeding 50 in
number. In
my opinion, this should be re-considered
The Island FSCs now have regimes similar to the UK’s for licensing and regulating investment activities other than
schemes,
including dealing, arranging deals, fund management and investment advice.
In Jersey, however, the regime does not extend to arranging deals. In Guernsey, long-term insurance products are
not counted
as investments and are therefore not subject to conduct of business regulation. In the Isle of Man, these products
are subject to
such regulation if sold by independent financial advisers but not if sold by the insurance company’s own staff.
The authorities in
each of the Islands would preferably in my opinion make good these lacunas.
The FSCs generally follow best practice in requiring segregation of client assets and accounts. In Guernsey, however,
the law
does not make clear that assets held by a firm in the name of a client are held in Trust and are not available
if the firm fails.
All the FSCs have good programmes for on-going supervision of collective investment schemes. But on-site inspections
are
hampered, especially in the Isle of Man, by staff shortages. Effective supervision of investment business other
than schemes will
require frequent on-site inspections, especially in the early years.
Especially in Jersey and Guernsey, outsourcing of back-office tasks is increasingly common. This is a problem for
supervision.
The solution may lie in co-operation with regulators or auditors in the jurisdictions where the back-office work
is done.
The legislation gives the FSCs wide powers to investigate. In Jersey, however, notice must be given and there are
no rights of
entry. The Guernsey law includes no powers to search and seize and no offence of failing to answer. It also needs
amendment
to reflect the ECHR Saunders judgment on self-incrimination.
The Isle of Man has extensive enforcement powers, matching those in the UK. The Guernsey authorities do not have
powers to
name and shame, seek injunctions against misleading statements, or ban individuals. The Jersey authorities do not
have powers
to apply for restitution for investors who previously suffered loss or to seek injunctions and restitution for
breach of regulatory
codes. The authorities in both Islands may wish to add these powers to their otherwise effective arsenals.
The Jersey authorities are preparing a new Insider Dealing Law. Securities violation and fraud should preferably
be defined as
widely as possible so as to ensure that co-operation can be given to overseas authorities. Offences under the Law
should
include as in the UK and the Isle of Man, creating false markets in securities.
The Guernsey FSC has announced plans for the introduction later this year of a
Channel Islands Stock Exchange (CISE). Management and supervision of a Stock
Exchange are not simple tasks. I hope therefore that the managing company and the
FSC will give priority to thorough preparation in advance rather than aii early launch.
In all the Islands, there are pressures on investment supervision resources. The Isle of Man FSC probably needs
between two
and three extra professional staff The Guernsey and Jersey FSCs probably need one extra person each. In Guernsey,
the need
arises in part from the new Stock Exchange. In Jersey the main need is to develop and deepen the approach to investment
regulation.
9 Insurance and pensions business
Guernsey and the Isle of Man have large offshore insurance sectors, mainly providing captive and life insurance
products to
non-resident customers. Jersey has only recently begun to compete for such business. The Islands have designated
territory
status under section 130 of the UK’s Financial Services Act, 1986. This enables their life insurance companies
to market their
products to UK residents.
The Island authorities all aspire to have well-regulated insurance sectors, suitably attuned to offshore needs.
Specialist insurance
management companies manage most of the offshore insurers. The authorities regulate mainly through these local
managers.
ln the Islands as elsewhere, insurance regulators have tended to play a larger part than banking or investment
regulators in
supporting the industry’s progress and developing new products. In my opinion, this is acceptable but only provided
that the
regulators scrupulously respect the principles set out in section 6.
The division of duties between “host” and “home” supervisors is less well specified than in the banking sector.
In my opinion,
explicit agreements are needed with the supervisors in parent company jurisdictions.
The legislation in all the Islands covers the differing needs of (and within) the domestic and offshore sectors
by giving wide
discretion to the regulators, including substantial “waiver” powers.
The authorities are reviewing their legislation. In my opinion, consideration should be given to a new structure
comprising
separate laws for the domestic and offshore business ana~ within the offshore business law, separate provisions
for captive and
commercial business and life insurance business.
The Isle of Man and Jersey authorities should deal at the same time with the other issues on the legislation listed
in Chapter 9. In
Jersey, the list is extensive and the authorities should move quickly to strengthen or (better) replace their legislation.
The Guernsey authorities introduced legislation in 1997 for Protected Cell Companies. Such structures offer economies
in
administration, fees and capital requirements for insurance and investment funds. But there is no knowing whether
they would
survive legal challenge in Courts outside Guernsey. The Guernsey supervisors have rightly been scrupulous in highlighting
this
uncertainty. They should ensure that firms offering the facility are similarly scrupulous.
The Island authorities vet applications for licenses carefully with a view to admitting quality. On-going supervision
depends
importantly on scrutiny of annual returns, including audited annual accounts, reports by consulting actuaries and
auditors, and
business plans. [As in the UK,] on-site inspections are not well developed.
Chapter 9 lists matters requiring attention in one or more of the Islands, including accounting standards, updating
of business
plans, solvency margins, actuarial criteria and certificates, whistle-blowing and procedure manuals. Also crucial,
especially in
long-term insurance, are systems for combating money laundering. The Isle of Man authorities require that the annual
Directors’
Certificate and Auditors’ Report certify full and effective compliance with the Island’s money laundering guidelines.
The authorities’ powers to investigate, intervene and petition for winding up of insurers mostly appear satisfactory.
The Jersey
authorities, however, need powers to petition the Court to wind up insurers and less cumbersome powers to investigate.
The Jersey powers to co-operate with overseas authorities are subject to certain restrictions. The authorities
may wish to
remove these.
The Isle of Man is alone among the Islands in having a policyholder protection scheme. The Jersey and Guernsey
authorities
have alternative trust arrangements which have been approved for the UK designated territory requirements.
None of the Islands has special legislation or supervision for pension schemes. The Isle of Man is developing such
a regime.
This will require considerable resources. The regime should preferably be tested domestically before extension
to the offshore
market.
The Island authorities should give priority to ensuring that the supervisory regimes for longer term products,
especially life
assurance, are well-judged, effective and up to date. These are the products where the public are at risk. Within
the captives
area, supervision of third-party business should receive special priority.
The Jersey authorities need in my opinion to recruit a further well-qualified staff member with experience of insurance
supervision to work alongside the present member. The insurance supervisors in Guernsey and Isle of Man both propose,
rightly in my opinion, to add [one] additional analyst (net) to their staff.
10 Companies
The Islands have developed large businesses as international company registration and administration centres. About
100,000
companies are incorporated in the Islands. Many more are administered from, but not incorporated in, the Islands.
The Islands’ company sectors differ markedly from those of the onshore jurisdictions. Most companies are private
companies
formed by non-resident individuals or Trusts to hold assets of various kinds or business interests outside the
Islands. Pyramid
structures, with a Trust at the top owning a variety of companies, are common. As in other offshore centres, these
companies
have been a source of concern to the Island authorities because of the potential they offer for concealment of
shady business
For multinational or overseas companies, the Islands’ company vehicles may offer substantial advantages in tax
savings and
convenience. Such vehicles are used for purposes such as headquarters, treasury and international trading functions,
captive
and life insurance, collective investment, share option and pension funds, and leasing as well as other forms of
asset holding.
Corporate service providers (CSPs), including company formation agents and managers, play a key role in the Islands.
They
are responsible for most company formations. They also provide Director, management, administration and company
secretary
services for many companies.
Company registration and regulation systems in the Islands are designed, as elsewhere, to give companies a legal
identity and, if
they so choose, limited liability; in return for making publicly available certain basic information about the
Directors, owners,
areas of activity and finances.
The regimes differ between the Islands and between the Islands and the UK. The authorities in Jersey and Guernsey,
but not
the Isle of Man, vet applications for new company registrations and require confidential disclosure to the authorities
of the
company’s beneficial ownership. Unlike the Isle of Man and the UK, however, they have not in the past required
companies
operating in or from the Islands but incorporated elsewhere to register. In none of the Islands are limited companies
required to
file audited accounts or an Annual Report by the Directors. In the Isle of Man, there is a requirement to produce
audited
accounts but it is not enforced.
For the reasons explained in Chapter 10, the case in favour of vetting is, in my opinion, strong. As the Isle of
Man authorities
have found, there is great scope for abuse of offshore company vehicles to facilitate financial crime and money
laundering.
The case for requiring disclosure of beneficial ownership in confidence at registration, and changes subsequently,
is likewise
compelling. The authorities need to know who the principals behind the businesses using the centre are.
Companies administered or otherwise operating in the Islands, but incorporated elsewhere, should clearly be required
to
register and make confidential declarations of beneficial ownership in the same way as locally incorporated companies.
The
Jersey and Guernsey authorities are right to plan this change.
In my opinion, again, there is a strong case for requiring all limited companies to prepare and file audited accounts,
preferably
as part of a wider initiative across all offshore centres. Without this, the nature, scale and purpose of individual
companies is
likely to remain opaque. Non-trading, asset-holding companies as well as small companies could be permitted to
file much
abbreviated accounts. A requirement to file accounts, even a single-page summary, is much the best way to enforce
the
requirement to keep audited accounts.
The authorities’ new policies for licensing and regulating company service providers (see section 13) should be
seen as
complementing, not replacing, the strengthened company regulation regimes.
Like other offshore centres, the Islands offer non-residents special company tax regimes designed to attract international
business, notably tax exempt companies and international business companies. In recent G7 and OECD discussions,
the
industrial countries have suggested that this is harmful tax competition. This issue will have to be discussed
at an international
level. The Islands have made clear that they wish to play a full and constructive part in such discussions.
In the meantime, [Jersey has a special category of foreign registered investment companies which are subject to
reduced
regulatory requirements. In my opinion, the same regulatory regime should apply to all companies associated with
the Islands. J
The Isle of Man has a special category of non-resident companies. These enable their owners to hide their identities
and the
activities of the company and to escape tax in return for an annual fee of £75O. [The authorities are considering
whether to
abolish this category. lam sure they will be right to do so.!
In my opinion, there is a presumption against permitting bearer shares. The Isle of Man and Jersey permit them.
Guernsey does
not.
Jersey has modem procedures for dealing with bankruptcies and corporate insolvencies.. The Isle of Man procedures
and
some of the Guernsey procedures need updating. The authorities have proposals to tackle this.
The authorities in all the Islands should introduce modern procedures enabling businesses to be rescued when appropriate,
rather than made insolvent. Companies might be allowed to obtain a moratorium on action by creditors for (say)
28 days.
Guernsey and the Isle of Man should introduce a new public body with responsibility for carrying through the practical
business
of insolvency in public interest cases. The Official Receiver in England and the Viscount in Jersey offer possible
models. The
new body should preferably also have responsibility for ascertaining access to assets held in Trust and for licensing
and
supervision of insolvency practitioners.
Chapter 10 includes a checklist of further issues which the Island authorities should consider when updating their
insolvency and
bankruptcy regimes.
11 Directors and partnerships
As in the UK, the Islands’ company legislation lays certain duties and obligations on Directors of companies. In
my opinion
such legislation needs to lay on Directors individually duties and responsibilities which cannot be ducked through
general
powers of attorney; to make provision for a Code of Conduct for Directors, preferably enforceable; to give the
authorities wide
powers, not confined to insolvency cases, to disqualify Directors; and to extend to Directors of companies operating
on the
Islands but not incorporated there.
The authorities’ new policies for licensing and regulating company service providers (see section 13) should be
seen as
complementing, not replacing, the strengthened company regulation regimes.
Like other offshore centres, the Islands offer non-residents special company tax regimes designed to attract international
business, notably tax exempt companies and international business companies. In recent G7 and OECD discussions,
the
industrial countries have suggested that this is harmful tax competition. This issue will have to be discussed
at an international
level. The Islands have made clear that they wish to play a full and constructive part in such discussions.
In the meantime, [Jersey has a special category of foreign registered investment companies which are subject to
reduced
regulatory requirements. In my opinion, the same regulatory regime should apply to all companies associated with
the Islands.
The Isle of Man has a special category of non-resident companies. These enable their owners to hide their identities
and the
activities of the company and to escape tax in return for an annual fee of £750. [The authorities are considering
whether to
abolish this category. I am sure they will be right to do so.]
In my opinion, there is a presumption against permitting bearer shares. The Isle of Man and Jersey permit them.
Guernsey does
not.
Jersey has modem procedures for dealing with bankruptcies and corporate insolvencies.. The Isle of Man procedures
and
some of the Guernsey procedures need updating. The authorities have proposals to tackle this.
The authorities in all the Islands should introduce modern procedures enabling businesses to be rescued when appropriate,
rather than made insolvent. Companies might be allowed to obtain a moratorium on action by creditors for (say)
28 days.
Guernsey and the Isle of Man should introduce a new public body with responsibility for carrying through the practical
business
of insolvency in public interest cases. The Official Receiver in England and the Viscount in Jersey offer possible
models. The
new body should preferably also have responsibility for ascertaining access to assets held in Trust and for licensing
and
supervision of insolvency practitioners.
Chapter 10 includes a checklist of further issues which the Island authorities should consider when updating their
insolvency and
bankruptcy regimes.
11 Directors and partnerships
As in the UK, the Islands’ company legislation lays certain duties and obligations on Directors of companies. In
my opinion
such legislation needs to lay on Directors individually duties and responsibilities which cannot be ducked through
general
powers of attorney; to make provision for a Code of Conduct for Directors, preferably enforceable; to give the
authorities wide
powers, not confined to insolvency cases, to disqualify Directors; and to extend to Directors of companies operating
on the
Islands but not incorporated there.
The Islands have some, but not all, off this in place already. The forthcoming legislation on Trust and corporate
services
providers will provide an opportunity to improve the present provisions where necessary.
The authorities need not only to have these powers but also to use them. Enforcement has so far been limited, possibly
because
of under-funding.
The reputation of all the Islands has suffered from the presence on the islands, especially Sark of so-called “nominee”
Directors of companies These Directors know little or nothing about the companies they nominally direct. Owners
of assets or
business interests in other jurisdictions have found that they can combine secrecy and tax-free status by forming
non-resident
companies in (say) the Isle of Man with “Directors” (and hence residence for tax purposes) in (say)Sark (where
there is no
tax and no company regulation).
The authorities in Guernsey, Alderney and Sark are agreed that the problem must be solved by means of new legislation
with
application throughout the three Islands. The aim is to have this in place by the end of 1998.
Such legislation needs in my opinion o provide for thc Guernsey FSC to license fit and proper all those in the
Islands who serve
as Directors or trustees by way of a business It should also provide for a Code of Conduct for Directors setting
out the
standards of conduct and diligence expected from theni Thc FSC should hove the powerand the duty to cnforL’c’ these
requirements. Directors without a fit and pro wr track rceord and Directors who fail to comply with the Code of
Conduct
would have their licences withdrawn or not be licensed in the first place.
The Jersey authorities have introduced a framework for Limited Liability Partnerships. [In my opinion these should
be subject
to the same regulatory requirements as companies, including auditing and disclosure of accounts].
The Isle of Man offers a similar vehicle, somewhat confusingly called the “Limited Liability’ Company” (LLC). [The
issues
these raise are similar to those which aris on other companies in the Islc of Man].
12 Trusts and Trustees
Trusts ate a key element in the Islands’ international finance centres Trust and company vehicles taken together
enable the
Islands to offer a range of facilities not generally available in civilian law finance centres, offshore or onshore.
The Islands are
able to offer a favourable tax environment for both Trust and company vehicles..
For the most part, the Islands appear to have as good a legal framework for Trust; as any other jurisdictions,
and better than
most. The framework is broadly similar to that in the United Kingdom In Jersey and Guernsey, however, Trust Law
has since
thee 1980s had a mainly statutory basis
The Islands have rightly not followed other offshore centres in bringing in new legislation for STAR Trusts or
so called Asset
Protection Trusts. The Island Courts would be expected to aside set aside such Trusts
Trust instruments offer great advantages. But the scope for abuses, both by settlers and by trustees, is also great
As Trusts
age, moreover, the scope for abuses by trustees multiplies. Trustees should therefore be obliged to make proper
disclosures to
beneficiaries and to produce, submit and preserve audited accounts.
Professor David Hayton has identified a number of specific improvements that might be considered in the Islands’
Trust
legislation To counter potential abuses by settlors he has suggested provisions to reduce the scope of defending
creditors,
frustrating legitimate claims of heirs and spouses and implementing disreputable “flee” clauses.
To counter abuses by trustees, he has suggested that the legislation should ban sole trustees, oblige trustees
to keep
beneficiaries and representative objects of a power informed about the Trust; prohibit clauses exempting trustees
and
negligence of any kind; require waiver by future trustees of the privilege against self-incrimination and make
Purpose Trusts
subject to inspection by an official enforcer.
The Island authorities have no proposals to register or regulate Trusts as such But they do all propose to extend
the regulatory
boundary to include professional providers of Trust and trustee services. Legislation is to be introduced within
the next [12]
months, with a view to implementing the new regimes in 2000. This legislation will offer a convenient opportunity
to enact the
other points mentioned below.
In my opinion, the Island authorities are entirely right to extend the regulatory boundary. They are also right
to focus the
regulatory regime on Trust service providers rather than Trusts themselves.
The legislation should require the FSC to vet, license and regulate Trust Service providers and to promulgate enforceable
Code
of Conduct. The FSCs should have investigation and enforcement powers to refuse or revoke licences. It should be
an offence
to provide such services without registration. Chapter 12 includes illustrative sketches for the legislation and
the Code
The transition from non-regulation to regulation will require careful handling. In my opinion, the initial registration
process
should set high standards and should be used to weed out dubious or incompetent providers.
The considerations that point to regulating Trust services providers in the Islands are equally cogent in the UK.
Such a step
would have the advantage of bringing for the first time a group of people inside the. UK Government, or the Financial
services
Authority, with a clear responsibility for overseeing the Trust sector.
13 Company and Trust services providers
The Island authorities have all, rightly in my opinion, brought forward proposals to licence and regulate the providers
of Trust
and Company services. This is perhaps the only effective way to regulate the Islands’ large Trust and company sectors.
The objectives should be to protect the Islands’ customers by preventing fraud and other disreputable activity
by providers: to
promote high standards of business conduct and competence, to combat abuse of the Islands’ Trust and Company facilities
for
money-laundering or other forms of crime; to ensure that providers do not facilitate or acquiesce in such abuse;
to put the bad
providers out of business; and by all these means to protect the Islands’ reputations.
The Islands’ proposals envisage different legislative structures, regulatory coverage and frameworks, and timetables.
A convenient structure is likely to be a single piece of overarching legislation, providing for the registration
and regulation of all
service providers, supported by specific rules or Codes of Conduct for each of the main areas, notably Trust services,
company services, Director services and other specialist services.
In my opinion all Trusts and companies not licensed by the FSCs should be obliged to use a licensed provider. The
authorities
should set high standards from the outset and refuse to license questionable providers. The requirement for licensing
should
apply to all who provide Trust or Company services. There should be no exemptions for particular institutions,
professional
qualifications or small scale of activity. It should be an offence to act as a provider without being properly
licensed Providers
should be obliged to maintain adequate levels of PII and EFI.
The FSCs should have duties and powers to withdraw licences, attach conditions, impose fines, inspect and investigate,
and
police unlicensed business. They should be allowed to use their own staff or these purposes as well as outsiders.
Provision should be made for a serious but sensible measure of proactive enforcement, including some on-going inspection
of
the licensed population.
In the early stages at least the FSCs are likely to need between four and six staff carefully chosen, to introduce
and implement
the new regulation.
The Islands have substantial numbers of resident lawyers and accountants to serve the heavy requirements of their
international
finance centres.
Those who provide Trust, company and investment services will be obliged to apply for licenses and submit to regulation
just
like other providers.
The Islands also apply appropriate professional disciplines to lawyers and accountants acting in other capacities.
Lawyers are
regulated by the Island Courts and/or Law Societies. Accountants arc mostly regulated by the UK’s accountancy bodies.
14 Financial crime and money laundering: policy, legislation and achievements
The authorities in all the Islands have made clear their firm commitment to prevent and combat crime of all kinds,
wherever
committed, including money laundering and tax evasion as well as drug trafficking, terrorism and fraud. They are
committed to
the fullest co-operation with other jurisdictions to that end.
All the Islands have a policy to comply with the Forty Recommendations on combating money laundering of the international
Financial Action Task Force (FATF), revised in 1996
The problems the Islands face in the field of financial crime and money laundering are similar to those in other
finance centres
'both offshore and onshore. Whether they have more than their fair share of money laundering and other financial
crimes is
hard to judge. Chapter 14 discusses this.
The Islands have developed considerable arsenals of legislation to combat financial crime and money laundering.
They have
generally followed UK models, sometimes with a considerable time-lag.
The UK's arsenal includes legislation relating to fraud, their, extradition, proceeds of drug-trafficking and terrorist
crimes, all
crimes money laundering, police and criminal evidence (PACE), and international co-operation.
The Islands now either have all these elements in place or are will soon do so. The Isle of Man has all the main
elements in
place. Guernsey and Jersey plan to enact their All Crimes Money Laundering legislation in the autumn.
Jersey does not yet have PACE, or International Co-operation Laws. In the absence of these, the Jersey authorities
do not
have powers to obtain information and evidence, or to assist overseas authorities, except in cases related to drugs,
terrorism
and serious or complex frauds. They intend, however, to have these laws in place by the autumn of 1999. It is clearly
important that they should do so.
For the most part, the Islands' existing and prospective legislation seems satisfactory. As in the UK, financial
institutions and
professionals in the Islands continue to have a common law duty of client confidentiality (though there are no
banking secrecy
laws). But the authorities have long had powers to override this duty in the pursuit of crime and the recent legislation
has further
enhanced their ability to do so.
There are, however, a few problem areas.
? Locally indictable offences. The new all crimes money laundering legislation in Guernsey and the Isle of Man
follows the UK
legislation in restricting cooperation with overseas authorities to cases where the predicate crimes would be indictable
if
committed in the home jurisdiction. If the UK decides to drop this restriction, 1 hope that the Island authorities
will do likewise.
The Jersey authorities propose to restrict co-operation analogously to offences carrying a maximum sentence of
not less than
one year. In my opinion, this restriction too should be dropped.
Co-operation threshholds. The Jersey fraud legislation applies only to cases of of serious or complex" fraud.
On this basis, the
Jersey authorities have limited their co-operation with overseas authorities to cases involving £2 million
or more, while
sometimes being prepared to assist in smaller cases. In my opinion this threshold should be publicly scrapped.
? Fiscal cases . The Jersey authorities have also had a policy hitherto not to assist investigations by overseas
authorities in
purely fiscal cases, I hope that they will be willing in future to give full assurance in such cases. The PACE
and International
Co-operation laws should be designed to provide the necessary powers. The sooner these laws can be enacted, clearly
the
better.
? Consent requirements. The new all crimes money laundering legislation in the Isle of Man and Jersey requires
the Attorney
General’s consent before the police can disclose information obtained through the suspicion reporting system to
people outside
the Island. This requirement could delay the transmission of urgent information. But the Attorney Generals propose
in both
cases to issue general consents.
? Time-bars. Jersey law requires that prosecutions of statutory offences must be brought within 3 years of the
date when the
alleged offences were committed. The Jersey authorities are recommending to their Parliament,, rightly in my view,
that all such
time-bars to prosecution should be repealed. / Theft?]
There are several areas, both in the UK and in the Islands, where the present legislation and international agreements
might be
improved so as to strengthen the hands of the authorities in the pursuit of financial crime and money laundering.
? A general law on co-operation. There may be a case for a single, general law on co—operation to replace the existing
proliferation of differing provisions. Chapter 14 includes an illustrative sketch for such a law. If the UK should
think it right to
adopt such a law, I hope that the Islands would follow suit.
? Information “gateways”. The UK and the Islands have similar “gateways” for individual authorities to exchange
information in
the pursuit of crime. The most important lacuna seems to be the inability of Tax authorities to supply information
to other
authorities in the pursuit of crime. If the UK is able to introduce such a gateway, I hope that the Islands will
follow suit.
? Double Taxation Agreements (DTAs). The combating of tax evasion, now a major problem for virtually all jurisdictions,
depends importantly on exchange of information between tax authorities. Double Taxation Agreements (DTAs) between
the
UK and each of the Islands provide for such exchanges. But these dated and deficient Agreements prevent information
exchanged from being used in evidence. They should be replaced by either modern DTAs, based on the OECD model,
or
modern Exchange of information Agreements (EIAs) with comprehensive coverage in each case.
In the UK and the Islands, financial crime remains too profitable. There are various steps that the authorities
could consider to
take the profits out of crime.
? Unexplained life-styles. There is a case for taking powers (as in the US and Ireland) to restrain assets, and
reverse the burden
of proof, in cases where people live beyond their visible means. If the UK authorities decide to take such powers
/ hope that
the lslauud authorities will follow suit.
? Penalties. There is a case for much higher financial penalties for financial crimes. The penalties in the Islands
are mostly similar
to, or in some cases higher than, in the UK.
? Use of civil law and locus. In both the UK and the Islands, prosecuting authorities could probably use civil
powers more
extensively to take the profits out of crime and recover proceeds. Legislation can provide a clear locus for public
bodies to
use such procedures.
? Licensingg and disqualifying the service providers. The licensing and regulation of Trust and company service
providers in the
Islands should contribute substantially to the prevention of financial crime.
15 Financial crime and money laundering: practicalities
The Island authorities have greatly improved their intelligence capabilities by introducing systems for suspicious
transaction
reporting along FATF and UK lines. In general these systems seem to work well. They have applied so far to suspicions
of
drug trafficking and terrorist offences. They will soon be extended to cover suspicions of crimes of all kinds,
including tax
evasion and other tax offences, as set out in the new all crimes money laundering legislation.
The obligation to make suspicion reports rightly extends, as in the UK, to all categories of financial institution,
bureaux de
change, Trust companies, other companies, lawyers, accountants, investment advisers and other partnerships and
individuals.
Even ahead of introduction of the All Crimes Money Laundering legislation, the level of suspicion reporting has
been
impressive. The Island authorities received 1670 suspicion reports in 1997. The majority of reports have come from
banks,
though life insurance and Trust companies too have made significant numbers. Other groups have made few reports
and may
not yet have adequate systems.
The Guernsey and Isle of Man authorities feed all their suspicion reports into the NCIS database in London. The
Jersey
authorities have in the past fed in only a limited number but propose to bring their practice into line with that
of the other Islands.
The Islands’ police authorities have had some problems at the investigation stage, both when they have needed to
make
investigations themselves and when overseas authorities have asked them for help. The islands receive many more
requests for
help than they make themselves.
The main problem has been that the legislation has not hitherto provided the necessary powers. As discussed above,
the Isle of
Man authorities have now completed the legislative arsenal and the Guernsey authorities will shortly have done
so The Jersey
authorities expect to have done so by the autumn of 1999.
In Jersey, the authorities’ policies of not helping in fiscal cases and limiting assistance on fraud to cases above
£2 million have
been a further problem.
Some investigating authorities overseas seem still to believe that requests for assistance from the Islands have
to be routed
through the Home Office or the FCO. Their right course is to make contact directly with the Island authorities.
Some overseas authorities urged that their own investigators be allowed, in appropriate cases, to join the local
investigators in
making searches and conducting interviews. The Island authorities are [all?] now willing to do this.
For the most part, the Islands’ procedures for obtaining evidence for overseas authorities have been less problematic.
The
traditional Letter of Request procedure seems to work well. Faster procedures are available in certain areas
Some problems have arisen when witnesses are reluctant to swear documents for use as evidence in the Courts of
other
jurisdictions. The problem can, however, always be solved through the Letter of Request procedure.
The Tax authorities in all the Islands have no general powers to collect information for the benefit of tax authorities
in other
jurisdictions. But they arc prepared to obtain evidence for use in criminal proceedings in fiscal cases in the
same way as for
other categories of offences.
The UK’s Extradition Act 1989 applies directly to all three Islands.
When the new All Crimes Money Laundering legislation is in place, all three Islands will be able and willing to
trace, restrain
and confiscate proceeds of crimes of all kinds, including ta~ evasion, in response to requests from overseas authorities,
within
the limitations mentioned earlier. In the Isle of Man, the proceeds in individual cases have (regrettably, in my
opinion) to be at
least £10,000.
Where necessary, civil forfeiture procedures can be used as well. The Islands’ Courts regularly issue Mareva restraint
injunctions.
Where the Islands themselves are the lead-jurisdictions, they all have a policy to prosecute financial and other
crime whenever
there is sufficient evidence and a reasonable prospect of conviction.
The Island authorities have all made prosecutions relevant to the international finance centres over the years,
though the
numbers have been relatively small. Rates of conviction have been high.
The case which has attracted most attention in recent years is the Bank Cantrade case in Jersey (1998). Despite
some
criticisms, the authorities succeeded in obtaining two guilty verdicts and a partial guilty plea in a very complicated
case. The
authorities have noted for future reference the importance of bringing in specialist Counsel and forensic accountants
from
England at the earliest stage in cases of such size and complexity.
The Royal Court in Jersey has a policy to impose more severe sentences than in England. The Guernsey and Isle of
Man
Courts follow English sentencing practice.
16. Financial crime and money laundering: resources and structures
The authorities in all the Islands are firmly committed to providing the resources of judiciary, prosecution, law
enforcement and
intelligence necessary to police their international finance centres effectively.
My impression is that, with rare exceptions in earlier times, the Island Judiciaries have been and remain well
able to cope with
the considerable workloads associated with the international finance centres. They bring in UK QCs in case of need.
The Law Officers bear heavy burdens in all the Islands. In my opinion, the Guernsey authorities would be well-advised
to
consider taking out two or three extra qualified staff and perhaps reducing their involvement in approving company
registrations.
In the police and Customs areas, the allocation of resources to fraud and commercial work, financial intelligence,
investigations
and responses to requests from other jurisdictions is of particular concern. Jersey now employs 11 people in these
areas;
Guernsey employs 8; the Isle of Man employs 6.5.
All the Islands will need extra resources to deal with the expected increase in suspicious transaction reports
and confiscation
orders after the new all crimes legislation and suspicion reporting take effect.
Jersey and Guernsey have provisionally estimated a requirement for 2 extra staff hi my opinion, the Jersey force
in particular is
likely to need one or two more as well. The Isle of Man seems to have a special need for extra staff in this area.
In my
assessment, 4 extra staff are needed, in addition to filling the present vacancy, and an extra 2 staff for the
all crimes suspicion
reporting. The Head of the Fraud Squad should preferably be a full-time post as well.
In my opinion, the Islands would do well to develop new structures as well for policing their finance centres.
The present Fraud
Units and Joint Financial Investigation and Intelligence Units would best be brought together into single, self-standing,
multidisciplinary Financial Crime Units (FCUs).
These units would be responsible for policing the Islands’ finance centres and supporting the Attorney Generals
in their roles as
public prosecutors for the finance centres. The Director would report to the Attorney General, with a dotted reporting
line to
the Chief Constable
The Units would work in close co-operation with the Attorney General’s office, the Police, Customs, the Tax departments
and
the financial regulators but be separate from them.
The Units would be financed separately from the Police and Customs The Attorney Generals would be responsible for
ensuring
adequate budgets for policing and investigation of the finance centres
Staff would be able to make careers in this specialist area of work. They would no longer be obliged to move back
and forth
between this and other policing work
The suggested structure would differ from present UK structures. But the Islands, being small, have options that
the UK does
not have. The UK too, moreover, arguably needs a National Fraud Squad.
17 International Standards
The authorities in all the Islands accept that international standards of regulation, policing and co-operation
are an absolute
obligation.
They have understandably been concerned to obtain due credit for such standards. They have therefore sought to
achieve
accreditation or other forms of recognition from international bodies such as the FATF, the l3asle Committee, IOSCO
and
IAIS. In this there has been some progress, though less than one would wish.
In some areas, such as Trusts, there are no international bodies or forums that set and monitor standards. The
UK would be
well placed to promote establishment of an international forum on Trusts.
The Islands have also sought to obtain favourable treatment from the larger countries individually in recognition
of their
regulatory standards. Examples are designated territory status in insurance and investment. There is scope for
the larger
countries to extend such practices, in return for high standards of regulation and co-operation, especially in
the fields of market
access and tax enforcement.
The Islands have taken a leading role in seeking to promote high standards in the offshore generally. The Jersey
authorities have
been instrumental in developing the role of the Offshore Group of Banking Supervisors (OGBS) and in developing
the Group’s
involvement in the FATF processes.
There may be a case for replacing or supplementing the OGBS with a new structure comprising an Offshore Steering
Group
(OSG) at senior level, with a paid working Chairman and sub-committees for individual areas of regulation or policing.
Also useful might be a forum for periodic discussions between representatives of the OSG and onshore jurisdictions
including
“parent” countries of offshore centres and other interested countries and international financial bodies. The UK
might be
well--placed to convene such a forum.
If no progress can be made in these areas, the UK, the Crown Dependencies and the British Overseas Territories
could
consider setting up a small independent Financial Centres Audit Office (FCA 0), somewhat along the lines of the
Audit
Commission in the UK. Such a body might help the offshore centres associated with the UK to achieve high standards,
a level
playing field and an enhanced reputation compared with other offshore centres. The better course, however, would
be to
develop international co-operation, accreditation and recognition.
18. Conclusion
For the most part, the infrastructures the Islands have developed for their international finance centres seem
remarkably good
for such small jurisdictions.
The Island authorities are all committed to implement the All Crimes Money Laundering regimes, to extend the regulatory
boundary to encompass Trust and Company service providers, and to ensure adequate resourcing of the regulation
and
policing of their finance centres. They all need to consider the case for a financial services ombudsman.
In other areas, the requirements vary from Island to island.
In Jersey, the authorities most urgent requirement, in my opinion, is to reach a position where they can and do
co-operate fully
with other countries in their combating of crime of all kinds, including tax evasion and lesser frauds, not least
at the investigation
stage. Thss will require a new policy stance and early passage of the missing elements in the legislative arsenal.
Several aspects
of financial regulation, notably insurance, need to be developed and deepened Customer protection schemes need
to be
considered. Companies operating but not incorporated in the Island need to be registered.
In Guernsey, an urgent requirement, which the authorities are already tackling, is the proposed legislation and
regulation to deal
with the problem of bogus Directors and the “Sark Lark’s The Law Officers and legal draftsmen need more staff As
in Jersey,
companies operating but not incorporated in the Island need to be registered. The insolvency legislation needs
to be updated.
Certain aspects of financial regulation need to be developed further. Customer protection schemes need to be considered.
In the Isle of Man, the urgent requirement is to strengthen regulation of the Island’s large company sector and
its considerable
population of company and Trust service providers. New insolvency legislation is needed and the Island’s Trust
law needs
attention. Extra resources are needed in certain areas of regulation, notably banking and investment supervision.
The police
need more resources to combat fraud and money laundering.
The Report has identified needs for around 20 extra professional staff in each Island ( to police and regulate
the international
finance centres (see Box I8.1). It should be possible to meet some of the requirement by redeployments from elsewhere.
Chapter 18 includes a suggested action timetable (see Box 18.2). Under this, the Islands would have implemented
by the end
of 2000 all the legislative and policy changes discussed in the Report except those contingent on prior action
by the UK
BOX 18.1
STAFF REQUIREMENTS INDICATED BY THE REPORT
Increase in full-time equivalents, gross
Jersey Guernsey Isle of Man
Support for Law Officers 2
Police and other staff for Fraud and 4 3 7
Financial Intelligence and
Information Units (FFIIUs)
Registration of Companies not 3 3 3
locally incorporated, returns of
beneficial ownership, filing of
accounting information,
enforcement
Regulation of banks, investment 3 3 4
business & Stock Exchange
Regulation of insurance 1 1 1
Regulation of Trust and Company 5 4 5.5
service providers
Enforcement 3 1
Customer protection and support to 1 1 0.5
Ombudsman
Support staff 1
20 18 20
BOX 18.2
TIMETABLE FOR,IMPLEMENTATION
*Requires no legislation or only minor legislation.
**Requires major primary legislation or treaty
Date and measures
Jersey Guernsey Isle of Man
1998
Conflicts of interest * * *
All Crimes Money Laundering ** **
Removal of prosecution time-bar *
Financial crimestoppers line * * *
1999
PACE law **
International Co-operation law **
Removal of fraud & ACML threshold *
Regulation of Director services **
Changes to Law on Purpose Trusts **
Insurance Law & regulation changes ** ** **
FSC and Regulatory changes, inc * * *
Board and structural changes, on-site
inspections and staff recruitment
Company regulation changes, inc ** ** **
action on beneficial ownership and
non-resident companies (IoM),
registration of companies incorporated
elsewhere (J,G) & LLPs disclosure
regime (J)
Insolvency legislation * ** **
New Double Taxation or Exchange of ** ** **
Information Agreements
Establishment of separately financed FCUs.* * *
Complete recruitment of new staff
for FCUs, FSCs & Law Officers * * *
1999 or 2000
Improve Trusts legislation ** ** **
Licensing & Regulation of Trust and Company** ** **
Service providers
Customer Protection schemes ** ** **
Financial Services Ombudsman ** ** **
Investment business legislation changes* * *
Rules of financial business conduct * * *
Finance centre training * *
TIMING CONTINGENT ON UK ACTION
Remove ACML indictable offences limitation * *
General law on co-operation, gateways etc** ** **
Measures to take profits out of crime: ** ** **
unexplained life-styles / use of civil law powers
REVIEW OF FINANCIAL REGULATION IN THE
CROWN DEPENDENCIES
PART I
By Andrew Edwards
INTRODUCTION
1.1 Terms of reference
The Home Secretary commissioned me in January 998 to review with the authorities in the Islands of Jersey and Guernsey
and
the Isle of Man their laws, systems and practices for regulation of their finance industries and companies, the
pursuit of financial
crime and co-operation with other Jurisdictions. The terms of reference are at Annex A.
For the reasons discussed in chapter 4, the three I ands are collectively known as Dependencies of the British
Crown, or
“Crown Dependencies”. The responsibilities of the Guernsey authorities extend in many (but not all) areas to the
Islands of
Alderney and Sark as well as Guernsey itself With the agreement of all the authorities concerned, therefore, I
have included
Alderney and Sark within the Review.
1.2 Plan of report
This Report presents the outcome of the review. It consists of four parts.
Part I presents my own assessment. This reflects extensive discussion with the authorities and practitioners in
the Islands and in
London and some discussion with officials in other financial centres. I myself, however, take responsibility for
what the report
says and for any errors of fact or judgement that it may contain.
Parts II, III and IV are “Island Chapters” for Jersey, Guernsey and the Isle of Man respectively. The Island authorities
have
prepared these in close consultation with me.
The Island Chapters offer professional prospectuses for the finance centres of each of the Islands. They are designed
to
provide for each Island, within a manageable compass, reasonably full descriptions of their political and judicial
systems, their
economies and finance industries, and their laws, systems and practices for financial regulation, company regulation,
the pursuit
of financial crime and co-operation with other Jurisdictions.
I hope that the Prospectuses will be of value to international institutions, Governments, judiciaries, regulators,
law enforcement
agencies and financial and legal practitioners inside and outside the Islands. I hope, too, that the Island authorities
will be willing
to update them each year so that they may be of continuing value
I would like to think that other Offshore Finance Centres, too, where information is often not available in a handy
form, may
likewise be willing to prepare and keep up to date professional prospectuses of a similar kind, designed for similar
audiences.
1.3 Review Team
The subject matter of the Review has called for a variety of professional skills and experience.
I am therefore grateful to Mr Munro Sutherland, Mr Guy Sears and Mr Derek Sullivan, who have looked at banking,
investment and securities, and insurance and pensions supervision, respectively, in the Islands, and to Professor
David Hayton,
who has looked at various aspects of Trusts in the Islands. The main conclusions from their work are reflected
in the report.
I thank the Home Office for commissioning and financing the Review and providing some invaluable support services.
I thank
the Treasury for seconding Mr Michael Swan for a short but valuable period to assist with it.
1.4 Participation and Consultation
In conducting the Review, I have sought, and received, an enormous amount of help from many people inside and outside
the
Islands.
The authorities in each of the Islands have taken endless trouble. By the authorities, I mean not only the professional
public
servants, regulators, prosecutors and law enforcement officers, who have devoted so much time to preparing the
“Island
Chapters” and to briefings and discussions, but also the leading politicians and judiciary
Also in the Islands, I have had the benefit of discussions with private sector financial practitioners, lawyers
and accountants,
both active and retired, as well as receiving many interesting letters from people living in or associated with
the Islands.
In the UK, I have received much valuable briefing from Government officials, regulator stain representatives of
self-regulating
bodies, private sector practitioners and professionals, and academic experts.
I have drawn heavily on advice from professionals and regulators with knowledge and experience of other “Offshore”
centres,
notably Gibraltar and the Caribbean
I have also learned much from discussions with officials and regulators of certain other
countries and organisations which have dealings with the Islands, including the United
States, Germany, France, Switzerland, the European Commission and the Financial
Action Task Force.
I thank all these people for giving so generously of their time, knowledge and experience.
2 THE ISLANDS’ FINANCE INDUSTRIES
2. 1 Overview
The development of the Islands’ finance centres over the past 30 or 40 years, and especially over the past 20 years,
has been a
remarkable success story. They have been considerable players in the wider development of “Offshore” centres over
this
period.
The Islands now have a wide range of finance business, including banking, investment, insurance, company business
and trust
business. The business has, moreover, become genuinely international. The Islands’ customers now come from all
parts of the
world, not just the UK. Niche businesses have been developed, especially for multi-national companies, rich individuals
and
expatriates.
As the finance industry has developed, so the Islands have become more prosperous. In Jersey and Guernsey, GDP
per head
is now well above that in the UK.
The Islands have also become increasingly dependent on their finance centres. The finance industries and related
services now
account for between two-thirds and three-quarters of the national income in Jersey and Guernsey and probably about
one-half
in the Isle of Man.
2.2 Offshore centres generally
The Islands have benefited from the rapid growth of international or “offshore” financial business generally in
recent decades.
The terms “offshore centre” or “offshore business” tend now to be used in several different senses. They always
include the
business of
small Island finance centres, constitutionally independent at least as regards their domestic affairs, which have
developed
legislation, regulation and tax vehicles to attract non-resident business, mostly denominated in foreign currencies.
But they are also often used to include, by analogy, the non-resident business of some or all of the following
types of centre, all
of which have seen rapid growth in recent years:
similar small centres which are coastal or inland enclaves;
special tax and/or regulation zones established by larger countries within their own borders;
any finance centre, including the large world centres, with a large volume of non-resident clients.
As international trade, multi-national companies and holdings of personal wealth have grown, and exchange controls
have
progressively been dismantled, so offshore business in the widest sense has burgeoned at rates outstripping the
growth of
national incomes. It is estimated that one-third of the wealth of the world’s “high net worth individuals”, or
approaching $6
trillion out of some $17.5 trillion, may now be held “offshore”: that is, outside the Jurisdictions where the individuals
live.
(Merrill Lynch & Gemini Consulting, World Wealth Report, 19981. The Crown Dependencies probably have between
5 and
10 per cent of this market.
2.3 Development of business in the Islands
The Crown Dependencies themselves, and the Channel Islands in particular, have attracted a certain volume of tax-driven
business for several generations.
From the 1960s onwards, there began a rapid growth of offshore banking and associated niche products, accelerated
by the
development of multi-national companies and the progressive dismantling of exchange controls.
From the early 1980s and through the 1990s, this and related forms of business have grown strongly as the total
offshore
market has grown and the Islands have developed new financial products and services. Both corporate and individual
customers have taken advantage of the tax and operational benefits of the offshore centres. This growth has continued
despite
tax and regulatory measures by the large Jurisdictions.
2.4 Nature of business
The Islands now have a wide range of finance business, including banking, investment, insurance, company business
and trust
business.
Total bank deposits in the Islands (resident and non-resident) are currently around £163 billion :(Jersey
490] million, Guernsey
£S4million, Isle of Man £19 billion). For comparison, non-resident deposits held in the UK are around
£ 1,000 billion.
Total funds under management are £...billion (Jersey £...., Guernsey £17 billion (collective
investment schemes only), Isle of
Man £16 billion. (For comparison, total non-resident funds under management in the UK are £....billion.]
Insurance companies in the Islands have total assets of £....billion (Jersey , Guernsey £6.5 billion,
Isle of Man £7 billion).
Guernsey has 10 authorised life assurance companies. The Isle of Man has 15. Guernsey has [475] captive insurers.
The Isle of
Man has 167.
Apart from unit trusts, no figures are available for the number of trusts or the value of assets held in trusts
established on the
Islands. The amounts held in this way are, however, believed to be very large, especially in Jersey but also in
Guernsey (where
a recent survey indicated that they were likely to be at least two-thirds as large as bank deposits). Assets held
in trusts will be
reflected in part, but only in part, in the bank deposit and assets under management figures quoted above.
Around [100] thousand companies are incorporated in the Islands. Jersey has some 40,000 some 24,000 of them tax
exempt
or subject to special non-resident tax regimes. The corresponding figures for Guernsey are [16,000] and 8,000.
The
corresponding figures for the Isle of Man are 42,000 and [21,000].
The table at Box 1 includes some of the figures just mentioned, along with similar figures for a selection of other
offshore
centres.
2.5 Country distribution of Financial Institutions
Financial institutions in the Islands are mostly subsidiaries or branches of large parent organisations with head
offices in the UK,
Europe or the United States. The size and nature of the Islands’ business closely reflects the policies and decisions
made by
these parent institutions.
Although UK parentage still predominates, the parent institutions now come from a wide variety of other countries
as well, as
indicated in Box 2.
2.6 Country distribution of customers
In common with other “offshore” centres, the Islands’ most important customers are companies operating on a global
basis,
rich individuals and expatriates. Niche markets have been developed, especially for these groups.
In earlier times, the Islands’ finance business was heavily UK-oriented. Although the UK the most important single
client,
however, the business has grown to be genuinely international. The Islands’ customers now come from all areas of
the world.
UK customers account for only ....per cent of total bank deposits in Jersey. The corresponding figure in Guernsey
is 14.5 per
cent and in the Isle of Man 25 per cent.
The banks do however continue to invest a high proportion of their deposits in the UK. In Jersey, the percentage
is ….. per
cent; in Guernsey, 41 per cent; and in the Isle of Man, 53 per cent. There is thus a substantial net inflow of
funds to the UK,
amounting to around [25] per cent of total deposits held in the Islands.
In terms of currencies, sterling deposits now account for only some ...per cent of the total (Jersey), 34 per cent
(Guernsey) and
... per cent (Isle of Man). [Business denominated in other European currencies is now as large as US dollar business.
See Box
3.]
2.7 Reasons for business
The Islands owe the success of their finance centres to their substantial constitutional independence in domestic
affairs and their
continuing willingness, evident throughout their history, to adapt to changing world conditions. These are the
vital factors from
which all else flows.
The substantial independence of the Islands has enabled them above all, like other offshore finance centres, to
offer potential
customers tax advantages which the large centres themselves and islands without such independence cannot readily
emulate.
These‘ advantages turn importantly on maintaining low levels of public expenditure in relation to GDP, as the Islands
have done.
The extent of the tax advantages to particular customers depends in practice on a wide
range of factors, not least the tax rules in customers’ home countries or the other countries
where they operate.
For some individual customers, however, and above all for expatriates, the low rates of direct tax (20 per cent
on personal and
corporate incomes in all three Islands), the absence of inheritance, wealth or capital gains taxes, and the non-taxation
of interest
paid to non-residents may add up to a highly favourable tax environment.
For corporations, similarly, and especially the ever-increasing population of multi-national companies, captive
insurance and
asset holding vehicles, the various concessionary tax regimes for companies registered in but conducting business
outside the
Islands, notably the tax exempt and international business companies, may be highly attractive.
The Islands have rightly appreciated that tax advantages are a necessary but not a sufficient condition for success.
Other
ingredients are important as well. In these they generally have no inherent comparative advantage compared with
the large
centres (or dependent Islands). But they have worked hard to supply these ingredients as well:
A good reputation
Political stability
Good links with other respected Jurisdictions
An absence of corruption
Confidentiality
Good laws, preferably familiar from elsewhere
Good systems of justice and public prosecution
Good law enforcement
Good counter-crime and money laundering regimes
Good financial and company regulation, preferably familiar from elsewhere
Good and honest financial institutions, including major world names
Good company and trust vehicles, preferably familiar from elsewhere
Good and honest professional and supporting services at reasonable cost
A familiar local currency
A familiar language
Good communications
The continuing growth of the Crown Dependencies’ financial business in recent years indicates the considerable
success they
have achieved in these areas as well. The islands’ links with the British Crown and the UK, including the interlocking
of legal
and judicial systems and the close copying of UK legislation and regulation alongside their traditional independence
in fiscal
affairs, have encouraged perceptions that they combine key advantages of the UK and the “Offshore”. They are even
sometimes known as “Offshore UK”.
Similarly, the dominant presence on the Islands of subsidiaries and branches of major financial institutions from
the UK and the
rest of Europe, and the adoption by the Islands of many EU standards, has encouraged a perception of the Islands
as
“Offshore Europe”.
2.8 Living standards
As the finance industry has developed, so the Islands have become more prosperous.
In Jersey and Guernsey, GDP per head [was slightly below that of the UK in 1980; the Guernsey chapter looks wrong
on this]
but is now about 25 per cent higher in Jersey and about 20 per cent higher in Guernsey than in the UK. This comparison
probably overstates the margin of difference since prices are mostly somewhat higher than in the UK as well.
In the Isle of Man, GDP per head has risen from 57 per cent of the UK level in 1985 to around 80 per cent now.
2.9 Dependence on finance business
The Islands have also become increasingly dependent on their finance centres. The finance industries and related
services now
account for between two-thirds and three--quarters of the national income in Jersey and Guernsey and probably about
one-half
in the Isle of Man.
2.10 Differences between Islands
Despite the strong similarities, the finance industries of the Islands exhibit some interesting differences.
Jersey has the largest banking, trust [and investment business] sectors but a relatively young insurance sector.
Guernsey is a major captive insurance centre as well as having substantial banking, investment and trust sectors.
The authorities
there propose to introduce a Channel Islands Stock Exchange.
The Isle of Man has the largest life assurance sector and an investment sector similar in size to Guernsey’s but
smaller banking
[and trust] sectors. The Island also has a significant shipping sector (not further discussed in this report).
The table at Box 4 shows the numbers of people employed in the banking, investment and insurance sectors of each
of the
Islands.
2.11 Comparison with certain other “Offshore” centres
The Crown Dependencies have [larger populations and somewhat more business than Gibraltar and most of the British
Caribbean Territories]. Compared with Hong Kong and
Singapore, on the other hand, they are relatively small. The Box I table gives some
comparisons for selected centres.
2.12 Prospects for future growth
Looking ahead, the main brake on the continuing growth of Jersey and Guernsey as international finance centres
is their size.
With total populations of some 85,000 and 59,000 respectively, population densities are already high, much higher
than in the
UK (1600 and 2250 per square mile, respectively, as against 600 in the UK). High proportions of the working populations
in
the Islands, x and y respectively, are already working in the finance industries or supporting services. For some
years now, the
Islands have been obliged to limit severely, through residence or housing permits, the inflow of newcomers to the
Island.
To accommodate significantly more people, as could anyway prove necessary for demographic reasons in Jersey, it
could be
necessary to construct high-rise buildings. This the Islands have been reluctant to do.
The alternative to such expansion will be to reinforce the existing policy of rigorous selection. The Islands will
have to choose
what financial business they do and do not want.
The Isle of Man, with 73,000 people, is less densely populated. Its population density, 275 per square mile, is
about half that of
the UK. In addition, a lower proportion of the total population is employed in the finance industry and supporting
services. The
scope for expansion of the finance industry is correspondingly much greater. But the Island authorities have a
policy to avoid
undue reliance on any single industry and may be reluctant to see the Island’s population density rise too far.
2.13 Vulnerabilities
The potential risks to the Islands’ finance centres are the same as for other offshore finance centres. They come
partly from
outside and partly from inside.
From outside, the main risk is that the large countries where most of the Islands’ customers live or conduct business
will change
their tax laws, regulations or enforcement practices in ways which make the facilities of offshore centres seem
less attractive.
The large countries might seek to introduce new international tax standards or conventions:
the on-going discussions in the G8, the OECD and the EU are addressing these matters. Or they might individually
make further
changes in their tax regimes, as they have done in the past. Or they might sharpen their enforcement practices.
It seems likely,
however, that such measures would lead to changes in the mix of business of offshore centres rather than put them
out of
business altogether.
Re-introduction of exchange controls could likewise have major effects on offshore centres. Fortunately, however,
such a
development looks improbable.
Changes in regulatory standards in the larger countries, such as capital and reserve requirements or conditions
for marketing
financial services in these countries, could have some impact as well. .,
From inside, the main risk is a loss of reputation. Offshore finance centres, even more than the large onshore
centres, live by
their reputations. Their problems, real or perceived, tend to receive disproportionate coverage in the world’s
Press.
The reputations of any finance centre may suffer as a result either of genuine problems or of misinterpretations.
Genuine
problems may include corruption, crime or perceived failures of legal processes or regulation, and the associated
public
scandals. The laws, regulations and systems discussed in this report are largely concerned with minimising the
likelihood of such
problems.
Also important are perceptions of confidentiality. Some customers of the Islands would move their business elsewhere
if they
felt that their affairs would not remain confidential.
Misinterpretations may be troublesome as well. All too often the successes of offshore centres, notably in the
fight against
international crime and money-laundering, are misinterpreted as indicating a prevalence of criminal activity rather
than effective
counter-crime systems. The Islands seek to minimise such risks through careful and timely briefing.
Among other internal risks, three are especially worthy of mention. As discussed above, the Islands could have
difficulty in
providing skilled staff and professional and support services to sustain ever-increasing amounts of business. They
could also
lose much of their comparative advantage, compared with the large countries, if they should ever allow public expenditure
and
taxes to rise to levels familiar in the larger countries or if local wage costs should ever become significantly
uncompetitive.
2.14 International criticisms
It is sometimes argued, especially in the world’s larg Jurisdictions, that offshore finance centres should not
exist at all. The
British Crown the UK are sometimes criticised for being associated with such Jurisdictions.
Whatever view one may take on these matters, t ere are two points from the preceding discussion that should be
borne in mind.
First, the British offshore finance centres ar a direct result of the fact that they have internal self-government.
As discussed
earlier, this has been the key factor in enabling such territories to develop financial centres . Especially, perhaps,
in the Crown
Dependencies, the development of such centres has been the product of local initiatives pursued within a constitutional
tradition
of independence in domestic matters.
Second, the low rates of direct taxation which have helped the Crown Dependencies and other offshore centres to
succeed in e
way they have reflect, in part at least, the low proportions of public expenditure to GDP in the centres.
REVISED SECTION
2 14 Criticisms and defences of the offshore
Offshore finance centres as a group have attracted considerable criticism in recent years. It is sometimes
argued, e5pecially in the large jurisdictions. that they serve no useful purpose and should not exist at all. The
centres themselves
argue, on the contrary. that they contribute significantly and constructively to the world’s financial system.
The critics usually target three main features of the centres
the tax regimes, which arc often seen its inducing particular industries to choose unsuitable offshore locations
at the expense of
the onshore jurisdictions and as depriving onshore jurisdictions of tax revenues properly due to them,
a framework of secrecy, allied to poor co-operation with other countries, which attracts and facilitates disreputable
business
and money laundering and
poor regulation, which enables financial institutions to build businesses the back of low standards, with considerable
risks to
clients.
Later chapters of the report suggest that the second and third criticisms, if applied to the Crown Dependencies.
would he quite
wide of the mark. For the most part, the position in these Islands is quite the opposite of what such criticisms
would imply.
The report does not offer any assessment of the Islands’ tax regimes The tax regimes of offshore centres generally.
and indeed
of onshore centres, are the subject of or -going discussion in thc G7, the OECD and the EU. The offshore centres
themselves
argue that onshore centres, too are active in seeking to attract business through favourable tax regimes.
The case in favour of offshore centres, from a global perspective, includes a number of elements
The right to supply services. There are many quality services to customers that well-regulated offshore centres
are well able to
supply and have a p4rfcct right to supply like anyone else. Examples are Trust services and services to expatriates
Stability. Stability is an advantage that offshore centres may bc able to offer. In the Crown Dependencies, systems
of
Government have remained remarkably stable over many centuries. Rates of tax on personal and corporate incomes
have
remained unchanged, at 20 per cent, for nearly half a century
Risk Spreading International clients wishing to spread their risks may Find it helpful to spread their assets between
different
jurisdictions
Convenience and simplicity. Especially in an electronic age, the offshore centres are well placed to facilitate
business or
co-ordinate transactions involving many different jurisdictions through provision of a base free from the tax and
other
complications of the larger jurisdictions. In this way they may help to lubricate the world’s financial markets.
Examples arc
international custody or treasury operations and banking services.
Innovation and flexibility. The offshore centres are sometimes better than the larger centres to test out innovative
financial
products such as new insurance or investment vehicles. They can respond flexibly and quickly to the changing needs
of
international customers and markets. In the larger centres, the ramifications of change are typically wider
Regulation. The offshore centres may also be able to lead the. way in certain areas of regulation. Examples are
the regulation of
Trust and Company services providers, discussed in chapter 13 of the report.
Fiscal elements. A degree of competition in tax rates may be helpful, no least in giving the large countries an
added incentive to
avoid penal rates of tax.
As discussed earlier, tie internal self-government of the offshore Islands associated with the British Crown and
the UK has been
the key factor in enabling them to develop their international finance centres.
BOXI
SELECTED OFFSHORE FINANCE CENTRES
Selected data, for latest available period
Jersey BVI Hong
Kong Singa pore
Guernsy LoM Gibral Bermda Caymn
Population
000 85,150
(1996
census)
Population density, Persons per sqm 733/km
0.733 per m
GDP per head, £ 15,854
99.8
Bank
dcposits. £bn
O/w: Sterling 37.9
61.9
Dollars $bn .
Funds under man gt £bn 37.8
£fl.4bn ~ — —
Insurance assets held
Companies locally incorporated, ‘000 32
17,000
Q/w:
Normal tax
Special tax or no tax 15,000
BOX2 .~
PARENTAGE OF THE ISLANDS’ FINANCIAL INSTITUTIONS
Per cent of total institutions, end 1997
Banks etc 44
20 je. 100%
UK 8 (% are for
Other EU 15 banking
Other Europe 4 institutions
N America 9 only)
South Africa 0
Other overseas
Local
Jersey Guernsey Isle of Man
Investment institutions
UK
Other EU
Other Europe
N America
South Africa
Other overseas
Local 30.0
12.5
9.5
12.5
8.0
12.5
15.0 100% (lnv institutions only)
Insurance companies
UK
Other EU
Other Europe
N America
South Africa
Other overseas
Local 21%
14
7
30
21
-
7 100%
(Insurance companies only)
BOX3
CUSTOMERS OF THE ISLANDS’ FINANCIAL BUSINESS
Percentages of total business originating from the areas listed or denominated in the
currencies listed.
Jersey Guernsey Isle of Man
Bank deposits
UK 15
Other EU 8
Other Europe N America 32
4 100%
South Africa -
Other overseas 26
Local 15
UK £ 32.0
US$ 42.0
DM 7.5
FF 0.7 100%
Other European Yen 62
0.3
Other 11.3
Funds under
Management 4
UK Other EU These figures are unavailable
Other Europe
N America
South Africa
Other overseas
Local
Insurance premium
Income
UK 10.5
Other EU 3.0
Other Europe N America 3.3
17.2 100%
South Africa 56.0
Other overseas -
Local 10.0
BOX4 .~
NUMBERS EMPLOYED IN THE FINANCE SECTORS
Jersey
TOTAL 7134 t 996 I 8130
Full time Part time Total
Banks 4562 585 5147
Other deposit takers investment and securities business
Insurance and pensions 145 25 170
1612 249 1861
411 70 481
Company, Trust and Advisory services 404 67 471
3 THE ISLANDS’ REPUTATIONS
3.1 The Islands’ reputations
In my extensive discussions with professionals of wide experience inside and outside the Islands, I found widespread
agreement
that the Islands are in the top division of small-to-medium-size offshore financial centres.
Many of the professionals I met expressed their admiration for what the Islands had achieved in recent decades.
Many of them commended the standards of government, regulation and business in the Islands and the absence of corruption.
Many of them noted, too, that the Islands are full of able and helpful people, who co-operate well with the rest
of the world.
The Islands’ co-operation with other Jurisdictions in the pursuit of drug-trafficking and terrorist offences won
universal praise.
3.2 Some concerns expressed
As one would expect, same of the professional people I consulted raised concerns as well. So too did some of the
people of
the Islands who wrote to me, in response to my general invitation, about the Review.
I do not regard such concerns as surprising or ominous. All financial centres, onshore and offshore, have problems.
All have
their critics. The Islands are no exception.
I have, however, thought it important to evaluate such concerns carefully, in so far as they are relevant to the
Islands as
international finance centres, and to consider what is to be learned from them.
The concerns most frequently expressed related to some perceived conflicts of function and interest, especially
among the
authorities but also within the financial and professional sectors; a perceived absence of any realistic means
of redress (short of
extended Court processes) for customers in dispute with institutions or professionals in the Islands; the perceived
continuation
in business of firms or individuals with questionable track records; fears that too little was known about many
of the companies
operating in the Islands; anxieties about the activities of certain Island Directors of companies incorporated
elsewhere; fears that
the Islands’ activities were depriving other countries of tax revenues; and a belief that some Island professionals,
in
collaboration with colleagues in other Jurisdictions, were facilitating tax evasion and other forms of financial
crime
Some of these concerns seemed to be widely shared. Others seemed to be minority views, sometimes confined to one
or two
Islands, but strongly held.
Some officials, regulators, investigators and prosecutors outside the Islands, while mostly full of praise for
the Island authorities,
felt that they could sometimes have co-operated more effectively in the pursuit of crime. In many cases, the problem
seemed to
lie in the absence of the necessary statutory powers rather than unwillingness to help. In others, the problem
seemed to lie in
failures of communication or understanding.
As discussed above, I do not think that these expressions of concern should be regarded as especially ominous.
If officials,
professionals and others had been invited to contribute their views to a similar review of other international
finance centres, the
concerns expressed would probably have been at least equally serious. I have however discussed them carefully with
the Island
authorities, and these discussions have influenced the report’s conclusions.
Several correspondents gave me details of particular cases affecting them where they felt that something had gone
wrong. I
have not sought to take a view on the rights and wrongs of such cases. To do so would have been quite wrong. I
have however
sought to identify what can be learned from them and what implications they may have for future development of
the Islands’
laws, systems and practices. These considerations, too, have influenced the report’s conclusions.
4 OBJECTIVES
4. 1 Objectives
The Islands have a firm objective to be, or to remain, the best governed, best regulated and most responsible of
offshore
centres as well as the most successful.
It is clearly in the best interests of the Islands, the UK and indeed the international community that the Islands
should set, and
deliver, high standards in this way.
The adoption (or re-inforcement) of such standards may sometimes entail some initial loss of business, especially
less reputable
business. As many professionals have remarked, however, the Islands’ best interests must lie in developing good
business and
rejecting business which is questionable or worse, especially as there is more than enough good business to keep
the Islands
occupied. In the medium and longer term, moreover, high standards will encourage, not discourage, the growth of
business.
[I am pleased to say that the Island authorities have confirmed that the policies they have for developing their
finance centres
correspond exactly to the approach suggested above.]
4.2 Practical implications
I
Fulfilment of the proposed objective will depend on developing or maintaining high standards in a number of areas:
public policies and administration;
legal, judicial and prosecution systems;
the avoidance of conflicts of interest;
the constitution of regulatory authorities;
the legislation, systems and practices for licensing and regulation of financial institutions, including co-operation
with other
countries in the pursuit of regulatory offences;
the legislation, systems and practices for registering and regulation of companies, resident and non-resident,
and for dealing with
insolvency;
the common and statutory law for Trusts and Trustees;
the licensing and regulation of professional service providers, including company formation agents, providers of
Director
services and other providers of corporate. trust and investment services;
the laws, systems and practices for countering crime of all kinds, including money laundering and tax evasion as
well as drug
trafficking, terrorism and fraud; and
co-operation with other countries in the pursuit of crime of all kinds.
To ensure the continuing achievement of high standards in an ever-changing world, and the receiving of credit where
credit is
due, there is a strong case for encouraging the development of effective international auditing and accreditation
of legal,
regulatory and counter-crime systems and practices in all the world’s finance centres. I hope that the Islands
will continue to be
active in this area as well.
The remaining sections of the report deal in turn with each of the areas listed, some briefly, others at greater
length.
5 SOME ASPECTS OF GOVERNMENT
5. 1 Introduction
For any international finance centre, political stability, public policy and administration, the legislative framework,
the legal,
judicial and prosecuting systems and the avoidance of conflicts of interest are key concerns. The Crown Dependencies
have
given much attention to all these areas.
5.2 Political stability
The Islands score highly on political stability. For many centuries, they have been dependencies of the British
Crown, without
ever being part of the United Kingdom. The United Kingdom is responsible for their defence and external relations
and, in
general terms, for their good government. By long-established constitutional convention, however, they are independent
in
matters of domestic policy.
Domestically, the Islands have likewise maintained their political systems, with only limited changes, over many
centuries.
As explained in the Island Chapters, the political systems of Jersey and Guernsey are directly descended from the
llth century
Norman systems. The Islands’ unicameral Parliaments, known in both Islands as the States, are elected by universal
suffrage.
They differ in six main respects from most Parliaments in the larger countries:
First, the Parliaments combine the roles of legislature and executive. The main committees of the Parliaments discharge
the
functions of Government Ministries in larger countries. The Presidents of the Committees are not exactly Ministers
but are the
nearest equivalent to Ministers. As in larger countries, the Committees are supported by permanent civil servants.
Second, the Parliaments combine the functions of central and local government in the larger countries. In some
respects they
function more like local councils in the UK than central governments.
Third, the approval of the Queen in Council is required before any primary legislation passed by the Islands’ Parliaments
can
take effect. Government Departments in London vet some of their legislation at the draft stage.
Fourth, the Island’s Chief Judges, known as the Bailiff and Deputy Bailiff, act as Speaker and Deputy Speaker of
the
Parliaments and also as first citizens and spokesmen of the Islands.
Fifth, there are traditionally no political parties. All members of the Islands’ Parliaments are traditionally
independent
Lastly, the Island Parliaments meet for only two or three days per month. Most members, including the Presidents
of most
Committees, do other jobs alongside their Parliamentary work.
The Isle of Man’s political system has an even more ancient ancestry but has undergone more change. The Island’s
Parliament,
known as Tynwald, meets in plenary and bicameral modes.
Although similar in most respects to the Channel Islands, the Island’s domestic political system more closely resembles
those of
the larger countries in two respects:
First, the legislature and the executive are more separate. The Island has a Chief Minister, who acts as First
Citizen and chief
spokesman for the Island, and a Council of Ministers.
Second, the Speaker is not the Chief Justice of the Island but [is elected by the Island’s Parliament]. The Judiciary
play no role
in the legislative or executive processes.
The Lieutenant Governor is able, moreover, to approve some categories of domestic legislation under powers delegated
by the
Crown.
In all the Islands, the links with the British Crown probably enhance external perceptions of political stability.
The absence of
political parties makes the outcome of particular Parliamentary votes somewhat less predictable but reduces the
likelihood of
major changes in policy after elections.
In my assessment, the intertwining of the legislature and the executive, especially in the Channel Islands, has
not so far been a
problem in terms of internal governance or external perceptions of the Island as a finance centre.
5.3 Relations with European Union
When the UK joined the European Union, the Islands decided not to become full members. Under Protocol 3 of the
Treaty of
Accession, however, they are treated as part of the EU for Customs purposes and for certain aspects of the common
agricultural policy. There is consequently free movement of goods between the Islands and the EU countries
REVISED SECTION
5. 3 Relations with European Union
When the UK joined the European Union in 1973, the Islands decided not to become full members
The main considerations at the time were
As offshore financial centres, the Islands needed above all to preserve flexibility in areas such as fiscal policy
and financial and
company regulation rather than be obliged to harmonise with the rest of Europe
Many of the Islands’ clients made clear that the Islands were attractive as places for business precisely because
they were
outside the EU and the UK.
In the Channel Islands, there were concerns that the requirements foreseen for harmonisation of VAT and Excise
duties would
damage the tourist trade
Already overcrowded the Islands could not readily accommodate obligations for the free movement of persons.
The Island authorities doubted their ability to cope with the great mass of EU legislation.
The Islands were concerned, nevertheless, to preserve their free trade in goods, including exports of agricultural
products into
the UK. They opted accordingly for free movement of goods (but not services) between the Islands and the EU.
Under Protocol 3 of the UK’s Treaty of Accession, therefore, the Islands are treated as part of the EU for Customs
purposes
and for trade in agricultural commodities, but not for other purposes. The authorities have opted in practice,
nevertheless, to
follow many aspects of EU legislation and standards in order to promote their business with EU countries.
The considerations listed above mostly remain pertinent today The Islands prosper by being similar but different
5.4 Public Policy and administration
All the Islands have developed capabilities for formulating and implementing public policy remarkable for such
small
Jurisdictions. Especially in the areas of financial and commercial policy, they have followed UK practices in most
respects and
not sought to re-invent the wheel. They have also brought in experienced professionals from outside to give help
where
necessary.
5.5 Legislative processes
The Islands have likewise deployed an impressive armoury of financial, company and criminal legislation. For the
most part,
they have been able to do this in spite of limited resources by closely (but not slavishly) following UK legislation,
sometimes
quickly, sometimes after considerable delays.
Although the Island Parliaments meet for only two or three days per month, they are able to pass legislation quickly.
In contrast
with Parliaments in the UK and most other large countries, there is no “Committee stage” in the passage of Bills.
The
established practice of using UK and other models for their legislation makes this less necessary.
5.6 Legal .systems
As implied above, the statute law which underpins the international finance and company business of the Islands
is similar to,
but not identical with, UK statute law. The common or customary law systems in the Islands likewise have much in
common
with English common law, precedents from which are usually considered persuasive in Island proceedings.
The closeness of the Islands’ law to English law brings two great advantages. First, it enables the Islands to
enjoy many of the
benefits of the legal system of a large Jurisdiction. Second, it is attractive to most customers of the Islands.
English law is not
only familiar but also well adapted to international financial business, both in its own right and because of the
similarities in key
areas to US law.
5.7 Judiciary
The Islands’ judicial systems have to deal with substantial amounts of business arising from the international
finance centres.
The local structures, more fully described in the Island Chapters, differ in certain respects from those in England.
The British
Crown, however, makes the senior appointments and the Appeal procedures mainly involve UK judges and lawyers.
In Jersey and Guernsey, there are (separate) Royal Courts which hear all criminal cases and the most important
civil cases
involving the international financial centre. The presiding judges of law are the Bailiff or Deputy Bailiff both
appointed by the
British Crown after consultation with the Island authorities, or other Judges appointed by the Bailiffs. In addition,
there are
twelve judges of fact, called Jurats, Elected by an Electoral College, Jurats are somewhat similar to Justices
of the Peace in
England. The Bailiff or Deputy Bailiff sit with two or more Jurats.
The hearing of cases by a Judge with two or more permanent Jurats contrasts with the jury system in England. It
has the
advantage that the Jurats are mostly retired professional people with a good understanding of the often difficult
financial and
commercial issues which tend to be involved in the litigation of international finance centres.
The other main difference, compared with England, is that (as discussed earlier) the Bailiff serves as Speaker
of the Island’s
Parliament and as First Citizen and spokesman of the Island as well as being the Island’s Chief Judge. The Deputy
Bailiff,
similarly, serves as Deputy Speaker. Some of my correspondents argued for separating these roles, especially in
a world where
judicial review is now more common, so as to put beyond doubt, in the perception as well as the reality, the independence
of
the Judiciary from the Legislature. The States of Jersey came close to doing so in [1992]. This, however, is a
constitutional
issue which lies beyond the scope of the present report.
The Isle of Man’s judicial system is closer to the English system. The Island’s High Court hears all civil matters
and another
Court equivalent to an English Crown Court hears serious criminal cases, including financial and fiscal cases.
The Judges
presiding over both Courts, known as First and Second Deemsters, are appointed by the British Crown. In serious
cases,
[both civil and criminal?], the presiding Deemster is accompanied by a jury of seven. The Deemsters do not serve
as Speakers
of the Island’s Parliament or as First Citizens and are clearly independent of the Legislature and the Executive.
For all the Islands, the First Court of Appeal consist of the Chief Judges of each Island and English, Scottish
and Northern Irish
QCs appointed by the Home Secretary after due consultation. The final Court of Appeal is the Judicial Committee
of the Privy
Council in London.
5.8 Prosecution
Each of the Islands has an Attorney General (known in Guernsey as HIM Procureur) who acts as public prosecutor.
In Jersey
and Guernsey the Attorney Generals have Deputies known as Solicitor General and Controller General, respectively
There are
supporting
The Attorney Generals and their Deputies are appointed by the British Crown, after due consultation, to serve as
independent
public prosecutors. They combine this role with the two further roles of advising the Crown and the Island Parliaments
on legal
matters (including oversight of legislation drafting) and authorising various actions by the police and others
under fraud, money
laundering and other criminal legislation. [In Guernsey they also authorise company formations]. They do not undertake
any
private work.
For any international finance centre, independent public prosecutors committed to prosecuting crime wherever there
is a
reasonable prospect of obtaining convictions are as important as independent judges.
A few of my correspondents argued that the role of public prosecutor should not be combined with that of adviser
to an
Island’s Parliament. For example, they thought it wrong that the same person should both advise the Parliament
or the
Executive on legal aspects of their relations with someone and be responsible for the decision whether to prosecute
him.
I suspect that any such conflicts of interest are likely to be rare. The Islands’ Attorney Generals all recognise
that, if they should
arise, their first duty would be to the Crown and they would need to appoint someone else to advise the Parliament
or the
Executive. Alternatively, if the conflict should arise from some earlier advice given to the Parliament, they would
delegate the
decision on whether to prosecute, and the prosecution itself; to son one else.
5.9 Resources
As in other Jurisdictions, the Islands appear to have had workload problems from time to time which have led to
some delays in
prosecutions, trial verdicts and responses to requests for assistance by other Jurisdictions, and to backlogs in
law drafting.
The Island authorities recognise that in an international finance centre it is more than usually important to avoid
delays and
backlogs of this kind. They have told me that an on-going solution needs to contain a number of elements:
First, staffing. They will need to ensure that sufficient staff with the necessary skills are available, not least
for law drafting.
Especially in the Channel Islands this is likely to require some long term planning for as long as legal training
in Normandy is
deemed a necessary part of the training programme for Island lawyers.
Second, delegation. The Attorney General and his Deputy propose to analyse carefully what work they must do themselves
and what they can delegate to supporting staff or to other parts of the Government or Regulatory regime.
Third, outsourcing. They will need to buy in expert resources from outside to
deal with peaks of workload and preferably to establish a pool of experts for this purpose.
In my opinion, this is entirely the right approach.
5.10 Conflicts of interest
One of the features that most distinguishes the best offshore finance centres from lesser centres is the avoidance
of corruption
and abuses arising from conflicts of interest. The Crown Dependencies have been keenly conscious of the need to
avoid such
abuses and have shown great determination in developing rules and procedures accordingly. These rules and procedures
have,
moreover, been considerably tightened in recent times.
In small communities, the requirement to avoid, and be seen to avoid, these abuses is no less compelling than in
larger countries.
But such communities are unlikely to have sufficient reserves of skilled and able people to replicate entirely
the separation of
functions found in larger countries.
The issue is most apparent in relation to politicians. The leading politicians in small communities (as in local
authorities) often
combine political duties with business or professional work. Small communities cannot afford to debar from politics
skilled and
experienced people from other sectors.
The Crown Dependencies have tackled the problem with considerable success by developing a culture of transparency
coupled with good sense. Members of the Island Parliaments are allowed to retain commercial and professional interests.
But:
they are obliged to record their interests in a public register, including employment, Directorships and investments
where their
interest exceeds 10 per cent; and
they habitually declare any relevant interests orally before participating in the discussion of any matter.
An informal public policing of conflicts of interest is also highly developed in the Islands and, in my opinion,
highly effective. As
in other small communities, commercial and professional interests are not easily hidden. People in the Islands
know much more
about what their neighbours are doing than would normally be the case on the mainland. Local critics, moreover,
are
indefatigable in attacking politicians and others who may be thought to have committed abuses. My impression is
that the critics
may even sometimes identify conflicts that do not really exist
In addition to the disclosure regimes, the Islands (have either introduced or are considering the introduction
of) certain further
elements of good practice for Members of the Island Parliaments:
an obligation that Members should not only declare their interests but also withdraw from meetings of the Parliament
or any of
its Committees when they have (or might reasonably be perceived to have) a financial interest in the matter under
discussion;
a presumption that Members should not accept Directorships or other paid positions when there might be a reasonable
perception that they have been offered such positions only because they are Members of the Parliament; and
a general presumption against accepting or retaining Directorships of companies, especially financial institutions,
directly
involved in or affected by the Ministries or Parliamentary Committees on which they serve or have recently served.
In my opinion, the Islands will be right to include these elements in their Codes of practice where they do not
do so already. As
discussed above, dealing visibly and effectively with conflict of interest problems is important for international
finance centres
not just in itself but also in terms of confidence and reputation.
It may be necessary to accept the corollary that the leading politicians, in particular, should be paid more for
the public duties
they discharge.
The Islands