Money Laundering, Offshore Centres and the Press

Money-laundering, Offshore Centres and the Press

Journalists at the best of times are pretty callow people. With little knowledge, few principles and fluctuating prejudices they can be relied upon to sacrifice almost anything to cause a sensation. This irresponsible expediency appears most frequently in their treatment of offshore jurisdictions.

Offshore financial centres were once called taxhavens. The term became synonymous with tax evasion havens. These jurisdictions levied a lower rate of tax than many industrial countries whose governments were aggrieved at the loss of revenue and whose journalists took pleasure at pointing grubby fingers at these jurisdictions:
rendering unto Caesar what was due to Caesar became render unto Caesar what Caesar particularly wants to have.

It is not so much the loss of revenue but the ability, and without too much thought, to point a self-righteous finger at jurisdictions, secure in the knowledge that the residents of these jurisdictions do not vote.

Journalists desperate to reveal and expose are only too willing to look for another Watergate or Clinton scandal under every stone. What better target than small countries?

Their approach is foreseeable: Robert Maxwell was a crook, Robert Maxwell operated through companies abroad, therefore companies formed abroad exist only for illegal and fraudulent purposes. If they can bring into this equation contacts with Liechtenstein, the Channel Islands or the Cayman Islands, the condemnation is complete. Rebuttals fall on deaf ears. The logic is that because Robert Maxwell banked in an offshore centre all other depositors in that jurisdiction are criminally tainted.

The fact that offshore centres are responsible for at least 30 per cent of legitimate international investment throughout the world counts for nothing. The last ten years have seen enormous growth in the importance of the skills offered by practitioners in offshore centres. This has been due to numerous influences.

Firstly the growth of wealth in new areas of the world, starting with the Middle East, requires skills in investment, law, accounting and insurance, and other aspects of international investment which are lacking in their own countries. Turning elsewhere for advice frequently meant going to the independent and growing abilities of offshore centres. Certainly amore favorable tax regime in many of them was an attraction.

Investors were not immediately handicapped by a high rate of taxation, nor were they committed to the placing of investment in any one country. The expertise which is now available in the more sophisticated offshore centres equals that available in London, New York or anywhere else. Above all they have the independence and versatility to act freed from clawing political dogma and rigid alliances.

The independence of London as a financial centre is diminishing. Under the heel of Brussels new investors from other parts of the world will look to advisors in offshore centres to position their investments. Whether journalists wish to recognize it or not this is the position. As the centre of world economic power moves out of Europe and North America to the Asia Pacific area the censure in the press may one day be regretted. The begging bowl held out by the United Kingdom to Japanese industry is likely to be repeated. The short sighted and chauvinistic attitude of the press could then be regretted. Unfortunately by that time the journalists and their political friends will have made their fortunes and gone (probably to an offshore centre) leaving the population, whose morality was falsely titillated by their mistaken revelations, the poorer.

George Bernard Shaw's comment that 'there is nothing more ridiculous than the British nation in a fit of political morality' is not without similar comparison in the financial field. Currently journalists have a marvelous vehicle for scandalizing in money laundering. The words money laundering themselves are easily remembered and quoted. Allegations on money laundering are easy to make. Moreover allegations of money laundering are wonderful to make;
they can be alleged against bankers, financiers and others whose professional obligations of confidentiality are easily labeled as conspiracy and secrecy.

If such allegations are combined with an offshore element it becomes as irresistible a journalistic target as sex and the Royal Family. Now we are getting on to dangerous ground. Popular reasoning will have it that anyone who complains of any condemnation of money laundering, no matter how foolish and irresponsible that condemnation may be, is therefore in favor of money laundering and all the criminal elements involved.

So, let us clear that up. There is nothing worse than the drug business. This vile trade needs to be stamped on at every stage and that includes those who deliberately deal in and launder the money of the dealers. But this does not pass all the responsibility for prevention of the crime and the prosecution of the criminals on the banks and other financial intermediaries which the criminals might use.

Money laundering is the last discernible stage in drug trafficking before the proceeds loose their identity and disappear as being identifiable profits of crime. That is the purpose of money laundering, but the hiding of the proceeds is not the only criminal element in the operation But it is the only criminal element in which one of the parties may be wholly innocent. The majority of money which is laundered involves such an innocent party. More money is laundered in London than in any other country in the world. This applies not only to money from the drug industry but also from other criminal activities around the world including the former Communist bloc.

The campaign relating to money laundering can be easily directed against banks and financial institutions which, by their nature, are static, international and identifiable and are first to blame.

More shady and mobile links in criminal activities cannot be condemned with the same relish. This does not mitigate the culpability of money laundering but criticism of financial institutions in offshore centres should only be made where there is some real and substantial evidence of active participation. Extra vacant allegations should not be tolerated to distract attention from where the rest of the criminal activities in the drug business take place.

The processing and distribution of drugs must be a greater crime. These are blatant and both parties to any such transaction are knowingly engaging in criminal activities. Since the profits of the drug business are generated in the United States, the United Kingdom and the rest of Europe, and, in the case of Amsterdam, sometimes blatantly and with the tacit approval of the law, politicians and journalists from these countries should have the sense to realize that. Where the neglect lies is in ineffective drug trafficking measures. Of course denying the criminal for the benefit of the proceeds is a valuable deterrent. The governments of many countries of the world are fumbling as to the best method to be applied. Each country has to adopt its own methods. But progress is being made and it is now clear that in this aspect of international law no country exists in isolation. Each jurisdiction, and that includes offshore jurisdictions, willingly conform to international standards but these standards are ineffective in many cases due to the difficulty of the problem. Islands are not islands as far as international legislation is concerned. It is therefore particularly silly when another wise respected newspaper fails to understand both the principles and accepts a blatantly sensational interpretation of a country's laws and labels an island a "Crook's Paradise".

The Sunday Times in January fell into this trap. Encouraged by a troublesome political minority, it made much of its own interpretation of part of The Seychelles European Development Act. This Act draws together for the larger investor the approval and incentive programme. This applies for investors of not less than US$10 million. One clause in this Act gives immunity from prosecution for all criminal proceedings except criminal proceedings in respect of offences involving acts of violence and drug trafficking in The Seychelles

The Sunday Times did rather better than that giving with paste and scissors this subsection a different preamble and making up its own interpretation whilst applying none of the principles of legal construction. The outcome was that The Seychelles government have been given the reputation of being able to provide immunity from prosecution world wide. This is journalistic lunacy.

The European Development Act does not give complete and utter immunity from all criminal proceedings. Even on the most liberal interpretation immunity is only given after intense scrutiny and approval by the government. It is The Seychelles Government who manage the Act and they are not going to prejudice the good reputation of The Seychelles.

They only allow any of the incentives and immunities of the Act to apply when an applicant has had clearance under their international standards. Secondly, it is clear that The Seychelles courts have no jurisdiction in connection with criminal offences which are committed outside The Seychelles.

For any offshore jurisdiction to be able to grant worldwide immunity to anything is a surprise. Politicians and journalist normally ignore the independent sovereignty of offshore jurisdictions, but in this case they have exaggerated the power of one country to dominate the criminal law of other countries. This immunity does not extend to any civil proceedings.

Apart from a strictly legal interpretation it must be remembered that the Act must not be regarded in isolation but must be taken in conjunction with other legislation in The Seychelles which will include, in the very near future, anti-money laundering laws of international standards.

There was some similar nonsense in other newspapers and this has influenced some strange statements by foreign governments and international organization who have jumped on the journalistic bandwagon to make prim and ill-considered rebukes. The Sunday Times (following its unfair treatment of The Seychelles) got egg on its face the following week where, amidst all the usual talk about the last feudal outpost in the British Isles, the citizens of Sark were revealed to be exploiting the island's unique tax position. "Islanders cash in on the Sark Lark Bonanza" said the headlines. The article appeared to be surprised that this primitive jurisdiction had heard of company formation. What the journalists had not heard of was that the "Sark Lark" ended years ago. This particular little tax planning gimmick depended upon the UK's definition of company residence as to where central management and control were exercised.

If the directors of a British company met in a rowing boat off Sark then the company was not controlled in the UK and favorable tax consequences followed. The island was also useful to companies formed in Jersey but the change in the Jersey law made it unnecessary.

The newspaper also did not realize that Sark is an independent jurisdiction and merely to insist upon its independence is not an unreasonable attribute of nationality despite its affront to the chattering classes. Anti-money laundering projects continue. There appears to be no shortage ofresolve to implement anti-money laundering provisions. Anti-money laundering measures are becoming more varied as the original measures, based upon "know your customer" have proved to be ineffective. There is still, however, noprecise international and specific anti-money laundering regime available by which individual practitioners and bankers can determine the legality of respective clients.International lawyers deny criminals access What is increasing is the resolve and the degree of cooperation between countries. This has be enencouraged by a resolution of the International Bar Association. This resolution, passed at their meeting in Paris in September last year, urges national governments to adopt the principal recommendations of the Financial Action Task Force and calls upon members of the association to promote highprofessional standards which they will embody in a code of practice to guide lawyers worldwide. The intention is to deny criminals access to legal services which facilitate the laundering of the proceeds of crime. The background paper presented to the members notes that lawyers have an increasingly important part to play in helping to deter the subversion of their profession by criminal elements. The IBA say that since money launderers have devised more sophisticated techniques lawyers may inadvertently be involved and must be sufficiently aware to assist in the detection, arrest and imprisonment of persons responsible as well as beingable and prepared to help in the seizure and confiscation of the proceeds ofcrime.

Despite supporting the establishment of an international criminal court, which the International Law Commission has suggested should take over as having international jurisdiction in serious drug trafficking offences, the IBA recognise that, because of the enormity of the continuing threat they and other Bar associations will have to take more specific actions in the future.

Brazil's efforts As stated above each country has to adopt its own measures to outwit the money launderers. Individual countries find the concept of money laundering difficult to tackle. Brazil, for example, is debating proposals based upon principles already adopted in other countries but is finding that it is not simply a matter of adopting off the shelf legislation.

The introduction of effective anti-money laundering law in that country has a long way to go. The Minister of Justice is concerned that he should not create a law more severe than those in other countries. Nothing should hinder the non-criminal flow of capital. Although the proposals will makemoney laundering from criminal sources in Brazil illegal it will have no extra beneficial effect and will not affect the money laundering outside the country. According to the US Department of Treasury, money laundering offlinds from Brazil exceeded $20 billion in the last four years. Brazil has found that it is not simply a matter of passing a law to make money laundering illeal, but that there are many other collateral illegal situations which require attention. For example the Brazilian Government has recently initiated investigations into Brazilian banks which have misusedthe rights to have overseas accounts and is attempting to cooperate with Caribbean countries in further investigations. It is also co-operating with US authorities in reviewing their own controls over overseas accounts.

Furthermore a technical team was sent by the Brazilian Central Bank to the Cayman Islands and there is the possibility of extending the investigation to the Bahamas. The Central Bank is concerned with crimes associated with funds being held by Brazilians in the Caymans. Intermediaries hold many of the accounts:

The identity of the principal is hidden. Illegal uses of nonresident bank accounts in Brazil are also being investigated. According to the Brazilian Finance Minister, Pedro Malan, dollars are illegally being sent out of Brazil from these accounts but the country's economy still requires this type of account to allow persons and enterprises outside of Brazil to move funds into Brazilian financial institutions.

This is the purpose for which nonresident accounts were created. Nonresident accounts never the less are the principal means by which crooks export illegal dollars from Brazil to the United States. Many of these dollars find their way back to Brazil as part of US investment in the country. The US Department of Treasury estimates that during the last five years at least $100 billion of illegal money has found its way to the US from Latin America. These funds have been derived from narcotics trafficking, the sale of gold in the black market and other illegal activities. The transmission of dollars within Brazil is less regulated than international transmission:

Bank secrecy and inadequate financial control impedes investigations.

Brazil recognises that it needs to get to grips with criminalising money laundering and to over come excessive bank secrecy in order to be able to provide an audit trail of illegal dollars. It also recognises that it must find the right balance in its constitutional, legal and cultural context.