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| Offshore
Reporting: Moving Beyond a Wink and a Nod |
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| You have
come to suspect that a client is engaged in criminal activity such as money
laundering or tax evasion. It is a disconcerting situation for
any accountant, attorney, investment advisor or financial planner, and
you are asking yourself what your professional, not to mention moral, obligations
are in terms of alerting the authorities. How do you go about doing
so, what information is required of you and to what extent may you be held
liable for your client's activities? |
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| Conflicts
in offshore jurisdictions can arise between "know your customer" and "code
of conduct" rules and the confidentiality laws in place to protect those
same clients' financial privacy. In many offshore centers it is a
crime to divulge financial information unless there is suspected criminal
activity such as money laundering (for some, tax evasion is not a criminal
offense). International pressure is changing the scope of proactive
regulation offshore, and it is likely the onus of suspicious activity reporting
will extend well beyond banking to any number of client services. |
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| "There
can be no doubt that under the current rules, accountants, attorneys, notaries,
company and trust formation agents and other licensed professionals can
facilitate serious international economic crime through providing advice
and services to their clients," said Jonathon Winer, former deputy
assistant secretary for US International Narcotics and Law Enforcement
Affairs, in his address to the 17th International Symposium on Economic
Crime in Cambridge, England on September 13, 1999. |
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| This
comment is not the first of its kind, and should come as no surprise with
international bodies and governments calling for increased fiscal transparency
in offshore jurisdictions. Some offshore centers are cautiously heeding
these calls, and are now faced with performing a juggling act between clients'
desire for privacy and the obligation to help fight international white-collar
crime. Many US politicians and government officials say they still
have a lot of work to do. |
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| "These
jurisdictions have tended to include micro-states, with small populations,
who in effect, have chosen to license their sovereignty to those looking
for loopholes in financial regulations," said Winer. "They have in
common no or inadequate regulations and supervision of financial institutions,
inadequate licensing and creation rules for financial institutions and
inadequate customer identification requirements for financial institutions. |
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| They permit
bearer shares or anonymous accounts in fictitious names, ineffective obligations
for financial institution record-keeping and reporting, grossly ineffective
or no requirements on reporting of suspicious transactions and legal and
material obstacles to access by administrative and judicial authorities
of other countries seeking information with respect to the identity of
the beneficial owners of accounts." |
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| Strong words,
yes. By now they should be very familiar to offshore regulators. |
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| Know your
customer rules |
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| Know your
customer rules were first introduced for banks in 1988 by recommendations
from the Basle Committee on Banking Supervision. The committee, a
group of banking supervisory authorities, was established by central bank
governors of the Group of Ten countries in 1975. It consists of senior
representatives of bank supervisory authorities and central banks from
Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands,
Sweden, Switzerland, the United Kingdom and the United States. The
committee's statement urged banks to properly identify all clients, and
both onshore and offshore banks have adopted the recommendations to varying
degrees since their release. For some, it's time for them to be extended
to other services. |
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| "To be effective,
the 'know your customer' requirements of the original Basle Committee recommendations
of a decade ago will need to be updated, broadened to cover those who offer
banking-like services, and targeted through partnership with the regulated
industries to ensure that 'know your customer' rules are effectively tailored
to counter risk and not unduly burdensome," said Winer. "Countries
that lag behind in undertaking this approach, either through self-regulation,
government regulation, or a mixture of the two, will find themselves and
their financial institutions home to the riskiest transactions, and over
time, their economies will pay the price." |
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| Winer acknowledged
that today's banks, even those located offshore, face a considerable body
of standards applying to their operations, beginning with lengthy recommendations
from the Financial Action Task Force (FATF). "By contrast, there
are no international standards governing the incorporation and licensing
of exempt companies, shell companies, international business companies
(IBCs), offshore trusts, offshore insurance and reinsurance companies,
or of offshore fund vehicles, including but not limited to hedge funds,"
he added. |
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| Domestic
reporting requirements |
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| In the United
States, politicians and citizens worried about the invasion of their financial
privacy have expressed concern over suspicious activity reports being filled
out by banks, thrift institutions and credit unions, which are submitted
to the Financial Crimes Enforcement Network (FinCEN). The reports
are made by institutions when clients make what is deemed to be an unusual
transaction in comparison with their banking history. Banking customers
are not informed that the report is being submitted to FinCEN, and each
one filed is made available to every US Attorney's office and the 59 law
enforcement agencies across the country. According to information
published by the American Civil Liberties Union, suspicion of a committed
crime does not need to be submitted to FinCEN by a law enforcement agency
before accessing a particular report. |
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| Outside
of the banking industry, domestic reporting requirements vary from profession
to profession. Lawyers are regulated at the state level, and are
subject to the rules of state bar associations, of which they must be members.
Solicitor-client privilege is, of course, strongly protected. Accountants
are regulated both federally and at the state level, and through self-regulatory
organizations such as the American Institute of Certified Public Accountants.
Self-regulatory organizations are in turn subject to federal regulation
by the Securities and Exchange Commission, through the Office of the Chief
Accountant. |
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| "Our system
is one in which there is regulation on both the state and federal level,
and so far it has worked well," says Charles Klingman, a senior analyst
with FinCEN. "We've found it to be effective to have state governments
that do regulate certain professionals. It is somewhat complex though." |
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| Three
key items provide regulation in the US: the country's criminal money laundering
laws, professional best practices and the Bank Secrecy Act (BSA).
Attorneys are not obligated under the BSA to make suspicious activity reports
to FinCEN, unless they work at a bank. Federal criminal money laundering
laws control behavior as well, but do not regulate like the BSA.
Some state laws also mirror its provisions. |
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| Klingman points
to best practices as playing an important role. "We're concerned
about results here, to reduce money laundering, and best practices can
be just as effective and just as controlling," he says. "So while
it might not fall under the jurisdiction of a particular law, if you're
governed by best practices, and are faced with the danger of losing your
job, it works quite well." |
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| The Channel
Islands |
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| It has been
over a year since the Edwards Report was released by the United Kingdom,
examining regulation of the financial services industries in Guernsey,
Jersey and the Isle of Man. The current regulatory efforts of the
Channel Island centers, stimulated in part by the release of the report,
are now some of the most proactive in terms of industry regulation. |
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| "The Guernsey
authorities are determined to maintain and enhance the island's position
as a reputable cooperative international finance center regulated to the
highest standards and to ensure that the island continues to play its part
in the fight against crime of all types, including tax evasion," reads
a report highlighting recent regulatory efforts published by Guernsey's
Advisory and Finance Committee in December 1999. |
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| Guernsey's
Criminal Justice Law 1999, commonly referred to as "All Crimes" legislation,
came into effect on January 1. The Police and Criminal Evidence Law,
giving authorities additional powers to obtain information for investigations,
is being slotted for enactment this year, and the Fiduciary and Administration
Businesses Law is also being considered for this year, which would provide
for the regulation of trust companies and company formation and administration
services for the first time. |
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| "I do not
like the underlying principles of this legislation in either the UK or
Guernsey, partly because they breach the principles of client confidentiality,
particularly for lawyers, and partly because they simply play into the
hand of other less principled jurisdictions," said Howard Flight, Guernsey
Member of Parliament for Arundel and the South Downs and co-chairman of
Investec Guinness Flight, in a speech to parliament on February 25, 1999.
"I believe, however, that this legislation is effectively ipso facto happening
and therefore the sensible objective is to make it as workable as possible." |
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| The provisions
of the Criminal Justice Law 1999 are equivalent to the provisions of similar
legislation already in force in the UK, Jersey and the Isle of Man. |
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| "It is also
worthy of note that Guernsey, as long ago as 1995, introduced legislation
which gave statutory protection to any informant who disclosed his suspicion
of money laundering activities in a case where he was subject to an obligation
of confidence, secrecy or other restriction on the disclosure of information,"
reads the December 1999 report. |
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| Codes of conduct
for certain professionals will also continue to be developed. They
will be included under the proposed Fiduciary and Administration Businesses
Law. |
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| "Despite all
this, however, the bottom line of the proposed law is quite clear; if behavior
is suspicious, then report," said Flight. ". . . What is needed in
the UK and Guernsey is a list of suspicious behavior in relation to drug
money, which prompts the professional to protect himself by reporting." |
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| Peter Crook,
director of Guernsey's Financial Services Commission, spoke at the same
Cambridge symposium in September 1999 as Winer, and spoke of the jurisdiction's
efforts. "Irrespective of whether or not a distinction is made between
onshore and offshore, finance centers should be divided into those that
are committed to compliance with international standards (and importantly
can demonstrate compliance) and those that do not," he said. "Hence,
jurisdictions such as Guernsey which do not have bank secrecy, which have
a can-do attitude to exchanging information and which are committed to
enforcing exchange of information legislation should be placed on one side
of the fence while those which are not committed to exchanging information
and cooperation would be on the other side of the fence." |
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| Bermuda |
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| Bermuda arguably
leads the jurisdictions in the Caribbean region in regulation. In
terms of reporting, the main legislation is the Proceeds of Crime Act 1997,
and its associated Proceeds of Crime (Money Laundering) Regulations 1998.
The regulations identify certain institutions, in addition to banks, that
are regulated in Bermuda. They include: deposit companies,
trust companies or any other person carrying on trust business, insurance
companies carrying on long-term business such as the writing of single
premium annuity products, credit unions, collective investment schemes
such as mutual fund companies, trading members of the Bermuda Stock Exchange,
trading members of the Bermuda Commodities Exchange, entities authorized
by the Bermuda Monetary Authority to offer currency exchange, and most
recently, licensed investment businesses. |
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| "We've got
a fairly detailed structure in relation to regulated financial institutions,"
says D. Munro Sutherland, general manager of the Bermuda Monetary Authority.
"We technically have a definition that has been expanded over time and
which also provides for non-regulated persons to voluntarily seek regulated
status. The way the act was structured, there is that capacity to
broaden it." |
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| The act was
also recently amended so that with amendments made to the Taxes Management
Act 1976, criminal tax fraud is brought within its scope as a money laundering
offense. It was anticipated that these amendments would come into
force in January 2000. |
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| Regulated
institutions are subject to four main duties: |
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| - due diligence,
or know your customer, practices
- accurate
record-keeping and retention including account openings and transactions
- internal
reporting procedures requiring each entity to appoint a reporting officer
- to have continuous
training processes in place to explain to staff their responsibilities
under the legislation,
including
how to identify suspicious transactions, and the duty to report them |
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| The regulated
institutions are subject to fines for failure to report suspicious transactions,
and if drug-money laundering is involved, staff face possible imprisonment.
While the act does not have direct application to all Bermudian companies,
offenses do have general application to anyone in Bermuda, such as concealing
or transferring proceeds of criminal conduct; assisting another to retain
proceeds of criminal conduct; or the acquisition, possession or use of
proceeds of criminal conduct. |
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| "In a jewelry
store for example, say someone comes in and says 'I want 100 of those $10,000
watches and will pay cash'," explains John Hill, manager of the Policy,
Research and Statistics Division of the Bermuda Monetary Authority.
"The salesman thinks it's a good sale. At the same time, he or she
must realize it's an unusual transaction, and it should occur to him or
her that it may not be quite kosher, and that drug money might be involved.
If that person has a suspicion, and fails to report that suspicion, they're
actually guilty of a crime for failing to report. That is quite a
serious situation." |
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| The proceeds
of crime legislation has a provision that if a person does report suspected
criminal activity, they cannot be held liable for it. "Anyone who
blows the whistle cannot be sued civilly for breach of confidence," explains
Hill. There are also anti-tipping-off provisions in the act.
If an employee of a bank or regulated service provider warns a suspected
customer that a report has been submitted, that action is in itself a crime,
and is punishable by fines and imprisonment. |
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| Guidance notes
have also been produced by Bermuda's National Anti-Money Laundering Committee,
which provide the industry with direction on know your customer procedures
and how to recognize suspicious transactions. In determining whether
a person has committed an offense under the proceeds of crime legislation,
a Bermuda court will take into account any relevant guidance issued by
the National Anti-Money Laundering Committee. Compliance with the
guidance notes may conceivably offer protection from any charge of failing
to comply with the regulations. "If a regulated institution is charged
with failure to comply, the institution can perhaps point to the guidelines,"
says Hill. "The point is that the structure of the anti-money laundering
regime here is not just the act and regulations." |
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| Reporting
officers for regulated institutions report to the Financial Investigation
Unit (FIU) of the Bermuda police. Simply speaking, the FIU is a central
office that obtains financial disclosure information, processes it in some
way and then provides it to the appropriate government authority to support
the national anti-money laundering effort. For a suspicion to be
reportable, it needs to be based on knowledge or suspicion of a crime,
or on facts that would relate to a reportable crime, such as tax fraud. |
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| The creation
of FIUs over the last five to seven years has occurred in several countries.
Through the recommendations of the FATF, and the Caribbean Financial Action
Task Force, suspicious transaction disclosures have become a standard part
of money laundering detection efforts in a number of centers. |
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| Where is
this headed? |
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| "We need to
find mechanisms to facilitate suspicious transaction reporting by company
formation agents, accountants, auditors, notaries and lawyers, and consider
making the intentional failure to file such reports a punishable offense,"
said Winer. "These standards need to create clear guidelines that
distinguish between zealous representation of a client and facilitation
of criminal activity." |
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| The standards
and reporting requirements that Winer envisions are probably quite far
off, both onshore and offshore. The US Senate has recently seen much
debate over the suspicious activity reports being submitted to FinCEN by
domestic banks, and citizens’ financial privacy concerns will be taken
into account. |
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| Offshore,
the international pressure to reduce money laundering and criminal tax
evasion through more intensive reporting requirements will remain. |
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| "In a globalized
financial services environment, it is time for us to move beyond the wink
and a nod that too often has come to pass among those in the learned professions
for the due diligence our citizens deserve," said Winer. |
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