Friday, September 16, 2016

Financial Regulatory Issues

The premise I start with is that Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) is not the principal financial regulatory issue affecting the Commonwealth Caribbean today.  The real issue is the misinterpretation and misapplication of the regulations by international, regional and local regulators.  De-risking, or the dumping by US and Canadian banks of their long-standing relationships with reputable Eastern Caribbean banks, out of an irrational fear that they will be prosecuted for processing money-laundering banking transactions with us, is but an extreme example of the misapplication and abuse of AML/CFT regulation.
Anguilla, like many of our small island Territories, has no income tax, capital gains tax or value added tax.  It is a 100% tax-free jurisdiction, so far as personal and corporate income, capital gains and estate taxes, are concerned.  For decades we have had no currency exchange restrictions, while others did and some still do.  In Anguilla, one has always been able to open a bank account in EC or US dollars, euros or sterling, or whatever currency you could persuade the bank to accept.
The Anguilla Government raises revenue principally through indirect taxation such as customs duties and licence fees.  Everything sold in Anguilla is effectively subject to customs duties, since Anguilla produces little or nothing of what it consumes.  If you don’t want to pay the exorbitant duty on Champagne, then buy Bordeaux.  Licence fees are entirely voluntary.  If you don’t want to pay the exorbitant fee for a gun licence or a dog licence, then don’t own a gun or a dog.
For decades, our lack of income or capital gains tax, and easy access to foreign currency, have proven useful to regional and international entrepreneurs.  They incorporate a company in Anguilla to do business in Anguilla and elsewhere, and take advantage of these characteristics.  Licensed company managers manage these companies.  A significant portion of the licensees of the Financial Services Commission (FSC) of Anguilla comprises company managers who provide management services to over 20,000 companies of which about 275 are insurance companies, mostly captive insurance companies.
There are some 60 licensed company managers, directly or indirectly supporting the employment of approximately 250 persons in Anguilla.  The resulting International Financial Services Industry is the second largest contributor to the Anguilla government’s revenue, and it represents some 25-30% of GDP, if we include the banks.  Additionally, Anguilla is among the top 10 domiciles for captive insurance companies.[1]  International Business Companies (IBCs) are cheap to form, and popular among Far Eastern clients.  Yet, Anguilla is miniscule in comparison to the financial services industries of the major financial centres of New York, London, Delaware and Wyoming.
In Anguilla, the FSC regulates for AML/CFT compliance under the Proceeds of Crime Act (POCA).  POCA derives from the Financial Action Task Force (FATF) formed in 1989.  The FSC regulates company managers, insurance companies and intermediaries, investment funds, money services businesses, trust companies, and offshore banks.  Typically, licensees are required to do a business risk assessment;[2] a customer risk assessment;[3] collect identification and verification information on the customer;[4] engage in ongoing risk-based due diligence; and, prepare and enforce an AML/CFT Policies & Procedures Manual.[5]
In 2009, Anguilla was inspected regarding the 3rd Mutual Evaluation Process (MEP) using the previous FATF methodology of 40+9 recommendations.  We spent the next 5 years addressing the deficiencies identified in that report, and we successfully exited the 3rd round MEP at the XLII CFATF[6] plenary in November 2015 held in Port-of-Spain.  The 4th round MEP, using the new revised FATF standards, is currently underway around the world, including the CFATF region.  According to the CFATF programme, Anguilla’s date for the next MEP inspection visit is the 3rd quarter of 2020.  I have no doubt that when our report comes we shall demonstrate 100% compliance with the AML/CFT regime.
While, to a great extent, AML/CFT regulation is a reasonable way to address international criminal activity, the real problem is that the rules aren’t enforced in the US to the same extent as is expected in smaller economies.  That is changing, but slowly.
The alphabet soup of OECD,[7] G-20,[8] FATF,[9] CFATF, and the Egmont Group,[10] all claim to be focussed on preventing financial service providers from laundering dirty money, and financing terrorism.  Not that any launderer of dirty money needs to come to the West Indies.  At any Walmart, he can buy a US$9,999.00 debit card in an anonymous name and spend it anywhere in the world he wants.  New York,[11] London,[12] Taiwan,[13] Hong Kong,[14] and Singapore[15] are widely acknowledged to be the five major money laundering capitals of the financial world.  A 12 July 2016 “Reuters Investigates” article claims that Delaware, Wyoming and Nevada are “hotbeds for the formation of anonymous shell companies.”[16]  Yet, there is no sign that their banks face de-risking.
With increasing globalisation, the large, oppressively taxed jurisdictions find they are losing their tax dollars to our more competitive tax jurisdictions.  While there are some who believe that there is no economic rationale for incorporations in tax-free jurisdictions, other than to evade tax, what the foreign regulators, egged on by some in government and certain lobby groups, really lust for is their missing tax dollars.  Foreign lobbyists demand that their governments force us to comply with increasingly complex due-diligence regulation, which they claim is targeted at AML/CFT, but which, in reality, is no more than their attempt to crush their fiscal competitors.
The US and the EU demand that we supply CFT information, but they don’t keep their own houses in order.  They don’t acknowledge their own involvement in money laundering and financing of terrorism.  They don’t admit their history.  The City of London and Wall Street would not be financial centres if it were not for money laundering and financing of terrorism.  Their leaders engage in nothing but posturing and constant electioneering.  They have never played fair.
The result for us of this confusion of purpose among the international regulators and lobbyists is increasing distress and damage to our financial services industry and economies.  The rules are often misinterpreted and misapplied by local regulators[17] in our countries, resulting in further damage to our financial systems and economic growth.
Even the international and regional regulators can misapply their own regulations.  In May 2015, the CFATF made an AML/CFT presentation in Anguilla to the FSC’s licensees.  There is a distinct difference between the due diligence required of a bank and that required of a company manager or even an insurance company, for obvious reasons.  A bank takes deposits from its customers, and must be subject to a higher standard of regulation.  So, to a certain extent, are insurance companies.  A company manager, on the other hand, is prohibited by section 19 of the Companies Management Act from receiving funds in trust for its client.  And, so its due diligence requirements are less stringent.  Now, whilst POCA makes no distinction based on the type of financial services business engaged in, the extent of ongoing monitoring in a bank will in practice be different from that by a company manager, due to the fact that the bank is in the business of intermediating transactions and has a much more active day to day monitoring responsibility.
As the CFATF presentation proceeded, it became evident that they were advising their audience that they were all required to follow the banks’ need to analyse and study financial transactions.  Licensed company managers don’t engage in the financial transactions of their clients.  This was clearly wrong advice for the audience in question, consisting as it did mainly of company managers.
Recently, a major international insurance company registered a subsidiary insurance company to do business in Anguilla.  This subsidiary met all the due diligence requirements, and was granted a Class A Insurance Licence by the FSC.  For several reasons, it required a bank account in Anguilla.  Under the FSC statutes, a licensed insurer is required to hold reserves in a bank account in Anguilla.  The bank administers a lien over this bank account in favour of the FSC.  Additionally, the Anguillian subsidiary was doing local insurance business.  It needed a bank account to conduct this business.  Yet, when it attempted to open a bank account, the bank, probably instructed by head office in North America, advised that the AML/CFT regulations prohibited an “offshore” company from opening a domestic bank account.  It took an immense amount of negotiation and work before the bank could be persuaded that this was not an offshore company or an IBC, and that this was legitimate insurance business.
Some months ago, a Trinidadian company won a bid on a contract for a new hotel on another island.  The contractor had a problem.  Some of the necessary materials were available only in the USA and Europe.  Trinidadian industry is burdened with currency exchange restrictions imposed and enforced by their Central Bank.  It takes forever to get permission to purchase foreign currency.  If the contractor applied for permission every time it placed an order for materials, it would miss its construction deadlines.
The obvious solution was to set up an Anguillian company, capitalised by a one-time authorised injection of US dollars deposited in Anguilla.  The company in Anguilla would order and pay for the materials, and have them shipped to the project.  When the job was done, the profits would be dividended back to Trinidad, and taxes paid on the profits.
The subsidiary company in question was an ordinary private company registered under the Companies Act of Anguilla.  It obtained a Caribbean Trading Business Licence, and hired staff in Anguilla.  It submitted the necessary documents to a local bank, and opened an account to be able to ensure it processed the letters of credit and other financial instruments it needed to have the materials ordered and paid for.
As there is no income tax in Anguilla, there is no statutory requirement for any trading company’s accounts to be audited, unless it is a public company.  Few businesses, save for public companies and licensed financial institutions, are in fact audited.  Under section 126 of the Companies Act, all that the directors of an ordinary trading company are required to do is to be able to ascertain the assets and liabilities and the financial status of the company.  Their bank is entitled to ask for their internal financial statements, not for audited accounts.
The bank, no doubt instructed by head office in North America, notified the company that, as it did not have audited financial statements as required, it was in breach of the Companies Act and the AML/CFT regulations.  The bank was therefore obliged to close the account.  The bank did not understand that in Anguilla only public companies, or licensees of the FSC, are required to audit their accounts.
It took a lot of effort: legal opinions, conferences and correspondence, before the company could persuade the bank that it was in full compliance with all the applicable laws and regulations, and could keep its account.
The continued existence of our region’s corresponding banking relationships depends on all our compliance with AML regulation.  We are glad to be able to comply with international regulatory standards, if that will ensure our continuing to enjoy vital corresponding banking relations.  Without this we shall not be able to settle credit card payments or clear US dollar denominated transactions. 
I am not aware of any US bank that has been fined as a result of doing business in the Eastern Caribbean.  The Eastern Caribbean is not the same risk to US and Canadian banks as are Wyoming, Switzerland, Paris or London, or even Western Caribbean countries such as Belize, El Salvador or Columbia.  It would appear that the international banks’ threatened removal of our corresponding banking relationships has more to do with US politics and xenophobia, and their desire for a non-level playing field, than from any genuine risk that we expose them to.  Indeed, our business is of no real importance for foreign banks.  We are so insignificant in substance that doing banking business with us is at most a mere nuisance to them.  From their point of view, because of their AML/CFT due diligence obligations, the cost/reward ratio has changed to our disadvantage.
In my view, however, we need to move on from bemoaning the unfairness of the world, and find a way to profit from the ever-increasing regulatory and taxation burdens that affect not only the Caribbean but the “onshore” world as well.  Things aren’t going to go back to the way they were, and the bigger economies will never make decisions to benefit competitors.  We simply have to be more inventive and learn to identify and use the new opportunities for serving our clients that continuously arise.
FATCA,[18] for example, presents an opportunity for progressive and inventive bankers and company managers.  FATCA is related to policing “passive” income reporting and not “active” income.  Where a US client invests his or her money in an active corporate equity opportunity in one of our countries, such as villa operations and other businesses, instead of in passive, bank term-deposits, he or she can permanently and legitimately defer all US tax requirements until repatriation, and should not be subject to FATCA.  Think of the Apple, Google and Starbucks examples, and the trillions of dollars of active income earnings not as yet taxed.
CFATF and the other regulators are very important for our international financial services industry in the Commonwealth Caribbean, and indeed to our entire economies.  If we do not get a good report card from them, we are liable to be put on a black list and to lose our corresponding banking relationships.  The industry is anxious to ensure that it complies with all the regulations, but it remains an uphill struggle to persuade the regulators that the industry is a legitimate one and that it does not harbour money launderers and terrorists.
A paper delivered at a Panel Discussion on the topic, “Financial Regulatory Issues Affecting the Commonwealth Caribbean” at the OECS Bar Association’s Annual Law Fair and Conference held in Saint Lucia.
Friday 16 September 2016
[2]     Under section 16(1) (f) of the AML/CFT Regulations and as detailed under section 3 of the AML/CFT Code 2013.
[3]     Under section 10 of the AML/CFT Regulations and section 10 of the AML/CFT Code.
[4]     Undersection 10 of the AML/CFT Regulations and sections 13 and 14 of the AML/CFT Code.
[5]     Under section 16 of the AML/CFT Regulations.
[6]     The Caribbean Financial Action Task Force (CFATF) is an organisation of twenty-seven jurisdictions of the Caribbean Basin Region, which have agreed to implement the international standards for AML/CFT Financial Action Task Force Recommendations (the FATF Recommendations): https://www.cfatf-gafic.org/.
[7]     The mission of the Organisation for Economic Co-operation and Development is to promote policies that will improve the economic and social well-being of people around the world. It was established in 1961, with its headquarters in Paris, and has an annual budget of over €360 million:  http://www.oecd.org/about/
[8]     The Group of 20 nations is an international forum for economic co-operation which was started in 1999 in the aftermath of the Asia financial crisis by its members’ Finance Ministers and Central Bank Governors.  It became established in 2008 after the collapse of Lehman Brothers as a Summit for its members’ leaders. http://www.b20coalition.org/about-g20.php
[9]     The Financial Action Task Force (FATF) on anti-money laundering and countering the financing of terrorism was established by the G-7 Summit that was held in Paris in 1989:  http://www.fatf-gafi.org/about/
[10]    The Egmont Group of Financial Intelligence Units is an informal network of national financial intelligence units (FIUs).  National FIUs collect information on suspicious or unusual financial activity from the financial industry and other entities or professions required to report transactions suspected of being money laundering or terrorism financing:  http://www.egmontgroup.org/about
[11]    See the New York Post’s 13 August 2016 article headlined, “Money Laundering has Wall Street Freaking Out”: http://nypost.com/2016/08/13/money-laundering-has-wall-street-freaking-out/ .
[12]     See the Independent Newspaper’s 4th July 2015 article headlined, “London is now the global money-laundering centre for the drug trade, says crime expert”: http://www.independent.co.uk/news/uk/crime/london-is-now-the-global-money-laundering-centre-for-the-drug-trade-says-crime-expert-10366262.html
[17]    By which I mean the money laundering reporting officer (MLRO) and the money laundering compliance officer (MLCO), both of which are required under POCA.
[18]    The Foreign Tax Compliance Act, 2010, requires foreign financial institutions to report assets and identify information relating to suspected US persons using their institutions or risk penalties:  https://www.irs.gov/businesses/corporations/foreign-account-tax-compliance-act-fatca
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