Memorandum from the States Of Jersey
EXECUTIVE SUMMARY
1. Jersey is well known to the Treasury
Committee as a Crown Dependency with a well regulated Finance
Industry on which the local economy is dependent for its economic
wellbeing.
2. Where possible Jersey participates actively
in international fora and has sought to establish itself among
the top tier of international finance centres in terms of scale,
substance and its commitment to international standards of regulation,
with citations from numerous leading independent, international
organisations.
3. It is Jersey's view that:
a. the title Offshore Financial Centres (OFCs)
can be misleading. Attempts to arrive at a universally accepted
definition have not been successful;
b. OFCs form an extremely diverse group forming
a spectrum of jurisdictions which overlap in terms of most relevant
criteria (regulation, transparency, tax rates) with many onshore
jurisdictions;
c. all jurisdictions should be considered in
terms of their levels of compliance with international standards
of regulation, transparency and harmful taxation; and
d. lower tax regimes exist in both onshore and
offshore jurisdictions and promote effective tax competition.
4. Today, Jersey's financial services industry
is based on a high level of expertise and responsiveness as well
as a commitment to international standards of regulation, competitive
tax rates and targeted tax certainty including fiscal neutrality.
5. Jersey's commitment to international
standards of regulation means that its regulation is in the top
quartile and ahead of many OECD nations. Further it has removed
all elements of harmful tax competition identified by the OECD
Harmful Tax Practices initiative and the EU Code of Conduct.
6. In respect of Financial Stability and
Transparency:
a. OFCs form only one part of the totality of
financial "linkages" with UK financial institutions;
b. credible threats to financial stability require
scale problems typically found only in onshore economies;
c. there is no evidence of which we are aware
to suggest that OFCs in general or Jersey in particular have been
or are a potential future cause of systemic financial instability;
d. Jersey acts primarily as a liquidity centre
with intra group loans to parent companies accounting for 75%
of banks' total assets. It has therefore been able to assist financial
stability and act more as a solution than a problem during the
recent crises;
e. there are no grounds for suggesting that SPVs
are a potential source of financial instability;
f. many SPVs are located in OFCs because of the
fiscal neutrality offered, not because of any lighter touch regulatory
environment;
g. financial stability is a global issue and
international standard setters should focus on creating the clearest
possible picture of linkages, identifying risks or gaps wherever
they arise, not just in OFCs; and
h. Jersey meets international standards and is
ready to meet further international standards introduced as part
of a level playing field.
7. In respect of tax rates and impact on
the UK:
a. lower taxes increase the return on investment
and thereby increase overall levels of investment encouraging
economic growth;
b. Jersey uses tax neutrality and targeted tax
certainty to attract international financial services business;
and the growth in the bank deposits and other financial business
in the island during the last 10 years suggests that these factors
have been successful in attracting new business despite the introduction
of additional regulatory, formal anti-money laundering and information
exchange regimes during that period;
c. the UK benefits directly from the circulation
of significant offshore investment funds attracted to Jersey from
around the world and invested through UK markets—funds that
might otherwise flow to the Caribbean and US markets or Hong Kong/Singapore
and Asian markets;
d. tax competition and targeted financial services
allow small otherwise economically challenged jurisdictions to
share in the world's economic success; and
e. independent studies have shown that the presence
of OFCs has resulted in an increase in inward investment in nearby
onshore economies.
8. HM Treasury has publicly listed Jersey
as a third country it considers as having equivalent anti-money
laundering and countering the financing of terrorism (AML/CFT)
systems to the EU standards.
9. Jersey is also extremely active in providing
international cooperation on a number of fronts in terms of both
international regulation as well as working with other international
authorities in the fight against financial crime.
10. Responses in this submission are in
reference to Jersey's particular circumstances and should not
be construed as a response on behalf of OFCs generally unless
stated.
INTRODUCTION
11. Jersey will be well known to the Treasury
Committee as a self governing possession of the British Crown,
one of the Channel Islands. The States of Jersey, the island's
parliament, have autonomous capacity in domestic affairs.
12. Jersey has a population of c. 90,000,
a working population of c. 55,000 of whom c. 13,000 work in the
finance industry.
13. Jersey has a high quality finance industry
with banking licenses only for banks that are in the world's top
500 banks. It has operations belonging to the top four accountancy
firms and leading offshore multi-jurisdictional legal practices
who work effectively with city of London based magic circle and
other legal firms.
14. The close working relationship with
the City of London, means that a very significant proportion of
financial flows received in Jersey will end up in, or flow through
the UK with all the multiplier benefits that accrue.
15. Jersey shares a Channel Island stock
exchange with Guernsey. It is recognised by the London and New
York Stock Exchanges.
16. Third-party endorsements of the Island's
compliance with international standards of financial regulation,
anti-money laundering and combating financing of terrorism are
set out in the response to question 7.
Question 1: To what extent, and why, are Offshore
Financial Centres important to worldwide financial markets?
17. Today, OFCs account for a material element
of worldwide financial assets and flows of funds.
18. Almost all funds placed in OFCs will
ultimately flow through and be invested in onshore economies.
19. A significant majority of funds that
are placed in Jersey are channelled through the City of London
with all the multiplier benefits that will accrue to the UK economy.
Those funds placed in Caribbean OFCs are most likely to benefit
US markets and those in Singapore the Asian markets. In the absence
of local OFCs there is no doubt that the UK economy would suffer
a material loss of market share of worldwide financial flows.
This has been most aptly demonstrated by the recent removal of
some of the typically offshore attractions offered by the UK to
the non-domiciled community in London which is now moving to alternative
locations.
20. In particular, Jersey's offer of political
stability, a sound legal system and fiscal neutrality, acts as
an attractive investment conduit to the UK for the significant
liquidity emanating from GCC countries in the Middle East.
21. In arriving at this position as major
players in worldwide financial markets, OFCs have acted as a spur
to competition lowering the cost of taxation and increasing the
rate of return on capital thereby encouraging additional investment
which typically benefits those onshore jurisdictions that work
most effectively in conjunction with the OFCs. Today OFCs have
to compete in a globalised world where tax competition is universal.
22. OFCs also highlight the importance of
appropriate regulation and certainty of tax regimes. As more nimble
and responsive economies OFCs are often able to be more targeted
with their regulation or taxation, avoiding the one size fits
all approach that may operate in larger economies with the resultant
additional costs. The example of the negative impact of the Sarbanes-Oxley
regulation in the US has been widely debated. Separately a greater
share of SPV activity would be onshore if the tax regime was more
certain.
23. Jersey in particular has developed an
economy based on a high degree of transparency and compliance
with international standards but is able to generate significant
business by offering more targeted or market focussed legislation,
regulation and taxation certainty.
24. OFCs have also played a major role in
dispersing risk throughout the worldwide economic system by facilitating
the establishment of SPVs. Although SPVs have received negative
publicity recently due to a lack of understanding in the media
(discussed further in the response to next question), they do
operate to disperse risk which has reduced concentration risk
in major institutions. This has operated to free up funding and
capital for further investment thereby expanding the overall economy.
Question 2: To what extent does the use of
Offshore Financial Centres threaten financial stability?
25. Jersey, like most OFCs is more dependent
on its financial services industry than onshore centres. It therefore
has an active interest in all initiatives to ensure global financial
stability.
26. Jersey considers that it offers no systemic
or material threat to global financial stability and indeed the
Financial Stability forum (FSF) has found no evidence that OFCs
generally operate to provide a systemic or material threat to
global financial stability.
27. Critically, in order to create serious
threats to financial stability there needs to be a scale problem
or the potential to create a scale problem that will typically
only be found in onshore economies. The recent study by the House
of Commons Treasury Committee in its Sixth Report of Session 2007-08
entitled "Financial Stability and Transparency" (The
Study) refers to "global imbalances" and "a crisis
of emerging market economies or failed macro-economic policies
in the rest of the world" and also that "the current
period of instability has its origins firmly in the most developed
markets" being the failure to adequately assess the risks
inherent in the US sub prime mortgage market.
28. Further The Study notes that "despite
strong growth in recent years, the total size of the market of
asset backed securities and sub-prime residential mortgage backed
securities is small when compared to other securities markets
such as those for corporate equities and corporate debt".
29. Jersey only provides licenses to the
world's top 500 banks which on average have world leading Tier
I banking ratios.
30. Further, Jersey acts primarily as a
liquidity centre with intra group loans to parent companies accounting
for 75% of banks' total assets. It has therefore been able to
assist financial stability and act more as a solution than a problem
during the recent crises.
31. The circumstances under which the use
of OFCs might threaten financial stability are therefore unclear.
32. The Study did not identify any areas
of particular concern other than that "the links between
offshore financial centres, the institutions and entities registered
in OFCs, and the financial institutions regulated by UK authorities
means that there is the potential for a further opacity to be
added to the financial system, as the lines of sight to where
economic risk actually lies may be obscured by the link with an
offshore financial centre."
33. The Study appeared to identify SPVs
as an example of potential opacity. The Study focussed on the
Granite structure, an SPV structure established by Northern Rock
(NR) which has received an unfair amount of negative publicity
in the media. The line of argument appears to have been that Northern
Rock has had to be rescued; that Northern Rock used SPVs; that
the SPVs couldn't be refinanced causing a liquidity problem; that
SPVs are a potential risk to financial stability; that most SPVs
are located in OFCs; and hence do OFCs cause a threat to financial
stability? We do not believe this to be the case as set out below.
34. The problems giving rise to the need
to mount a rescue for NR did not originate with the Granite structure.
35. A number of facts are clear. The main
problem at NR was its over-dependence on wholesale funding. Despite
concerns over the business model having already been raised by
onshore regulators NR continued with 75% wholesale funding (compared
to a typical 20-30% for most building societies). Stress testing
models did not anticipate that such funding would dry up completely.
Once the default rates on sub prime mortgages shot up in August
2007 the market sentiment turned against mortgage backed securities
generally and it was clear that it was going to become more difficult
to refinance shorter term wholesale funding. Most banks were aware
of the scale of committed liquidity lines funding mortgage assets
generally and in anticipation of calls on these lines there was
an expectation that overall inter-bank liquidity would be affected.
In response many banks started to hoard cash thereby exacerbating
the problem. Wholesale funding stopped. NR had significant on
balance sheet funding that could not be replaced and they had
to go to the Bank of England for support. Word of NR's problems
spread causing a run on the bank.
36. Around 50% of NR's mortgage assets were
funded through SPV structures.
37. It is fair to say that many SPVs are
located in OFCs.
38. It is not fair to say that their location
in OFCs added any opacity to the system as typically full information
on the underlying structures is publicly available.
39. Neither in NR's case was the problem
caused by the complexity in the underlying assets which were high
quality assets.
40. The problems at NR were caused by the
inability to refinance certain on balance sheet wholesale funding.
Arguably, if NR had securitised more of its assets this would
have reduced its on balance sheet maturity mismatch and avoided
or reduced the problem. It is worth noting that the maturity dates
for the September 2007 note issue for the Granite structure are
either 2032 or 2054.
41. The opacity is derived from the complexity
of the market risks faced. In NR's case it was the speed at which
credit issues arising on sub-prime mortgages in the US were transformed
into problems of funding high quality mortgages in the UK, and
liquidity issues in the UK wholesale and inter-bank markets in
particular.
42. SPVs can easily be located in onshore
markets (indeed within the Granite Structure there are three SPV
vehicles only one of which, the Mortgages Trustee, is located
in Jersey and it holds the mortgages under a trust created under
English law).
43. SPVs are often located in OFCs not only
to obtain the benefit of regulatory regimes designed with SPVs
in mind but also to obtain taxation certainty that is unavailable
in onshore markets. Despite recent changes in UK taxation this
remains the case in the UK.
44. If the UK tax regime were more attractive
in this respect many SPVs could be located in the UK but the consequences
would not have been different. In relation to Northern Rock, for
example, the jurisdiction of incorporation of the Mortgages Trustee
had no influence upon the events.
45. There have also been a number of other
charges targeted at SPVs or the Granite Structure in particular
and it is worth addressing those here.
46. The first of these is the media perception
that the Granite Structure had an unfair allocation of higher
quality mortgages. This suggests that there is some degree of
choice about which mortgages are sold to the Mortgages Trustee
in the Granite Structure. Clearly once (SPV) investors have invested
on agreed terms then it would clearly be unreasonable that repaid
low risk mortgages be replaced by higher risk assets. Indeed FSA
regulations prohibit cherry picking of assets in this regard.
The initial choice of mortgages would have been selected to meet
the requirements of the investors (typically AAA notes). Critically,
any mortgage assets passed to the Mortgages Trustee in the Granite
Structure will be purchased with a zero risk asset, namely cash,
and so it is hard to see how this treats onshore investors/depositors
unfairly.
47. The second of these is that SPVs have
reduced capital requirements compared to onshore banks. This view
fails to understand the role of capital on a bank balance sheet
where it acts as protection for those investors/ providers of
funds (especially retail depositors) who are exposed to risks
that they have not knowingly accepted (retail depositors do not
assess a banks range of assets prior to depositing their cash)
and therefore prudential regulations require that an element of
capital is required to fund those assets which would shoulder
initial losses and create the security for those retail investors
seeking a safe deposit. In an SPV on the contrary the professional
investors will assess the risks of their investment without the
presence of a capital "buffer" and choose to invest
on that basis so there is no requirement for capital. Each investor
has invested in their chosen asset based on the terms offered
including any credit enhancements already mentioned that are available
to their tranche of investment or class of loan note issued. The
credit rating of the higher rated tranches will reflect amongst
other matters the credit enhancement mechanisms in place in respect
of them. These commonly include provisions for the replacement
of any key element of the structure (for example the liquidity
facility provider) whose own credit rating is downgraded.
48. It also needs to be highlighted that
in such cases (eg the Granite Structure) full public data is typically
available and, in particular, all investing organisations will
have had full access to complete information on the underlying
investments.
49. Finally there have been suggestions
that the formalities of incorporation are minimal in OFCs. In
fact, incorporation of a company in Jersey has been and remains
a much more complex process than incorporating a company in other
parts of the world, including the United Kingdom—see further
the response to the next question. By way of example, Jersey currently
requires the production to the authorities of the identity of
the proposed beneficial owner of the company before incorporation
is allowed to proceed, and indeed this requirement has existed
for over 35 years.
50. In the first instance it is therefore
hard to see where financial stability issues arise from SPVs being
offshore. Credit losses arising from investment in SPVs should
be similar to onshore losses in similar assets, SPVs do not typically
incorporate any additional gearing and onshore institutions that
have established "bankruptcy remote" SPVs and have sold
assets to them should have no continuing beneficial exposure (exposure
to defaults, arrears and interest flows) to the assets and no
continuing obligations to the loan note investors.
51. What has confused perceptions over the
NR circumstances is the extent to which in other circumstances
(eg as in the case with certain European banks) onshore institutions
have retained continuing actual or perceived obligations to SPVs
that have resulted in decisions to bring assets back on balance
sheet and or the obligation to provide additional liquidity or
other support to the vehicle.
52. Mention is also made in The Study of
the complexity in the underlying products in some circumstances
whereas in the case of the Granite Structure, whilst the structure
may appear complex (primarily to separate beneficial and legal
ownership and add some credit enhancement), it only involved vanilla,
high quality mortgage assets and problems have not arisen as a
result of product complexity.
53. Where these circumstances do apply the
problem lies not with the OFCs but with disclosure or transparency
within the onshore jurisdiction. Transparency in ensuring that
onshore organisations adequately disclose their continuing risks
to SPVs or other structures and transparency in terms of the monitoring
and disclosure of investment risks arising from any product complexity.
54. Whilst The Study notes this is not an
easy task as "many of the new financial instruments are ludicrously
complex" and that "where such information exists, it
is, as the Association of British Insurers stated often indigestible",
this appears to be a matter for international standards to ensure
that such obligations are properly captured and disclosed.
55. Further information on SPVs is included
at Appendix 1.
Question 3: How transparent are Offshore Financial
Centres and the transactions that pass through them to the United
Kingdom's tax authorities and financial regulators?
56. Jersey is at least as transparent as
(and in most cases more transparent than) all other offshore jurisdictions.
57. Jersey is also as transparent as most
onshore jurisdictions and more transparent than some, including
several OECD countries or States (political sub-divisions) of
the USA.
58. All matters that are regulated in the
UK are regulated in Jersey by the Jersey Financial Commission
which has 33 regulatory memoranda of understanding with regulators
in other jurisdictions, including four with the UK.
59. Jersey can reasonably claim to be a
world leader in the regulation of Trust and Company Service Providers
(including company formation agents) which are not regulated in
most onshore jurisdictions including the UK and the US.
60. Jersey requires banking confidentiality,
like the UK, but it does not have any banking secrecy or domestic
interest test laws.
61. Bearer shares are prohibited in Jersey.
62. Jersey has only recently introduced
pre-incorporated companies available on demand. This practice
has been commonplace for some time in other jurisdictions including
the UK. It has now been permitted in Jersey because those who
incorporate companies are themselves required to be regulated
persons and have to provide details of beneficial ownership and
satisfy the requirements of the Control of Borrowing (Jersey)
Order 1958, which allows the JFSC to request details of the ownership
of, or interests held in companies, limited partnerships, and
unit trusts at the time that they are established.
63. As in most onshore jurisdictions Jersey
retains no register of trusts but the proposed activities of all
companies incorporated are required to be disclosed to the regulatory
authorities prior to incorporation. SPVs established as plcs are
also obliged to file accounts with the public registry.
64. Jersey requires that beneficial ownership
for all corporate vehicles (companies, trusts and partnerships)
is available.
65. Jersey has been an active participant
in the EU Taxation of Savings Directive, signing bilateral arrangements
with each of the EU member states.
66. Jersey has a track record in respect
of providing information concerning criminal matters arising in
other jurisdictions.
67. Jersey is one of 35 jurisdictions that
has made a commitment to improving transparency and the effective
exchange of tax information for civil matters and is working actively
with the OECD Sub-Group on Level Playing Field Issues as a Participating
Partner with the aim of speeding up progress towards a level playing
field.
68. Jersey has signed Tax information exchange
agreements with the US and the Netherlands and expects to sign
up to nine further TIEAs during 2008 assuming that benefits sufficient
to compensate for proceeding ahead of the level playing field
can be agreed. Jersey has a track record of dealing effectively
with every request received under such TIEAs.
69. Jersey has responded fully on all TIEA
requests received to date other than the three that continue to
be worked on.
70. Additionally, Jersey receives monthly
requests from Her Majesty's Revenue and Customs for information
requested under its Double Taxation Agreement (DTA) with the UK.
Jersey provides regular assistance on such requests.
71. Jersey stands ready to explore the introduction
of any additional internationally agreed measures of transparency
that are introduced as part of a level playing field.
Question 4: To what extent does the growth
in complex financial instruments rely on Offshore Financial Centres?
72. Product innovation of this nature is
typically developed onshore and within major investment banks
in major financial centres in particular.
73. Jersey's business model typically relies
on onshore innovation being adapted for the offshore market. The
reason why complex funds may be based offshore are for the same
reason as simple or straightforward funds are based offshore and
that is the fiscal certainty offered and the market related regulation
imposed.
74. Therefore as far as we are aware, the
growth in complex financial instruments do not rely on OFCs.
Question 5: How important have the levels
of transparency and taxation in Offshore Financial Centres been
in explaining their current position in worldwide financial markets?
75. Jersey has for some time, realised that
a commitment to transparency is an integral part of its proposition
as a premier OFC and as a leading international finance centre,
committed to international standards.
76. This positioning has served Jersey well
for many years and it is increasingly clear that this is the only
viable long term strategy.
77. Overall regulation in Jersey is now
market leading, best illustrated by the many international citations
set out elsewhere in this submission.
78. Jersey's commitment to high levels of
compliance with international standards and international co-operation
has established itself both as a premier brand within OFCs but
also as an international finance centre that competes directly
with onshore jurisdictions for quality business from across the
globe.
79. Today, Jersey's economy depends on providing
a quality range of financial services that meet international
standards. Whilst lower taxation and greater taxation certainty
is a part of the overall proposition, Jersey is able to compete
with all jurisdictions offering the following proposition:
— top level experience across a range
of products and services;
— banking services only from top 500
banks from around the world;
— substantial operations for each of
the top four and other leading accountancy practices;
— leading multi-jurisdictional legal
practices that work closely with London's magic circle lawyers;
— the leading centre for regulated
trust services;
— political and economic stability
and democracy;
— an established and well understood
legal system;
— a 40 year track record; and
— a flexible time zone with excellent
transport links to and proximity to the UK and the City of London.
80. However, Jersey has not always been
in this position. Small jurisdictions face many challenges in
becoming self sufficient and avoiding the need for financial support.
Driven by a lack of natural resources or physical capacity to
attract substantive physical or labour intensive activity, OFCs
were initially encouraged to establish simple primarily deposit
based financial services businesses but more recently have developed
the capabilities to develop high quality financial services businesses
and compete with the more established financial centres.
81. Initially, the main driver of this growth
was tax competition and lighter regulation.
82. OFCs have provided and continue to provide
lower tax for residents and local businesses and zero taxation
or fiscal neutrality for non resident owned businesses.
83. Jersey's has shared this success with
the City of London and the wider UK economy as funds have typically
been invested in or have flowed through the City of London and
have circulated there or have been used to boost investment.
84. In response to this competition, onshore
jurisdictions have been lowering their corporation tax rates and
some such as Ireland have introduced similar corporate tax regimes
eg at 12.5% and the UAE have used their 0% environment as the
basis for a comprehensive drive to build financial services businesses.
85. Further, the so designated "harmful"
elements of differentiated tax rates in Jersey for local and non
resident owned businesses have been removed in line with the recommendations
by the OECD Harmful Tax initiative and the EU Code of Conduct.
86. The tax advantage offered by OFCs is
therefore being steadily eroded and captured by major nations.
87. Tax competition and tax certainty have
therefore been pillars of Jersey's past success and are likely
to play a critical part of Jersey's continuing strategy. Recent
competitive responses however have confirmed that a commitment
to transparency and quality business is the only long term credible
strategy.
Question 6: How do the taxation policies of
Offshore Financial Centres impact on UK tax revenue and policy?
88. Tax competition typically leads to a
headline loss of tax as do tax incentives, allowances etc. as
with the remittance basis offered to UK non domiciled individuals.
However, it is clear that the purpose for providing such incentives
the world over is the belief in there being a net economic benefit
from the additional activity thereby encouraged.
89. Tax competition within the EU and from
jurisdictions across the globe have a direct impact on UK tax
revenue.
90. Similarly it can be assumed that as
OFCs compete with the UK for taxable income the immediate impact
on UK tax revenue is negative.
91. However, as already stated, and in contrast
to the impact of competition from elsewhere, much of the benefit
obtained by Jersey is then duplicated as financial flows are reinvested
in onshore markets either directly or via the city of London.
92. Appropriate structuring also allows
onshore and offshore jurisdictions to work effectively together
to lower the cost of taxation and thereby capture a greater market
share of worldwide mobile investment and to boost inward investment.
93. A number of studies (see response to
question 9) have shown that onshore markets that are geographically
close to OFCs and work effectively with them have succeeded in
boosting inward investment.
94. OFCs compete actively between themselves
and with most onshore jurisdictions for the provision of financial
services and to secure market share in financial assets.
95. Those financial assets are then typically
invested in or circulated through the leading financial centres.
96. Jersey and the other CDs probably account
for over a £1 trillion of financial assets, a significant
proportion of which will be invested in the City of London, at
the same time consuming closely related financial services such
as banking, foreign exchange, money transfer, insurance, accounting
and legal services etc.
97. Business lost to competing OFCs or onshore
jurisdictions in the Caribbean or in Asia will end up supporting
other financial centres such as New York, Hong Kong, Tokyo, Zurich.
Question 7: Are British Overseas Territories
and Crown Dependencies well-regarded as Offshore Financial Centres,
both in comparison to their peers and international standards?
98. Jersey is well regarded as an OFC and
has obtained numerous citations for its commitment to international
standards:
— The review of the Island's financial
regulation undertaken in 1998 set out in the Edwards Review which
confirmed that the arrangements in place at that time conformed
in large measure to the internationally accepted standards of
financial regulation.
— The FATF style mutual evaluation
undertaken in 1999 by a team drawn from the United States, France
and Malta which concluded that Jersey was close "to complete
adherence" with the then FATF Forty Recommendations.
— The FATF decision in 2000 to exclude
Jersey from its list of non-cooperative countries and territories.
— The Financial Stability Forum's ("FSF")
decision in 2000 to place Jersey in Group 1 of the Offshore Financial
Centres ("OFCs") reviewed. This group included jurisdictions
which were described as cooperative, with a high quality of supervision
which largely adhere to international standards.
— The International Monetary Fund ("IMF")
report in 2003 when the Island was assessed as part of the OFC
assessment programme which concluded that the Island's financial
regulatory and supervisory system complies well with all the main
international standards.
— Following their May report entitled
"Managing Risk in the Overseas Territories, the chairman
of the Commons Public Accounts Committee, Edward Leigh, stated:
"In most of the territories, the standards of regulation
across areas such as banking, money laundering, insurance and
securities are not as good as those in the crown dependencies".
— In his testimony before the Senate
Finance Committee on Offshore Tax Evasion in May 2007, Jeffrey
Owen, Director of the OECD's Centre for Tax Policy and Administration
singled out Jersey and Guernsey as examples of jurisdictions thatr
have implemented high standards orf transparency.
99. Jersey is therefore seen as one of the
leading, if not the leading offshore jurisdiction in terms of
its commitment to international standards and its role as an international
good neighbour.
100. In the context of international cooperation
in criminal matters, the island has never been treaty based, but
as a study of the Attorney General's reviews will show, the Law
Officers do receive requests annually from other countries including
the UK, all but a very few of which are processed on a timely
and constructive basis with relevant information supplied to the
enquiring jurisdiction as a result. Jersey Law Officers have participated
regularly in the European Judicial Network's activities and are
pleased to operate actively within it. The Attorney General gave
a presentation on the subject of trust law in the common law jurisdictions
to the EJN meeting hosted by the UK during its presidency of the
EU, held in Edinburgh in December 2005. In addition, though the
island is not within Eurojust, the Law Officers have had useful
dialogue with Eurojust in individual cases and worked proactively
and collaboratively with other EU countries in particular investigations.
The island also participates in the Mutual Legal Assistance Forum,
chaired by the Judicial Cooperation Unit of the Home Office, in
London, and in the Channel Islands—French Law Enforcement
Liaison Group, established to ensure practical and close cooperation
between those responsible for this area of international business.
Further afield, the Law Officers have had for many years a very
good working relationship with the Department of Justice in Washington
and are hopeful of developing equally good relations with their
colleagues in leading EU Member states.
101. Further, Jersey is often regarded more
favourably than many offshore and several OECD nations in terms
of international compliance.
102. The International Trade and Investment
Organisation (ITIO) commissioned a report on Assessing the Playing
Field—International Cooperation in Tax Information Exchange.
A study was undertaken by Camille Stoll-Davey of Oxford University
as a basis for the report, which was published recently by the
Commonwealth Secretariat. The report disproves the contention
that offshore centres have inferior regulation or standards to
onshore ones. It is based on an analysis of objective data compiled
by the Organisation for Economic Cooperation and Development.
It finds that in key areas such as a willingness to exchange tax
information or to identify who is behind companies or trusts,
OECD member countries do not operate to a higher standard than
OFCs and in some cases they operate to a lower standard.
103. Jersey is also co-sponsoring a study
on the taxation and regulatory arbitrage of OFCs in Europe by
the independent think tank, the Centre for European Policy Studies
(CEPS). The project will be led by Rym Ayadi, Head of Research
of the Financial Institutions and Prudential Policy Unit at CEPS.
Jersey is confident that this independent study will further confirm
its commitment to international standards.
104. Jersey legislation does not require
bi-lateral agreements to be in place in order to cooperate internationally.
Nevertheless, the JFSC has concluded 33 bilateral memoranda of
understanding with overseas financial services regulators. The
purpose of each memorandum is to establish an agreed mechanism
under which both signatories commit to using their statutory powers
of cooperation.
105. In addition, the JFSC has concluded
a letter of intent with the Hong Kong Securities and Futures Commission
and Statement of Cooperation with the China Banking Regulatory
Commission.
106. In March 2003, Jersey was also amongst
the first jurisdictions to become a signatory to IOSCO's multilateral
memorandum of understanding. The memorandum sets a benchmark for
cooperation on combating securities and derivatives violations,
and commits the Island to sharing a wide range of information
about the illegal use of the securities and derivatives markets
with securities regulators in other countries. Before signing
the memorandum, the JFSC had to satisfy IOSCO that it has the
necessary laws, powers and practices to cooperate effectively
in investigations.
107. The JFSC also works closely with the
Wolfsberg Group, an association of eleven global banks, which
develops industry standards for "Know Your Customer and AML/CFT
policies.
108. The JFSC is also committed to engaging
with the international regulatory community and is a member of
IOSCO, the IAIS, and the Offshore Group of Insurance Supervisors
("OGIS").
109. Officers of the JFSC sit on IOSCO Standing
Committee 5 (investment management) and also the Implementation
Task Force, which developed the Methodology used to assess compliance
with IOSCO's Objectives and Principles. An officer of the JFSC
also sits on the IAIS's pensions committee and OGIS's management
committee.
110. The JFSC has been a member of the OGBS
since its creation in 1980, and has played a leading role in the
OGBS's anti-money laundering programme; particularly through the
OGBS Chairman Colin Powell, who is also Chairman of the JFSC.
111. Through its membership of the OGBS,
the JFSC works with the FATF and Basel Committee. The JFSC's Chairman
attends FATF meetings. Most recently, the Chairman co-led the
typologies project on the misuse of corporate vehicles, the report
on which was published in October 2006. The JFSC's Chairman also
co-chaired the Basel Committee Working Group on Cross-Border Banking,
which has issued a number of papers including a paper on "Cross-Border
Banking Supervision" and in 2001 a paper on "Customer
Due Diligence for Banks". The OGBS is also involved in Interpol's
Working Group on Anti-Money Laundering and Terrorist Financing.
112. As part of the OGBS, the JFSC has also
participated in the development by the OGBS of a statement of
best practice for trust and company service providers.
113. Jersey's Companies Registry is a member
of the European Business Register—which provides easy access
to reliable information on companies all over Europe.
114. The Companies Registry is also a member
of the European Commerce Registries' Forum ("ECRF")
and has actively taken a lead in two projects: provision for a
standard certificate for companies that continue in other jurisdictions;
and provision for a multi-lateral memorandum of understanding
between registries. The Companies Registry is also responsible
for the management and modernisation of the ECRF website.
115. The Companies Registry also supports
the Business Registries Interoperability through Europe project
("BRITE"), which is funded by the EU and intended to
improve communication between European registries.
116. The JFCU is a member of the Egmont
Group, an international affiliation of FIUs which was established
in 1995 to combat the threat of money laundering. It is also a
member of the Camden Asset Recovery Inter-Agency Network ("CARIN")
and sits on CARIN's steering group. The JFCU actively participate
in developing the role of CARIN to identify best practice and
promote cooperation in tracing assets that are the proceeds of
crime, drug trafficking and funds used to promote acts of terrorism.
CARIN coordinates an informal network of recognised experts in
the field of asset tracing with one law enforcement and one prosecution
representative from each jurisdiction. The representatives act
as a focal point to issue advice and guidance to CARIN members
seeking to identify methods, best practice and legislation to
trace and restrain assets in another jurisdiction.
117. The Island is effectively a member
of the OECD through the UK's membership and an official declaration
of the Island's association in 1990, whereby decisions and recommendations
adopted by the OECD are extended to the Island, such as the Codes
of Liberalisation on Current Invisible Operations and on Capital
Movements.
Question 8: To what extent have Offshore Financial
Centres ensured that they cannot be used in terrorist financing?
118. In a "Common Understanding"
published in May 2008, the EU's Committee on the Prevention of
Money Laundering and Terrorist Financing stated that "the
UK Crown Dependencies may be considered as equivalent by Member
States"
119. Subsequently, HMT has publicly listed
Jersey as a third country it considers as having equivalent AML/CFT
systems to the EU. The list is relevant to assessing whether a
jurisdiction is equivalent for the purposes of simplified due
diligence and this applies to both AML and CFT.
120. Jersey has a good record of suspicious
activity reporting (SARs) and dealing with requests from other
jurisdictions. Volumes are currently c.1,500 per annum (3,571
from regulated businesses during 2005-07) and c 500 per annum
respectively and details have been published for several years
now on the Jersey police website.
121. Prosecutions tend to be concluded in
other jurisdictions but Jersey concluded seven in 2007 and 25
during the period 2004-07 and provides active support to other
jurisdictions throughout their processes where required.
122. Jersey has introduced The Terrorism
(United Nations Measures) (Channel Islands) Order 2001 in order
to make it an offence to collect for, or make funds available
to, terrorist organisations, and to enable it to comply with UN
Security Council Resolutions. In addition, the island passed the
Terrorism (Jersey) Law 2002, which is modelled upon the UK Act,
with some exceptions in respect of matters thought unlikely to
be of practical relevance locally, and consideration is being
given to updating that legislation in the light of amendments
which have more recently been adopted in the UK.
123. The Island requested the UK in 2003
to extend to Jersey its ratification of the International Convention
for the Suppression of the Financing of Terrorism, and has subsequently
renewed that request on several occasions. Unfortunately that
extension of the ratification has not yet happened, but it is
hoped that the matter is being addressed imminently. Jersey's
request for that extension is evidence of the island's commitment
to the standards set by that Convention.
124. More detailed information on Jersey's
approach to Anti-Money Laundering and Countering the Financing
of Terrorism is set out in Appendix 2
Question 9: What are the implications for
the policies of HM Treasury arising from Offshore Financial Centres?
125. HM Treasury policy will undoubtedly
consider tax competition across the globe. Tax competition is
brought about not just by OFCs but by many countries including,
Ireland, Switzerland, new EU member states as well as Gulf states
and elsewhere.
126. By way of illustration, a study by
the recently formed UK government Department for Innovation, Universities
and Skills (DIUS) reported that large British Companies pay more
in corporate taxes (12%) than their competitors in Germany (6%),
France and Switzerland (8% each).
127. Also the recent selection of Ireland
as the tax residence for Shire Pharmaceuticals and United Business
Media has demonstrated that an inability to offer a competitive
corporation tax environment is likely to result in a steady erosion
of the number of large companies, content to remain tax resident
in the UK.
128. On the other hand, a study published
in 2006 by Mr Hines of the University of Michigan and Mr Desai
and Fritz Foley of Harvard Business School entitled "Do tax
havens divert economic activity?" found that OFCs boosted
economic activity in nearby onshore markets rather than diverting
it.
129. The Economist report dated 24 February
2007 concluded that the interaction (between onshore and offshore
jurisdictions) increased total economic activity in the world
and thereby both offshore and onshore jurisdictions benefit.
130. In a paper by Andrew Rose and Mark
Spiegel in October 2007 for the National Bureau for Economic Research
entitled "OFCs—Parasites or Symbionts?", it was
found that of the banking sectors of the 221 countries studied
that the nearer a country or territory was to an OFC the more
competitive and efficient its banking system appeared to be.
131. In reviewing potential responses to
tax competition from EU member states and further afield, perhaps
HM Treasury might consider exploring what opportunities exist
to work more closely with local OFCs to mutual benefit.
Question 10: What has been and is the extent
and effect of double taxation treaty abuse within Offshore Financial
Centres?
132. Jersey has two full double tax agreements:
one with Guernsey the other with the UK; and a very limited treaty
with France in relation to shipping and transport.
133. The UK DTA was signed in 1951 and is
limited in its operation. In particular, there are no provisions
relating to income from immoveable property, dividends, interest,
royalties or capital gains. Furthermore, there are no tie-breaker,
discrimination, or pension clauses.
134. Due to the limited nature of the agreement,
there is little scope for wide spread double tax arrangement abuse.
It should further be noted that Jersey was not a jurisdiction
in which to locate offshore trading partnerships which was subject
to a clamp down in this year's UK finance bill.
135. On the other hand, many less transparent
OECD nations have wide double tax treaty arrangements agreements
eg Luxembourg and Switzerland, as well as Singapore and UAE despite
the latter being a zero tax regime.
Question 11: To what extent do Offshore Financial
Centres investigate businesses and individuals that appear to
be evading UK taxation?
136. Legislation allows the Jersey Authorities
to investigate all kinds of fraud, money laundering and tax evasion.
By and large, the Authorities do not investigate tax evasion in
the United Kingdom, because that is not an offence within the
jurisdiction of Jersey which one could prosecute here. It is also
the case that Island Authorities do not have the basic information
which would be required, in most cases, to carry out those investigations
themselves. The Island's policy is entirely consistent with ordinary
principles of exercising an independent criminal jurisdiction
that the investigating authorities concentrate their efforts in
relation to offences which they are able to prosecute before their
domestic courts.
137. Accordingly, Jersey approaches these
matters in exactly the same way as the United Kingdom would approach
the question of an investigation of businesses or individuals
that appear to be evading taxation in some other jurisdiction—which
might include evading the tax laws of Jersey.
138. This is not to say however that the
Authorities in Jersey turn a blind eye to the evasion of UK taxation,
nor do they act in any sense unco-operatively in this connection.
First of all, the money laundering offences contained in the Proceeds
of Crime (Jersey) Law, 1999, include the money laundering of the
proceeds of tax evasion, wherever that tax evasion takes place,
including tax evasion in the United Kingdom. Accordingly, among
the suspicious activity reports filed by Jersey financial services
businesses with the States of Jersey Police are included suspicious
activity reports in relation to suspected UK tax evasion, and
intelligence is shared appropriately.
139. Furthermore the Jersey Financial Services
Commission regard it as part of their regulatory function to crack
down on businesses which do not have sufficient anti-money laundering
controls and defences, and therefore are alert to any problems
which arise from businesses assisting illegal activity such as
tax evasion, wherever that evasion might have taken place. As
Jersey's regulatory regime extends beyond that which exists in
the United Kingdom and includes regulation of the provision of
trustee services and company administration, the defences against
Jersey businesses being used for the purposes of encouraging tax
evasion elsewhere are robust.
140. None of this is to say that taxpayers
in the UK do not abuse the services of financial services businesses
established in Jersey to evade their tax liabilities. If the positions
were reversed, the Jersey Authorities would suspect that there
may be English practitioners in the financial services industries
which assist Jersey taxpayers in evading their Jersey taxation
liabilities. The issues which arise are:
(a) Does government encourage such activities?
(b) Assuming such activities are discouraged,
what steps are taken when evidence arises of the activity taking
place?
141. For the reasons given above, the Jersey
Authorities are clear that financial services businesses in Jersey
are actively discouraged from taking steps which would assist
taxpayers in other jurisdictions from evading their taxation liabilities.
This is a statement of general application, but of course it applies
particularly to the United Kingdom.
142. Our experience shows that the Island
Authorities have in fact assisted United Kingdom Authorities considerably
in relation to criminal tax enquiries. Since 1999, the Attorney
General has received annually from other jurisdictions including
the United Kingdom between 74 and 120 new requests. In 2007, there
were 77 new requests. In addition to those, the Attorney General
received 67 supplementary requests seeking more information in
relation either to the requests made in 2007 or those made in
earlier years. Of the 77 new requests received in 2007, 31 were
from the United Kingdom. These concern a range of criminal offending,
but they certainly include tax evasion and benefit fraud. All
of the United Kingdom requests made in 2007 resulted in mutual
legal assistance being given fully and speedily. By contrast with
some other jurisdictions, which are much slower in handling such
requests, Jersey turns round the requests for assistance on average
within two to three months.
143. As an example of the proactive and
co-operative stance which exists in practice in this area of governmental
business, reference is made to the case involving a Mr. Peter
Michel, an accountant running his own business in Jersey under
the name and style of Michel & Co. It became apparent in or
about 2001 that Mr Michel's business included a number of money
laundering operations the purpose of which was to assist UK taxpayers
in evading their liabilities. The taxpayers themselves were the
subject of Inland Revenue enquiries in the United Kingdom. In
Jersey, an investigation was commenced by the Attorney General
using his powers under the Investigation of Fraud (Jersey) Law,
1991. In the course of that investigation, all the business records,
including the computer hard drive, were seized. A copy of the
hard drive was provided to the Inland Revenue under certain conditions,
the most important of which was that the information so disclosed
could only be used for the purposes of criminal tax investigations
or prosecutions. This was necessary because the Attorney General's
statutory powers in Jersey to obtain the information were similarly
circumscribed. However, the sharing of that information is a clear
illustration of the type of co-operation which the Jersey Authorities
do in practice give to UK Authorities with the responsibilities
of investigating criminal UK tax evasion.
144. Furthermore, the investigation of Mr
Michel resulted in money laundering charges being brought against
Mr Michel in the Royal Court of Jersey. He was convicted of 10
counts of money laundering and was sentenced to six years imprisonment.
In addition there were confiscation orders and orders for costs.
145. The Jersey Authorities are in no doubt
that they do not only require extensive amounts of information
to be retained by financial services businesses; that such businesses
are required to demonstrate high levels of probity in order to
obtain the appropriate registrations enabling them to be in business
at all; and that when requests are received either for mutual
legal assistance or for regulatory assistance, the Island Authorities
deal with such requests co-operatively, promptly and fully.
146. Mention should also be made of the
Civil Asset Recovery (International Cooperation) (Jersey) Law
2007, the purpose of which is to confer on the island's competent
authorities the power to serve summonses on residents of external
civil asset recovery process from countries outside Jersey, to
collect evidence and transmit it to the requesting authority,
to make property restraint orders in support of external civil
asset recovery orders and to register and enforce such orders
in the Royal Court. The enactment of this legislation fills a
gap in the ability to assist other countries in cases where there
is no criminal forfeiture process but a civil asset recovery system
in lieu.
19 June 2008
APPENDIX 1
THE ORIGINS OF SPVS AND THEIR OPERATION
1. The recent study by the House of Commons
Treasury Committee entitled Financial Stability and Transparency
(The Study) notes the shift from an "originate and hold"
to an "originate and distribute" banking model has become
well established in response to surplus global liquidity "in
search of yield".
2. SPVs are therefore established to meet
the dual needs of the investor and the loan originator, being
the appetite for higher yield that SPVs offer and the need to
free up capital and funding to expand the origination business
respectively.
3. At one level the process is not dissimilar
to the more traditional business of the sale of loan portfolios
between banks. In each case there is a willing professional buyer
who is seeking a specific type of asset and a seller who is trying
to free up capital and funding for further business.
4. The difference in the case of an SPV
is that there typically exists a variety of investors with different
risk reward appetites but none of which are interested in buying
the whole portfolio. The portfolio is therefore securitised"
ie it is turned into securities.
5. As The Study notes the "search for
yield" has resulted in a significant appetite for higher
yield AAA assets. The underlying portfolio is not of AAA standard
and so an SPV is used to structure the investment options some
of which will have much lower risk than the overall portfolio
including AAA assets and some of which will face risk that is
much higher than the overall portfolio. The higher is the quality
of the underlying portfolio, the easier this is to do and the
greater will be the proportion of AAA investment created.
6. Creating the AAA investment is often
achieved be providing other benefits to the SPV to reduce the
risk to an investor eg by providing credit enhancement by in the
form of insurance, or additional collateral such as by providing
guarantees or undertakings from the previous owner of the portfolio
being securitised.
7. In the case of the Granite structure
it is understood that NR had made the decision to securitise its
higher quality assets to limit the levels of credit enhancement
that would have need to have been provided (at an additional cost
to NR) if lower quality assets had been used as has been the case
in the US with the greater levels of origination of sub-prime
or higher risk mortgages.
8. The result whichever route is selected
is that a number of independent professional investors operate
to buy the whole portfolio of assets by each buying their preferred
loan note that matches their risk reward profile.
9. The bank has therefore sold the assets
to a third party and has received cash in return and should have
no further exposure to the assets and therefore does not need
to hold capital against those assets.
10. This situation is often assisted by
creating an orphan (bankruptcy remote) asset via the use of a
charitable trust (the charity being used simply to provide a beneficiary
to ensure that the trust does not fail, not because it imparts
any tax benefit). In this way the onshore institution does not
own the SPV thereby removing any obligations to hold capital against
the sold assets or any parental responsibility to make good losses
in the SPV.
11. This is fairly standard practice whether
such structuring operates onshore or offshore. As the SPV is simply
repackaging interest flows (so that interest expense exactly equals
interest income) there should not be any profit or taxation consequences.
Locating offshore in a fiscally neutral environment confirms and
avoids any unintended taxation arising.
APPENDIX 2
DETAILED INFORMATION ON JERSEY'S APPROACH
TO ANTI-MONEY LAUNDERING AND COUNTERING THE FINANCE OF TERRORISM
(AML/CFT)
1. Legislation criminalising money laundering
and terrorist financing has evolved over time, initially recognising
drug trafficking and some terrorist funding as predicate offences,
and now covering all predicate offences for which a person is
liable on conviction to imprisonment for a term of one or more
years (including more specific terrorist financing offences) (referred
to as "serious offences"). In common with other jurisdictions,
Jersey's framework continues to develop, and the Island is in
the process of revising and updating its legislation in line with
the revised 40 Recommendations and 9 Special Recommendations of
the Financial Action Task Force (the "FATF")—which
Jersey has formally endorsed.
2. All natural and legal persons are covered
by Jersey's AML/CFT framework. In addition, certain obligations
are imposed on persons that conduct financial services business—as
defined in Schedule 2 of the Proceeds of Crime (Jersey) Law 1999
("Proceeds of Crime Law") (and hereafter referred to
as "financial services businesses"). These obligations
are set out in the Money Laundering (Jersey) Order 2008 ("Money
Laundering Order").
3. The most important statutes are the Proceeds
of Crime Law, the Drug Trafficking Offences (Jersey) Law 1988
(the "Drug Trafficking Offences Law"), the Terrorism
(Jersey) Law 2002 (the "Terrorism Law"), and the Money
Laundering Order. Together with the Guidance Notes and Handbook,
these are referred to hereafter as "AML/CFT legislation".
4. The Handbook sets out regulatory requirements—which
are considered to be "enforceable means issued by a competent
authority"—in areas that the FATF does not require
Recommendations to be set through law or regulation. Currently,
these requirements are enforceable on registered persons and on
the approval of new law by the Privy Council and the law coming
into force, non registered persons, eg lawyers, accountants, estate
agents, and high value goods dealers. Oversight is and will be
conducted by the JFSC.
5. Other laws have been introduced in response
to measures taken by the United Nations. The Terrorism (United
Nations Measures) (Channel Islands) Order 2001 makes it an offence
to collect for, or make funds available to, terrorist organisations,
and the Al-Qa'ida and Taliban (United Nations Measures) (Channel
Islands) Order 2002 makes it an offence to make funds available
to, or for the benefit of, Usama bin Laden, or any person designated
by the UN Sanctions Committee as a member of the Al-Qa'ida organisation,
Taliban, or an associated individual, group or undertaking. Under
both orders, the Attorney General has been delegated the authority
to be able to freeze assets.
6. Other laws allow the Island to cooperate
fully where financial crime has been committed outside Jersey.
7. In addition, legislation also provides
for an ongoing assessment of the "fitness and properness"
of registered persons under the following laws: the Collective
Investment Funds (Jersey) Law 1988 (the "Funds Law"),
the Banking Business (Jersey) Law 1991 (the "Banking Business
Law"), the Insurance Business (Jersey) Law 1996 (the "Insurance
Business Law"), and the Financial Services (Jersey) Law 1998
(the "Financial Services Law") (hereafter referred to
as "regulatory laws"). The Financial Services Law covers
investment business, trust company business, and general insurance
mediation business, and an amendment to the law recently extended
its scope to include money service business—bureaux de change,
money transmission, and cheque cashing activities.
8. Also relevant, and peculiar to Jersey
(and also Guernsey), is the Control of Borrowing (Jersey) Order
1958, which allows the JFSC to request details of the ownership
of, or interests held in companies, limited partnerships, and
unit trusts at the time that they are established. This power
has provided a useful deterrent to money launderers and was commented
on favourably by the Organisation for Economic Co-operation and
Development (the "OECD") in its report on the misuse
of corporate vehicles. The Island has also enacted the Corruption
(Jersey) Law 2006, which will permit in due course the ratification
of the UN Convention against Corruption, the OECD Convention against
the Bribery of Foreign Public Officials and the Council of Europe
Criminal Law Convention on Corruption.
9. The main features of Jersey's AML/CFT
legislation are summarised below.
10. Money laundering offences. Under the
Proceeds of Crime Law and Drug Trafficking Offences Law it is
an offence to: (a) assist another to retain the benefit of the
proceeds of serious offences; (b) acquire, possess or use, the
proceeds of serious offences, and (c) conceal, disguise, convert,
transfer or remove from the jurisdiction the proceeds of serious
offences, knowing or suspecting them to be so. This is consistent
with the definitions set out in the Vienna Convention against
Illicit Traffic in Narcotic Drugs and Psychotropic Substances
(the "Vienna Convention") and the United Nations Convention
against Transnational Organized Crime, 2000 (the "Palermo
Convention").
11. Under the Terrorism Law, it is an offence
to become concerned in an arrangement which facilitates the retention
or control by or on behalf of another person of terrorist property
by concealment, by removal from the Island, by transfer to nominees,
or in any other way.
12. Money laundering offences cover laundering
one's own proceeds, and can be applied to bodies corporate. The
maximum penalty is 14 years imprisonment and/ or an unlimited
fine.
13. Overseas offences are covered where,
had the equivalent conduct occurred in Jersey, it would have been
a predicate offence. There is no exemption for fiscal offences.
14. Terrorist financing offence. The Terrorism
Law makes it an offence to (a) fund-raise for the purposes of
terrorism, (b) use and possess property that is used or may be
used for the purposes of terrorism, and (c) enter into or become
concerned in an arrangement as a result of which property is made
available or is to be made available to another, where than individual
knows or has reasonable cause to suspect that it will or may be
used for the purposes of terrorism. This is consistent with the
definition set out in the Convention for the Suppression of the
Financing of Terrorism.
15. Financing offences can be applied to
bodies corporate. The maximum penalty is 14 years imprisonment
and/ or an unlimited fine.
16. Overseas offences are covered where,
had the equivalent conduct occurred in Jersey, it would have been
a predicate offence.
17. Reporting obligations. The Proceeds
of Crime Law creates an obligation on all citizens to report their
involvement in money laundering in order to provide an absolute
defence to the commission of a money laundering offence. In practice
this is treated as a firm legal reporting obligation. In addition
to this reporting obligation, the Drug Trafficking Offences Law
and the Terrorism Law make it an offence for a person not to report
knowledge or suspicion that another person has committed a money
laundering or terrorist financing offence, where that knowledge
or suspicion arises in the course of a trade, profession, business
or employment. Under the Terrorism Law, where knowledge or suspicion
arises in the course of a financial services business, then it
is also an offence to fail to make a report where there are reasonable
grounds for suspicion. Under the Drug Trafficking Offences Law
and Terrorism Law there is a maximum sentence of five years imprisonment
for failing to report. Amendments to the statutory provisions
of the Proceeds of Crime Law and Drug Trafficking Offences Law
are under way to mirror the broader reporting offence of the Terrorism
Law.
18. Where a SAR is made to the JFCU before
a transaction is executed, it becomes an offence to execute the
transaction without the consent of the JFCU. The JFCU is not obligated
to provide consent.
19. Broad immunities from criminal and civil
claims for breach of confidentiality exist. Provision is also
made for legal professional privilege.
20. Under the Money Laundering Order, financial
services businesses are also obliged to maintain procedures which
require knowledge or suspicion to be reported internally and,
in turn, to the JFCU, and failure to maintain such procedures
constitutes an offence.
21. In addition, the Money Laundering Order
requires the JFSC to report knowledge or suspicion of money laundering
or terrorist financing to the JFCU—which is discovered in
the course of examinations of registered persons.
22. Tipping off. Subject to provision for
circumstances where legal professional privilege applies, it is
an offence, with a maximum sentence of five years imprisonment,
to prejudice an investigation by tipping off a suspect or third
party.
23. Additional obligations. Schedule 2 of
the Proceeds of Crime Law defines a wide range of financial services
business activities that must adopt and maintain systems in order
to deter money laundering and terrorist financing.
24. These additional obligations are set
out in the Money Laundering Order. The Order requires financial
services businesses to establish and maintain procedures for the
purpose of forestalling money laundering and terrorist financing,
covering verification of identity, record keeping, the recognition
and reporting of suspicious transactions, and also to provide
staff with training and to raise awareness so that employees are
aware of AML/CFT legislation and helped to recognise operations
that may relate to money laundering or terrorist financing. The
Money Laundering Order also requires financial services businesses
to "take such other procedures of internal control and communication
as may be appropriate for the purposes of forestalling and preventing
money laundering". Failure to establish and maintain such
procedures, and to train and raise awareness of employees on AML/CFT
matters, is an offence punishable by up to two years' imprisonment
or an unlimited fine, or both, irrespective of whether money laundering
has taken place.
25. Financial services businesses are required
to seek satisfactory evidence of identity of a prospective customer
(a person seeking to form a business relationship or to carry
out a one-off transaction)—except where exceptions apply
(as set out in Article 6 of the Money Laundering Order, in line
with those permitted by the EU First and Second Money Laundering
Directives). Unless satisfactory evidence of identity is obtained
"as soon as is reasonably practicable, then a business relationship
or one-off transaction must not proceed. Where a customer acts
on the instructions of a third party, then the Money Laundering
Order also requires that reasonable measures be taken to establish
and verify the identity of that third party. Irrespective of exemptions,
identification procedures are required where there is suspicion
of money laundering or terrorist financing.
26. Currently provisions covering verification
of identity apply only to new accounts, and not to accounts already
in existence when the Order came into effect on 1 July 1999. However,
financial services businesses remain responsible for having appropriate
systems and controls to manage the risk arising from both new
and existing customers. The Island is, however, to directly apply
FATF Recommendation 5 to existing customers.
27. Record-keeping procedures maintained
by a financial services business are in accordance with the Money
Laundering Order if they require evidence of a person's identity
to be held throughout the relationship and for a further period
of five years after the relationship is terminated or one-off
transaction completed, and also a record containing details of
all transactions carried out, to be held for at least five years
following execution of each transaction.
28. The Money Laundering Order requires
a financial services business to identify a person to whom a SAR
is to be made (a "money laundering reporting officer"
or "MLRO"). That person must consider the information
provided to determine whether or not to report to the JFCU. The
Money Laundering Order provides for the MLRO to have access to
necessary information so that he may investigate the SAR.
29. In 2006, the Court of Appeal upheld
a decision by the Royal Court to convict persons for failing to
comply with the Money Laundering Order. The Court of Appeal agreed
that the obligation to establish and maintain procedures for the
purposes prescribed in the Money Laundering Order is an absolute
one and the ruling makes it clear that even a single breach is
enough to constitute an offence. The defendants in the case were
fined £100,000.
30. Investigation. Provisions allow information
and evidence to be obtained for the purposes of criminal investigations.
The police may, for the purposes of an investigation into whether
any person has benefited from criminal conduct or into the extent
or whereabouts of the proceeds of criminal conduct, apply to the
Bailiff (Jersey's chief judge) for a production order compelling
a person who appears to be in possession of material likely to
be of substantial value to the investigation to produce such material
(for example bank statements, correspondence etc). In addition,
in certain circumstances, the police may apply for a search warrant
in relation to specified premises. The Terrorism Law also includes
a specific provision relating to financial services businesses,
requiring such businesses to provide customer information to the
police for an account to be monitored for up to 90 days.
31. Freezing and confiscation. In circumstances
where proceedings have been instituted in Jersey, or the Royal
Court is satisfied that proceedings are to be instituted in Jersey,
the Royal Court is able to freeze assets.
32. Once convicted of any criminal conduct
committed in Jersey, the Royal Court, if satisfied to the civil
standard that the defendant has benefited from any relevant criminal
conduct, may make a confiscation order requiring the defendant
to pay an amount considered to be the proceeds from such conduct.
33. An application to vary or discharge
a freezing order may be made to the Bailiff by any person affected
by it. Compensation may also be paid where property is frozen
and where a defendant is not subsequently convicted. Affected
parties also have the right to be heard prior to the confiscation
of property.
34. Under the Drug Trafficking Offences
Law and Terrorism Law, cash can be seized at the border if it
is suspected to be associated with drug trafficking or terrorist
financing—and it is intended to extend these powers to cover
inland seizure and also serious offences under the Proceeds of
Crime Law.
35. Sanctions for non-compliance with AML/CFT
legislation can be criminal, civil, or administrative. The basis
for enforcing compliance with regulatory requirements—which
may attract civil or administrative sanctions—is considered
below.
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