Offshore Financial Centres - Treasury Contents

Memorandum from the States Of Jersey


  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.


  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;

    —  English;

    —  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



  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.



  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.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2009
Prepared 26 March 2009