UK Committee reportson offshore financial centres
19-Aug-2008The UK Commons Select Committee on Foreign Affairs published, on 6 July 2008, its seventh report on the UK's overseas territories and financial offshore centres.
In relation to the regulation of offshore financial services, the report said the UK has strong reasons to ensure that Overseas Territories' financial industries are well regulated. They present serious risks to the UK's reputation as well as potential financial liabilities, including compensation costs where the UK has direct responsibility and, in the worst-case scenario, aid dependency should a sector collapse.
It said seven of the Overseas Territories currently have financial services industries and, in all cases, the National Audit Office had found that they faced a challenge in responding "adequately to growing pressures to reinforce defences against money laundering and terrorist financing".
Bermuda, the British Virgin Islands (BVI) and the Cayman Islands were the largest financial centres. Bermuda was the international leader in insurance, BVI was a leading global player in licensing international business companies and the Cayman Islands was a leading world player in financial services, particularly banking and hedge funds.
The Committee said it received mixed evidence about the quality of financial regulation in these territories but the UK Foreign Office(FCO) had provided some support to the Territories, saying: "We need to recognise that there is significant international pressure to limit the role of the Overseas Territories in providing international financial services. The Overseas Territories are often expected to apply higher standards of regulation than some OECD countries."
Gibraltar's financial services industry, said the report, was not large by international standards, but it provided a wide range of services, including banking, insurance, fund management, trusts and advisory business and was increasing its share of this market.
For many years, it said, Gibraltar was the object of allegations of financial impropriety - mostly but not only from Spain. Its firm rebuttals of these allegations were not helped by the opacity of its system of financial regulation. But the government of Gibraltar had overhauled its regulatory framework in 1989 and set up a Financial Services Commission. Gibraltar received very good assessments for compliance from the International Monetary Fund in 2001.
The financial services industries of Anguilla, Montserrat and the Turks & Caicos Islands, for which the UK retains direct responsibility, remained small. The National Audit Office found that Bermuda, BVI, the Cayman Islands, and Gibraltar, were "leaving in their wake the weaker regulatory capacity" of these three financial centres.
The Public Accounts Committee (PAC) had concluded that the FCO, the Financial Services Authority, the Treasury and the Serious Organised Crime Agency, needed to "deploy their expertise and capacity jointly to manage the risks better". In particular it highlighted a lack of investigative capacity properly to scrutinise suspected money laundering activity.
The Committee found that the governors in the three smaller financial centres had not used their reserve powers fully and described it as "complacent" for the UK to allow these Territories to manage the risk themselves. It recommended that the FCO and UK agencies should bring in more external investigators or prosecutors to bolster capacity until the Territories could be self-sufficient in this area.
The PAC noted that the FCO had accepted that standards needed to improve and had employed a financial services adviser based in the Caribbean and provided assistance in drafting legislation to allow the Territories to retain and reinvest the confiscated proceed of crime, but argued that it was "improbable" that a single specialist was "sufficient to address the scale of the risk".
The report also received evidence from St Helena's Banking Supervisor, Alan Savery, who had a contract with the UK Department for International Development (DFID) to draw up a financial services ordinance for the Island.
He had warned: "Although St Helena has banking legislation and a regulatory regime for banks it has at present no legislation relating to other financial services or money laundering. There have been indications that certain parties would like to take advantage of this situation and one website described St Helena as the 'last unregulated financial centre in the world'."
St Helena's Legislative Council told the Committee that a draft Financial Services Bill and a Money Laundering Bill had been published in December 2007 and argued that enacting such legislation was important both to protect St. Helenians from "falling victim to unscrupulous financial service providers" as the economy begins to develop in preparation for tourism and to ensure the Territory complied with its international obligations.
The Committee recommended that the FCO should encourage Bermuda, the BVI the Cayman Islands and Gibraltar to continue to make progress in improving financial regulation, in particular in arrangements for investigating money laundering.
But it was concerned by the National Audit Office's finding that the FCO has been complacent in managing the risk of money laundering in Anguilla, Montserrat and the Turks and Caicos Islands, particularly as the UK was directly responsible for regulation in those Territories and therefore most exposed to financial liabilities.
It agreed with the Public Accounts Committee's recent recommendation that governors of those Territories should use their reserve powers to bring in more external investigators or prosecutors to strengthen investigative capacity.
The report also recommended that the FCO should continue to work with DFID to introduce a financial services regulatory regime in St Helena that was appropriate to its local economy and development.
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