Ethics and governance in the European Financial centers

G8 Leaders have committed to take steps to ensure that the global financial markets implement the highest international transparency standards and other measures to protect against criminal abuse. With ample evidence that the system is misused for corrupt purposes, the G8 must intensify efforts to promote greater transparency in cross border capital flows and to better coordinate controls to deter and detect the illicit transfer of funds through the global financial system.

Dishonest people and companies may still make money through tax havens.

G8 governments should accelerate implementation of their commitments to fighting financial crimes and money laundering and to ensure transparency in onshore and offshore centres by taking the following actions:
• Make tax evasion through offshore accounts a predicate criminal offence under relevant anti-money laundering law and make every effort to expose and prosecute such crimes;
• Promote international coordination to deter such crimes and to make the placement of illicitly obtained proceeds in offshore bank accounts as risky as possible;
• Call on the IMF, FATF and other international governmental organisations to publish information and assessments of countries’ compliance with antimoney laundering and transparency standards and require financial
institutions to take that information into account;
• Adopt stronger transparency rules for the global financial markets that effectively prevent the abuse of legal schemes (such as trusts, company services and foundations) for purposes of hiding illicit transfers of funds
across borders while still protecting legitimate concerns about privacy;
• Coordinate regulations to ensure that international accounting standards require disclosure of special purpose vehicles and other off book entities and annual reports of multinationals identify and justify strategies for transactions involving offshore centres; and
• Require greater transparency of asset-backed securities to prevent fraud; adopt and fully apply FATF anti-money-laundering requirements; and increase transparency of entities or funds (including hedge funds).

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The FATF recently issues its typologies report on the real estate sector. This first FATF in-depth study of the sector examines its vulnerabilities to misuse for money laundering and terrorist financing.

The FATF provides an interesting list of red flags (pages 34-37). Unfortunately these experts do not take into consideration red flags relating to the management or the audit firm of a real estate company, that are visible especially in Luxembourg the small country where everydoby knows everyone and that is self regulated:

- Knowingly appointing a dishonest managing director (recent judiciary sources) that definitely do not comply with the requirement of professional standing,
- having a "commissaire" (auditor) that is neither member of the charered accountants nor of the chartered auditors : in Luxembourg anyone may be auditor.
- having a "commissaire" that is audited by an auditor in a far tax haven (for instance a company located in Luxembourg audited by a company located in the BVI...)
- ...



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The European Commission has decided to pursue infringement procedures against 15 Member States for failure to implement the Third Anti-Money Laundering Directive in national law. The Commission will send formal requests to Belgium, Czech Republic, Germany, Greece, Spain, Finland, France, Ireland, Luxembourg, Malta, the Netherlands, Poland, Portugal, Sweden and Slovakia. These formal requests take the form of "reasoned opinions", the second stage of the infringement procedure laid down in Article 226 of the EC Treaty. If there is no satisfactory reply within two months, the Commission may refer the matter to the European Court of Justice. The Directive should have been implemented by 15 December 2007.

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The OECD is being urged to update the evasion blacklist as only three countries currently remain on the OECD list of tax havens: Liechtenstein, Monaco and Andorra.

As the Financial Times reported, quoting a French Official: "There are some countries which said they would co-operate and which were then removed from the list, but in practice they have not at all".

For instance, in the context of the Liechtenstein scandal, that should inciter to be careful, when

1) officials are bold enough to state that "It is not our duty to control if the tax payer was honest" or "Banking secrecy remains : Luxembourg is not compelled to communicate its clients'data"

2) some bankers agree to facilitate tax evasion from Liechtenstein to Luxembourg.

such center is unfortunately not reliable and trustable anymore: neither for the investor whoever he or she is, nor for organisations like the OECD.

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US Senators Carl Levin and Barack Obama (Democrats) and Senator Norm Coleman (Republican) have introduced a bill, with the unwieldy title of "Incorporation Transparency and Law Enforcement Assistance Act" (summary here.) Its declared intention is "to protect the United States from U.S. corporations being misused to commit terrorism, money laundering, tax evasion, or other misconduct."

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TJN

Senator levin's website

Senator Obama's website

The UK Chancellor of the Exchequer chaired a meeting of FATF Ministers in Washington DC a few days ago.
The Ministers discussed the work of the FATF in the international fight against money laundering and terrorist financing. They also endorsed a revised mandate for the FATF, which determines its direction and priorities between 2008 and 2012. The new mandate:

- Deepens global surveillance of evolving criminal and terrorist threats identified by the FATF;
- Responds to new threats which affect the integrity of the financial system such as proliferation finance;
- Builds a stronger, practical and ongoing partnership with the private sector which is at the frontline of the global fight against money launderers and terrorist financiers; and
- Supports global efforts to raise standards, especially in low capacity countries.

Source : FATF website

FATF new mandate

Liz Moyer and Tatyana Shumsky from Forbes have recenttly published an article relating to the World's Top Tax Havens
They observe that traditional venues like Switzerland, the duchies of Lichtenstein and Luxembourg and Caribbean paradises like the British Virgin Islands are finding competition from the U.S., where lawyers in seven states, such as Nevada and Alaska, are muscling in, looking to grab business from the world's wealthy

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The FATF recently revised its Methodology for Assessing Compliance with the FATF 40 + 9 Recommendations. It is the methodology followed in the mutual evaluation program to assess countries’ anti-money laundering and counter terrorism financing (AML/CFT) systems.

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The FATF recently published astudy that examines the means used by terrorists to raise funds and the wide variety of methods used to move money within and between organisations. The adaptability and opportunism shown by terrorist organisations suggests that all the methods that exist to move money around the globe are to some extent at risk.

It covers the following areas :
THE TERRORIST REQUIREMENT FOR FUNDS
RAISING TERRORIST FUNDS
MOVING TERRORIST FUNDS
INTERNATIONAL RESPONSE TO TERRORIST FINANCING
POLICY IMPLICATIONS

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Every year the International Narcotics Control Strategy Report is published by the American Department of State (Bureau of International Narcotics and Law Enforcement Affairs).

The 2008 release is worth reading. Copied below are the last paragraph relating to the countries is the framework of this blog.

Cyprus

Cyprus has put in place a comprehensive AML/CTF regime, which it continues to upgrade. Cyprus should ensure not only the passage, but also the full implementation, of the two laws that will tighten the current regime requirements. Cyprus should ensure that it is able to implement the law criminalizing the collection of funds with the knowledge that they will be used by terrorists or terrorist groups for any purpose, not only to commit terrorist or violent acts. Cyprus should enact provisions that allow for civil forfeiture of assets in the future.

Gibraltar

The Government of Gibraltar should continue its efforts to implement a comprehensive anti-money laundering and counter-terrorist financing (AML/CTF) regime. The criminal laws on money laundering should be consolidated, and powers presently available only in drug-related money laundering cases should be extended to money laundering cases involving the proceeds of other crimes. The GOG should introduce legislative provisions to its asset seizure and confiscation regime allowing authorities to confiscate assets, including cash, even without a link to the original criminal proceeds. Gibraltar needs to conduct risk assessment of those designated nonfinancial businesses and professions that are unsupervised and determine and extend the necessary authority to conduct AML/CTF compliance examinations of these entities

Ireland

The Government of Ireland should enact legislation to prohibit the establishment of “shell” companies. Law enforcement should have a stronger role in identifying the true beneficial owners of shell companies as well as of trusts in the course of investigations. Ireland should increase the technical and human resources provided to the FIU to manage and evaluate STRs effectively. The GOI should enact legislation that covers both funding of a terrorist acting alone and funding of two terrorists acting in concert, as well as legislation fully implementing UNSCR 1373. To this end, Ireland should remove the evidentiary requirements acting as obstacles to full compliance, as well as circulate the UN and the U.S. lists to its regulators and obligated entities. Ireland should continue implementation of its new anti-terrorism legislation and its AML law amendments, and ensure stringent enforcement of all such initiatives. Ireland should ratify the UN Convention against Transnational Organized Crime and the UN Convention against Corruption.

Isle of Man

Isle of Man officials should continue to support and educate the local financial sector to help it combat current trends in money laundering. The IOM should act on the 2007 Consultative paper with the MSB/e-money regulation proposals that authorities have discussed, and implement the most effective. The IOM should also ensure that the obliged entities understand and respond to their new and revised responsibilities as delineated by the 2007 AML Code. To this end, the FSC should work to release the Anti-Money Laundering and Terrorist Financing Handbook as soon as possible in 2008. The authorities also should continue to work with international AML authorities to deter financial crime and the financing of terrorism and terrorists.

Jersey

The Bailiwick of Jersey should continue to enhance compliance with international standards. Jersey should ensure that all entities, within all sectors, are subject to reporting requirements. The FSC should work to ensure that the AML Unit has enough resources to function effectively, and to provide outreach and guidance to the sectors it regulates. This is especially true for the newest DNFBPs required to file reports. Jersey should mandate the same AML/CTF requirements over its “exempt” companies that it does over the rest of the obliged sectors. The FSC should distribute the UN, European Union and U.S. lists of designated suspected terrorist and terrorist-supporting entities to the obliged entities and not rely on the entities stay current through Internet research.

Liechtenstein

The Government of Liechtenstein has made consistent progress in addressing the shortcomings in its AML regime. It should continue to build upon the foundation of its evolving anti-money laundering and counter-terrorist financing regime. Liechtenstein should ratify the UN Convention against Transnational Organized Crime and the UN Convention against Corruption. Liechtenstein should enact and implement legislation requiring the reporting of cross-border currency movements and ensure that trustees and other fiduciaries comply fully with all aspects of AML legislation and attendant regulations, including the obligation to report suspicious transactions. The GOL should prohibit the issuance and use of corporate bearer shares. The FIU should have access to additional financial information. While Liechtenstein recognizes the rights of third parties and protects uninvolved parties in matters of confiscation, the government should distinguish between bona fide third parties and others. Liechtenstein should consider discarding its list of predicate offenses in favor of an all-crimes approach.

Luxembourg

The Government of Luxembourg has enacted laws and adopted practices that help prevent the abuse of its bank secrecy laws and has enacted a comprehensive legal and supervisory anti-money laundering regime. Luxembourg has steadily enacted AML/CTF laws, policies, and procedures. However, the scarce number of financial crime cases is of concern, particularly for a country that has such a large financial sector. Luxembourg should take action to delineate in legislation regulatory, financial intelligence, and prosecutorial activities among governmental entities in the fight against money laundering and terrorist financing. The situation is most acute regarding the lack of a distinct legal framework for the FIU whose staff, activities, and authorities are divided among at least four different ministries. The State Prosecutors in the FIU should be exempt from nonfinancial crime duties and the FIU should increase the number of analytical staff to effectively analyze and disseminate the volume of STRs that the FIU receives. Luxembourg should pass legislation creating the authority for it to independently designate those who finance terrorism. Luxembourg would be well served to have the authority to designate suspected terrorists. Luxembourg should also enact legislation to address the continued use of bearer shares and consider specifically extending AML legislation to include SICAR entities. Luxembourg should become a party to the UN Convention against Transnational Organized Crime.

Switzerland

The Government of Switzerland hopes to correct the country’s image as a haven for illicit banking services. The Swiss believe that their system of self-regulation, which incorporates a “culture of cooperation” between regulators and banks, equals or exceeds that of other countries. The primary interest of the Swiss system is to avert bad risks by countering them at the account-opening phase, where due diligence and know-your-customer procedures address the issues, rather than relying on an early-warning system on all filed transactions. The GOS believes that because of the due diligence approach the Swiss have taken, there are fewer STRs filed than in some other countries. At the same time, 82 percent of the STRs that are filed lead to the opening of criminal investigations. While generally positive, Switzerland’s FATF mutual evaluation report nonetheless identified weaknesses in the Swiss anti-money laundering and counter-terrorist financing regime, including problems with correspondent banking and the identification of beneficial owners. Per FATF Special Recommendation IX, the GOS should implement cross-border currency reporting requirements. Switzerland should also put forward effective AML legislation and rules that monitor and regulate money service businesses.

United Kingdom

The United Kingdom has a comprehensive AML/CTF regime. However, as discussed in the FATF mutual evaluation, there are areas that should be further addressed by the authorities. The UK should develop legislation and clearly enforceable implementing regulations to ensure that beneficial owners are identified and verified and that customer due diligence is required and ongoing, regardless of an already established relationship with the client. The UK should also develop clear regulations regarding politically exposed persons as well as correspondent banking relationships. Risk-based measures should be codified and taken, not only in the context of customer due diligence, but also with regard to the identification and treatment of wire transfers, the standards and measures set by the designated nonfinancial businesses and professions, and to more effectively target the resources of the supervisory entities. The 2005 Gambling Act should be amended to require the gaming industry to be covered in the same manner as the financial and designated nonfinancial businesses and professions, including giving the Gambling Commission a full range of sanctions. Authorities should track and examine the effects of the SOCAP change regarding acts and assets in or from foreign jurisdictions, and revisit this legislation to determine whether it has been effective, or whether it has enabled exploitation. Authorities should also ensure the FIU’s operational and authoritative independence.


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