Ethics and governance in the European Financial centers

To reject the French MPs' report about Luxembourg Luc Frieden said in Paris that Luxembourg is not a tax, banking or judiciary haven and explained that their statements were not verified on the field.

The official communication for the financial center states as well that "Contrary to a widely held misconception, Luxembourg is not a tax haven and has many other characteristics which make it internationally attractive. It is, however, stated Government policy to create conditions which will allow the Luxembourg Financial Centre to compete on equal terms with other important financial centres. Over the years, this policy has been translated into various measures such as the auspicious corporate tax of 30,38% and the different VAT rates applicable: 3%, 6%, 12% and 15%".


Let's have a look on the field.

Let's have a look on what is said by a Professional : "Despites moderate taxes rates Luxembourg is not a tax haven. There are taxes for individuals and companies. More than a tax haven, Luxembourg gathers the advantages of an on shore jurisdiction because it is in Europe and the advantages of off shore states taxes of which are similar to a tax haven for Holding 1929 companies, Holding companies' (SOPARFI)...".

Let's see what is said by another professional on the Benefits of the Place :
(...)
The economic policy of Luxembourg is characterized by its liberalism as regards establishment.
The policy pursued by the government encourages the private initiatives, the administration is with the service of the companies, and not the reverse.
The bank secrecy forms integral part of the Luxembourg legislative system.
Absence of local taxation for the non-residents, bearer shares, exemption of appreciations on the participations.
(...)
The abuse social good and tax evasion are non-existent in the Luxembourg law.
The majority of the daily expenses of the leaders can pass in load.
(...)
Anonymity is a paramount concept in the Grand Duchy whose keystone is the bank secrecy.
The economic recipient with the possibility of not appearing as a shareholder and/or an administrator of the company by the installation of the contract of trust.
This contract is regulated by the Luxembourg law as well as the bank secrecy.
Trust is a notion absent from the French right, it makes it possible to transfer the legal property from its goods fiduciary while preserving the economic capacity on the aforementioned goods.
The application of trust makes it possible to manage its business very by preserving anonymity.
(...)
We irremediably entered a phase of delocalization which corresponds above all to problems of tax management and say for the company to a procedure of survival.

And the professional to specify that "thanks to X and has its partners Attorney and Lawyers, you can within the framework of an economic beneficiary, own and manage your business without appearing officially. That can be practical for the detention of goods and real estate , or for the continuation of an activity

The best is the legal page where the fiduciary explains that :
- it does not support fraud, and
- it is not responsible for verifying the compliance with laws and regulation, which is up to the client.



Considering such public marketing communication, that is not repudiated, how can Luc Frieden be so affirmative when saying that Luxembourg is not a tax, banking or judiciary haven for people that do not have a proper business conduct ?

Accorddin to the official communication (www.gov.im), the Isle of Man has applied the "Know Your Customer" ("KYC") principle since 1985. More detailed provisions are now in place to determine how customers and clients are adequately identified and their identification verified.

KYC is a convenient term to describe the process of obtaining, retaining and using information about a customer such that his identity and residential address are verified, the source of his funds and wealth are understood, his financial circumstances are understood, and the nature of the transactions he undertakes are understood in the context of his known personal circumstances and activities. Similar concepts apply to corporate, trust and other business, modified accordingly. Increasingly the term "Customer Due Diligence" ("CDD") is being used to represent the same concepts.

Every licenceholder must have a Money Laundering Reporting Officer, keep adequate records and have effective staff training in this area. The definition of business caught by the new standards goes much wider than financial services and includes Estate Agents, Bookmakers, Casinos and Local Authorities amongst others.

The Commission has issued Guidelines for licenceholders on the prevention of money laundering explaining how the Commission would expect institutions to fulfil their responsibilities under the new legislation. In order to assist licenceholders to fulfil their training obligations under the Code the Commission arranges, from time to time, Anti-Money Laundering seminars.

The Island introduced its first anti-money laundering legislation in 1987, the Drug Trafficking Offences Act. This was followed by other legislation such as the Prevention of Terrorism Act 1990, the Criminal Justice Act 1990 and the Criminal Justice Act 1991. A full list of the Island's anti-money laundering legislation is below.

The Drug Trafficking Offences Act 1987;
The Prevention of Terrorism Act 1990;
The Criminal Justice Act 1990;
The Criminal Justice Act 1991;
The Drug Trafficking Act 1996;
The Criminal Justice (Money Laundering Offences) Act 1998;
The Anti-Money Laundering Code 1998;
The Anti-Money Laundering (Amendment) Codes 1999, 2001 and 2005;
The Criminal Justice Act 2001
The Terrorism (United Nations Measures) (Isle of Man) Order 2001
The Anti-Money Laundering (Money Service Businesses) Regulations 2002;
The Anti-Money Laundering (Online Gambling) Code 2002; and
The Anti-Terrorism and Crime Act 2003.
The Commission issued updated guidance to its licenceholders in 1991, extending the application of guidance to the new investment business licenceholders, as well as to banks. The introduction of the Drug Trafficking Act 1996 led to a further revision of the Commission's guidance to licenceholders in the same year.

The introduction of the Criminal Justice (Money Laundering Offences) Act 1998 extended the definition of money laundering to cover all serious crimes, leading to its informal title of "the all crimes legislation." In addition, it led to the creation of the Anti-Money Laundering Code ("the Code"), which came into force on 1st December 1998.

The Code applies to:
- banking business within the meaning of the Banking Act 1998;
- investment business within the meaning of the Investment Business Act 1991;
- insurance business within the meaning of the Insurance Act 1986;
- business carried on by a building society within the meaning of section 7 of the Industrial and Building Societies Act 1892;
- business carried on by a society registered as a credit union within the meaning of the Credit Unions Act 1993;
- business carried on by a society (other than a building society or credit union) registered under the Industrial and Building Societies Act 1892;
- any activity carried on for the purpose of raising money authorised to be borrowed under the Isle of Man Loans Act 1974;
- any activity carried on for the purpose of raising money by a local authority;
- the business of a bureau de change, cheque encashment facilities and money (including any representation of monetary value) transmission services etc.;
- the business of an estate agent within the meaning of the Estate Agents Act 1975;
- the business of a bookmaker within the meaning of the Gaming, Betting and Lotteries Act 1988 but excluding business which is online gambling to which the Anti-Money Laundering (Online Gambling) Code 2002 applies;
any activity permitted to be carried on by a licenceholder under a casino licence granted under the Casino Act 1986;
- the business of the Post Office in respect of - any activity undertaken on behalf of the National Savings Bank;
any activity involving money transmission services or cheque encashment facilities;
any activity in which money belonging to a client is held or managed by –
an advocate;
- a registered legal practitioner within the meaning of the Legal Practitioners Registration Act 1986;
- an accountant or a person who, in the course of business, provides accountancy services;
- the business of engaging in any regulated activity within the meaning of Part 1 (corporate services) of Schedule 1 to the Corporate Service Providers Act 2000.
- the business of engaging in any regulated activity within the meaning of Part 1A (trust services) of Schedule 1 to the Corporate Service Providers Act 2000.

Persons who are subject to the Code's requirements are "relevant persons."

Any relevant person who fails to comply with the requirements of the Code may be liable on summary conviction to a fine of up to £5000, to custody of up to 6 months, or both, and may be liable on conviction on information* to a fine, to custody of up to 2 years, or to both.

The Code requires that relevant persons have in place anti-money laundering policies, procedures and practices in relation to money laundering, including the financing of terrorism. Specifically, the Code requires that relevant persons should not form business relationships or carry out one-off transactions with or for another person unless they:
-Establish procedures which establish the identity of the applicant for business as soon as is reasonably practicable after contact is first made;
- Report suspicious transactions;
- Maintain adequate records;
- Adopt adequate internal controls and communication procedures;
- Provide appropriate training for employees; and
- Establish internal reporting procedures, including the appointment of a Money Laundering Reporting Officer ("MLRO").

To accompany the new Code, in January 1999 the Commission issued fully revised draft Anti-Money Laundering Guidance Notes ("AMLGN") to licenceholders, which went into force in April 2000. To reflect evolving international standards, new legislation on the Island, and the new licensed status of Corporate Service Providers, the AMLGN were further revised in December 2001, and April 2003.

An updated Anti Money Laundering Guidance Notes is provided online.

According to the official communication from the Gibraltar Financial Services Commission (www.fsc.gi), Gibraltar is at the forefront of anti-money laundering practices :
- it was one of the first jurisdictions worldwide to criminalise money laundering from all types of criminal activity not just drugs related offences. This was also recently extended to cover the financing of terrorism.
- it was the first jurisdiction to regulate the providers of fiduciary services (company management and formation as well as professional trustees) and to apply the provisions of the Anti-Money Laundering regime to this sector.

Gibraltar has transposed and given effect to the EU’s 1st and 2nd Money Laundering Directives and is already largely compliant with the provisions of the proposed 3rd Directive. Gibraltar is also largely compliant with the recently revised 40+9 special recommendations of the Financial Action Task Force (FATF/GAFI) and is actively working to update those few areas where international standards have recently changed all the more as money launderers get more sophisticated, which requires the evolution of regulatory and supervisory practices.

In relation to other jurisdictions both onshore and offshore, Gibraltar’s company management industry with only 30,000 active companies does not make it a large player worldwide. The risks posed by the sector itself is mitigated by the fact that the firms providing these services are vetted and regulated by the Gibraltar Financial Services Commission. The firms providing these services are themselves required to apply the same standards as any financial institution in relation to the fight against money laundering and the combating of terrorism.

Tax evasion is considered as a criminal offence as the person committing such an offence will also be committing a number of other offences as well, all of which are defined as criminal offences under the Laws of Gibraltar. There is no differentiation drawn between tax evasion and other criminal activity in the legislation.

Gibraltar is geographically exposed to launderers from two main sources :
- the first of these is the existence of a major drug producing region (Morocco) and
- a large consumer and distribution network in Spain not only for drugs emanating from Morocco but also cocaine and designer drugs imported into Europe. Add this risk to the recent establishment of organised criminal activities from Eastern Europe into southern Spain and there is a huge potential for launderers to use Gibraltar as a base for money laundering.
These risks are mitigated by the small coastline and effective policing of the area preventing Gibraltar being used as a transhipment area for drugs or people smuggling. Secondly many of the Eastern Europeans settling in Southern Spain remain outside of the EU and therefore cannot travel physically into Gibraltar due to visa requirements. Meticulous border controls between Gibraltar and Spain also acts as a deterrent to potential launders wishing to use Gibraltar for placement stages of their activities.

The strongest defence mechanism for preventing layering stages, which is where Gibraltar is most vulnerable, is the regulation of every financial intermediary that operates in or from within Gibraltar with strong KYC requirements and linked to an effective enforcement agency network.

Evaluations have been effected by the FATF under the aegis of the Offshore Group of Banking Supervisors who found that Gibraltar’s standards were "close to complete adherence with the FATF 40 Recommendations." FATF itself found that Gibraltar was a co-operative jurisdiction in the fight against money laundering and found "Gibraltar has in place a robust arsenal of legislation, regulations and administrative practices to counter money laundering." The findings were further reinforced by a subsequent evaluation by the International Monetary Fund (IMF) and a independent review of the activities of the Financial Services Commission which concluded that "supervision is generally effective and thorough and Gibraltar ranks as a well-developed supervisor." The IMF is due to report again on Gibraltar in 2006.

The latest supervisory review of the Financial Services Commission was conducted to establish whether the Financial Services Commission matches UK regulatory practice. In relation to anti-money laundering practices the report praises the Gibraltar regime as "more robust than that of the UK in a number of areas" and says that regulations have been "developed to a good standard and staffed by competent regulators with a manifest determination to improve performance further." The review notes that Gibraltar's decision to regulate professional trustees and company management means that "enforcement of these requirements in Gibraltar now exceeds that in the UK, even taking account of the different risks posed by the business," It adds that the Financial Services Commission imposed a review of the identification evidence held on all existing customers by Gibraltar financial institutions, and commented that "this requirement goes beyond the position in the UK. The FFinancial Services Commission is to be particularly commended for this."
Gibraltar participates in the Egmont Group of Financial Intelligence Units via the independently run Gibraltar Financial Intelligence Unit (GFIU) which is manned by officers of the Royal Gibraltar Police and Customs Department of the Government of Gibraltar.


Summary of the anti-money laundering provisions

Scope

All financial and non-financial institutions need to comply with the provisions of the Criminal Justice Ordinance 1995 (the “Ordinance”). This creates the offences of money laundering (assisting another person to retain the benefit of criminal conduct, acquisition, possession or use of property representing proceeds of criminal conduct, concealing or transferring the proceeds of criminal conduct and failing to report knowledge or suspicion of money laundering).

All financial institutions and certain non-financial business needs to abide by the specific provisions in the Ordinance which require identity and source of funds to be sought and documented.

The financial institutions caught by these requirements are :Banks & Building Societies, The Gibraltar Savings Bank, Investment Business and Fiduciary Service Providers, Life Insurance Companies, Insurance Intermediaries, Bureaux de Change and money transmission services. Compliance with the provisions of the Ordinance is facilitated by the Anti-Money Laundering Guidance Notes issued and updated by the Financial Services Commission.

Additionally the following non-financial businesses are also caught by the Ordinance : Auditors, external accountants, tax advisors, estate agents, notaries and other legal professionals, dealers in high value goods and casinos.

Requirements

The legal requirement on all of these businesses is that the identity and source of funds of their clients is known and recorded before entering into any arrangement. If the business finds or suspects that money laundering has or may be about to happen, the requirements impose upon them an obligation to make a report to GFIU.

“Knowing your client” (KYC) cannot be delegated to another person. Gibraltar, unlike most other jurisdictions does not permit the use of introducer certificates whereby the true identity of the beneficial owner is not known to the Gibraltar institution.

The provisions also require the true beneficial owner of funds to be established before entering into a business relationship. This also extends to companies and trusts. If the beneficial ownership cannot be established then the firm cannot enter into the business relationship.

KYC records are required to be maintained and be made available to enforcement/ investigating agencies for a period of up to five years from the end of the business relationship.

Training is also required to be provided for all staff on the detection and prevention of money laundering.

Gibraltar is one of the few jurisdictions worldwide to have required a retrospective review of KYC documentation for all existing clients of financial institutions.

The Financial Services Commission conducts on-site reviews of all regulated entities to ensure that compliance with the requirements of the CJO and Guidance Notes are adhered to.

The Definition of Criminal Conduct

The Ordinance defines criminal conduct as any activity, either committed in Gibraltar or elsewhere which if it had been conducted in Gibraltar would be indictable. This includes tax evasion as the committal of such an offence would normally also include the committal of other indictable offences.


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