Roger Crombie

The island keeps passing the rigorous tests of international bodies investigating the regulatory systems of offshore insurers. But the complexity of legislating fiscal safeguards has raised controversy--and requires clarity.

For the offshore community of insurance centers--of which Bermuda is the undisputed leader--2000 has been a year of reckoning.

An alphabet soup of separate international initiatives has simultaneously focused on the fiscal and regulatory infrastructure in the world's smaller jurisictions--and, in some cases, has caught larger countries, such as Russia and Israel, in their net. In the process, the offshore jurisdictions have been held to international standards that the countries doing the investigating have themselves not always been able to achieve, bringing forth accusations of a double standard and a secret agenda.

The result has been a haphazard grading of the world's lesser jurisdictions into two classes: those whose financial and regulatory systems meet or will meet "the highest international standards"--a virtual 'A-list' of international financial service providers--and a second inventory of jurisdictions who must change their ways or face exclusion from the international family of nations. For those in the latter group who are unwilling to mend their ways, the future looks bleak.

Bermuda is one of a handful of jurisdictions that, so far, has passed all the tests, although legislative changes are required--which, for reasons known only to himself, Deputy Premier and Minister of Finance Eugene Cox has chosen not to reveal.

The outcome has been an odd turnaround: what should have been celebrated as the best possible news in Bermuda has been greeted with distrust and accusations of bad faith.

Threat of the OECD

For starters, Bermuda was omitted from a list compiled in June 2000 by the Paris-based Organization for Economic Cooperation & Development (OECD) of 35 jurisdictions considered to contribute to harmful tax competition. The OECD initiative is considered the most important and far-reaching of the international investigations.

Along with five other jurisdictions--the Cayman Islands, Cyprus, Malta, Mauritius, and San Marino--Bermuda has promised to enact a laundry list of legislation considered necessary by the OECD within five years and not to introduce other legislation hat the OECD would frown upon.

In May 1998, the OECD published its rationale for addressing harmful tax regimes offshore and set about investigating almost 50 jurisdictions placed on an unpublished list of potential villains. Each jurisdiction was offered the opportunity to meet with, and persuade, the OECD that it belonged on the world's A-list ("Level One," in OECD parlance) of countries operating transparent tax regimes, prepared to trade information and regulate themselves to the highest international standards.

"The Government of Bermuda undertakes to implement such measures (including through any legislative changes) as are necessary to eliminate any harmful aspects of Bermuda's regimes that relate to financial and other services," Cox wrote to the OECD, in a letter released to the public. The details of the necessary changes were contained in an annex, which is not to be made public.

Cox's reticence was made more intriguing when the Cayman Islands chose to reveal the details of its annex. "As a major international financial centre, we are committed to maintaining a well-regulated financial services industry which meets the highest international standards," said Hon. George McCarthy, financial secretary of the Cayman Islands. "The outcome with the OECD demonstrates what can be achieved through sustained, constructive engagement."

U.S. Treasury Secretary Lawrence Summers called the announcements by the six countries an important milestone in the international effort to curb the use of offshore subsidiaries, bank accounts and other arrangements to avoid taxes. "In today's global economy, it is vital that we put an end to international tax practices that encourage tax evasion and improper tax avoidance and that distort capital flows," Summers said.

Some of the details began to emerge when Bermuda's House of Assembly started to consider legislative changes in the wake of the OECD's report. Changes to the Proceeds of Crime Act, Bermuda's principal antimoney laundering legislation, have been made retrospectively and without time limitation, which raised concern that some employees of trust companies, who thought they were acting within the law years ago, may now be subject to punishment.

Bermuda's Shadow (or, opposition) Finance Minister Grant Gibbons pointed out that the United States has a statute of limitations, which Bermuda has eschewed. "Clearly, we're not in conformity with the U.S., our biggest trading partner; clearly, we're not in conformity with the wider world," Gibbons says.

Had the annex been made public, Cox's assertion that the charges made by Gibbons are "arrant nonsense" might have been understandable. As it is, Bermuda's financial community will have to hold its breath for more details until at least November, since the House broke for the summer in mid-August and will not reconvene until then.

Daniel Mitchell, a senior fellow at the Washington-based Heritage Foundation, says Bermuda and the five other jurisdictions have made a strategic mistake and should instead have rebuffed what he calls a cartel of tax-hungry nations.

The letters extracted by the OECD "were like the confessions made during the Soviet show trials in the 1930s," Mitchell says. "It's like choosing to become a house slave rather than a field slave, in the hope that you get better treatment. In the end you're still a slave."

The OECD, he says, is in effect attempting to set up a cartel to make smaller nations become their tax collectors. Such moves, in his view, are an attack on the sovereignty of the offshore jurisdictions.

"Surrendering early in the hopes of getting treated better is guaranteeing you're going to lose," Mitchell says. "I don't think you're going to win through negotiating. The best strategy is to fight back by publicizing your views against what is essentially a rebirth of colonialism and imperialism."

Mitchell, a former advisor to the U.S. Senate Finance Committee, says he has "started a coalition in the U.S. to derail the OECD's pernicious efforts."

The FATF Report

Bermuda emerged almost free of criticism from the report last May of the Financial Action Task Force on Money Laundering (FATF), a body empowered by the OECD to investigate money laundering.

The FATF report was highly critical of several offshore jurisdictions, but said: "Bermuda appears to have effective regulations and supervision for financial institutions operating in its territory, as well as an efficient mandatory system for reporting, monitoring and sanctioning for the failure to comply with the obligation to report suspicious or unusual transactions."

The one criticism the report contained was that "financial institutions (in Bermuda) are not required to identify the beneficial owners of all companies for which transactions are undertaken."

In his budget statement, delivered in February this year, Finance Minister Eugene Cox had advised that Bermuda was likely to pass muster with the FATE. "As a member of the Caribbean Financial Action Task Force (CFATF), Bermuda has been reviewed to determine its adherence to the Vienna Convention and its preparedness to deal with money launderers seeking to utilize its financial services," Cox told the House of Assembly.

He continued: "It was pleasing to be able to attend the CFATF Council meeting where the report on Bermuda was adopted and her approach praised and endorsed." Among others, Russia, Lichtenstein, and Panama failed the FATF test, as did the Philippines.

Bermuda fared better than its rival, the Cayman Islands, which served as president of the CFATF sessions. The Caribbean findings were ignored when the full FATF report was issued. Within weeks, France was calling for sanctions against offenders and U.S. Deputy Treasury Secretary Stuart Eizenstat said that countries identified as "rogue jurisdictions" unwilling to cooperate would be heavily penalized by the United States.

Financial Stability Forum

The Financial Stability Forum (FSF), a grouping of financial regulators, finance ministries and central banks, was created in April 1999 by policymakers from the Group of Seven leading industrialized nations, ostensibly to prevent a repeat of the Asian and Russian financial crises.

The FSF published late in May a list of 25 offshore financial centers whose standards of supervision and transparency placed them in three categories, reflecting their perceived quality of supervision and perceived degree of cooperation with international regulators.

The groupings were "based on responses of OFC supervisors and the impressions of a wide range of onshore supervisors." Although the FSF report stated that its findings did not "constitute judgments about any jurisdiction's adherence to international standards," the report was nothing if not judgmental.

Bermuda was placed in the middle category, reserved for jurisdictions "generally perceived as having legal infrastructures and supervisory practices, and/or a level of resources devoted to supervision and cooperation relative to the size of their financial activities," the report stated.

Others included in Group II were Andorra, Bahrain, Barbados, Gibraltar, Labuan (Malaysia), Macau SAR, Malta, and Monaco.

British Economic Secretary Melanie Johnson greeted the FSF review warmly, saying: "Ensuring effective supervision and cross-border cooperation is essential to tackling financial crime and delivering a more stable global financial services industry. The FSF report marks a significant step toward achieving these aims."

Since it was followed rapidly by the OECD report and made no recommendations for change within the named jurisdictions, the findings of the FSF were largely ignored, although Bermuda is pushing for promotion to Group I, based on recent legislative tightening-up.

Britain's White Paper

As part of its white paper, entitled "Partnership for Progress," on the future of its remaining Dependent Territories (to be renamed Overseas territories in due course), the British government requested that the six territories with the largest international financial services sectors commission a review of their financial and regulatory systems by international financial services provider KPMG.

The review was to be completed by July 2000, but was delayed for at least two months when the territories rejected the first draft of the report. Although no one would speak on the record prior to the release of the report, Risk & Insurance understands that the first draft was extremely critical of all six jurisdictions.

A second draft was produced by early August, which Bermuda's Permanent Financial Secretary Donald Scott describes as generally positive. Significant legislative changes introduced in the Cayman Islands came too late for inclusion in the report.

Among the key criteria being looked at was the degree of independence from government that financial regulators in the territories enjoy. The Bermuda Monetary Authority, the chief regulator in Bermuda, is mostly independent of the government. Despite a recent broadening of its powers, the BMA's clout remains somewhat limited.

Meanwhile, the United Nations Global Program against Money Laundering, known as the U.N. Offshore forum, is an initiative of the U.N. Office of Drug Control and Crime Prevention.

The forum is looking for a commitment from jurisdictions to adhere to the minimum performance standards it has set. Its work is ongoing and none of the forum's findings have yet been made public.

Not surprisingly, the European Union has followed each of these initiatives closely. It is not expected to commission its own separate report unless it remains unsatisfied by the conclusions reached by all the other initiatives. E.U. member states, particularly Germany and Belgium, are acknowledged as being among the world's least efficient tax collectors and the organization views the initiatives as an opportunity to increase its tax yield.

Bermuda has always prided itself on a high degree of integrity. The island's reputation has long been considered its main selling point. Careful scrutiny of those seeking to do business from Bermuda has always been a key element. Companies that have passed muster tend to view Bermuda as an elite club, and reaction to the international initiatives has generally been positive. Banks have long pursued the "know your customer" policy on which antimony laundering relies.

KPMG, in a separate report on international money laundering, estimates that as much as $600 billion is laundered annually, of which Canada processes as much as $17 billion. Bermuda bank deposits total about the same amount; it is generally agreed that only a tiny fraction is likely to be laundered through Bermuda, malting the island one of the smallest centers for such activities in the world.

Having been the subject of so many detailed initiatives, and with a number of legislative changes either made or in the pipeline, the Bermuda Government believes that it will emerge essentially unscathed from the current season of investigations.

Cox struck an upbeat note when he reported on the OECD activities. "I believe we will fare far better than will most of our competitors," he said. "And the upshot of all these factors will be, I believe, that our reputation as the world's premier international financial center will grow and become stronger. The future, it seems to me, has never looked brighter."

COPYRIGHT 2000 Axon Group

COPYRIGHT 2001 Gale Group