Bank Secrecy and Confidentiality: The Offshore Perspective – Orwell’s New World

Peter Crook's speech to The Cambridge International Symposium on Economic Crime - 15 September, 1999

 

"I have been asked to speak today about bank secrecy and confidentiality from the offshore perspective.

 

Let me say at the outset that it is clear to me that any finance centre which wishes to enjoy long-term success will need to be able to exchange information and co-operate with other jurisdictions. All of the main regulatory bodies have these criteria as part of their objectives. I cannot see how it is possible for a jurisdiction with bank secrecy to meet the standards of these bodies. It is therefore with some surprise I note that the Caribbean Financial Action Task Force has stated it has no difficulty with Cayman's secrecy legislation. I also wonder how Luxembourg and Austria are so readily accepted. Besides the regulatory bodies, there are a number of international initiatives reviewing the exchange of tax, criminal or regulatory information.

 

Exchange of information and co-operation will be the benchmark by which all finance centres are judged. However, we live in an Orwellian world. All finance centres are equal but onshore finance centres are apparently whiter than white and offshore centres are blacker than black. At least, that is what I infer from representatives of the onshore centres.

 

This view was echoed recently in a speech in Jersey by Howard Davies, the Chairman of the Financial Services Authority. He said "there is some frustration among G7 finance ministers and indeed amongst regulators, about the co-operation they get from some offshore financial centres". This frustration has led to a G7 initiative, the creation of the Financial Stability Forum. This Forum is reviewing how offshore centres enforce international prudential and disclosure standards and comply with international agreements on the exchange of supervisory information.

 

On an allied issue, a paper on Financial Havens, Banking Secrecy and Money Laundering issued by the United Nations in 1998 points the finger at offshore centres. That paper describes the common denominator in money laundering and other financial crimes as being the "enabling machinery that has been created in the financial havens and offshore centres". Part of this machinery is excessive bank secrecy protection, IBCs with an impenetrable layer of protection around the ownership of assets and the role played by professionals protected by legal privilege.

 

Unfortunately, like much of the criticism of offshore centres the paper does not substantiate that offshore IBCs and offshore bank secrecy are particular problems. Drawing upon US State Department material the report lists jurisdictions unwilling to lift bank secrecy, unwilling to assist domestic and international investigations and unwilling to permit the sharing of financial records. Few of these are offshore jurisdictions. The case studies in the report include some examples of the use of offshore bank accounts. But it is not clear how bank secrecy affected each case and it is apparent that onshore bank accounts are used by launderers just as much or more than offshore accounts. If I am to understand what I read in the papers, the Bank of New York's onshore facilities have been especially popular with money launderers in recent years.

 

The conclusion I have long held is that onshore centres are hypocrites. The vast majority of crime occurs onshore. The vast majority of the proceeds of crime enters the banking system onshore. The UN paper goes on to say that more than 90 jurisdictions offer bank secrecy and that such secrecy is becoming more popular. Presumably that number does not include jurisdictions with bank services that offer secrecy such as anonymous or numbered bank accounts. Such services should be part of any rational consideration of bank secrecy. There are far fewer than 90 internationally accepted offshore centres. A good number I know well, do not offer bank secrecy, particularly my colleagues from the other two Crown Dependencies here today. Yet it is offshore centres which are tarred with facilitating economic crime, especially money laundering. And it is offshore centres which are the targets of an ever increasing number of international initiatives.

 

Of course, there are problems with some offshore centres. We work hard in Guernsey to ensure we comply with the highest international standards but only a fool would say there is no room for improvement. However, some jurisdictions have far more scope for improvement than others.

 

I believe it is artificial to differentiate between offshore and onshore centres. The onshore jurisdictions have various lists of jurisdictions they would like to include as offshore but there is no philosophically satisfactory way of describing an offshore centre without including London, New York and similar financially based cities. Usually, definitions of offshore also exclude transparently offshore regimes. The United States has some of these regimes.

 

Irrespective of whether or not a distinction is made between onshore and offshore, finance centres should be divided into those that are committed to compliance with international standards (and importantly can demonstrate compliance) and those that do not. Hence, jurisdictions such as Guernsey which do not have bank secrecy, which have a can-do attitude to exchanging information and which are committed to enforcing exchange of information legislation should be placed on one side of the fence while those which are not committed to exchanging information and co-operation would be on the other side of the fence. John Moscow has never approached the Guernsey authorities for assistance but, if he were to do so through the appropriate channels, we would be able to prove we have confidentiality, not secrecy.

 

The subject matter of the speech I was offered is telling. It contains an equally weighted reference to secrecy and confidentiality. There is a different but equally Orwellian aspect to this. Secrecy is a position whereby law specifically prevents the exchange of information for any purpose whatsoever. Confidentiality is a completely separate legal position. Here, subject to the appropriate evidence and an approach to the appropriate body, confidentiality can be over-ridden and information passed to another body. However, it has become clear that when I talk about confidentiality, some American and European regulators and law enforcement officials think I mean secrecy. To them, there is no distinction between the two other than semantics. All the shades between true secrecy and true confidentiality are also often considered to be secrecy.

 

When I talk about tax planning, many people understand me to say tax evasion. It is clear from statements made by the UK authorities and the OECD that tax avoidance is increasingly considered to be tax evasion.

 

Such attitudes simply serve to cloud the real issues. A world where the onshore authorities state that white is black and that they, the onshore centres, are without blemish is not the right way to remove obstacles to the exchange of information and co-operation.

 

The ability to exchange information also brings with it civil rights issues. Somehow we all have to steer a sensible middle course, co-operating responsibly with the international forces of law and order while scrupulously preserving the confidentiality that legitimate customers are entitled to."

 

P Crook

 

Guernsey Financial Services Commission