Offshore Financial Centres and the Law

Suspect Wealth in British Overseas Territories

Dominic Thomas-James

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000411171
• Edition: 1
• Topic: Business
• Subtopic: Business Law
• Index: Business

This book considers the ability of island jurisdictions with financial centres to meet the expectations of the international community in addressing the threats posed to themselves and others by their innocent (or otherwise) facilitation of the receipt of suspect wealth.

In the global financial architecture, British Overseas Territories are of material significance. Through their inalienable right to self-determination, many developed offshore financial centres to achieve sustainable economic development. Focusing on Bermuda, Turks and Caicos, and Anguilla, the book concerns suspect wealth emanating from financial crimes including corruption, money laundering and tax evasion, as well as controversial conduct like tax avoidance. This work considers the viability of international standards on suspect wealth in the context of the territories, how willing or able they are to comply with them, and how their financial centres can better prevent receipt of suspect wealth. While universalism is desirable in the modern approach to tackling suspect wealth, a one-size-fits-all approach is inappropriate for these jurisdictions. On critically evaluating their legislative and regulatory regimes, the book advances that they demonstrate willingness to comply with international standards. However, their abilities and levels of compliance vary. In acknowledging the facilitatively harmful role the territories can play, this work draws upon evidence of implication in transnational financial crime cases. Notwithstanding this, the book questions whether the degree of criticism that these offshore jurisdictions have encountered is warranted in light of apparent willingness to engage in the enactment and administration of internationally accepted laws and cooperate with international institutions.

1
Introduction and conceptual framework

1.1 Overview

In the global financial architecture, British Overseas Territories in the Caribbean and North Atlantic are of material significance. Post-colonialism, these relatively homogenous, archipelagic territories with financial centres have been the recipients of soft domination, and more recently legislative intervention, by metropolitan interests. Through their inalienable right to self-determination and pursuit of autonomous governance and financial independence, many developed offshore financial centres to achieve sustainable development, with encouragement from the UK. Recently, and exacerbated by the Panama and Paradise papers – two unprecedented breaches and publications of confidential data from law firms in Bermuda and Panama – the Overseas Territories are subject to increased pressure and ongoing perception that their financial centres facilitate criminality by harbouring suspect wealth, due to lack of transparency.

This book concerns suspect wealth as a product of economic misconduct like corruption, money laundering, terrorism financing, tax evasion, fraud and securities violations, and the increasingly controversial tax avoidance. This includes suspect wealth derived from overseas or domestic misconduct, given law enforcement’s response is typically the same irrespective of origin. The book focuses on offshore financial centres and, in particular, systematically examines the legal, regulatory and compliance frameworks of three very different Overseas Territories: Bermuda, the Turks and Caicos Islands (TCI) and Anguilla. It sets out to examine their legal, regulatory and compliance regimes and explores three questions relating to such. First, how viable are international standards on suspect wealth and economic crime in the context of these three jurisdictions? Second, how willing and able are these jurisdictions to comply with international standards on suspect wealth? Third, how can they better protect the integrity of their financial centres from the risks of, and receiving, suspect wealth? Given how the global anti-economic crime framework is envisaged at international levels, the book also considers whether a one-size-fits-all approach to the Overseas Territories is appropriate.

In short, the research finds that while universalism is a desirable aspect of the modern approach for tackling suspect wealth, some standards are unviable or existing frameworks may present viable alternatives. On a critical evaluation of their legislation, international cooperation and reviews, the research indicates that all the territories demonstrate willingness to comply with international standards – contrary to the conception that they are pariah states. However, for reasons identified in this book, their ability and levels of compliance vary greatly. The book also tackles important issues arising from increasingly developing standards, namely the status of fundamental legal protections and whether these are at times eschewed in favour of the silver bullet purportedly afforded by transparency. Proceeding on the basis that receipt of suspect wealth is inimical to development, the book discusses its impact on development for both countries from which the wealth transits and the Overseas Territories themselves, with many having fundamental development concerns. In acknowledging the facilitatively harmful role that can be played by these territories, this work draws upon evidence of implication in international cases which indicate a less positive view of the territories. Notwithstanding this, a purpose of the book is to call into question whether the degree of criticism that these and other small jurisdictions have encountered is warranted in light of their apparent willingness to engage in the enactment and administration of internationally accepted standards and legislation and to cooperate with international mechanisms and institutions. In this regard, the book approaches a series of important issues for law, international relations and development, and hopes to facilitate a more constructive, meaningful discussion about offshore financial centres and the British Overseas Territories.

1.2 Approach and chapter structure

The book begins by exploring the concerns which relate to economic crime which have manifested at international and supranational levels and have provided the basis for the inception and development of the global rules-based anti-economic crime framework, such as various international treaties and conventions, and the emerging influence of soft-law standards propagated by the Financial Action Task Force and others. The book also contextualises the problem associated with the offshore world and provides important background knowledge about the development of offshore financial centres, their utility and role in the global financial machine. Through extensive primary and secondary research, material background information on the Overseas Territories will be presented both as a collective group of jurisdictions and, importantly, as individual ones. The analysis of the selected territories’ legal, regulatory and compliance frameworks is approached systematically, addressing the following themes which are widely acknowledged to be constituent elements of a country’s toolkit to tackle economic crime and mitigate against the risks of suspect wealth: bribery and corruption; anti–money laundering and counter-terrorism financing; beneficial ownership, company law, and transparency; economic substance requirements; and tax information exchange and international cooperation.

One of the book’s principal concerns relates to the ability of small jurisdictions to meet the expectations of the international community in addressing the threats presented both to themselves and others by their innocent, or otherwise, facilitating of laundering the proceeds of economic misconduct. It discusses the extent to which actual, or perceived, involvement in these processes harms the stability and development of the countries concerned but also the wider international community. The backdrop to this discussion takes the proposition in the preamble to the United Nations Convention Against Corruption (UNCAC), which underlines the damage to stability, development and security threatened by corruption, money laundering and other serious crimes. In order to address the aforementioned research questions, the book’s methodological approach is a qualitative one, involving the analysis of primary and secondary materials including case law, legislation, treaties and other legal instruments in the international and domestic law contexts. Soft-law resources are also evaluated. This approach is complemented by informal discussions which have been conducted with a range of present and former officials, experts and practitioners in the Overseas Territories; participants of the Annual International Symposium on Economic Crime at Jesus College, Cambridge; and through professional associations such as the Inner Temple. These discussions were conducted on a non-attributable basis and informed the points made in this book.

The book comprises 8 chapters. Following a functional overview and guidance on structural approach, Chapter 1 introduces the reader to background concepts. These include economic crime, offshore financial centres, defining ‘suspect wealth’, and the relevance of this research within the broader field of financial crime, set against increasingly high-profile and intensifying interest in this topic.

Chapter 2 considers the impact of suspect wealth on development together with the concerns about corruption, money laundering, fraud, tax evasion and the increasingly stigmatic tax avoidance. It identifies and explores the concerns which have manifested at international and supranational levels and how suspect wealth threatens the stability of financial markets and institutions, with reference to cases. In the development context, concerns about the impact on countries losing public revenue through economic crime will be considered. Along with concerns, the chapter acknowledges and explores some of the ambivalences in the way certain types of misconduct are viewed. It also sets out for the reader the international anti-economic crime movement and its hard- and soft-law components.

In Chapter 3, offshore financial centres are discussed at greater length, as well as perceptions and cases of facilitating economic crime and harbouring suspect wealth therein. The Overseas Territories are introduced and the backdrop as to their constitutional relationship with the UK, and the legal framework, is considered. Aspects of the Panama and Paradise papers data sets are analysed by way of contextualising how the territories are increasingly becoming targets for their role as so-called tax havens. Important background is also outlined, such as capacity and development issues, putting the jurisdictions into context prior to considering three selected territories.

Chapter 4 focuses on Bermuda, one of the jurisdictions analysed. It commences with an overview of Bermuda’s history, legal framework, governance and taxation system, and economic development as a financial centre. Drawing upon evidence of implication in international matters, it considers Bermuda’s role as a financial centre and criticism of Bermuda’s tax practices. The chapter moves to a systematic review of Bermuda’s response to suspect wealth and economic crime, and levels of compliance with international standards. It also considers Bermuda’s social and developmental concerns as well as evidence of implication in criminal cases overseas. In summary, the findings indicate that Bermuda’s compliance and response to suspect wealth and economic crime is the most advanced of the three territories considered.

Chapter 5 focuses on the Turks and Caicos Islands, a jurisdiction which in 35 years has had periods of substantial economic growth yet also development-hindering circumstances such as allegations of systemic domestic corruption and ministerial criminality causing direct rule. The same systemic analytical approach is followed in reviewing TCI’s response and compliance with suspect wealth and anti-economic crime standards. In summary, this chapter’s analysis indicates TCI’s increasing willingness to implement international standards, while several areas display considerable room for improvement.

Chapter 6 focuses on Anguilla and follows the same systemic analytical approach to reviewing its response to economic crime and suspect wealth. The chapter identifies Anguilla’s fundamental development concerns, such as connectivity, capacity and need for legal reform. It also examines Anguilla’s implication in recent data breaches, cases and reports of serious misconduct overseas, and receiving suspect wealth. In summary, this chapter indicates that Anguilla has shown some willingness to adhere to international standards, but implementation remains affected by capacity issues and a lack of progress with regards to institutional development, legal and constitutional reform.

In Chapter 7, the concept of transparency in corporate ownership is examined. The chapter considers this issue manifesting through public and central beneficial ownership register laws and policies. It also analyses the role of privacy and confidentiality and questions whether these legal protections are gradually diminishing in favour of increased transparency. It considers whether the general right to privacy extends to financial affairs and whether the utility of confidentiality and the offshore confidentiality norm stands reconcilable with recent legislation compelling public registers in the Overseas Territories. Given the importance placed on misappropriated data in the Panama and Paradise papers (and more recently in the FinCEN files) and its impact on reforming law and contributing to policy discussions, some remaining paradoxes are considered.

In Chapter 8, the main arguments raised in this book are summarised and conclusions are provided in relation to the research questions. A pertinent issue in law, development and international relations is whether it is reasonable to expect small states to be able to shoulder the same kinds of responsibilities as large, better-resourced jurisdictions. It is in this context that this book has examined the ability and willingness of three Overseas Territories with regards to the various standards and laws that have been internationally advanced relating to financial crime and the receipt of suspect wealth. It is hoped that conclusions reached through the analyses provide a research resource at a time where research and deeper thinking is lacking.

1.3 Background, topicality and contribution to research

For any society interested in upholding the rule of law, it is imperative that there remains a clear demarcation between conduct which is legal and conduct which is illegal. A long-standing principle of jurisprudential positivism is that a law ‘properly so called’ and the corresponding duty to obey it stands, irrespective of whether the law is morally justified or a good law (Hart 1958). Of course, law is not the single normative domain in society, given the influence of religion and ethics on behaviour (Kelsen 1934). With this, there is an increasing perception that jurisdictions which have established themselves as sophisticated business (and even offshore finance) centres are actively harming the world’s economy and otherwise serve no useful economic purpose (Oxfam 2016). In other words, there is an intensifying, fervent perception that offshore finance is at the heart of so many of the problems faced today – particularly those relating to the poorest. There is, rightly or wrongly, a perceived underhandedness and iniquity in one jurisdiction facilitating ‘dangerous opportunity’ for those in other jurisdictions seeking to abuse and undermine their offerings, or obviate legal or other obligations. The charge is simple: that offshore financial centres knowingly, or inadvertently, facilitate economic crime, widen countries’ tax gaps, and contribute to growing inequalities, however so defined. Therein lies a very interesting problem, one which is as argumentatively divisive as it is necessary to address. That is, what do we do about ‘offshore’?

Part of contributing some answers in relation to this highly complex question involves understanding what the problem actually is, and parameterising it accordingly. Much has been written about offshore financial centres (e.g. Antoine 2013; Sharman 2006; Hampton and Abbott 1999; Shaxson 2011; Hendry and Dickson 2018). Yet, the discourse seems to settle at extremes: support at the one end (often found in the legal discourse) and negativity at the other (often in social science discourse). Offshore jurisdictions have traditionally been referred to as ‘tax havens’ and they evoke perceptions akin to author W. Somerset Maugham’s famous formulation of the “sunny place for shady people”. Since the OECD-led campaigns against tax havens going as far back as the 1990s (Sharman 2006), and perhaps more recently dominated by global tax justice advocates, these jurisdictions are increasingly under legislative, regulatory and popular scrutiny. Such has been compounded by recent data breaches emanating from Bermuda, the Bahamas and Panama. Notwithstanding the inimical relationship between economic crime and facilitative misconduct which harbours suspect wealth, the picture about the role of international and offshore financial centres is far more complex than the charges typically laid, and assisting in the understanding of this is a foundational aim of this book.

While much has been written on economic crime itself, particularly in legal and criminological discourse, the concept of suspect wealth is under-researched. Suspect wealth is wider in scope than proceeds of crime, and is arguably where the complexity arises when assessing the role played by offshore financial centres. The Panama and Paradise papers – two unprecedented breaches of confidential information from law firms Mossack Fonseca’s (MOSSFON) office in Panama and Appleby’s office in Bermuda – showed that the problem was not confined to nefarious actors and corruptibility, but rather the function of jurisdictions in enabling permissible conduct under law to be exploited for financial gain, the most notable being tax avoidance. Suspect wealth is defined in this book as wealth attributable to criminality or to controversial, yet perhaps legal conduct. Therefore, it can derive from the proceeds of criminality such as money laundering, fraud, corruption, narcotics trafficking and others defined at Schedule 1, Serious Crime Act 2007. It can also relate to wealth fleeing some type of civil, societal, legal or matrimonial injunction. Or, it could be monies which States have an interest in, insofar as its ability to be structured offshore may lead to less taxable income in a particular jurisdiction. While fiscal planning, for example, is permissible by law, aggressive forms are increasingly perceived as immoral and treated similarly to tax evasion. The fallout from the Panama and Paradise papers were as much to do with wealth emanating illicitly as legally, although the common theme was inarguably the adverse role played by offshore financial centres.

This book examines offshore financial centres and their legal and regulatory responses to suspect wealth. These jurisdictions, commonly known as tax havens, are significant in the global financial architecture but are also perceived to be the destinations, or facilitators, of suspect wealth. There is corpus evidence suggesting many are facilitators or recipients of illicit wealth transitin...