Peter Crook's speech to The British Association, 13 January 2000
"My remit today is to discuss the changing regulatory offshore environment following the Edwards Report. John Aspden and Richard Pratt, my counterparts from the Isle of Man and Jersey, will discuss the Edwards Report and its specific effects in detail. The findings of the Report for Guernsey are not dramatically different than those for the other Crown Dependencies. The major conclusions for Guernsey were that trust and company administration firms and directors should be regulated. I expect legislation covering these areas to be agreed this year.
I intend mainly to concentrate on the international pressures which led to the Edwards Report and the more recent international initiatives against offshore finance centres.
There is nothing new about change in the financial regulation of offshore finance centres. Onshore regulation is also subject to change. Yesterday in the UK you had 9 financial regulatory bodies. Tomorrow you will have one, the Financial Services Authority. The key issue is why change comes about. Some arises from domestic reasons, other is encouraged by external sources. The Guernsey Financial Services Commission is a member of all of the main international regulatory bodies and our aim is to meet the standards set by those bodies. This means our regulatory framework continues to evolve. In addition, regulation in any jurisdiction does not take place in a limbo, it is always measured against regulation elsewhere. In Crown Dependencies for example we are always sensitive to what the other Islands are doing so we do not end up with regulatory arbitrage. However, increasingly, it is international bodies which are doing the measuring and, where shortcomings are identified, they expect action to remedy those shortcomings. This has been the significant development of the last 2 years on the regulatory environment offshore.
The offshore regulatory environment is still undergoing significant change. Many of the reasons for this pre-date the Edwards review. The remit given to Andrew Edwards in January 1998 was the product of mature thought. One idea circulating in that year was that the Edwards review was the consequence of a new Labour Government attempting to remedy its areas of ignorance. That view is a comforting one. However, it has become clear that a similar exercise would have been conducted by a Conservative Government. I am also convinced from my discussions over here that their knowledge of the activities of the dependent territories was no better. In truth neither party is particularly interested in us as there are no votes to be gained. So one can therefore begin to suspect that there may have been something more than ignorance in the background.
There is also the European Union business tax code of conduct, signed in December 1997, which will have an effect on some offshore centres.
The code covers the principles for the co-ordination of tax structures to achieve the single market. The intention is to extend the code to the dependant and other territories of the EU member states wherever it is constitutionally possible to do so. Allied to the code is a proposed directive on withholding tax on interest. It is probably fair to say that the potential effects of the directive on London have attracted more interest from most of the firms represented in this room than the effects of the code on the Crown Dependencies. Nevertheless, the EU is spreading its tax net as widely as possible. It is clear that a number of EU member states will impose tax rates on their associated territories which comply with the EU-wide tax structures. The Islands political authorities had some input into the wording of the code and were responsible for the inclusion of the phase "wherever it is constitutionally possible to do so." This offers protection for the Crown Dependencies from the UK imposing the tax on us as constitutionally parliament has admitted they do not have the power. However, it would be wrong to believe that we can show wilful blindness to these changes as we are responsible centres but importantly as things stand they cannot be imposed on us.
The Edwards review and the EU tax code of conduct were only the first of the external initiatives with an effect on offshore finance centres. However, between them, they cover all of the areas which interest the world's major countries. These are tax, financial regulation, international co-operation and anti-money laundering systems.
All offshore finance centres are now under the microscope and here I need to say that there is a very wide range of quality between those uncontrolled and accepting without investigation and those at the top of the range, such as the Crown Dependencies, where the standards are higher than very many onshore centres.
The main challenges for many will be to meet appropriate standards but for the Crown Dependencies it will come on the taxation front.
Here the challenge will be from the OECD. The OECD produced a report in April 1998 setting out what might be considered to be tax situations which distort international financial trade and how they might be eliminated. It is currently producing a list of offshore jurisdictions which could be considered to be tax havens. I expect details of the list to be released at the June 2000 ministerial meeting of the OECD. It is possible that the list will differentiate between unco-operative tax havens and those that are willing to co-operate to remove harmful tax practices. It is envisaged that unco-operative tax havens will be subject to co-ordinated countermeasures by OECD member countries.
The OECD review is one of the most significant initiatives even though its review is widely perceived as partial and unbalanced and even though its power rests on influence and persuasion rather than legal statutes. Nevertheless, it will almost certainly be the first international body to publish lists catagorising offshore finance centres. These lists are likely to have some authority. It will also be the first body to openly discuss the kind of countermeasures it wishes to see applied to those offshore finance centres it considers to be tax havens, with preferential tax regimes who are not prepared for some form of dialogue that will lead to change.
In order to boost the importance of both the EU and OECD taxation measures, in May 1998 the G7 ministers gave their full support to the proposals and the intentions behind the proposals.
That same communiqué also encouraged cross-border co-operation between law enforcement officers and regulators to limit money laundering activities.
The anti-money laundering organisation established by the G7 countries, the Financial Action Task Force on Money Laundering, is also active. Guernsey has made a political commitment to meet FATF's standards. FATF is also keen to see members of the Offshore Group of Banking Supervisors meet its Recommendations and a FATF inspection team visited Guernsey in July. We await, with a moderate degree of confidence, its draft report for our comments. FATF has also established an ad hoc group on non-co-operative jurisdictions. This group is intending to produce a list of such jurisdictions by June 2000. Of course, the political reality is that these jurisdictions will all be offshore finance centres and they will be measured against twenty-five criteria. I and my colleagues from the Crown Dependencies can perhaps expect more FATF review teams to visit us in the near future.
In addition, the United Nations Office for Drug Control and Crime Prevention will be reviewing offshore centres' compliance with FATF's Recommendations and international regulatory standards. It remains to be seen how this programme will be carried forward but here the position of the dependent territories will most likely be to act as role models.
As a result of the Long-Term Capital Management crisis and other concerns about some offshore centres, the G7 countries have established the Financial Stability Forum in Basle. The Forum was established to investigate the threats of offshore finance centres to international financial stability. Although it concluded there was no threat, one of the Forum's three working groups is reviewing financial regulation in, and co-operation by, offshore finance centres. That group has submitted questionnaires to a large number of onshore and offshore centres, including Guernsey. It is likely that the Forum or the G7 countries will propose that banks dealing with institutions in the more poorly regarded offshore centres should be subject to greater capital requirements. We shall certainly see the Forum's work develop during 2000 and it will be interesting to see what conclusions have been reached by June. I suggest this body will prove to be the most influential and far reaching of those reviewing the offshore world.
No one seems to wish to be left out so in yet another field, prudential issues arising from the role of offshore centres, the IMF is at work. In addition, the IMF's sister body, the World Bank is reviewing banking supervision in offshore finance centres.
It is unending. Other international organisations to which the Commission belongs are also active. IOSCO has set up a specific working party on offshore issues. How long will it be before the banking and insurance regulatory bodies follow suit? Also, there is the UK review of financial regulation in its Offshore Territories. This we suspect will be modeled on the Edwards report but will be undertaken by KPMG.
So, what does the future hold?
Challenges by the major countries and international bodies against offshore centres will be a feature of my life for some time. At any one time the Crown Dependencies can expect to be dealing with ten or more initiatives. The papers we produce are unending but at least they are getting easier now as we have answered the same questions several times. Some initiatives will lose their way as it is realised the issues under the review are an onshore as well as an offshore problem. Others are just too difficult. Some will reappear later in a different guise. There is no point pretending otherwise.
Although self-praise is no recommendation, the Crown Dependencies have responded well to these international challenges. I believe we can do this because we have good regulatory frameworks, because we have a good reputation for co-operation with other regulators and law enforcement bodies and because we have co-operated with the organisations undertaking the initiatives. We also have in place most of the key legislation expected by these organisations. We have provided the fullest responses possible to the bodies investigating offshore centres. It is clear that a successful future lies in this approach. The OECD, FATF and the UN are all considering identifying non-co-operative jurisdictions rather than taking the view that offshore centres are a single category of jurisdictions requiring attention. Furthermore, it is obvious that countermeasures will be directed at the poorer quality jurisdictions.
That does not mean the Crown Dependencies will fulfil to the letter every suggestion or recommendation made to them. What it does mean is co-operating where we can within our laws with those asking for information about our regulatory, tax and anti-money laundering systems and using that open approach, together with cogent and intellectually rigorous argument, to defend what is right for us. We may feel it appropriate to change some tax measures but the impact of such change will be cushioned by the continual growth of non tax-related business. At the same time our regulatory framework will continue to evolve in line with international standards. Time will tell whether this is the right approach but the message we are receiving from the major countries is that it is serving us well. I also believe the international challenges can be to our advantage. We are ahead of the game. We also find the customers want to be in well regulated centres which bodes well for us. The review by the UK of its Offshore Territories has only just commenced. I would also suggest it is a matter of time before there is a global review of all offshore centres.
All of this points to an increase in the pace of the changes to the regulatory environment offshore. Some of Charles Darwin's words are particularly appropriate. He said, "It is not the strongest of the species that survives, nor the most intelligent. It is the one that is most adaptable to change." The last two years have seen much that will lead to change and I am sure that you will all be able to continue or to start to use the Islands with confidence as they have a buoyant future. There is every reason to think we will carry on prospering."
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