Banking Secrecy and Offshore Financial Centers

Money laundering and offshore banking

Mary Alice Young

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781135123376
• Edition: 1
• Topic: Law
• Subtopic: Financial Law
• Index: Law

This book brings together the issues surrounding banking secrecy and confiscation of criminal proceeds. The book examines the existing legal agreements at the international, regional and national levels and their interaction in the substantive areas of confiscation, anti-money laundering and banking confidentiality laws. It looks at how these agreements have been applied in offshore financial centers and demonstrates that despite a number of legally binding UN Conventions as well as global anti-money laundering recommendations, the implementation of them is often lukewarm by those Parties who have ratified the Convention and adopted obligations, because of this the confiscation legislation is incompatible with strict banking confidentiality laws. The work draws on the experience of criminologists to offer critical insight into the legislative frameworks designed to deal with banking secrecy and confiscation in offshore financial centers. It goes on to offer suggestions for measures that may be taken by major economies to circumvent the lack of cooperation by offshore financial centers as intolerance towards money laundering grows in light of recent political and economic events.

This book will be of particular interest to students and scholars of Law, Finance and Criminology.

1 Introduction

Introduction

The high profile recognition of money laundering taking place in the offshore accounts of micro states was given global coverage on April 2, 2009, when the G20 summit convened in London, United Kingdom to discuss key issues concerning the operation of offshore financial centers. The Obama administration and Brown government agreed in their criticism of the alleged lack of transparency in low tax jurisdictions, with Gordon Brown voicing there would be a crack down on all British Overseas Territories that operate as offshore financial havens with strong banking confidentiality legislation.¹ The G20 summit reignited the debate that in the twenty-first century, Caribbean offshore financial centers are used not only for tax avoidance purposes but also by criminals to launder the proceeds of their crimes, highlighting that strict banking confidentiality laws in the region lead to a lack of financial transparency and therefore effectively conceal criminally derived assets.

In November 2009, the Cayman Islands were lauded as a prototype of good practice at a Typologies Exercise meeting, focusing on the Global Money Laundering and Terrorist Financing Threat Assessment,² and hosted by the Cayman Islands government in conjunction with Interpol, the Financial Action Task Force and its observer body, the Caribbean Financial Action Task Force. One of the important conclusions reached at the meeting, was that offshore financial centers are a driver of money laundering because they allow the proceeds of crime to remain concealed through the use of strong confidentiality laws.³

This book examines the importance and effectiveness of confiscation in the twenty-first century at a global level, by reference to its weakest point, the offshore financial center. The research argues that offshore financial centers have no more than a superficial commitment to international confiscation standards due to the irreconcilability of confiscation with their main economic pillar, for example strong banking confidentiality. In conjunction with their significance as financial hotspots, offshore financial centers undermine the effectiveness of confiscation on a global level.

As acknowledged at the Typologies meeting by the government of the Cayman Islands (which is ranked as being one of the world’s top four offshore financial centers),⁴ there is a significant link between confidentiality laws and the effectiveness of confiscation. Incidents of money laundering allow for past criminal activity to be covered up and also facilitate further criminal activity on the global stage. This is of course nothing particularly new and as the G20 summit highlights, world leaders are taking a renewed interest in money laundering. A revived concern in money laundering at a global level can be seen as a direct response to the September 11, 2001 terrorist attacks on the United States, as well as the recent financial frauds revealed by the global financial crisis.⁵ Furthermore, though fiscal fraud and terrorist financing are increasingly viewed as interchangeable because they are both forms of organized crime,⁶ ultimately it is money laundering which allows these illegal activities to continue by concealing the illegally derived assets. In order to combat global organized crime and confiscate the criminally derived assets that result from it, general anti-money laundering requirements therefore request that countries meet legal international standards including adopting ‘laws for seizure, confiscation and forfeiture of illegal proceeds’.⁷

When the United Kingdom Foreign and Commonwealth Office employed a specialist financial services advisor to instruct overseas territories in the Caribbean on how to retain and reinvest criminally derived assets that had been confiscated, the Public Accounts Committee of the British government felt that such action was not adequate enough to remedy the risk of money laundering posed in the region. It is clear that at the start of the twenty-first century, money laundering through offshore financial centers in the Caribbean is viewed with concern by the international community.⁸

This book sets out to examine the responses of the international community, as well as those of the offshore financial centers, to the increased intolerance of money laundering in light of recent political and economic events. What is evident is that although the governments of offshore financial centers endorse the rhetoric of confiscation, ultimately they lack the political will to change the strict confidentiality laws that sustain their financial economies. At the Typologies⁹ meeting in 2009, the Cayman Islands government, acting as the incoming Chair of the Caribbean Financial Action Task Force, insisted that it upheld the most robust anti-money laundering standards in its private and public sectors and is proud of ‘the quality, stability and integrity in all aspects of commercial transactions’ carried out in the Caymans.¹⁰ However, although the days of the 1980s, when money launderers carried ‘cash hordes directly to offshore banks’, with mushrooming numbers of ‘aircharter services in various parts of the country … ferrying suitcases and even cardboard boxes directly to banks in the … Caymans’ are gone,¹¹ the jurisdiction still nurses an environment which is conducive to money laundering activity because of its tight banking confidentiality law.

Although this book examines the generic problem which offshore financial centers present to the wider effectiveness of confiscation in the fight against global organized crime, reference will be made to the Cayman Islands, a prominent international financial center. As an illustrative example, the Cayman Islands suitably highlight the unavoidable link between strong banking confidentiality and ineffective confiscation legislation and are a particularly pertinent example as, depending on the ranking system used, the jurisdiction is distinguished as being within either the top five¹² or top 30 financial centers in the world,¹³ while at the same time the country is also associated with disguising criminally derived assets from the illegal drugs trade, since its beginnings as a popular destination for offshore finance in the 1970s. For example, in 1980 the Nugan Hand Bank based in Sydney went into liquidation. Though it had 22 branches worldwide and was a seemingly legitimate operation, $50 million was unaccounted for, with $20 million missing from the Nugan Hand branch in the Caymans. It later emerged that the bank had been actively involved in drug money laundering for global heroin dealers.¹⁴ In March 2011, the International Narcotics Control Strategy Report highlighted that money laundering remains a problem in the jurisdiction and is mostly related to fraud and drug trafficking.¹⁵ The Cayman Islands are therefore an ideal illustrative example of an offshore financial center, in that they are both financially highly significant and also troubled by the typical problems of banking confidentiality jurisdictions.

Existing literature

This work examines a number of existing legal agreements at the international, regional and national levels and their interaction in the substantive areas of confiscation, anti-money laundering and banking confidentiality laws. There are a number of key articles and reports upon which the research for this book is built. There is a significant body of academic literature on confiscation including Levi,¹⁶ Nicol,¹⁷ DeFeo,¹⁸ and Mitchell, Hinton and Taylor.¹⁹ In defining the concept of confiscation, Alldridge provides a clear definition that it is ‘an order made against a convicted defendant to pay the state a sum equivalent to the proceeds that s/he has gained by crime’.²⁰ Importantly, in the context of this research, Smellie²¹ believes that confiscation is so effective that it directly impacts upon terrorist activities. However, some commentators, including Fisse and Fraser,²² Ping,²³ and Lea,²⁴ believe that confiscation could be made more effective in its application and that it disregards fundamental human rights, including the right to property. Despite a wealth of views on the effectiveness of confiscation, the literature is mainly silent concerning its interaction with banking confidentiality laws in offshore financial centers. This book seeks to fill the gap by bringing together these important areas of banking and economic crime.

Money laundering and its complexities, including its interaction with the legitimate global financial system, have attracted significant academic attention in literature (Lilley,²⁵ Muller et al,²⁶ Verhage).²⁷ Notably, the criminologist Walker²⁸ provides a comprehensive model for estimating the amount of money laundered in any given country, corroborating Solomon’s²⁹ hypothesis that offshore financial centers attract laundering activity. He identified as part of his ‘seven steps’ Walker model the ‘attractiveness’ scale of the Cayman Islands, and ranked it higher than the Turks and Caicos Islands (a fellow Overseas Territory of the UK), highlighting that traditionally safe financial havens are still the most popular to launder money in.³⁰ Noting that the higher the score, the more generally attractive a country is to money launderers, Walker’s model scores the Cayman Islands at 600 (with the highest ranking country – Luxembourg – scoring 686). For money launderers, the Caymans are the fourth highest attractive destination in the world. However, as Walker notes, the high ranking of the Cayman Islands on the money laundering index does not necessarily reflect poorly on a jurisdiction’s banking regime, but it is an indication of the country providing a secure environment for investments and a ‘benign environment’ for money launderers.³¹ It is paradoxical that Walker’s findings based on a simple formula calculated from publicly available information, are for a jurisdiction that the International Monetary Fund concludes, ‘has been a leader in developing anti-money laundering programs throughout the Caribbean region’.³² Though, in theory, the Caymans have the anti-money laundering legislation on paper, it is clear that it is not implemented effectively because the country continues to remain a top destination for money laundering activity. Walker’s model, which also has the blessing of Unger,³³ is significant for the research of this book as its main argument assumes the general correctness of the model, for example that strong banking confidentiality is one of the drivers of money laundering.

Similarly, much has been written on how strict banking confidentiality is conducive to money laundering, especially by international bodies including the World Bank,³⁴ Financial Action Task Force³⁵ and Caribbean Financial Action Task Force,³⁶ but the literature is mainly silent concerning the impact of banking confidentiality on confiscation law in offshore financial centers. The interaction between the ...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Contents
• Table of cases
• Table of legislation
• Table of conventions
• Table of international agreements
• Abbreviations
• Preface
• Acknowledgements
• 1 Introduction
• 2 Confiscation: Justifications and competing interests
• 3 International law
• 4 Regional law
• 5 Case study: The Cayman Islands
• 6 Tackling strong banking confidentiality to strengthen confiscation
• 7 Conclusion
• Bibliography
• Index