OECD, FATF, FSF & the EU – lawyer
Offshore Financial Centres:
OFCs’ Response to recent International Initiatives
2002 Dr Jean-Philippe Chetcuti. All Rights Reserved.
INDEX
2. A changing scenario international upheaval
OECD and Harmful Tax Competition
Attempts to regulate the use of offshore facilities on a case-by-case basis has generally been thwarted by the internationalisation of the modern commercial world, the enhanced mobility of individuals and the growing complexity of the offshore world. The onshore world has, in the last few years, undertaken to augment challenges to specific regimes with a huge confrontation on the set of laws and services commonly accessible in the offshore setting. Presently, compromise of the sovereignty of the offshore country is seen as a suitable way to induce observance of the regulatory procedures and fiscal strategies perceived as adequate by the high tax states. [17]
OFCs have been highly criticised by multinational organizations and high-tax jurisdictions alike. The term tax haven has been amply and indiscriminately used, referring tax jurisdictions with no or only nominal effective taxes, with an absence of effective exchange of information, with a marked lack of transparency and characterised by the absence of real activities carried out by the entities incorporated therein.[18]
The basis for criticism of OFCs is threefold. Primarily, the sharp increase in money transferred to OFCs and the consequent loss of income to high tax jurisdictions. Secondly, bank secrecy and confidentiality rules which conceal indications of tax evasion and money laundering.[19] Thirdly, there is the ever-present unease that the enormous quantity of capital being placed offshore will lead to an enhancement in instability in the worlds financial system.[20]
Table of Contents
Reports Issued by the OECD
Initiatives undertaken by the OECD in the ambit of taxation, have had a major impact on OFCs. In 1998, the OECD published its report on harmful tax competition.[21] This report set out the criteria for determining harmful tax practices and presented recommendations for fighting such harmful practises. The OECD progress report on harmful tax competition and practices was issued in the year 2000. This latter report updated the previous work and identified 35 tax havens and 47 potentially harmful preferential regimes.[22]
The report[23] has four main parts:
n The first part categorizes harmful tax practices among OECD MSs and establishes a deadline by which these MSs must alter or give up particular practices to keep away from sanction;[24]
n The second section characterises and lists harmful tax haven jurisdictions;[25]
n The third is an attempt to incorporate non-OECD members in the attempt to fight tax havens; and
n The fourth encourages OECD members to assume specific practices regarding uncooperative tax havens. [26]
Countries listed in the OECDs list of tax havens are roughly 30 OECD members were encouraged to adopt measures including,
n the disallowance of deductions, exemptions, and credits connected to dealings with uncooperative tax havens;
n the improvement of audit and enforcement activities as regards unaccommodating tax havens; and
n the imposition of transactional charges on certain transactions involving uncooperative tax havens.
Effect of the OECD Report
The OECDs black list of harmful tax havens was primarily intended as a warning to the countries listed therein. Bermuda, Cayman Islands, Cyprus, Malta, Mauritius, and San Marino signed advance commitment letters and hence, escaped blacklisting. In these letters of commitment, each pledged to do away with the tax practices regarded as harmful in their own jurisdictions.[27] Widespread criticism followed the OECD report on harmful tax practices. The BIAC contends that tax competition between different countries is nothing but positive: it encourages governments to be efficient.[28] Furthermore, it contended that if adopted, OECD sanctions would create a cartel-like atmosphere that would be in clear conflict with the concept of free trade and investment across national frontiers.[29] In fact, it has been claimed that:
The OECD is essentially a cartel consisting of the worlds richest countries, most of which are high-tax jurisdictions … most OECD member states are guilty of egregious unfair tax competition that is much more serious and harmful than that of which the OECD is complaining. These activities have been conveniently ignored in the OECDs self assessment of harmful activities by its own members.[30]
OECD MSs, Switzerland and Luxembourg, also refrained from partaking in the report because of similar practices in which they offer bank secrecy and tax shelters to foreign investors.[31]
The OECD supports its list by reiterating that by merely being a low tax state, sanctions would not automatically result. For such nominal taxes to have a negative effect, the low or nominal tax percentage must come with no effective exchange of information, or lack of transparency or no substantial activities.[32] The OECD maintains that their plan is to prevent non-cooperation with tax legislation, or to put it in the vernacular, it is directed against tax cheats.[33]
The FATF[34] assembled a primary list of 15 jurisdictions whose policy for combating money laundering demonstrated severe shortcomings.[35] It issued 40 recommendations in 1990 serve as a guide to international financial regulation and supervision.[36] Its main aim was to thwart money-laundering and it issued a set of 25 criteria to determine whether a jurisdiction has adequate safeguards against money laundering.[37]
FATFs 25 Criteria
The list of criteria is divided into four broad categories:
1. loopholes in financial regulations, including: inadequate regulations and supervision of financial institutions; inadequate licensing rules, inadequate know-your-customer rules and excessive confidentiality;
2. obstacles raised by other regulatory requirements, including: inadequate commercial law for registration of business and legal entities; lack of identification of beneficial owners;
3. obstacles to international co-operation, including: obstacles by administrative and judicial authorities;
4. inadequate resources for preventing and detecting money laundering activities.
By means of these criteria, 15 OFCs were classified as non-cooperative.[38]
The Response to the FATF List
Initially, the response was varied. Even though many OFCs showed concern about the process of assessment, yet no rebelliousness similar to that in response to the OECD list was manifested. This might have been due to the fact that removal from the list did not entail an unlimited pledge to the scheme in question, as in the case of the OECD requirements. Worthy of note is also the fact that metropolitan jurisdictions gave strong support to the FATF list and these onshore jurisdiction were more than ready to act upon the FATF document. Therefore, OFCs did not have much choice but to abide by its propositions. [39]
The UN Office for Drug Control and Crime Prevention[40]concerns itself mainly with the abuse of OFCs for criminal purposes.[41] In March 2000, the Offshore Forum of the UN invited around 30 OFCs to the Cayman Islands to approve a number of internationally acknowledged minimum principles on regulation and supervision of OFCs and on fighting money laundering. During December 2000, 124 countries also became signatories to the UN Convention on Transnational Organized Crime[42]which seeks to reinforce the authority of governments in the fight against serious crimes. It is envisaged that the Convention provides the foundations for stronger mutual assistance in the fight against money laundering, better ease of extradition, and measures on the safety of witnesses and improved judicial assistance.[43]
Europe
In 1991, the Council of Europe enacted the Convention on Laundering, Search, Seizure and Confiscation of Assets[44] which has turned out to be the major international convention that obliges signatory states to collaborate against the laundering of income derived from all serious criminal offences. The EU is a signatory to the Convention. It amalgamated the Convention to its own initiates to combat financial crime and issued the 1991 Anti-Money Laundering Directive.[45] The EU is also examining the activities of organized crime in OFCs and their dangers to the EU financial system.[46]
The FSF[47], inter alia, investigated the threats that could be potentially posed by OFCs on international financial markets. Its report found deficiencies in the regulation and supervision of various OFCs. Its study was based on the identification of around 70 OFCs, which it divided into three Offshore categories.[48] The IMF has also carried out work in the field of Offshore Banking.[49] It received its mandate from the FSF to study the listed states in connection with their observance to internationally acknowledged principles in the area of financial market regulation and supervision. 
3. Adapting to the new international legal order: a comparative study
See also:
From offshore to onshore: