FATF Told: 'Physician, Heal Thyself'

Tax-News.com, London

31 October 2002

In its latest issue, The Economist says that if the Financial Action Task Force (FATF) is to have a real impact on money-laundering, 'it will need to tackle not just the
usual, small island, suspects, but some of its most powerful members. The Economist quotes the study recently carried out by law firm Stikeman Elliott and co-sponsored by the Society of Trust and Estate Practitioners (STEP), noting that these "powerful members" include the US states, where holes in anti-money laundering regulations are undermining FATF efforts.

The study, Towards a Level Playing Field, reveals that while the FATF argues for tighter regulation of "corporate vehicles" worldwide, corporate domiciles such
as Delaware and Nevada in the USA are excused from compliance with new rules to regulate service providers and track beneficial ownership.

The Economist also highlighted a report by America's General Accounting Office in 2000 "which concluded that it is easy for foreign entities to hide their identities in Delaware shell corporations and launder money". The Economist notes that Senator Carl Levin of Michigan, who asked for the report, said at the time that although America criticises other countries for allowing the creation of corporations with secret ownership, "we are basically doing the same thing".

Colin Sharp, STEP Worldwide Chairman, says, "International crime is a global problem which requires global solutions. Our members worldwide find it incomprehensible that they have to bear more onerous and costly obligations than competitors in some US states. Unless we have a level playing field this partial approach will only achieve partial results, and in the short term, business may flow from well regulated centres to less stringent ones. In the long-term international financial centres which do not bring themselves up to global standards face considerable reputational risk".

Richard Hay, who headed Stikeman Elliott's report team, says, "The FATF has made important contributions to improving the regulation of companies. However, service providers in FATF Member countries, particularly the U.S., still sell corporate shells around the world with no questions asked about beneficial ownership and no requirements to track financial statements. The FATF must seek even and comprehensive application of new rules to all jurisdictions, to achieve its own
goals."

In November 2001, an OECD report, Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes, called on governments and regulatory authorities to ensure they were able to obtain information on the beneficial ownership and control of "corporate vehicles" in order to combat their misuse for illicit purposes. The report has proved influential and is being actively used by the FATF, which tackles international money laundering. However, it has two major failings: it was prepared without involving countries outside the OECD; and it focuses on corporate vehicles in non-OECD countries while largely ignoring those in OECD countries which are vulnerable to misuse, such as Delaware limited liability companies. OECD member countries control approximately 80 per cent of the global trade in financial services provided to non-residents.

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