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The Effects Of US Anti-Terrorist Law On Offshore

by Mike Godfrey, Tax-News.com, New York

06 November 2001

Professor David Hardesty, publisher of E-Commerce Tax News, considers in his latest issue the question of the impact of the new US anti-money laundering legislation on offshore jurisdictions and offshore e-commerce.

Under the dramatic headline: 'Will Offshore E-Commerce Survive Anti-Terrorism', Professor Hardesty analyses the The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act 2001.

'Inside the anti-terrorism bill,' says the Professor, 'are many provisions directed at offshore financial institutions. Long a target of US investigators in both the Justice and Treasury Departments, these institutions can now be forced to yield information, or face being cut off from the US financial system. What will be the effect on offshore e-commerce if bank secrecy falls victim to the new war on terrorism?'

In fact, there is very effective banking secrecy in the US, among other large economies, except when suspicious transactions take place, and the banking laws of many offshore jurisdictions are equal to if not superior to 'onshore' banking laws in respect of the reporting and investigation of suspicious transactions.

New rules applying to US banks were considerably watered down during the passage of the Act, and the close connection between banking secrecy and low taxation contained in the original wording of the bill was removed as a result of lobbying from the Centre for Freedom and Prosperity and others.

Under the Act, says Professor Hardesty, the U.S. Treasury Secretary can require U.S. banks to make available records on transactions with foreign institutions. The information sought by the Treasury Secretary includes such things as the identity of the beneficial owners of foreign accounts. This will require U.S. banks to acquire information they have never asked for before. True, but as he goes on to say, this enhanced reporting is not aimed at all foreign institutions, but only applies to those foreign jurisdictions, foreign financial institutions, or classes of international transactions that are deemed to be of primary money laundering concern.

The provisions of the original bill ordered US banks to trace the origins of assets in all accounts handled on behalf of foreign banks. However, protest from the banking sector caused this to be amended to dealings with foreign banks which the Treasury department believes to be suspect.

Another watered-down proposal saw enhanced due diligence on all correspondent banking relationships reduced to increased monitoring of correspondent accounts held in 11 countries which the Treasury Department has designated high risk areas for money laundering.

According to Alvin James, a former Treasury investigator, and current head of Ernst & Young LLP's money laundering advisory unit, these changes have effectively rendered the provision toothless, as the amount of business that US banks undertake with organisations in 'suspect' countries is negligible.

'In determining whether there is a primary money laundering concern,' continues Professor Hardesty, 'the U.S. Treasury Secretary is supposed to consult with the Attorney General and the Secretary of State, and is required to take into account a number of factors. These factors include, among other things:

  • Whether criminal groups or international terrorists have transacted business in a jurisdiction;
  • The existence of bank secrecy or special regulatory advantages for nonresidents or nondomiciliaries;
  • The quality of bank supervisory and counter-money laundering laws;
  • The extent of official or institutional corruption;
  • Whether a jurisdiction has been labeled an offshore banking or secrecy haven by international organizations; and
  • Whether the United States has a mutual legal assistance treaty with the jurisdiction; and the success law enforcement has had in obtaining information.'

These criteria are not identical with the 40 recommendations of the FATF, but they are close to them, and the leading echelon of offshore jurisdictions, including such important banking countries as the Bahamas, Jersey and the Cayman Islands are aiming to reach conformity with the FATF's recommendations in order to get off or stay off its list.

Professor Hardesty says: 'If a foreign financial institution refuses to provide information sought by the US government, that institution can be cut off from the US financial system. For instance, if an institution maintaining a correspondent account in the United States does not comply with a summons or subpoena, either the Secretary or the Attorney General can require that the correspondent account be closed.

'The impact on foreign financial institutions, especially those operating in jurisdictions that impose strict bank secrecy, is a real question. What will foreign banks do? Already, some in Switzerland have said that their bank secrecy is not negotiable. If a U.S. Treasury official issues a summons for records, what will happen if banking rules in the foreign jurisdiction prohibit compliance? Will the Treasury Secretary and Attorney General act to cut off a major bank from the U.S. financial system?'

But banking secrecy is not incompatible with FATF conformity. More crucial are the presence of a Financial Intelligence Unit, the effectiveness of Mutual Assistance Treaties, and the willingness of the authorities to pursue reports of suspicious transactions from banks and other money-handling organisations. In these respects, Switzerland, along with some other leading offshore jurisdictions, stacks up well against, for instance, the US.

So Professor Hardesty may be worrying too much on this occasion. 'Offshore' has survived apparently fatal challenges before, and will no doubt do so again. Far from being dented by the current post-September 11th furore, a low-tax jurisdiction which succeeeds in conforming with the FATF's requirements is in a better-than-ever position to compete against the high-taxing megaliths of the OECD, as witness the flood of capital racing towards Bermuda to take advantage of newly-strengthened insurance rates in a low-tax environment.

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