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Over-Regulation Is Damaging Offshore Centres, Says Report

by Jason Gorringe,, London

20 September 2006

The Society of Trusts and Estates Practitioners says that small offshore financial centres are suffering financially because of the burden of international rules aimed at combating money laundering, terrorist financing and tax evasion, according to a new study.

Taking the case studies of Barbados, Mauritius and Vanuatu, the report reveals that offshore centres have lost business in spite of improving their reputations by complying with standards drawn up by the Organisation for Economic Co-operation and Development and the inter-governmental Financial Action Task Force. The costs of compliance substantially outweigh any benefits to their reputation.

The financial sector is an important source of government revenue for many small Commonwealth member states, which lack alternative development options.

The report, “Developmental Implications of Anti-Money Laundering and Taxation Regulations”, was commissioned by the Commonwealth Secretariat’s Economic Affairs Division to summarise the findings of a larger Project, "Developmental Implications of Recent International Taxation and Anti Money Laundering/Countering the Financing of Terrorism (AML/CFT) Initiatives”.

Commonwealth Finance Ministers discussed the study at their meeting in Sri Lanka last week. They accepted that compliance costs could be particularly heavy for small, developing finance centres. They also accepted that small countries needed to be more included in setting international standards and promised to explore the issues further

Richard Hay, Co-Chair of the International Committee of the Society of Trust and Estate Practitioners, comments: "Small countries' offshore centres are suffering from disproportionate compliance costs and are gaining little advantage from being good global citizens. The OECD has said that, in return for compliance, small countries will be able to participate in global financial services on a 'level playing field', yet this is not happening. They are not getting the recognition their compliance merits.

"Indeed, small states are actually losing business to offshore centres in large countries that won't raise their own standards. For example, as the Financial Action Task Force (FATF) reported this July, virtually every US state still permits tax-free companies with secret ownership. The FATF revealed that US service providers have successfully lobbied against raising standards, while Delaware actively promotes itself as more secretive than so-called offshore centres.

"If the efforts to raise standards are to succeed, these must apply evenly to large and small countries. Dominant countries, including those in the Commonwealth, must also share market access opportunities with those small states that meet higher standards.

The communiqué issued by Commonwealth Finance Ministers at the conclusion of their meeting in Colombo, Sri Lanka on 13-14 September 2006 states: “Ministers discussed the impact of international rules on AML/CFT and taxation on small Commonwealth International Financial Centres. They recognised the essential role such rules play in all financial centres in combating financial abuse in all forms. They also recognised the costs of compliance with relevant international standards and rules, which can be particularly heavy for some small developing financial centres. They called for a more inclusive process in setting these standards, and the need to explore further the resulting issues many small jurisdictions face".

“Small states will be watching closely to see how Commonwealth ministers turn their words into action," said Mr Hay.

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