Standards? Make Mine a Double!

In early 2006, Gibraltar underwent its second review by the International Monetary Fund (IMF), undertaken as part of its ongoing assessment of Offshore Financial Centres (OFCs). Gibraltar was one of the first OFCs to take part in the second round of assessments, with other centres participating over the coming months.

The report, published on 21 May, 2007, and available on both the IMF and Gibraltar Financial Services Commission websites, is extremely positive. It establishes that in the area of banking supervision, Gibraltar is fully compliant with 27 out of the 30 applicable international standards, and largely compliant with the remaining three. This is matched by 24 "observed" and three "largely observed" out of 28 applicable standards for insurance supervision. The remaining insurance standard out of the 28, which scored as "partially observed", relates to market statistical data.

The findings of the IMF report show that there is no difference in the quality of regulation between leading OFCs and leading onshore centres, and this looks set to be echoed in future reports for other leading smaller international finance centres. This in fact mirrors the IMF conclusions from the first round of its assessments, when it commented,

"Two distinct groups were identified by the assessments [of OFCs]: the larger, more important centers, which have supervisory systems comparable to advanced onshore jurisdictions; and the smaller and poorer jurisdictions, which have significantly weaker supervision".

Indeed, a review of the second round reports published to date continues to show a marked difference between centres' levels of compliance with international standards. For example, a recent IMF report of one centre found the level of compliance with the International Association of Insurance Supervisors (IAI S) standards to be two "observed", five "largely observed", 16 "partially observed", and four "not observed".

In short, the IMF assessments demonstrate that the current definitions of 'onshore' and 'offshore' are meaningless, and often misleading, because the two cannot be distinguished by either activity or quality of supervision.

Centres that are deemed 'offshore' are not some sort of homogeneous mass. In fact, they are often marked more by their differences rather than their similarities. Some are members of the international bodies that set the standards by which they are judged, others are not. Some, through their membership of the European Union, must comply with all EU directives, and thus have access to the Single European Market. Some have established expertise in a particular market (for example, insurance), which is vastly more important in marketing the jurisdiction than any alleged 'offshore' advantages.

The term "Offshore Finance Centre" (OFC) itself is fundamentally flawed. If Jersey is 'offshore', then so are London and Dublin. Whilst attempts have been made to define OFCs in a non-pejorative way, they have not been successful; if you define OFCs negatively by referring to banking secrecy and low-quality regulation, then the leading 'offshore' centres today clearly do not fit the definition.

Yet, despite this fundamental failing, the process of a segregated IMF review continues.

Nevertheless, this does not mean that I do not think that the review of Gibraltar by the IMF brought some worthwhile results. Clearly there are benefits, and for these we are grateful. The team that assessed Gibraltar was skilled and constructive, and I support the process of regular independent assessments. On the other hand, my concern is that by basing the review process on a rather vague and negative view of what constitutes 'offshore', OFCs are immediately rendered in the eyes of some as fairly 'second class'.

So, what is the point of the current review process? Following on from the simplistic analysis of OFCs by the Financial Stability Forum (FSF) in 2000, the original purpose of the IMF review is based on the presumption that these centres are generally uncooperative, poorly regulated, and therefore a potential threat to the global financial system. What has been indisputably found since is that, while individual centres may have those failings, they are not intrinsic of OFCs as a whole.

In truth, the IMF's aim must be to identify and assist those jurisdictions that do represent such a threat, regardless of whether they are 'on' or 'offshore'. Indeed, the IMF already seeks to do this in respect of its member countries via its ongoing Financial Sector Assessment Programme (FSAP).

Therefore, if the aim is to identify those jurisdictions that otherwise would be missed from the IMF's surveillance because they are neither members of the IMF nor dependencies of members, then why not refocus the process to reflect this aim? This would remove the need for subjective labelling such as "Offshore Financial Centre". A resultant list of those to be assessed, which would comprise of non-IMF members and dependencies, would be clear and unambiguous.

Yet, by itself, such a change would not be sufficient. The IMF must also prioritise those centres that have either under-performed in their previous reviews, or over which the IMF has specific concerns. The simplistic rotation of all centres in a review cycle is a waste of resources, both within the IMF and the jurisdictions concerned.

Virtually all modern regulators use a process of risk assessment to determine where they need to focus their resources, and onsite visits are then scheduled accordingly. In the case of Gibraltar, we generally operate on a one, two or three-year cycle. However, others operate on different periods and indeed, some choose not to visit licensees that, because of their size or high level of compliance, do not present a material risk.

The IMF must move to a similar approach. Some centres are simply too small to have an impact on international financial stability. For example, it is difficult to see how Samoa, with four domestic banks (the largest two of which are subsidiaries of major Australian banks) and six international banks (with total assets of about $112 million) can pose a threat to the world economy.

Others have regulatory environments better than the vast majority of IMF members. Therefore, these too can be reviewed over a longer cycle.

Surely, in order to minimise their threat to global financial stability, it is sensible to focus efforts on those of material size but which lack the necessary level of regulatory compliance.

However, a lack of adequate risk assessment is not simply a resource issue. The failure to firmly distinguish between centres, thereby prolonging the 'offshore' myth, often leads to what some would consider a biased approach by some international bodies (although this cannot be said of the IMF, which has maintained a level of objectivity throughout).

The Financial Action Task Force (FAT F) initiative against Non-Co-operative Countries and Territories (NCCTs), which began in 2000, is still used as an example of the international community's concern regarding 'offshore' centres. It is true that 12 of the 15 jurisdictions originally named in the first round were OFCs. Yet, the second round listed Egypt, Guatemala, Hungary, Indonesia, Myanmar and Nigeria, none of which are OFCs. Notably, the last two of these were the most recent countries to be de-listed.

Whilst there are currently no NCCTs, the list does remain open for additions. However, the extent to which it will be used and against whom remains a moot point.

If, for example, a designated 'offshore' centre had received a FAT F assessment as condemning as that of Greece (a FAT F member) this year, then there is little doubt that it would have been in danger of being placed on the NCCT list. Had the FAT F levied comments against an OFC such as, "in general, it appears that the money laundering offence is not effectively implemented", and "the preventive system that deals with customer identification is generally insufficient and not in line with the international standards", it would no doubt have been used to yet again prove how underregulated the offshore environment is.

Please note that I am not criticising Greece, but merely using it as an illustration of the double standards that continue to be applied in the assessment process. And this is not the only example of such impartiality. Whilst alleged weakness in their anti-money laundering regimes has also been cited as the reason for the international focus on OFCs, it is clear from the FAT F's own reviews that the leading centres are not the 'sink-holes' for such activity. Indeed, if the asserted level of money being laundered each year is credible, it is impossible for OFCs to be the major location of such activity, as they are simply not big enough.

As a result of this labelling, reputable, well regulated centres with internationally respected anti-money laundering regimes suffer ill-informed criticism simply because they have been deemed by an arbitrary process to be 'offshore' and therefore considered 'risky'.

Similarly, since its 2000 report, the FSF has repeatedly asserted that many OFCs have initiated significant reforms in response to the FSF initiative and the IMF assessment programme. This implies that had it not been for the FSF initiative, OFCs would have remained rogue centres. This is palpable nonsense.

Whilst FSF may be able to claim some credit for 'dragging' a few centres into compliance, the leading ones were already compliant, or at least well on their way to becoming so. To them, the FSF review was an irrelevance.

Perhaps by the time this article is published (it has been written at the end of July 2007), the FSF will have, at last, updated its view of OFCs. This hope rests on the fact that the FSF is to undertake a review of its OFCs initiative, to be discussed at its meeting in September 2007. The hope is that it will at last realise that categorising places as 'offshore' and grouping them as if they are alike makes as much sense as grouping a collection of countries together because their names begin with the letter "P". Somehow, regretfully, I doubt it

Marcus Killick OBE
Marcus is Chief Executive Officer at ISOLAS LLP and is a retired English Barrister and member of the New York State Bar as well as a Chartered Fellow of the Chartered Institute for Securities and Investments. Prior to joining ISOLAS, Marcus was Chief Executive Officer of the Gibraltar Financial Services Commission. Marcus also sits as a non-executive director on a number of boards including the Gibraltar International Bank and BetVictor. He is also a non-executive member of the Independent Monitoring Authority set up to safeguard EU citizens’ rights in the UK and Gibraltar post the UK leaving the EU. Marcus was awarded the OBE in the 2014 New Year’s Honours List.