Offshore Financial Centers.

Advances in communications technology are making the world a smaller place to do business. A simple mouse click can transfer millions of dollars to the next hemisphere in an instant. As a result, no longer do international borders stand as barriers to criminals who engage in international fraud and money laundering. In fact, they use them to their advantage. To keep tenacious investigators at bay, fraudsters execute their scams in multiple foreign jurisdictions simply to exploit the difficulties that local law enforcement officers often encounter when dealing with other countries.

The Channel Islands and the Isle of Man 

Because fraud investigations progress by tracking the money involved, the trail frequently leads to, or passes through, a foreign country. Therefore, the global law enforcement community must respond to the technological advances used by criminals engaged in these activities by actively developing greater cooperation among foreign authorities. This requires the establishment of effective gateways for the timely exchange of information and delivery of assistance.

THE CHANNEL ISLANDS AND THE ISLE OF MAN CONNECTION

Most experienced fraud investigators view the Channel Islands and the Isle of Man [1] as loosely regulated tax havens immune to inquiries from foreign authorities, which make the Islands the choice of criminals to launder their illegal gains. However, two recent reviews of the Islands' financial and legal sectors provide evidence to the contrary. The consensus of these reviews found that the Islands have a well-regulated financial industry, money laundering legislation in place, and a demonstrated willingness to cooperate with and provide assistance to foreign authorities. [2]

In the last 15 to 20 years, the Islands have blossomed as offshore financial centers due, in part, to their proximity to the United Kingdom, low taxes, and overall economic and political stability. What is an "offshore" financial center? Simply, it is any financial center that provides financial services for a substantial number of nonresidents.

Geographic and Historical Aspects

Where are the relatively obscure Channel Islands and their even lesser-known cousin to the north, the Isle of Man? The Channel Islands comprise the islands of Jersey and Guernsey, well known for their two unique breeds of cattle, which bear the islands' names, their fine agriculture and horticulture produce, and beautiful scenery. Located in the English Channel, the Islands lie approximately 13 miles from the northern coast of France and about 85 miles from the southern coast of Great Britain.

The Bailiwick of Jersey comprises the island of Jersey and a few uninhabited islands and covers approximately 45 square miles in surface area, with a resident population of approximately 85,000. The Bailiwick of Guernsey includes the two smaller islands of Alderney and Sark. Guernsey has a surface area of just over 25 square miles, Alderney approximately 3 square miles, and Sark slightly more than 2 square miles. The entire Bailiwick of Guernsey has a resident population of approximately 62,000.

The Isle of Man is centrally located in the Irish Sea between Northern Ireland and Great Britain. The topography ranges from vast stretches of open moorland to thickly wooded glens. A central range of mountains traverses the island from the northeast to the southwest, together with valleys leading to rocky cliffs and secluded bays. The island measures 33 miles running north to south and 13 miles from east to west for a total surface area of 227 square miles, making it 5 times larger than Jersey and 9 times the size of Guernsey. The island's resident population stands at approximately 73,000.

Local history of the Channel Islands is steeped in the memory of invasions and attempted conquests. Along the coast, gray concrete World War II bunkers and fortifications contrast with old castle turrets and towers remaining from the Napoleonic wars and medieval times. The Normans added the Channel Islands to their duchy in 933. In 1066. Duke William of Normandy successfully invaded England and became King William I of England. When King John of England lost control of his possessions on mainland France in 1204, the Islands remained loyal to the English Crown and have been English dependencies since that time. The Islands have enjoyed seven centuries of self-government, but still retain some relics of the French-Norman language and law.

The Isle of Man can trace its history from the introduction of farming in the fourth millennium B.C. through the Manx Iron Age (from 500 B.C. to 500 A.D.) and the Celtic traditions to Christianity and the Viking rule of the ninth century. Rule of the territory alternated between England and Scotland, and less frequently Ireland, during the thirteenth to fifteenth centuries. Throughout the years, the Isle of Man developed its own unique culture. Although spared the Roman and Norman invasions, the Vikings left lasting impressions, such as the island's parliament, known as the Tynwald, the oldest governing body stretching back over 1,000 years. [3]

Administrative Authority

Since the emergence of the European Union (EU), whose members (with the exception of the United Kingdom) recently adopted the "Euro" as a common currency, the Islands have faced increasing pressure to adopt effective money laundering legislation, broaden their efforts to cooperate and assist with foreign inquiries, and implement financial regulations similar to the United Kingdom and other EU countries. Most of the EU countries are members of the Financial Action Task Force (FATF), established at the 1989 economic summit in Paris, France. The FATF is a multinational group that develops and promotes policies and procedures to combat international money laundering. By 1997, all 26 FATF members enacted money laundering legislation in accordance with FATF recommendations, which set forth international standards for money laundering legislation and financial industry regulation. [4]

However, because the Islands are dependencies of the British Crown, they cannot participate fully as members of the EU and, therefore, do not consider EU directives on such issues as tax harmonization as binding upon them. Their constitutions allow them the independence to govern their own affairs. While the United Kingdom remains responsible for the Islands' international affairs and for their defense, the Islands have autonomy over their domestic affairs, including taxation. Furthermore, because the Islands are not part of the United Kingdom, the Mutual Legal Assistance Treaty (MLAT) between the United States and the United Kingdom and Northern Ireland does not apply to them.

EU pressure to create a more "level playing field" remained on the United Kingdom and, by extension, on the Crown Dependencies. In January 1998, due, in part, to EU pressure, the United Kingdom Home Secretary, a Justice Minister equivalent, commissioned a review of the laws, financial regulatory systems, and methods for combating financial crime and cooperating with foreign jurisdictions in the Islands. This review culminated in a four-volume report issued in November 1998. [5]

Because the Home Secretary commissioned the report without any prior consultation with the Islands, the report's anticipated release caused some anxiety for Island officials. But, despite the controversy generated by the United Kingdom's imposed review, the conclusions drawn by the report proved positive. The report concluded that the Islands, "...have infrastructures of legislation, judiciary, prosecution, regulation, and law enforcement, mostly based on United Kingdom models, which for the most part are extremely good for such relatively small jurisdictions. In many areas they have cooperated well, sometimes remarkably so, with the authorities of other countries in the pursuit of crime and regulatory breaches." [6]

Financial Profile

The Islands' financial industry includes banking investment, as well as insurance and trust companies. Total bank deposits on the Islands (resident and nonresident) currently consist of around 170 billion pounds (Jersey, 100 billion; Guernsey, 50 billion; and Isle of Man, 20 billion pounds). [7] By comparison, nonresident deposits held in the United Kingdom total approximately 1 trillion pounds. [8] The independence of the Islands also has enabled them to provide considerable tax advantages to their customers. For example, corporate and personal tax rates generally are 20 percent on all of the Islands as opposed to tax rates in the United Kingdom and Europe, which can vary from approximately 30 to 50 percent. [9] This proves unsurprising because the Islands have no international debt, a simple tier of government, low unemployment, and a low-cost infrastructure.

Jersey has the largest banking sector of all of the three islands, while Guernsey constitutes a major center for captive insurance companies. The Isle of Man has a relatively large life insurance and commercial insurance sector, with smaller investment and banking sectors.

The financial industry in Jersey represents approximately 55 percent of this island's economy, whereas in Guernsey, it represents approximately 60 percent. [10] In the Isle of Man, the financial industry accounts for approximately 37 percent of this island' s economy. [11] Finally, Jersey and Guernsey each has a Financial Services Commission designated as regulators of the financial industry, while the Isle of Man has the Financial Supervision Commission.

Global Cooperation

Over the years, the FBI legal attache [12] in London has enjoyed excellent cooperation with the law enforcement agencies from the Islands. In recent years, a growing number of U.S.-initiated fraud and money laundering investigations, with a nexus to the Islands, have ensued. Furthermore, the Islands have adopted new legislation, which requires financial institutions to report any suspicious activities to the police and creates criminal statutes for money laundering offenses. Former legislation required disclosure only when suspicious activities related to drug trafficking or terrorism.

More frequently, the Islands play a role in large-scale international fraud investigations. While these localities offer a variety of legal, legitimate, and prudent business and tax advantages, these same attributes often attract the more unscrupulous or criminal element. For example, in the Islands, nominee directorships represent an area under considerable scrutiny. Essentially, nominee directors often serve as the directors of so many companies that it proves impossible for them to have detailed knowledge of any individual company's business activities or monetary transactions. Nominee directors generally receive a fixed annual fee as a director for each company. Usually, nominee directors have no knowledge of the company's true beneficial owners. This problem exists primarily on the island of Sark in the Bailiwick of Guernsey. This island has a total resident population of approximately 575; however, directorships held by Sark residents total approximately 15,000.

Sark residents enjoy a unique tax position together with perceived secrecy. These attributes have created a situation where companies incorporated in other jurisdictions seek Sark's residents as directors. In recent years, the practice has expanded, with many residents participating in what has become a lucrative business. Some individuals hold in excess of 1,000 directorships. In addition, some residents also supply accommodation addresses, fax and telephone services, and company administration. Most Sark directors have no knowledge of what their companies do nor do they know the identities of the companies' true beneficial owners. The actual running of the company is performed by a company administrator. [13] To address this problem, the legislative assemblies in the Bailiwick of Guernsey have approved, in principle, legislation that will impose regulation of fiduciaries, company administrators, and company directors. The proposed legislation will require the registration of all company directors, implement regulatory oversight, and impose a specific "know-your-customer" regimen. In November 2000, by authority of the Tynwald, the Corporate Services Providers Act 2000 came into force in the Isle of Man. Similar to Guernsey's response, this act brings company services providers under the supervision of the Financial Supervision Commission, the island's financial regulator. Company services providers now must be licensed and adhere to a set of guidelines governing "good practice" and "know your customer."

Formal Assistance Requests

If U.S. law enforcement agencies, whether local, state, or federal, should require investigative assistance from the Islands, they should contact the Office of International Affairs (OIA), Criminal Division, U.S. Department of Justice (DOJ) in Washington, D.C. [14] The OIA-DOJ represents the Central or Competent Authority for the United States, and all requests seeking foreign assistance are transmitted through this office. Likewise, a foreign Central Authority responding to a formal request will submit its response to OIA. Upon receipt, OIA will forward the information or evidence to the U.S. prosecutor initiating the request.

Typically, requests to the Islands are made in the context of "letters rogatory." Letters rogatory, or diplomatic requests, constitute the method by which one country requests assistance from another where compliance by the requested country may require use of the foreign court's compulsory process. Requests for bank or business records or the testimony of a witness may require the foreign court to issue a compulsion order to satisfy the request. The United States uses letters rogatory to request assistance from any country that it does not have an MLAT with or in instances where the MLAT does not cover the offenses involved.

An MLAT represents a type of bilateral agreement. The United States has entered into MLATs with a number of countries. While these treaties provide the formal mechanisms for the execution of requests submitted to obtain information, documents, and assistance in locating and repatriating assets, they relate only to crimes addressed by a specific MLAT. For example, the MLAT between the United States and the United Kingdom and Northern Ireland creates procedures to provide mutual assistance in--

* taking the testimony of persons;

* providing documents, records, and evidence;

* serving documents;

* locating or identifying persons;

* transferring persons in custody for testimony;

* executing requests for searches and seizures;

* identifying, tracing, freezing, seizing, and forfeiting the proceeds and instrumentalities of crime and assistance in related proceedings; and

* providing any other assistance that Central Authorities may agree upon.

The requested country is not obligated to respond, but usually does so as a matter of comity.

Police-to-police Network

Following the first review of the Islands' financial industry in 1998, another outside evaluation occurred in the spring of 1999. The FBI legal attache in London and the Financial Crimes Section at FBI Headquarters coordinated this review from a law enforcement perspective. Welcomed by law enforcement and government officials from each island, the States of Jersey Police, Commercial Branch; the Guernsey Police Fraud and Financial Investigation Unit; and the Isle of Man Fraud Squad all made significant contributions in this effort to improve law enforcement cooperation in the global fight against fraud and money laundering.

The review centered on developing an in-depth understanding of the Islands' offshore financial industry and the local government's legal and judicial system, as well as learning how local law enforcement authorities combat financial fraud and money laundering. After gaining some insight and a context for these offshore localities, the review identified gateways and methods for the effective exchange of information relating to criminal matters of mutual interest. These gateways consist of formal (e.g., official or diplomatic) and informal (e.g., police-to-police) communications. Today, law enforcement agencies in the Islands have established informal gateways to share criminal intelligence on a regular basis with the FBI.

A report of the findings of the review serves as a resource and guide to all U.S. law enforcement agencies who have, or will have, investigative contact with the Islands. It provides a detailed, but succinct, review of these offshore financial centers from a U.S. law enforcement perspective. The report discusses the political and economic climate, as well as the law enforcement and criminal environment, and cites the specific legislation local authorities operate under in conducting fraud investigations and providing assistance. Because each of the Islands stands as a uniquely individual international offshore financial center, the report includes copies of published guides from each island jurisdiction, which provide instructions on how to draft requests for evidence and assistance. Law enforcement agencies can access the report [15] on the FBI's Law Enforcement Online. [16]

CONCLUSION

With the technological advances in communications, law enforcement agencies have begun to face the effects of the global criminal. Fraud and money laundering have become commonplace for the international thief due to these modern developments.

Offshore financial centers, such as the Channel Islands and the Isle of Man, demonstrate the need for global law enforcement cooperation. For years, authorities have agreed with the widely held notion that these areas are maverick centers of thinly regulated financial activity attracting money launderers and impenetrable by law enforcement. Fortunately, two reports by outside evaluators have dispelled this long-standing myth. The assessment by the director of the Jersey Financial Services Commission sums up the results of these reviews the best: "...the Commission is very conscious of the completely legitimate demands by international customers for privacy in their financial affairs.... At the same time, the Commission believes that it is vital that we, like other Jersey authorities, cooperate fully with others internationally in the fight against crime. When there is an international investigation into financial fraud, we are not prepared to allow Jersey to be the place where the trail goes cold." [17] Expe rience has shown that the authorities in Guernsey and the Isle of Man have adopted the same robust attitude.

Endnotes

(1.) For this article, the author refers to both areas collectively as the Islands.

(2.) In 1999, the Offshore Group of Banking Supervisors (OGBS) organized a Financial Task Force (FATF) evaluation of the Islands. Both the OGBS and the FATF reviews proved favorable to the Islands and found all three jurisdictions cooperative.

(3.) For additional information, see http://www.isle-of-man.com; accessed November 2, 2000.

(4.) For additional information, access the FATF Web site at http:/www.oecd.org/fatf.

(5.) Andrew Edwards, Review of the Financial Regulations in the Crown Dependencies (London, England, 1998). This report became better known as "The Edward's Report."

(6.) Ibid., Part I, Chapter 18, page 161.

(7.) Ibid., Part II, Chapter 2, page 4. In U.S. currency, about $245 billion total, with Jersey at $144 billion, Guemsey at $72 billion, and the Isle of Man at $29 billion.

(8.) Ibid., Part II, Chapter 2, page 4. In U.S. currency, about $1.4 trillion.

(9.) Ibid., Part II, Chapter 2, page 5; and "Taxing Wages in OECD Countries, 1998-1999," Organization for Economic Cooperation and Development; available from http://www.oecd.org/daf/fa/stats/wages.htm; accessed November 2, 2000.

(10.) Ibid., Part II, Chapter 2, page 3.

(11.) Ibid., Part II, Chapter 2, page 3.

(12.) FBI legal attaches represent the primary means through which FBI investigations are progressed overseas.

(13.) "Obtaining Evidence in the Bailiwick of Guernsey," Sark Directors, Guernsey Police and Commercial Fraud Department and the Joint Customs Financial Investigation Unit, 17.

(14.) U.S. Department of Justice, Criminal Division, Office of International Affairs, 1301 New York Avenue, NW, Washington, DC 20530; http://www.usdoj.gov/crirninal/oia.htm1.

(15.) Because Special Agent Brian F. Warren of the FBI's Charlotte, North Carolina, office conducted the review, the report, The Warren Review, bears his name.

(16.) Access is free to qualified law enforcement, criminal justice, or public safety professionals. To obtain access, call 202-324-8833 or send an e-mail [e-mail].

(17.) Richard Pratt, "The Jersey Financial Services Commission," Jersey International Finance, 5, no. 1 (January 1999): 14.