Implementing International Financial Standards in the Offshore Financial Centres
| Published date | 01 April 2002 |
| Pages | 326-329 |
| DOI | https://doi.org/10.1108/eb026031 |
| Date | 01 April 2002 |
| Author | William Witherell |
| Subject Matter | Accounting & finance |
Journal of Financial Crime — Vol. 9 No. 4
Implementing International Financial Standards
in the Offshore Financial Centres
William Witherell
Offshore finance, the provision of financial services to
non-residents, includes the traditional bank activities
of the borrowing and lending of money together
with other services such as fund management, insur-
ance,
trust business, tax planning and international
business corporations (IBCs). Defining offshore
financial centres is more problematic, since practically
all financial centres provide some offshore financial
facilities. A recent IMF background paper gives a
good working definition of an OFC:
'a centre where the bulk of financial sector
activity is offshore on both sides of the balance
sheet (that is the counterparties of the majority
of financial institutions liabilities and assets are
non-residents), where the transactions are
initiated elsewhere, and where the majority of
the institutions involved are controlled by non-
residents.1
Such a definition covers a wide variety of juris-
dictions, ranging from well-developed financial
centres such as Singapore and Hong Kong to very
small centres where the value added may simply be
the booking of a transaction.
The quality of regulation and supervision and will-
ingness to cooperate internationally with supervisors,
regulators and law enforcement authorities also vary
widely. There are highly reputable OFCs that apply
internationally accepted practices and standards. But
there are others characterised by light and flexible
supervisory, incorporation and licensing regimes,
flexible use of trusts and other special corporate
vehicles, a very high level of client confidentiality
based on impenetrable secrecy law and an evident
unwillingness to cooperate internationally. 'Prob-
lematic OFCs' in these respects can constitute weak
links in the supervision of an increasingly integrated
financial system. Such jurisdictions can also be used
by criminals and others to launder proceeds of
crime through banking systems without appropriate
checks on the sources of such funds and to use
bank or corporate secrecy legislation as a means of
protection against enquiries from law enforcement,
supervisory and tax authorities and/or to commit
financial fraud.
In view of such concerns, it was not surprising that
one of the initial acts of the Financial Stability Forum
(FSF) when it was convened in April 1999 was to set
up a working group on offshore financial centres to
consider the significance of OFCs in relation to finan-
cial stability in all its aspects. More specifically, the
group was asked 'to evaluate the impact on global
financial stability of the uses made by market partici-
pants of financial offshore centres, and the progress
made by such centres in enforcing international
prudential standards and in complying with cross-
border information exchange agreements'.2 This
move reflects a recognition of the growing signifi-
cance of offshore financial activity (although available
statistics on this activity are incomplete) and the
possible implications of this development because of
the increasing interdependence of national financial
systems and the ease with which offshore facilities
may now be accessed due to advances in communica-
tions technologies and the lowering of regulatory
barriers.
FSF REPORT ON OFFSHORE
FINANCIAL CENTRES
The FSF Working Group on Offshore Financial
Centres reported back to the FSF in April 2000 and
its report was subsequently released to the public.3
The group had consulted widely and also carried
out a formal survey on OFCs of supervisors from
both onshore and offshore jurisdictions.
Some of the conclusions of the group are relevant
at the present time.
— While OFCs to date do not appear to have been a
major causal factor in the creation of systemic
financial problems, there are concerns about pos-
sible future problems due to those OFCs that are
unwilling or unable to adhere to international
supervisory standards. Such 'loopholes' frustrate
collective efforts to reduce overall exposure to
global financial instability.
Journal of Financial Crime
Vol.
9,
No.
4,
2002,
pp 326-329
© Henry Stewart Publications
ISSN 1359-0790
Page 326
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