Where are we and where are we going in the offshore context: The Cayman Islands experience
| DOI | https://doi.org/10.1108/eb027189 |
| Date | 01 January 1999 |
| Published date | 01 January 1999 |
| Pages | 225-248 |
| Author | Timothy Ridley |
| Subject Matter | Accounting & finance |
Journal of Money Laundering Control —
Vol.
2 No. 3
Money Laundering, Combative Legislation and
Cross-Border Disclosure and Enforcement
Where are we and where are we going in the offshore context:
The Cayman Islands experience
Timothy Ridley
OVERVIEW
Supporting the international fight against drug
trafficking and serious crime is hard to contest; it
is like being in favour of family values. Likewise,
therefore, the fight against money laundering, ie
burying or disguising the financial proceeds of
those activities, including helping someone else to
do so. The real and potential long-term damage to
societies, honest government, the rule of law and
sound economies is now well recognised. But, on
closer inspection, the route mapped out by the
international community to achieve the laudable
goal of putting serious criminals (and those who
assist them) out of business by attacking the finan-
cial jugular causes a number of political, economic
and legal tensions.
Never has the adage of 'one man's meat is
another man's poison' been as apposite as when
looking at the international banking and financial
industries and customer confidentiality. What to
the customer is a fundamental right that his finan-
cial affairs should be kept confidential often
appears to the regulators and authorities as an
unacceptable screen behind which criminal activi-
ties can be conducted. This conflicting polarity is
underscored by the increasing intrusiveness of
governments in many (democratic) countries and
the commensurate growth in the demands of civil
libertarians for laws protecting the individual
against invasions of privacy. How do you distin-
guish, therefore, between the right of members of
the ruling family not to have inquisitive camera-
men pointing long-range lenses over a palace wall
and the right of wealthy businessmen not to have
their net worth disclosed to terrorists or potential
kidnappers and the need to pry open the lid of
complex offshore structures to 'follow the money'
of drug traffickers and other criminals? The
answer is difficult because often these two worth-
while goals will inevitably be in conflict. The solu-
tion must be to develop a proper balance between
the interests of international finance and com-
merce in the speedy execution of transactions and
of citizens in not having their affairs open to the
world and the interests of the community at large
in deterring serious crime and in tracking down
and seizing ill-gotten gains which can now be
moved with increasing rapidity cross-border aided
by modern technology and freedom of capital
movement. This is simple to postulate; not as easy
to execute.
Role of financial centres
Offshore financial centres play an important part
in these discussions. But their importance (and the
difficulties they cause) may be over-emphasised by
onshore authorities in whose own backyards the
problems originate. The offshore jurisdictions
generally become involved as the (often) unwitting
(and usually passive) recipients of the proceeds of
criminal activities outside their boundaries. By and
large, most (and an increasing number of) offshore
financial centres and institutions located there
cooperate where there is clear evidence of criminal
activity. However, they are understandably sensi-
tive to general threats and pressure to erode the
normal rules of law protecting confidential infor-
mation and individual rights. Should those rules be
eroded entirely, there is a risk that the ability of
those jurisdictions to earn a livelihood from their
legitimate financial industries will be prejudiced,
which may then make them a burden on the inter-
national community to the extent they cannot
support themselves. Alternatively and worse, they
may be forced to turn to less acceptable means of
paying their way or to seek the support of undesir-
able members of the international community.
Page 225
Money Laundering, Legislation, Cross-Border Disclosure and Enforcement
Bank secrecy
The use of the term 'bank secrecy' is immediately
pejorative. A student of legal history knows that
the laws providing for the protection of confiden-
tial information have existed for many years in
most jurisdictions where the rule of law prevails.
They are based on the fundamental principle that
where Mr A has a professional or banking relation-
ship with Mr B, Mr В should not, except in well-
defined circumstances, disclose to third parties any
information of a confidential nature gained as a
result of the relationship, unless Mr A consents.
This is a principle which is well understood in
common law and civil law jurisdictions. In some
jurisdictions, these principles are founded in the
common law and court decisions, such as in
England where the principles enunciated by the
House of Lords many years ago in Tournier ν
National Provincial
Bank of England [1924] 1 KB 461
still apply.
It is those principles which form the substance
of the Cayman Islands Confidential Relationships
(Preservations) Law passed in 1976 and in a
number of other offshore common law jurisdic-
tions with substantially similar statutes. It is
interesting that such legislation, which has received
much adverse criticism over the past decade or so,
not only follows the principles laid down in the
leading English case but also introduced some
rather more extensive statutory exceptions to the
basic rule of confidentiality. This aspect has fre-
quently been lost in the fog of misinformation
about the legislation and what it does. Indeed, had
the legislation not existed, disclosure of informa-
tion in appropriate circumstances, eg where there
is evidence of criminal activity, could have been far
more circumscribed. It put in place an efficient set
of procedures for dealing with applications to
courts for disclosure orders. To remove that would
be a significant step backwards. A point which
should be borne in mind by those who advocate
wholesale repeal of this legislation in the offshore
jurisdictions.
Civil law jurisdictions
In civil law countries, bank secrecy has always
been highlighted by the position in Switzerland. It
must be remembered that one of the primary driv-
ing forces behind the development and expansion
of the rules covering bank secrecy in Switzerland
was to assist foreign individuals and businesses
wishing to protect their assets from confiscation in
the 1930s. The Swiss did not develop their bank
secrecy laws in order positively to assist criminals.
Their behaviour has been consistent with this con-
clusion. However, they have been vigorous in
defending their financial institutions against fishing
expeditions by foreign tax authorities. Neverthe-
less,
perhaps more than any other jurisdiction,
Switzerland has been under intense international
pressure to develop all-crimes' money-laundering
legislation (now in place) and to be more proactive
in disclosure of information and asset seizures
(also now occurring).
Extraterritoriality
Confidentiality laws have come under scrutiny and
criticism by jurisdictions which believe that extra-
territoriality is perfectly acceptable and should be
the norm when imposed by them. Other jurisdic-
tions have not been so receptive. Also, it is often
the case that countries which claim extensive extra-
territorial scope for their own legislation are the
first to resist strenuously when other countries
take the same approach with them. One has to
remember the considerable resistance from Euro-
pean countries to the extraterritorial extent of the
US anti-trust and securities laws, particularly when
an application of those laws directly affected the
economic welfare of those European nations. An
example is the resistance by the UK Government
to US investigations into North Atlantic shipping
cartels and other anti-trust matters, which resulted
in specific legislation to limit the intrusiveness of
those investigations. Also, the English courts have
traditionally been quick to refuse the extraterri-
torial enforcement of subpoenas issued in connec-
tion with US securities laws violations.
Differing standards
Jurisdictions do not march in step when develop-
ing new areas of what may be considered criminal
activity. Particularly in areas of securities regula-
tion, tax, 'old oil or new' and other arcane areas,
some countries have criminalised activities in
respect of which other jurisdictions have remained
inactive — usually because there was not perceived
to be a problem. Thus, for example, it is naive to
expect a jurisdiction to respond with alacrity to
requests for disclosure of information arising out
of investigations in another country into breaches
of
its
domestic oil trading regulations.
Page 226
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