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Dr. Gilbert Morris and Padideh Tosti

The Coming Anti-climax
Review of the OECD/FATF Initiatives

by:

Dr. Gilbert NMO Morris
Security Policy Group International
George Mason University

 Padideh Tosti, RHQ
Security Policy Group International
The London School of Economics

The Bahamas, and sundry other Off-shore Banking Centres (OBCs) will likely be removed from the Financial Action Task Force's (FATF) "Blacklist" later this week. If that is so, it cannot be regarded as anything but a pyrrhic victory. Principally, removal from the list means only that the relative OBC has adopted the plethora of legislation which the FATF requires in its fight against money laundering. This means that the tireless efforts of a variety of groups highlighting the collateral effects of the OECD/FATF initiatives will have had little effect on policy. The Financial Times reports (June 18, 2001) that the OBCs are rolling over themselves to comply before the mid-summer deadline. The Bahamas instead of leading the intellectual case for a more subtle approach - has become a member of the Egmont Group, having established a Financial Intelligence Unit the objective of which is to provide financial intelligence. The U.S.'s attitude to all this is still unclear. After meeting with OECD officials this month - June 2001 the Bush administration has given positive signals to both the OECD and those opposing its initiatives.

What is emerging is that the U.S. is moving two paces forward one pace backwards on the issue, since the Bush administration has not made a comprehensive statement of definitive U.S. policy.  Rather than helping to create the intellectual argument for a policy in the Americas, most regional OBCs have adopted the OECD/FATF driven legislation in varying degrees; hedging that if the U.S.'s statement stands in significant contrast to the Europeans, they will simply ignore the concessions already made in the domestic laws. This is a troubling manner in which to conduct international affairs or maintain the legitimacy of laws.

Few OBCs seem aware that removal from the FATF list has nothing to do with the OECD's blacklist [which concerns Harmful Tax Practices (HTP)], or the associated IRS blacklist initiated by Mr. Secretary Lawrence Summers - now of Harvard University. Amongst the Blacklisted countries, there has been little, if any clear understanding of what is at stake legally, economically, morally or intellectually. And in the end, Barbados and Monaco alone have emerged as two centres who's reputation has grown from their willingness to adopt strategies to deal with the initiatives.

Some clarification needs be gotten on these questions if policy-makers are to take informed action. In the May issue of Tax Notes International, it was made it clear that Treasury Secretary Paul O'Neill's disavowal of the OECD's HTP blacklist, and that his comments should not be taken triumphantly. In some quarters this admonition was heeded, but in others not at all. It is necessary to get into the core of Mr. O'Neill's concerns. First, he did not, as is widely supposed, speak in favour of the so-called "tax havens". Part of the OECD's initiative was to develop a universal tax regime across the international financial system. What Mr. O'Neill did was to reject explicitly the OECD's objective in setting a relative tax rate for all jurisdictions. This undermines the OECD initiative aimed at destroying any tax advantages to be gained in moving monies off-shore.

Mr. O'Neill rejected the proposition on two fronts. First, he argued that the US had no interest in interfering with the internal financial systems of other nations, insofar as setting their tax policies. This is consistent with the "strategic isolationism" which has characterized the new Bush administration. Second, he expressed concern that reporting agencies such as the OECD and standard-setting bodies such as the FATF should not engaged in international law enforcement, which is not their proper function.

In his Tax Notes International article dismissing the OECD's initiative, Mr. O'Neill mentions the FATF not once. In fact, his comments may be taken to have supported the FATF's anti-money laundering 40 recommendations. But here is the thing: those 40 recommendations achieve the same or similar effect that the OECD initiatives would have done. They demand unlimited transparency, information exchanges which contravene various forms of privacy; not least of which is the corporate veil, and lawyer-client privilege. They usurp the rules on enforcement of judgments, by drawing financial institutions into policing even those activities which are not crimes in the relative jurisdictions. There are moves underway by significant Senators to undercut certain planks of the various FATF recommendations, such as "information exchange" (#32). (Mr. O'Neill rejected components of the same initiative in the OECD initiative on HTP). However, as was said before, the OFCs have already adopted the legislation which allows for these intrusions which are uncommon to common law rules. Our fear of this is not only the putative effects on international finance, but the subornation of and entreaties to breaches of the rule of law. No one is defending money laundering. But the OECD/FATF approaches are too simplistic as we have opined in other places, and they amputate the patient merely to excise a wound.

Here are some timely considerations for the near term. First, compliance with any of the foregoing initiatives will require either external assessments or self-reporting. We believe some of the OBCs are looking to publish their own reports. We fear that this could be perceived as uncooperative. We believe this largely because of the distrust of the European for non-OECD or FATF bodies, and because the International Monetary Fund (IMF) is emerging as the official assessment authority on anti-money laundering questions. The IMF adopted about half of the FATF 40 recommendations as part of its protocol in dealing with OBCs and a part of its official assessment criteria dealing with countries seeking IMF program assistance. This still raises the question brought forward by Mark A.A. Warner at the Heritage Foundation, May 2001, meeting in Washington DC concerning unfair treatment. This question remains unanswered since, no G-7 country has as yet been at the centre of an IMF assessment.

Additionally, we argued in November of 2000, that International Business Companies (IBCs) in particular and OBCs general will be abolished and closed down respectively. The first has almost been achieved. The second is underway. The external assessments will enter determinations by the IMF for instance on credit, loan guarantee programs and such like.  Neither the FATF or the IMF have the capacity to maintain a police or enforcement role in respect of ensuring compliance, and each seems to be casting about for answers to an enforcement formula. Does this not indicate inter-agency confusion and uncertainty concerning their respective roles ?

What this means is that the OECD, FATF, IMF are searching for models to manage compliance and supervision, and as yet have no real idea on how to proceed. In addition there are subsidiary agencies now in the process of following precedents set by the FATF, positioning themselves in supervisory or enforcement roles, adding another layer of regulation and compliance requirements. For example, the Financial Stability Forum (FSF) has a mandate through supervision and assessment reports, to ensure the structural stability of the international financial system. This would imply that it is the FSF rather than the IMF that should conduct national institutional assessments. However, it has disappeared from the scene. Our research reveals that in recent meetings with OBCs no FSF or FATF officials were present. Will they accept the IMF assessments, or will they conduct their own ? What effect will this have on business ? What this implies is not only the confusion mentioned above, but a collision course between the IMF and the FSF. Yet, the OBCs that have given undertakings or have altered their laws and financial systems profoundly; and have done so without an understanding of these inter-agency rivalries. What this must mean is that there will be more hoops to jump through, new regulations, new agencies demanding access to records and reports.

The effect will be that these creeping encroachments will not only lead to a structure that no one wants, but one that is unworkable and a danger to the international financial system

 

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