When the AML inspectors came to town

As Guernsey and Jersey await the results of their Moneyval anti-money laundering assessments, some industry insiders have been left wondering if the examining body has shifted the goalposts

It would be understandable if the Channel Islands were complacent about the outcomes of external reviews of their financial regulations, as every examination conducted over the years has concluded they"re among the best-regulated places on the planet.

The first major review was carried out by Whitehall civil servant Andrew Edwards in the late 1990s and positively crowed about standards in place to fight crime and safeguard assets. Others from the OECD, the IMF and even the G8 have all concluded that the islands were top of the tree compared to competitor centres around the globe.

So, many will expect a similar outcome when the results are released of an examination being conducted by an organisation named Moneyval, the independent anti-money laundering body within the Council of Europe. However, judging by what key industry figures are picking up, that may not be the case this time.

Since the last, excellent IMF assessments of both islands about five years ago, new measures have been put in place to further improve defences against money laundering and to counter terrorist financing. But questions have been asked as to whether the international community and Moneyval may have moved the goalposts somewhat in how a jurisdiction"s performance is now being measured.

The Moneyval approach this time has been not only to examine the islands" AML/CFT defences based on what"s written in their respective statute books, but also how rules and codes of practice are actually being applied in practice. That is a change in emphasis from previous assessments that looked primarily at the measures in place designed to deter the use of international finance centres for nefarious purposes.

Guernsey"s under the microscope first when the inspection team presents its report to the Moneyval membership at a plenary session in September. Jersey"s review could be done at the same session but is more likely to take place in December.

Under scrutiny

Contents of the pre-publication draft reports are expected to be the subject of intense negotiation between the local authorities and the Moneyval experts, especially over how the Moneyval team has interpreted certain processes and actions.

The Director General of the Jersey Financial Services Commission, John Harris, says a lot of time was spent talking to the inspectors about “definitions, understandings and meanings”. “But I expect there will still be imperfect understanding about certain things when the report is published,” he says.

As a result, he suspects that “previous excellent A* grades” won"t be handed out when the verdicts on Guernsey and Jersey are given this time.

But Harris believes the international community needs to define what a good outcome looks like in drawing conclusions from assessments. “It may be that an "A*" is no longer available, but that a "B" is a good result in comparison to other centres,” he says.

Guernsey"s regulator was more circumspect and declined to publicly answer BL"s questions on the Moneyval review, as it"s still ongoing.

Regulatory expert Sandra Lawrence, Head of Compliance at investment management firm Ravenscroft in Guernsey, says we should expect that the Moneyval inspectors will more than likely have suggestions for improvements in the regimes practised in the islands. “A good regulator will rarely leave without making some comment after an inspection, but I don"t believe that means we are doing a bad job or falling behind the curve."”  

Harris points out that the latest Moneyval assessment was part of an ongoing process that will see heightened future scrutiny of international finance centres, and there"s already a programme in place for an even more far-reaching round of assessments in the years ahead.

In this latest inspection round, it seems that the international regulators want greater effort made by finance centres to pursue criminality - including tax evasion - even when that activity has taken place beyond their borders. Therefore, it may not be sufficient in future for Channel Islands authorities to merely pass information to their counterparts where the alleged perpetrators reside.

“Moneyval"s point is that, in these circumstances, you - Jersey - should be pursuing that individual as far as you possibly can, independent of any cooperation elsewhere,” explains Harris.

If this was to become the internationally accepted norm, it would be a huge departure from current practice and could have far-reaching consequences. “Such an approach would be time-consuming, expensive and uncertain. There may need to be a reality check about how far jurisdictions can actually successfully push cases autonomously,” says Harris.

Experienced funds and corporate finance lawyer Marcus Leese, a Partner at Ogier in Guernsey, questions the Moneyval approach. “Do they truly think we should be trying to act where the local authorities have decided not to? It"s unrealistic to expect us to be experts in the law of every single place that we do business with,” he states.

Meanwhile, it"s also possible that the Moneyval assessors may question the effectiveness of the Channel Islands regimes on the basis that not enough prosecutions have been pursued. They may highlight what Harris describes as a "numerical mismatch" between the relatively small numbers of prosecutions compared to the increasing number of suspicious activity reports generated on an annual basis.

But Harris contends that a low rate of prosecutions could simply indicate that the system in place was effective in deterring criminals from using a jurisdiction in the first place. “It"s not necessarily the case that a high level of suspicious activity reports and a low level of prosecutions are evidence of an ineffective centre. In fact, you could argue that it shows that your defences actually work,” he says.

Harris defends Jersey"s responses and says that in cases where sufficient evidence existed, the island had pursued prosecutions and assisted overseas authorities when asked to do so. He cites major money laundering probes, such as the Bhojwani case, as evidence of Jersey"s commitment to bringing criminals to justice.

Away from the core elements of what Moneyval was actually assessing, industry sources were surprised about some of the questions raised by the inspection team. One area covered was how the islands assess the validity of the registers of beneficial ownership held by professional service providers. It remains to be seen whether this line of questioning is a precursor to some sort of future action where the Crown Dependencies are forced to allow public access to information held on beneficial ownership - as Labour leader Ed Miliband said he would make them do if he comes to power.

But Marcus Leese says such a move would be “all for window dressing and appearance and have no impact on AML/CFT or on tax evasion. The fully licensed and regulated service providers in the Crown Dependencies are already required to obtain, update and retain beneficial ownership information and to disclose it to the authorities when required to do so,” he says.

One thing is for certain: with the Moneyval reports due toward the end of 2015, both islands are sure to be watching the horizon with interest.