Jersey: Leading the Way on the Global Stage

The recent revelations uncovered in the Panama Papers have again put the role of offshore international financial centres under the spotlight of international scrutiny, with the range of concerns emanating from the on-shore communities pressing ever more sharply into the ribs of the IFCs. Even though the Crown Dependencies stand above many onshore jurisdictions in terms of transparency, openness and compliance with international financial regulations they still find themselves open to unfair and ill-informed populist criticism.

The facts however, paint a very different picture, and Jersey sets an example on the international stage in a number of ways. The 2015 MONEYVAL report on Jersey provides an impressive endorsement to Jersey as a robust and 'best-in-class' jurisdiction, in terms of international compliance and transparency, whilst recent high profile cases have demonstrated the ability of Jersey's sophisticated legal frame work to deal with complex international legal matters.  

In this article Collas Crill partners, Mark Rawlins and Elena Moran, look at both sides of the coin, considering, firstly, the outcome of MONEYVAL report and, secondly, how Jersey recently took centre stage in a complex state immunity battle.

'Best-in-Class' – Mark Rawlins

This year we have seen the Panama Papers leak from Mossack Fonseca and fingers pointed both at politicians and business leaders on the world stage – with the largest scalp taken from the leak being the Prime Minister of Iceland, Sigmundur Davio Gunnlaugsson. On top of this, the base erosion and profit shifting (BEPS) initiative of the OECD seeks to level the playing field in terms of corporate taxation of multinationals – the Googles and Starbucks of the world. It seeks to ensure an appropriate tax take in the geographical region in which – broadly – the business is performed.

Then tiered above these initiatives, and over-arching them to some degree, sits the drive for transparency of corporate entities and trust structures.

In the context of these challenges, MONEYVAL - a monitoring body of the EU's Council of Europe more fully known as the Committee of Experts on the Evaluation of Anti-Money Laundering and the Financing of Terrorism – has delivered a 300-page report on its 2015 assessment of Jersey (the 4th report) reviewing the anti-money laundering and counter-financing measures (AML/CFT) that operate in Jersey.

Jersey is a member of MONEYVAL, and operates within a robust legal and regulatory framework, supported by the Jersey Financial Services Commission (JFSC), the financial services regulatory body, which is independent of the government, but has regard to the policies set out by government – most recently detailed in the Government of Jersey's Financial Policies Framework.

The MONEYVAL report benchmarks Jersey against the FATF 40 Recommendations, 2003 and nine Special Recommendations 2004, and the IMF assessment of Jersey, although it is an update/overlay on prior reports rather than a full assessment in itself.

The key findings of the report demonstrate Jersey's robust AML/CFT regulatory environment and its commitment to a pro-active approach to international co-operation. In particular, the report's key findings include:

• Jersey is a well-established IFC with a mature and sophisticated AML/CFT regime. The risks of money laundering stem from Jersey's position as a financial centre and through Jersey's Financial Crime Strategy Group these risks are monitored on an on-going basis, with the intent of risk mitigation.

• Jersey's legal framework evidences a high level of compliance with the global standards assessed by MONEYVAL.

• The offences for money laundering and financing of terrorism in Jersey are in line with relevant international standards.

• The legal framework governing provisional measures and confiscation is comprehensive and has been efficiently used in several cases. The report notes that total confiscated sums are considered to be low (although there are some notable cases of confiscation, for example the recent confiscation of approximately £3.5m related to Kenyan bribery and corruption, in a Jersey case in which it sought assistance from twelve other jurisdictions).

• The preventative measures required of financial institutions, and certain non-financial businesses/professions, are largely in line with the international standard.

• The AML/CFT co-ordination process functions very well at policy and operational levels.

• Jersey adopts a pro-active approach to international co-operation – most recently evidenced by the 1 June 2016 memorandum of understanding between the JFSC and the Bank of England/Prudential Regulation Authority in the UK.

Overall, MONEYVAL gives Jersey a compliant or largely compliant rating in 48 out of the 49 standards, which is the highest 'best-in-class' rating of all jurisdictions that have undergone the 4th MONEYVAL evaluation cycle.

The one area where further enhancement is expressed as necessary is in the area of prosecutions. In this area, Jersey is now committed to taking appropriate actions – with four prosecutions in 2016 as of the end of May. As a further measure here, the JFSC has recently been given the power to impose fines on regulated entities for breaches of the Codes of Practice applicable to them. This power means that if a regulated entity is deficient in maintaining appropriately robust arrangements for compliance with the regulatory framework – including compliance with the handbook for the prevention and detection of money laundering and the financing of terrorism - a financial penalty may be levied, of up to £4 million. It is to be expected that further enforcement/financial penalties will be forthcoming in the following months, as the law enforcement authorities proceed with case review.

Allied to Jersey's regime for countering money laundering and terrorist financing (AML) is its long-standing practice (in place since 1989) in capturing the beneficial ownership of companies and trusts through both the AML framework and the corporate registration process. The issue of beneficial ownership disclosure has been scrutinised over the last year, particularly with the UK's focus on the creation of a beneficial ownership register for itself and its off-shore dependencies. In the UK now for the first time, company returns must include details of beneficial ownership. Jersey's register is largely comprised of information obtained, and vetted, by regulated service providers operating under their AML obligations, and as such is in line with FATF recommendations. Although not a public register, it is available to tax and law enforcement authorities.

Jersey's enviable position as an appropriately regulated and transparent jurisdiction gives clear water advantage to the growth of the jurisdiction for legitimate and well-structured business. This is demonstrated no better than in the sustained growth of assets under administration in Jersey now standing at £228.4bn.

Jersey's World Class Legal Framework in Practice – Elena Moran

Jersey is currently centre stage for a complex state immunity battle involving the Republic of Turkey.

The case arises out of the construction of the Baku-Tbilisi-Ceyhan (BTC) pipeline. The BTC pipeline transports oil from fields in the Caspian Sea through Azerbaijan and Georgia to the Turkish coast from where it is shipped to markets in Europe. The pipeline is of regional and strategic importance and is owned by a consortium of 11 oil companies including BP. The pipeline is 1,768km in length and it takes a year for the oil to travel the length of the pipeline.

The Turkish section of the pipelines was built for the consortium by Botaş, a Turkish state owned enterprise. Botaş sub-contracted some of the work to Tepe, a construction company based in Turkey. Collas Crill act for Tepe.

Botaş terminated the contracts with Tepe and the resulting legal dispute was referred to arbitration in Paris under the rules of the International Chamber of Commerce. The arbitral tribunal made a series of awards in favour of Tepe and against Botaş for approximately US$101m. Despite having exhausted all avenues of appeal Botaş has failed to make any payments under the arbitration awards.

Botaş has two Jersey registered subsidiary companies. One of the companies operates the Turkish section of the BTC pipeline on behalf of the consortium. The other company is an oil exploration and production company with interests in over 20 countries including Kazakhstan, Iran, Georgia and Colombia.

Tepe applied to the Jersey courts for an order that would allow the Viscount to sell the shares of the Jersey companies and use the proceeds to satisfy the outstanding debts owed to Tepe by Botaş under the awards.

The Republic of Turkey is attempting to prevent the sale by claiming state immunity over the shares. State immunity is a concept of international law that most counties in the world respect. The principle prevents judgment creditors from enforcing judgments against state owned property held in a foreign state. Thus, it would prevent a judgment against Spain before it enforced against Spanish assets held in a bank account in London.

For immunity to apply the property has to be in the direct ownership of a state or property over which the state has a sufficient level of control. This is the first time that a court has considered whether a state has sufficient control over the shares in an indirectly owned subsidiary. Given that states are increasingly establishing state owned companies with foreign subsidiaries (especially in the energy sector) the case has repercussions worldwide. If Tepe is successful, governments may be more reluctant to establish foreign subsidiaries and risk losing those companies in enforcement actions. On the other hand, judgment creditors will find it easier to enforce their judgments against states that prefer not to pay.

The Royal Court rejected the Republic's claim of state immunity. The shares are owned by Botaş not the Republic and while under Turkish law Botaş cannot transfer the shares without the permission of the Republic, the Court decided that this is insufficient control for the purposes of state immunity. The finding of lack of control has been appealed by Botaş and the judgment of the Court of Appeal is expected shortly.

One of the consequences of Jersey's status as a premier offshore financial centre is that the Jersey courts often find themselves resolving disputes between protagonists that have no real connection with Jersey. In this case a dispute between a Turkish construction company and a Turkish state owned enterprise.

Jersey's sophisticated legal framework means the Island has the ability to deal with complex cases quickly. Jersey has also developed a body of case law that is well respected in other jurisdictions. It is an example of how something internal to Jersey can have worldwide repercussions. It also further illustrates how Jersey is a place that has the right legal framework for international businesses to register, operate and settle their legal disputes.

Perhaps then, out of the dark cloud of the Panama Papers comes an opportunity to recognise IFCs, like Jersey, as leaders on the global stage in regulatory compliance and transparency, which combined with a sophisticated legal framework set a benchmark for other financial centres jurisdiction to enviably follow.