Money laundering – the process of introducing the proceeds of crime into the legitimate stream of financial commerce by masking their origin – is a global phenomenon of enormous proportions. It provides the fuel for drug dealers, terrorists, illegal arms dealers, corrupt public officials, and other criminals to operate and expand their criminal enterprises. Its social consequences are devastating and it is a very real threat to national security.
When the term “offshore” is used, jurisdictions such as Bermuda, Bahamas, Cayman Islands and the British Virgin Islands immediately spring to mind. It is purported by those onshore that it is these jurisdictions that establish shell companies, trusts, special purpose vehicles, and mutual funds which are subsequently used to facilitate illegal activities, criminal identity, and criminal ownership of assets. It is these perceptions that burden the offshore world with the continuous threat of sanctions, external regulations and bad press.
However, today the term ‘offshore’ can also be applied to places in the United States like Wyoming, New Jersey, Delaware; as well as London and Switzerland. These countries also seek to attract capital from non-residents by promising low/no taxes, low regulation, privacy and confidentiality.
International regulators such as the Organisation for Economic Co-Operation and Development (OECD) and Financial Action Task Force (FATF) have consistently sought to hold the offshore industry to higher AML standards far beyond what is expected of their onshore counterparties. In the US, the Financial Crimes Enforcement Network (FinCEN) is the organisation that combats financial crime. Any concerns about US dollar transactions are sent to FinCEN, even if they took place outside the US.
The countries named above that are considered to be tax havens and low-tax and low-disclosure jurisdictions have been under scrutiny for a very long time. Conversely, very little attention has been paid to those unashamedly committing fraudulent activities in the US or the UK.
In September 2020, the FinCEN Files exposed how major global banks miserably failed to stop money laundering and financial crime. The FinCEN files also revealed how often the UK is the weak link in the global financial system and how London is awash with Russian cash. In fact, it is alleged that one of the dodgiest addresses in the world is Suite 2B on the second floor of 175 Darkes Lane, just off the High Street in the Hertfordshire commuter town of Potters Bar.
It is alleged that what happens in Suite 2B is just one large-scale example of the role the UK plays in global money laundering.[i]
Criminals in Russia and other countries who want to launder their money take advantage of UK limited partnerships (LPs) and limited-liability partnerships (LLPs). These UK companies require the owners to file very limited information about their operations. Therefore, criminals utilise them to anonymously move large amounts of money.
The House of Commons Second report of Session 2022-23, states that “London’s role as a global financial centre is tarnished by its reputation as a hub for illicit finance.” The report provides an assessment of the consequences of successive Governments’ complacency towards illicit finance.[ii]
The Report also notes that it is regretful that it took the war in Ukraine to motivate the UK Government “to move forward on long-promised plans to tackle the flows of illicit finance through London and beyond.”[iii]
It seems that “the intertwining of financial globalization and deregulation with the post-Soviet transition has provided a plethora of business for professional service firms in the UK.[iv] However, it has also made the UK a nesting place for “dirty money”.
In direct contrast to what is happening in Europe, the Cayman Islands has made herculean efforts to combat money laundering. Cayman, as well as other offshore jurisdictions, have had to demonstrate an increased level of regulation, particularly in relation to anti money laundering (AML), counter-terrorist financing (CTF), and tax evasion, due to the unrelenting pressure that international bodies in the US and the UK continue to impose on them. The UK and US have shown that they have no tolerance for and will not conduct business with countries that they consider to be poorly regulated.
These global, “Big Brother is Watching” regulators, require offshore companies to demonstrate tax planning behaviour where profitability is not moved to tax-neutral jurisdictions like Cayman. They must demonstrate economic substance and prove that an entity’s fiscal gain is derived in the jurisdiction where the said entity does business. However, the taxation codes of G7 jurisdictions allow for companies and individuals to structure their financial affairs in such a way that it allows for their wealth to be held offshore.
In 2019 the Cayman Islands enacted significant legislative reform introducing a public beneficial ownership register in compliance with evolving international soft law standards which had been enhanced in the EU’s 5th Anti Money Laundering Directive. It is wrongly concluded that due to its location, its growth in the financial services industry and its perceived lax regulatory environment create the perfect brew for money laundering practices to flourish. However, the government of the Cayman Islands has enacted broad legislative reforms to dissuade money laundering activity, and it is committed to providing a robust AML framework which is effective and proportionate to its position as a global financial centre.
In May 2022, the Cayman Islands dropped from 1st to 14th on the Tax Justice Network (TJN) index after it disclosed data that revealed that the true scale of the financial services it provides to non-residents is significantly lower has been estimated.
Ironically, the US has climbed to the top of the TJN’s list of countries most complicit in helping individuals to hide their wealth from the rule of law. The US earned the worst rating ever recorded since the ranking began in 2009.[v]
The TJN Index reports that although the financial secrecy services, utilised by Russian oligarchs, tax evaders and others, continue to decrease globally due to transparency reforms, five G7 countries alone – the US, UK, Japan, Germany, and Italy – remain responsible for impeding global progress against financial secrecy.
According to the TJN, the top 10 biggest suppliers of financial secrecy are:
The US received an FSI Value of 1950.8 on the 2022 edition of the Financial Secrecy Index. A jurisdiction’s FSI Value is a measure of how much financial secrecy it supplies to the world.[vii]
It is noteworthy that it is the “onshore offshore” jurisdictions who present the greatest risks and are the major culprits. Hypocritically, under the Foreign Account Tax Compliance Act (FATCA), and its related inter-governmental agreements (IGAs), the US requires all countries to share with it, all information about the financial accounts of US taxpayers abroad, but, in return, the US shares little to no information with countries about their residents.
Money-laundering was not even a crime across most parts of the world until the 1980s. Since that time, both America and the UK have strong armed countries into passing various laws to combat it. Yet these two countries, among others, remain non-compliant, and are the largest facilitators of dodgy transactions by questionable parties.
“Clean up your own backyard”, a 1969 song recorded by Elvis Presley, has to be the new national anthem for those jurisdictions subject to the arm-twisting of the US and the UK:
“Clean up your own backyard
Oh don't you hand me, don't you hand me none of your lines
Clean up your own backyard
You tend to your business, I'll tend to mine.”[viii]
[i] BBC News, FinCEN Files: One of the world’s “dodgiest addresses” is in leafy Hertfordshire, 21 September 2020
[ii] The House of Commons Foreign Affairs Committee, The cost of complacency: illicit finance and the war in Ukraine, Second Report of Session 2022-23, Report, together with formal minutes relating to the report, 14 June 2022
[iv] “The UK’s kleptocracy problem: How servicing post-Soviet elites weakens the rule of law”, John Heathershaw, Alexander Cooley, Tom Mayne, Casey Michel, Tena Prelec, Jason Sharman and Ricardo Soares de Oliveira, December 2021
[v] www.taxjustice.net, Tax Justice Network’s Financial Secrecy Index 2022, 17 May 2022
[viii] Elvis Presley, Clean Up Your Own Back Yard lyrics © Budde Music France, Raleigh Music Publishing, Universal Music Publishing Group
Leah K Scott
Leah is Corporate Secretary/Legal Counsel and a Money Laundering Reporting Officer with Harbour Group of Companies in Bermuda. Leah has 25 years of general corporate management experience, office management and operational experience, together with and over 15 years of trust experience and structuring and estate planning. Leah is a member of the Bermuda Bar Association, STEP and the ITPA; and is President of the Bermuda Association of Licensed Trustees.