Bermuda could be White Paper model for financial regulation
The following is the full text of the speech which local lawyer John Collis made to the International Bar Association last week on the effects on Bermuda's financial sector of the British White Paper on the Overseas Territories on Brmuda.
Robin Cook, the UK Secretary of State for Foreign and Commonwealth Affairs, published in March of this year a White Paper on Britain and its remaining Dependent Territories.
The White Paper parades under the heading "partnership for Progress and Prosperity'' although it is most widely known for its relevance to the issue of citizenship (and perhaps more practically passports) for the remaining colonialists in Britain's dependent territories. The White Paper also mentions the introduction of "financial regulations'' and it is this that I wish to consider.
It is important to understand that there is no suggestion that adoption of UK-style financial regulation is a quid pro quo for passports. This has been confirmed publicly by the UK government on a number of occasions. Further, the UK needs to regularise its passports in any event -- unlike, say, US or German passports, the British passports are the only passports where it is necessary to read the fine print to determine the nationality rights of the bearer! Depending upon how you count, there are about twelve remaining British Dependent Territories (which, incidently, are soon to be referred to as "Overseas Territories''). Of those, Bermuda, Cayman and the British Virgin Islands are the principal jurisdictions with significant offshore financial centres and, as such, I will limit my comments to what "financial regulation'' may mean for these three Territories. The White Paper does not give much detail as to what the UK Government may have in mind under the heading "financial regulation''. As such, I have reviewed certain other UK reports and what snippets I could find of comments made by various officials in the UK, surveyed some of the issues currently under way in the Territories and otherwise tried to "read between the lines'' in the White Paper itself.
Preliminary Comments In an overview of the proposals, the White Paper suggests that "a check-list of regulatory measures for the territories to bring their financial regulation up to internationally accepted standards would be drawn up''. Robin Cook himself seems to suggest that the purpose is to "enable Britain to meet its own international obligations''. Elsewhere, it is stated that the UK wishes to see the Territories "flourish'', and also that the UK will "defend'' the Territories against other jurisdictions.
The White Paper itself recognises that in all sorts of ways the Territories differ, including as to the basis of their economies, the level of regulation, etc. The White Paper also states that the relationship needs to be "free and fair'' and it is not suggested that different conditions will be imposed upon different Territories. Accordingly, comments in the White Paper have to be taken in the context of the broad scope of circumstances facing the various Territories, for instance, recognising that there is a spectrum of regulatory frameworks, where some Territories have no financial regulations at all and others have quite a lot of regulations. It is, therefore, likely that a standard will be set by the UK, and that each of the Territories will, or may, have to adjust in varying degrees.
For simplicity's sake, I will consider the issue of "financial regulation'' in three categories, namely: (i) matters which are unlikely to be included, (ii) matters which are likely to be included and (iii) perhaps, the most difficult, matters which might be included.
First, I will start with matters it appears will unlikely be included in the notion of "financial regulations''.
UK Style Regulation: There is no reason to believe that the intention is to replicate UK legislation and institutions on financial services, banking, insurance and the like. I do not think the Secretary of State would visit the chaos of the current UK financial services regulation on its worst enemies in Belgrade, let alone the beloved colonies.
Second, in contrast to the foregoing, there is one area that quite clearly will be included.
Money Laundering: Bermuda, Cayman and the BVI have all, at the behest of the UK, adopted similar statutes designed to prevent money laundering which in large measure accord with the UK position. There is no general public disagreement in the Territories with the notion of preventing money laundering, particularly with respect to drugs, terrorism, fraud related matters and the like. One issue on which there is some contention, however, is with respect to so-called "fiscal offences'' and the rights of a foreign authority to seek information available in the Territories. There is a genuine concern that the Territories might be subject to the impossible task of having to become "experts'' in the tax laws around the world or otherwise be exposed to criminal liability simply to accommodate foreign "fishing trips'' in the Territories.
The third category is, of course, a grey area involving elements of "guess work'' to identify those matters which are not expressly referred to anywhere, but yet might be a part of the proposed "financial regulation''. As mentioned before, the White Paper does not specifically set out the list of "regulatory measures'' that it is seeking to introduce.
Edwards' Report: Although it did not strictly address the Overseas Territories, the Edwards' Report commissioned by the UK in January, 1998, is perhaps the best guide as to the sorts of things which one would expect to be in the mind of the Secretary of State when considering financial regulations.
After all, Mr. Edwards set out to review the state of "regulation of the international finance centres'' in Jersey, Guernsey and the Isle of Man, all of which have financial industries not too dissimilar from those in Bermuda, Cayman and the British Virgin Islands.
Existing Regulation: Edwards considers in detail the regulation of the typical financial industries, namely: banks, investment business and insurance business. Bermuda, Cayman and BVI all have statutes regulating those industries, in particular laws for (i) mutual funds (or collective investment schemes), (ii) insurance business, (iii) banks (although Bermuda does not permit the establishment of offshore banks), (iv) trust business and (v) investment business. Bermuda's financial regulators (both the BMA and the Registrar of Companies) are members of various internationally recognised bodies of regulators and, as such, are generally conscious of the level of regulation expected internationally. A certain class of Bermuda's mutual funds have been recognised under the UK Financial Services Act as qualifying for distribution in the UK. It is, therefore, not obvious that the UK Government will find anything wanting in the standards of these regulations. The regulations in Cayman and BVI are, although perhaps somewhat more relaxed, not too dissimilar from those in Bermuda and, as such, it is not obvious that a lot could be requested of Cayman and BVI by way of further enhancements.
Cayman does permit so-called offshore banks and, while there is no obvious comment on concerns of a banking regulatory nature, there are comments, both in the White Paper and elsewhere, on apparently undesirable confidentiality associated with offshore banks. It may be, therefore, that Cayman can expect disclosure requirements with respect to its offshore banks -- and I comment further in a minute.
Independence of Regulators: Mr. Edwards' comments on the need for regulatory authorities to be independent from the political arms of government. The existing level of interaction between the governments and their regulatory authorities in the Territories is not exactly clear, although certainly many licensing and regulatory powers are approved by Ministers and/or Governors.
Such independence of regulators is also a "theme'' in the White Paper and a matter that is mentioned by a number of commentators. I suspect, therefore, that the independence of the Territories' regulators will be an issue. Many of the statutes in Bermuda and Cayman already devolve regulatory powers on to their regulators, and BVI is moving that way. The remaining powers now held by Ministers would have to be handed over to the regulators. By itself, this may be no bad thing provided that such regulators are given clear statutory directions over these new powers and can be held accountable for their decisions.
Confidentiality: One of Edwards' principal concerns relates to confidentiality and the fact that the ownership of companies is not always known. Edwards strongly supports disclosure to regulatory authorities of a company's beneficial ownership, both on incorporation and on subsequent changes in that ownership. Edwards further comments that in his view there is a "presumption against permitting bearer shares''. In addition to money laundering (mentioned earlier), there is further "theme'' in the White Paper referencing "secrecy laws'' and the desire that regulators in the Territories' financial sectors can "cooperate'' with overseas counterparts. Robin Cook in the foreword to the White Paper refers to "tax evaders'' (the word "evader'' would likely have been carefully chosen by his speech writer to refer to those engaged in illegal activities, as distinct from tax "avoidance'' which is generally considered legal). Certain of the commentators have also mentioned "bank secrecy''.
The very basis of Bermuda's international business has been to require disclosure of the beneficial ownership of all companies, and share registers and directors' registers are generally a matter of public record. Cayman and BVI, on the other hand, do not as a general rule require such disclosure although, in the context of regulated activities, some disclosure is necessary. It may be that Cayman and BVI will be required to obtain disclosure of ultimate beneficial owners of companies, and make public the usual company registers.
It is not clear whether the notion of availability of information in the White Paper goes beyond availability or access to the public records. It may be that exchange of information, perhaps in matters relating to fraud or tax evasion, will also be included.
National Audit Office: In May, 1997, the Controller and Auditor General of the UK National Audit Office prepared a report to the Foreign and Commonwealth Office which was subsequently presented to the UK Parliament. The purpose of the report was to consider the UK's "contingent liabilities in the Dependent Territories'', or perhaps in a more colloquial language, the risk of something (including in their financial centres) going wrong in those Territories. That report comments favourably on Bermuda's process of vetting the beneficial ownership of companies in Bermuda, the "know your client'' principle. The report concludes with a heading "Lessons Arising'' as follows, "as Bermuda is generally recognised as a well managed Territory with sound financial regulation, the National Audit Office sought to establish whether lessons could be learned from its management of risk''.
Conclusion The White Paper's reference to "financial regulation'' portends three likely consequences for Territories, namely: (i) money laundering regulation, (ii) exchange of information on fraud and tax evasion matters, and (iii) independent regulatory bodies. This is all supposed to be in place by the end of 1999.
Bermuda, Cayman and BVI have already implemented money laundering statutes, although there may be further tinkering with the provisions. It is clear that the regulatory regime in Bermuda satisfies the tests of two recent UK reviews on offshore financial regulation, and Bermuda could well be the "standard'' for the purposes of the White Paper. It is also the case that the rules in Cayman and BVI, although perhaps with one or two notable exemptions, are not too dissimilar from Bermuda. Accordingly, there is every reason to suspect that these three Territories should experience little by way of changes in order to accommodate the UK demand for financial regulation.
John Collis