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Dirty Laundry

In the context of the financial war on terrorism, FSA chairman Howard Davies warned offshore centres in late September that they would be expected to do more to demonstrate that they are meeting international standards of best regulatory practice.

This reflects sentiment expressed by Gordon Brown about information exchange, as well as President Bush&#39s comments regarding the need to change money laundering rules in Europe.

How does this affect offshore providers? It is worth mentioning that, contrary to popular opinion, offshore investment is these days unlikely to offer the ideal means of money laundering.

Regulation in offshore centres is often greater than that in mainstream nations. Offshore bonds are unlikely to be first choice for money launderers as they generally require to be held for a minimum of six or seven years for investors to enjoy the full benefits of tax-free growth. Money launderers may prefer a more temporary home for their cash.

Notwithstanding this, for international life offices the key question in the first instance is the jurisdiction in which they are based – and whether it already requires high standards of money laundering regulation or has it been identified as poorly regulated.

This will obviously affect the base line from which any improvement will be expected. The G8&#39s financial stability forum regards the main jurisdictions in which international life companies are established – Dublin, Luxemburg, Guernsey, the Isle of Man, and Jersey – as highly regulated.

Similarly, the OECD&#39s financial action task force did not rate any of these jurisdictions as non-cooperative in its recent money laundering review.

However, we cannot rule out the possibility that the existing money laundering regulations may change as a result of the events of September 11. At the moment, regulations refer to the source of the incoming money to an organisation.

If the system retains its current emphasis and what is being sought is “dirty” money arriving in the legitimate system, then international life companies appear to have little to fear.

The suitcase full of used European currency is a myth. Premium income will generally arrive from a source where money laundering checks have already taken place – most often a bank account.

What might be expected then is continued vigilance from life companies and intermediaries to ensure that the normal verifications have indeed taken place with notification of suspicious transactions as appropriate.

However, it would be a different matter if the existing system were to switch its emphasis towards the eventual destination of the funds being withdrawn from an institution.

Combating terrorism appears to demand almost a reverse approach to the existing system. Changes to the system might involve companies being expected to keep an eye on the eventual destination of cash – as funding terrorism may also involve turning previously legitimate money into a criminal income stream.

If the new climate requires scrutiny of the destination of capital, perhaps money laundering checks of assignees or the owners of bank accounts to which capital is mandated will be expected.

The second area in which political posturing may be expected relates to confidentiality. It is important to remember that confidentiality rules are not designed to protect criminals.

In Luxemburg, for example, confidentiality rules fall away where criminal activity is being investigated.

Unless politicians take the opportunity to use the polit-ical climate to push through reforms which are designed to create a level playing field between international financial centres, the reform of confidentiality rules is likely to have little impact in practice.

In any case, the reality is the vast majority of investors in international jurisdictions are using life policies for legitimate financial planning.

IFAs recommending offshore solutions to their investors will already be aware of the stringent money laundering controls which are in place in the main offshore life centres detailed above and of their personal responsibilities in this respect.

This type of investor – and their IFA – has nothing to fear from any level of reform.


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