A new standard for offshore TCSPs

14 April 2015

Written by Philip Nicol-Gent

Philip Nicol-Gent, a lawyer at the Guernsey Financial Services Commission, submitted his private opinion about beneficial ownership to the International Compliance Association conference in London recently. His speech, sponsored by Offshore Red, appears here in article form with some editorial comments.

A new standard has come forward to govern trust and corporate service providers that can be summed up in one sentence: “Hold the beneficial ownership with the trust and corporate service provider because that is how you ensure that you have accurate, up-to-date information because they are (certainly amongst the international finance centres) well-regulated.”

Among international standard-setters everyone has heard of Basel, IOSCO (the International Organization of Securities Commissions) for investors and the IAIS (the International Association of Insurance Supervisors) for insurers. You might not have heard of the GIFCS – the Group of International Financial Centres Supervisors, which has 18 member-jurisdictions: Guernsey, Jersey, the Isle of Man, Gibraltar, Macao, Bermuda, and some Caribbean islands. They have been around for 15 or 20 years now. They have observer status with the Basel committee of banking supervisors and with the Financial Action Task Force (FATF) and attend its ‘plenary meetings’ about 3 times a year in Paris.

They have been taking and setting up for the first time an international standard for the regulation of trust and corporate service providers. It is particularly important for bankers because in a way, when you are opening accounts and there are corporates involved, the fact that a gatekeeper is there and the gatekeeper is regulated should give you added assurance that the person coming to see you comes with some element of approval and/or oversight because they are provided to you by trust and company service-providers (TCSPs) who are themselves regulated and subject to enforcement action. Regulators are on hand to ensure that they have appropriate procedures and controls, and not just for money laundering and terrorist finance.

The first piece of work that the GIFCS undertook was in 2002, when (under its former name) it issued a statement of best practice for TCSPs. The International Monetary Fund has used this around the world in assessing jurisdictions that have TCSPs.

We all know that practice evolves and supervisory trends change. Bankers know that Basel I and Basel II happened, then we had Basel III and somehow we have bits of Basel I back again. Best practice changes and sometimes the old is shown to be as useful as the new.

Initial discussion about a standard

The GIFCS started looking at [the idea of a new standard for TCSPs] in 2011. The time-line is important. At the meeting of the GIFCS alongside the Basel committee meeting in 2012, which happened to be in Istanbul, the working party was formed with me as its chairman, developing the international standard. By early 2013 we were very well underway.

Obviously, there was a big fanfare with the G8 in 2013 at Loch Erne, but actually by that stage the IFCs had been looking at this and considering what the best approach was and actually doing what has been sent to me, interestingly, by multinational bodies actually taking to the stage, taking our expertise and sharing it, and indeed in scenarios where the IFCs are able to show some leadership, because the crucial point is that in the IFCs you have regulation of TCSPs, whereas in the majority of the onshore world you don’t.

In some cases there is oversight in respect of AML obligations, but it is not across the board in the way that it is offshore. By 2014, six months ago, and in all places in Tianjin in China, the GIFCS adopted the standard and that is where we are now.

Recitals to the standard

[A recital is an enumeration or listing of connected names, facts, or events. Nicol-Gent, however, seems to be using the word almost as a legal one, although he is describing a mere international agreement and therefore no law is involved. The word ‘recital’ does, coincidentally, have its own legal meaning; it is the preamble to a deed in English law and begins with the word ‘whereas’. This is a formal statement or a setting-forth of some facts to explain the reasons upon which the transaction is founded, redolent of the old preambles to English statutes before the Second World War, which also began with ‘whereas’. This is as far as our speculation can take us. - Ed]

Here are some of the important aspects of what we have been looking at. The recitals state [apart from a reference to TCSPs being important for the surveillance of their own customers for the benefit of the FATF and how all countries ought to regulate them] that TCSPs can be important in ensuring that their organisations are not used as conduits for financial crimes such as money laundering, bribery, corruption and tax-evasion or the holding of stolen assets. Their usefulness against these problems shows that they can provide banks with a good deal of reassurance.

The recitals also state that FATF research involving the Caribbean Financial Action Task Force has shown that higher standards exist for money- laundering control and terrorist finance control in jurisdictions where TCSPs are regulated.

An academic did some mystery shopping a little while ago, ringing around the jurisdictions [and, presumably, posing as someone with dodgy money to launder]. The number of calls it took in the onshore world before someone said “oh yes, we can do that for you” were in many cases four or five times fewer than the number of calls it took to the offshore centres. That is partly because offshore TCSPs are licensed and they know that their regulators are keeping a careful eye on them.

The standard

Let us look at the standard very briefly. The regulators’ expectations are much as you might expect with any international standard. You have to have a regulator which is independent of its government [something that no country has yet achieved - Ed]; is properly resourced [ditto] and is in a position to finance itself properly by raising fees [this phrase is only used when someone is describing the British model of ‘guild regulation’ - Ed]. It must be able to share appropriate information with regulators and law-enforcement bodies around the world; it has to take a risk-based approach to the job of regulating; [still not a universal requirement for other forms of regulation - Ed] and, crucially, it has to have effective mechanisms for enforcement.

Imperialism with a standard

I would like to look briefly at what the standard requires of jurisdictions. At clause 5.5 the standard actively encourages jurisdictions that do not regulate TCSPs to consider introducing legislation and regulatory regimes in accordance with it and promote practices to meet it.

How does the standard operate?

The standard contains an awful lot of knowledge acquired over time. It says that a jurisdiction has to licence its TCSPs and nobody can operate without a licence. This is how the Guernsey regime works, for example. In line with other standards, the document requires the regulators to look at corporate governance, ensuring that the people who run TCSPs are ‘fit and proper’ [another British phrase] and requiring each TCSP to have a physical presence in the jurisdiction in which it is regulated, overseen by two key individuals who, in turn, have obtained regulatory approval.

This last rule is to ensure that each TCSP’s affairs are conducted in a prudent and financially sound manner. This includes the ability to detail the ultimate beneficial ownership of all the vehicles that each TCSP is responsible for overseeing.

It should go without saying, I should hope, that strong corporate governance is essential and particularly important when TCSP-type work is involved. Boards must collectively comprise an effective balance of skills, knowledge and competence. Other than in very small companies there will always be some delegation of duties. That delegation and the controls around it should be undertaken appropriately.

Untoward controllers

On the subject of controllers and ‘key persons’, both types of people must, in that well-worn Basel/IOSCO phrase, be ‘fit and proper.’ This is, effectively, a requirement of integrity, competence and financial soundness.

With regard to ownership, it is very important that the people in control of the way a TCSP ultimately operates should be free from ‘inappropriate influence’ so that the companies that they control cannot be influenced by untoward controllers.

We have lived in times of austerity and continue to. The standard therefore also recognises the important role that the holder of a debt or an option can have in having effective control over a corporate. It is therefore important that regulators should understand where the debts and where other elements of inappropriate control could creep in. I shall come back to this in a moment when I look at the prudential elements of this standard.

In developing this standard, the danger was to say that TCSP control is all about money laundering and terrorist finance and nothing else. Actually, we have also introduced requirements to do with conduct, with prudence and with the administration of TCSPs. The question of conduct is obvious for banks and insurers, but you may wonder why we thought it was necessary in this context.

Actually, it is linked to AML obligations and compliance. A company must be able to interact with its clients properly and then make informed decisions about them. It must have appropriate terms and conditions, its advertising must be clear and ethical, it must not go ‘round promoting breaches of legislation, and it must follow appropriate complaints-handling procedures. None of that ought to be rocket-science!

Prudential issues

One would prudential issues to arise elsewhere in the financial service sector, but why for TCSPs? This is linked to the previous point about conduct and the next one about administration. Administration is a complex thing these days; it is no longer just about straight-forward transactions.

Requirements of ‘customer due diligence’ [a term that the Basel committee began to use around 2001 to refer to ‘know your customer’ controls – Ed] and verification of information (VOI) count here. On top of that, there are other requirements to do with ‘source of funds’ and knowing exactly what is going on.

IT systems

If you need to be in that position, you need to have proper systems in place. You need proper IT. That does not just happen; that requires capital. If you are holding beneficial ownership information, which is customary in offshore centres, then you have to have systems that work. You must have the liquidity to train your staff. You must have the cash-flow to be able to make sure that, if the regulator comes knocking and says “right, I want the beneficial ownership of that company,” it is not sitting in a box in the archives somewhere. It has to be readily accessible.

Financial crime

The standard falls into two parts over financial crime: ML/TF; and bribery and corruption. This is because of the direction of travel from the World Bank and the International Monetary Fund, which helped in the drafting of the standard.

It is, like all international standards, necessarily vague, but it does address an important area that influences money-flows. As a body, the Group of International Financial Centres Supervisors does not have the same international acclaim as Basel or IOSCO and does not trip off the tongue as easily, but it is one model. 

An original version of this article was published in Offshore Red, March 2015.

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