President Bush signed into law a renewal of the USA Patriot Act on 9 March, one day before certain provisions were due to expire. Bush’s signature came two days after the House gave final approval to the legislation after objections that it infringes privacy. The president said the law had been vital to protecting Americans from terrorists. Sixteen provisions of the old law were set to expire and political battles over the legislation forced Congress to extend the expiration date twice. To get the legislation renewed, Bush was forced to accept new curbs on the Patriot Act’s powers. These protections state explicitly that people who receive subpoenas granted under the Foreign Intelligence Surveillance Act for library, medical, computer and other records can challenge an order in court. The legislation renews the expiring provisions of the original Patriot Act, including one that lets federal officials obtain “tangible items,” such as business records, from libraries and bookstores, in connection with foreign intelligence and international terrorism investigations. Other provisions clarify that foreign intelligence or counter intelligence officers should share information obtained as part of a criminal investigation with counterparts in domestic law enforcement agencies. The Patriot Act enables the US Treasury to track and identify funds through sharing of information with the financial sector both vertically ? between the government and the industry ? and horizontally ? by providing a safe harbour that allows industry members to share information with each other. The Patriot Act also assists the Treasury to prevent money laundering and terrorist financing through greater transparency of correspondent accounts maintained by US banks on behalf of foreign banks. The Act expressly prohibits shell banks from participating in the US financial system and insists upon strict record keeping regarding the ownership of each non-US bank that maintains a correspondent account with a US institution. It also authorises the Treasury to designate foreign jurisdictions or institutions as a ?primary money laundering concerns? and take a range of regulatory actions, including requiring US financial institutions to terminate correspondent relationships with the designated entity or jurisdiction, against them.
China?s tax treaty with Belgium entered into force on 24 December 2005 and came into effect as of 1 January 2006. The treaty was signed on 13 October 2004. Belgium is the fifteenth country with which China has signed an income tax treaty, and the fourth in Europe. Under the treaty, the source country may impose a maximum withholding tax rate of 10% on dividends, interest and royalties. Under domestic rules in China, taxpayers are subject to withholding taxes at a rate of 30% on dividends paid to non-resident individuals and 25% on dividends paid to businesses, and 20% on interest and royalties. Residents of Belgium receiving Chinese-source income other than dividend, interest, and royalty income are exempted from Belgium income tax provided they have paid Chinese income tax on the income. Belgium resident corporations receiving dividends from companies resident in China are exempt from Belgium corporate income tax if specific conditions are met. Belgium residents receiving Chinese-source interest and royalty income qualify for the foreign tax credit. China residents who pay income tax to Belgium on Belgium-source income are permitted to claim a foreign tax credit.
The Chinese government is accelerating its push to reform the country’s corporate tax regime, and will be submitted to the cabinet in the third quarter, according to one senior minister. The proposed legislation will unify the corporate tax rate paid by domestic firms and foreign-backed enterprises. Vice Finance Minister Lou Jiwei told the Xinhua state news service on 6 March that the State Council is to submit to the Standing Committee of the National People’s Congress (NPC) plans for a new corporate tax law by August. The standard rate of corporate tax in China is currently 33% but a number of incentives and waivers designed to attract higher levels of foreign investment, have reduced the charge to an effective rate of 14% for to foreign-funded firms and around 24% for domestic firms. It is likely that, following unification, all firms will pay tax at a similar rate to that currently paid by domestic firms. Jiang Enzhu, spokesman for the National People’s Congress, said: ?It has been four years since China joined the World Trade Organisation in November 2001, with improvement in the country?s market system. Therefore, it is necessary to make relevant laws and provisions concerning all income taxes on all kinds of companies. This is aimed to ensure fair market competition among various enterprises.” China has also announced, in a joint statement issued by the Finance Ministry and the State Administration of Taxation, plans to exempt foreign investors’ Yuan-based securities from capital gains tax. Under China’s qualified foreign institutional investor programme, overseas companies are allowed to invest specified amounts in Chinese securities. The Chinese government hopes that eliminating capital gains tax for those investors will encourage them to apply for increased quotas, and boost foreign investment in China’s domestic markets.
The Dubai Financial Services Authority (DFSA) has granted the first licence to a hedge fund to operate from within the Dubai International Financial Centre (DIFC). The Constans Crescent Investment Fund is a geographically focused, multi-strategy fund aimed at investment opportunities in the greater Middle East/North Africa/South Asia region.
The Tax Court of Amsterdam ruled, on 15 February, that a Dutch BV (private limited liability company) that transferred its effective management to Greece is subject to tax in Greece under the Greece-Netherlands tax treaty, and therefore could not be assessed tax in the Netherlands on that income. It held that it was irrelevant that no corporate tax assessments had been imposed on the BV in Greece. It was also is irrelevant that the BV did not have a declaration of residence from the Greek tax authorities. An individual Dutch resident incorporated the BV in 1990 and, from the end of 1995, its assets consisted solely of Luxembourg portfolio investment accounts and a current account with a Dutch bank. In 1995 the sole shareholder and his spouse moved permanently to Greece and, in 1996, the company notified the Dutch tax inspector that it had become a resident of Greece under the Greece-Netherlands tax treaty. In 2000 the BV informed the Dutch tax inspector that it still had not been able to obtain formal registration in Greece and still had not received any corporate income tax assessments there. The tax inspector confirmed that the company was a resident of Greece, but, in 2002 and 2003, imposed tax assessments for 1996 and 1999. The tax inspector contended that, under the treaty, it was not sufficient for the effective management of the company to be situated in Greece, the company must actually be subject to tax in Greece to be considered a resident of Greece. Although the company had filed Greek tax returns, it had not yet received any Greek tax assessments. The court disagreed. It held that the tax treaty did not require that a resident must actually be subject to tax in the relevant state to be considered a resident of that state. Such a requirement could not be derived from the OECD commentary to the 1977 model tax treaty, on which the Greece-Netherlands tax treaty was based. It therefore ruled in favour of the taxpayer and cancelled the tax assessments.
The European Commission is to refer Spain to the European Court of Justice (ECJ) over its taxation of non-residents’ capital gains on property sales and its taxation of non-residents’ income from employment. Under Spanish law, capital gains of resident individuals derived from immovable property are taxed at a rate of 15%, whereas similar capital gains of non-resident individuals are taxed at a rate of 35%. And while employment related income is generally subject to a final withholding tax at a rate of 25% when paid to non-resident individuals, resident individuals are subject to progressive rates of taxation ranging from 15% to 45%. The Commission contends that the Spanish regime fails to conform to the EC Treaty requirements, in particular the principle of non-discrimination. Spain has failed to amend its legislation despite a formal request to do so from the Commission in July 2005.
UK financial regulator, the Financial Services Authority (FSA), confirmed in a Policy Statement issued on 27 January 2006 that it intends to streamline its anti-money laundering requirements, as part of its drive to simplify the UK regulatory regime and remove rules and guidance that are no longer needed. The FSA is to remove the existing detailed rules on anti-money laundering controls in their entirety, replacing them with high-level requirements for firms to have their own risk-based controls on money laundering. The FSA said this reflected its wish to provide firms with greater flexibility to meet their anti-money laundering obligations and an increased focus on senior management responsibility to do so. It was intended to encourage firms to target resources on those activities that were most likely to result in deterring and detecting money laundering.
The trustees of a settlement succeeded in having a Deed of Appointment set aside by the UK High Court because of the trustees’ mistake as to the tax consequences of the appointment. They invoked the principle in Re Hastings-Bass, which permits the Court to interfere with the discretionary acts of the trustees if they have failed, when exercising a power, to take into account all relevant considerations or have taken into account any irrelevant ones. In Re Bedford Estates, Sieff v Fox, the consent of a beneficiary and his father was required to effect an appointment of certain assets out of a settlement to a beneficiary and a subsequent assignment into another settlement. The intention was to permit a wider class, including younger female members of the beneficiary’s family, to benefit from the assets while incurring no immediate charge to tax and mitigating future inheritance tax charges within the settlement. It was subsequently discovered that the effect of the appointment and assignment, if valid, would be a substantial immediate charge to capital gains tax together with potentially significant adverse tax consequences for the beneficiary. The trustees applied to the Court seeking to have the appointment set aside under the principle in Re Hastings-Bass, or in the alternative, on the grounds of mistake. The beneficiary supported the application on the basis that his consent to the appointment was invalidated by mistake. A beneficiary of the recipient settlement was joined to the proceedings to present to the Court the arguments in favour of the validity of the appointment. The Inland Revenue declined to join. On 23 June 2005, Lord Justice Lloyd held that the appointment should be set aside under the rule in Re Hastings-Bass because of the trustees’ mistake as to the tax consequences of the appointment. He also found that the beneficiary had been mistaken as to both the tax consequences of the appointment and the impact of the subsequent assignment such as to invalidate the giving of his consent. He reformulated the Hastings-Bass principle as: ?where trustees act under a discretion given to them by the terms of the trust, in circumstances in which they are free to decide whether or not to exercise that discretion, but the effect of the exercise is different from that which they intended, the court will interfere with their action if it is clear that they would not have acted as they did had they not failed to take into account considerations which they ought to have taken into account, or taken into account considerations which they ought not to have taken into account.?
Authorities had undertaken some important money laundering investigations leading to significant seizures and prosecutions, but the challenge remained formidable. The report said it was important to sustain and strengthen these gains because focusing on money laundering was one of the most valuable tools to combat international crime. Much recent anti-money laundering progress was due to the efforts of the United Nations, the Financial Action Task Force (FATF), the global network of FATF-style regional bodies (FSRBs), and in individual countries, to raise international awareness and inspire national commitment to attack money laundering?and its associated problem of terrorist financing. The FATF?s Non-Cooperative Countries & Territories (NCCT) initiative to spur greater international anti-money laundering cooperation and compliance was now, it said, being scaled down after years of effective implementation. In 2005, FATF removed the Cook Islands, Indonesia, Nauru, and the Philippines from the list leaving only Burma and Nigeria as the remaining NCCTs. Increasingly, the global network of FATF-style regional bodies was the mechanism responsible for ensuring compliance and implementation of the FATF Recommendations. The report found that129 countries now belong to one or another of the seven FSRBs that now cover most of the world. The two newest FSRBs that were formed in 2004?the Eurasian Group on Combating Money Laundering & Financing of Terrorism (EAG) which covers Russia, Central Asia, and China, and the Middle East and North African Financial Action Task Force (MENAFATF) which covers 14 countries in those regions?had become operational. These efforts, said the report, were producing results. The number of jurisdictions that have criminalised money laundering to include predicate crimes beyond narcotics had increased to 172 in 2005 from 163 in 2004. Similarly, 10 more countries criminalised terrorist financing in 2005, bringing the total number of countries with such laws to 123. The US continued to exert bilateral pressure through application of Section 311 of the USA PATRIOT Act which authorises the US Treasury to designate a foreign jurisdiction, financial institution, class of transactions, or type of account as being of “primary money laundering concern,” and to impose ?special measures?. In 2005, two Latvian banks, VEF Banka and Multibanka, and Macau-based Banco Delta Asia were so designated. The US also provided bilateral and regional assistance, and through contributions to multilateral organisations. To the end of 2005, State Department-led interagency teams had comprehensively assessed the capabilities and vulnerabilities of 20 countries and have provided assistance to 23. The five-year Caribbean Anti-Money Laundering Program (CALP), a multilateral undertaking of the US, UK and the European Union had now been completed. To replicate the success of the CALP in the Pacific, the State Department was now funding the Pacific Island Forum (PIF) to create the Pacific Anti-Money Laundering Program (PALP). A four-year programme, to be coordinated with efforts in the region by the UN, the Asia/Pacific Group on Money Laundering (APG), Australian anti-money laundering agencies, and the International Monetary Fund, was aimed at building comprehensive anti-money laundering/counter terrorist financing regimes in the 14 Pacific Islands Forum member states that are not members of FATF. The biggest hurdle to achieving significant international success against money laundering, said the report, had been implementation. The international community was underachieving on this front. Part of the problem was the elusiveness of the threat that continued to thwart efforts by even the best investigators; and part continued to be the lack of political will and corruption. The FATF, it said, had formally recognised the link between corruption and anti-money laundering at its October 2005 plenary session at which it agreed to explore with the Asia/Pacific Group on Money Laundering the ?symbiotic relationship among corruption, money laundering and terrorist financing? and how the FATF?s experience could be used to ?combat these combined threats?. The UN Convention Against Corruption (UNCAC), which entered into force in December 2005 and currently has over 180 signatories or parties, also called for extensive action in the area of money laundering and asset recovery, and was quickly becoming the new global international standard for fighting corruption. UNCAC and the growing international anti-corruption movement would provide complementary benefits to ongoing anti-money laundering efforts worldwide. Despite the progress, the international community continued to face a large and dynamic threat that would require a prolonged commitment of resources to sustain and intensify efforts. More innovative methods such as Trade Transparency Units would be required to attack traditional systems of transferring value, laundering money and financing terrorism, and more efficient use of scarce resources, such as regional training, would become increasingly necessary. All of this must play out against a backdrop of countries having the political will to go beyond important first steps of accepting their responsibilities to combat money laundering and terrorist financing and creating the structures to do so, to actually launching and completing investigations. Below is a summary of the strengths and weaknesses of the laws and regulations in place in the major offshore financial centres, and recommendations for future work in this area: Antigua & Barbuda Antigua & Barbuda has comprehensive legislation in place to regulate its financial sector, but remains susceptible to money laundering because of its offshore financial sectors and Internet gaming industry. Money laundering in the region is related to both narcotics and fraud schemes, as well as to other crimes, but money laundering appears to occur more often in the offshore sector than in the domestic financial sector. The Government should continue its international cooperation, and rigorously implement and enforce all provisions of its anti-money laundering legislation. Antigua should vigorously enforce its anti-money laundering laws by actively prosecuting money laundering and asset forfeiture cases. Aruba Due to its geographic location and excellent infrastructure Aruba is both attractive and vulnerable to money launderers and narcotics trafficking. The Government has shown a commitment to combating money laundering by establishing a solid anti-money laundering regime that is generally consistent with the recommendations of the FATF and the CFATF. Aruba should immobilise bearer shares under its fiscal framework and should enact its long-pending ordinance addressing the supervision of trust companies. Bahamas The Commonwealth of the Bahamas is an important regional and offshore financial centre. Second to tourism, the economy depends on its financial services sector. Financial services account for approximately 15% of the gross domestic product. Money laundering in the Bahamas is related to financial fraud and the proceeds of drug trafficking. Illicit proceeds from drug trafficking usually take the form of cash or are quickly converted into cash. The strengthening of anti-money laundering laws has made it increasingly difficult for most drug traffickers to deposit large sums of cash. As a result, a new trend has developed of storing extremely large quantities of cash in security vaults at properties deemed to be safe houses. Other money laundering trends include the purchase of real estate, large vehicles, and jewellery, and the processing of money through a complex national or international web of legitimate businesses and shell companies. The Government has enacted substantial reforms that could reduce its financial sector?s vulnerability to money laundering; however, it must steadfastly and effectively implement those reforms. The Bahamas should provide adequate resources to its law enforcement and prosecutorial/judicial personnel to ensure that investigations and prosecutions are satisfactorily completed, and requests for international cooperation are efficiently processed. Bahrain Bahrain has one of the most diversified economies in the Persian Gulf and the Gulf Cooperation Council (GCC), which consists of Bahrain, Saudi Arabia, United Arab Emirates, Kuwait, Qatar, and Oman. Bahrain has promoted itself as an international financial centre in the Gulf region and sees the sector as vital to its future. As of December 2005, the Bahrain Monetary Agency (BMA)?Bahrain?s Central Bank and sole regulator for the financial sector?had issued a total of 358 licenses, including 169 banks, of which 51 are offshore banking units (OBUs), 39 are investment banks, 25 are commercial banks, and 32 are representative offices of international banks. With so many financial institutions, and a geographic location in the Middle East as a transit point along the Gulf and into southwest Asia, Bahrain may attract money laundering activities. However, it is thought that the greatest risk of money laundering is not illegal money generated in Bahrain, but rather Bahrain?s financial institutions being used to layer illegal foreign money by transiting it through Bahrain. Despite the achievements of the Anti-Money Laundering Unit and the BMA, the Bahraini Government has not yet passed a law to combat terrorist financing and the problem of cash couriers. The Bahraini Government should continue its battle against money launderers and terrorist financiers by enacting such laws, by aggressively enforcing both the new laws and the existing AML law and regulations, and by enhancing the prosecutorial and judicial ability to successfully try financial crimes. Barbados As a transit country for illicit narcotics, Barbados is both attractive and vulnerable to money launderers. The Government has taken a number of steps in recent years to strengthen its anti-money laundering legislation. Although the Government has strengthened anti-money laundering legislation, it should consider adopting civil forfeiture and asset sharing legislation. Barbados must steadfastly enforce the laws and regulations it has adopted. The Government should be more aggressive in conducting examinations of the financial sector and maintaining strict control over vetting and licensing of offshore entities. In 2005, there was a disproportionate number of SARS reported compared to the number of financial institutions. The Government should ensure adequate supervision of non-governmental organizations and charities. It should also work to improve information sharing between regulatory and enforcement agencies. Additionally, Barbados should continue to provide adequate resources to its law enforcement and prosecutorial personnel, to ensure Mutual Legal Assistance Treaty requests are efficiently processed. The Government should adequately staff its FIU as a first step toward bolstering its ability to prosecute anti-money laundering cases. Belize Belize is not a major regional financial centre. In an attempt to diversify Belize?s economic activities, authorities have encouraged the growth of offshore financial activities and have pegged the Belizean dollar to the US dollar. Belize continues to offer financial and corporate services to non-residents. Belizean officials suspect that money laundering occurs primarily within the country?s offshore financial sector. The local casas de cambios (money exchange houses), which were suspected of money laundering, were closed effective July 11, 2005. Money laundering, primarily related to narcotics trafficking and contraband smuggling, also occurs through banks operating in Belize. The Government should increase resources to law enforcement and should provide adequate training to those responsible for enforcing both Belize?s anti-money laundering/counterterrorist financing laws and its asset forfeiture regime. Belize should take steps to address the vulnerabilities in its supervision of its offshore sector, particularly the lack of supervision of the gaming sector, including Internet gaming facilities. Belize should immobilise bearer shares and mandate suspicious activity reporting for the offshore financial sector. Bermuda Bermuda is a major offshore financial centre, and has a strong reputation internationally for the integrity of its financial regulatory system. The Government cooperates with the United States and the international community to counter money laundering and terrorist financing, and continues to update its legislation and procedures in conformance with international standards. The Government should continue its efforts to update its financial services legislation relating to anti-money laundering and counterterrorism. It should also enact the proposed measures to strengthen provisions relating to the cross-border transportation of cash and monetary instruments and to include gatekeepers, such as accountants and attorneys, as covered entities under its anti-money laundering laws. Botswana Botswana is a developing regional financial centre as well as a nascent offshore financial centre. Botswana has a relatively well-developed banking sector and is vulnerable to money laundering. Neither the narcotics trade nor the laundering of its proceeds appears to be a major problem in Botswana. Financial crimes such as bank fraud and counterfeit currency were down marginally from 2004. Reportedly, illicit diamonds are smuggled from Botswana into South Africa and other neighbouring countries. The Government of Botswana is preparing a draft strategy to combat money laundering and the financing of terrorism, including interagency procedures and coordination. Although Botswana does not yet have a full-fledged financial intelligence unit, the Directorate on Corruption & Economic Crime has responsibility for investigating suspected instances of money laundering, and it can demand access to bank records if needed during the course of an investigation. Government agencies are actively considering the need for broader asset forfeiture to allow a financial intelligence unit to effectively combat money laundering and the financing of terrorism. Legislation authorizing a financial intelligence unit and granting it sufficient powers to investigate would increase the government?s capacity to combat financial crimes. British Virgin Islands During 2005, the United States has not developed any new information on money laundering vulnerabilities and countermeasures in the BVI. Yet the BVI remains vulnerable to money laundering, primarily due to its financial services industry. Tourism and financial services account for approximately 50% of the economy. The offshore sector offers incorporation and management of offshore companies, and provision of offshore financial and corporate services. The Government should continue to strengthen its anti-money laundering regime by fully implementing its programs and legislation. Cayman Islands The Cayman Islands continues to make strides in strengthening its anti-money laundering program, including its first successful prosecution of a money laundering case in February 2005. Nevertheless, the islands remain vulnerable to money laundering due to their significant offshore sector. As the world?s fifth largest financial centre, the Cayman Islands is home to a well-developed offshore financial centre that provides a wide range of services such as private banking, brokerage services, mutual funds, and various types of trusts, as well as company formation and company management. The Cayman Islands should continue its efforts to implement its anti-money laundering regime. Cook Islands After the Government remedied deficiencies in its anti-money laundering regime, the Financial Action Task Force (FATF) removed the Cook Islands from its Non-Cooperative Countries & Territories list in February 2005. The Cooks had been on the list since 2000. The Cook Islands should continue to implement legislation designed to strengthen its nascent institutions, should maintain vigilant regulation of its offshore financial sector, and should abolish “flee clauses” in new asset protection trusts to ensure that it comports with international standards. Cyprus The Republic of Cyprus is a major regional financial centre with a robust financial services industry, both domestic and offshore, which contributes about 6.1% of GDP. Like other such centres, it remains vulnerable to international money laundering activities. Fraud and, to some extent, narcotics trafficking are the major sources of illicit proceeds laundered in Cyprus. The Government has put in place a comprehensive anti-money laundering regime. It should continue to take steps to tighten implementation of its laws. In particular, it should ensure that regulation of charitable and non-profit entities is adequate. Cyprus should enact provisions that allow for civil forfeiture of assets. Dominica The Commonwealth of Dominica initially sought to attract offshore dollars by offering a wide range of confidential financial services, low fees, and minimal government oversight. A rapid expansion of Dominica?s offshore sector without proper supervision made it attractive to international criminals and vulnerable to official corruption. In response to international criticism, Dominica enacted legislation to address many of the deficiencies in its anti-money laundering regime. Dominica?s financial sector includes one offshore and four domestic banks, 17 credit unions, approximately 9,000 international business companies (IBCs) (a significant increase from 1,435 in 2002), 18 insurance agencies, and one operational Internet gaming company (although reports indicate more Internet gaming sites exist). There are no free trade zones in Dominica. Under Dominica?s economic citizenship programme, individuals can purchase Dominican passports and, in the past, official name changes for approximately US$75,000 for an individual and US$100,000 for a family of up to four persons. Although it was not very active in 2005, Dominica?s economic citizenship program does not appear to be adequately regulated. Individuals from the Middle East, the former Soviet Union, the Peoples? Republic of China and other foreign countries have become Dominican citizens and entered the United States via a third country without visas. Subjects of United States criminal investigations have been identified as exploiting Dominica?s economic citizenship programme in the past. The Government should fully implement and enforce the provisions of its legislation and provide additional resources for regulating offshore entities, including its Internet gaming entities. Dominica should continue to develop the FIU to enable it to fulfil its responsibilities and cooperate with foreign authorities. Dominica should eliminate its programme of economic citizenship. Gibraltar As part of the European Union (EU), Gibraltar is required to implement all relevant EU directives, including those relating to anti-money laundering. Gibraltar was one of the first jurisdictions to introduce and implement money laundering legislation that covered all crimes. The Financial Services Commission (FSC) is responsible for regulating and supervising Gibraltar?s financial services industry. It is required by statute to match UK supervisory standards. Both onshore and offshore banks are subject to the same legal and supervisory requirements. Gibraltar should put in place reporting requirements for cross-border currency movements. Grenada Like many other Caribbean jurisdictions, the Grenada raises revenue from the offshore sector by imposing licensing and annual fees upon offshore entities. After being placed on the Financial Action Task Force?s (FATF) list of non-cooperative countries and territories (NCCT) in the fight against money laundering in September 2001, the Government implemented and strengthened its legislation and regulations necessary for adequate supervision of Grenada?s offshore sector, which prompted the FATF to remove Grenada?s name from the NCCT list in February 2003. As of November 2005, Grenada has one inactive offshore bank, one trust company, one management company, and one international insurance company. Grenada is reported to have over 20 Internet gaming sites. There are also 810 international business companies (IBCs). The domestic financial sector includes six commercial banks, 26 registered domestic insurance companies, two credit unions, and four or five money remitters. The Government has repealed its economic citizenship legislation. Although the Government has strengthened the regulation and oversight of its financial sector, it must remain alert to potential abuses and must steadfastly implement the laws and regulations it has adopted. Grenada should also continue to enhance its information sharing, particularly with other Caribbean jurisdictions. Guernsey The Bailiwick is a sophisticated financial centre and, as such, it continues to be vulnerable to money laundering at the layering and integration stages. Guernsey has put in place a comprehensive anti-money laundering regime, and has demonstrated its ongoing commitment to fighting financial crime. Bailiwick officials should continue both to carefully monitor Guernsey?s anti-money laundering programme to assure its effectiveness, and to cooperate with international anti-money laundering authorities. The Bailiwick should work with the UK to extend the UN International Convention for the Suppression of the Financing of Terrorism to Guernsey. Hong Kong Hong Kong is a major international financial centre. Its low taxes and simplified tax system, sophisticated banking system, the availability of secretarial services and shell company formation agents, and the absence of currency and exchange controls, facilitate financial activity but also make it vulnerable to money laundering. The primary sources of laundered funds are narcotics trafficking (particularly heroin, methamphetamine, and ecstasy), tax evasion, fraud, illegal gambling and bookmaking, and commercial crimes. Laundering channels include Hong Kong?s banking system, and its legitimate and underground remittance and money transfer networks. Hong Kong is substantially in compliance with the Financial Action Task Force?s (FATF) Forty Recommendations on Money Laundering, and has pledged to adhere to the revised FATF Forty Recommendations. Overall, Hong Kong has developed a strong anti-money laundering regime, though improvements should be made. It is a regional leader in anti-money laundering efforts. Hong Kong has been a member of the FATF since 1990. The Government should further strengthen its anti-money laundering regime by establishing threshold reporting requirements for currency transactions and putting into place “structuring” provisions to counter evasion efforts. Hong Kong should also establish mandatory cross-border currency reporting requirements and continue to encourage more suspicious transaction reporting by lawyers and accountants, as well as by business establishments such as auto dealerships, real estate companies, and jewellery stores. Hong Kong should also take steps to stop the use of “shell” companies, IBCs, and other mechanisms that conceal the beneficial ownership of accounts by more closely regulating corporate formation agents. Ireland Narcotics trafficking, fraud, and tax offences are the primary sources of funds laundered in Ireland. Money laundering mostly occurs in financial institutions such as bureaux de change. Additionally, investigations in Ireland indicate that some business professionals have specialised in the creation of legal entities, such as shell corporations, as a means of laundering money. Trusts are also established as a means of transferring funds from the country of origin to offshore locations. The use of shell corporations and trusts makes it more difficult to establish the true beneficiary of the funds, which makes it difficult to follow the money trail and establish a link between the funds and the criminal. Suspicious Transaction Reports (STRs), received by the Revenue Commissioners and the Garda Bureau of Fraud Investigation (GBFI), cites the use of solicitors, accountants, and company formation agencies in Ireland to create shell companies. Investigations have disclosed that these companies are used to provide a series of transactions connected to money laundering, fraudulent activity, and tax offences. The difficulties in establishing the beneficial owner have been complicated by the fact that the directors are usually nominees and are often principals of a solicitors? firm or a company formation agency. “Shell” companies-companies that have no physical presence and normally have nominee directors are contrary to FATF?s international standards. These “paper companies” are convenient vehicles for the laundering of funds and could be used to finance terrorism. The Government should consider strengthening measures to prevent the establishment of such companies. Similarly, law enforcement should have a stronger role in identifying the true beneficial owners of shell companies as well as of trusts in the course of investigations. Isle of Man Its large and sophisticated financial centre is potentially vulnerable to money laundering at the layering and integration stages. The US dollar is the most common currency used for criminal activity in the IOM. Most of the illicit funds in the IOM are from fraud schemes and narcotics trafficking in other jurisdictions, including the United Kingdom. Identity theft and Internet abuse are growing segments of financial crime activity. Isle of Man officials should continue to support and educate the local financial sector to help it combat current trends in money laundering. The authorities also should continue to work with international anti-money laundering authorities to deter financial crime and the financing of terrorism and terrorists. Jersey Jersey?s sophisticated array of offshore services is similar to that of international financial services centres worldwide. Due to Jersey?s investment services, most of the illicit money in Jersey is derived from foreign criminal activity. Domestically, local drugs trafficking and corruption of politically exposed persons (PEP) are sources of illicit proceeds found in the country. Money laundering mostly occurs with Jersey?s banking system, investment companies, and local trust companies. The Government has established an anti-money laundering programme that in some instances, such as the regulation of trust company businesses and the requirement for companies to file beneficial ownership with Jersey?s Financial Services Commission (JFSC) go beyond what international standards require, in order to directly address Jersey?s particular vulnerabilities to money laundering. Jersey should establish reporting requirements for the cross-border transportation of currency and monetary instruments. Jersey should continue to demonstrate its commitment to fighting financial crime by enhancing its anti-money laundering/counter terrorist-financing regime in areas of vulnerability. Labuan The offshore banking centre on the island of Labuan is more vulnerable to money laundering and the financing of terrorism than the rest of the formal financial sector in Malaysia. However, its regulation of the offshore banking sector has improved over the past few years. The Labuan Offshore Financial Services Authority (LOFSA) is under the authority of the Central Bank, Bank Negara. The offshore sector has different regulations for the establishment and operation of offshore businesses but the same anti-money laundering laws as govern domestic financial service providers. Offshore banks, insurance companies, and trust companies are required to file suspicious transaction reports under the country?s anti-money laundering law. Labuan has 5,022 registered offshore companies, money banking companies, trusts, and insurance companies. Offshore companies must be established through a trust company. Trust companies are required by law to establish true beneficial owners and submit suspicious transaction reports as necessary. Conversely, there is no requirement to reveal the true identity of the beneficial owner of international corporations. LOFSA officials may require any organisation operating in Labuan to disclose information on its beneficial owner or owners. Bearer instruments are strictly prohibited in Labuan. The Government of Malaysia continues to make a broad, sustained effort to combat money laundering and terrorist financing flows within its borders. To further strengthen its anti-money laundering regime, Malaysia should insist on the identification and registration of the true beneficial owners of the more than 5,000 international business companies of Labuan. Liechtenstein The Principality of Liechtenstein?s well-developed offshore financial services sector, relatively low tax rates, liberal incorporation and corporate governance rules, and tradition of strict bank secrecy have contributed significantly to the ability of financial intermediaries in Liechtenstein to attract funds from abroad. These same factors have historically made the country attractive to money launderers. Rumours and accusations of misuse of Liechtenstein?s banking system persist in spite of the progress the principality has made in its efforts against money laundering. Liechtenstein?s financial services sector includes 16 banks, three non-bank financial companies, 16 public investment companies, and a number of insurance and reinsurance companies. The three largest banks account for 90% of the market. Liechtenstein?s 230 licensed fiduciary companies and 60 lawyers serve as nominees for or manage more than 75,000 entities (mostly corporations or trusts) available primarily to non-residents of Liechtenstein. Approximately one third of these entities hold controlling interests in separate entities chartered outside of Liechtenstein. Laws permit corporations to issue bearer shares. The Government has made consistent progress in addressing previously noted shortcomings in its anti-money laundering regime. It should continue to build upon the foundation of its evolving anti-money laundering and counter terrorist financing regime. Liechtenstein should accede to the 1988 UN Drug Convention and the UN Convention against Transnational Organised Crime. Liechtenstein should require reporting of cross-border currency movements and ensure that trustees and other fiduciaries comply fully with all aspects of the new anti-money laundering legislation and attendant regulations, including the obligation to report suspicious transactions. The EFFI, the financial intelligence unit, should be given access to additional financial information. While Liechtenstein recognises the rights of third parties and protects uninvolved parties in matters of confiscation, the government should distinguish between bona fide third parties and others. Luxembourg Luxembourg is one of the largest financial centres in the world. Its strict bank secrecy laws allow international financial institutions to benefit from and operate a wide range of services and activities. With US$1.4 trillion under management, Luxembourg is the second largest mutual fund investment centre in the world, following the United States. Luxembourg is considered an offshore financial centre, with foreign-owned banks accounting for a majority of the nation?s total bank assets. Although there are a handful of domestic banks operating in the country, the majority of banks registered in Luxembourg are foreign subsidiaries of banks in Germany, France, and Belgium. For this reason (and also due to the proximity of these three nations to Luxembourg), a significant share of Luxembourg?s suspicious transaction reports (STRs) are generated from transactions involving clients in these three countries. While Luxembourg is not a major hub for illicit drug distribution, the size and sophistication of its financial centre create opportunities for drug-related and other forms of money laundering and terrorist financing. The Government has enacted laws and adopted practices that help to prevent the abuse of its bank secrecy laws and has enacted a comprehensive legal and supervisory anti-money laundering and counter terrorism financing regime. Further action should be taken to address issues such as the lack of a distinct legal framework for the financial intelligence unit and the small number of money laundering investigations and prosecutions. The financial intelligence unit should work with regulatory agencies to formulate and issue substantive guidance to financial institutions on anti-money laundering trends and techniques. Luxembourg should continue to strengthen enforcement to prevent abuse of its financial sector, and should continue its active participation in international fora. Luxembourg should enact legislative amendments to address the continued use of bearer shares. It should ratify the UN Convention against Transnational Organised Crime. Marshall Islands The Marshall Islands offshore financial sector is vulnerable to money laundering. Non-resident corporations (NRCs), the equivalent of international business companies, can be formed. Currently, there are 5,500 registered NRCs, half of which are companies formed for registering ships. NRCs are allowed to offer bearer shares. Corporate officers, directors, and shareholders may be of any nationality and live anywhere. NRCs are not required to disclose the names of officers, directors, and shareholders or beneficial owners, and corporate entities may be listed as officers and shareholders. The corporate registry program, however, does not allow the registering of offshore banks, offshore insurance firms, and other companies of a financial nature. Although NRCs must maintain registered offices in the Marshall Islands, corporations can transfer domicile into and out of the Marshall Islands with relative ease. Marketers of offshore services via the Internet promote the Marshall Islands as a favoured jurisdiction for establishing NRCs. In addition to NRCs, the Marshall Islands offer non-resident trusts, partnerships, unincorporated associations, and domestic and foreign limited liability companies. Offshore banks and insurance companies are not permitted in the Marshall Islands. The Government has stabilised its key defences against money laundering and terrorist financing, and has commenced work aimed at aligning its anti-money laundering system with the revised 40 plus 9 Recommendations of the Financial Action Task Force on Money Laundering. The Republic of the Marshall Islands should become a party 1988 UN Drug Convention. Additionally, the Government should require the identification of the beneficial owners of Non-resident Corporations. Monaco The Principality of Monaco is known for its tradition of bank secrecy, network of casinos, and favourable tax regime. The principality does not face the ordinary forms of organised crime, and the crime that does exist does not seem to generate significant illegal proceeds; rather, money laundering offences relate mainly to offences committed abroad. Russian organised crime and the Italian Mafia reportedly have laundered money in Monaco. Monaco remains on an OECD list of so-called “non-cooperative” countries in terms of provision of tax information. The Government should amend the Criminal Code to include an “all-crimes” approach, rather than the current list of predicate offences. Monaco should also amend its legislation to implement full corporate criminal liability. Monaco should continue to enhance its anti-money laundering and confiscation regimes. Netherlands Antilles Narcotics trafficking and a lack of border control between Sint Maarten and St. Martin create opportunities for money launderers in the Netherlands Antilles. Of note is the surge over the past few years of remittance transfers from the Netherlands. The Government has shown a commitment to combating money laundering. An increase to the Netherlands Antilles Reporting Centre (MOT NA) staff is particularly notable. The Netherlands Antilles should continue its focus on increasing regulation and supervision of the offshore sector and free trade zones and pursuing money laundering investigations and prosecutions. The Netherlands Antilles should criminalise the financing of terrorism, and should enact the necessary legislation to implement the UN International Convention for the Suppression of the Financing of Terrorism. Panama Panama is a major drug-transit country, and particularly vulnerable to money laundering because of its proximity to major drug-producing countries, its sophisticated international banking sector, its US dollar-based economy, and the Colon Free Zone (CFZs). Some goods originating in or transhipped through the CFZ are purchased with narcotics proceeds (mainly via dollars obtained in the United States) through the Colombian Black Market Peso Exchange. Despite significant progress to strengthen Panama?s anti-money laundering regime, Panama must remain vigilant to the threat that money laundering continues to pose to the stability of the country?s legitimate financial institutions. After Hong Kong and the British Virgin Islands, Panama has the highest number of offshore-registered companies, approximately 350,000. Panama?s large offshore financial sector includes international business companies, 34 offshore banks, captive insurance companies (corporate entities created and controlled by a parent company, professional association, or group of businesses), and fiduciary companies. Transfer of negotiable (bearer) bonds is another potential vulnerability that could be exploited by money launderers. The high volume of trade occurring through the CFZ (there are approximately 2,600 businesses established in the Zone) presents opportunities for trade-based money laundering. The Government should continue its regional assistance efforts. It should also continue implementing the reforms it has undertaken to its anti-money laundering regime in order to reduce the vulnerability of Panama?s financial sector and to enhance Panama?s ability to investigate and prosecute financial crimes, including money laundering and potential terrorist financing. Samoa Samoa is an offshore financial centre, with eight offshore banks licensed. For entities registered or licensed under the various Offshore Finance Centre Acts, there are no currency or exchange controls or regulations, and no foreign exchange levies payable on foreign currency transactions. No income tax or other duties, nor any other direct or indirect tax or stamp duty is payable by registered/licensed entities. In addition to the eight offshore banks, Samoa currently has 13,465 international business corporations (IBCs), three international insurance companies, six trustee companies, and 175 international trusts. International cooperation can occur only if Samoa has entered into a mutual cooperation agreement with the requesting nation. Under the Act, the Money Laundering Prevention Authority (MLPA) has no powers to exchange information with overseas counterparts. All cooperation under the MLPA is through the Attorney General?s Office, which is the Competent Authority under the Act for receiving and implementing. However, according to a 2003 Samoa Report to the UN Counter-Terrorism Committee, Samoa is reviewing the legal framework for the effective operation of the MLPA in order to further strengthen domestic and international information exchange. In addition, the Office of the Attorney General, in conjunction with the Central Bank, the Ministry of Police and the Division of Customs of the Ministry for Revenue, is currently preparing amendments to the Money Laundering Prevention Act of 2000 for purposes of strengthening and complementing legislation that is being drafted or developed, including the Proceeds of Crime Bill, the Mutual Assistance in Criminal Matters Bill, and the Extradition Amendment Bill. At the 2005 Asia/Pacific Group Plenary, Samoa reported that these bills and an Insurance Act would be tabled for Parliament?s approval in December 2005. The Attorney General?s stated that enactment of the relevant amendments to these bills would be enacted in the first quarter of 2006. Since the passage of the Money Laundering Prevention Act in June 2000, Samoa has continued to strengthen its anti-money laundering regime and has issued regulations and guidelines to financial institutions so that they have a clear understanding of their obligations under the Act. Particular emphasis is directed toward regulation of the offshore financial sector, principally the establishment of due diligence procedures for owners and directors of banks and the elimination of anonymous accounts for onshore and offshore banks. The Government is strengthening relevant legislation to identify the beneficial owners of IBCs to help ensure that criminals do not use them for money laundering or other financial crimes. Samoa is in the process of adopting amended and additional legislation to allow for international cooperation and information sharing. The inability of the MLPA simply to exchange information on an administrative level is a material weakness of the current system and is an impediment to international cooperation. To rectify that situation, the Government should enact legislation to provide the MLPA with the legal authority to share information with foreign analogs. Samoa should also accede to the 1988 UN Drug Convention and become a party to the UN Convention against Transnational Organised Crime. Seychelles Seychelles is a not a major financial centre, but it does have a developed offshore financial sector that makes the country vulnerable to money laundering. The Government, in efforts to diversify its economy beyond tourism, has taken steps to develop an offshore financial sector to increase foreign exchange earnings. The Government actively markets Seychelles as an offshore financial and business centre that allows the registration of non-resident companies. There are currently over 25,461 registered international business companies (IBCs) in Seychelles that pay no taxes in Seychelles, and are not subject to foreign exchange controls. The Seychelles International Business Authority (SIBA), which acts as the central agency for the registration for IBCs, promotes the fact that IBCs need not file annual reports. The SIBA is part of the Ministry of International Trade, and also manages the Seychelles International Trade Zone. In addition to IBCs, Seychelles permits offshore trusts (registered through a licensed trustee), offshore insurance companies, and offshore banking. Three offshore insurance companies have been licensed, one for Captive Insurance and two for General Insurance). The International Corporate Service Providers Act 2003, which is designed to regulate all the activities of the corporate service providers as well as the trustee service providers, entered into force in 2004. A major weakness of the Seychelles? offshore programme is that it still permits the issuance of bearer shares, a feature that can facilitate money laundering by making it extremely difficult to identify the beneficial owners of an IBC. Seychelles officials stated in 2000 that they were reviewing the question of bearer shares and intended to outlaw them. In the interim, the Government has indicated that it will not approve the issuance of any more bearer shares. Seychelles should expand its anti-money laundering efforts by moving to prohibit bearer shares and requiring the complete identification of beneficial owners of international business companies (IBCs). Seychelles should establish a financial intelligence unit to collect, analyse, and share financial data with foreign counterparts, in order to effectively combat money laundering and other financial crimes. Seychelles should criminalize the financing of terrorism. Singapore As a significant international financial and investment centre, and in particular as a major offshore financial centre, Singapore is vulnerable to potential money launderers. Bank secrecy laws and the lack of routine currency reporting requirements make Singapore an attractive destination for drug traffickers, criminals, terrorist organisations and their supporters seeking to launder money, and for flight capital. Money laundering occurs mainly in the offshore sector, but may also occur in the non-bank financial system, which includes large numbers of moneychangers and remittance agencies. Some structural gaps remain in financial regulation that may hamper efforts to control these crimes. The Corruption, Drug Trafficking, and Other Serious Crimes (Confiscation of Benefits) Act of 1999 (CDSA) criminalises the laundering of proceeds from narcotics and 184 other categories of serious offences, including ones committed overseas, which would be serious offences if they had been committed in Singapore. As part of amendments to the CDSA that came into effect in September 2005, Singapore added two more categories of offences. Despite these changes, Singapore?s current list of designated predicate offences for money laundering does not include many of those in line with the Financial Action Task Force?s (FATF?s) Recommendations. Singapore should continue close monitoring of its domestic and offshore financial sectors. As a major financial centre, it should also take measures to regulate and monitor large currency and bearer negotiable instrument movements into and out of the country, in line with the Financial Action Task Force?s (FATF) Special Recommendation Nine, adopted in October 2004, that mandates countries implement measures such as declaration systems in order to detect cross-border currency smuggling. The conclusion of broad mutual legal assistance agreements is also important to further Singapore?s ability to work internationally to counter money laundering and terrorist financing. In order to conform to international standards, Singapore should lift its rigid bank secrecy restrictions and significantly increase its list of predicated crimes for money laundering. St Kitts & Nevis The federation is at major risk for corruption and money laundering, due to the high volume of narcotics trafficking activity through and around the islands and the presence of known traffickers on the islands. An inadequately regulated economic citizenship programme adds to the problem. Most of the offshore financial activity in the federation is concentrated in Nevis, in which there is one offshore bank (a wholly owned subsidiary of a domestic bank). There are approximately 15,000 international business companies (IBCs) and 950 trusts, with 50 trust and company service providers. St. Kitts & Nevis continues to be vulnerable to money laundering and other financial crimes. It should continue to devote sufficient resources to effectively implement its anti-money laundering regime. Specifically, St. Kitts and Nevis should determine the number of Internet gaming sites present on the islands. Oversight of these entities is crucial, as they are vulnerable to abuse by criminal and terrorist groups. Additionally, St. Kitts and Nevis should curtail its economic citizenship programme. St. Lucia St. Lucia has developed an offshore financial service centre that could potentially make the island more vulnerable to money laundering and other financial crimes. Currently, St. Lucia has four offshore banks, 1,884 international business companies, 43 international trusts, 17 international insurance companies, two money remitters, three mutual fund administrators, nine registered agents and three registered trustees. St. Lucia has a free trade zone. The Government also is considering the establishment of gaming enterprises. The Government should become a party to the UN International Convention for the Suppression of the Financing of Terrorism and adopt counter terrorism financing legislation. St. Lucia should continue to enhance and implement its money laundering legislation and programmes, including adopting civil forfeiture legislation. St Vincent & the Grenadines St. Vincent & the Grenadines remains vulnerable to money laundering, other financial crimes, and the facilitation of terrorist financing, as a result of the rapid expansion and inadequate regulation of its offshore sector. The offshore sector includes six offshore banks, 6,632 international business corporations, 14 offshore insurance companies, 29 mutual funds, 33 registered agents, and 114 international trusts. No physical presence is required for offshore financial institutions and businesses. Nominee directors are not mandatory except where an international business corporation is formed to carry on banking business. Bearer shares are permitted for international business corporations but not for banks. The Government should address all remaining concerns raised by the international community in regard to its anti-money laundering regime. These include the areas of customer identification, money remitters, outstanding bearer shares, and money laundering prosecutions. St. Vincent should continue to provide training to its regulatory, law enforcement, and Financial Intelligence Unit personnel in money laundering operations and investigations. The Government should also ensure that it properly supervises the offshore sector. St. Vincent should pass counterterrorist financing legislation that will provide the authority to identify, freeze and seize terrorist assets. In addition, the Government should pass civil forfeiture legislation and consider the utility of special investigative techniques. Switzerland Switzerland is a major international financial centre, with some 338 banks and a large number of non-bank financial intermediaries. Authorities suspect that Switzerland is vulnerable at the layering and integration stages of the money laundering process. Switzerland?s central geographic location, relative political, social, and monetary stability, wide range and sophistication of available financial services, and long tradition of bank secrecy are all factors that make Switzerland a major international financial centre. These same factors also make Switzerland attractive to potential money launderers. However, Swiss authorities are aware of this and are sensitive to the size of the Swiss banking industry relative to the size of the economy. Reporting indicates that criminals attempt to launder proceeds in Switzerland from a wide range of illegal activities conducted worldwide, particularly financial crimes, narcotics trafficking, arms trafficking, organised crime, and corruption. Although both Swiss and foreign individuals or entities conduct money laundering activities in Switzerland, narcotics-related money laundering operations are largely controlled by foreign narcotics trafficking organisations, often from the Balkans or Eastern Europe. Swiss bank accounts also frequently figure in investigations of fraud and corruption of government officials and leaders, most often from foreign countries. The Government hopes to correct the country?s image as a haven for illicit banking services. The Swiss believe that their system of self-regulation, which incorporates a “culture of cooperation” between regulators and banks, equals or exceeds that of other countries. The primary interest of the Swiss system is to avert bad risks by countering them at the account-opening phase, where due diligence and know-your-customer procedures address the issues, rather than relying on an early-warning system on all filed transactions. The Swiss Government believes that because of the due diligence approach the Swiss have taken, there are fewer STRs filed than in some other countries. At the same time, 75% of the STRs that are filed lead to the opening of criminal investigations. While generally positive, Switzerland?s recent FATF mutual evaluation report nonetheless identified weaknesses in the Swiss anti-money laundering and counter terrorist financing regime, including problems with correspondent banking, identification of beneficial owners, and the cross-border transportation of currency. The Government should continue to improve on its regime while simultaneously working toward full implementation of existing laws and regulations. It should ratify the UN Convention against Transnational Organised Crime and the UN Convention against Corruption. Turks & Caicos Islands The TCI has a significant offshore centre, particularly with regard to insurance and international business companies (IBCs). Its location has made it a transhipment point for narcotics traffickers. The TCI is vulnerable to money laundering because of a large offshore financial services sector as well as because of bank and corporate secrecy laws and Internet gaming activities. The offshore sector offers “shelf company” IBCs, and all IBCs are permitted to issue bearer shares; however, the Companies (Amendment) Ordinance 2001 requires that bearer shares be immobilised by depositing them, along with information on the share owners, with a defined licensed custodian. This applies to all shares issued after enactment and allows for a phase-in period for existing bearer shares of two years. Trust legislation allows establishment of asset protection trusts inoculating assets from civil adjudication by foreign governments; however, the Superintendent of Trustees has investigative powers and may assist overseas regulators. Currently, the FSC is rewriting the Trust legislation. The Government has put in place a comprehensive system to combat money laundering with the relevant legislative framework and an established FIU. The FSC has made steady progress in developing its regulatory capability and has some experienced senior staff. Recently, a number of on-site examinations were conducted and one resulted in an enforcement action against an institution. Notwithstanding, the current regulatory structure is not fully in accordance with international standards. The TCI should criminalise the financing of terrorists and terrorism, and enhance its on-site supervision programme. TCI should expand efforts to cooperate with foreign law enforcement and administrative authorities. TCI should provide adequate resources and authorities to provide supervisory oversight of its offshore sector in order to further ensure criminal or terrorist organisations do not abuse the financial sector. United Arab Emirates The United Arab Emirates (UAE) is an important financial centre in the Persian Gulf region. The UAE is still a largely cash-based society. However, the financial sector is modern and progressive. Dubai, in particular is a major international banking centre. There is also a growing offshore sector. The UAE?s robust economic development, political stability, and liberal business environment have attracted a massive influx of people and capital. Because of the UAE?s geographic location and its role as the primary transportation and trading hub for the Gulf States, East Africa, and South Asia, and with its expanding trade ties with the countries of the former Soviet Union, the UAE has the potential to be a major centre for money laundering. The large number of resident expatriates from the above regions, many of whom are engaged in legitimate trade with their homelands, or send remittances there, exacerbates that potential. Approximately 80 percent of the UAE population is comprised of non-nationals. Given the country?s close proximity to Afghanistan, where most of the world?s opium is produced, narcotics traffickers are increasingly reported to be attracted to UAE?s financial centres. The UAE?s robust economic development, political stability, and liberal business environment have attracted a massive influx of people and capital and as a result, has the potential to be a major centre for money laundering. The large number of resident expatriates from the above regions, many of whom are engaged in legitimate trade with their homelands, or send remittances there, exacerbates that potential. Some money laundering in the UAE occurs in the formal banking system, including the numerous money exchange houses, but it is likely more prevalent in the informal and largely undocumented hawala remittance system. The fact that hawala is an undocumented and non-transparent system, and is highly resilient despite enforcement and regulatory efforts, makes it difficult to control and an attractive mechanism for terrorist and criminal exploitation. The UAE has begun to make progress in confronting its vulnerability to the unregulated use of hawala. New regulations to improve oversight of the hawala system were implemented in 2002, when hawala brokers were required to register, submit the names and addresses of senders and beneficiaries, and to file suspicious transaction reports. The UAEG has begun constructing a far-reaching anti-money laundering programme, and it is considered a regional leader in these efforts. The UAE has sought to crack down on potential vulnerabilities in the financial markets and is cooperating in the international effort to prevent money laundering, particularly by terrorists. There has been a substantial improvement on behalf of the Anti-Money Laundering & Suspicious Case Unit (AMLSCU) in the area of information sharing with other countries. However, there remain areas requiring further action. Law enforcement and customs officials should begin to take the initiative to recognise money laundering activity and proactively develop cases without waiting for referrals from the AMLSCU. Additionally law enforcement and customs officials should conduct more thorough inquiries into large undeclared cash imports and required the declaration of exports from the country. UAE officials should give greater scrutiny to trade-based money laundering in all of its forms. The Central Bank should continue its efforts to encourage hawala dealers to participate in the registration program. The UAE should implement a uniform system to monitor all charities active in the UAE, and it should engage in a public campaign to ensure all charities are aware of the requirements. It should ratify the UN Convention against Transnational Organised Crime. Uruguay In the past, Uruguay?s strict bank secrecy laws, liberal currency exchange, capital mobility regulations and overall economic stability made it a regional financial centre vulnerable to money laundering, though the extent and the nature of suspicious financial transactions have been unclear. In 2002, banking scandals and mismanagement, along with massive withdrawals of Argentine deposits, led to a near collapse of the Uruguayan banking system, significantly weakening Uruguay?s role as a regional financial centre. This crisis has diminished the attractiveness of Uruguayan financial institutions for money launderers in the medium term. The Government took steps in 2004 and 2005 to strengthen its anti-money laundering and counter terrorist financing regime. The passage of legislation criminalising terrorist financing places Uruguay ahead of many other nations in the region. However, Uruguay is one of only two countries in South America that is not a member of the Egmont Group of financial intelligence units. Once the Financial Information & Analysis Unit (UIAF) is evaluated and determined to meet Egmont standards, the Government will have greater access to financial information that is essential to its efforts to combat money laundering and terrorist financing. UIAF?s becoming a member of the Egmont group, as well as the Government?s continued implementation and enforcement of its anti-money laundering and counterterrorist financing programmes, should continue to be priorities. Vanuatu Vanuatu?s offshore sector is vulnerable to money laundering, as Vanuatu has historically maintained strict banking secrecy provisions that have the effect of preventing law enforcement agencies from identifying the beneficial owners of offshore entities registered in the sector. Due to allegations of money laundering, and in response to pressure from the Financial Action Task Force (FATF), a few United States-based banks announced in December 1999 that they would no longer process US dollar transactions to or from Vanuatu. The Government of Vanuatu responded to these concerns by introducing reforms designed to strengthen domestic and offshore financial regulation. It passed amendments to four of its main legislations relative to money laundering and terrorist financing during its last session of Parliament in November 2005. The four pieces of legislation effected are the Mutual Assistance in Criminal Matters Act No. 31 of 2005, the Financial Transaction Reporting Act No. 28 of 2005, the Counter-Terrorism and Transnational Organised Crime Act No. 29 of 2005, and the Proceeds of Crime Act (Amendment) Act No. 30 of 2005. Since the passage of the International Banking Act of 2005, the Reserve Bank of Vanuatu regulates the offshore sector that includes seven banks and approximately 4,750 “international companies” (i.e., international business companies or IBCs), as well as offshore trusts and captive insurance companies. These institutions were once regulated by the Financial Services Commission. This change was one of many recommendations of the 2002 International Monetary Fund Module II Assessment Report (IMFR) that found Vanuatu?s onshore and offshore sectors to be “non-compliant” with many international standards. IBCs may be registered using bearer shares, shielding the identity and assets of beneficial owners of these entities. Secrecy provisions protect all information regarding IBCs and provide penal sanctions for unauthorised disclosure of information. These secrecy provisions, along with the ease and low cost of incorporation, make IBCs ideal mechanisms for money laundering and other financial crimes. Vanuatu should immobilise bearer shares and require complete identification of the beneficial ownership of international business companies (IBCs). It should implement all the provisions of its Proceeds of Crime Act and enact all additional legislation that is necessary to bring both its onshore and offshore financial sectors into compliance with international standards. Vanuatu should also become a party to the 1988 UN Drug Convention.
The Societas Europaea (SE) has been added by the Internal Revenue Service (IRS) to its list of foreign business entities regarded as ?per se corporations?.Under regulations issued in 1996, the so-called ?check-the-box? regulations (section 7701 of the Internal Revenue Code), the IRS permits a business entity that is not specifically classified as a corporation to elect to be treated as a pass-through entity, that is, a partnership or branch, or as a taxable entity, that is, a corporation.These regulations also include a list of business entities that will always be classified as a corporation for US federal tax purposes ? the ?per se corporation? list. Other entities so classified, in addition to the SE, are Estonian Aktsiaselts, Latvian Akciju Sabiedriba, Lithuanian Akcine Bendroves, Slovenian Delniska Druzba, and Liechtenstein Aktiengesellschaft to the per se corporation list.The new regulations adding the SE to the per se corporation list will apply to entities formed on or after 8 October 2004. For the other named entities, the new regulations will apply to new entities formed on or after 7 October 2004, but will also apply to existing entities upon a 50% or greater change in ownership occurring after that date.
In Re the Internine Trust & the Intertaders Trust, Sheikh Abdullah Ali M Alhamrani v Russa Management & Ors, the Jersey Court had to consider whether certain individuals, who had signed an agreement divesting themselves of their interests under two Jersey trusts in return for a transfer of assets in Saudi Arabia, had the right to ask the trustees for trust information. The Saudi Arabian Court of Appeal had declared this agreement to be void. The individuals wished to pursue the matter in the Jersey courts and, when it appeared that the trust assets were being depleted, requested disclosure of the trust documents. The Royal Court upheld their application. The trustees appealed to the Court of Appeal arguing that the individuals were not even discretionary beneficiaries under the trust and so had no rights to information. The Jersey Appeal Court dismissed the appeal and held that, in exceptional circumstances, even if it had not yet been determined whether someone was a beneficiary or not, the court had jurisdiction to exercise its supervisory power in favour of an applicant for information. Disclosure would facilitate settlement of a family dispute.
The Organisation for Economic Cooperation & Development (OECD) put out to public discussion, on 1 February, a draft on procedures for resolving international tax treaty disputes. The OECD said unresolved international tax disputes and the resulting double taxation could be a significant barrier to the expansion of cross-border trade and investment. Whilst existing dispute resolution procedures under bilateral tax treaties had been effective in settling the vast majority of cases, the uncertainty created by the increasing inability to reconcile opposing positions on complex tax issues had drawn considerable attention from both business and government. The Discussion Draft (Proposals for Improving Mechanisms for the Resolution of Tax Treaty Disputes) focuses on two key elements to improve dispute resolution procedures ? improving both the Existing Mutual Agreement Procedure (MAP) and the Supplemental Dispute Resolution. Provided for in tax treaties, MAP has been the traditional mechanism to resolve cross-border tax disputes but both business and governments have suggested improvements aimed at increasing timeliness, transparency and effectiveness. The OECD is in the process of developing an online Manual for Effective Mutual Agreement Procedures and proposed changes to the Model Tax Convention’s Commentary which will help improve the effectiveness of the process and provide much needed guidance on the administrative procedures of MAP. Supplementing the current MAP process, the OECD is also proposing an arbitration mechanism as one way to deal with those cases where governments cannot reach an agreement within a reasonable period of time. This option would be included in the OECD Model Tax Convention and its Commentary for countries to implement where they believe it is appropriate to do so. Key features of the proposal for arbitration would be that: ? It provides for mandatory resolution; ? The mode of application would be settled by treaty partners via mutual agreement and a wide variety of approaches to arbitration are outlined in the OECD work; and ? A request for arbitration may be made if a case remains unresolved after two years in the normal MAP proceedings. Jeffrey Owens, who leads the OECD tax work, said the consultations would provide useful input into finalising the changes to the OECD’s Model Tax Convention and its Commentary and in producing a completed Manual to assist both OECD and Non-OECD countries in improving the effectiveness of their dispute resolution procedures. Participants, he said, could expect to see changes in the next revision to the Model Tax Convention.
Summary of strengths and weaknesses of:Antigua & Barbuda; Aruba; Bahamas; Bahrain; Barbados; Belize; Bermuda; Botswana; British Virgin Islands; Cayman Islands; Cook Islands; Cyprus; Dominica; Gibraltar; Grenada; Guernsey; Hong Kong; Ireland;Isle of Man; Jersey; Labuan; Liechtenstein; Luxembourg; Marshall Islands; Monaco; Netherlands Antilles; Panama; Samoa; Seychelles; Singapore; St Kitts & Nevis; St. Lucia; St Vincent & the Grenadines; Switzerland; Turks & Caicos Islands; United Arab Emirates; Uruguay; Vanuatu
The Russian Finance Ministry submitted for government approval on 13 March a final draft of revised legislation to introduce a tax amnesty. The proposed amnesty will become effective on the date of its official publication and will expire after the deadline for the filing of 2006 tax returns in April or May 2007. The measure, which requires approval by both chambers of parliament and the signature of President Putin, was revised in December 2005 to extend the list of assets that individuals would be permitted to declare. Under the revised proposal, individuals would no longer be required to transfer the declared funds to, or deposit the funds in, Russian banks and would only have to file simplified tax returns and pay the standard 13% rate of individual income tax on those funds.
The Budget statement, given on 17 February, contained several significant tax proposals including the enhancement of Singapore’s tax treaty network and new tax incentives to promote intellectual property, research and development, manufacturing, financial services, shipping, and logistics. Singapore’s existing network of 50 tax treaties is to be expanded and updated. Following the conclusion of a tax treaty protocol and comprehensive economic cooperation agreement with India last year, Singapore is now holding tax treaty negotiations with several countries, including China. To assist Singapore companies, the Inland Revenue Authority of Singapore is to issue transfer-pricing guidance and will provide assistance in resolving disputes with foreign tax authorities on transfer pricing issues. Foreign-source income that is disqualified from the foreign-source income tax exemption regime will be exempt from tax if remittances are made under specific scenarios or circumstances. Gains derived by an approved holding company from the disposal of shares of subsidiaries are to be exempt from tax, from 17 February 2006, provided that the holding company owned at least 50% of the shares of the subsidiaries for a minimum of 18 months. Tax incentives are to be extended to partnerships on a scheme-by-scheme basis. Allowances for the acquisition of intellectual property will be extended to economic and not just legal owners of intellectual property on an approval basis. Other measures designed to develop Singapore as a full-service global financial centre include: ? The designated unit trust scheme is to be broadened to allow other types of funds such as restricted authorized schemes to qualify for designated unit trust status; ? Qualifying domestic trusts and their underlying holding companies will be exempt from tax on their Singapore-source investment income and foreign-source income to the same extent as the tax exemption for individuals. Beneficiaries also will be exempt from tax on trust distributions made from that income. ? The approved trustee company scheme and the tax exemption scheme for foreign trusts are to be expanded to include a wider range of settlors and beneficiaries of the trusts. ? A new tax incentive scheme will exempt from tax resident funds with foreign investors. ? Foreign-source interest and trust distributions received by REITs listed on the Singapore Exchange will be tax exempt, and special-purpose companies established to hold overseas non-residential properties will be allowed to recover goods and services tax incurred on the setting up of the special-purpose companies and the acquisition and holding of overseas non-residential properties by the special-purpose companies. ? The tax treatment of Shariah-compliant financial products will be harmonized with conventional products to ensure a level playing field for tax. ? An income tax exemption will be granted to approved captive insurance companies for a period of 10 years. The Ministry of Finance said it was examining the abolition of estate duty and that it should reach a conclusion by the next Budget.
A protocol amending the 1977 UK-Switzerland tax treaty was agreed at official level in January. The main amendments are the elimination of taxation at source on dividends where the beneficial owner of the dividends has a substantial participation in the payer or is a pension scheme. The protocol also amends the exchange of information article. It provides that, in future, information will be exchanged in cases of tax fraud or the like, and in cases involving holding companies. The protocol also contains measures relating to pensions. In future, lump sum payments may be taxed only by the state in which they arise. Also, pension contributions paid to a scheme recognised for tax purposes in one country may, under certain conditions, be deductible in the other country.
The UK High Court has upheld a claim by a UK branch of a Swiss bank that the non-discrimination article in the Switzerland-UK tax treaty entitles the Swiss bank to offset losses against certain dividend income to claim the UK tax credits applicable to the dividends. In UBS AG v Her Majesty’s Revenue & Customs (HMRC), the High Court agreed with the Special Commissioners that the UK branch of UBS, as a permanent establishment of a Swiss enterprise, was subject to less-favourable tax treatment than that of a UK enterprise carrying on the same activities. It therefore fell under the non-discrimination article in the Switzerland-UK treaty. The Court allowed a claim by one of UBS’s UK branches that the non-discrimination article in the Switzerland-UK tax treaty entitled UBS, a Swiss bank, to offset losses against certain dividend income to claim the UK tax credits applicable to the dividends. Under UK law in force during 1993-1996, the period at issue in the case, such a claim could be made by a UK resident company, but not by a non-resident company like UBS. Although the case relates to legislation that has since been repealed, the February 7 decision is significant because the UK courts had rejected most of the earlier claims for relief that were based on the non-discrimination articles of UK tax treaties. In reaching its decision, the High Court reversed an earlier decision by the Special Commissioners. The Special Commissioners concluded that the relevant provisions of the treaty had not been incorporated into UK law. The High Court, on the other hand, accepted a new argument raised by UBS that the UK legislation incorporating the treaty into UK law automatically entitled a foreign company to payment of the tax credits. The High Court’s decision is subject to further appeal by HMRC.
The Pennsylvania Supreme Court found in favour of the W.W. Smith Charitable Trust and against the corporate trustee in a ruling of 28 April 2005. The trust was set up by the late Philadelphia oilman William Wikoff Smith and has donated more than US$130 million to medical research and college scholarships. The trust deed specifically provided for ?reasonable compensation? annually for services rendered, not to exceed in any year an amount equal to five percent (5%) of the then current annual income of the trust fund. The trustee, Wachovia Corporation, as successor to First Union Bank, was seeking to raise its fees, arguing that without the additional compensation it would lose more than US$100,000 a year handling the Smith account. It was also seeking to collect more than US$5 million in back compensation for years in which it said it had not been adequately paid. A lower court ruling in 2001 had denied Wachovia the right to receive additional payment for past services, but held that Wachovia could increase its current fees for handling the fiduciary responsibilities of the Smith Trust. Wachovia because The Superior Court, by a 9-0 decision, upheld the lower court to the extent the ruling provided that no additional compensation would be paid to the trustee for past services. It also reversed the ruling of the lower court modifying the trustee’s compensation on a prospective basis. The Pennsylvania Supreme Court, it said, had set forth the standard for allowing additional compensation to a trustee: ?It is well settled that where there is a valid agreement between settlor and trustee fixing the terms of the trustee’s compensation, courts must ordinarily enforce the terms of the agreement without making an independent determination of whether the terms are reasonable … An exception to the general rule, in circumstances where the trustee has performed extraordinary services beyond those contemplated by the parties or where the compensation fixed by the agreement is so low that the unwillingness of a competent trustee to continue or undertake to administer the trust would defeat or substantially impair its purposes, is well recognised.? The court then went onto to adjust the burdens of proof that the lower court had imposed on the parties, concluding that First Union was not entitled to a fee increase because it had not met the burden of proof.
Mackenzie Tariobed, head of Vanuatu?s Financial Intelligence Unit, warned companies that heavy fines would be imposed on those who do not comply with recently amended anti-money laundering legislation. He reminded companies and financial institutions that the Financial Transaction Reporting Amendment Act (FTRA) No 28 of 2005 came into force on 24 February 2006, except for Section 19 of the Act of which will only be effective as of 1 September 2006. ?Section 19 clearly states that financial institutions are to report financial transactions to the unit,? said Tariobed. ?Financial institutions are also reminded of the heavy penalties for non-compliance with the provisions of the Act.? The FTRA was brought into force together with the Counter Terrorism Act No 29 of 2005, the Proceeds of Crime (Amendment) Act No 30 of 2005, and the Mutual Assistance in Criminal Matters (Amendment) Act No 31 of 2005.
The World Trade Organisation?s Dispute Settlement Body (DSB) adopted, on 14 March, a WTO appellate body report holding that the transition rules in the American Jobs Creation Act of 2004 are in violation of WTO rules. The European Union had challenged the Jobs Act on the grounds that it failed to completely revoke the US extraterritorial income exclusion (ETI) tax breaks for exporters, and the appellate body agreed on 13 February. EU legislation lifting the original sanctions in the dispute over the ETI tax break contained a 60-day grace period, starting from the date on which the DSB adopted the appellate body report and made it official. As a result, the EU now expects to reimpose sanctions on 13 May, unless the US first amends the Jobs Act’s transition rules.