THE ORDER OF THE HAMMER

Baron Trevor at the age of 64 delivered his maiden speech in the House of Lords. He had waited 43 years to do so on the principle of speaking only when he had something to say. Though with less compulsion than Baron Trevor, I did feel the urge to write this article after watching how the spotlight is increasingly being shone on lesser known offshore centres. In doing so, I believe that one crucial aspect should be debated and examined - irregardless of location, size, commercial infrastructure or language. It is the matter of regulatory rather than practitioner competence. The myriad problems of offshore administration are greatly exacerbated whenever there is an absence of competence and experience within the regulatory body and so I would urge practitioners to consider not only the commercial virtues of an offshore centre, but also how it is regulated. Those offshore governments who have sparse alternative sources of income and are enticed into becoming offshore centres should be aware that any aspirations of joining the premier league of offshore centres and reaping the attendant revenues will be tremendously handicapped by a poorly organised and badly run supervisory machine. A fledgling offshore centre, therefore, should not just concern itself with the quality of business transacted, but should be equally mindful of the quality of its regulatory system. You may think Iīm stating the obvious, but a global review would suggest otherwise.  

Although there are exceptions, I still believe that the best structure for supervision is an independent commission, as opposed to an appendage of a government ministry, because such governments rarely possess the necessary in-house expertise. The commission must have a board which is competent to advise government whilst at the same time it promotes, supports and is sympathetic to the legitimate interests of both the public and private sectors. Even accepting supervision within a government ministry, I think that an independent commission avoids political overtures and dilutes the chances of political appointees. The independent commission ensures that any persons engaged are accountable to the commission rather than to political masters with possible hidden agendas. A regulator must be there to do a job not just keep a job despite Voltaireīs aphorism, "It is dangerous to be right in matters in which the established authorities are wrong" and Machiavelliīs caution that "It must be remembered that there is nothing more difficult to plan, more uncertain of success, nor more dangerous to manage than the creation of a new order of things, for the initiator has merely the lukewarm support of those who stand to gain from the institutions and the enmity of those who stand to lose."  

Whatever the supervisory structure, however, the regulators and other appointed consultants must be seasoned offshore professionals. This is the nub and the crucial sine qua non. Public monies will be expended (perhaps substantial sums) and practitioners, in varying degrees, will invest effort and money in the development of their business. Both sides can end up being cheated when governments, poorly counselled, appoint persons who often have no hands-on experience in the particular field. A university geography don, noting several disastrous irrigation schemes in Africa, observed that politicians and bureaucrats had been talked into programmes by well-meaning consultants who had neither the required knowledge nor the necessary experience. I listened to one ex-regulator bemoaning the stifling effect of certain legislation with which he had to comply since crossing over into the private sector. He spoke of well-intentioned but unsuitable regulation which to him as a regulator had appeared appropriate and reasonable. If only the regulator had first been a private sector practitioner. The quality of the regulatory system is, therefore, crucial as is a sound general knowledge of the various forms of business activity likely to be encountered. Harmony with the private sector will be easier to attain when there is respect for a regulatorīs own proven background experience. The inter-face with a jurisdictionīs practitioners is a crucial, but often overlooked, factor in the equation for success. An offshore regulator does not need to be liked, but he should be respected.  

Lack of knowledge and experience on the supervisory side of the fence can have such a damaging effect on the financial services industry. It can cause legislators and regulators to have their vision blurred by financial abuses. The perceived solutions are often reactionary rather than reasoned and trigger complex remedies which can be inflexible and cast the net wider than is necessary. One member of the U.K. parliament went so far as to castigate so-called tax havens in the form of a private bill entitled "Transactions with Tax Havens (Sanctions) Bill". Machiavellian plots need not be hatched offshore where confidentiality laws prevail. Several civil and common law countries permit the use of bearer shares: the limited liability company in some states in the United States of America is a case in point. In England a company can be formed without disclosing beneficial ownership at the time of incorporation (unlike the position in several mature offshore centres) and the use of nominee shareholders is common. 

Money laundering activity is a blight with which we have to live and although it is regrettable, the solution is more co-operation, not more regulation, between authorities. The BCCI debacle is a text book example of the need for more public sector co-operation. The basic tenet "know your customer" which has universal application across the financial services spectrum cannot be enforced by regulation or legislation. The end of the Swiss Form B bank account in the quest to reinforce the bankerīs obligation to vet customers is laudable provided that the new procedures are more effective. To my mind, the door is still open for corrupt and creative intermediaries to circumvent that regulatory wall and put as many holes in it as a piece of Swiss cheese. Lawyers and accountants with traditional fiduciary omnibus accounts in Switzerland present an interesting conundrum. No matter the number of controls put in place, it is impossible to bypass the human element with all its frailties and fallibilities; but, that said, it is in our collective interest to discourage practitioners who are prepared to take on business solely on the basis that the client has a pulse and a cheque book.  

Under-regulation, of course, is as hazardous as over-regulation: Barlow Clowes spurred Gilbraltarians to increased regulation which has enhanced Gibraltarīs reputation. Perhaps every Clowes has a silver lining. Although regulation and supervision will always be necessary in order to thwart the unscrupulous and protect the innocent, its application should be countered with the awareness that the majority of people are moral and that supervision, therefore, should be focused on assisting and guiding the honest in a manner which will interfere as little as possible with legitimate business activity.  

I am reminded of the manager at a manufacturing plant who, unable to solve a mechanical breakdown, sent for the retired engineer who had installed the machinery. Following a brief inspection, the engineer took a hammer and hit a pipe which did the trick. The next day the engineer submitted a bill for $1,000 to a horrified manager. Above the protests at the charge for a solitary hammer-blow the retired engineer explained, "only $1.00 of it is for hitting the pipe. The other $999 is for knowing where to hit it." In re-telling that well-known allegorical tale, I would offer this advice to all novice offshore centres: make sure that your offshore supervisor is a member of The Order of the Hammer.