Looking out to sea recently, I noticed two large fishing boats hauling in their catch, surrounded by what appeared to be a virtual blanket of pelicans, frantically attempting to snatch fish from the fishermen’s nets. In the background a Beatles song from the Sixties, "Taxman", was playing as I indulged myself in a fit of nostalgia. George Harrison was delivering the pungent lyrics of the song, reminding people they were really working for the taxman and to be thankful that the taxman didn’t take every penny. Continuing to gaze out at the azure Pacific, I began to see a correlation between taxes and the frenetic activity taking place around the fishing boats. I imagined the boats as offshore financial centres and the pelicans as anxious tax collectors endeavouring to pluck whatever they could from the nets.

I had been invited to contribute a feature about Regulation and Exchange of Information by a British magazine and it would be fair at this point to ask me what my musings have to do with the subject at hand. Quite a lot, is my answer, and the Sixties is a good starting point. Let me preface my commentary by saying that I will concentrate on the Caribbean where, since 1979, I have spent several years as either a practitioner or regulator.

 THE SWINGEING SIXTIES

An editorial I read hinted at the connection between taxation and information and suggested that some people might accuse the American Authorities of seeing income tax planning as akin to drug money laundering. I am not surprised by this perception, the origins of which are firmly rooted in the exchange of information debate. During the Sixties, before most of us had been made aware of the scourge that drug trafficking was to become (now with an annual turnover from global trade alone of $400 billion) many ordinary people with wealth began using offshore financial centres in increasing numbers with the intention of hiding their income and not declaring it to tax authorities. The evaders and the offshore financial centres continued to grow in number until a global tax-dodging public was adequately catered for. But back in the Sixties, with swingeing tax regimes, the British and American nationals mainly gravitated towards the British West Indies in their search to escape from the taxman. The reasons for choosing the Caribbean were varied, but shared common law, proximity (in the case of the Americans) historical links (in the case of the British) and hospitable legislation were probably large magnets. Admittedly, the Channel Islands and other traditional centres were also receiving a sizeable share of the market at this time. Untaxed income could safely and (most importantly) secretly nestle in the hands of bankers, lawyers and accountants in locations apparently oblivious to the bilateral and multilateral tax treaties being negotiated elsewhere. It seemed as if the islands had erected a wall of conch shells, impenetrable by tax collectors.

PRIDE AND PREJUDICE

Both the United Kingdom and America were affected emotionally by this denial of access to tax information, but each for its own special reasons. Obviously, both were equally galled by the situation, which was the fiscal equivalent of applying sand paper to the reproductive parts of a tax collector’s anatomy, but what upset the Americans in particular was a disregard of laws and what embarrassed the United Kingdom was the responsibility it had for the Caribbean territories.

Let’s start with the law. America, amongst some academics, has a reputation for parochialism when it comes to observance of the law. Whilst fully understanding its own laws (and expecting the rest of the world to be interested in them) America, it is alleged, has a shallow knowledge and appreciation of other legal systems. In consequence, the ubiquitous offshore confidentiality laws were - and still are - an anathema. Law is big business in America, with ten times more lawyers per head of population than the Netherlands and whilst it might be socially acceptable to sometimes see the law as an ass in much of Europe, the tendency is less so in America. The fact that most of the offshore havens did not impose income tax made them indifferent to the tax laws of other countries, including those of America. To add insult to injury, these islands were but a coconut’s throw away from the American coastline.

The United Kingdom for its part was not only losing tax revenues, but was responsible for those dependent territories (previously known as colonies) in the Caribbean. Today, Washington and Brussels would like to see these wayward wards of the United Kingdom disciplined and I am sure that the United Kingdom, in turn, would prefer that the islands were held individually responsible and accountable for their own actions. Since the beginning of this decade British aid to its overseas territories has been around GBP 153 million, so I am sure that the United Kingdom would delight in having its financial umbilical cord to the islands severed. The amount of red from world maps might have diminished, but not in the ledgers of Her Majesty’s Treasury. The Hong Kong handover to China, for example, still leaves an on-going liability of GBP 130 million for the pensions of Hong Kong public officials - and that’s after the handover reduces the number of subjects in the dependent territories by about 97%. It doesn’t help, either, when the governments on some of the islands are less than grateful recipients of the British funding. Although to some degree I sympathise with them (as I did in my previous article "The Order of the Hammer") when they gripe that too much aid meant for island governments is being paid to United Kingdom-based consultants.

 FAIR EXCHANGE

So this was the background which prevailed as the increasing onslaught of drug and other criminal money laundering put the Caribbean islands increasingly in the spotlight. Illicit funds were pumped into offshore accounts there by criminals anxious to shelter their profits in the shadow of offshore confidentiality laws. However, although the offshore financial centres considered the term "exchange of information" an oxymoron when applied to taxes because they could see nothing of value to exchange, it was a different matter when it came to the sinister businesses behind money laundering. Disguising the origin of criminals’ cash and then transforming it into investments which had the appearance of legitimacy went against the grain of shared social values and social goals. This understanding has been evidenced by the number of Mutual Legal Assistance Treaties (MLATs) which have been negotiated with America. Unfortunately, many of these treaties have been negotiated against a background of suspicion and often hostility, rather than information, has been exchanged.

The precursor of the MLATs was an information treaty between America and Switzerland, negotiated in 1973 (it came into force in 1977) which was an attempt to prevent American mobsters from using Swiss Banks to launder their ill-gotten gains. Not all MLATs are the same, although they are always negotiated with governments and cannot be invoked by private parties in pursuit of a civil action. It is usually the respective Attorneys General who handle applications for the release of information under an MLAT and the Attorney General receiving the request has to decide whether or not the application has merit. It follows that no information will be given if it is considered that the grounds upon which it is needed are insufficient to establish that the offence specified was committed. Dual criminality (a crime recognised in both jurisdictions) is not usually necessary, although tax offences are generally excluded. That said, even in criminal cases, MLATs provide for Uncle Sam to claim his share of taxes from the revenues of, say, drug trafficking. Although MLATs are primarily concerned with criminal activities, some treaties do permit information to be requested in the case of civil proceedings brought for the recovery of the proceeds of a crime.

On balance, and despite logistical and other practical problems - such as vested and competing interests and personality clashes - MLATs are the most effective official means of obtaining information from private and public sources because of their scope, the authority which they carry and the speed (in some instances) with which applications can be processed.

 ENDING IN TIERS

Information is not only exchanged at the MLAT level. There is a second tier which can be very effective, even if it is very informal. In their common goal to curtail the activities of fraudsters and their ilk, a few offshore regulators, in league with their onshore counterparts, exchange information with one another. This can be a very powerful weapon, particularly at the stage when a criminal is first attempting to gain a foothold in a jurisdiction. Only a few onshore regulators, however, are immune to the jaundiced view of their governments and, on the other hand, only a few offshore regulators are prepared to walk a tightrope that demands a balancing act between the protection of the public and upholding the spirit of confidentiality laws without breaching them. Not surprisingly, this is not a road well-travelled because it calls for skill and experience and can be disastrous when attempted by enthusiastic amateurs.

But communication, whether it’s exchanging information or just views, is crucial between onshore and offshore regulators. Offshore regulators, it should be said, generally co-operate with each other, although their track record has been a little spotty at times. In any event, the long-term interests of every offshore financial centre would be best served by an open dialogue between regulators everywhere and, probably, a number of MLAT applications could be avoided as well.

 A NEW DAWN

There are some hurdles to overcome, however, besides the attitude of mainland governments. The United Kingdom’s official machinery operates within a Byzantine system which is often burdened by too many cooks spoiling the broth and it doesn’t augur well when a former official, attempting to assist in a case of fraud, does not receive replies to telefaxes sent to an Attorney General in the Caribbean, a police agency and Whitehall. In America, by contrast, many of the regulators are political appointees with a shallow background knowledge and second agendas that do not inspire long-term commitments.

On the other side of the fence, being an offshore practitioner has its problems, but many of us have established our own information exchange network that works pretty well. No officialdom to worry about, just a cadre of professionals protecting their collective interests. Even so, sometimes the line between being a trust officer and a member of a bomb squad can become blurred and I must confess that I often derive comfort from dealing with clients who I know will never remotely interest a tax collector or initiate an MLAT application. Small fish who would not even interest the pelicans. Many are marginal cases who need not have ventured offshore in the first place, but were enthralled with the idea of donning a Panama Hat and flying off to the tropics in true Le Carré fashion to visit their bankers and advisers. Never mind the truth, make it interesting. It is true that appearances can be deceiving and because of this the general public will often not be aware of the many issues that lie below the surface when governments tackle this question of exchanging information.

I should also add that just because I have confined my article to the Caribbean, it would be wrong for the reader to infer that the region is the agent provocateur that it was back in the Sixties. A recent report issued by the American State Department had only three Caribbean Islands on a list of 21 high priority laundering centres that included America, Canada, Germany, Nigeria, Singapore and the United Kingdom.

It’s going to take a long time before there is unqualified international co-operation and I have a hunch that the Beatles will have been forgotten and the pelicans will have stopped bothering the fishermen before that day dawns.