The study undertaken by JC Sharman and Percy S Mistry, with funding from the Commonwealth Secretariat and the FIRST (Financial Sector Reform and Strengthening) Initiative, seeks to provide the first assessment of the costs incurred from implementing the international standards on anti-money laundering and countering financing of terrorism (AML/CFT). The study provides a clear insight on the policies and procedures utilised in the compliance process and contrasts the associated costs with benefits.

The project – Considering the Consequences: the Developmental Implications of Initiatives on Taxation, Anti-money Laundering and Combating the Financing of Terrorism – was commissioned by the Commonwealth Secretariat and financed by the Financial Sector Reform and Strengthening (FIRST) Initiative. Its objective was to assess the impact of recent multilateral regulatory initiatives on small Commonwealth international financial centres (IFCs). This final report draws together, distils and synthesises the results of three country studies, assessing the costs and benefits of these initiatives for Barbados, Mauritius and Vanuatu. The country studies are themselves based on survey data (quantitative and qualitative) compiled by local consultants in each jurisdiction in conjunction with the two lead consultants.

The project Considering the Consequences: the Developmental Implications of Initiatives on Taxation, Anti-money Laundering and Combating the Financing of Terrorism assesses the costs and benefits of implementing new international regulations for small Commonwealth states with significant international financial services (IFS) sectors. The goal is to improve policy and operational outcomes by: (a) systematically assessing the impact of recent financial regulatory standards and reforms; and (b) providing this information to local stakeholders and governments, as well as multilateral organisations involved in improving the stability and quality of the international financial regime.

The Barbados international financial services (IFS) sector, of which international business companies (IBCs) are the dominant area of activity, has grown steadily over the last decade. Even with the slowdown in the year 2000, resulting from the uncertainty surrounding the Organisation for Economic Co-operation and Development (OECD) initiative and other global economic developments, the level of activity in the sector has grown considerably since 1965 when the first International Business Company (IBC) Act was passed.

Barbados is characterised as a low-tax jurisdiction, with a long-standing reputation for a sound legal framework and high regulatory and supervisory standards. The success achieved to date in attracting international business is reflective of the extensive treaty network of double taxation agreements and bilateral investment treaties with several countries, including most importantly the United States and Canada, which encourage transparency and the establishment of a commercial presence. In addition, the industry benefits from effective co-operation between government and the private sector on legislative reforms and promotion. As such, legislative amendments have been implemented in response to changes in the international business environment in an effort to capitalise on new opportunities. A legal separation between the international business services industry and the onshore financial sector is maintained in Barbados, and any activity between the two requires the special permission of the Minister of Finance. This effectively limits the potential for the transmission of contagion effects between the international business and the domestic financial sectors.

Barbados has continued to maintain its reputation as a well-respected international financial services jurisdiction with high regulatory and supervisory standards, despite being listed by the OECD as a ‘tax haven’ in 2000. Indeed, without having to make any commitments to the OECD, Barbados was removed from that list in 2002 and was subsequently identified as a significant international financial centre (IFC) in the OECD report A Process for Achieving a Global Level Playing Field1 . As a result, Barbados was invited to participate in the Global Forum on Taxation and has been involved in providing information on transparency and exchange of information. It should also be noted that Barbados has a stand-alone information exchange agreement with the United States and in addition, all of Barbados’ double taxation agreements provide for the exchange of information on all direct taxes between the parties unless the entities involved are specifically excluded from the treaty. Barbados’ Financial Intelligence Unit (FIU) has also established formal Memoranda of Understanding with other FIUs relating to information exchange and is also part of an international network of FIUs that exchange information. These measures were all in place prior to the new international regulatory requirements.

The enhancement of the international business and financial services sector of Barbados is a key component of its long-term development strategy. Therefore, improving the standards of regulation and supervision in accordance with global developments, in particular the growing concerns about money laundering and the financing of terrorist activities, is critical if Barbados is to maintain its long-standing reputation for high levels of regulation and supervision and a highly branded jurisdiction. Indeed, the aim is to create a more effective and enabling environment in line with international best practices, without increasing the compliance costs of both government regulators and private providers of international business and financial services.

The intellectual origins of the international financial services (IFS) industry in Mauritius are perhaps traceable to 1972 when the Export Processing Zone (EPZ) was established with tax concessions and exemptions, an export orientation and prohibitions on domestic market access. The creation of the Offshore Financial Centre (OFC) 20 years later, applied the same ideas to financial services. Although it materialised in 1992, studies on establishing an OFC were carried out by the Bank of Mauritius (BoM) at the request of the Prime Minister’s Office (PMO) a decade earlier. However, the idea went into limbo during the mid-1980s; perhaps because of the debt crisis engulfing the developing world at the time, and the salutary experience of the Seychelles with its OFC. The OFC came up again for public discussion in 1988/89 when the findings of a study commissioned from an international firm became available and, concomitantly, the domestic financial sector was overhauled under a reform programme.

In 2005 Mauritius’ Gross National Product (GNP) was estimated at just over US$6.25 billion, with per capita income approaching US$5,300. As table 7.1 shows, its economy is primarily services-based, with government services, distribution, transport, health and education accounting together for the largest proportion. Tourism and financial services exports are significant, but appear to be reaching their potential growth limits requiring Mauritius to move further up the scale of sophisticated value-addition and geographic client (as well as product/service) diversification.

As indicated earlier, prior to 2001 regulation of financial services was fragmented in Mauritius. Regulatory/supervisory responsibilities were shared by the Bank of Mauritius (BoM; for banks) and the Ministry of Finance (MoF), which had a dedicated department for the supervision of insurance services. In 1988, the Securities and Exchange Commission of Mauritius was set up to regulate the stock exchange and the securities industry, including authorised mutual funds and unit trusts. Offshore finance came under the purview of MOBAA, established in 1992. The idea of a single regulator for financial services was mooted in the 1994/5 Budget Speech and was studied by the Financial Services Reform Steering Committee in 1996. The idea was implemented partially in 2001, but went no further.

After five years of Mauritius’ passing new laws, creating new regulatory and investigatory agencies (i.e. the Financial Services Commission [FSC], the Financial Intelligence Unit [FIU] and the Independent Commission against Corruption [ICAC]) and applying a series of complex additional rules and regulations to providers of financial products/services (i.e. banks, insurers, trusts, management companies etc.) it is timely to ask whether the incremental benefits derived from ‘enhanced’ regulation have been commensurate with its costs.

Vanuatu or New Hebrides (when it was a British-French Condominium prior to 1980) is a small developing Pacific island country located about 800 kilometres west of Nadi, Fiji Islands and about 2,500 kilometres northeast of Sydney, Australia.

Two separate regulatory bodies have the responsibility of regulating the offshore sector in Vanuatu. These are the Reserve Bank (RBV) and the Vanuatu Financial Services Commission (VFSC). Both are supported by the Financial Intelligence Unit (FIU), which is established within the State Law Office (SLO). The SLO, though not a regulator, provides important drafting and technical legal assistance. In addition, although the Vanuatu Investment Promotion Authority (VIPA) is not an IFS regulator as such, it does have the authority to approve investments, assist investors and set down requirements to regulate investment.

The public sector in Vanuatu has had to recruit new staff and retrain existing staff to meet the new international regulatory standards. The private sector has also had to recruit new staff and retrain existing staff to fulfil the new due diligence and suspicious transactions reporting requirements. Where new staff members have been recruited, new office space has had to be allocated and additional hardware and software systems have had to be bought or licensed. Some offices have also bought new IT systems such as ‘World Check’ in order to be able to satisfy the new international regulatory standards. Overall administrative overheads have increased for both the private and public sectors in Vanuatu.

This final chapter presents a synthesis of the results from the preceding case study reports from Barbados, Mauritius and Vanuatu. It broadly considers the costs and benefits of enhancing the regulatory regime for international financial services in the public and private sectors for these three countries, and draws out some general implications for the international financial centres under consideration. The authors end by forming a number of overall conclusions and ask readers to consider the importance of further research to assess the developmental impact of recent international tax and AML/CFT initiatives to the much larger number of IFCs worldwide.