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WHITE PAPER EU 'WHITE LIST' OMITS THE DIAMOND FOR THE DIRT

The European Union 'White List' of Third Country Equivalence in Anti-Money Laundering LAW | TRAINING | KYC360

The publication in May 2008 of a EU draft ‘white list’ 1, countries considered to have the equivalent controls on money-laundering to EU member states, has caused something of a storm amongst the Crown Dependencies; they have been omitted from the list. The purpose of the list is to determine those countries in which transactions demand less scrutiny. The list was compiled by members of the EU committee on the prevention of money laundering and terrorist financing, and according to a report in the Financial Times 2, is the result of more than 18 months of talks. The countries on the list are: The Russian Federation The United States In addition the footnote to the list states that the French overseas territories (Mayotte, New Caledonia, French Polynesia, Saint Pierre and Miquelon and Wallis and Futuna) as well as the Dutch overseas territories (Netherland Antilles and ) qualify for inclusion on the list as a result of their membership of and the Kingdom of the . The statement that the UK Crown Dependencies ‘may’ be considered equivalent does not provide an awful lot of comfort to those concerned at the EU’s failure to recognise Jersey’s success in combating money laundering and the financing of terrorism. The UK does consider the Crown Dependencies to be equivalent and it is expected that the IMF will include Jersey on its own White List to be published next year. Guernsey’s finance minister, Charles Parkinson, was quoted in the Telegraph 3 as calling the decision to omit the Crown Dependencies as ‘political’. Whether the decision was a political one or not, it must be considered unlikely that the decision to omit Jersey was based on its record of compliance with international standards. The IMF’s 2003 assessment of supervision and regulation of the Financial sector 4, noted that ‘ the financial regulatory and supervisory system of Jersey complies well with international standards ’. Particular praise was given for Jersey’s achievement in meeting international standards on anti-money laundering and its success in complying with FATF recommendations. The report found that Jersey ‘complied’ or ‘largely complied’ with every recommendation with a finding of full compliance with 76% of the recommendations 5. Recent assessments carried out on some of the countries that made it to the EU’s list only seem to underline the notion that Jersey’s omission owes nothing to its standards of international compliance. The following table shows the levels of compliance with FATF recommendations of some White List countries compared to Jersey 6.

Country Report Level of compliance % date Compliant Largely Partially Not Not compliant compliant compliant rated Jersey 7 2003 76 18 --6 Australia 8 2005 24 29 27 20 - Canada 9 2008 14 47 16 23 - Singapore 10 2008 23 65 84- Switzerland 11 2005 22 43 27 62 USA 12 2006 31 57 48- LAW | TRAINING | KYC360

We obtained and reviewed FATF and IMF reports on all the countries on the White List. The White List countries in the table above are those for whom an assessment including individual ratings appeared in the report. The individual ratings for each country were added together and then expressed as a percentage of the total ratings. The Jersey report is based on ratings for 37 individual ratings. The remaining countries ratings are based on 39 individual ratings (they are based, unlike the Jersey report, on the 2004 methodology). For instance 10 ‘Largely compliant’ ratings out of a total 39 individual ratings would amount to 25.64 (10 ÷ (39 ÷ 100)). Once precise percentages for each rating were ascertained, the numbers were rounded up or down to the nearest whole to number so as to achieve a total of 100. Those are the figures that appear in the above tables. We also obtained and reviewed in the same manner FATF reports on other countries that were omitted from the White List. The results of our analysis on and The are referred to below. Those White List countries not included in the table above do not have reports containing data that can readily be expressed in percentage terms. We do however comment on the findings contained in those reports below. The endnote details the reports used and tables of ratings analysed. Perhaps surprisingly, of the White List countries included in the table, only the USA achieved compliance with more than a quarter of the FATF recommendations, which is something of an underachievement when compared with the three quarters full compliance achieved by Jersey. Australia and Canada staggering level of non-compliance with FATF recommendations, at 20% and 23% respectively, makes it difficult for the EU to justify their inclusion on the White List on the grounds of ‘equivalence’. is perhaps one of the most surprising inclusions on the White List. The first mutual evaluation report on Russia 13 , carried out in 2001 by the European Committee on Crime Problems, noted as a ‘ critical deficiency ’ Russia’s lack of comprehensive laws and regulations giving effect to international standards on money laundering, an obvious and somewhat concerning vulnerability. The Russian Authorities were frank in their admission that KYC requirements ‘ do not meet the international standards ’. Although Russia did have in place confiscation procedures, they were not utilised in such a way as to correspond with multilateral treaties. On law enforcement in general, Russia was described as having ‘ a long way to go before it can be said to have a real operational system in place to fight money laundering ’. A second round evaluation was carried out in 2004 14 . Whilst significant improvements were noted, primarily the introduction of legislation to combat money laundering, the numbers of investigations, prosecutions and convictions for money laundering were reducing and KYC procedures remained deficient. GAFISUD’s evaluation of Argentina 15 noted inherent weaknesses in legislation which had the effect of impeding the successful prosecution of money laundering and no offence of terrorist financing existed. Argentina was criticised for its failure to provide statistics in anti-money laundering areas meaning an assessment of the implementation of core requirements could not be carried out. Bank and trust secrecy in Mexico was criticised in the FATF’s report in September 2004 16 as it impeded access to financial records by enforcement, prosecutorial and judicial authorities during investigations and prosecutions. The application of anti money laundering measures was somewhat haphazard and the lack of mutual legal assistance legislation not only inhibited Mexico’s ability to co-operate internationally, it also undermined national prosecutions. South Africa received praise from the FATF 17 for developing a legislative structure to combat money laundering (though the absence of a framework to combat the financing of terrorism was noted) that framework is quite new and will need some time before its effectiveness can truly be assessed. Neither Brazil 18 , New Zealand 19 , Japan 20 nor Hong Kong 21 received ringing endorsements in their respective reports. Indeed the IMF made a number of recommendations to Jersey notwithstanding its 76% finding of compliance and no areas of non or partial compliance. The Jersey authorities however responded to the results of the IMF assessment in very robust terms, the opportunity being taken to emphasise the achievements made by Jersey and to reply, in substantive and extensive terms, to many of the recommendations. The Brazilian authorities made no response to the recommendations contained in the report on Brazil. The authorities in New Zealand, Japan and Hong Kong all made relatively brief responses compared to the Jersey Authorities. The incredulity at Jersey’s omission from the White List is not based merely upon the fact that the other countries on the list fall so far behind Jersey in their record of tackling money laundering, it is that many of the countries fall behind recognised international standards. Australia, Argentina, Canada, Russia, Mexico and South Africa in LAW | TRAINING | KYC360

particular are years behind. The bewilderment should not be restrained to Jersey alone; recent FATF assessments of the Bahamas 22 and Cayman 23 show that they significantly outperformed most of countries on the White List, having been found to be compliant or largely complaint with 45% and 78% respectively of the FATF recommendations. Whilst there is perhaps insufficient evidence to conclude that Jersey’s omission is political, it cannot be explained purely on the basis that Jersey lacks equivalent money laundering controls to member states of the EU. Indeed when compared to countries on the list, Jersey is a beacon. Given that the EU recently announced that it is to pursue infringement measures against 15 of its member states for failing to implement the Third Money Laundering Directive into national law, the EU would perhaps be better placed to give Jersey the recognition it deserves, and the role model some of its member states appear to need, as the leader in the field of anti-money laundering.

For further information please contact: Stephen Platt, Chairman BakerPlatt Group

1 HM Treasury, 12.05.08 http://www.hm-treasury.gov.uk/documents/financial_services/money/fin_crime_equivalence.cfm 2 Financial Times, 28.05.08, http://www.ft.com/cms/s/0/e3990a64-2c4f-11dd-9861-000077b07658.html?nclick_check=1 3 Daily Telegraph, 04.06.08, http://www.telegraph.co.uk/news/uknews/2070094/Channel-Islands-left-off-EU's-money-laundering-'white-list'.html 4 IMF, Jersey, Assessment of the Supervision and Regulation of the Financial Sector (November 2003) 5 IMF, Jersey, Assessment of the Supervision and Regulation of the Financial Sector (November 2003) Volume 2, table 7 6 The Jersey report was based upon the AML/CFT 2002 methodology, all other reports are based upon the FATF 2004 methodology. Jersey is yet to be assessed under the 2004 methodology. 7 IMF, Jersey, Assessment of the Supervision and Regulation of the Financial Sector (November 2003) Volume 2, table 7 8 FATF / GAFI, Australia, Third mutual evaluation report on Anti-money laundering and combating the financing of terrorism (October 2005, table 1) 9 FATF / GAFI, Canada, Third Mutual Evaluation on Anti-Money Laundering and combating the Financing of Terrorism (February 2008, Table 1) 10 FATF / GAFI, Singapore, Third Mutual Evaluation Report, Anti-Money Laundering and Combating the Financing of terrorism (February 2008, Table 1) 11 FATF / GAFI, Switzerland, Third Mutual Evaluation Report, Anti-Money Laundering and Combating the Financing of terrorism (October 2005, Table 1) 12 FATF / GAFI Report on Observance of Standards and Codes, FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism (September 2006, Table 1) 13 European CDPC, First Mutual evaluation Report on the Russian Federation, 19.01.01 14 European CDPC, Second Round Evaluation on the Russian Federation, 09.07.04 15 GAFISUD’s First round of evaluations on the system against money launder, public summary of the report on Argentina, June 2004. 16 FATF / GAFI, Mexico, Report on Observance of Standards and Codes, FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism, 29.09.04 17 FATF / GAFI, South Africa, Report on Observance of Standards and Codes, FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism, April 2004 18 FATF / GAFI, Brazil, Report on Observance of Standards and Codes, FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism, June 2005. 19 FATF / GAFI, New Zealand, Report on Observance of Standards and Codes, FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism, August 2005 20 IMF, Japan, Report on Observance of Standards and Codes, FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism, July 2004 21 IMF, People’s Republic of – Hong Kong Special Administrative Region: Financial system stability assessment, including reports on the observance of standards and codes on the following topis: banking supervision, securities regulation, insurance supervision, payment systems, securities settlement systems, monetary and financial policy transparency, corporate governance, and Anti-Money Laundering and combating the Finance of Terrorism, June 2003. 22 CFATF, The Bahamas, Mutual evaluation / detailed assessment report, on Anti-Money Laundering and Combating the Financing of Terrorism, 23.11.07 23 CFATF, Cayman, Mutual evaluation / detailed assessment report - Anti-money Laundering and Combating the Financing of Terrorism 23.11.07 24 Press release from Europa, 05.06.08 ‘Commission takes measures against 15 Member States for non timely implementation’ http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/860&format=HTML&aged=0&language=EN&guiLanguage=en LAW | TRAINING | KYC360

BAKERPLATT GROUP The BakerPlatt Group is comprised of three complimentary businesses established to support the needs of its clients.

BAKERPLATT A niche dispute resolution law firm comprised of Jersey and English lawyers with a unique focus on three practice areas: - Financial Crime and Regulatory Law - Commercial and Trust Litigation - Asset Recovery and Insolvency The firm is widely recognised for its expertise and is frequently instructed to advise on matters within its niche practice areas by governments, regulators, international bodies, Attorneys General and financial institutions, internationally. BakerPlatt is recommended by both the Legal 500 and Chambers & Partners Law Firm Directories. "BakerPlatt, through its focus and high levels of expertise, rapidly established itself as a market leader in its chosen areas of practice." "The expertise of BakerPlatt's fee-earners is sought internationally, particularly regarding regulation of trust companies and asset recovery". Legal 500 2007.

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KYC360 KYC360 is a next generation web based customer due diligence tool utilised by regulators, FIU's and financial institutions complying with the risk based approach to money laundering prevention. Drawing upon unique global datasets of PEP's, legislation, sanctions regimes, wanted lists, reports, country files and one of the world's most powerful news archives, KYC360 provides real time 360 degree views of people, organisations and countries. KYC360 is supplemented by World Factbook a live web-based encyclopeadia of country risk information covering every jurisdiction and territory in the world.

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