Financial institutions registered in Jersey: links to Panamanian legal firm Mossack Fonseca (P.42/2016) – comments.

STATES OF JERSEY

FINANCIAL INSTITUTIONS REGISTERED IN JERSEY: LINKS TO PANAMANIAN LEGAL FIRM MOSSACK FONSECA (P.42/2016) – COMMENTS

Presented to the States on 18th May 2016 by the Council of Ministers

STATES GREFFE

2016  P.42 Com.

COMMENTS

1. The  Council  of  Ministers  wish  to  provide  the  following  comments  on P.42/2016. It is anticipated that Deputy G.P. Southern of St. Helier may wish to take his proposition in 2 parts, therefore these comments are structured with that position in mind with a number of legal, procedural and reputational issues concerning  part  (a)  of  the  proposition  being  covered  first  and  arguments concerning why part (b) of the proposition is unnecessary being outlined under a section entitled, The "Panama Papers" – What is Jersey doing?'
2. It is hoped that in addition to responding to the proposition, these comments will  provide  a  useful  update  to  States  Members  concerning  the  "Panama Papers" and what Jersey is doing, particularly concerning the role of the Jersey Financial Services Commission (the "Commission").

Legal, procedural and reputational issues with part (a)

3. There are significant legal, procedural and reputational issues with taking the action requested of the Chief Minister by Deputy Southern .
4. The wording of the proposition is as follows –

"to request that the Chief Minister, in co-operation with the Minister for Treasury and Resources, as appropriate –

1. directs the Jersey Financial Services Commission (JFSC) –

1. to request the handover of any information held by financial institutions registered in Jersey about their dealings with the Panamanian legal firm Mossack Fonseca, and
2. to ask what action the institutions concerned are taking as a result  of  any  significant  issues  or  relationships  identified following internal investigation; and

should the results of steps taken under paragraph (a) suggest that further action is required –

2. establishes, with appropriate funding, a taskforce, consisting of the JFSC, the Financial Crimes Unit and the Comptroller of Income Tax, to examine any abuse or breach of regulatory standards by those Jersey financial institutions identified in the "Panama Papers" which might jeopardise the Island's international reputation.".

5. In order to explain why it is not possible for the Chief Minister to direct the Commission in the manner requested by the proposition, some background on the existence, structure and function of the Commission is required.
6. The  Commission  is  established  by  Article 2  of  the  Financial  Services Commission (Jersey) Law 1998 (the "Commission Law") –

"2  Establishment of the Commission

4. Save as this Law provides to the contrary, the Commission shall be independent of the Minister and of the States and neither the Minister nor the States shall be liable for any act or omission or debt or other obligation of the Commission.".

7. The Functions of the Commission are set out in Article 5 of the Commission Law –

"5  Functions of the Commission

(1)  The Commission shall be responsible for –

1. the supervision and development of financial services provided in or from within Jersey;
2. providing the States, any Minister or any other public body with reports, advice, assistance and information in  relation  to  any  matter  connected  with  financial services;
3. preparing  and  submitting  to  the  Minister recommendations for the introduction, amendment or replacement of legislation appertaining to financial services,  companies  and  other  forms  of  business structure; and
4. such functions in relation to financial services or such incidental or ancillary matters –

1. as are required or authorized by or under any enactment, or
2. as the States may, by Regulations, transfer.".

8. The ability of the Chief Minister to give guidance and general directions to the Commission is set out in Article 12 of the Commission Law –

"12  Guidance and directions

1. The Minister may, after consulting the Commission and where the Minister considers that it is necessary in the public interest to do so, give to the Commission guidance or give in writing general directions in respect of the policies to be followed by the Commission in relation to the supervision and development of financial services in Jersey and the manner in which any function of the Commission is to be carried out.
2. It shall be the duty of the Commission in carrying out any of its functions  to  have  regard  to  any  guidance  and  to  act  in accordance with any directions given to it by the Minister under this Article.".

The  Power  of  Direction  provided  to  the  Chief  Minister  by  the Commission Law

9. The above extracts from the Commission Law make it clear that there can only be general directions in respect of (1) policies or (2) the manner in which any function (under Article 5) is to be carried out. A direction to the Commission that it ". . . request the handover of any information held by financial institutions registered in Jersey about their dealings with the Panamanian legal firm Mossack Fonseca" would seem to be a specific rather than a general direction. It is the Commission and not the Chief Minister (or the States Assembly) that is responsible for the supervision of financial services in or from within Jersey. If the Chief Minister were able to give binding specific, case by case, directions to probe a matter that he thought suspicious, the Commission would not be able to operate independently of the Chief Minister (and of the States Assembly) as Article 2(4) of the Law stipulates.
10. The Chief Minister signed a Memorandum of Understanding (the "MoU") with the Commission in December 2014 specifically outlining the position under which he would consider using his powers under Article 12 of the Commission Law. That MoU is published online and is also attached to these comments in the Appendix.
11. A particular reason for entering into the MoU was due to concerns expressed by the International Monetary Fund (the "IMF") that the power of the Chief Minister to give guidance or direction to the Commission could affect the operational  independence  of  the  Commission  and  its  carrying  out  of  its regulatory obligations. The use of the power of the Minister to give guidance or direction to the Commission could, if used inappropriately, place Jersey in breach of international standards concerning financial regulation.
12. The MoU makes it clear in paragraph 3.1 that the powers granted to the Chief Minister under Article 12 "will only be used when exceptional circumstances make it necessary to do so in the public interest, and there is no intention to use the powers on a regular or routine basis." It is difficult to see how the situation outlined  in   Deputy   Southern 's  proposition  satisfies  the  exceptional circumstances test and whether it is necessary to use the powers in the public interest concerning this matter.
13. The MoU further makes it clear in paragraph 4.2 that "the Chief Minister confirms that any guidance as well as any direction given by him will be general in nature and will not be used so as to influence particular cases". In Paragraph
    4. it is further stated that the Chief Minister confirms "that any guidance or direction of the type referred to in paragraph 4.3.1 above will not prejudice the operational independence of the Commission by dictating the specific manner in which the Commission should carry out its responsibilities in relation to the supervision and development of financial services in Jersey."
14. It appears clear to the Council of Ministers that were the Chief Minister to exercise the power of direction as requested in Deputy Southern 's proposition he would be in breach of both the position at law and the position in the MoU.

15. Finally, it is important not to underestimate the very real concerns that would arise if the Chief Minister did exercise the power despite the legal and MoU issues raised above. Interfering with the independence of the financial regulator can cause a jurisdiction to be in breach of international regulatory standards which could cause significant issues concerning restrictions on market access for the finance industry. Given that this issue has previously been raised as a concern by the IMF, interference with the independence of the regulator in the manner suggested would clearly not be in the public interest.
16. It would therefore appear that the proposition as presented by Deputy Southern , even if supported by the States Assembly, would present the Chief Minister with a significant legal obstacle if he was requested to use the power of direction in such a way. It may therefore be the case that the Chief Minister may conclude that the use of the power of direction cannot be justified in these circumstances.

Restricted information under the Financial Services (Jersey) Law 1998

17. Article 37 of the Financial Services (Jersey) Law 1998 (the "Financial Services Law") deals with limiting disclosure (by the Commission) of information received about persons conducting financial services in Jersey. It is set out in the following terms –

"37 Restricted information

1. Subject to paragraph (2) and to  Article 38, a person who receives information relating to the business or other affairs of any person –

1. under or for the purposes of this Law; or
2. directly or indirectly from a person who has so received it,

shall be guilty of an offence and liable to imprisonment for a term not exceeding 2 years or a fine, or both, if he or she discloses the information without the consent of the person to whom it relates and (where sub-paragraph (b) applies) the person from whom it was received.

2. This Article does not apply to information which at the time of the disclosure is or has already been made available to the public from other sources, or to information in the form of a summary or collection of information so framed as not to enable information relating to any particular person to be ascertained from it.[1]".

18. The proposition as lodged by Deputy Southern is therefore, arguably, not able to be fulfilled upon a request from the States as, quite simply, if the information was disclosed as outlined, the person disclosing such information would be committing a criminal offence under Article 37 of the Financial Services Law. This presents an additional concern in fulfilling part (a) of the proposition as drafted.

Part (b): The "Panama Papers" – what is Jersey doing?

19. All Jersey based banks, trust companies and other financial institutions are regulated by the Jersey Financial Services Commission (the "Commission") and the Commission is taking all necessary steps to ensure that regulated entities are complying with their regulatory requirements. This includes capturing beneficial ownership information, the purpose of the business relationship, the monitoring of transactions and all other due diligence requirements.
20. The action taken by the Commission in relation to Mossack Fonseca has been thorough in the circumstances and stands comparison with what is being adopted by counterpart regulators elsewhere. The Commission has sought relevant information from regulated firms on any connections they can identify with Mossack Fonseca, or with any material published through the Panama Papers. The Commission has also visited the Mossack Fonseca office in Jersey to verify that the firm's current status here as an unregulated business remains a true reflection of the activity being conducted in the Island. This has been shown to be the case.
21. The Commission has relied on a high level of awareness in regulated firms of the issues raised by the Panama Papers. This has been borne out by the speed of self-reporting of any connections to Mossack Fonseca.
22. States Members will appreciate that it is neither appropriate nor possible to provide details on specific cases, but it can be disclosed that at the current point in time 28 connections have been identified. The Commission is evaluating each reported incidence for: any potential conduct of business concerns; suspicion of exposures to financial crime (including tax evasion) or other potential problems. It should be noted that mention of Jersey among the Panama Papers is not automatically an indication of any misconduct by the named Jersey entities.
23. The case by case review has currently revealed no significant concerns of inappropriate conduct by Jersey financial services practitioners. However, each case will continue to be monitored and can be reviewed if any further information emerges. In order to ensure that the jurisdiction is best placed to offer any necessary detailed comment on any matter arises that affects Jersey, on 5th May 2016 the Commission sent a structured request to firms about their links with Mossack Fonseca.
24. Members may be aware that on 9th May 2016 information on 200,000 entities contained in the Panama Papers was made available on the International Consortium of Investigative Journalists database. This database contains information about connections between entities – presence on the list is itself no indication of any wrongdoing.
25. Members should, of course, be aware that Jersey's legislative framework requires that should an employee of a financial services firm in Jersey form a suspicion of financial crime, they are obliged to file a suspicious activity report with the Joint Financial Crime Unit of the States of Jersey Police and Customs (the "JFCU").

26. It is therefore important to note that in addition to the action taken by the Commission, the JFCU have also carried out a review of any suspicious activity reports ("SARs") related to Mossack Fonseca. Equally, communication about all matters concerning financial law enforcement in Jersey are regularly updated through the tri-partite financial crime law enforcement group that includes the Commission, the JFCU and the Law Officers' Department.
27. It is for these reasons that the formation of a "taskforce" as outlined in Deputy Southern 's proposition is not required in the circumstances as the matter is being handled appropriately within existing resources. There is no indication at this stage that the injection of further resources into such a "taskforce" would have any material benefit. The matter will continue to be monitored by the relevant law enforcement authorities.
28. It is also of note that Jersey's reputation as a stable, well-regulated international finance centre is widely established. The Commission plays a vital part in ensuring Jersey's leading market position as a jurisdiction that supports high- quality financial and professional services providers. Jersey's reputation for sound regulation and good business practice has been endorsed by a range of expert international bodies that assess compliance with the relevant global standards.
29. For example, Jersey has gained international recognition of its leading position from the World Bank, the IMF and MONEYVAL (the FATF style regional body for Europe) for the standard of compliance with the international standards of transparency and information exchange. Jersey is fully committed, as an early adopter', to automatic exchange of information in accordance with the international Common Reporting Standard and next year will be providing information to over 50 countries. Jersey has been a party to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters since June 2014. Together with the Tax Information Exchange Agreements and Double Taxation Agreements that have been entered into, Jersey is currently in a position to exchange information on request with some 80 countries.
30. Jersey has also received commendations from the Secretary General of the OECD and the EU Tax Commissioner on the extent of Jersey's commitment to and  compliance  with  the  international  standards  on  transparency  and information  exchange.  The  results  of  Jersey's  2011  OECD  Peer  Review (including the 2014 Supplementary Report) found the Jersey authorities are fully committed to transparency and exchange of information for tax purposes' and Jersey's practices to date have demonstrated a responsive and cooperative approach'. And Jersey is supporting the OECD's Base Erosion and Profit Shifting  programme  and  is  currently  engaged  in  consultation  on  the arrangements for information exchange through country by country reporting by multinational enterprises.
31. In  addition  to  the  Island's  engagement  with  multilateral  bodies  that  set international standards, Jersey has also taken action locally to discourage the use of the Island by those engaged in tax evasion and abusive tax avoidance. Following the statement by the Chief Minister in July 2014 Jersey has further tackled the issues of tax evasion and abusive tax avoidance on 3 fronts –

1. Jersey Finance Ltd. has issued a best practice document to finance industry practitioners;
2. the  Commission  is  looking  for  evidence  of  tax  schemes  being administered when undertaking on-site examinations;
3. the government is refusing applications for licenses for the setting up of a business and the employment of staff where the activities are considered to pose a risk to the Island's international reputation.

32. The Commission and Government regularly host regulators and officials from other jurisdictions who come to learn from the experience on offer in Jersey. During this month, we have already had a visit of delegates from over 10 worldwide jurisdictions  who have  visited the  Island to learn about "best- practice" in corporate registry matters.
33. Members will also be aware of the more recent developments in respect of exchange of beneficial ownership information and the worldwide fight against corruption and financial crime, which include –

1. a  bi-lateral  agreement  with  the  United  Kingdom  by  signing  of Exchange of Notes on 11th April 2016 concerning enhanced provision for  exchange  of  beneficial  ownership  information  with  law enforcement and tax authorities;
2. confirmation on 10th May 2016 of Jersey's willingness to join the list of jurisdictions that have committed to the recently launched initiative for the development and subsequent implementation of a new global standard for the exchange of beneficial ownership information;
3. the attendance of the Chief Minister, at the invitation of the Prime Minister of the United Kingdom, at the Anti-Corruption Summit held in London on 12th May 2016.

34. These examples are evidence of the strength of Jersey's regulatory regime and of  the  Island's  hard-earned  reputation  as  a  high-quality,  cooperative  and transparent international finance centre. This is why over 12,000 members of our community choose to live and work in this sector in Jersey – a vote of confidence in our regulatory regime, and a vital source of the prosperity and growth that the Council of Ministers is resolved to promote and protect.
35. It is for the above reasons that the Council of Minister would encourage members to reject P.42/2016 in whole.

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