Jersey beats UK on financial regulation

IMF rates Jersey ahead of UK on compliance with international financial regulation rules

Jersey's Mont Orgueil Castle. The IMF said Jersey complies with 44 of 49 recommendations to cut financial crime. Photograph: Toby Melville/Reuters

Jersey's compliance with international financial regulation and supervision rules is rated ahead of the UK, according to a detailed study by the International Monetary Fund (IMF).

Jersey, which has earned notoriety as a tax haven, complies with 44 of 49 anti-money laundering and financial crime busting recommendations compared with only 36 by the UK.

The IMF's latest assessment has been welcomed by Jersey's financial elite, eager to portray the island as a premier international financial centre rather than a secrecy jurisdiction.

The island has long been seen as an important staging post for washing illicit cash. Sani Abacha, the corrupt former Nigerian leader, made use of a number of bank accounts in Jersey, Liechtenstein, Luxembourg and Switzerland when he looted his country's coffers of hundreds of millions of pounds. The Swiss authorities revealed Jersey's role in the scandal rather than the island's own regulators.

Tens of millions of pounds linked to the slush fund of allegedly corrupt BAE arms deals flowed through Jersey accounts, and of the £1bn siphoned illicitly from Angola's state owned oil firm, huge sums went through the country.

But while rating much of Jersey's financial architecture as meeting international standards set by the Financial Action Task Force, IMF investigators did find fault in some of the island's supervisory arrangements.

In particular, it was concerned that Jersey's regulators had limited knowledge of the activities of special purpose vehicles registered on the island. In addition, the IMF stated there was no "official oversight" of the quality of auditors working in Jersey, though it said arrangements are being made to strengthen this area.

The IMF was also concerned with Jersey's reliance on "intermediaries and introducers" undertaking due diligence assessments of clients. The IMF's financial system stability update stated: "The assessment concludes [Jersey] does not comply fully with the international standard." Jersey, it noted, does not agree.

But Geoff Cook, chief executive of Jersey Finance, said: "The IMF has given Jersey's finance industry a ringing endorsement for the quality of its regulation and legislation, the transparency of its regulatory processes and the robustness and resilience of its banking system.

"In addition, the IMF review has reaffirmed a number of features of Jersey's regulatory and supervisory regime, referring to Jersey as one of the pioneers of the Tax Information Exchange Agreements. It highlights that Jersey's financial institutions and trust company businesses are well supervised to counter terrorist financing and money laundering, and that Jersey's finance industry has continued to maintain open and co-operative relationships with regulatory authorities overseas." The IMF said Jersey's financial industry had been affected by the global crisis, but described financial soundness indicators for institutions licensed on the island as "satisfactory". There have been growing concerns over the financial viability of offshore financial centres as the economic downturn takes its toll. A Treasury report, due next month, is expected to warn ministers that they may have to bail out some UK dependent tax havens.

Though Jersey is projecting a budget deficit of as much as £100m, the IMF said: "Stress tests confirm the [Jersey] system is resilient to a range of shocks. However, there is a high concentration of risk and spill-over risk from parent banks."

Critics of offshore finance say evidence suggests money from the island accounts for the majority of all foreign direct investment from repressive regimes such as Djibouti, Libya and Turkmenistan and that it will face huge pressure as a growing international consensus looks set to break open so-called secrecy jurisdictions. But Cook said: "Critics of Jersey's finance industry should ... recognise that the standard of Jersey's financial services regulation and supervisory capabilities are either ahead of or on a par with the regulatory positions of both EU member states and G20 countries."

Make accountants accountable

It is clear from the EU's G20 preparations that its neoliberal ideology perpetuates respect for those who oppose regulation

At a time when numerous EU figures are descending on Dublin as part of efforts to browbeat Irish voters into accepting the Lisbon treaty, one man has been conspicuous by his absence.

Charlie McCreevy, Ireland's representative in the European commission, has barely featured in the media coverage of the campaign ahead of the referendum on 2 October. His apparent willingness to be muzzled could be explained by how he unintentionally helped persuade his compatriots to reject the same treaty last year by admitting that he hadn't bothered to read the document.

McCreevy, whose portfolio covers financial services, has not displayed the same reticence about the global economy. Last weekend, he made the ludicrous suggestion that we shouldn't blame the financial crisis on unregulated capitalism but on the "failure of the education system which rarely encompasses sufficient emphasis on the life skills needed to understand, manage and mitigate personal financial risk".

If McCreevy really thinks that ordinary people should be blamed for Wall Street's woes because they haven't figured out how derivatives work, then it is fortunate that his stint as commissioner will soon come to an end. Sadly, the neoliberal ideology that he espouses (to extremes) won't be leaving Brussels with him, judging by the EU's preparations for the G20 summit in Pittsburgh.

Wrapping up an earlier G20 pow-wow in April this year, Gordon Brown announced the demise of the "Washington consensus", under which key international players had foisted market fundamentalism on the poor. Yet at the beginning of this month, the EU's finance ministers facilitated at least a partial return to the days when the west meddled in the economic and political affairs of Latin America with the sole intention of protecting the profits of multinational firms.

On 1 September, the International Monetary Fund allocated $150m to Honduras, despite the fact that the country's democratically elected government had been toppled in a rightwing coup. Rather than protesting at how the IMF was conferring legitimacy on an illegally installed regime, the EU agreed one day later to endow the fund with $178bn. (It took the IMF another week before it announced that the money wouldn't be released to Tegucigalpa until the fund had decided if it could recognise the new regime).

In his latest stunt, Nicolas Sarkozy has pledged to walk away from the Pittsburgh summit if he doesn't secure an agreement on limiting bankers' salaries. This threat will probably come to nothing, just as happened with a similar vow by the French president to leave London if the previous G20 summit didn't go his way. Of course, he's right to insist that the bonus culture is scrapped but this is only one of a range of measures that the EU should be seeking.

Sarkozy's finance minister, Christine Lagarde, is perturbed by a new blueprint for changing the way that assets held by banks are valued that has been drafted with the Pittsburgh summit in mind. Her anger would perhaps be better directed not at the detail of the proposal but at the body behind it: the International Accounting Standards Board. The IASB is a private firm dominated by the accounting industry, banks and multinational companies. Although it was only established in 2001, it sets the standards that listed companies in more than 100 countries must follow. Its activities may sound arcane, yet without clear accounting standards none of us can have any idea what major firms, some of which are more powerful than governments, are up to.

Lagarde's reservations notwithstanding, the EU has been generally supportive of the IASB. Am I the only one struggling to explain why such an untrustworthy and unaccountable group is treated with respect not only by governments but also by some anti-poverty campaigners? Christian Aid and a few like-minded organisations are calling for the G20 to demand that the IASB co-operates in efforts to secure a new system whereby large companies have to report how much tax they pay in each country where they operate.

I fully support the principle of country-by-country reporting and applaud the fight against tax swindling, which, according to Christian Aid, could be depriving poor countries of $160bn per year. But how can we have any confidence in a body like the IASB, stuffed with men (its 15-member board has only one woman) with a deep-rooted aversion to regulation?

In December last year, Prem Sikka, an accounting professor at the university of Essex, wrote: "Accounting has done grievous harm to too many innocent citizens and is central to the current financial crisis. Rather than allowing private interests to make public policies, accounting rules should be made by an independent body representing a plurality of interests."

If the standards of the IASB have been central to causing the crisis, why on earth is it still operating?

Investors back flexible governance code

FRC publishes responses to consultation on UK corporate governance system

Investors have strongly backed the flexibility of the UK’s corporate governance rules. Shareholder groups that responded to a consultation on the UK code are broadly happy with the existing comply-or-explain approach.

They voice concern, however, over the quality of corporate reporting and say companies should do more to explain their positions when they do not comply with the code.

‘The general tone of the comments we received from both companies and investors is that, by and large, they prefer the flexibility the comply-or-explain approach provides,’ says Chris Hodge, head of corporate governance at the Financial Reporting Council (FRC), which is conducting the review. ‘That’s not to say they think it’s working perfectly. Investors still have concerns about the quality of some of the disclosures companies make, which they think aren’t sufficiently informative.’

The UK’s governance rules – known as the Combined Code on corporate governance – have come under scrutiny following the failure of several of the country’s financial institutions.

Some have called for a radical overhaul of the system to prevent a repeat situation, including making parts of the code mandatory. The Association of Chartered Certified Accountants, the global accountancy body, says in its submission to the FRC that the comply-or-explain approach is ‘excessively flexible’ and ‘inadequate’.

But large investor groups tend to support the existing system in their responses, including the Association of British Insurers (ABI) and Hermes Equity Ownership Services (HEOS), which operates the UK’s largest pension fund. The ABI says the UK system ‘has served us well and we continue to support the code’, while HEOS observes that the ‘comply-or-explain principle continues, in our view, to have significant merit.’

Both add that corporate reporting and disclosure by companies need to improve in quality. ‘We believe that, for it to work properly, boards need to demonstrate better that their behavior is in tune with the spirit of the code,’ writes HEOS in its submission.

Accountants for Business

Bringing benefits, from the boardroom to the small business sector

Accountants for Business is the global theme adopted for 2009 / 10 by ACCA (the Association of Chartered Certified Accountants).

This theme emphasises the important roles accountants play in both the private and public sectors, promoting their role as advocates of sound business practices, champions of sustainable business development and identifiers of value drivers which lead to high-performing organisations.

Dr Steve Priddy, Director of Technical Policy and Research, ACCA says: “This is an agenda for business which puts sound financial management at its heart.
It highlights the importance of accountants to fostering long-term corporate success.

“There has never been a more crucial time for accountants to continue to show their true value. Over the last 18 months, as a systemic banking collapse has evolved into significant worldwide recession in many countries, a range of presumptions about accounting, organisations and society will be questioned – and we believe that the role of the accountant will emerge into a golden age as a champion of sustainable value in business.

“Corporate governance, regulation, asset pricing, risk management, remuneration design are all subject to root and branch examination. What organisations need now is the firm leadership and financial discipline for the immediate short term, and the confidence of knowing they possess a business model which is sustainable. As global economic conditions continue to be uncertain, CFOs have every opportunity to emerge as leaders and to rise to the challenges ahead.”

ACCA’s website will include the latest research, events and opinion on this issue – visit http://www.accaglobal.com/accountants_business