A negulator's uream..

Bombarded by regular salvoes of Euro-Directives and under pressure from a string of International organizations to tighten KYC ("know your customer") procedures, it is hardly surprising that off-shore financial centres feel that they are being sub merged in a tsunami of over-regulation. Bankers and other players on Gibraltar's financial stage confirm that the paperwork and effort involved in the systems of "compliance" they face today add substantially to their costs. The same is true on the Isle of man,the Channel Islands Bremuda.... or anywhere else that large sums of investors'funds are managed.

Local Financial Services Com missioner Marcus Killick must, per force, defend the system, but gen erally he and his team at the FSC have a lighter touch on the reins than many while managing to keep Gibraltar ahead of the field in terms of international regulatory require ments. But even so, Killick admits that there is a danger of over-regu lation... and, in an article in the current issue of Offshore Invest ment points to the cost in manhours and effective working of some demands of organizations such as the International Monetary Fund when that body dons its su pervisory hat,

As anyone knows who has heard Killick speak at bankers' or other financial functions, Gibraltar's Fi nancial Services Commissioner has a sharp sense of humour and a wit which at times verges on the mor dant. Both are used to good effect in the article which takes the form of an imaginary conversation be tween Killick and Rodrigo de Rato, the managing director of the IMF — which in March is scheduled to conduct a follow-up assessment of the Rock's financial sector... to which it gave a glowing report af ter its first wide-scale survey a few years ago.

"I got a phone call recently from the Managing Director of the IMF" , the article begins.."'Marcus' he said,'we have been assessing all the work that the IMF,Financial Stabil ity Forum and others have been doing on offshore financial centres.'

'As you know we had been wor ried that offshore centres were the sinkholes of depravity, non-coop erative, full of money launderers, badly regulated, lousy corporate governance etc. We therefore wanted to sort them out. Obviously we needed to establish the truth though, hence the decision by the IMF board to follow the recommen dation of the FSF and establish a programme to assess all offshore finance centres.'

Still talking in the dream-world guise of De Rato, Killick points out that this has been going on for nearly five years during which time the IM has visited "pretty much every offshore centre" being ex tremely thorough and carrying out specific analyses, with on-site teams carrying out a Module 2 as sessment or one under the Finan cial Sector Assessment Program or FSAP.(The FSAP is the one theIMF uses to check the economies of on shore jurisdictions.)

"We've checked them banking standards, insurance standards, investment standards, even their anti money laundering systems.Toensure transparency we have even persuaded virtually eve ryone to publish the results of our visits...' Killick imagines De Rato to say.

"What we found was that many of the larger centres we visited are actually pretty well run, they com ply with the major international standards. Sure they have some weaknesses and areas they should improve, but so does practically every finance centre. Indeed in the last report I got from my Monetary and Financial Systems Department it said that compliance with stand ards in OFCs was,on average, bet ter than in other jurisdictions as sessed under the FSAP."

"So, what's your problem Rodrigo?" I replied, "Seems to be that you can chalk this one up as a job well done. Keep an eye on the basket cases, provide technical as sistance where needed, write a re port saying how much things have improved since you got involved. Quick bit of mutual back slapping, talk about the world being a kinder, better place as a result of your work and move on."

And against this background, Killick advances the not-so-tonguein-check suggestion that the IMF's decision to carry out a second round of visits could be a waste of time and cash.

"But why another round?"

Killick asks. "Do you realise the amount of work it takes to prepare for one of your visits, the amount of regulators' time used up during the visit itself and in responding to the numerous drafts that come out before the report is finalised. You visit some pretty small jurisdic tions; don't you think their time might be better spent actually regu lating? After all you have reported that supervisory deficiencies were most frequently found to result from inadequate resources and skills and your visits soak up re sources."

"Hang on, we have stated that during the second round of assess ments, priority will be given to as sessing (1) progress in addressing weaknesses identified in the first round of assessments;(2) relevant areas not previously assessed; and (3) cooperation and information sharing arrangements. Surely that is perfectly reasonable and fo cused?"De Rato replies in Killick's dream.

"On the face of it yes, but you are still effectively undertaking a com plete reassessment rather than just an update," Killick tells him."You may be prioritising these areas you mention but you are still covering a number of the areas you covered last time. Is such a wide ranging on site inspection really the best use of your and our resources?

"Please don't get me wrong, we aU support the IMF in whatit is try ing to achieve, better global coop eration and less systemic risk are in aU our interests, I am just not sure you are doing it in the most efficient way for either you or us."

"But you forget, participation in the programme is voluntary, a ju risdiction can always choose not to participate if it feels we are wast- ing their time," says De Rato.

"It depends on your definition of voluntary. A failure to participate for whatever the reasons is bound to have reputational consequences as people would believe the juris diction hassomething to hide. I also note that the FSF have stated that OFCs will be incentivised to partici pate in the second assessment proc ess by the fact that participation it self draws attention to their willing ness to co-operate. I had always thought that the level of coopera tion was assessed in respect of as sistance between jurisdictions on such matters as money laundering and regulatory issues, not that we were to be judged by our level of cooperation with an assessment process."

"But Marcus, there are still wor ries; poor regulation in an offshore finance centre might cause prob lems for the rest of the financial world. Offshore is seen by some as a home for scandal."

"Hang on; look at the evidence of the last five years,virtually every scandal so far this millennium has been onshore. Enron, Worldcom, Parmalat, and now Refco to name but a few. These have shown defi ciencies in onshore supervision, accounting or corporate govern ance, not offshore."

Similarly the money laundering problems exposed have been al most exclusively onshore ones, Killick points out. In fact the most recent US Department of State In ternational Narcotics Control Strat egy Report recognises that money laundering concerns are global,and includes France,Italy,Spain,the UK and USA in its list of"jurisdictions of primary concern". The only EU nations not listed as being of con cern but are simply being moni tored are Denmark, Estonia, Fin land, Lithuania, Malta and Slovenia.

The fact that some of the onshore scandals had offshore elements is understandable for we live in a globalised financial world, Killick points out. And everyone is con cerned about systemic risk because the failure in one jurisdiction can affect many others.

"But just because subsidiaries in an offshore jurisdiction were being abused to hide losses off balance sheet, does not divert the fact that the actual fraudsters were operat ing onshore, under onshore scru tiny. To claim this as an offshore problem would be a bit like blam ing the Swiss if a fraudster used a Mont Blanc pen to sign his dodgy cheques."

The article, a delight — and a must read for anyone involved in offshore finance —continues in this vein.

But one wonders what the IMF's reaction will be.