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Commonwealth finds compliance costs outweigh benefits for IFCs

A Commonwealth Secretariat study has found that small island states are finding compliance costs substantially outweigh any benefit to their reputation as international financial centres.

The study, entitled “Developmental Implications of Anti-Money Laundering and Taxation Regulations” and presented at the Commonwealth Finance Ministers’ Meeting in Sri Lanka in September 2006, looked at Barbados in the Caribbean, Mauritius in the Indian Ocean and Vanuatu in the Pacific.

“In the three international finance centres under consideration, the costs of meeting new multilateral regulatory standards have exceeded the short-to-medium term benefits for both the public and private sectors,” the report said.

It found that offshore centres have lost business in spite of improving their reputations by complying with standards drawn up by the Organisation for Economic Co-operation & Development (OECD) and the inter-governmental Financial Action Task Force (FATF).

According to the study, “increased public revenue of these three developing island jurisdictions has been diverted toward regulating their international financial services sectors. The majority of private firms and banks operating in international financial services sectors in these states have experienced a significant increase in compliance costs, in some cases sufficient to threaten their future business viability.”

“Indeed, small states are actually losing business to offshore centres in large countries that won't raise their own standards. For example, as the Financial Action Task Force (FATF) reported this July, virtually every US State still permits tax-free companies with secret ownership,” said Richard Hay, Co-Chair of the International Committee of the Society of Trust & Estate Practitioners

The FATF revealed that US service providers have successfully lobbied against raising standards, while Delaware actively promotes itself as more secretive than so-called offshore centres.

“If the efforts to raise standards are to succeed, these must apply evenly to large and small countries. Dominant countries, including those in the Commonwealth, must also share market access opportunities with those small states that meet higher standards, said Hay.

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