Rightly or wrongly, the Caribbean as a whole has been vilified in European and US circles as a mecca for money laundering and tax evasion, despite any efforts the region might have made to prove its financial cleanliness.

The Cayman Islands, which has arguably fought hardest to prove its integrity, has, in recent months felt that it was fighting a losing battle. It is the world's fifth-largest banking centre, has more than $500Milliard assets under management at its institutions, including 580 banks. It has undeniably thrived on making company incorporation easy and earnings tax-free.

But with success has come an unwanted reputation that the Cayman banks' history of secrecy had made the island a favourite place for drug lords and other criminals to stash cash. Officials have worked in recent months to overcome that image, but to little avail.
In May this year, the territory agreed to seek certification under the Offshore Initiative launched in March by the UN Global Program Against Money Laundering -- the first offshore centre to do so.

But by August it was on the defensive again. Cayman Islands bankers and regulators vigorously disputed a former banker's courtroom claim that its government knowingly abets tax evasion by US citizens. John Mathewson, a US citizen who owned and ran the defunct Guardian Bank & Trust Ltd. in the Cayman Islands, made that claim at his New Jersey sentencing hearing on money-laundering charges.

"This person is a criminal, he's trying to cut a deal with the authorities in the United States. It's natural that he's going to say that," said Eduardo D'Angelo Silva, president of the Cayman Islands Bankers Association.

The pressure on Caribbean and offshore centres has come close to boiling point. An OECD report entitled Harmful Tax Competition, An Emerging Global Issue, has become the centrepiece of an attack against all offshore centres, coming on top of other initiatives from the UK and the European Union to force offshore centres into fiscal compliance.

The report includes 47 tax havens on a preliminary black list of 'preferential tax regimes' - financial centres whose main aim, it says, is to attract international capital through low taxes, thus distorting capital flows for the rest of the world.

The OECD is now receiving depositions from each jurisdiction and will publish a 'real list' later in the year. The emphasis of the report is not on money laundering but on foreign tax evasion and secrecy laws. The report is pressuring offshore tax havens to legislate 'all crimes' money laundering laws, which include tax evasion as an indictable money laundering offence.

The report says: "...increased liberalisation of financial markets has improved the international allocation of savings and capital...but also widened opportunities for tax evasion and avoidance."

It is concerned that location and financial decisions will become primarily tax driven, distorting financial flows and making it more difficult to achieve fair competition for 'real' economic activities. The OECD, UK and EU all wish to eliminate secrecy laws prohibiting the exchange of tax information from one jurisdiction to another.

Most Caribbean offshore centres have no income or capital gains taxes, but indirect taxes to compensate. Their laws safeguard banking secrecy and the governments do not recognise a duty to enforce tax laws of other jurisdictions.

The Caymans, Bahamas and the British Virgin Islands are on the list as well as other smaller Caribbean territories such as Anguilla and Antigua. Outside the Caribbean but in the region is Bermuda, also included. The larger islands, such as the Caymans and Bermuda, boast first class anti-money laundering legislation, but are loathe to include foreign tax crimes within the laws, because income tax evasion does not exist as a crime in either jurisdiction.

The Caymans have been certified by the Financial Action Task Force (FATF) yet it remains on the black list.

"They are trying to impose a kind of exchange control," says Anthony Travers, the London-based senior partner of Cayman law firm Maples & Calder.

"The OECD bases the report on the assumption that if there were not different tax regimes in the world, all other things would be equal. It's compete and utter nonsense."
But some offshore centres which have preferential tax regimes equivalent to those in the Caribbean and Bermuda are not included - Switzerland, Luxembourg, the Republic of Ireland. The first two vetoed the report, which smacks of hypocrisy, says Travers.

Travers says the OECD rationale is that it is far easier dealing with offshore centres which have no voice at the negotiating table and which are not part of any body such as the EU.

"They cannot effectively negotiate their position like Switzerland and Luxembourg, so the offshore islands are included on the black list and those running tax havens within Europe are not."

Aligned to the OECD report is a UK government White Paper on British Overseas Territories which was published in March this year. British citizenship (and the right of abode) is proposed to be offered to those citizens of the overseas territories who do not already have it, in exchange for improved financial regulation and better co-operation in combating money laundering and tax evasion. Importantly, the UK endorses the OECD and EU initiatives on harmful tax competition and is expected to enforce it.

The response from the Cayman Islands, the British Virgin islands and Bermuda have all been different. Cayman officials have been the most vociferous, with officials saying the British Caribbean territory is determined to keep its tax haven status and its banking confidentiality laws despite pressure from London and the various initiatives on tax legislation mooted by the OECD, the group of Seven and the EU.

Cayman Tourism Minister Thomas Jefferson met Britain's Foreign and Commonwealth Office (FCO) in early July to discuss tax laws among British Overseas Territories. Jefferson said any attempt by the UK to change Caymanian tax laws would be a "serious national issue".

Some members of the Caymanian parliament have speculated that any enforced removal of the territory's favourable tax laws by Britain could prompt a move toward independence, something neither they nor most of the Caymans 36,000 residents want.
In contrast to the Caymans, Bermuda has been more tight-lipped on the subject. But it is undoubtedly concerned. The Minister of Finance, C Eugene Cox, said in July that the 'harmful tax competition' issue represented a "major challenge to Bermuda's international business industry" and that during a discussion with the OECD and UK officials it had addressed "many incorrect perceptions".

Bermuda appears to be toeing the line and is considering incorporating fiscal offences as part of the island's Proceeds of Crime Act, but it is by no means clear that fiscal offences will be included within the legislation.

The British Virgin islands says it has taken significant steps in recent years to fight money laundering and criminal conduct within the territory, introducing a Proceeds of Criminal Conduct Act and a code of conduct for registered financial advisers on the island. In a recent press release, the island authorities said BVI was "playing a full and frank part in current EU and OECD initiatives on harmful tax competition".

"We are pressing hard for our views to be taken fully into account and to see that a level playing field is applied across all jurisdictions," the statement said. The BVI also says it is glad that a recently launched 'Offshore Initiative' of the UN's Global Programme Against Money Laundering "recognised the important distinction between money laundering and taxation issues".

The Bahamas, being independent, is said to be under less pressure than its 'British' neighbours in the Caribbean, although it is currently drafting its deposition to the OECD.
"What the Bahamas is really worried about is the impact the OECD report may have on their secrecy laws," says Caroline Garnham, a partner at London law firm Simmons & Simmons which deals with Caribbean clients.

"Yet they have not been under any real pressure yet. The authorities in the US, which have some sway over them, have not pressed the Bahamas in the same way as the UK has pressed its Overseas Territories in the Caribbean."

The question of whether money laundering and tax offences should be bound up in the same legislation is a vexing one. Several jurisdictions are said to be considering including tax crimes (of as yet unknown type) within the ambit of "predicate crime".

Excessive bank secrecy is regarded as contributing to a lack of transparency in financial information, undermining onshore tax compliance and law enforcement efforts to prevent money laundering.

Vehicles such as international business companies and trusts which do not identify settlors and beneficiaries have come in for particular criticism because of their use for screening the beneficial owner of assets. What the mainland jurisdictions want is to be able to see the records of beneficial owners of offshore structure upon request.

"This is the nub of the problem," says one fraud investigator. "There is no difference between offshore entities shielding the proceeds of drugs, money laundering or tax evasion. They are all crimes under the UK's Criminal Justice Act and should be treated in the same way."

He is not alone is believing that laundering money from tax evasion and drugs money should not be differentiated. "It is all dirty money and should be prosecuted as such," he says.

Obtaining information from some offshore jurisdictions on the true owners and beneficiaries of foreign registered business entities appears to be a primary obstacle in investigating criminal activity and foreign tax evasion.

Chris Dickson, a former director of the UK's Serious Fraud Office, says that when he was at the SFO he was forced to drop possible prosecution against criminals because Caribbean islands (he would not mention which) had failed to enact laws which allow company documents to be viewed before a criminal hearing.

He describes it as a chicken and egg situation. "We can't charge the person until we have information from the island, but the island won't give us the information until he is charged."

Requests for mutual assistance may take up to two years, only to find that the police will simply be handed an "opaque company account, where the directors of the directors of a company or trust are untraceable. So the crooks go free."

It is not hard, therefore, to see why Caribbean centres are being targeted. The BVI and the Bahamas are said to produce the greatest number of international business companies. Individuals tend to prefer the confidentiality, minimal reporting requirements and cost-effectiveness of IBCs offered in the Caribbean.

The beneficiaries of the entity are often unknown (or unknowable), the shareholders elusive and the directors often lawyers living in the place of registration and appointed by the client's lawyer. The client, shareholders and the directors can all exist at one remove to the other.

So serious has the IBC problem become that a 72-page UN discussion paper, released in February, effectively called for a ban on them.

Financial Havens, Banking Secrecy and Money Laundering says IBCs are "at the heart of the money laundering problem" and the best way to sift the good from the bad is for a world-wide agreement not to recognise entities that "do not have full authority to do business in that jurisdiction".

Trusts are also criticised, particularly where they do not disclose the identity of the settlors and the beneficiaries. Such trusts are identified by the UN report as having "become a standard part of the money laundering arrangements".

The report recommends that 'flee clauses' in trust arrangements, also described as walking trust provisions, should be prohibited where such clauses instruct the trustee to terminate the trust and move the assets if the trust becomes the subject of an investigation or legal proceeding.

Many believe it is not the job of financial professionals, whether bankers, accountants or lawyers, to involve themselves in foreign tax crimes. As one European banker said, fiscal 'surveillance' by financial institutions is almost impossible to achieve.

"It may be possible to know where a client's money is coming from, but how can you possibly sift through an account and know which is taxed money and which has not been seen by the taxman? They are asking the impossible from us."

Travers believes that the offshore centres are becoming the 'whipping boys' of their onshore counterparts, which have a real tax evasion problem. "The OECD and the European Union base their assumptions that there is something inherently bad about a jurisdiction like the Caymans which has a perfectly sensible tax structure of indirect taxes rather than direct ones such as income and capital gains tax.

"We charge 20% on import duty, we have sales tax and huge taxes on property transactions. It is an effective system. But look at the problems in Europe. The Germans and French are evading tax through Luxembourg yet we are described as hurtful because we have a perfectly effective method of tax collection."

Richard Hay, a tax partner at law firm Stikemann Elliott, told a recent conference on Transcontinental Trusts in Geneva that action against offshore centres would bite with uneven effect.

He said that some jurisdictions, such as the British Overseas Territories, would be more amenable to pressure while others, perceived as rogue states, may be subject to draconian action.

"States which succeed in marketing themselves effectively to the decision makers in high tax countries, or which enjoy a status which for some reason provides better insulation from the changes, will find that initiatives to limit offshore fiscal planning activities apply to them with delayed effect, if at all," he says.

In other words, an unfair playing field will be created. Hay said institutions and clients will have to be able to arbitrate the advantages between offshore centres "to preserve the best position for their clients" as events unfold over the next five years.

Another proposal by the UN, is for a 'white list' of offshore financial centres with acceptable regulatory standards. The UN believes the 'carrot' of inclusion on such a list would be more effective than blacklisting. it might avoid accusations of discrimination from developing nations.

But the UN proposal has been criticised. Despite support from a number of centres, the idea was slammed by Patrick Moulette, head of the FATF's secretariat in Paris.

He said it would cause confusion, with the possibility of one country being included on the OECD's blacklist for harmful tax competition, yet be simultaneously on a white list for having acceptable anti-laundering statutes. Compromise from both sides may be the only way through the difficulties. Limitations on bank secrecy must be balanced against the desires and needs of tax payers to preserve privacy and undertake legitimate tax planning.

If not, the repercussions may be worse than the OECD contemplated, with money moving to more 'far flung' places. "The danger may be that the OECD will move money away from the UK's Overseas Territories, or from the Channel Islands and it will know even less of what is happening than it did before," says Philip Prettejohn, partner at London law firm Rawlinson & Hunter. "If this happens, there are no lack of jurisdictions which are prepared to put up services to help the criminals."