Assessing offshore financial centers
Ingves: People have been trying for a long time to come up with a workable definition of offshore financial activities. Briefly, an offshore financial center is a place where most of the business is conducted with parties outside the region or country in which the center is based.
Ingves: When offshore financial centers began evolving, the need to monitor their activities was not all that important because very small sums of money passed through them. However, as capital flows between countries have increased, so, too, has the need to supervise banks and other financial sector activities. This holds true as well for the business conducted within the offshore centers. Today, almost all major world players have subsidiaries or affiliates in these centers, so a very substantial part of the business is passing through these channels. If the rules and regulations governing these centers are lax, passing money through them is a way of escaping national rules and regulations. And that’s detrimental to the international financial system as a whole. So there is a serious need to follow closely what is going on in these centers.
Ingves: Supervisory agencies around the world have been dealing with these issues and discussing them among themselves for many years, but the process has often been slow, especially the attempt to get the supervisory agencies in the offshore financial center countries more involved.
These issues are now being discussed in a number of international forums in the hopes of speeding up the process. There are at least three separate aspects of the problem—money laundering, taxation, and financial regulation. The Financial Action Task Force, for example, was set up to deal with the legal and criminal implications of money laundering, which is a worldwide problem not confined to offshore centers only. The Organization for Economic Cooperation and Development has been concentrating on tax evasion, tax competition, and differences in tax laws between jurisdictions.
The IMF’s work in the area of offshore financial centers is a natural extension of our work helping members strengthen their financial systems. Many of the offshore financial centers are also IMF members, so it makes sense for us to look into the supervisory aspects of their financial activities.
Now, if you are looking at financial stability from a national perspective—and most of the business of these offshore centers is being conducted with noncitizens—then the national aspect of sizable offshore financial center activity may not be all that important. But given the links between countries and the IMF’s concerns about financial stability, our involvement is unavoidable.
Evans: Hundreds of billions of dollars are passing through these centers, so although most of the centers themselves are very small in terms of population, the actual amount of financial activity going on is very large and is of concern to many people around the world.
Evans: Adverse consequences of inadequate supervision can be felt in developing countries as well as anywhere else. See, for example, what happened in the BCCI and Meridien cases. I’ve heard real concerns expressed by developing countries that have financial institutions in some poorly supervised offshore centers.
Ingves: We now have more countries buying into the process of improving supervision and regulation.
Evans: We also have pretty full buy-in from the offshore financial centers themselves, all of which have indicated they want to achieve international standards of financial supervision. We have met with virtually every one of them and have completed three reports—Cyprus, Gibraltar, and Panama—and we have published the report on Cyprus (see box, this page).
Ingves: It’s important to keep in mind that this whole process will go on for quite some time. It is one thing to send a mission for a few weeks to take a look at what is going on. But that just produces a snapshot of things at a given moment. It will actually take some time to improve supervision, change the laws, and do all the things you normally do in countries when you have decided to change something.
Ingves: First, an assessment won’t happen unless a country agrees to have us come in. We have views about where it would make sense to go, and we discuss these with members and come up with a work program. So far, it has always been possible to agree on a program.
Evans: The discussions are not about whether the IMF should be involved but when: when we should come and what kind of assessment would be most helpful to the country or offshore financial center.
Ingves: Also, there is an ongoing discussion about what it would make sense for us to do, which depends a lot on the nature of the financial business in these countries. We have also held meetings with many offshore financial centers to explain what we do.
Evans: We want people to understand what an assessment means, what kind of help we can give them, and over what sort of time frame. Then they can consider the timing that would suit them best.
Ingves: We have found this approach very helpful as a way of building consensus and getting a general buyin to the process. In the early days, many people asked what the IMF was doing, why we were doing it this way, or what these standards and regulations were that they suddenly had to comply with. But these concerns can normally be addressed in preliminary meetings.
Evans: Some of these concerns can also be allayed through the short- and long-term technical assistance that we are able to give the offshore financial centers.
Ingves: It’s a joint exercise. The expertise we have is leveraged through all the work we do with cooperating institutions: central banks and supervisory agencies that lend us their experts. Without their help, it would take us almost forever.
Evans: A substantial part of an assessment team will be experts on the regulation and supervision of institutions—both onshore and offshore—from cooperating institutions around the world. They are already playing a key part in providing the necessary expertise.
Ingves: Technical assistance in supervision is not new for us. What is new is how to deal with the supervisory aspects in regard to money laundering. This issue has been on the agenda for many years, and it tends to pop up when there are serious cases of misbehavior. These cases can seriously affect the public perception of a financial center.
Evans: Money laundering is a concern in all markets; it is a particular danger in large markets where laundering activities can pass unnoticed among the billions or trillions of dollars traded. The IMF has been asked to intensify its activities to help counter money laundering, and we will do that both on- and offshore. But we’re not the police trying to catch criminals, and we have no intention of getting involved in law enforcement.
Evans: In the past year, in particular, we’ve seen efforts in many offshore financial centers to strengthen the laws and to increase the number and skills of financial supervisors. But, of course, as Stefan said, raising standards takes time. First you have to decide what to do, which usually involves updating, extending, and improving your laws. Then you need to put more supervisors with updated skills in place. Further, you have to make sure that everything is working and that supervisors have the necessary independence and legal backing to support their efforts. Any financial supervisor will tell you that this is a matter of years, not months.
Evans: It depends. Some jurisdictions are upgrading their laws and their supervisory resources. Some small jurisdictions with limited resources would be best advised to limit the extent of business that they supervise. In other instances, there may be a case for regional supervision—for example, the Caribbean.
Ingves: Absolutely. A year and a half ago we had a lively debate about whether this was the right way to go. Now the issue is how we factor these assessments into our work with countries on their financial sectors. It’s on the way to becoming a regular part of our business.
For further information on the IMF’s work with offshore financial centers, please see the following papers by IMF staff: Offshore Financial Centers (OFCs): Note for the IMF Executive Board, which can be found on the IMF’s website (www.imf.org/external/np/mae/oshore/2001eng/062901.htm).