Money laundering: a tough business to clean up - Is the Government going overboard?

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It is clearly open season for the offshore islands. Almost every day the papers have a new story. Last week Jack Straw, the Home Secretary, announced a six-month inquiry into money laundering in Jersey, Guernsey and the Isle of Man. Robin Cook, the Foreign Secretary, is expected to make a statement today on the UK's future relationship with its remaining dependencies following a Foreign Office review.

Meanwhile, the continued pursuit of Geoffrey Robinson, the Paymaster General, leads inexorably to the conclusion that the Budget in March will eliminate any residual UK tax benefits of offshore trusts. This will be a repeat of what happened in 1991, when the Conservatives tightened up the rules after The Sunday Times put the spotlight on taxes being deferred by such trusts.

In some government quarters the attitude seems almost hostile - for example, in the drive to introduce legislation against money laundering in these jurisdictions. Nobody objects to laws that help to identify and thwart drug barons, but the Government's enthusiasm for this is being used to attack a different mischief - to the potential detriment of both the islands and the City of London.

This other mischief is foreign tax evasion, which should be tackled in a different and more co-ordinated way if the economies of the islands are not to be undermined at no net gain to the UK.

The impetus for anti-money laundering legislation comes from the G7's Financial Action Task Force. This operates out of Paris and has had considerable success in stimulating enactment of tougher laws around the world. The UK first did this in the late Eighties, and the Government is pushing for equivalent legislation in all remaining UK dependencies.

This happened in Cayman in 1989 and 1996, and in the British Virgin Isles and Bermuda in 1997. Legislation is under discussion in the Isle of Man, Jersey and Guernsey. The hot topic is whether the reporting requirements at the centre of these laws will extend to foreign tax and exchange control offences as well as heavy criminal offences such as drug-dealing, kidnapping, extortion and financial frauds.

The position in Cayman and Bermuda is clear. The Cayman law specifically excludes tax offences; the Bermuda law applies to a list of offences and tax is not one of them.

In the British Virgin Isles, the result is intended to be the same in that the relevant criminal offences have to be indictable. At present, tax offences in BVI are not. So as the legislation operates on the "dual criminality" basis, the argument is that BVI law cannot apply to tax offences committed elsewhere.

The position is complicated by the fact that these more distant islands are the responsibility of the Foreign Office, while the Home Office runs our relationship with the Isle of Man and the Channel Islands. Although last August the Foreign Office denied that it was putting pressure on Cayman to revise its specific tax exclusion, rumours continue to the contrary, and civil servants openly admit that this is what they would like to see.

Some professionals in the Channel Islands are said to recognise the "political imperative" of including foreign tax offences in their new money-laundering laws; and this is taken as evidence that the damage likely to be caused to local economies is minimal.

All these offshore jurisdictions long ago realised that their economies depend on tourism and financial services. The latter have to be properly regulated to have a credible long-term future. If this isn't done, they risk being cut out of the world's financial markets. Few actually want to invest in these centres, as opposed to using them as a base from which to invest elsewhere. This is why the islands accept the need for regulation.

But the UK government may be pushing on too fast in expecting this new legislation to outlaw foreign tax evasion as well as the heavy criminal offences for which it was first envisaged. To question this is not to support universal tax evasion. Any UK professional will be meticulous in the advice given to clients on UK tax. Evading tax here is both morally and socially unacceptable. But this does not mean such professionals can set themselves up in judgement on the tax morality of other countries, or pretend to be expert on them.

The line between taxation and confiscation can be hard to draw. Who can blame families who have had all their family assets confiscated taking steps to avoid it happening again? This is still recent history in Shanghai, Middle Europe and the former USSR: it may still be happening in countries such as Iraq or Iran.

We may joke that tax evasion is a national pastime on the Continent, but if you had personal experience of invasion by a foreign power you too might be reluctant to tell any government all there is to know.

So far as can be discovered, no other country is yet expecting its bankers and professionals to report suspicion that a new customer may not be up- to-date with his taxes back home. This isn't even clearly the law in the UK and the US, let alone any other EU country. So why expect our offshore islands to lead the way?

Continuing pressure on this issue will simply result in money being moved elsewhere. If this happens, our market will lose funds now under management here. At present, $150bn of Jersey's $200bn is invested through London. At worst, the UK might also end up having to provide the islands with financial support as their economies suffer from the withdrawal of business.

Instead, the Government should promote a more co-ordinated approach to the whole problem of tax evasion. This means first persuading other countries to have more rational systems with lower average rates of tax: then to adopt the same disclosure rules across the board.

Only when these rules match up in Liechtenstein, Switzerland, Luxembourg and Monaco, let alone the United States and the rest of Europe, will it make any sense to impose this high moral ground on our offshore islands.