Governor Alistair Harrison's Speech To The Anguilla Financial Services Industry, 20 November

"the game has changed .....Nothing will ever be the same again in the financial world"

Ladies and Gentlemen, 

I am delighted to have this opportunity of addressing you all today. It is a good time to be discussing the issues of financial regulation and indeed financial activity more generally. A good moment for Anguilla, and also for me personally. A good moment for me personally as it is now seven months since I became Governor, and in those seven months I have spent more time on financial issues than anything else. It is also fourteen months since 15 September 2008, which was the day I learnt that my bid to be Governor here had been successful. Most of you here will also remember that date - it was the day that Lehman Brothers went under: the event that most people use as the starting point of the global financial crisis. There is still disagreement as to who is to blame for the global crisis - my list of suspects includes greedy bankers, complacent regulators and inactive governments. It clearly didn’t start in Anguilla, but like many jurisdictions around the world Anguilla has suffered from it and there is probably a lot more pain to come. The latest OECD forecast is for an upturn in 2010, but only a modest one.

Working through the consequences of the crisis will be a task for many years to come. The issues for Anguilla are easy to summarise - the massive downturn in our tourist industry, and other consequences of the recession; the much greater attention paid to so-called "tax havens" (I will come back to that term) by the G20 and other key institutions; and the need for all of us to recognise that the game has changed, is still changing, and will change still further. Nothing will ever be the same again in the financial world, and those who prosper in future will be those who realise that. Just as the international political landscape changed forever eight years ago on 9/11/2001, so the financial landscape changed forever on 9/15/2008. I was struck the other night at the opening ceremony of the OECS how many speeches referred to transformation as the big theme of the moment – one speaker recalled Bill Gates saying that things are now changing “at the speed of thought”. I don’t believe there is any point in looking back in nostalgia. But I do think we can look forward in hope. Anguilla has demonstrated throughout its history a nimbleness and adaptability that is the envy of larger and slower-moving jurisdictions. In living memory it has moved through subsistence agriculture, salt panning and boat building to become one of the world’s great tourist destinations and a thriving financial centre. I am confident Anguilla can continue to adapt to whatever history throws at us. But we need to accept that, although we have survived the financial tsunami, things are still fragile. There have been three major financial collapses in the Caribbean – Stanford, CLICO and BAICO, and a fourth would test the resilience of the region to the limit. 

It's also a good moment to take stock as far as Anguilla is concerned. A lot has happened in the world of financial regulation since my predecessor met you this time last year.  The Proceeds of Crime Act has now reached the statute book. Anguilla has concluded or nearly concluded Tax Information Exchange Agreements with a number of other jurisdictions, and should have signed the magic number of twelve after the Chief Minister’s and Finance Minister’s visit to London in early December. The Caribbean Financial Action Task Force has begun its periodic peer review of Anguilla – a team visited the island in July. And Michael Foot has carried out his independent review of British offshore financial centres, on which he released his final report on 29 October.  

The Foot Review covered a wide range of relevant issues, many of which apply in the other eight jurisdictions he considered, as much as Anguilla. I would like to begin by going through the report, which I am sure you have all read, and giving some preliminary views on the issues he raised. Incidentally, I think it is important to work from the report itself, and the useful summary of recommendations in Chapter One, rather than from the selective and occasionally inaccurate press reporting. The most lurid report “Bell Tolling for Offshore Tax Havens” benefited from being written before the report was published. In fact, Foot deliberately does not use the intellectually unrigorous term “tax haven” and his report is a judicious and balanced piece of work. Michael Foot himself has spent a lifetime in the financial world, and many years as a senior regulator. His report therefore deserves to be taken seriously. Nor is it all critical.  He was very grateful for the cooperation he received from the Government of Anguilla, and others on the island during his visit in June.  His report notes that Anguilla has a good story to tell in some of the areas covered – for example that Anguilla is close to implementing the agreed G20 standard on tax information exchange. But there is plenty of work to do to implement his recommendations. Some of them are for me, with my responsibility for the regulation of international finance; some for the Government of Anguilla; some for the British Government; some for the Financial Services Industry here; and some for more than one stakeholder. Among the more important issues he covers are financial regulation, Anguilla’s business model, and the fight against financial crime.

Foot makes clear that there is no room for complacency, in Anguilla or anywhere else, and that standards will continue to rise.  The report’s recommendations provide benchmark standards against which each jurisdiction can assess itself, and Foot invites the jurisdictions to consider what actions they may need to take to achieve these standards. The Review contains both general and territory-specific recommendations.  

So the report provides a valuable and independent expert assessment of how Anguilla complies with international standards and norms.  Anguilla is singled out for criticism in a number of respects. The recommendations provide a road-map to assist Anguilla to match up to global expectations and demonstrate how it might strengthen the effective implementation of its regulatory regime. 

The most important issue that Foot addresses as far as Anguilla and other jurisdictions is concerned is financial regulation. The central message, not just from Foot, is quite clear. Anguilla has done a lot, but there is a lot more to be done. The motto "Good regulation is good for business" has never been truer. The central  challenge for Anguilla is to demonstrate a genuine commitment to raising standards. For me this starts with the FSC. The Commission has done an excellent job in recent years with limited staffing. Handling the consequences of the BAICO collapse, for example, has required a lot of careful and demanding work.  I would like to pay a warm tribute to the outgoing Director Niguel Streete, who is sadly leaving us. I wish Eleanor Astaphan well as she takes over the duties of Director. I also pay tribute to Chairman Dennis Cross whose term is coming to an end. I hope to be able to announce his successor shortly. In the next phase of its work the Commission will need more resources so that it is operating on a par with regulators in other successful offshore financial centres. Achieving the necessary critical mass is the first step. The focus should be on applying strict licensing criteria and enhancing hands-on supervision of licensed firms. This will mean a larger FSC, and I hope that the process of building up the human resources available to it can start very soon.

The regulatory system in Anguilla is somewhat complicated. Whereas the international sector is regulated by the FSC reporting to me, the domestic sector is regulated by the ECCB reporting to a Council of the Finance Ministers of the member states of the ECCU. Two of Anguilla’s three international banks are subsidiaries of two of the four domestic banks operating on the island. Nothing wrong with that, but it makes the task of regulation quite complicated. Of course Anguilla’s relationship with the ECCB goes much wider than the issue of regulation. The ECCB has maintained the longstanding currency union in the Eastern Caribbean and has brought financial and economic stability from which Anguilla has benefited. But I don’t want to get into the details of all that, partly because it would take far too long and mainly because it is a matter for the elected Government. I would simply like to ask the question whether the current model is the best available. Some OTs have a single regulator, with safeguards as to their independence. Other models are conceivable.

There is one other oddity of the regulatory model that I think should be addressed, and would be a very easy win.  At present the Registrar of Companies also carries out promotional activity. Both activities are important but it is crucial that promotion of the financial sector is clearly separated from the regulatory system, of which the Registrar should be the first phase, so that the credibility of the regulatory regime is not undermined in fact or in appearance.  (This is part of a wider and familiar problem about the role of governing institutions in business. The Department of Trade in London used to boast that it employed 3,000 people, 1500 of whom were there to make life easier for British business, and 1500 of whom were there to make life more difficult).

But regulation is far too important to be left solely to the regulators. The private sector – ie all of you - has an important part to play. I would encourage you to think about re-invigorating the private sector compliance association so that it can take a more pro-active role in the regulatory regime.  And I would also encourage private sector partnership with Government on promotional activities, if these are separated from regulation as I have just suggested.

While I am on the subject of regulation, I would like to mention one area which is beyond the scope of the Foot Review, namely regulation of the legal profession. Anguilla certainly needs a regulated legal profession. I would also submit that the legal profession itself would benefit from being regulated. I have found in most countries where I have lived that the general public does not necessarily share the legal profession’s view of itself as the “noblest profession” and - rightly or wrongly - the Anguillian public is no exception. Regulation would help to address this.  There are two obvious models available – either a Legal Professions Act, as has been enacted in Antigua and Barbuda and elsewhere; or the statutory fleshing out of the short reference to regulation in the Eastern Caribbean Supreme Court Act, a model followed by St Vincent and the Grenadines. I understand a draft Legal Professions Bill is the subject of consultation here at the moment. The legal profession, like every part of the judicial system, has to meet the highest ethical standards - a lawyer’s first duty is to the Court as an officer of the Court, not to his or her client – and it is only right that those standards should be clearly and simply enforceable.  The legal profession is closely linked with the financial services industry in many ways, and regulation of each would benefit the other.

A second area on which Foot offers views is Anguilla’s (and other jurisdictions’) business model, including identifying and managing economic risks.  The worst economic downturn in sixty years has required all countries, including the Overseas Territories, to improve their economic resilience.  For Anguilla (and other OTs) this means:

    * Timely and accurate measures of economic variables, including public revenues and public expenditure (Foot notes that GoA revenue was 15% below budget in 2008);

    * Effective measures to control public spending and improve public sector efficiency;

•  Identification of options to maximise sources of revenue, including diversifying the tax base;
• Building sufficient reserves to improve economic resilience;
• Medium-term economic planning to support the fiscal planning process.

As Governor I should naturally be reticent about what I say on these issues for they fall within the responsibility of the elected Government, so it would be wrong for me to comment in detail. And I should be doubly reticent as we approach an election campaign during which I imagine that all candidates will be putting forward their ideas on new revenue-generating measures and closing the fiscal gap. I would only say that the Foot Report, and in particular the annexes, include some interesting ideas which may help to inform the political and public debate.

A third area addressed by Foot is fighting financial crime. I would like to say at the outset that financial crime is just as bad as the more traditional sort. I am sure that the Anguillians who have been metaphorically mugged in internet scams from outside the island feel (rightly) just as aggrieved as those who have suffered burglaries. And our reputation as an island on financial crime is as important as our reputation for being a low-crime destination is to the tourist industry.  Effective regulation and transparency are essential. Anguilla must not have its reputation tarnished by the use of Anguillian registered entities for illegal activities – such activities range from money laundering to the corrupt diversion of public funds in a third country (which usually tends to be a very poor one).  It is not just the reputation of Anguilla at stake but also the reputation of legitimate businesses registered here.   Effective regulation enhances confidence in Anguilla as a place to do business and invest. The days of “regulatory arbitrage” (a marvellous euphemism for finding the dodgiest jurisdiction) are over. What will count in the financial world of the future is quality of service, the range of legitimate products on offer, and ease of doing business. I have occasionally found in Anguilla a tendency to think that Anguilla is different, perhaps because of the island’s singular history and extraordinary adaptability which I mentioned earlier. That tendency can lead to a dangerous tendency to believe that the rules don’t apply here. They do. A reputation for the rule of law, and respect for the spirit of the rules as well as the letter is the greatest asset any jurisdiction can have.

Foot concludes that the technical and human resources devoted to the fight against financial crime in Anguilla need to be boosted to achieve compliance with the FATF recommendations. Much of the work will continue to fall to the RAPF - Andy Arsenault is addressing us later. But, again, the private sector has an important role to play. It is in the front line of the fight against crime and has a responsibility to protect the reputation of Anguilla.  This means having effective internal systems and controls that are able to detect suspicious activities and having procedures for filing Suspicious Activity Reports in accordance with the requirements of the law. Foot notes that the number of SARs is statistically very low; and too many of those that are filed seem designed to cover the back of the person filing rather than a genuine attempt to catch criminals. We must do much better in this area. If you saw an old lady being robbed at gunpoint in the street you would report it. Financial criminals are just as bad. Foot also notes that Anguilla needs to take steps to improve compliance with the FATF recommendation on politically exposed persons (PEPs). 

The report acknowledges that some Overseas Territories will need technical assistance to help with the fight against financial crime.  But it adds that this must be accompanied by a clear commitment from the local government to tackling financial crime by ensuring that legislation keeps pace with developments and gives both the regulator and the investigating authority the powers they need to detect and prosecute financial crime.  The local government must also make a commitment to fund the provision of sufficient resources to secure the benefits of the technical assistance they receive.  Foot says that this is a necessary condition for these jurisdictions continuing to operate as international financial centres.  In the present global climate where intense scrutiny of offshore centres by the G20 and the FATF could lead to the very real prospect of inclusion on a blacklist and the possibility of sanctions for any territory deemed to be not sufficiently compliant, there can be no second chances. In this context the Foot report represents an opportunity to safeguard Anguilla's future. 

I would now like to talk briefly about the CFATF report, which is still in draft and will not be finalised for some months yet. There is likely to be much good news in it.  But the standard of evaluation is much higher than ever before. A clear theme is likely to be that it is not enough for Anguilla simply to have a law on the statute book. Anguilla must also demonstrate the effective implementation of its laws in practice in order to satisfy international expectations. That means implementation in three key areas - supervision, investigation and prosecution of financial crime. A topical example is the Proceeds of Crime Act which is a model of its kind and based on similar legislation in the UK. Anguilla scores well for having passed this excellent law, and I pay tribute to the Government and House of Assembly who passed it. But implementing it is the key. I have yet to meet anyone who would be happy to see the person who robbed them - physically or electronically - buy the house next door with the proceeds of the crime. And Anguilla stands to gain financially from the Act. It pains me to think of criminals living on the proceeds of their crimes. It should bring us all pleasure to think of the money going into a National Forfeiture Fund to be spent on law enforcement and consequent social problems here in Anguilla. 

Against the background of what I have said so far I want us to ask ourselves three big questions. I don’t have a settled answer to any of them, but I think we should all reflect on them as we look to the future.  The first arises from a point made in the Foot Review.  Anguilla is a very small centre by international standards. (A study by Deloitte, which is attached to the review, helpfully pointed out that the idea that there were vast sums of money in the offshore jurisdictions is a myth). Given the small size of the sector, it did not surprise me that the first question I was asked by the press when the review was published was whether it made sense for Anguilla to stay in financial services given the costs?  This is a question we need to ask and answer on the basis of a careful cost-benefit analysis, weighing the benefits to Anguilla against the costs. Anguilla is certainly not dependent on financial services in the way that some jurisdictions are.  They are only part of the economy - perhaps 12% in a normal year, and employing only 6% of the population. But the sector represents a source of diversification away from our main industry of tourism, which is on a long-term trend upwards but a more uncertain medium-term trend. The fact that in the most recent year for which figures are available the financial sector accounted for about 21% of GDP makes the point.

The second question flows from the first. Assuming that Anguilla stays in the game,  aren’t there more important and more urgent issues on which to spend money? On this argument, we spend on social goods - health and education for instance - today and leave financial regulation until we can afford it.  Again, it’s a question to which I have no final answer. But the parameters are clear. We may decide we can’t afford a well-regulated sector, in which case we will have to leave the game. If we get onto a black list or grey list it will effectively be a one-way ticket, because Anguilla’s reputation and hence its ability to attract business will be damaged for years to come. If we want to stay in the game we have no choice but to up our performance, as we have been doing. Regulation need not be prohibitively expensive.  The FSC is self-supporting, for example.  But more needs to be invested if we are to match up to international standards.  Anguilla's return on that investment will be the future growth of the sector in the medium to longer term.

The final question is another difficult one for a small jurisdiction.  What will Anguilla's comparative advantage be in the future? I know half the answer - it will not be secrecy or lax regulation. It will not be the belief that you can get away with things here that you can’t get away with next door. It will be a top class model of service and transparency. But the sectors in which Anguilla may develop its comparative advantage are very much for the market, and all of you, to decide. 

I have spoken during this presentation of the contribution the industry can make to its own future. I hesitate to suggest how you organise yourselves, but I can see some advantage in an industry body that could make a more formal and structured contribution to the development of the sector and its regulation, and therefore could act as an interlocutor with the FSC. A strong, vibrant and inclusive private sector organisation has an opportunity to be one of the architects, with government and the regulator, to enhance or redesign the Anguilla model to respond to the anticipated short and medium term challenges during this rationalisation of world economics.      Strong regulation is indispensible to sound financial sector development.  They are both contact sports, which require active participation by all the parties; your return is based on your input (investment).  The Commission is looking for a strong, credible partner, which represents a wide cross section of stakeholder to consult with on a number of home grown, regional and international initiatives for enhance regulation on Anguilla.  The relevance of member-driven organisation, especially voluntary ones, are determined by the returns to members.

Looking to the future I have mentioned a few of the things that are on the agenda for the sector. There is no doubt that it will get more and more difficult to operate in the international financial world. The future is a demanding one, in which badly regulated jurisdictions, and badly run financial firms will go to the wall. But the good firms, the honest and well-run firms, have a very bright future in front of them; so do the well-run jurisdictions. I am sure Anguilla can be one of them.