External reviews are a bit like one’s in-laws – always welcome…but you just wish they didn’t visit so often.” The words are those of local Financial Services Commissioner Marcus Killick, and he is referring to this month’s visit to Gibraltar by a team from the International Monetary Fund who from March 1st – 17th checked our financial regulatory system. In the process their efforts will have cost the FSC hundreds of man-hours which many believe could be better spent on the real work of the Commission – particularly as they covered ground that they and others have already combed.
This month’s checks followed an IMF review carried out less than five years ago at the invitation of the Gibraltar Government and which – after what was then one of the most rigorous the international body had conducted into a finance-dominated jurisdiction – not only gave the Rock’s regulatory structures a clean bill of health but also lauded it as being in the forefront of best practice.
And an equally comprehensive review was carried out by the Pratt Commission whose report was similarly favourable, while many of the recommendations it contained have been implemented or are in the process of being taken on board by Government and the FSC.
When the Pratt review – appointed by the Governor Sir Francis Richards – was announced, it was welcomed by Killick who said at the time: “We constantly look at ways to improve our regulatory approach. Therefore we have welcomed and continue to welcome independent reviews of the way in which the Commission performs its task and the recommendations they bring. We would not be operating an equitable regime if we conducted on-site inspections of our regulated firms, yet were unwilling to undergo such inspections ourselves.”
In fact this pursuit of transparency and a determination to submit the FSC to the scrutiny of its “stakeholders” (as the Commissioner likes to describe Gibraltar’s voters and financial sector players) has been a hallmark of Killick’s tenure at the helm of the FSC.
But as the Rock’s financial community faces a growing number of Euro-Directives, pressures to tighten KYC (“know your customer”) procedures and the snow-storm of additional paperwork these involve, he also accepts that there is a danger of over-regulation. And though Killick is too practiced a diplomat to criticize the IMF – and particularly on the eve of a visit, I suspect that he shares at least some of the views of the Governor of the Bank of England, Mervyn King.
Those who work closely with King point out that for some time he has regarded the IMF’s annual meetings as little more than talking shops which gloss over the real issues and problems facing the world economy. But in February he aired them publicly for the first time – a clear sign that he believes the basics of the international economic system are not working, or – as he described it – that “the invisible hand of international capital markets has not successfully coordinated monetary and exchange rate policies”.
For too long the IMF has glossed over the growing imbalances that have developed between the world’s economies. While countries such as the US and UK have built up massive levels of domestic debt and current account deficits, the IMF “has spent more time harassing developing countries to reform their economies.”
It’s a situation to which Killick alludes in an article in the current issue of Offshore Investment. He also points to the cost in man-hours and effective working of some demand of organisations such as the International Monetary Fund when that body dons its supervisory hat.
The sharp sense of humour and a wit – at times verging on the mordant – which distinguish Killick as a public speaker are used to good effect in the article. It takes the form of an imaginary conversation between Killick and Rodrigo de Rato, the managing director of the IMF.
“I got a phone call recently from the Managing Director of the IMF”, the article begins.. “ ‘Marcus’ he said, ‘we have been assessing all the work that the IMF, Financial Stability Forum and others have been doing on offshore financial centres,’
‘As you know we had been worried that offshore centres were the sinkholes of depravity, non-cooperative, full of money launderers, badly regulated, lousy corporate governance etc. We therefore wanted to sort them out. Obviously we needed to establish the truth though, hence the decision by the IMF board to follow the recommendation of the FSF and establish a programme to assess all offshore finance centres.’
Still talking in the dream-world guise of De Rato, Killick points out that this has been going on for nearly five years during which time the IMF has visited “pretty much every offshore centre” being extremely thorough and carrying out specific analyses, with on-site teams carrying out a Module 2 assessment or one under the Financial Sector Assessment Program or FSAP. (The FSAP is the one the IMF uses to check the economies of onshore jurisdictions.)
“We’ve checked them against banking standards, insurance standards, investment standards, even their anti-money laundering systems. To ensure transparency we have even persuaded virtually everyone to publish the results of our visits…’ Killick imagines De Rato to say.
“What we found was that many of the larger centres we visited are actually pretty well run, they comply with the major international standards. Sure they have some weaknesses and areas they should improve, but so does practically every finance centre. Indeed in the last report I got from my Monetary and Financial Systems Department it said that compliance with standards in OFCs was, on average, better than in other jurisdictions assessed under the FSAP.”
“So, what’s your problem Rodrigo?” I replied, “Seems to be that you can chalk this one up as a job well done. Keep an eye on the basket cases, provide technical assistance where needed, write a report saying how much things have improved since you got involved. Quick bit of mutual back slapping, talk about the world being a kinder, better place as a result of your work and move on.”
And against this background, Killick advances the not-so-tongue-in-cheek suggestion that the IMF’s decision to carry out a second round of visits could be a waste of time and cash.
“But why another round?” Killick asks. “Do you realise the amount of work it takes to prepare for one of your visits, the amount of regulators’ time used up during the visit itself and in responding to the numerous drafts that come out before the report is finalised. You visit some pretty small jurisdictions; don’t you think their time might be better spent actually regulating? After all you have reported that supervisory deficiencies were most frequently found to result from inadequate resources and skills and your visits soak up resources”
“Hang on, we have stated that during the second round of assessments, priority will be given to assessing (1) progress in addressing weaknesses identified in the first round of assessments; (2) relevant areas not previously assessed; and (3) cooperation and information sharing arrangements. Surely that is perfectly reasonable and focused?” De Rato replies in Killick’s dream.
“On the face of it yes, but you are still effectively undertaking a complete reassessment rather than just an update,” Killick tells him. “You may be prioritising these areas you mention but you are still covering a number of the areas you covered last time. Is such a wide ranging on site inspection really the best use of your and our resources?
“Please don’t get me wrong, we all support the IMF in what it is trying to achieve, better global cooperation and less systemic risk are in all our interests, I am just not sure you are doing it in the most efficient way for either you or us”
“But you forget, participation in the programme is voluntary, a jurisdiction can always choose not to participate if it feels we are wasting their time,” says De Rato.
“It depends on your definition of voluntary. A failure to participate for whatever the reasons is bound to have reputational consequences as people would believe the jurisdiction has something to hide. I also note that the FSF have stated that OFCs will be incentivised to participate in the second assessment process by the fact that participation itself draws attention to their willingness to co-operate. I had always thought that the level of cooperation was assessed in respect of assistance between jurisdictions on such matters as money laundering and regulatory issues, not that we were to be judged by our level of cooperation with an assessment process.”
“But Marcus, there are still worries; poor regulation in an offshore finance centre might cause problems for the rest of the financial world. Offshore is seen by some as a home for scandal.”
“Hang on; look at the evidence of the last five years, virtually every scandal so far this millennium has been onshore. Enron, Worldcom, Parmalat, and now Refco to name but a few. These have shown deficiencies in onshore supervision, accounting or corporate governance, not offshore.”
Similarly the money laundering problems exposed have been almost exclusively onshore ones, Killick points out. In fact the most recent US Department of State International Narcotics Control Strategy Report recognises that money laundering concerns are global, and includes France, Italy, Spain, the UK and USA in its list of “jurisdictions of primary concern”. The only EU nations not listed as being of concern but are simply being monitored are Denmark, Estonia, Finland, Lithuania, Malta and Slovenia ”
The fact that some of the onshore scandals had offshore elements is understandable for we live in a globalised financial world, Killick points out. And everyone is concerned about systemic risk because the failure in one jurisdiction can affect many others.
“But just because subsidiaries in an offshore jurisdiction were being abused to hide losses off balance sheet, does not divert the fact that the actual fraudsters were operating onshore, under onshore scrutiny. To claim this as an offshore problem would be a bit like blaming the Swiss if a fraudster used a Mont Blanc pen to sign his dodgy cheques.”