John Harris (JFSC) on life and death and super equivalence

The nature of compliance is a broad subject, which of course allows interpretation, and after a decade of being the Chief Regulator in a small but well established financial jurisdiction such as Jersey, I felt I wanted to share with you what compliance, as a concept, means to us, as a jurisdiction.

In our case it is much more than meeting a set of rules but is actually is a strategic necessity.

And let me tell you also that what I have to say to you this morning in my brief ten minutes is from the heart, observed over those many years of operating in the environment that I do.

Offshore centres are much misunderstood.

Certainly very much so since the beginning of the financial crisis of 2008, and the fact that many, Jersey included, are still thriving despite nearly a decade of hostility and misunderstanding ought to tell you that the business model that is traditionally ascribed to them is neither accurate nor fair.

Of course this is all about complicated politics but the bottom line is that the best offshore or international finance centres such as Jersey provide a very valuable conduit for inward and outbound investment structures to facilitate all manner of development in both the developed and the developing world in a tax neutral, efficient and transparent manner and thereby contribute significantly to the health of the world economy. But that perhaps is a question for another day.

The question for today is to what extent a centre such as mine not only meets the well-established grid of norms and rules which is set internationally by international organisations such as the FATF, Basel, for Banking, IOSCO, for Securities and so on but perhaps more pertinently whether they are a chink in the armour of the world’s defences in this respect as some say – or actually a bell weather of what success ought to look like for everybody.

My thesis is more in favour of the latter rather than the former.

Objective assessment over the years would definitely show that in general small jurisdictions perform well in international evaluations of their compliance performance and this not only relative to each other but also to larger economies which operate to a much greater scale.

It is always surprising to me how little acknowledged this is, far less promoted, but given the limited resources that smaller jurisdictions have to play with, I believe it is worth asking why this is and how it is achieved.

One of the biggest single drivers is what I like to describe as single event risk.

Reputation matters but not nearly as much to a large well established economy, such as the US, the UK or a European one, as it does to smaller places making their way in the world of financial services provision.

Bluntly put if there is a Citibank problem in London, it is a Citibank problem, if there is a Citibank problem in Jersey the situation tends to be that it is first and foremost a Jersey problem, at least in the eyes of the media, and secondly a Citibank problem.

Can you imagine anything more catastrophic for any jurisdiction than a link to a terrorist financing situation?

In the case of a smaller jurisdiction this could literally be the kiss of death in that such a major event risk crystallising for a smaller place is likely to result in a greater degree of opprobrium coming down on its head in a much more rapid and destabilising way than might be the case in a larger jurisdiction.

For this reason amongst others, notably that it is the right thing to do, small jurisdictions such as Jersey put a lot into being able to demonstrate to evaluation bodies a broad scale of acceptable compliance against international norms and rules. This was certainly the case in the last full IMF evaluation in Jersey in 2009 and as we speak we are coming to the conclusion of a 2015 evaluation by MONEYVAL, the Council of Europe body for assessing Anti-Money Laundering and combating financing of terrorism compliance, which although it is ongoing I can confidently suggest to you will show once again that Jersey and its sister Island of Guernsey are comfortably in the top quartile performers in this respect worldwide.

So, I may have explained why but what about the how?

Simply I believe it is by giving far greater attention to the culture of compliance that such results can be achieved.

What needs to be done is to ensure that managing AML/CFT risk well is in the very DNA of the practitioner firms in the jurisdiction and woven into the very fabric of best industry practice.

To get there the message needs to go out that everyone needs to be vigilant, what are the reasons for that need and that the way to achieve it is through training, knowing why it is important in the first place, being attentive and alert to the type of risks to which the jurisdiction (quintessentially cross border in nature) is exposed.

In addition to this carrot, you also need a stick, and that Ladies and Gentlemen comes in the form of enforcement measures.

Many jurisdictions represented in this room are good at enforcement but it is perhaps less well known that Jersey is amongst them and I defy you to find another equivalent sized jurisdiction which has such a comparable and honourable track record as Jersey in demonstrating a number of varied enforcement actions over the past decade or so.

You don’t have to take my word for it, you just need to look at our website and look at the nature and scale of those types of enforcement actions against a variety of different firms, the most notable of which recently has been the public statement issued last week in respect of HSBC Bank of the Middle East – a Jersey registered Bank.

You might think that such muscular action in a jurisdiction of choice as opposed to necessity (HSBC doesn’t have to be in Jersey, it’s a matter of choice that they are) might make industry complain, and indeed there are some voices that do.

But on the whole most don’t, and the reason for that is that they see the benefit of a robust regime and the need to maintain a robust reputation. There is nothing particularly new or innovative or sophisticated about any of this, it is really about a culture. What we are trying to do is create a self-fulfilling approach.

If practitioners see the benefits and get into a sort of virtuous circle of genuinely trying to do the right thing and benefiting from the right environmental results as a consequence then we all gain and our financial centre is the more resilient as a result. And that is the nature of compliance for our firms, it is all about the culture.

We work very hard at identifying the three dominant risk factors within a culture of a firm that we evaluate on a regular basis that are likely to result in some of the worst crystallisation of risks that we see.

Over dominant shareholder owners or controllers is obviously uppermost.
The need to put short term revenue before the maintenance of long term business viability is another.
Risk taking of the worst variety, by gaming the system and hoping you won’t get found out is another.

And I would say as an aside that the healthy increase of whistleblowing of one sort or another that we have experienced in Jersey over recent years is largely putting paid to that last particular problem.

In terms of gaining large pieces of business from far away overseas markets it has also become pleasingly more apparent in recent times that firms are prepared to devote commensurate money and resources to researching and establishing the real nature of the risk that they are undertaking whereas a few years ago there was a degree of taking short cuts and wilful blindness in this respect, with some pretty unhappy results.

Moreover, we are seeing a pattern of industry consolidation particularly in the area of smaller trust and company service providers and smaller investment firms where safety in numbers is something whereby firms with challenging cost dynamics in ensuring the right degree of compliance can find the needed critical mass by banding together with others to make sense of that cost. We don’t mind that in Jersey, we may have fewer firms but if they overall employ the same number of people are better run then so be it, if that provides the sort of level of defence that I have been talking about this morning.

So Madame Chairman, Ladies and Gentlemen, in summary. Whether we like it or not, as a small jurisdiction in this modern world there is a doctrine of what I might term SUPER EQUIVALENCE.

That means that we have to be rather better at the type of AML/CFT defence work than perhaps our rather larger peer competitors and whilst that is not remotely fair we have taken a decision, a strategic decision some years ago, to just get on with it and try and make sure that we can pass that additional test.

As I have said it takes a combination of carrot and stick to instil self-fulfilling mechanisms in firms so that they behave appropriately and do the right thing for the right reasons.

I think we have had some very good results and notably this is attested by international evaluations as I have said.

Sadly the missing piece however is wider acceptance and acknowledgement of this fact whether that be for example, writing in the Economist, official announcements by international bodies and/or national governments. It would however be a helpful addition to the deconstruction of the myths that surround the better and non-secretive offshore centres to recognise that actually their compliance standards are not only good but also worth looking at in addition to examination of the wider business models that they pursue.

Essentially, there is not just a need for smaller jurisdictions such as Jersey to meet compliance tests but also I would suggest for wider encouragement and endorsement of that by relevant third parties. In the absence of that, there may come a time, when the question begins to be asked “are we getting a fair return on all this investment in financial crime prevention that we are undertaking”.

As I say there is a complicated matrix here of politics and sometimes wilful misunderstanding of offshore centres but for as long as there is a reasonable measure of competitiveness can be maintained then my view will be that smaller centres such as mine will continue to regard the need for super equivalence as the price of the admission ticket to the game of international financial services provision.

So perhaps I might end by musing that the nature of compliance in an international finance centre (or if you prefer offshore centre) is rather different, and call in aid of that notion the infamous quote by Bill Shankley who, albeit when he was talking about football but which I think can be applied here, said something along the lines of