Mauritius: The Future Of An Industry Financial Offshore Centres

("Financial Havens, Banking Secrecy & Money Laundering", published by the UN Office for Drug Control and Crime Prevention, May 1998).

Offshore Financial Centres (OFC), also sometimes called Offshore Centres or Tax Havens, are jurisdictions where a distinction is made between business conducted where one party at least would be a resident of that country and business conducted exclusively abroad and where all parties concerned must be non-residents of that jurisdiction. The former would be treated as onshore transactions or business and the latter as offshore.

The differing regimes applied to these two situations include generally a specific and more favourable tax regime for offshore transactions. It can also imply the use of a different set of regulations, such as in the maritime sector or the investment funds industry, for example.

Such OFC emerge typically in jurisdictions with rather a small land area and small population, with a less developed economy. It is obviously a way to attract business and activities which otherwise would normally not have taken place in that jurisdiction. However, favourable tax regimes are by far not restricted to some remote islands. Most developed countries have in various ways set up preferential tax regimes to be used by non-residents. For example, the United Kingdom does not tax interest on Eurobonds and Belgium and the Netherlands have their law on co-ordination centres.

Often, these OFC were helped in various ways by some more powerful neighbour or friendly nation to develop their preferential tax regime, by recognising the use of tax free corporations or by signing preferential Double Taxation Agreements (DTA). The revenue generated by these financial activities helps in ensuring economic well-being and social stability to the OFC and might even bring direct local investments to such neighbours, whereas their absence might imply the need to subsidise directly. At some stage in their development, one could claim that several Caribbean Islands were in such a situation towards the United Kingdom and the United States, the Netherlands Antilles with the Netherlands and also Mauritius with its links with India.

The uses of such OFC differ greatly. Some offer specific advantages to foreign (non national) individuals would can become resident and benefit from a nil or very low personal tax environment; Monaco is in this category. Others provide a zero corporate tax regime to non residents, under the form of the International Business Company (IBC); for example, Panama, the British Virgin Islands and Mauritius, to name a few. Still others have developed a network of DTA, to be used for outward investments; such is the case of the Netherlands, Luxembourg and Mauritius.

Over the years, new and increasingly sophisticated activities have been build around these regimes in several OFC, with varying degrees of success. So for example investment fund business, insurance and reinsurance, maritime registry, private banking and asset management. It is also a fact that OFC have a strong commitment towards confidentiality or even secrecy in all matters financial.

But recently, several actions have been mounted against these OFC. These actions against the existing environment have been coming from several directions, namely taxation, disclosure of bank information, money laundering and global financial stability.

Globalisation is increasingly reality, with the disappearance of many tariff and non tariff trade barriers, as a result of work first by "The General Agreement on Tariffs and Trade" (GATT) and now by "The World Trade Organisation" (WTO). National boundaries will be less important and the links of individuals and corporations alike to their home country is likely to lessen. Internet trade will increase, with decreasing importance to the customer of geographic location.

Such new situations also generate new concerns, essentially centred around three major areas:

1. taxation and the existence of "harmful tax competition";
2. money laundering;
3. stability of the international financial system.

The Organisation for Economic Co-operation and Development (OECD) started working on these various areas of concern in the mid nineties. It was progressively followed by related international bodies or organisations.

Started in 1961, the OECD, as is written on its website, "brings together thirty countries sharing the principles of the market economy, pluralist democracy and respect for human rights … The OECD is not a closed club. Many contacts have been established with the rest of the world through dialogue and co-operation programmes with the countries of the former Soviet bloc, Asia and Latin America."

Its thirty member countries are: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom and the United States.

The first concern having been addressed by the OECD regards taxation of geographically mobile services. It claims such services will choose locations where tax regimes are the most friendly, i.e. no or low taxes. It is contended that many jurisdictions world-wide have entered into harmful tax practices, by trying to attract business activities simply by offering tax regimes lower than those in other countries. This implies a loss of tax revenue in the countries where the activities will no longer be based. This in turn implies either an increased taxation on those non-mobile activities, either a reduced level of Government spending in services and infrastructure, resulting in a decreasing level of welfare of the local population.

To combat these tendencies, individual countries can not do much on their own. As a result, the OECD started work on its level.

It published a first report on Harmful Tax Competition in May 1998, which involves itself only with geographically mobile financial and other service activities. But the report indicates that the OECD intends to explore a wider agenda in the future, more particularly different types of investment, including direct investment. In concentrates on what it considers the essential broad principles: transparency, non-discrimination and effective exchange of information on tax matters.

This report, which created the Forum on Harmful Tax Practices, sets forth Guidelines for Dealing with Harmful Tax Regimes in Member Countries. It reported forty seven such practices among the then twenty nine member countries.

It also adopted a series of Recommendations for Combating Harmful Tax Practices (in non member countries), from which Luxembourg and Switzerland abstained. To this end, the report listed forty seven countries, allegedly tax Havens, who were engaging in such practices according to the following criteria:

• no or only nominal taxation, in conjunction with
• lack of effective exchange of information
• lack of transparency
• absence or prohibition of any substantial local economic activity (ring fencing)

The "tax Havens" listed in this initial report were to be further investigated. The possibility was offered to any of them to provide "a clear signal that it wishes to curtail its harmful tax practices", which would give them the possibility of not being included in the first blacklist to be published.

Six countries did this, in accordance with OECD criteria: Bermuda, Cayman Islands, Cyprus, Malta, Mauritius and San Marino, and were removed from this list. In addition, six more countries were removed unilaterally by the OECD, because upon further investigation, the criteria did not apply to them. These were Brunei, Costa Rica, Dubai, Jamaica, Macao and Tuvalu.

The first blacklist was thus published on 26 June 2000. It includes the names of thirty five countries, namely Andorra, Anguilla, Antigua, Aruba, Bahamas, Bahrain, Barbados, Belize, British Virgin Islands, Cook Islands, Dominica, Gibraltar, Grenada, Guernsey/Sark/Alderney, Isle of Man, Jersey, Liberia, Liechtenstein, Maldives, Marshall Islands, Monaco, Montserrat, Nauru, Netherlands Antilles, Niue, Panama, St Kitts and Nevis, St Lucia, St Vincent and the Grenadines, Seychelles, Tonga, Turks and Caicos Islands, US Virgin Islands, Vanuatu and Western Samoa.

These countries have a further twelve months to indicate formally their commitment to take the appropriate measures to do away with the alleged harmful tax practices, which will allow them not to be included on the final blacklist to be published in July 2001. This future report will give the names of those countries having not been co-operative and therefore targeted with the announced sanctions.

Among the OECD suggested sanctions, nations might impose:

• use of domestic tax laws to deny all deductions, exemptions, allowances and credits for taxpayers or entities doing business in OFC;
• under civil and criminal penalties, require new, extensive reporting of all offshore financial activity;
• expansion and strict enforcement of controlled foreign corporation (CFC) rules;
• levy new withholding taxes on payments or transfers to OFC;
• increased tax audits of all offshore business activity;
• review, repeal and/or refusal of bilateral tax treaties;
• special new tariffs on financial and other activities involving OFC.

The Committee on Fiscal Affairs of the OECD issued a report on 12 April 2000, "Improving access to bank information for tax purposes", unanimously endorsed by all member countries. It lists proposals to improve access to bank information for tax purposes, in particular through the exchange of information under tax treaties between OECD countries. Countries with dependencies will be responsible to implement these in their dependencies.

In particular, the report stresses:

1. the importance of the elimination of anonymous bank accounts and the requirement for bank customers to be identified;
2. the exchange of information under the double taxation agreements, even if the co-contracting state has no interest in obtaining such information;
3. strict application and use of "know your customer policy" and the need for exchange of information for criminal tax cases;
4. it lists initiatives to achieve access to bank information for civil tax cases.

A spokesperson for the Swiss Government insisted that bank secrecy was not negotiable. The Swiss banking association insisted that actual Swiss legislation was in conformity with the recommendations contained in this report.

The Financial Action Task Force on Money Laundering (FATF) (known as "Groupe d'Action Financière" - GAFI - in French) was established by the G7 summit held in Paris in 1989. The FATF is an independent international body and its Secretariat is housed at the OECD. It is the world's leading anti-money laundering authority, next to other international anti-money laundering organisations and initiatives. It follows efforts made by countries to effectively combat money laundering.

The twenty nine member countries are: Argentina, Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong (China), Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, Turkey, United Kingdom and the United States. Two international organisations are also members of the FATF: the European Commission and the Gulf Co-operation Council.

In 1990, the FATF issued the list referred to as "The forty Recommendations". Revised in 1996, these recommendations set out the basic principles to be implemented by each country in their national legislation, subject to multilateral surveillance and peer review.

It issued a report on 14 February 2000 on "Non-Co-operative Countries or Territories", which defines the criteria identifying those not having or not putting in place effective anti-money laundering laws and regulations.

These criteria were grouped under four general headings, proposed to identify those jurisdictions:

1. loopholes in financial regulations;
2. impediments set by other regulatory requirements;
3. obstacles to international co-operation;
4. inadequate resources for preventing, detecting and repressing money laundering activities.

The FATF finalised the assessment of 29 countries and territories according to 25 publicly stated criteria and identified 15 jurisdictions as non-co-operative in the fight against money laundering. These were included in the blacklist published on 22 June 2000: Bahamas, Cayman Islands, Cook Islands, Dominica, Israel, Lebanon, Liechtenstein, Marshall Islands, Nauru, Niue, Panama, Philippines, Russia, St Kitts and Nevis and St Vincent and the Grenadines.

As a first step, the FATF calls on its members to request their financial institutions to give special attention to any dealings and financial transactions conducted with parties linked to these countries. The FATF wants to continue a dialogue to help these countries adhere to international anti-money laundering principles. However, no clear way has been indicated for countries to be removed from this blacklist. It will be on a best efforts basis.

This report makes it very clear that countries not abiding to these principles would face serious counter measures from the FATF member States, in order to protect themselves from the influx of funds of criminal origin. These proposed measures include the following:

1. Mandatory customer identification for any financial transaction conducted with any person linked to such a blacklisted country;
2. Mandatory reporting by financial institutions in FATF member countries to the Financial Intelligence Unit in that member State;
3. Restriction or prohibition of all financial transactions with such uncooperative jurisdictions;
4. Other sanctions, such as restrictions to access to information, provided by FATF member countries.

The FATF set June 2001 as the deadline to impose retaliatory measures against countries considered non co-operative in the fight against money laundering and which by then will not have reformed their practices.

The Financial Stability Forum (FSF) was established on 20 February 1999 as a G7 initiative. Its purpose is "to promote international financial stability through information exchange and international co-operation in financial market supervision and surveillance".

It has a total of forty members. Twenty-five represent the G7 countries and their financial authorities, six the International financial institutions, six the international regulatory and supervisory groupings and two the committees of central bank experts.

It set up a working group on 14 April 1999. This group analysed the regulations in the "Offshore Financial Centres" concerning the banking industry supervision, and where corrective action should be taken in order to avoid an international monetary or financial crisis. The report noted that offshore financial activities are not inimical to global financial stability, provided they are well supervised and supervisory authorities co-operate. If not, such OFC constitute weak links in an increasingly integrated international financial system.

The FSF published its "Report of the Working Group on Offshore Financial Centres" on 5 April 2000, after having surveyed financial supervisors from thirty major financial centres and thirty-seven OFCs.

The report included a list of three groups of "Offshore Financial Centres", group III offering the lowest quality of supervision. These lists were composed according to the perceived degree these OFC followed international standards, and according to the lack of appropriate controls and/or their enactment, which might provoke an international monetary crisis.

These three groups were as follows:

1. Group I includes the jurisdictions "generally perceived as having legal infrastructures and supervisory practices, and/or a level of resources devoted to supervision and co-operation relative to the size of their financial activities, and/or a level of co-operation that are largely of a good quality and better than in other OFCs. These jurisdictions are Hong Kong SAR, Luxembourg, Singapore and Switzerland. Dublin (Ireland),Guernsey, Isle of Man and Jersey are also generally viewed in the same light, though continuing efforts to improve the quality of supervision and co-operation should be encouraged in these jurisdictions".
2. Group II includes the jurisdictions "generally perceived as having legal infrastructures and supervisory practices, and/or a level of resources devoted to supervision and co-operation relative to the size of their financial activities, and/or a level of co-operation that are largely of a higher quality than Group III, but lower than Group I. These jurisdictions are Andorra, Bahrain, Barbados, Bermuda, Gibraltar, Labuan (Malaysia), Macao SAR, Malta and Monaco".
3. Group III includes the jurisdictions "generally perceived as having legal infrastructures and supervisory practices, and/or a level of resources devoted to supervision and co-operation relative to the size of their financial activities, and/or a level of co-operation that are largely of a lower quality than Group II. These jurisdictions are Anguilla, Antigua and Barbuda, Aruba, Belize, British Virgin Islands, Cayman Islands, Cook Islands, Costa Rica, Cyprus, Lebanon, Liechtenstein, Marshall Islands, Mauritius, Nauru, Netherlands Antilles, Niue, Panama, St Kitts and Nevis, St Lucia, St Vincent and the Grenadines, Samoa, Seychelles, The Bahamas, Turks and Caicos Islands and Vanuatu".

The report stressed that this list did not pass judgement about any country adherence to international standards. The inclusion in this list did not imply that all financial sectors of a given country would have to be reviewed. Contrary to the lists issued by the OECD and the FATF, this is thus not a blacklist.

The FSF did recommend that the International Monetary Fund (IMF) should take the responsibility for developing, organising and carrying out a process for assessing the OFC adherence to these standards. The sanctions for non-compliance to be administered by the IMF might even include tighter criteria for obtaining funds and loans from international bodies for such OFC institutions.

On 5 September 2000, Switzerland sent a letter to the members of the FSF, stating that it did not consider itself an "Offshore Financial Centre", and should thus not have been included in this list, solely established from the responses to a survey. The FSF responded by saying that the "Working Group did not attempt to identify jurisdictions as OFC. Rather, OFC surveyed were drawn from lists of OFC included in publications of other international organisations and groups".

In February 2000, the United Nations Offshore Forum is a new initiative within the UNODCCP Global Programme on Money Laundering, as part of an initiative launched by the UN Office for Drug Control and Crime Prevention in Vienna to ensure that anti-laundering legislation meets the required standards.

These reflect many of the recommendations put forward by the Financial Action Task Force, the Basle Committee on Banking Supervision and some by the G7 Group. Unlike the OECD Report which focuses on thirty-five "tax havens", this initiative monitors all jurisdictions which provide cross border financial services, and is not restricted to OFC. In addition, it clearly states its aim as non-fiscal. This initiative seeks to obtain the commitment of countries to internationally accepted standards of financial regulation and anti-money laundering measures with regard to cross border financial services.

It is intended that all jurisdictions participating in this initiative enact legislation including the commitment to investigate fraud, implementation of effective money laundering counter measures, the introduction of all crimes money laundering legislation, a commitment to international co-operation and the setting up of information gateways to side-step banking secrecy legislation in appropriate cases.

In addition, legislation is recommended in the context of the regulation and supervision of financial services. In this context, there should be a specific requirement that the regulatory authorities should be free of political or commercial interference. Furthermore, it is recommended that there should be an independent Financial Intelligence Unit, which would have the capacity to co-operate with other financial service supervisory regulators, and the relevant law officers with respect to enforcement procedures. The particular objective would be to achieve the enactment of effective prosecution powers in case of fraud and the introduction of the appropriate due diligence, know your customer procedures.

With regard to sanctions, it proposes criminal prosecution to the offenders.

The Internal Revenue Service (IRS) of the United States has enacted new rules, under which any US paying agent of dividends, interests, royalties or proceeds of sale must know the identity of the beneficial owner (BO) or beneficiary of such payments. The purpose is to ensure that all taxes due by US citizens are indeed paid. The BO must fill forms provided by the IRS, to make himself known.

Since 1 January 2001, under certain very strict rules, agreed foreign paying agents (Qualified Intermediary – QI) can certify to the US paying agent that the BO is a non-US citizen, without communicating his identity to the IRS. They can thus get tax relief on his behalf.

The IRS wants to make it impossible to American investors to hide behind foreign anonymous bank accounts to invest in the United States and, by doing so, to benefit illegally from reduced taxation rates, namely by non authorised use of Double Taxation Agreements (DTA). This concerns all withholding taxes on all US source revenue.

Thanks to the use of DTA, foreigners investing in the US benefit from reduced withholding tax rates, compared to the internal standard rate of 30%. The IRS wants to make it impossible for US citizens or for persons liable to US taxes not to pay these internal taxes.

The new IRS rules stipulate that the financial institutions, intermediaries investing for the account of their clients in US financial instruments, must certify that the clients for whom they request the reduced tax rates by the application of DTA are indeed not subject to US taxes. These certifications must be made in accordance with the identification rules laid out by the IRS and be open for review by independent external auditors, whose role it is also to guarantee the confidentiality of the processed information vis-à-vis the IRS.

Financial institutions which would not be recognised as QI will have great difficulties to obtain the use of reduced taxation rates under the DTA, unless they will allow the IRS access to the identity of the relevant client. This might cause great problems in private banking for example, where confidentiality or even banking secrecy is of great importance to the client. It is less of an issue in the case of permanent shareholdings or long term investments, which are generally conducted through a corporate entity of which the beneficial owners are or can be known.

The European Union aims to see all its residents taxed in similar ways, regardless of their country of residence. As a first step, it wants to harmonise the taxation of their savings. It therefore pursues tax harmonisation and seeks initially to impose upon all its members a minimum level of withholding tax, but also communication on tax matters.

In 1998, the Commission presented a draft directive on the taxation of income from savings. A choice was offered to the member states between a system of withholding tax and the exchange of information on income from savings with other member states. The objective was to ensure that all income would be subject to a minimum level of tax and to avoid "each country within the EU becoming its neighbour's tax haven", according to the commissioner, Mr Mario Monti.

At the 20 June 2000 summit in Santa Maria da Feira (Portugal), the following was agreed, which was confirmed by the ECOFIN Council of 26 and 27 November 2000.

Up until the end of 2009, each member country in the EU has a choice between a non reciprocal exchange of information on income from savings with other member states and the levy of a withholding tax. For those countries choosing the withholding tax, namely Austria, Belgium, Greece, Luxembourg and Portugal, the rates will be of 15% from 2003 until 2006 and 20% thereafter. These taxes will be split 25% to the state where the tax is withheld and 75% to the state of residence of the investor.

After this transitory period, the ultimate objective will be reached: general exchange of information will be mandatory among member states. As a result, all citizens of the EU will pay taxes on their income from savings.

The aim of the Commission is that this European directive be adopted before the end of 2002. However, this will only be the case if equivalent measures are adopted by the United States, Switzerland, Liechtenstein, Monaco, Andorra and San Marino, as well as their dependant or associated countries (Channel Islands, Isle of Man and Caribbean territories).

How did and do OFC respond to these wide and strong attacks? In fact, up until late spring 2000, not too much attention was given to these various studies and investigations under way. However, since summer 2000, things have changed and targeted OFC react, increasingly strongly and defiantly.

Indeed, the sanctions to be enacted upon such OFC under the various initiatives would likely include one or more of the following: full disclosure of all parties involved in any bank transfer, the refusal to accept any bank transfer, freezing such funds if some suspicion raised, exclusion from DTA, financial sanctions administered by the International Monetary Fund (IMF). Such sanctions would basically threaten their very survival as OFC; it is indeed hard to imagine how such countries would be able to operate in the financial arena if bank transfers were rendered impossible.

The OECD seeks agreements including the following elements:

1. Criminal information exchange: The OECD seeks procedures for efficient administrative exchange of reliable financial data by 2004, achieved through treaties with OECD member countries, where there is a specific request.
2. Civil tax information exchange: The OECD seeks procedures for efficient administrative exchange of civil tax data by 2006, again where there is a specific request. All OECD members have not agreed to this.
3. Access to information on ownership and financial data: The OECD seeks effective government access to locally kept information with regard to beneficial ownership and financial data for companies and trusts.
4. Not attracting business without substantial domestic activity: The OECD wants residents to have access to all so-called offshore entities, and that these entities be allowed to conduct local onshore activities.

Since July 2000, three more countries have sent their commitment letters to the OECD, namely the Netherlands Antilles on 30 November 2000, the Isle of Man on 13 December 2000 and the Seychelles on 13 February 2001. Their letter of commitment and attachments have been published by the OECD and these countries will formally be removed from the blacklist to be published in July 2001. It must be noted that any country having taken a commitment along those lines can at all times withdraw, which would automatically bring about its reinstatement on the blacklist.

Gibraltar intends to sign similar commitments, as Mr Peter Caruana, the Chief Minister, indicated on 20 April. He stressed that there was no choice, but to comply with the OECD as the alternative course "does not offer a viable and durable future to Gibraltar as a prosperous, successful international finance centre".

It was also reported recently by the Financial Times that four British Territories, Anguilla, the British Virgin Islands, Montserrat, and the Turks and Caicos, were prepared to make a joint commitment as long as OECD member countries would themselves commit to the same standards that they are demanding of the low-tax jurisdictions. This was however denied in an article in the Financial Times on 7 May by the director of financial services for the British Virgin Islands.

OFC can not resist the pressure being applied. When envisaged sanctions will be applied, their implementation will threaten the very survival of many of them as financial centres. Indeed, OFC exist by the fact that they solicit other countries' onshore source clients, who in turn will access the international banking network to invest in other countries' onshore financial instruments.

The sanctions by which these OFC are threatened would immediately endanger their very survival. It would prohibit or at least make access to the banking network or to other countries' onshore investments much more difficult.

On the other hand, in order to be removed from the OECD blacklist and no longer be accused of carrying out harmful tax competition, the listed OFC will be forced to adopt changes in their legislation, which generally will make them less attractive than what their users had experienced so far. It is therefore likely that the financial services sector of those OFC adapting their legislation to the wishes of the OECD will shrink very fast.

There is thus clearly a crucial dilemma for most of those OFC. If they do not abide to the wishes of the OECD, they will likely face a quick extinction as a consequence of the implementation of the announced sanctions. If they do abide, many will probably also face extinction, albeit slower, due to the removal of the previous attractiveness.

The arguments addressed against the OECD are mainly the following:

1. OFC are all sovereign States. Why would (rich and developed) countries impose laws which certainly infringe upon the sovereignty of OFC (small and less developed)?
2. These OECD member countries all supposedly want to establish a world where free competition should be the rule, under the auspices of the World Trade Organisation. Why in that case can they not accept tax competition?
3. Rather than force upon OFC increased levels of taxation, would these countries not better reduce their own level of taxation, often seen as the first reason for their residents to try to keep income or wealth untaxed or less taxed in OFC?
4. OFC request a level playing field. All OECD member states and listed OFC must be treated equally, and must have the same timetable and sanctions imposed.

Several bilateral and multilateral meetings have and are still taking place. A somewhat revised OECD stance has emerged.

The OECD claims it is not infringing upon the sovereignty of OFC and recognises their legitimate right to run tax regimes as they wish; the OECD has reminded OFC that it accepts them to run zero-tax jurisdictions. It is not the aim to abolish all zero tax regimes.

Similarly, it asks those OFC not to infringe upon their own member countries sovereignty. Indeed, some OECD member states run high tax regime. OFC should recognise the legitimate rights of such states and not infringe upon their sovereign rights; they must therefore consent not to attract residents of such high tax countries by confidential (secret) offshore structures and accept to exchange tax information. According to the OECD, it is clearly the OFC who are infringing upon their member countries sovereign rights by preventing them from taxing their residents as they see appropriate, and not the other way round.

If OECD countries would like to restrict access to their financial markets, there is not much recourse against it. Such measures are discretionary and would not aim to restrict free competition; their purpose would be to keep a standard of behaviour, applicable to all market participants.

But experts are indeed claiming that the OECD's proposed sanctions might get its member countries in trouble with international trade law. In particular, it is claimed that these sanctions may violate non discrimination provisions, because they would not apply to OECD member countries, even though they have similar "harmful tax competition" features in their legislation and should be treated the same way than OFC.

The Caribbean Community and Common Market (CARICOM) nations have indicated they may bring their views on the OECD proposals to the WTO, in the event satisfactory arrangements would not be worked out with the OECD. Above all other matters, they want "a level playing field", i.e. that the measures taken against them would be similar to those taken against the OECD member states and therefore should not be discriminatory. They are concerned that the various reviews to which they have been subjected were conducted by representatives of the most developed countries in the world, with whom their financial services sector is often in direct competition.

Indeed, forty-seven instances of potentially harmful tax practices by OECD member countries were pointed out in the June 2000 report. Member countries have committed to eliminate the harmful features of any regime found to be actually harmful by April 2003, but no sanctions are attached in case of non compliance, contrary to OFC, which must commit before end of June 2001 or risk sanctions. Also, Luxembourg and Switzerland, both OECD members, dissented from the 1998 report and continue to refuse to exchange information for tax purposes. The OECD seems not to consider this to be important, although these two countries are among the major players in international finance and in direct competition with OFC.

To encourage blacklisted OFC to adhere to its requests, the OECD issued on 19 October 2000 a "Collective Memorandum of Understanding"; it invites jurisdictions on its blacklist to endorse it. The proposed collective instrument is available as an alternative to bilateral agreements between the OECD and individual offshore jurisdictions. However, some of its features pose difficulties to the OFC, as they would to OECD member countries. It is therefore important that this document be signed both by OFC and member states, in order for the OECD initiative to keep its credibility.

To improve the quality of its dialogue with small and developing countries (SDC), a meeting between OECD and Commonwealth countries was held in Barbados on 8 and 9 January 2001, where OFC aired some of their misgivings and frustrations. A Joint Working Group was set up, co-chaired by Australia and Barbados. It aims to review the issues of transparency, non-discrimination and effective exchange of information. The OECD has already indicated that, if successful, this process would replace the procedure first contained in the Collective Memorandum of Understanding. A similar meeting took place on 15 and 16 February in Tokyo for the Asian Pacific countries.

As of today, thirty-two countries would still be potentially on the revised blacklist. Many OFC did likely not give enough attention to this issue before the publication by the OECD of its first blacklist in June 2000. But since then, it has been a growing concern to blacklisted OFC, amid great dissatisfaction and frustration. Given the dire impact that these imposed changes in the tax laws of many OFC will have on their economies, the opposition to the perceived unilateral threats has been mounting.

To these various dissenting and grumbling voices, an organisation named "The Center for Freedom and Prosperity" has added its own. Allegedly funded by private resources, it has been created in the United States, specifically to fight the OECD initiative. It is increasingly succeeding to be heard on this issue.

A stalemate has occurred between the non-OECD and OECD countries in the Joint Working Group, as reported by His Excellency Sir Ronald Michael Sanders, Chief Foreign Affairs Representative with Ministerial Rank of Antigua and Barbuda on 27 March 2001.

Mr Sanders also announced that the non-OECD members had established an International Tax and Investment Association (ITIO), which will serve as a unified voice by small and developing economies (SDE) on international tax and investment matters, even on issues beyond OECD matters.

Although the statement issued by the G7 Finance Ministers and Central Bank Governors at their meeting in Palermo on 17 February 2001 contains a reminder of their support to the OECD to address harmful tax practices and of their encouragement to the OECD to continue its efforts, the adherence of the United States to this campaign is now less than certain.

Indeed, since then, several Senators and Representatives of the United States have written to Mr Paul O'Neill, President Bush's Treasury Secretary, urging him to withdraw the United States support for this OECD initiative, as it is indeed perceived that this administration is in favour of less rather than more tax. These personalities include such influential persons as Senator Don Nickles, Assistant Majority Leader of the Senate, Senator Jesse Helmes, Rep. U.S. Richard K. Armey, the House Majority Leader, Sam Johnson, of the Ways and Means Committee, next to other Congressmen and the entire Congressional Black Caucus, regrouping twenty six Representatives.

No official word has been coming out yet from the administration. It must however be noted that Mr Mark Weinberger, the U.S. Assistant Treasury Secretary, indicated as recently as 17 April last that the United States has no intention of joining the OECD in imposing sanctions, but that they would support the OECD in its goal of sharing information.

On 22 April, during the third summit of the Americas in Quebec, the leaders of fourteen Caribbean states met with president Bush. They sought to persuade him to abandon the United States' support to the OECD harmful tax competition drive.

In the statement issued after the latest such G7 meeting on 29 April 2001, no reference to the OECD campaign against harmful tax practices was included, although the support for the FATF work was reiterated. Germany's Finance Minister Eichel and especially France's Fabius had sought to convince Mr O'Neill to renew the United States' commitment to the OECD initiative, but to no avail. According to Mr Fabius, Mr O'Neill does not approve of imposing a tax regime upon countries and dislikes the notion of dictating to people what they should do.

And on 10 May, in a long-awaited statement, the US Treasury Secretary Paul O'Neill clearly stated the US disagreement with the OECD stance: "The United States does not support efforts to dictate to any country what its own tax rates or tax systems should be, and will not participate in any initiative to harmonise world tax systems". He added that "the work of this particular OECD initiative … must be refocused on the core element that is our common goal: the need for countries to be able to obtain specific information from other countries upon request in order to prevent the illegal invasion of their tax laws by the dishonest few", and that the United States would continue to guard against over-broad information exchanges. He added that the OECD project, under its current form, is "to broad and not in line with this administration's tax and economic priorities".

One final note on this issue. It seems peculiar that the OECD does not inform about this renewed resistance encountered in its work. In particular, the very strong and vocal opposition from several elected politicians in the United States as well as from several Caribbean countries, added to this clear refusal of the Bush administration to support the work done recently by the OECD on this issue, might put the project in jeopardy.

In any case, a major stumbling block will remain, even after a revised blacklist would be published this summer. Indeed, the sanctions recommended by the OECD and to be applied against blacklisted countries must be enacted by each member state; the international organisation can only advise upon sanctions to be enacted by each member. This takes time and any enactment will likely be challenged in the courts, under the accusation of discrimination under international trade laws. In addition, it looks certain that not all member states will enact those, such as the United States, who has made it clear, or such as Switzerland and Luxembourg, who are very reluctant to the whole process, to name a few.

Most if not all countries will be ready to follow the injunctions with regard to money laundering. It is safe to assume that no single country would want to be known of as promoting or even condoning money laundering. This includes all such actions derived from drug money, prostitution, "serious crime", arms trafficking. Indeed, as of 1 February 2000, all blacklisted countries, except for Nauru, had implemented some changes or indicated such intention to the FATF.

But resistance is encountered for alleged crimes resulting from tax evasion, as defined by the law in many OECD countries. Most OFC do not view tax evasion as a crime; it is therefore evident to those that there can be no money laundering resulting from tax evasion under their laws.

On 5 October 2000, at its plenary meeting, the FATF reviewed the progress of countries on their blacklist. No jurisdictions were removed, as the FAFT rejected calls to amend its list of "non-co-operative" countries or territories at that time, but said it would continue to monitor progress.

In its 1 February 2001 meeting, it noted "with particular satisfaction that seven jurisdictions - the Bahamas, the Cayman Islands, the Cook Islands, Israel, Liechtenstein, the Marshall Islands and Panama - have enacted most if not all legislation needed to remedy the deficiencies identified in June 2000."

At its next plenary meeting on 20-22 June 2001, the FATF will determine which countries, if any, should be removed from the list, based upon progress made, primarily enactment of appropriate legislation and its enforcement. It will decide on the countermeasures for those jurisdictions called "non-co-operative countries" (NCCT), listed on the blacklist of June 2000 and which would not have made sufficient progress. At the same meeting, the FATF will also consider the results of inquiries into a second set of countries presently under review.

Presumably, the need for bank control and regulation, in order to avoid any kind of disruption to the global financial stability, can not seriously be challenged. It will probably be more a matter of agreeing on rules, procedures and staff training for Central Banks of OFC.

The International Monetary Fund is currently helping many jurisdictions to improve their regulations and procedures in the field of banking supervision. It is anticipated that the list issued last year will be modified in the near future.

This body is continuing its work on this area. At present, the initiative pursued by the FATF is more in the "spotlight". Most targeted jurisdictions are collaborating with the FATF to improve their standings in this area.

As the procedure goes, interested jurisdictions must first obtain their qualification as "Qualified Jurisdiction" (QJ). Thereafter, financial intermediaries wishing to obtain the QI status, must individually apply to the IRS. Among their commitments, QI must appoint an external auditor, previously approved by the IRS, to verify their procedures.

However, in the annexe to each QJ agreement, specific clauses can be introduced, in relation with the laws and procedures applicable in each jurisdiction.

Many Offshore Financial Centres have already obtained QJ status. As of 31 January 2001, the IRS had approved the adoption procedures of new clients ("Know your client procedures" - KYC) of thirty nine countries and two more were expecting this approval.

These QJ are those for which it is important not to disclose necessarily and systematically the identity of investors to the IRS, in order to safeguard their reputation as countries running a reliable and confidential banking system. In other words, these QJ are those:

1. for which asset management, more particularly private banking, represents an important part of their international financial activities and/or which have large business flows with the United States and
2. who have generally a DTA with the United States.

Several issues need to be resolved before the planned directive on the taxation of savings can be issued. Even European officials acknowledge that the chances for passing this piece of legislation are becoming slimmer by the day.

Among these issues, the code of conduct to be adopted by EU member States seems to be less of a done deal than first anticipated. A special working committee discovered sixty nine tax regimes in the EU countries, supposedly harmful, in the sense that they provide an unfair advantage compared to other States. A code of conduct was to be approved, together with the intended directive. Now some member States, including Belgium and the Netherlands, claim there was never any final agreement on this procedure. The now well-known and frequently used "Co-ordination Centres" are one of the major obstacles.

Likewise, Luxembourg has now an interpretation on new bond issues which seems to run against what was perceived to be agreed before. The EU intends to have all bonds issued after 30 March 2001 to be taxed under the savings tax. Luxembourg claims that it only concerns new bond issues authorised after that date, and not those authorised before that date, even if issued later. Belgium immediately declared that this interpretation was totally unacceptable and that it would not accept a directive if this interpretation would prevail.

In addition, another major difficulty looms ahead. It turns out the role of Switzerland in the issuing of the Directive on taxation of savings before end 2002 is turning out to be essential. Indeed, Luxembourg has reserved itself the right to veto this directive (which needs unanimity to pass) if Switzerland would not adhere to the same principles than those set out in this directive.

This seems increasingly likely. In a referendum held in Switzerland on 4 March 2001, a majority of almost 77% voted against an initiative, under which the Federal Government would have had the obligation to accelerate the negotiations to join the EU. Although this vote was not meant to be a vote on the adhesion to the EU, its results are interpreted by many as such. The fear of potentially having laws on taxation and bank secrecy imposed by the EU was one of the mean reasons for this vote, in addition to some untimely and inappropriate remarks, allegedly made by top EU officials, with regard to the ratification process of the bilateral agreements between the EU and Switzerland.

The Commission invited officially the Swiss Government to enter into negotiations with the EU on the taxation of savings. The position of the Swiss Government and the Swiss banks is rather clear, as written by Edouard Cuendet, First Secretary of the Geneva Private Bankers Association and Vice President of the Swiss Private Bankers Association.

"On the one hand, it would not be realistic to think that Switzerland could disassociate itself from this question on the pretext of not belonging to the EU, whose system would make our financial centre appear only too attractive. On the other hand, inasmuch as nothing can be done without Switzerland, the principles adopted by the EU in June 2000 give the country a kind of veto. But the forces involved are such that Switzerland will not exercise this veto."

"However, it would not be worthy of a sovereign country to have its policy dictated by foreign countries, even if they constitute its biggest economic partner."

To start these negotiations, Switzerland has chosen a Euro-compatible withholding tax system, and thus no exchange of information. This is clearly in contradiction with the goal of this projected EU directive.

It must be pointed out that this position was taken before the 4 March vote. Given the now increased public awareness on these issues, the room for manoeuvre by the Swiss Federal Government has in all likelihood been reduced further. Even if some agreement could be reached quickly, which is doubtful, the subsequent national approval process (if at all) would take a long time.

It seems therefore likely that Switzerland will not adhere (in time) to the principles contained in the directive, and consequently likely that Luxembourg and probably other countries will veto the directive and that it would postpone any potential agreement on the taxation of savings in the EU. Given the unanimity rule which applies to this directive, one might anticipate some difficulty in its timely adoption.

On final comment on this issue. It was reported as recently as the last week of April that the Blair Government requested Belgium to relax its tax harmonisation agenda for its upcoming EU presidency, starting this July. The Labour party wants to avoid negative impact on the upcoming UK June general election.

Before the issuance by the OECD of its report on Harmful Tax Competition, the Republic of Mauritius, in a letter sent to the OECD Secretariat on 24 May 2000 by its then Minister of Finance, committed to bring the necessary changes to its laws to meet the OECD requirements (see attachment). Consequently, Mauritius was not included in the OECD blacklist.

In order to comply with this commitment, the Parliament of Mauritius modified both The International Companies Act 1994 and the Companies Act 1984, as included in the Budget of June 2000. The document enclosed, entitled "The Republic of Mauritius, Financial Offshore Centre" gives a description of the actual legal offshore environment in Mauritius.

The International Companies Act was modified as follows. First, for all such International Companies (IC) incorporated after 1 July 2000, only registered shares can be issued. For existing ICs, the required changes to the Memorandum and Articles of Association must be effected before 31 December 2001, i.e. to remove the possibility of issuing bearer shares and to exclusively issue registered shares. Nominee shareholders can be used.

The name of the owner needs to be registered in the register held at the company's Registered Office in Mauritius, along with the names of the Directors and of the principal officers and Corporate Secretary.

Second, this information must be communicated to the Registrar of International Companies. Any subsequent change must also be communicated to the Registrar, within one month of such change occurring.

The Tax Act was also modified, with regard to its application to Offshore Companies (OC). Offshore Companies incorporated after 30 June 1998 are governed by the Income Tax Act 1995, under which they are taxed at the flat rate of 15%. Mauritius Law allows a tax credit equal to the amount of foreign taxes paid (underlying foreign tax credit), up to the amount of tax due in Mauritius. In the absence of proof, the amount of foreign tax paid is presumed to be 90% of the Mauritius tax. The effective tax rate can thereby be reduced to a maximum of 1.5%.

As per the Finance Act 2000, this presumed foreign tax credit will be reduced to 80% as from 1 July 2002, resulting in an effective tax rate of 3%. There is no capital gains tax, nor withholding tax on dividends and interest paid to non-residents.

Offshore Companies incorporated before 30 June 1998 still have the option to choose an income tax rate ranging between 0% and 35%, before tax credit. However, as from 1 July 2002, the rules explained above will also apply to these.

There are currently regular meetings and ongoing consultations between the Mauritius authorities and the Offshore Forum. It is also the intention of the Government to enact new legislation before 30 June 2001, which aims to unify both the offshore and onshore sectors.

The FAFT has excluded Mauritius from its list of non co-operative countries that appeared in its Report published on 26 June 2000. It states that "Mauritius has a range of legislation governing the domestic and offshore financial services industry. Some concerns have been identified regarding the identity of directors and beneficial owners of offshore trusts, but the Economic Crime and Anti-Money Laundering Act reinforces existing legislation in the prevention of and the fight against money laundering."

Appropriate legislation has been passed in this area of concern. The Parliament of Mauritius enacted the Economic Crime and Anti-Money Laundering Act 2000. This Act was adopted in June 2000 and provides a system in line with international conventions and standards.

The Act provides:

1. the creation of an Economic Crime Office (ECO) headed by a Director to investigate, following complaints or on his own initiative, into:

• suspicious transactions,
• money laundering and
• serious economic offences, defined as money or property gained or lost which exceeds a value of MRU 500,000 - US$ 20,000 - or such other sum as may be prescribed; it includes criminal activity which was carried out outside Mauritius, if it would have constituted an offence in Mauritius.

2. for the Director with a Court Order to have power to enter and search premises of banks, financial institutions or any other premises;
3. for a provisional seizure of all moneys and properties of a suspect for a period not exceeding 60 days to prevent their disposal or transfer;
4. measures to prevent money laundering;
5. that banks (including offshore banks), financial institutions and relevant professionals report suspicious transactions of money laundering to the ECO;
6. for the Supreme Court to freeze the assets of a suspect pending trial and to forfeit the assets of persons convicted and to impose fines and imprisonment as well.

The Act establishes an Economic Crime Office, headed by a Director, whose task includes "gathering, processing and evaluate information relating to suspicious transactions ... and to investigate and counteract money laundering and economic offences".

• The Director may by notice in writing summon any person under investigation to attend an interview and answer questions, furnish information or produce documents.
• It shall be a reasonable excuse for a person to refuse or fail to answer a question or to produce documents where the answer or document might tend to incriminate him. This protective shield is lifted where the Director of Public Prosecutions (DPP) guarantees that the answer/document will not be used against him.
• The Director has the power with Court Order to enter and search any premises or place of business at all reasonable times and remove any documents therefrom.

Where the Director suspects that a person has or is about to commit an offence, he may apply to Court for a bank or a member of the relevant profession forthwith to produce to the Director all information obtained by it about any business transaction conducted by or for that person, in order to locate or quantify any property or transfer.

Where the Director suspects that a person has or is about to commit an economic offence, he may with Court Order attach in the hands of any person named in the Attachment Order (AO) all moneys and property due or held on behalf of the suspect.

He may also require that person to declare in writing to the Director within 48 hours, the nature and source of the moneys or property so attached and prohibits the person from transferring /pledging or disposing of same. Persons named in the AO can be the owner or any professional intermediary or administrator.

The AO shall remain in force for 60 days from its date of issue and may be renewed for successive periods of 60 days by Court on an application by the Director.

The liability for breach of Part II of the Act, e.g. give misleading information or failing to produce documents, is a fine not exceeding MRU 1 Million – US$ 40,000 - and imprisonment not exceeding 5 years.

The offence is committed under the Act when any person engages in a transaction that involves property which directly or indirectly represents the proceeds of any crime or receives, possesses, conceals, disguises, transfers, converts, disposes of or brings any such property.

Any member of a relevant profession who fails to take such measures as are reasonably necessary to ensure that neither he nor any service he offers is capable of being used for dirty purposes or facilitating money laundering shall commit an offence.

The penalty is a fine not exceeding MRU 2 Million - US$ 80,000 - and penal servitude not exceeding 5 years.

No person shall make or accept payment in cash in excess of MRU 350,000 - US$ 14,000 - or an equivalent amount in foreign currency. "Cash" includes any cheque which is neither crossed nor made payable to order. This limitation is not applicable to "exempt transactions" as defined in s.2 of the Act and which includes transactions between a bank and another bank or between a bank and a financial institution.

The Act imposes an obligation on banks, financial institutions and professionals to take such measures as are reasonably necessary to ensure that the service offered is not capable of being used to facilitate money laundering.

Every member of a relevant profession shall forthwith report every suspicious transaction to the Director of the ECO. The reporting should be confidential and should not be communicated to other parties.

Every bank shall verify the true identity of all customers and persons it transacts with and keep records. It shall report suspicious transactions to the Bank of Mauritius.

The penalty for breach of Part IV is a fine of MRU 1 Million and imprisonment not exceeding 5 years.

Assets can be frozen by Court Order pending outcome of trial, though Court may allow payment of debts incurred in good faith due to the creditors of the accused.

Assets can also be forfeited if accused is found guilty. If assets cannot be located or have been transferred to a third party or is located abroad or its value has been substantially diminished or has been mixed up with other property, Court may order the accused to pay an equivalent sum in lieu of forfeiture.

The Director shall execute the request of a foreign state who has asked for assistance in investigating a money laundering offence. The same powers are granted to the Director in assisting the foreign state: tracking order, order for freezing property, search order, forfeiture, etc.. The Director can similarly request assistance from foreign states. Offenders of money laundering can be extradited.

The new Authority, the Mauritius Economic Crime Office (ECO), is operational. It is already investigating several cases of alleged corruption, both onshore and offshore.

As part of the ongoing monitoring process. a FATF review team visited Mauritius in mid-January 2001 and held wide-ranging meetings with major stakeholders in the financial services sector, namely Government, regulators and bank and non-bank financial operators. It appears this team was satisfied with their findings.

Mauritius was listed in the third group of the "Report of the Working Group on Offshore Financial Centres" issued on 5 April 2000. This prompted an official protest by the Government on 30 June 2000.

This report, and most specially its rankings, have been criticised repeatedly. Some countries were (privately) surprised having received the grade they had, while some others are rather incensed for being included at all. Such is the case most notably of Switzerland, on the basis that it does not view itself as an "Offshore Financial Centre".

Although quite recent as an institution, the Bank of Mauritius has always assured a supervision of high standard. The central bank is now almost permanently assisted by staff of the International Monetary Fund (IMF) to help putting in place the necessary new laws, regulations and procedures to further improve the actual supervision provided.

Mauritius has gained the recognition of the UN Forum on its regulation of the offshore sector, due to the strong regulatory framework and diligent practice in the same matter. The enactment of the Economic Crime and Money Laundering Act will reinforce this framework and enhances the position of Mauritius as a well regulated and well supervised offshore centre.

Earlier, in its report on "Financial Havens, Banking Secrecy and Money Laundering" published in 1998, the UN pointed out already that "some jurisdictions, such as Mauritius, have been very careful in regulating their offshore sectors". Mauritius has signed the convention in Palermo earlier this year.

As of today, Mauritius is not a "Qualified Jurisdiction" (QJ). As indicated earlier, countries seeking the QJ qualification are generally those:

1. for which asset management, more particularly private banking, represents an important part of their international financial activities and/or which have large business flows with the United States and
2. who have generally a DTA with the United States.

With regard to the Republic of Mauritius, none of these two comments do apply yet. However, this should change rather quickly.

Indeed, firstly with regard to asset management, some offshore banks, still concentrating on commercial transactions, wish to expand their activities into this field. In addition, commercial transactions with the United States are developing at a steady pace, partly following the adoption of the Africa Act by the American Parliament, which applies no or favourable duty rates on products of Mauritius origin. One can imagine that the conditions needed to start a CDI negotiation will be rapidly fulfilled.

It is worth noting that companies under Mauritius law are what is referred to as "Transparent Companies" under IRS rules, according to US tax laws. These are frequently used to hold assets and accounts for asset management purposes.

Notwithstanding the fact that no DTA exists today between the United States and the Republic of Mauritius, several American groups have incorporated companies in Mauritius to invest in the People's Republic of China, and also in other countries with whom Mauritius has attractive DTA. The absence of a DTA between Mauritius and the United States is not an obstacle to these US investments in Mauritius, because there is never any withholding tax out of Mauritius.

As far as it is known today, Mauritius has not entered into negotiations with the IRS to become QJ. It should be hoped that this will take place soon. Indeed, besides some clear administrative advantages when dealing with US investments, the fact of becoming a QJ in the hopefully not too distant future would undoubtedly provide enhanced status to Mauritius in the international financial arena.

These provisions and endeavours have no direct impact on Mauritius.

The purpose of the Financial Services Development Bill is to regulate all financial non-banking activities in the Republic of Mauritius. It provides for the creation of a single regulator of these activities, the "Financial Services Authority" (FSA), which will work in close co-operation with the Bank of Mauritius, whose Managing Director should become its Chairman.

The FSC will have exclusively a regulatory function and, as such, replace the MOBAA in that role. The promotional activity, until now also under the responsibility of the MOBAA, will be entrusted to a new and separate body, the "Financial Services Promotion Agency".

In addition, the Acts and laws regulating specifically the offshore sector are merged into existing pieces of legislation, under the Companies Act 2001, adopted by the Mauritius Parliament on 14 May 2001. The aim is to abrogate the existing distinction between onshore and offshore activities.

After a period of three years, the FSA should pave the way for the creation of a single regulatory body. This future body will carry the responsibility for the supervision of all financial activities, both banking and non-banking.

This new legislation was enacted by the Mauritius Parliament on 15 May 2001.

The nature of commercial (and therefore financial) transactions has changed greatly over the past decades. Until recently, transactions were mostly conducted in a local environment, where people knew each other or which enabled parties to at least very easily get the necessary background information on potential business partners. International level transactions only took place after necessary prior introductions and referrals. This has now totally changed.

Today, transactions are no longer local in scope, and very often include interregional or international elements. Parties to a contract generally do not know each other outside their business relationships, which are increasingly becoming anonymous. Prior personal knowledge of a business partner becomes increasingly rare or non-existent.

This goes also for banks. Whereas contacts used to be local, where people were known to each other and were conducting essentially local transactions, this has now changed. Anonymity is now widespread in financial activities, on a global scale. When in the past banks did not formally require the precise identity of a client wanting to open an account, this was so because the bank officer knew the client outside their business relationship. As transactions have become increasingly international and therefore anonymous, banks had to react.

Times from the recent past, when banks opened accounts without knowing or even trying to know formally the identity of the beneficial owner, are definitely over. This was a goal of international supervisory bodies, to better be able to monitor bank activities and banking transactions. But it is also far healthier for the banks themselves. Any commercial organisation today needs to know its clients, in order to be able to control its business and to apply successfully marketing strategies. We tend to view this as an elementary necessity to assure medium and long-term survival of concerned commercial banks.

In view of the increasing global awareness of anti-money laundering needs, no bank today wants to be caught not knowing its clients or being named in newspapers when allegedly helping knowingly or not clients to launder money. Banks will impose internal code of conducts and procedures to avoid such situations. The negative impact this has on its business is too high a price to pay.

Large banking groups have already "Know your client" (KYC) rules applying to all their offices world-wide. Some do not wait for official word of sanctions by international bodies; they are the frontrunners in trying to root out any wrongdoing which might indirectly affect their own business through tainted money transfers or banking transactions in their own books. As an example, the decision by leading banks world-wide to adopt stringent anti-money laundering rules or another decision to accept only with the greatest scrutiny any transfer from specified and named countries, well before any sanction has been decreed by the OECD or the FATF, in this instance.

Today, any commercial bank is able to follow the trail of any operation. If requested, it can communicate this at any time to a inquiring body. The only refraining factor would be the banking secrecy law of the country where such an offence would presumably have taken place.

Most countries have anti-money laundering laws; almost all those remaining are working on it. This covers generally drug and arms trafficking and "serious crime". But proceeds from tax evasion are not always targeted in the laws, or are positively excluded from any criminal prosecution, as for instance in Mauritius, Luxembourg and Switzerland.

Whereas broad consensus generally exists on these anti-money laundering issues and the principles guiding the FATF initiative, the same can not be said about the OECD anti-taxation drive. To do away with zero tax regimes seems not attainable and is officially not pursued by the OECD either.

It claims its member countries want to be able to tax their residents as they wish and to exercise what they consider their sovereignty right. They want to tax world-wide income. They need therefore all relevant information on their residents' affairs abroad, which implies the removal of bank secrecy and general exchange of information.

These OECD member states would still allow the existence of offshore centres, but not to be used by their own residents. But these member states would want to keep their own very favourable tax laws designed in similar fashion to those found in OFC and by which they compete directly for business by non-residents.

If it is indeed the sovereign right of a country to tax its residents as it wishes, it might also be thought that the reverse would be true, namely that a resident may choose and change its country of residence. This in turn is rendered increasingly difficult.

For many years, US nationals have had to file a tax return in the United States, even when they are not resident of the United States. In practical terms, this measure has not much impact on the individual, since tax rates in the US are generally lower than most developed nations. When the IRS suspects that a change of nationality from US citizenship is motivated by tax reasons, it can enforce some very expensive constraints. More recently, France has enacted laws making changes in residency difficult and very costly from a tax viewpoint. Other countries might follow suit, as such concepts are being debated.

The feeling grows that these OECD member countries want to keep their taxpayers in their net by not allowing them to emigrate, by preventing them from using offshore structures, and then apply high tax rates compared to most countries, all in the face of globalisation and increasingly mobile services industry. This seems a rather arduous task.

It seems likely that the statement by Secretary O'Neill on 10 May 2001 has put a strong brake to the excesses of such proposals and aims. In his statement, he reflects strongly the concerns of many people and nations around the world, as he states "I am troubled by the underlying premise that low tax rates are somehow suspect and by the notion that any country, or group of countries, should interfere in any other country's decision about how to structure its own tax system." He also added he was concerned about the potentially unfair treatment some non-OECD countries had been subjected to.

It seems that the OECD initiative will loose some of its incisiveness, due to the disappearing support of the United Sates, particularly with regard to intended sanctions, and to the widespread resistance from targeted countries. The FATF initiative encounters no such resistance and its recommendations are generally being followed.

Even if the OECD initiative would loose some of its steam in the months to come, it must be said that these two major initiatives have already left their marks, not only through laws being enacted all over the world, but even more so in the mentality of the people. Anti-money laundering principles are adhered to internationally, with regard to crime. Tax evasion is not considered such a crime by law, and in several countries not criminally prosecuted. However, citizens today recognise the need and their duty to pay taxes, to fund government services.

The level of the tax rates is at issue. Many individuals can not adhere to the fact that the share of the government in the economy is close to 50% in Western European countries, whereas the United Kingdom is lower and the United States is around 30%. The OECD claims that its aim through their initiative is in fact to lower taxation rates in the member countries, which will be made possible when every citizen will pay its share of taxes in its country of residence.

The awareness to these concepts comes from these initiatives. As a result, to survive and grow in the future, any OFC must offer more than exclusively tax based attraction. It must have a qualified and efficient workforce, excellent communications, be well located geographically, maintain its reputation as a safe, high quality and well regulated financial centre and offer specific services such as private banking, investment funds, holding and investment companies, regional headquarters, international tax planning using double taxation agreements, insurance and reinsurance…

This is in our view the case of the country under review, the Republic of Mauritius. It has also additional and unique advantages such as the use of two legal systems, Common law and French, or the fact that the whole population is bilingual, English and French. It has expanded and continues to adapt its legal environment, to further consolidate its claim as a sound and solid Offshore Financial Centre.

Mauritius was not included in the blacklist of the OECD or of the FATF. It offers a rather unique proposal of International Companies, with zero taxation, and Offshore Companies. These latter entities can benefit from double taxation agreements, of which Mauritius has ratified twenty-six. This unique proposal should ensure further stable growth of its financial services sector, within the renewed international rules.