Gibraltar: International Law

Gibraltar is part of the EU and its banking regulation reflects that fact. In Gibraltar, within a general statutory duty of confidentiality, authorised institutions, and their controllers and subsidiaries, and institutions of which authorised institutions are controllers, are permitted to exchange between each other information about their customers necessary to facilitate supervision of institutions on a consolidated basis, in accordance with EU law.

During 2001 Gibraltar had to defend its standards of banking regulation and financial supervision on a number of occasions, first against a scurrilous report on the UK produced by a left-wing French parliamentary group which included adverse references to Gibraltar.

Then in November of that year came an attack from closer to home, when a Financial Times editorial suggested that the UK colony was lax in its anti-money laundering and anti-smuggling practices.

The Gibraltarian Chief Minister, Peter Caruana, took particular exception to the suggestion that: 'Spain has some legitimate complaints about Gibraltar's tolerance of smuggling and money laundering.'

However, in his response to the article, Mr Caruana contented himself with reassuring FT readers that the territory's anti-money laundering and anti-smuggling laws fulfilled all European Union standards.

'We rightly enjoy a reputation as one of the world's foremost, reputable and well regulated international finance centres,' he asserted, adding that: 'Only Spain, for political reasons, asserts the contrary.'

Gibraltar was included on the OECD's list of territories with 'harmful' tax practices, but reached agreement with the OECD in March, 2002. According to the announcement: 'Following many months of discussions between the Gibraltar Government and the OECD, the Gibraltar Government...submitted a letter to the OECD committing to implement the principles of exchange of information and transparency contained in its Report on Harmful tax practices.

'The Gibraltar Government had already stated publicly many months ago that it would make the commitments to ensure that Gibraltar remained at the forefront of mainstream, well regulated international finance centres of the highest repute.'

Peter Caruana explained that: “Many of the objectives of the OECD Report are already reflected in Gibraltar’s laws and administrative practices. Gibraltar supports the raising of standards and elimination of harmful practices in all finance centres across the world. It is essential that there should be a global level playing field, that is, uniformity of application, if the objectives that we all desire are to be achieved. The OECD report represents a new international standard to which all finance centres that wish to be mainstream and internationally reputable must subscribe."

In the same month, Gibraltar received a boost when an International Monetary Fund (IMF) report announced that the jurisdiction is 'at the forefront of the development of good practices.'

The IMF praised the region's regulatory body, the Financial Services Commission, observing that it: 'carries out its duties diligently and has an intimate knowledge of the institutions under its supervision.'

During 2002, Gibraltar was frequently in the headlines because of the ongoing discussions between Spain and Britain over its sovereignty. On the whole, that process did not impinge on the question of the Rock's regulatory standards, but in June the British Government appeared to have orchestrated a campaign of media slurs against Gibraltar's financial regime.

A more amicable relationship between the two was re-established in April 2006, when Jack Straw and Peter Caruana announced that an agreement had been reached on a new Constitution for Gibraltar which, they claimed, introduced "substantial constitutional reform and modernisation" to the relationship between the UK and the Rock.

The agreement envisaged the UK retaining international responsibility for Gibraltar, including its external relations and defence, and as the Member State responsible for Gibraltar in the European Union.

However, the new Constitution also confirmed that the people of Gibraltar have the right of self-determination - the first time that this right has been enshrined in Gibraltar’s Constitution.

In December 2006, voters in Gibraltar accepted the new constitution; 60.24% of those who turned out voted 'yes', while 37.75% voted to reject it.)

Returning to money laundering matters, and with all relevant EU legislation in place in Gibraltar, there was little surprise when in November, 2002, the FATF endorsed the anti-money laundering regime in place on the Rock.

The ‘Mutual Evaluation Report on Gibraltar’ was produced by the FATF under the aegis of the Offshore Group of Banking Supervisors (OGBS), of which Gibraltar is a member. The FATF concluded that Gibraltar had a comprehensive legal framework and administrative arrangements in place to fight money laundering, and it recognised the commitment of the Government and the Authorities in Gibraltar in that regard.

The report stated:

“Gibraltar has in place a robust arsenal of legislation, regulations and administrative practices to counter money laundering. The authorities clearly demonstrate the political will to ensure that their financial institutions and associated professionals maximise their defences against money laundering, and cooperate effectively in international investigations into criminal funds. Gibraltar is close to complete adherence with the FATF 40 Recommendations.”

Unfortunately for Gibraltar, the EU was going to prove to be grit in Gibraltar's wheels as well as its defence against the FATF, in the shape of the Savings Tax Directive, and in respect of Gibraltar's response to the OECD and the Code of Conduct Committee. This latter took the form of revised corporate tax proposals, intended to move towards fiscal transparency.

The government in July, 2002, unveiled proposals to replace its company profits tax with payroll and business property occupation taxes, to be topped up with profits taxes of 8% and 35% respectively for financial service and utilities companies. Although the Ecofin Council accepted that the reforms conformed with the Code of Conduct, the then Competition Commissioner, Mario Monti announced that the proposals would need to be investigated on the astonishing grounds that they constituted unfair State aid to 'a part of the UK'.

(These corporate tax proposals were never to come to pass, however, and in 2007, it was announced that more straightforward cuts in the headline rate would instead be put in place, a process accelerated in June 2008, when the Chief Minister announced in the budget his intention to bring forward a 3% cut in corporate tax originally scheduled to take place in 2009, meaning that the corporate rate will drop by 6% that year.

"Last year, and in order to signal the Government’s seriousness of purpose in reducing corporate tax rates, I reduced corporate tax rates to 33%, and said that I would reduce it further this year to 30%, with a signalled reduction to 27% next year," Caruana told Parliament in his budget speech.

"In order to further signal the Government’s commitment I am advancing that timetable by one year, and therefore the corporate tax rate is now reduced by 6% from 33% to 27% with effect from this year that is the year of assessment 2008/09," he added.

Caruana explained that he envisages a further cut in the rate next year, before moving to the rate of between 10% and 12% from 2010, adding that: "My strong preference will favour the bottom end of that range.")

In mid-2003, Peter Caruana sought legal advice on whether the territory had a case against the UK and the European Union to block their attempts to impose the rules of the Savings Tax Directive on the jurisdiction.

However, the dependent territories crumbled during the remainder of 2003 in the face of the UK Treasury's determination, leaving Gibraltar with no choice but to accept the Directive.

There was, however, a small amount of controversy surrounding Gibraltar's position vis-a-vis the STD following its introduction in mid-2005.

Responding in July 2005 to criticism from the UK's offshore dependencies that it had managed to wriggle out of its responsibilities under the directive, the Gibraltar government argued that the jurisdiction was already within the ambit of, and fully compliant with, the terms of the European Savings Tax Directive.

"The Government of Gibraltar notes statements in the Channel Islands which refer to a 'last minute problem' and 'an initial difference of views between the UK and Gibraltar' in the implementation of the Taxation of Savings Directives between the UK and Gibraltar and demanding a 'quick resolution to the problem'. There have even been calls for UK to 'force' Gibraltar to comply with the Directive," the Gibraltar government noted in a statement.

The statement continued:

"These remarks are based on lack of familiarity with the facts. Gibraltar already is within the ambit of and complies with the Savings Directive. There has been no 'last minute problem', nor any difference of views. Nor, as has been said has 'Gibraltar signed up to the Directive'. The Directive applies, and has always applied to Gibraltar as of right and obligation because Gibraltar is an integral part of the EU. However, as was stated jointly by the Gibraltar Government and the UK Government in a joint press statement issued by them on 1st July 2005, the Directive does not apply as between the UK and Gibraltar because we are not separate member states in relation to each other."

"Nevertheless, as announced jointly on 1 July 2005 the two governments are in discussion to agree appropriate arrangements for exchange of information between them outside of the legal framework of the Directive, which does not apply between them. The two Governments have jointly announced that they are working together with a view to agreeing such arrangements during the next few months. Expectations by ill informed third parties that this should happen by the end of this month are as inappropriate as they are unrealistic."

In April, 2004, the EU Commission rejected Gibraltar's aforementioned tax reforms, arguing that they would give companies domiciled in Gibraltar an unfair advantage over their counterparts in the UK. It also took issue with the fact that since the taxes were based on payroll and the occupation of business premises, offshore companies registered in Gibraltar would be unlikely to incur any tax liability. The EC therefore effectively suggested that for taxation purposes, Gibraltar should be considered part of the United Kingdom.

The Rock's government argued that the ruling was "wrong both as to material selectivity and as to regional selectivity, and announced that "accordingly, it will be challenged in the European courts". Chief Minister, Peter Caruana slammed the EC for suggesting that the jurisdiction is fiscally part of the United Kingdom, pointing to its 1969 constitution, which gives the territory fiscal autonomy.

In January, 2005, Gibraltar’s Financial Services Commission was able to welcome the publication of a statutory review of Gibraltar's Financial Services Commission, conducted by an HM Treasury review team.

According to the FSC, four key areas of its work were considered by the review team, these being: anti-money laundering, banking, insurance and investment services. The report concluded that the Commission’s supervisory activities, for both insurance and investment services, established and implemented standards that substantially matched UK legislation and practice.

Then n March, 2006, a team of International Monetary Fund personel arrived in Gibraltar to conduct an investigation into the workings of the jurisdiction's financial system.

The object of the review was to measure Gibraltar's laws against 49 principles designed to protect financial centres against money laundering and terrorist financing. The last such IMF investigation in Gibraltar took place five years ago.

In November, 2006, the Financial Services Commission announced a comprehensive review of the jurisdiction's anti-money laundering measures.

The review saw the GFSC redraft the anti-money laundering guidance notes for the finance industry from top to bottom, with the proposed changes intended to clarify the existing laws while reducing paperwork and bureaucracy, and also encouraging finance industry participants to take a more active role in combating financial crime and terrorist financing.

Importantly, the revised rules were also designed to bring Gibraltar into compliance with the third money laundering directive, which came into force that year, and the latest Financial Action Task Force (FATF) recommendations.

In May 2007, the IMF once again endorsed Gibraltar’s robust regulatory environment, following an extensive review of the Financial Services Commission’s regulatory and supervisory practices in the fields of Banking and Insurance, as well as a jurisdiction-wide review of the Anti-Money Laundering and Terrorist Financing Regime, which also included the FSC, as well a large number of enforcement agencies and Government Departments.

In all three areas Gibraltar was found to be meeting international standards, and was found to be ahead of many onshore - and much larger - finance centres.

However, the report made a number of recommendations for further improvements, which were accepted by the government and the FSC.

In March 2008, and in spite of the relatively friendlier relations between Spain and the Rock, reports suggested that the Spanish government was set to ask the Organisation of Economic Cooperation and Development (OECD) to place Gibraltar on its 'blacklist' of uncooperative tax havens, reigniting a tax debate that many had thought was at last being allowed to die.

In a two-page article published by the Spanish El Pais newspaper, the Spanish government effectively accused Gibraltar of helping to facilitate money laundering and tax evasion through its apparent reticence when dealing with Spanish requests for assistance in fraud and fiscal investigations.

According to the report, the Spanish government found the Gibraltar police force generally cooperative in criminal investigations, if in an "underhand" sort of way.

However, it added that this cooperation tends to dry up when Spanish authorities request information about Gibraltar-based companies, banks and insurers.

In response, the Gibraltar government announced its intention to denounce to the OECD, the IMF and the EU the 'false statements about Gibraltar’s finance centre' attributed to officials in the Spanish Government in the article, arguing that the record of the Spanish authorities left something to be desired in the area of money laundering prevention.

In May 2008, though, the UK House of Commons Committee of Public Accounts published a report arguing that the Foreign and Commonwealth Office (FCO) was not doing enough to manage the risks arising from the UK's liability for the 14 Overseas Territories choosing to remain under British sovereignty, according to Edward Leigh, Chairman of the House of Commons Committee of Public Accounts.

Edward Leigh, Chairman of the Committee, observed that:

'In most of the Territories, the standards of regulation across areas such as banking, money laundering, insurance and securities are not as good as those in the Crown Dependencies. The FCO, actively supported by other relevant agencies, must do more to help the Territories, especially the smaller ones, strengthen regulation. Where necessary, this should include bringing in more UK investigators and prosecutors.'

The report, using evidence from the Foreign and Commonwealth Office and the Department for International Development, examined the oversight of offshore financial services in the Territories; the balance between UK and Territory funding and responsibilities; and governance and management of the Territories' external relations.

While the report noted that the UK government is attempting to increase capacity for oversight of Territories' financial services industries, it argued that regulatory standards in most Territories are not yet up to those in the Crown Dependencies (Jersey, Guernsey and the Isle of Man).

It also found that limited capacity reduced the ability of Territories to investigate and prosecute money laundering.

Echoing this, in late June 2008, the Commons Select Committee on Foreign Affairs in the UK published its seventh report addressing issues surrounding overseas territories and offshore centres.

On the subject of the regulation of offshore financial services, the Commons Select Committee (CSC) observed that the UK has strong reasons to ensure that Overseas Territories' financial industries are well regulated.

In March, 2009, in the context of the ongoing debate and proposals for reform of the world financial system in the run up to the forthcoming April 2, G20 London summit, the government of Gibraltar released a statement repeating its longstanding commitment to exchange of information on the basis of the current OECD model agreement.

Gibraltar said it ha concluded negotiations on the text of an agreement with the United States of America, and of the operative parts of the text with another of the largest OECD countries. The government has announced that both are due to be signed shortly. In November last year the Gibraltar government offered such agreements to all OECD member countries, through the OECD itself, and has subsequently contacted other countries through bilateral means.

Gibraltar is an integral part of the European Union, including its single market in financial services. Accordingly, all EU regulatory and supervisory directives and other laws, as well as all European Union laws, agreements and measures relating to transparency, exchange of information (including for tax purposes) and regulatory co-operation and direct taxation already apply in Gibraltar. Gibraltar’s finance centre is thus ‘on-shore’, noted the government’s release, and continued:

"Gibraltar accordingly welcomes the current initiative to ensure the raising of the bar on a broader, more global basis. We welcome the recent commitment made by some countries to the OECD exchange of information standard, which finally levels the playing field in this important area."

“Gibraltar shares the view that international co-operation in tax matters has become increasingly important, and will inevitably and necessarily be an ingredient of the new financial order that will emerge in the aftermath of the current global financial crisis. Gibraltar remains willing to participate in exchange of information on the OECD model basis”.

In October, 2009, Gibraltar was placed on the OECD’s white list of territories that have substantially implemented the internationally agreed standard, having signed 13 tax information exchange agreements (TIEAs), the latest being with Finland, Greenland and Faroe Islands on October 20.

In a statement, the Gibraltar government said that the territory is "well-placed" not only having concluded the required number of agreements, but also that the territory had concluded agreements with important countries within the OECD. The government noted that at its most recent meeting, the G20 gave notice that it was not just a matter of signing 12 agreements, but also of who they were signed with, urging territories not to enter into agreements solely with less economically relevant countries in order to quickly fulfill the quota.

“For Gibraltar this is not a ‘numbers game'. We are committed to the underlying principles of the commitments that we gave. Therefore, in addition to these 13 signed agreements, we have already negotiated and initialed several more, which will be signed when the other countries complete their internal constitutional procedures for doing so. Our offer to sign a TIEA with whatever country wants to sign one with us remains open,” the government stated.

In December, 2009, the government announced the entry into force of the International Cooperation (Tax Information) Act 2009 on December 21, 2009, making the Tax Information Exchange Agreements it had signed with the US and Greenland operational.

In May, 2010, Gibraltar’s Chief Minister, Peter Caruana underlined the territory’s willingness to enter into a Tax Information Exchange Agreement with Spain as soon as possible.

The announcement followed the conclusion of year-long negotiations on a trilateral agreement with Madrid, mediated by the UK. While it is thought that small textual alterations are still required to the TIEA, Caruana stated that "the text has been agreed, and as far as we are concerned it could be signed tomorrow. We don’t want to be seen as a threat to Spain’s public treasury."

The beginning of talks signaled a change in stance by the Spanish government towards bridging a long-standing feud between Spain and the UK; Gibraltar’s autonomy from Spain has long been a bone of contention between the Spanish and British governments.

Gibraltar has already concluded a total of eighteen TIEAs, classifying it as a territory that has substantially implemented the internationally agreed standard in transparency and information exchange.

While the Spanish authorities have said that the agreement will facilitate efforts towards reducing tax evasion, the TIEA is not expected to deter companies from registering in Gibraltar. Indeed, Gibraltar’s new 10% corporate tax regime, to come into force at the end of 2010, compares very favourably with Spain's 30% corporate tax rate.

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