The Isle of Man Commits To The FATF And Gains QI Status

In June 2000, just before the OECD published its first blacklist, the Isle of Man Government wrote a 'Letter of Commitment' to the OECD's Financial Action Task Force in which it promised to comply with international standards of transparency and mutual assistance. The Government did not immediately reveal what specific legislative consequences would follow, but it was supposed that there would be some changes to company law, and a strengthening of international treaty obligations which might be reflected in domestic law

In September 2000, an inter-governmental report was published by the Offshore Group of Banking Supervisors and the Financial Action Task Force (FATF) which praised the Isle of Man authorities for their successful endeavours in countering money laundering and related criminal activities with a 'robust arsenal' of pro-active initiatives. The report examined the effectiveness of the island's legislation, regulations and administration activities directed against money laundering. The authors were particularly impressed with plans to strengthen company sector regulations, saying that these enabled the Island to be 'at the forefront of international efforts to prevent the abuse of company structures for criminal purposes.'

The report also welcomed the creation of a new financial crime unit deigned to draw on the combined efforts and expertise of the police, customs and regulators with a pro-active enforcement strategy. And financial professionals and institutions on the island were also praised by the report - it said that the financial sector has a 'good compliance culture' which allows it to quickly highlight potentially suspicious transactions.

The report also welcomed the creation of a new financial crime unit deigned to draw on the combined efforts and expertise of the police, customs and regulators with a pro-active enforcement strategy. And financial professionals and institutions on the island were also praised by the report - it said that the financial sector has a 'good compliance culture' which allows it to quickly highlight potentially suspicious transactions.

Then in October 2000 the Manx parliament, Tynwald, announced that the island was to be incorporated on a list of countries approved by the US Internal Revenue Service under new Withholding Tax Legislation.

The legislation, which took effect from 1 January 2001, demanded that local financial institutions looking to invest in US securities must apply for Qualified Intermediary Status - those institutions that are classed as unqualified intermediaries will have great difficulty in claiming exemption from US withholding tax on behalf of their clients.

Before any financial institutions based in the Isle of Man could apply for Qualified Intermediary status, the island had to satisfy 18 "know your customer" principles, and as a result there was close collaboration between the Manx Financial Supervision Commission and the Government Treasury.

In a press release, a Treasury spokesperson stated: 'this is excellent news for the island and is a vindication to the FSC's approach to anti-money laundering procedures. We are ... grateful to our consultants, KPMG, who have assisted us with the application.'

At the end of October, as pressure from the OECD continued, the chief financial officer of the Isle of Man Treasury, John Cashen, lashed out at "sanctimonious" jurisdictions and said the island would not be bullied by international bodies over its practices as an offshore financial centre. Speaking at the annual general meeting of the Chartered Institute of Management Accountants in the Isle of Man, John Cashen said the island had been under almost constant pressure since the 1988 Edwards Report on the Crown Dependencies, but would not bow to it.

Mr Cashen levelled charges of hypocrisy against other unnamed jurisdictions and said prejudice and preconceptions often meant the Isle of Man was accused of being lax about money laundering. He added that the media had contributed to the confusion, with misleading reports over the various bodies and investigations.

Besides the Edwards report, Mr Cashen cited the Financial Action Task Force (FATF) and OECD initiatives on money laundering and harmful tax competition. The latter, he said, had seen the Isle of Man on a list of what he termed "the usual suspects" which were thought to be "unco-operative" jurisdictions. Hot on the heels of the OECD blacklist came Dawn Primorolo’s code of conduct committee for EU member states and dependencies which Brussels tried to apply to the Island despite its non-member status.

Mr Cashen suggested that many of those carrying out the investigations had little idea of how strong the Isle of Man's regulatory legislation and practice was. He also said that many investigators were taken aback by how much co-operation the government had shown.

Mr Cashen added: 'We are big enough to acknowledge these external pressures will dominate our external affairs for some time to come. We could take the moral high ground and refuse to take part in many of the reviews and exercises but we do not. We can react to them and we can cope with them. Only by being involved in them can we influence them. We have never been busier and while our growth continues we cannot afford to be complacent. But we will not be bullied by other jurisdictions who, despite their sanctimonious statements, actually have weaker regulatory legislation.'

Whilst Mr Cashen condemned the pressure put upon the Isle of Man, he said that the upside was that the island had been proven to be amongst the best in fighting money laundering. He described the island's stance as "co-operative but keenly competitive" and said the Treasury would continue to improve regulatory procedures.

The Isle of Man Commits To The OECD

In December 2000, the Isle of Man was told by OECD Deputy Secretary General Seiichi Kondo that it must make more changes to its tax regime before it could satisfy the OECD and be removed from the organisation's blacklist of un-cooperative tax havens. He had praised the Isle of Man, saying the island had done well, but the regulations governing transparency, exempt companies and the exchange of information were issues that had yet to be dealt with, it was announced at that time.

Shortly afterwards, the Manx government came up with a proposed schedule of OECD commitments aimed at ensuring the Paris-based organisation would not include the Isle of Man on its revised list of tax havens, due to be published in July 2001.

The commitments dealt with the precise "deficiencies" noted by the OECD Deputy Secretary General. They covered exchange of information with other tax authorities (instead of the introduction of banking secrecy laws), transparency and preferential tax regimes, and were in line with the Treasury tax strategy approved by Tynwald in October. The changes ensured information on the beneficial ownership of companies would be available to regulatory authorities; international companies in their current form, non-resident companies and share warrants to the bearer would be abolished, and restrictions on the ability of Isle of Man entities to do business on preferential tax terms would be removed. Changes would be phased over five years.

The Council of Ministers stressed that its offer to make changes should be counter-balanced by guarantees from the OECD that the Isle of Man would not make the 2001 blacklist, and that sufficient equivalent commitments would be made by other jurisdictions, including OECD members.

Also in December, the Isle of Man Treasury introduced new legislation to strengthen the authority of the Financial Supervision Commission (FSC) in order to more effectively regulate the island's Corporate Service Providers (CSPs). The Corporate Services Providers Bill 2000 gave the FSC, which is responsible for the licensing and supervision of the Island's banking institutions, investment businesses, collective investment schemes and building societies, powers to ensure that CSPs hold their clients' funds in accounts separate from their own, thus providing security for the clients if the CSP fails.

Furthermore the FSC would have the authority to regulate CSP applications and to investigate CSP licenceholders with regard to business practices and the provision of information.

In a press statement the Manx government described the new law as "ground-breaking", and explained the need to regulate the providers of corporate services which form a significant part of the finance sector: 'The legislation aims to protect anyone engaging the services of a CSP in the Island by imposing on CSPs standards of "fitness and properness".' By requiring all CSPs to conduct their CSP business to the highest standards through a codification of industry "best practice", the Bill also aimed to protect the reputation of the Isle of Man.

After lengthy negotiations, the Isle of Man reached an accommodation with the OECD before the end of the year, but it didn't veil its distaste at the process to which it had been subjected. At a February forum in Paris hosted by the FATF, an organisation set up by the OECD, the Isle of Man's Chief Minister, Donald Gelling, attacked the multilaterals saying: 'We seem to have witnessed a period of unprecedented international suspicion about the nature of business transacted in small financial centres. On the tax front we have had to contend with the OECD harmful tax competition report and the various European Union tax initiatives. The prejudice in some quarters has been palpable. Having been on the receiving end of more international scrutiny and ill-informed comment than I can ever recall, I relish this opportunity of responding.'

However Mr Gelling said the Isle of Man's impending removal from the blacklist marked a new beginning for the Island's financial services sector and his government would overlook what could be considered as the OECD's prejudice and threats, in order to make a commitment to building on the new consultative process. He stated: 'We are prepared to give the new process a chance to get it right.'

The Isle of Man gave the following commitments to the OECD at that time:

• Exchange of Information: The Isle of Man will not introduce banking secrecy laws, and will enter agreements with all OECD members under which it will provide information in response to specific requests on criminal and tax matters, whether or not an alleged offence is criminal under local laws.
• Transparency: Details of beneficial ownership for all business entities, trusts and businesses on the island will be available to the authorities as and when needed ('Know Your Customer' rules will apply in all cases to intermediaries); businesses will have to keep accounts and audit requirements will be in line with international standards.
• Non-Discrimination: Discriminatory tax regimes will be abolished along with the specialised corporate forms which offer them, such as International Companies, Exempt Companies and Non-Resident Companies.
• Timing: The commitments will be implemented in stages, with transparency installed by the end of 2001, tax discrimination for new company formations removed by the end of 2003, and all completed by the end of 2005.

The Island did reiterate to the OECD that its commitments were conditional in some respects on adherence by other offshore and OECD jurisdictions to similar regimes; and all commitments will be implemented through the normal Isle of Man legislative process.

In fact, the Isle of Man legislature, Tynwald, had addressed itself to the issue of the legality of what was proposed by the OECD and other international agencies in an international context, and had called on the government to seek independent specialist legal advice on international law to help it understand the legal context in which it was being called upon to operate by agencies such as the United Nations, the European Union, the International Monetary Fund, and the OECD.

This recommendation was made in a report by the Tynwald Standing Committee on Economic Initiatives, which was created to monitor the economic, fiscal and monetary initiatives of international and multilateral agencies which have the potential to significantly affect the island's economy. The Committee's first report, late in 2000, dealt with double taxation agreements and exchange of information.

The Committee questioned the international legitimacy of some of the economic initiatives undertaken by the international agencies, saying: 'this may affect both the competence to undertake the initiatives as they affect the Isle of Man and also the way the initiatives are conducted. We believe that these are considerations which could, perhaps, play a more central role in the strategic thinking of the government when responding to such initiatives. To that end we recommend that the government take independent specialist legal advice on the international law and community law issues raised in this report.'

Implementing The Commitments - Or Not?

After making its commitment to the OECD, the Isle of Man continued working to construct an offshore regime that would be acceptable to the multilaterals. Later in December, 2000, along with Jersey and Guernsey, the IOM published a consultation document, entitled Overriding Principles For A Revised Know Your Customer Framework, aimed at bolstering existing anti-money laundering regulations.

The consultation paper stated: 'Representatives of all three jurisdictions have entered into detailed discussions and, where possible, have agreed to minimise any inconsistencies in their approaches to certain specified overriding principles for a revised know your customer framework. These are to be known as the Overriding Principles, which are not an exhaustive list of issues raised by the FATF, but are major points relevant to the Anti-Money Laundering Guidance Notes that are common to all Crown Dependencies. It has also been agreed that the Islands will consult with their respective finance sectors on their Overriding Principles with a view to adopting guidance in these areas in each jurisdiction's anti-money laundering guidance notes.'

'The areas to be covered by the Overriding Principles are as follows:

'In the majority of circumstances, financial services businesses will be required to verify the identity of their customers, and if different, the principals behind their customers. No distinction is to be made between accounts opened in person and those opened remotely

'Reliable introductions must only be accepted from regulated entities subject to anti-money laundering regulations and resident in "approved" jurisdictions. Documentary evidence of identity of the underlying customer must be held in Jersey on the accepting financial services business' file

'A list of jurisdictions will be agreed by all three Crown Dependencies although each will have discretion to draw up from the agreed list their own list of "approved" jurisdictions

Financial services businesses must introduce a progressive client review programme

'Exemptions for certain postal, telephonic and electronic business will be restricted to certain businesses in specified circumstances.'

The directors-general of the Financial Services Commisssions of Guernsey, Jersey and the Isle of Man said in a joint statement: 'This consultation paper demonstrates the Crown dependencies' determination to work together to defeat money laundering. Our existing defences have all been endorsed as robust and effective. This further clarification of key principles and the tightening of standards will be a useful further reinforcement of those defences.'

In February 2001, in a six-page article in the FBI's Law Enforcement Bulletin, the Bureau praised the offshore financial centres of the Isle of Man and the Channel Islands for their 'willingness to cooperate with and provide assistance to foreign authorities.'

The article, written by Special Agent Mark Ferbrache, assistant legal attaché based in London, explained that most FBI fraud investigators had tended to view the Channel Islands and the Isle of Man as 'loosely regulated tax havens ... which makes the islands the choice of criminals to launder their illegal gains.' But the 1998 Edwards report into the crown dependencies and a survey conducted in 1999 by the FBI itself have changed the FBI's perception of the financial centres.

The FBI review focused on the islands from a law enforcement point of view and praised the "significant contributions" made by the Islands' law enforcement agencies, 'to improve law enforcement cooperation in the global fight against fraud and money laundering. Today, law enforcement agencies in the islands have established informal gateways to share criminal intelligence on a regular basis with the FBI.'

Mr Ferbrache said the FBI had particularly welcomed the role that the islands can now play in international fraud investigations. He stated: 'The consensus of these reviews found that the islands have a well-regulated financial industry, money laundering legislation in place and a demonstrated willingness to co-operate with and provide assistance to foreign authorities.'

The article concluded by describing the attitude of the islands as "robust" in the international fight against crime and asserts: 'For years authorities have agreed with the widely-held notion that these areas are maverick centres of thinly regulated financial activity attracting money launderers and impenetrable by law enforcement. Fortunately,' wrote Mr Ferbrache, 'the two reports by outside evaluators have dispelled this long-standing myth.'

Later in February 2001, Financial Supervision Commission chief executive, John Aspden, said that abuse of corporate services was "increasingly more difficult" now that the Isle of Man government had endeavoured to tighten up its financial regulations in this regard.

He was quoted in the press as saying: 'From the corporate point of view abuse is increasingly more difficult to arrange through the Island. Corporate service providers will be licensed and they are already required by anti-money laundering legislation to "know their customer"'.

He continued: 'This knowledge will need to extend to the purpose for which client companies are established and, to the extent that any of the CSP's officers are involved in the subsequent running of the companies, to monitoring and, if necessary, reporting any "suspicious transactions"'.

Fishing Expedition Dismissed

Whatever the IOM's intentions for the future were at that point, existing Manx law was far from permissive in terms of transparency: in a notable judgement in May 2001 the Isle of Man Chancery Court dismissed an application by Irish court-appointed inspectors to inspect the books of the Douglas branch of National Irish Bank, calling it 'a fishing expedition'.

The inspectors, Mr Justice John Blayney and Tom Grace, were appointed by the Irish High Court several years ago with terms of reference which included the investigation of suspected ‘improper charging of interest to account of customers, improper charging of fees to accounts of customers and improper removal of funds from accounts of customers’.

The application to the Manx court sought access to a list of deposit accounts at the branch, the names and addresses of the account holders together with all account balances.

The 11-page judgment delivered by Deemster Cain discussed whether precedents existed to give the Court the power to make such an order in Manx law, and the propriety of giving details of the accounts of innocent third parties to the proceedings.

One such precedent was in the Chancery Court in 1979 when officers of the Inland Revenue came to the Island looking for permission to inspect and take copies of books in the Manx branch of Barclays Bank. Deemster Roy Eason had at that time refused the order saying the application was in respect of legal proceedings in Wales and could not, therefore, be make under Manx law, which only covered proceedings within the Island.

Deemster Cain observed that no notice of the application had been given to accounts holders in the NIB. ‘I am bound to say that I think the practice of making orders ex parte in respect of accounts of persons who are genuinely third parties, unconnected with the proceedings is a most undesirable one,’ he added.

The Deemster quoted other precedents ruling that such orders should be strictly limited and not be allowed if they could be regarded as ‘fishing licences’ into the affairs of third parties; he said that in the present case, the details sought by the inspectors were an intrusion into those affairs and were ‘in the nature of a fishing expedition’.

His judgment concluded: ‘For these reasons I consider that even if this court had power to make an order ... in relation to the investigation into the affairs of the bank, it would not have been appropriate to have made an order in the terms requested by the petitioners.’

Some reassurance for those who fear that the FATF and the OECD between them have stripped away legal protections enjoyed offshore!

In a related development, Tynwald gave a statutory footing to the common law practice of granting free-standing injunctive relief in aid of foreign jurisdictions. A new section 56B of the High Court Act which came into force on January 1, 2001, allows the Manx courts to grant interim relief in cases where proceedings have been instigated off-island. 'It is also envisaged that the enforcement of foreign judgements will become wider in scope in terms of the type of judgements and the countries of origin which will be recognised,' said a spokesman.

Changes To The Tax Regime?

By June 2001 it was clear that the OECD's initiative was going to be limited to transparency and information exchange aspects of 'offshore', and the jurisdiction felt able to begin to address necessary reforms to its offshore regime in relative freedom.

A sharp decline in the number of company formations of about 40 per cent in the previous six years had led the government to look into ways of establishing an alternative to the tax exempt company. Jane Bates, head of companies supervision at the FSC, said: 'I am hoping to set up a working party in the near future to consider the issue,' and added that an assessor from the Income Tax division was 'looking very actively at an alternative to exempt companies.'

Ms Bates said the decline could be attributed to the controversy surrounding the OECD 'harmful tax competition' initiative which had deterred some companies from locating offshore. But a senior bank official said: 'That would be a fair argument were the problem applicable to all financial service centres. There has been a noticeable move by existing businesses from the Isle of Man to Gibraltar in the last six months. We need to find another way to make ourselves competitive.' He added that recent wage inflation on the Island could not allow it to keep trading on its reputation as a 'low-cost' centre, particularly when compared with the Island's Crown Dependency counterparts, Jersey and Guernsey.

Paul Beckett, a director of Mann & Partners attorneys, claimed that the decline in incorporations appeared to reflect the increase in the number of companies that were struck-off. 'The question has been raised whether business is being driven away because clients fear a climate of over regulation. The FSC plays a vital background role. An emphasis needs, however, to be placed on the liberal commercial business climate which exists in the Isle of Man…. As long as the FSC continues quietly to take out the bad guys it will be doing the Island a very considerable service,' said Mr Beckett.

He added: 'The Isle of Man needs to encourage long-term commitment on the part of those forming companies here and this is perhaps reflected best in the stated intention of the Treasury to reduce resident taxation of company profits to 10 per cent within the next year or so. Although the Isle of Man must never be complacent, perhaps comparisons made with countries such as the BVI and the Cayman Islands, which would hardly have reason to exist in financial terms if there were no finance sector present, are misleading.'

Does The IOM Have Secrecy Laws?

In August 2001 Treasury Minister at the time, Richard Corkhill, wrote to Ireland's Sunday Independent newspaper, among others, condemning their coverage of court proceedings in Ireland over allegations that financial institutions in the Isle of Man had helped Irish customers avoid paying tax.

Mr Corkhill was particularly angry at the suggestion that the Isle of Man had 'secrecy laws' governing the Island's financial institutions. He wrote: 'The Isle of Man has some of the strictest regulation against criminal abuse in the world, which has been specifically designed to keep out "hot money". Our economy is the fastest growing in Europe with a growth rate of 13.5 per cent. We do not need ill-gotten gains and we do not want them.'

He continued: 'Recent (newspaper) reports have spoken of the Isle of Man's "secrecy laws". This is simply not true – we have no such laws. Of course our legislation protects customer confidentiality in the same way it does in most other reputable jurisdictions. However, we have always made it clear that we will co-operate fully with investigations into criminal activity.'

In his letter, Mr Corkill concluded: The "ease" with which one is purported to be able to open an Island bank account involves providing independent proof of your name and address, which in turn has to be separately verified. Potential customers must also provide details of the source of the funds – if this is not verifiable the account is likely not to be opened. Accounts are monitored closely to guard against any criminal activity.'

'The word "offshore" seems to make people get over-excited. But contrary to popular myth, it is not synonymous with "illegal", we live in a global economy, business people travel and trade across the world. To hold a bank account in a jurisdiction accustomed and adapted to such lifestyles is not really that strange.'

September 11th 2001

In the immediate aftermath of the terrorist attacks in the US, the Isle of Man, like many other offshore jurisdictions, felt vulnerable.

John Aspden, chief executive of the Isle of Man's Financial Supervision Commission, expressed his concerns over the backlash against offshore financial centres in the wake of the terrorist attacks on America. Mr Aspden said the US and UK displayed a 'knee-jerk' reaction to offshore centres and hoped that the international pressure felt by the centres would lessen once the US declared hostilities towards the Taliban.

'It has certainly suited the US purposes for the time being to take an immediate swipe at offshore centres. It's something they've had on their agenda for a long while. And it hasn't just been the US, it's been the UK as well. At the moment there is a shortage of news on other fronts ... and as soon as hostilities start, it will be forgotten.'

He added: 'One of the things I am a bit dismayed about is the fact that all of this has thrown the offshore tag back into the melting pot. I think that's a shame because the Crown dependencies have gone a long way to gaining recognition.'

Mr Aspden also said it was likely that in light of terrorists funding their activities through offshore finances, the FATF would review its anti-money laundering recommendations and international standards. He commented: 'It will not happen in the immediate near term because we are going to be guided in particular by the FATF, and the FATF's working parties on some of the key issues.'

Chairman of the UK's Financial Services Authority at the time, Sir Howard Davies, said that he expected the Island would adopt more stringent regulations as the political pressure on offshore centres 'to fight terrorism and crime and for more general financial stability reasons' increases. He added: 'The competition among offshore centres is such that a loss of reputation, however caused, may lead to rapid outflow of business elsewhere. So it is preferable to bite the bullet on some of the more tricky issues and to be seen to be taking the lead.'

Meanwhile the IMF had announced plans to conduct an assessment of the Isle of Man and the Channel Islands in 2002 and Mr Aspden believed it would considerably enhance the Island's reputation as an offshore financial centre.

A Spokesman for the Island's Association of Licensed Banks (ALB) says the association welcomed the IMF review and aimed to 'continue to work closely with government and regulatory authorities to ensure that ... clients are aware we are committed to maintaining our high standards.'

The IMF report, when it finally emerged in 2003, praised the Isle of Man’s financial regulators for their “proactive” approach in achieving the required standards demanded internationally.

The report was welcomed by the Island’s then Treasury Minister Mr Allan Bell who commented: “The report is a positive and welcome independent endorsement of the regulatory arrangements which we have in the Isle of Man. It is probably the most authoritative and comprehensive report which has ever been prepared on our regime and will therefore stand us in very good stead in attracting new business to the Island.”

The report confirmed that the jurisdiction has attained a high level of compliance in all major areas including banking, insurance, securities, anti-money laundering and combating the financing of terrorism.

“This is another clean bill of health for the Isle of Man from a major global organisation. Combined with our planned move to a zero rate of income tax for companies in 2006, and our triple-A credit rating, it underlines the Island’s reputation as an internationally responsible, highly competitive and secure base for doing business,” said Mr Bell.

Almost the only critical note in the IMF report concerned the Financial Services Commission, which the IMF thought was not sufficiently independent of government, and in June, 2004, the Isle of Man Treasury confirmed that changes would be made to the structure of the FSC.

In July, the FSC's Chief Executive, John Aspden noted the IMF’s report, which found a very high level of compliance with relevant international standards and represented an important milestone for the jurisdiction internationally. Remarking on the FSC’s twentieth anniversary, Mr Aspden highlighted the fact that the Commission was one of the first regulatory bodies established as a regulator of different markets, a model which has since been followed and adapted in many other jurisdictions. He said that the FSC's supervisory role would be strengthened in the months to come.

The EU's Code Of Conduct Committee

Although the Isle of Man's chief preoccupation during 2001 had been with the OECD, the EU's own brand of 'fiscal colonialism' also had to be reckoned with, particularly in the form of the Savings Tax Directive and the proposal for EU-wide information exchange.

Richard Corkill, then the Isle of Man's Chief Minister, officially acknowledged in January 2002 that the IOM could have to meet the European Union 'part way' in negotiations on the 'Code of Conduct' Committee's list of 'harmful tax practices', which included several aspects of the Island's offshore regime, and on the EU's attempts to persuade key offshore jurisdictions to agree to an information sharing regime on savings interest paid to EU residents.

Presenting his annual address, he said: "In the final analysis it may prove necessary for us to make changes, in our own interests, to meet the European Union part way on the issue of taxation, but that remains to be seen, and I would not want to be pre-empt the outcome of our discussions. In the meantime I can assure Tynwald that it will have the final say on our stance on the European tax initiatives.'

Until then, the IOM Government had publicly refused to acknowledge the full extent of the pressures to concede to EU demands on the Tax Code of Conduct and the Savings Directive. Although constitutionally, the UK had no right to dictate Island tax policy, the UK committed the Crown dependencies to the EU demand and was negotiating on their behalf; in practice the UK could bring considerable pressure to bear on the Island.

Mr Corkill said: 'The outcome of the EU tax initiatives remains uncertain. We continue to keep a close watch on developments and we are in discussions with the UK government. We have no wish to create difficulties for Europe, nor do we want to become the target of European countervailing measures by standing wholly outside international developments. But equally we have no intention of surrendering our autonomy or undermining our economy.'

Luckily for the Isle of Man, in stark contrast to Gibraltar, there was no colonial power other than the UK wanting to assert sovereignty, so that the threat of complete independence was a realistic weapon in obliging the UK to reach an acceptable compromise with the EU. Eventually the Isle of Man defused the 'Code of Conduct' threat by committing itself to a zero rate of corporation tax.

Last Word On The OECD?

When the OECD issued a 'final' report on its unfair tax competition initiative after the February 28th 2002 deadline, one that was widely seen as an admission of failure, the Isle of Man announced politely that it welcomed the report. Ian Kelly, the Isle of Man Tax Assessor commented that:

'The expansion of the global economy depends on international finance centres - both onshore and offshore - combining a highly competitive, entrepreneurial environment for business with a quality of regulation that safeguards a company's reputation. That is why we support the OECD's efforts to ensure that tax competition is fair as well as keen.'

However, he reiterated the concerns expressed by several offshore jurisdictions, that the international tax initiative operate on a 'level playing field', asserting that equality of treatment is 'absolutely fundamental to the success of the initiative.'

An OECD spokesman responded by announcing that: 'We are looking forward to the Isle of Man's continuing participation on the basis of their commitment which has been made and accepted.'

Between 2003 and 2006, the 'Global Forum' which had resulted from the pressure put on the OECD by offshore jurisdictions trundled slowly forwards, achieving very little.

After an OECD meeting in Ottawa in October, 2003, to review progress, Treasury Minister, Allan Bell, said that the Isle of Man welcomed the outcome of the meeting. Announcing that the multilateral body's recognition of the need for greater fairness with regard to its tax information sharing initiative was "encouraging news" for the jurisdiction, Mr Bell explained that: "The Island was one of the first non-OECD countries to commit to the OECD programme, in accordance with our policy of constructive engagement with such international initiatives. But we made it clear from the outset that we expected a level playing field - in other words, that the OECD's requirements should apply equally to countries large and small around the world."

He continued: "The OECD's confirmation of the importance of the level playing field principle is very much in line with what the Isle of Man has been saying all along, and we look forward to further progress on this issue."

The meeting of the Global Forum which took place in Berlin in June, 2004 resulted in little more than a decision to stage the next meeting at the end of 2005, and in the eyes of most jurisdictions represented recognition that the 2006 target date for the implementation of the OECD's international tax law agenda was unattainable.

A Flurry Of Tax Information Exchange Agreements

The second half of 2002 saw the Isle of Man burnishing its international credentials by negotiating Tax Information Exchange Agreements (TIEAs) with the United States and Germany. Although the IOM's responsibilities towards the OECD had come to seem vague, the island felt itself obliged to enter into a TIEA with any OECD member state or committed territory which requested one. However, no sense of duress has been felt on the Island, according to a Treasury statement, which announced that: 'In each case the discussions have been amicable and ways are being explored for establishing closer economic ties.'

The government insisted that all the TIEAs would include safeguards to ensure that 'fishing trips' for tax details cannot take place: 'The model being adopted provides for exchange of information based upon a formal request being received by the competent authority in the Isle of Man. A request must be made on an individual case basis and the subject of the request must be under investigation in the requesting jurisdiction . . . the requesting country must also have pursued 'all means available' within its own area of jurisdiction, and strict confidentiality provisions are contained within the TIEAs to ensure that information is not passed on to third parties.'

In October, Treasury Minister Allan Bell, signed the TIEA with the United States, saying: “Today co-operation between Governments is more important than ever as we work to ensure that no safe haven exists - either onshore or offshore - for funds associated with activities such as money laundering, terrorist financing or tax evasion.

“Equally the Isle of Man believes that the expansion of the global economy depends on both onshore and offshore international financial centres combining highly competitive entrepreneurial environments for business with a quality of regulation and stability.”

The Isle of Man sets out to be a well regulated and responsible jurisdiction and is financially strong, as evidenced by its Triple A rating with Moody’s and Standard & Poors. It has been recognized by the FATF as being ‘at the forefront of international efforts to prevent the abuse of company structures for criminal purposes’.

Allan Bell continued: “The ability to exchange information in relation to criminal matters already exists between our countries via the Department of Justice in the United States and the Attorney General in the Isle of Man.

“The Island’s early commitment to OECD has permitted us to play an active role with the United States and other member countries in the development of a model agreement on which the agreement being signed here today is based. This provides an alternative route to obtain information in relation to criminal tax matters and also provides for a timetable for this to be extended to include civil tax matters.

“The development of a network of such agreements between member states and committed jurisdictions, whether on a multilateral basis, or a bilateral basis as adopted by the Isle of Man, will in due course evidence the existence of a new and truly international standard on Exchange of Information.

“The Isle of Man will continue to support the development of such international standards and seek to foster business relationships with other countries based on those standards and we look forward to participating in the ongoing discussions with the United States to further develop and establish closer economic and fiscal ties.”

The provisions of the agreement had effect from 1 January 2004 with respect to criminal tax matters relating to taxable periods beginning on or after 1 January 2004; and from 1 January 2006 with respect to all other tax matters relating to taxable periods beginning on or after 1 January 2006.

In February, 2005, the the Central Bank of the United Arab Emirates signed a Memorandum Of Understanding (MOU) with the Isle of Man's Financial Supervision Commission (IOMFSC).

The MOU, signed in Abu Dhabi by His Excellency Sultan Bin Nasser Al Suwaidi, governor of the UAE Central Bank and John Aspden, chief executive of the Financial Supervision Commission, aims to establish a general framework for mutual cooperation and assistance between the UAE Central Bank and the IOMFSC.

The agreement provides a framework for regulatory cooperation through the exchange of information and cooperation in the field of on-site examinations of entities subject to regulation in both jurisdictions. Such cooperation is intended to ensure more effective supervision, while avoiding potential duplication and possible conflicts that may arise from the application of differing regulatory practices.

Speaking following the signing of the MOU, Mr Aspden observed that: "We are developing strong business links with this region and co-operation between regulators is a foundation of effective supervision. We are honoured and delighted that our excellent relationship with the UAE Central Bank has now been further reinforced by this MOU."

The EU's Savings Tax Directive

Without doubt, the most important developments for the Isle of Man's banking confidentiality regime between 2002 and 2005 concerned the tangled history of the Savings Tax Directive. After the Directive took more or less final form in early 2003, Treasury Minister, Allan Bell had to admit that Savings Tax Agreement had been a 'fudge'. 'It is a very confused situation and what we have ended up with is totally illogical,' he observed, continuing: 'There is no fairness and only a nominal tilt towards a level playing field, but it is a set of circumstances we have got to live with. It is not what we would have wished but we have to accept it.'

It took months for the Isle of Man, along with Jersey and Guernsey, to reach a decision on how it would respond to the Directive, but eventually, it was revealed that all three jurisdictions would, from January 2005, levy a withholding tax rather than exchange information on the savings interest of EU residents.

Despite what seemed to be a firm decision on the part of government, banking experts in the Channel Islands and the Isle of Man feared that the UK's Crown Dependencies would nonetheless come under pressure from the United Kingdom to exchange tax information. President of the Association of Licensed Banks in the Isle of Man, Sean Dowling explained at the time that: 'We anticipate that the UK, which was never happy with the withholding tax route, would be pushing the Crown Dependencies for a greater sharing of information.' He went on to add that: 'There were mixed opinions in the Isle of Man about which way to go, but it is fair to say that it would be confusing, having chosen withholding tax, to go down another route for another jurisdiction. Yet, as we all said, we would be quite happy to move forward if there were a real level playing field.'

Questioned as to whether the UK would indeed be pushing for greater information exchange with its dependencies despite the agreement reached by European Union members on this issue, a spokesman for the Inland Revenue announced menacingly that: 'The UK has always made it plain that in principle we regard the exchange of information, on as wide a basis as possible, as the most appropriate way forward.'

In December, 2004, the Manx Association of Licensed Banks called on the jurisdiction’s finance sector to adopt a more coordinated approach to the Savings Tax Directive, which it believed would have a significant impact on the Manx economy. Association president Phil O’Shea appealed to all elements of the island’s finance community, including corporate and trust services providers, the life sector, the fiduciary sector and captive insurers to use their collective leverage to the economy’s benefit.

“We believe there are a number of significant issues that the Island has got to contend with if it is going to continue to be a viable and successful jurisdiction in five to 10 years' time. Some of those issues have yet to manifest themselves,” stated Mr O’Shea, warning that the erosion of the island’s deposit base was likely to be “significant.”

He predicted that the savings institutions, such as current and former building societies, would be the hardest hit by the directive, whilst private and trust banks would feel the consequences the least. “But certainly our anticipation is that we will see a reduction in deposits and of course that may well have an impact through to tax take,” O’Shea cautioned.

The IOM's 'Know-Your-Customer' Regime

The Isle of Man said that it had avoided some of the 'KYC' excesses that have taken place in the UK. Chris Eaton, chairman of the Association of Corporate Service Providers (ACSP) noted for instance a "sharp contrast" in the way that the Isle of Man's FSC and the UK's FSA (Financial Services Authority) go about handling the setting up of corporate bank accounts.

Eaton observed that the situation in the UK is one in which corporate service providers are somewhat "overburdened" with regulation, although he points out that this was not unlike the situation the Island found itself in some three or four years ago.

"Now we've experienced that 'first hit' of onerous regulations, there's a more mature approach here in the Island, which is seeing those regulations being interpreted in a sensible and commercially-focused way, rather than the 'knee-jerk' reaction by the banks in the UK, where the FSA, in its strict interpretation of the regulations, has fined more than one high street bank recently for not demonstrating adequate levels of due diligence," said Mr Eaton. "Unlike our UK counterparts, CSPs here are regulated and this allows one regulated entity (the CSP] to introduce business to another regulated entity (the bank] in a less burdensome manner than is currently available in the UK," he added.

The ACSP chairman cited examples such as the requirement for banks in the UK to meet the beneficial owners of accounts face-to-face which can be hugely impractical, given the global spread of many beneficial owners.

In August, 2003, FSC chief executive John Aspden indicated that a review may need to be undertaken of the various international measures relating to anti-money laundering, but said that the Isle of Man would follow the UK in not introducing compulsory retrospective Know Your Customer checks. Under existing rules, firms in the United Kingdom and the Isle of Man are expected to identify new customers by carrying out the KYC tests, but this does not apply to clients who came onto their books prior to the introduction of the KYC rules.

According to a comprehensive global money laundering report by the US State Department issued in March, 2006: 'the Isle of Man's large and sophisticated financial center is potentially vulnerable to money laundering at the layering and integration stages. Identity theft and Internet abuse are growing segments of financial crime activity.

'Isle of Man officials should continue to support and educate the local financial sector to help it combat current trends in money laundering. The authorities also should continue to work with international anti-money laundering authorities to deter financial crime and the financing of terrorism and terrorists.'

Developments In 2006-07

The Isle of Man's 2006 budget in February, 2006, included a package of measures to stimulate the inflow of investment and business to the Island, including the introduction of zero corporate tax as of 5th April 2006.

This followed the 2005 Budget, in which a zero rate of income tax was announced for six sectors of the Island's economy - manufacturing, film, e-gaming, tourist accommodation, agriculture and fishing.

Treasury Minister Allan Bell confirmed at the time that the Island - which already had the zero rate for insurance, fund management, space and satellite technology and shipping - would introduce it as a standard for business from April 2006, with a 10% rate of tax for 'financial institutions'.

This includes companies holding banking licences and those receiving income from land and property in the Isle of Man (which includes rental income, extraction of minerals and property development).

In May, 2006, Irish residents were reported to have withdrawn hundreds of millions of euros held on deposit with Irish banks in the Isle of Man in the wake of the Irish Revenue Commission's campaign against offshore tax evasion.

The amount of money held on deposit in the Isle of Man by individuals resident in Ireland was said to have halved from EUR600 million to EUR300 million in the previous year alone, and fallen from almost EUR1 billion in the last six years.

In November 2006, meanwhile, the Manx government announced new type of corporate vehicle, when the Isle of Man Companies Act 2006 became Law.

The Act updated and modernised the Island’s Company Law, by introducing a new simplified corporate vehicle into Isle of Man Law. It was a development of the international business company (IBC) model, available in a number of other international business centres and is fully in line with recognised benchmarks.

In April 2007, the UK's HM Revenue and Customs announced arrangements enabling investors with offshore accounts to disclose to HMRC any income and gains not previously included in their tax returns.

The UK tax authority explained that:

"HMRC has recently obtained information about holders of offshore accounts from a number of banks and has obtained similar details through the European Savings Directive."

It continued:

"There is nothing wrong with holding an offshore account as long as you pay any tax due on the money deposited in it, and on the interest from it. If you have done this you do not need to use the Offshore Disclosure Facility."

"We want to encourage those with unpaid tax and duties to pay what they owe. Therefore, we are introducing the Offshore Disclosure Facility to help them get their tax affairs up to date."

The facility was open to those who hold or have held an offshore account, either directly or indirectly, that is in any way connected to a loss of UK tax and/or duty.

For a limited period, taxpayers could come forward and make a full disclosure of all undeclared liabilities, not just those connected with an offshore account.

It later emerged that HMRC planned to launch its clampdown on undisclosed tax liabilities in offshore accounts on 9 July - just 16 days after the 22 June notification deadline.

In July 2007, Financial Secretary to the UK Treasury, Jane Kennedy announced details of the UK's treaty negotiating priorities for the year to 31 March 2008.

Ms Kennedy stated that:

"I am pleased to announce the programme of work on double taxation conventions for the year to 31 March 2008. The UK has a comprehensive network of bilateral conventions and is committed to maintaining and strengthening this network. Double taxation conventions provide an agreed framework for individuals and businesses when dealing with overseas tax systems."

In a statement on the matter, HMRC revealed that that:

"We plan to complete work on new DTCs with the Faroes, Macedonia, Moldova, Slovenia and Thailand; and on Protocols with Australia, Mexico, New Zealand, South Africa and Switzerland. We also plan to complete work on new Tax Information Exchange Agreements (TIEAs) with Jersey, Guernsey, the Isle of Man, Anguilla, Bermuda and the British Virgin Islands."

In September 2007, following an announcement by the HMRC that it would be further pursuing UK taxpayers with undeclared offshore accounts, Isle of Man Finance urged those affected to get urgent tax advice.

Speaking to the IFAOnline news service, a spokesman for Isle of Man Finance explained that:

“The Isle of Man Government is aware of this situation and recommends that clients make themselves aware of their tax position and if necessary seek professional tax advice, similarly that the Island’s banks strongly recommend that their clients seek professional tax advice.”

HMRC had hoped to flush out many of the suspected holders of accounts with undeclared money in an amnesty earlier in the year. However, this was not nearly as successful as the tax authority would have liked, with only 50,000 individuals choosing to take advantage of the so-called Offshore Disclosure Facility, which capped penalties at 10% of any unpaid tax for successful applicants.

This has left the Treasury with the onerous and costly task of pursuing the remaining 350,000, many of whom no doubt live in foreign countries.

In October, 2007, an association of Nordic countries concluded a package of Tax and Information Exchange Agreements (TIEA) with the Isle of Man.

The TIEA negotiations which came to fruition provide for the exchange of information between governments on a case-by-case basis, as the Manx government seeks to reinforce its global reputation as a well-regulated financial centre.

A similar deal between the Isle of Man and the Netherlands came into operation in August 2006 and was then hailed by the Manx government as the first of its kind between a small international business centre and an OECD member and a major boost to the island's international reputation.

"Fiscal agreements, in particular, foster bilateral trade and investor confidence in both countries," Manx Treasury Minister Alan Bell noted at the time.

The Nordic countries started joint negotiations in July 2006 to conclude tax information exchange arrangements with jurisdictions that have made a commitment to apply the OECD standards on transparency and exchange of information in the tax area.

In June of this year, they announced that "substantial progress" had been made with a number of jurisdictions, including Aruba, Isle of Man, Jersey and the Netherlands Antilles. Talks between the Nordic states and Bermuda, British Virgin Islands, Cayman Islands and Guernsey were also planned.

The taxation and economic co-operation agreements reached this week have been signed with the seven members of the Nordic Council, namely Norway, Sweden, Finland, Iceland, Denmark, Greenland and the Faroe Islands.

The package of 28 agreements was signed at a ceremony in Oslo.

The package included:

• Tax information exchange agreements based on the OECD (Organisation for Economic Co-operation and Development) model of exchange of information on request on a case by case basis.
• Shipping and aircraft taxation agreements ensuring that a relevant business based in the Isle of Man will not be taxed in the Nordic countries so long as it is conducting international trade.

In November 2007, it emerged that businesses in the Isle of Man which accept cash payments worth EUR15,000 or more would have to comply with new anti-money laundering legislation in place in the jurisdiction.

The Criminal Justice (Money Laundering) Code 2007 (the ML Code) came into effect on September 1, 2007. The ML Code replaced the previous Anti-Money Laundering Code 1998, and brought in changes to anti-money laundering and counter terrorist financing requirements. In addition, where previous legislation had focused on the financial services sector, the ML Code brought additional businesses within its remit, ensuring that the Isle of Man complies with international standards.

Home Affairs Minister, Martyn Quayle commented:

"Important changes to the legislation mean that any business accepting cash payments equivalent to 15,000 euros or more will have to keep records for a minimum of five years and identify the customer. While banks and the finance sector generally have been used to complying with the legislation for some time, we appreciate the need to publicise the changes to bring it to the attention of businesses including shopkeepers, auctioneers, car dealers and jewellers – for example – who may not realise they must now comply with the Money Laundering Code."

The Home Affairs Department revealed that it is launching a publicity campaign, in partnership with the Financial Supervision Commission (FSC), to ensure that businesses which accept cash payments of 15,000 euros or more are aware of the requirements under the ML Code. All businesses are due to receive a leaflet later this month giving details of the ML Code and its requirements.

The ML Code states the amount in euros in order that Tynwald does not need to amend it each time the currency’s value fluctuates against the pound.

Changes to the ML Code were made in order to bring the Isle of Man in line with international standards.

Developments in 2008-09

In March 2008, the Isle of Man parliament, the Tynwald, week ratified taxation agreements with the Nordic Council countries of Denmark, the Faroe Islands, Finland, Greenland, Iceland, Norway and Sweden.

The agreement was signed by Manx Treasury Minister, Allan Bell, in Oslo on October 30th 2007, and was ratified by the Tynwald on March 12th, 2008.

At the time of signing in October 2007, Paolo Ciocca, Chair of the Organisation for Economic Cooperation & Development’s (OECD) Committee on Fiscal Affairs, commented that the agreements demonstrate that the Isle of Man is making good progress towards achieving international legal and regulatory standards.

He went on to commend the Isle of Man and the Nordic economies for the "innovative multilateral approach they have taken to their negotiations".

"This has been very effective in facilitating the conclusion of seven agreements in a relatively short period of time," he noted.

Commenting on the agreements Isle of Man's Chief Minister, Tony Brown said: “The Isle of Man has a thriving and varied economy that is underpinned not only by the government’s understanding of our international obligations as a small but significant member of the global financial community, but also by our commitment to give investors in the Island stability, confidence and an environment in which they can prosper."

"Our agreements with the Nordic Council countries further emphasise our proactive approach to international relations and international cooperation.”

Treasury Minister Bell added: “The Isle of Man is increasingly recognised as a country that has a distinct approach in the field of international tax cooperation and a voice that is listened to around the world. As Treasury Minister I look to the interests of the Isle of Man first, but no one should be in any doubt that I and our government also look to the interests of our economic partners far and near."

Bell concluded that: “I expect that the Isle of Man will be signing more international tax agreements in the near future and that, as with the Nordic agreements, we will move rapidly to bring them into force. As confidence in the Island grows, our people, businesses and country will flourish further."

Bell was right. The following month, the Isle of Man concluded tax agreements with the government of Ireland.

The agreements - the first of their kind between Ireland and an international financial services centre - were signed at a ceremony in Dublin by Bell and Ireland’s then Deputy Prime Minister and Minister for Finance, Brian Cowen.

The two agreements are:

• A tax information exchange agreement based on the Organisation for Economic Co-operation and Development (OECD) model of exchange of information on request on a case by case basis; and
• An agreement for affording relief from double taxation with respect to certain income of individuals and establishing a mutual agreement procedure in connection with the adjustment of profits of associated enterprises.

Minister Bell commented:

"Ireland is one of our closest neighbours, and it is essential that we work together in a spirit of friendly co-operation to further the interests of both countries."

"The Isle of Man understands its obligations as a financial centre that is part of the global economic community. These agreements draw to a close a period during which the Irish government had concerns that its citizens and businesses might abuse the Isle of Man’s financial services and evade taxes at home."

"This normalising of relations will provide a platform for significantly strengthening our business and economic ties with Ireland. The specialist services in the Isle of Man can complement those in Ireland, and I now look forward to seeing many new opportunities develop for business between our countries."

In a brief speech at the signing ceremony, Minister Bell further announced that:

"The Isle of Man is meeting the international benchmark standards and fulfilling the resulting obligations as a small but significant player in the global economic community. These standards are becoming increasingly vital, and I hope, as I am sure that you do, that they are adhered to by all countries wishing to attract top-class investment and business to their shores."

He closed by stating that:

"These agreements represent the start of a new phase in relations between Ireland and the Isle of Man and will lead, I am sure, to the further development of our political, economic and cultural ties."

Later that month, the UK House of Commons Treasury Committee announced that was undertaking an inquiry into offshore financial centres and their impact on global business and investment, and the international fight against money laundering. The inquiry, formed part of the committee's ongoing work into Financial Stability and Transparency.

Among its 11 questions, the inquiry asked: to what extent, and why, are Offshore Financial Centres important to worldwide financial markets?; to what extent does the use of Offshore Financial Centres threaten financial stability?; and (the key question as far as the UK Treasury was concerned) how transparent are Offshore Financial Centres and the transactions that pass through them to the United Kingdom’s tax authorities and financial regulators?

The Isle of Man published its response to the inquiry in July and Treasury Committee members took up an invitation to visit the island to learn more about the Island’s position.

"The Treasury Committee inquiry is a valuable opportunity to explain to an important UK parliamentary body that the Isle of Man is a responsible international finance centre, and is recognised as such by the OECD," said Chief Minister Tony Brown.

"In our submission, and in our meetings with the Committee, the Isle of Man Government has been able to show that the Island is at the forefront of small jurisdictions working with the OECD to improve the exchange of tax information."

He added: "We have demonstrated that the Isle of Man complies with the highest international standards of financial regulation, as confirmed by the IMF, and is acknowledged by authorities in the United States and elsewhere as an active partner in combating global financial crime."

"The Committee has also learned that the Isle of Man, like the UK, has normal commercial confidentiality but no banking secrecy laws, and that the Island is a significant gateway to the City of London, channelling billions into the City every year."

The Isle of Man consistently argues that it is one of the most transparent financial centres, either onshore or offshore. In June 2008, the IoM Financial Supervision Commission held an event to publicise the jurisdiction's new anti-money laundering laws, the Criminal Justice (Money Laundering) Code 2007 having replaced the previous Anti-Money Laundering Code 1998.

Minister for Home Affairs, Martyn Quayle, commented that:

"It is crucial that Island businesses are aware of their responsibilities. Those in the finance sector have been required to comply with anti-money laundering legislation for some time, but recent changes mean that many more businesses are affected."

The positive part played by the Isle of Man in the global war against financial crime was been highlighted by a key official from one of the US Treasury’s main anti-money laundering agencies in June 2008.

William F. Baity - Deputy Director of FinCen, the Financial Crimes Enforcement Network – spoke of the Island’s involvement with his and other agencies when he delivered the Chief Minister’s International Lecture

Mr Baity told 120 guests from the private sector and Government that the Isle of Man regularly provided information to FinCen, adding that: "What you are doing is helpful in our fight against financial crime and I think that is important."

However, on the issue of the island's international reputation, Mr Baity, a former chairman of the Egmont Group, advised a move away from the label ‘offshore’, which, he argued, had connotations that could not be overcome, to something like ‘independent financial centre’.

"Perception is reality and you will struggle as long as people talk about offshore" he observed.

He also suggested that the Isle of Man use its maturity and experience in financial regulation to help less developed jurisdictions around the world.

In terms of communicating the reality of the Isle of Man to the US Government, he stated that there were many different components of the administration in the States, with constantly changing personnel. It was therefore vital for the Island to keep going back to the US, and to a range of bodies, to get its message across, he stressed.

In July 2008, the Isle of Man's Financial Supervision Commission announced the publication of its Anti-Money Laundering and Countering the Financing of Terrorism Handbook, with the exception of Section 9.

Section 9 of the AML/CFT Handbook will comprise sector specific guidance which will be drafted in due course with further industry consultation.

The AML/CFT Handbook has been drafted to provide guidance for the Commission’s licenceholders on the requirements of the Criminal Justice (Money Laundering) Code 2007, and the anti-money laundering and countering the financing of terrorism provisions in Part 9 of the Financial Services Rule Book 2008.

The AML/CFT Handbook came into effect on 1st August 2008 to correspond with the coming into effect of Part 9 of the Financial Services Rule Book, and replaced the Money Laundering and Prevention of Terrorism Guidance Notes (April 2003) as amended on that date.

New tax agreements between the Isle of Man and the United Kingdom were signed at a ceremony in Douglas in late September 2008 by the Isle of Man’s Chief Minister, Tony Brown and the United Kingdom’s Minister of State for Constitutional Renewal, Michael Wills.

The governments agreed to amend the provisions of the 1955 double taxation agreement by adding provisions on the taxation of income from pensions and a mutual agreement procedure.

Once the new provisions are in force, many pensions paid from the United Kingdom to people living in the Isle of Man will be taxed in the Isle of Man only. In addition taxpayers will be given new rights under the agreement to ask one government to intervene in order to resolve problems arising from the application of the agreement.

Naturally, an agreement to facilitate the exchange of information relating to taxes between the Isle of Man and the United Kingdom was also signed.

After the signing of the agreements, Chief Minister Brown reiterated the IoM's policy of cooperation: “The Isle of Man has taken a leading part in driving forward the development of international tax agreements, working closely with the OECD and its members, so I am pleased we have been able to conclude this agreement with the United Kingdom. It is another demonstration of the Isle of Man’s continuing commitment to taking an active and positive role in the global economy”.

In November 2007, the European Commission announced that it had adopted an amending proposal to the savings tax directive that will widen the scope of the legislation "with a view to closing existing loopholes and eliminating tax evasion."

Effective since 2005, the savings tax directive seeks to ensure that paying agents either report interest income received by taxpayers resident in other EU member states or levy a withholding tax on the interest income received. The Commission proposal seeks to tighten the directive, so member states can tax more interest payments channelled through intermediate tax-exempted structures.

The EC proposes to extend the scope of the directive to forms of income obtained through investments in some "innovative financial products" as well as investments in certain life insurances products. It also proposed to simplify the technical operation of the directive to make it more "user friendly and efficient."

In November 2008, Chief Minister Tony Brown welcomed the prospect of yet another review of Britain’s Crown Dependencies and Overseas Territories announced by United Kingdom Chancellor of the Exchequer Alistair Darling in his 2008 pre-budget statement.

Mr Brown commented:

“The announcement of this review across the three Crown Dependencies and 14 Overseas Territories is understandable in terms of the turbulent economic climate being experienced around the globe.

“As far as the Isle of Man Government is concerned we welcome this exercise as another opportunity to show that the island is well regulated, financially stable and internationally responsible.”

“The Isle of Man has a strong record of compliance with the highest global standards in the areas of financial regulation, taxation, transparency and international co-operation. This has been confirmed by bodies such as the IMF and the OECD.”

Following prior discussions about the future relationship of the Isle of Man and the UK, Brown did underline that the review announced by Darling was “not a review of the Isle of Man’s constitutional relationship with the United Kingdom”.

Darling told the Commons in his speech that the review of British offshore financial centres woul focus on their role in the global economy and their long-term business strategies. He added that the review would work with the crown dependencies and overseas territories to identify current and future opportunities, risks and mitigation strategies, including issues such as:

• financial supervision and transparency;
• fiscal arrangements;
• financial crisis management and resolution arrangements; and
• international co-operation.
  

In December 2008, the Isle of Man announced that all of the tax agreements concluded with the seven Nordic states had been ratified and would go into force from December 28, 2008. The tax agreement with Ireland signed earlier that year entered into force on December 31.

That same month, The Isle of Man enacted the Criminal Justice (Money Laundering) Code 2008. The Code was tabled in Isle of Man’s parliament on December 16, and came into force on December 18.

The Criminal Justice (Money Laundering) Code 2008 contains anti-money laundering provisions in line with the FATF's recommendations on money laundering and terrorist financing. This Code now includes provisions with respect to undertaking risk assessments, beneficial ownership and control, enhanced customer due diligence, dealing with politically exposed persons, insurance-specific exceptions from customer due diligence, correspondent banking services, foreign branches and subsidiaries, ongoing monitoring and technological developments.

The introduction of the Code revoked the Criminal Justice (Money Laundering) Code 2007, the Criminal Justice (Money Laundering) (Amendment) Code 2007 and the Criminal Justice (Money Laundering) (Amendment) Code 2008.

The Isle of Man government took an important step on March 2, 2009 in its programme of developing closer economic and taxation co-operation with other countries by concluding agreements with Germany. In a similar vain to previous accords, these two agreements comprised: a tax information exchange agreement based on the Organisation for Economic Co-operation and Development (OECD) model; and an agreement for the avoidance of double taxation with respect to enterprises operating ships in international traffic.

Later than month, the Isle of Man has signed a Tax Information Exchange Agreement with France, taking the number of tax agreements signed by the Island to 13, 11 of which were members of the OECD.

Jeffrey Owens, Director of OECD’s Centre for Tax Policy and Administration, welcomed the development as a further step in efforts to bring greater transparency and fairness to cross-border financial transactions. “The time has now come,” he noted, “for all jurisdictions that have made commitments to the international standards of transparency and exchange of information to follow the Isle of Man’s lead in implementing them.”

The Isle of Man government on April 3 released a statement welcoming the island’s inclusion on the OECD ‘white list’ of countries complying with the global standard for tax co-operation and exchange of information.

The list, produced following the G20 summit in London, places the Isle of Man in the top tier of jurisdictions – along with nations such as the UK, USA, Germany, France, Sweden and Ireland – that have "substantially implemented the internationally agreed tax standard."

Welcoming the Isle of Man’s recognition as a cooperative jurisdiction, Chief Minister Tony Brown said:

"The OECD white list provides recognition at the highest level of the Isle of Man’s place in the mainstream of economies that comply with the global standard on tax. This is a defining moment for us, confirming our position amongst the most responsible and co-operative countries of the world.”

However, this still wasn't quite good enough for UK Prime Minister Gordon Brown, who wrote to all Crown Dependencies urging them to continue "setting the pace" with regards transparency.

"If genuine progress in agreeing, implementing and abiding by these agreements does not continue to be made I will encourage the G20 to look at the issue again until all abide by the highest standards," Prime Minister Brown warned.

Speaking on behalf of the Manx government, Minister David Cretney commented:

“The UK Prime Minister has acknowledged that the Isle of Man has taken a leading role in complying with international standards on taxation.”

“Brown’s emphasis on the importance of international standards on tax is very much in line with the policy of the Isle of Man government over the past decade. Compliance with global standards of tax transparency and financial regulation has been, and will continue to be, fundamental to our approach.”

The Isle of Man’s continuing high level of compliance with global standards of financial sector regulation and supervision – including international co-operation and the combating of money laundering – confirmed by the International Monetary Fund (IMF) in September, 2009.

A report published by the IMF shows that the island is amongst the top countries in the world in terms of implementing the recommendations of the Financial Action Task Force (FATF) to counter money laundering and terrorist financing.

The report was produced following a thorough assessment by an IMF team, which visited the island in September of 2008 as part of an international program of inspections. In addition to the Island’s strides towards anti-money laundering and combating the financing of terrorism (AML/CFT), the IMF looked at the regulatory and supervisory system, the soundness of the financial system, and its ability to cope with stress situations.

The report concludes that "the Isle of Man is broadly compliant with most aspects of the FATF recommendations," having continued to upgrade its requirements significantly. The report further states that "the quality of implementation of AML/CFT measures by financial institutions was found to be mainly of a high standard. In meetings with financial institutions (as well as in some cases their auditors and legal advisors) the assessors found a very high level of awareness of AML/CFT risks and requirements."

The report says the Island has a general high standard of financial sector regulation and supervision, and a "very high standard of compliance" with the Basel Core Principles for effective banking supervision. The IMF found that the Manx banking system had a limited exposure to market shocks, with a "very sound" level of capitalization. The insurance sector was found to be similarly well regulated, also with "considerable resilience against shocks."

The report goes on to say that "the Isle of Man authorities take their responsibilities in the area of international co-operation seriously," citing supervisory cooperation, mutual legal assistance, and tax information exchange agreements.

The report notes that the coverage provided by the Isle of Man’s Depositors’ Compensation Scheme is "unusually extensive for a small, internationally-oriented jurisdiction."

The IMF first gave the Isle of Man a regulatory clean bill of health in 2003, when it reported that the Island complied well with international standards for the regulation and supervision of financial services.

Welcoming the latest report, Chief Minister Tony Brown said: “This report from the International Monetary Fund is a comprehensive, independent and expert endorsement of the quality of the Isle of Man’s financial services regime. We in the Isle of Man have always worked hard to achieve a high level of compliance with international standards, and will continue to do so as the standards evolve.”

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