Tax Havens - Secrets island

Michael Marsh never believed in conspiracy theories, until he went to Jersey. Despite several years spent in the secretive world of offshore banking, he was still surprised by what he saw as the determination of islanders to close ranks over embarrassing events.

Marsh visited the island in 1994 after nearly $600,000 (#355,000) of his savings disappeared from an investment made via Cantrade Bank. He didn’t know the extent of his financial troubles at the time. He merely suspected that a fraudster might have run off with some of the money. Little did he know that all of the Cantrade funds had been flushed away.

Since 1994, Marsh, who invested with Cantrade through his Liberian-registered business Troy Associates, has campaigned for a full investigation by the island’s regulators into the affair. Each request for information, he says, has met with silence or a refusal to answer questions.

Last month, though, the island’s financial watchdog declared the Cantrade case closed. In a statement, the Financial Services Commission said an investigation would ‘not add to the action already taken’.

The alleged cover-up

The main protagonists in what had become Jersey’s biggest fraud had been tried and found guilty. The bank had also been forced to clean up its act, following a secret report by Arthur Andersen, which the commission was revealing for the first time. The regulator said there was nothing more to be done.

Marsh believes that this is far from sufficient. ‘There has been a huge cover-up over this case,’ Marsh alleges. ‘The statement by the commission does not say that there is an outstanding civil case brought by the investors alleging fraud by Cantrade. It also doesn’t mention the huge conflicts of interest on the island that still exist.’

The Edwards report

The commission’s decision to close the book on Cantrade Bank comes at an awkward time for the island’s authorities. For the last year, a former Treasury official, Andrew Edwards, has been conducting a Home Office inquiry into the arrangements for financial regulation on the offshore islands of Jersey, Guernsey and the Isle of Man.

When he started his probe, critics said the islands’ financial regulators would end up punch drunk. They even faced a suggestion of being stripped of their sovereignty – so great was the concern in UK government circles.

Accountants watched nervously. Ernst & Young and the then Price Waterhouse had spent over two years threatening to leave the UK and register in Jersey, where limited liability status was available. Mid-tier firms had spent many years building large practices on the islands.

The island’s drive into financial services over the previous 20 years has proved irresistible. It offered low income taxes and a complete absence of inheritance or capital gains taxes, coupled with lax regulation.

For many participants, the situation was cosy and very profitable. Yet the Labour government seemed on the point of ruining it. Earlier this year, Accountancy Age revealed how the Edwards review had been sparked by Treasury concerns that the islands played host to large-scale money laundering.

A draft of Edwards’ report, leaked last month to several newspapers, including Accountancy Age, praises the efforts the islands have made in recent years to bring onto the statute book sophisticated banking and company legislation. But there are hundreds of recommendations setting out how the islands should improve their regulations.

When Edwards kicked off his review, Labour backbench MPs Jim Cousins and Austin Mitchell tabled a motion in the commons urging him to take a tough stance.

They said: ‘Any review … should examine the overlap between the worlds of business interests, media control and legislators in such dependencies, which enables inadequate legislation to pass virtually unopposed.’

Jersey’s Financial Services Commission is a new creation, while Guernsey has had a similar body for two years and the Isle of Man for 15 years.

Treasury officials hoped the new commission would model itself on the London-based Financial Services Authority.

But, instead, senior politician Senator Frank Walker, head of the Jersey committee which runs the island’s finances, was appointed president of the commission. The commission also took on the role of promoting the island’s finance industry, together with the finance and economics committee.

Conflicts of interest

Walker encapsulates the conflicts of interest outlined in Cousins’ and Mitchell’s motion. If the finance and economics committee, of which Walker is chairman, drafts a law the commission, of which he is president, regulates it.

If any citizen wants to criticise the law or its regulation, they can write a letter to the local newspaper. Except there is one main newspaper on the island, the Jersey Evening Post, which is owned by a company run by Frank Walker. Walker also owns 60% of the island’s newsagents.

Walker dismisses suggestions that these roles conflict in any way. ‘The island is very different to other centres, like London. Everybody here knows I own the newspaper. But I don’t interfere. If there is pressure to stand down as head of the commission, I am very relaxed about it. We don’t see it as a problem.’

Walker says the island has worked hard in the last few years to put in place the anti-money-laundering legislation demanded by international bodies, such as the Paris-based Financial Action Task Force. He says outsiders simply do not understand the way the island works, and that close links between officials in the judiciary, police, parliament and business community are transparent to the local community.

The Cantrade Bank scandal suggests a different conclusion, however. Cantrade was a subsidiary of the mighty Union Bank of Switzerland that took around $18m from 180 investors during the late 1980s and early 1990s and placed it in the hands of trader Robert Young.

Young had developed a financial model that supposedly guaranteed success on the foreign exchange markets. Even if his model failed, he wasn’t allowed to carry on trading once losses reached 10%. A Swiss-based outfit, called Mayo Associates, acted as trustees, and Young’s trading statements were audited by Touche Ross partner Alfred Williams.

But a sure-fire hit turned rapidly into a disaster. Rather than driving the funds up $27m, as the audited accounts stated, Young managed to lose 95% of everyone’s savings.

Following a criminal investigation, Young and Williams were tried and jailed earlier this year and Cantrade was fined #3m for making ‘misleading statements that induced people to invest money’.

Marsh says this is only half the story, and the need for a full investigation remains. He believes there is ample evidence that Cantrade, not only induced people to invest in the scheme, but was an integral part of the fraud.

In the evidence given during the trial of Young and Williams, it was revealed that Cantrade had taken part in a commission-splitting arrangement with Young. For every trade placed by Young, Cantrade charged a commission.

It then split the proceeds with Young. By this means, Young profited from each trade whether it was successful or not. The phrase in the stockbroking world for this practice is ‘churning’.

Marsh alleges that Young’s loss-making trading was encouraged by this deal, and that Young might have stopped racking up losses earlier without it.

But these allegations will now wait until a civil damages claim by Marsh and other investors is heard in New York or Jersey, in an attempt to win back compensation of up to $90m.

A memo from the Greffier – clerk to the Appeal Court and Jersey parliament – to the finance and economics committee which came to light during the Cantrade trial suggests great sensitivity over the further investigation of the Cantrade affair. The memo was sent on 19 December 1994, in response to calls for a judicial review by Michael Marsh’s lawyer Philip Sinel.

He wrote: ‘The director (of financial services) informed the (financial services and economics) committee that once a response of the committee has been filed, the pleadings on both sides would unavoidably become public knowledge, and that this could be damaging to the committee and the finance industry in the light of terminology used in Advocate Philip Sinel’s representation.’

The proud Jersey elite

The Edwards report concentrates as much emphasis on how the islands’ authorities regulate laws as on new laws themselves. He castigates them for resisting requests from foreign police forces for information, and he tells them their processes should be more transparent to the outside world.

The attitude of the island authorities in Jersey and, to a lesser extent, Guernsey, suggests they will need to be dragged kicking and screaming to the church of good regulation.

If the Cantrade episode reveals anything, it shows the Jersey elite are proud to sing from a different hymn sheet and will fight strongly to preserve their traditions, no matter how out of step they are with the UK.