Offshore and Money Laundering : a hanging sword over Mauritius

Stephen Platt, one of the worlds’s most experienced practitioners in the conduct of regulatory investigations relating to financial crime, rated Mauritius as a C+ for money laundering activities last year. However, with the recent scandals, the ratings must have surely been on a downward trend. The wound further given by Alvaro Sobrinho is still raw and we recently came to know about Jean-Claude Bastos. Is the sword of Damocles hanging over Mauritius?

Money laundering has become the buzzword in Paradise Mauritius. According to Financial Intelligence Unit (FIU), money laundering is the process of disguising, through conversion, concealment and transfers, proceeds derived from illegal activities to legitimize their future use.

Money laundering may impact a country’s economy, finance and socio-economic assets at several levels. Reza Uteem, Dan Maraye, Penny Hack, Rajen Bablee and Assad Abdullatif shed light on this issue. Reza Uteem states that Mauritius has very good laws concerning financial services but unfortunately, we are in such a crisis. “Laws are exiting but it is time to apply them.” 

Former Governor of Bank of Mauritius, Dan Maraye, remarks that with the recent scandals, Mauritius has been dealt a harsh blow. “Our current situation is unacceptable. We are being labeled as a corrupt country. With the recent scandals, our efficiency is being confirmed.”

The President of the Association of Trusts and Management Companies, Assad Abdullatif, argues that Mauritius possesses very good legislation but what we need is enforcement. “If there are abuses, sanctions need to be taken. Mauritius is a country with the proper framework already. There is no perfect system in the world. But since we are a small country, a small scandal proves dangerous. Henceforth, we need to be more vigilant. There is always the issue of reputational risk.” 

Impact on image

According to Reza Uteem, the reputation of Mauritius is at stake. “If Mauritius is willing to become a finance centre, then it is important to be well regulated. If this situation persists, our offshore sector will be in danger. Already with the DTAA, we have lost some clients but now with scandals, there is high probability that we lose more clients.” 

Likewise, Penny Hack maintains that since 2015, our country has been under the limelight for the wrong reasons and this affects our reputation. “Across the world, various jurisdictions face scandals but work continues. We cannot stop working just because of some scandals. As compared to other jurisdictions, Mauritius is just a drop in the ocean in the finance world.” 

Rajen Bablee, on his part, states that associating money laundering with the Mauritian offshore sector can be dangerous and is surely detrimental. “The financial sector here is well regulated and the process for due diligence and ‘Know your Customer’ principle is well established. The operators are well aware of the laws here, be it pertaining to money laundering or to terrorism financing. This being said, it is inevitable, as everywhere else, that some criminals try to find flaws in the system to beat it.”

He recalls that it is a very dynamic and specialised sector which requires perpetual updates and reviews. Furthermore, it is an area of specialisation which implies the use of tools such as trusts, Global Business Companies of types one and two, protected cells companies, private trust companies, investment schemes and double taxation treaties, etc. “These tools can be misused by criminals through rogue management companies, banks, introducers, lawyers, etc.

As such, it is very important for both, regulators and management companies to remain vigilant and cautious at all moments, more so when the client is a ‘politically exposed person’. Now, to come back to money laundering, we tend to forget that it occurs in every country, every day and mostly onshore. Money laundering is the process through which money coming from criminal activities is injected into the legitimate flow of the financial system through a series of transactions which, at the end, would cause that money to appear legitimate.”

Weaknesses in the system

If Mauritius is well regulated as per the saying of experts, why are we so vulnerable to financial crimes? What are our weaknesses?

Political interference  

Reza Uteem states that political interference is a major issue in the offshore sector. “With political nominees at the head and political interference, things will obviously go wrong. How can unfit people bag operation licenses? Why is it that the licenses of certain offshore companies suspected of wrong doings are not suspended immediately? There is a big problem with the FSC. The wrong person is at the wrong place.”

Lawyer Penny Hack also believes that political interference is a major weakness in our system. “We cannot obviously protect ourselves by 100%, but with political interference, the situation gets worse.” 

Likewise, Dan Maraye declares that people at the head of institutions are not really up to the required standard. “It is catastrophic. With political nominees, an institution loses credibility. Hardly can we ever find a political nominee who will forget his belonging to the party and act independently.”

Lack of responsibility

Another weakness, as highlighted by Reza Uteem, is the lack of responsibility from the part of some management companies. “It is the responsibility of management companies to check suspicious transactions. They should verify the source of funds and be certain that the money does not come from corruption.”  

Absence of transparency

Rajen Bablee explains that the absence of transparency refers mainly to the fact that details about the shareholding, beneficial owners and financial reports are not made public, as is the case for domestic companies.

“The offshore sector had primarily been designed to facilitate the business transactions of multinationals and sometimes to shield the identities of high worth individuals. Criminals have seen a way there to misuse the tools for the purpose of laundering the proceeds of their crimes. The fact that the only information the public have access to, with regards a GBC2 for example, would be the name of the management company.”

Dan Maraye also feels that lack of transparency is another major flaw. “Transparency is seen as the real enemy of corruption. If there isn’t any, how will things proceed? If we want to promote transparency, then we should protect the whistleblower. Until now, there is no law to protect the whistleblower.”

Due diligence

Various tools utilised by the offshore centres are now under scrutiny, as they are misused by criminals, highlights Rajen Bablee. “Many offshore centres provide such services or tools as tax planning and double taxation avoidance treaties, they are being targeted as accomplices to those trying not to pay tax in their countries of origins. Lots of amalgams are often made, like associating tax planning with tax evasion.

Furthermore, the due diligence processes, even when properly applied, have shown its limits. Information provided is sometimes fragmented. There is also a lot of hypocrisy whereby emerging financial hubs are targeted while some in the developed countries still reveal salient flaws but continue to operate candidly. The big banks which accept tainted monies choose to go for out of courts settlements where money talks but they will not lose their banking licences.”

Shortage of competency

Reza Uteem argues that the main institution dealing with financial sector is not up to the standard. “It is sad that the main organ of the institution does not have competent people. Despite having so much qualified personnel, the institution lacks competent employees at key positions. Inexperienced people cannot perform their work properly. ”

Measures and action

Stop political interference

Reza Uteem urges that the right people should be at the right place. “It is high time to stop political interference and let the right people take the decisions. If competent professionals are at the head of the main institution, things will improve. We have laws, we just to apply them.”

Similarly, Rajen Bablee remarks that another action which is important is to have high calibre professionals to work in institutions which are responsible for regulation or law enforcement. “Having political nominees with limited experience won’t serve the country or any government.”

On the other hand, it is time to review the whole system. “We need honest, experienced and intellectuals people at high level for the betterment of our country.”

Reinforcement of due diligence

Rajen Bablee highlights that the offshore sector has been monitored closely since years now and there is this proposal that all countries should have central, public registers of the real owners of companies, as well as registers containing information on all parties to trusts.

“Due diligence requirements should be reinforced and proper training to be given to all regulators and management companies. Special attention should be given to luxury goods such as luxury cars, jewels, estate properties etc. where, in many countries, the sellers are not bound by law to file suspicious transaction reports even when there is consequent layering to flout the law on limitation of transaction in cash.” 

Management companies more vigilant

Assad Abdullatif states that MCs, which are independent, should be more vigilant. “It is the responsibility of the MC to carry proper verifications. They should be able to detect suspicious transactions. They are critical for our offshore sector. They should see to it that the global businesses are abiding by the law. If need arises, they should ask for documents to support any transaction and see to it that money transferred are not illicit.”  

Freedom of Information Act

If we want to combat corruption, then Freedom of Information Act is a must, proposes Dan Maraye. “Since long we have been maintaining the need for a Freedom Information Act. We also need a law to protect whistleblowers, if we want to promote transparency.” 

Economic consequences

Vineet Jugessur, finance expert, explains that the financial service is one of the most important economic pillars for Mauritius. He reveals that the sector contributes around 12% to the GDP with a growth rate of 4%.

“Per the latest statistical data available on the website of the Financial Services Commission, there were above 22,000 Live Global Business Companies beginning of 2018. These include Category 1 and 2, Management Companies, Global Funds. The sector has sustainably contributed in creating direct and indirect employment for more than a decade now.”

He argues that money laundering has been a persistent issue for a long time not only for Mauritius but also globally. “There is a real worry amongst the international community that countries need to be proactive in bringing more prosecutions against financial institutions that don’t take effective steps to prevent it. The recent cases constitute for sure a real reputational risk for Mauritius which might tarnish our image.”

Mauritius is willing to make the offshore sector a major economic pillar for Mauritius’ growth. But with the current situation, will we be able to attain our objectives?

“With the emergence of innovative financial services and products (for example crypto-currencies), sophisticated laundering systems have seen the day and offenders identify ways of manipulating them. Besides AML, great efforts should also be invested by financial institutions to counter this new way of laundering, for instance make use of new technologies to digitalise customer data to improve customer screening and risk rating via real time alerts. If problems could be identified upfront, scandals could be avoided.”

Vineet Jugessur believes that if necessary steps are not taken, this could affect the growth of the sector. “Steps include more adapted legislation and compliance, tighter prosecution against financial institutions that launder illicit money or which fail to have in place adequate AML controls. Currently, there exists a national commitment to preventing financial crime, and this should give a strong positive signal to the international community.

The Mauritian offshore sector can still continue to remain a sustainable economic pillar for the future, provided that we have the ability to flexibly adapt legally and technologically to the highly dynamic financial world, and at the same time minimise reputational risk by having strong compliance and regulatory frameworks.”

What statistics say?

As per statistics, Global businesses based in Mauritius have assets valued at $630-billion.   At the end of December 2017, there were 11 501 live companies in category 10 084 in category 2, 182 in MCs and 982 in global funds. As at February 2018, there is an increase in Category 1 reaching 11 632 live companies.  According to the FSC statistics, 106, 078 USD million portfolio investment were involved in 2016. 

Process of Money Laundering

Experience has shown that money laundering is generally carried out in three phases, namely placement, layering, and integration. The placement stage, which is the initial stage, is the introduction of criminally tainted money into the financial system.

The layering stage is the dissociation of the dirty money from their source through a series of transactions to obscure the origins of the proceeds. These transactions may involve different entities such as companies and trusts as well as different financial assets such as shares, securities, properties or insurance products.

The integration stage is the use of the funds in the legitimate economy through for instance, investment in real estate or luxury assets. However, with features like access, anonymity and speed which stem from modern technology, criminals are very creative in developing new techniques to disguise the nature of their illegal proceeds.

To have an indication of the current money laundering situation, international organizations like the FATF, the Egmont Group and the IMF publish, in that respect, regular typologies studies describing the techniques, patterns and trends used by launderers.

Financial Service Commission

On the forefront to combat money laundering

The Financial Service Commission (FSC) has always been criticized and targeted. For this article, the FSC has been asked several questions regarding its mechanisms, objectives and its role in combating money laundering.

Mechanisms to detect any potential money laundering

According to the FSC, there are indeed different mechanisms in place to detect potential money laundering attempts in Mauritius. “At the level of the Financial Services Commission (the “FSC”), there is the AML/CFT Code on anti-money laundering and the combating of the financing of terrorism pursuant to which all licensees of the FSC need to comply with and which provides for measures relating to prevention of money laundering, for example, licensees (including Management Companies) have to conduct Customer Due Diligence (CDD) on clients. Failure to comply with the AML/CFT Code may lead to disciplinary actions, including but not limited to directions and other administrative sanctions. In addition, all suspicious transactions.” 

Moreover, the FIAMLA sets up the framework for anti-money laundering and the combating of the financing of terrorism for the whole jurisdiction include financial services but also other sectors, which may be at risks of money laundering. “In addition, there is a National Committee, set up under the FIAMLA, which coordinates policy matters for anti-money laundering and for the combating the financing of terrorism.”

The role of FSC in combating money laundering

Pursuant to section 18(1)(c) of the FIAMLA, the FSC has a statutory duty to supervise and enforce compliance by its licensees in respect of the requirements imposed under the FIAMLA and Regulations or guidelines which are made under the FIAMLA.

The FSC has issued a Code on the Prevention of Money Laundering and Terrorist Financing on 29 March 2012. The Code provides requirements for all financial service providers licensed under the Financial Services Act 2007, Insurance Act 2005 and Securities Act 2005, but it is also applicable to the designated non-financial businesses and professions (DNFBPs) licensed by the FSC, namely Management Companies and Corporate Trustees. As part of its Supervision functions, the FSC monitors compliance with FIAMLA and the above mentioned Code through both off-site and on-site inspections and may take enforcement actions with respect to non-compliance.

Awareness campaign

The FSC is mandated under Section 6 of the FSA to take measures for better protection of consumers of financial services and to promote public understanding of the financial system including awareness of the benefits and risks associated with the different kinds of investment.

The FSC has initiated a number of consumer education campaigns to contribute towards a financially literate population which is capable of understanding the functioning of the financial services sector and the effective use of financial products and services.

For examples, during consumer outreach sessions held across Mauritius and Rodrigues, the public is sensitised on the need to beware of all sorts of fraudulent and illegal investments/financial practices. The Minute of Finance, recently broadcast on MBC radio, also contained messages in relation to best practices to be adopted by members of the public in terms of investment and financial planning.

Other initiatives to educate the general public include dissemination of consumer education material including brochures, posters, games, videos and investor alerts to inform and protect investors against illegal, dishonourable and improper practices, market abuse and financial fraud.