The decision of the European Commission (EC), about a fortnight ago, to put Mauritius on its list of high-risk countries with strategic deficiencies in its Anti-money Laundering and Counter Financing of Terrorism framework, although not yet effective, has sent shockwaves throughout the industry. A lot has already been said about the appropriateness, timing, and process by which the EC has arrived at its decision. Whilst our immediate focus must be to take Mauritius out of this impasse, and all the stakeholders are working together to achieve a favorable outcome, we should be careful not to let this be the tree that hides the forest. The last years has seen the Mauritius IFC having to overcome a succession of challenges, ranging from compliance with the new requirements from the international standard setters and dealing with the aftermath of Panama/Paradise Papers and Mauritius Leaks to name a few. The continuously changing international landscape means that the pressure on International Financial Centres is not likely to subside in the coming years. On the contrary, with the unfortunate advent of COVID-19, it will exacerbate further. Mauritius need to be mindful of challenges and threats ahead and revisit its business model. This is an existential threat!
The Three-Headed Monster
In Greek mythology, Cerberus, is the monstrous watchdog of the underworld. He is described as a three-headed dog, (though some have said that he had up to 50), has a serpent for a tail, and snakes protruding from multiple parts of his body. Cerberus, with his three heads, is now firmly standing in the way between Mauritius and its ambition, as enunciated in the Government’s Blueprint, to double the size of the financial sector by 2030.
1.Tax Planning and Low Tax Rate
Much water has flown under the bridges since the House of Lords of the UK stated in IRC v. Duke of Westminster (1936) that “Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then (…) he cannot be compelled to pay an increased tax.”
Over the years, the demarcation line between tax avoidance (lawful) and tax evasion (unlawful) has become increasingly clouded. Laws known as General Anti-Avoidance Rules (GAAR) have been passed in several countries and judicial doctrines have accomplished similar purposes. There is also the question of whether tax avoidance is moral, especially when undertaken by large multinationals, and organizations such as Tax Justice Network and the ICIJ have been very vocal on the issue.
The OECD through the Base Erosion Profit Shifting (BEPS) Project, has nailed the coffin of treaty shopping through Article 6, which imply a set of minimum standards into existing double taxation treaties. With the enormous pressures on countries arising through COVID-19, the focus on the avoidance of base erosion and profit shifting will certainly exacerbate.
The next pet project of the OECD is to impose a global minimum level of corporate taxation for technology giants and other large multinationals. Indeed, in November 2019, it called for the introduction of a safety net to enable home countries to ensure their multinationals cannot escape taxation, even if other countries have offered them extremely low tax rates. Clearly such initiatives will require Mauritius to review its business model which is still to a large extent tax driven.
Money laundering and the financing of terrorism are financial crimes which hurt not only governments, and national economies but also individuals. They can threaten the stability of a country’s financial sector or its external stability, but also come at a high human cost. From human trafficking, prostitution, drug trafficking, child labour, corruption, tax evasion to the financing of terrorist organizations, the impact of financial crime on societies is very real. As Min Zhu, Deputy Managing Director of the IMF stated, “Action to prevent and combat money laundering and terrorist financing thus responds not only to a moral imperative, but also to an economic need”.
Clearly, there will be an all-out assault on those countries that are perceived to lack the necessary framework to combat financial crime. International financial centres, like Mauritius, will continue to be under increased scrutiny because they are particularly susceptible to risks from money laundering and terrorist activities due to the nature of their global business activities.
Although the FATF observed in February 2020 that Mauritius had made significant progress in improving its technical compliance with its recommendations, it remains that the 5 deficiencies highlighted by the FAFT report on Mauritius in February 2020 have led the EU to put Mauritius on its list of high-risk countries. This subject is very much a moving target as perpetrators of ML/TF continue to find more creative ways to slip through the cracks and abuse the system. It is therefore expected that the international standards will continue to be enhanced.
3.Beneficial Ownership (BO) information
Although the interest in BO information is a subset of AML/CFT, I have considered it as the third head of Cerberus, because of the distinct attention that the international community is giving to it. The call for greater global transparency has gained momentum since the Panama papers, but transparency initiatives have been in place for years. However, the last few years have seen proposals aimed at the introduction of public registers of BO become a reality following the coming into force of the Fifth Money Laundering Directive (5AMLD) on January 10, 2020.
In fact, the interest in BO information is not new (it finds its origin in 1988) and over the years, the FATF, G7, G20 and the EU have all successively had it on their agenda. It is worth noting that one of the five deficiencies highlighted by the FAFT report (above) related to the failure to ensure access to BO information by competent authorities in a timely manner. It must be noted however that this deficiency is in respect of the domestic sector (in respect of companies incorporated prior to 2017) as the identification of beneficial owners has always been a requirement for the global business sector and Management Companies have an obligation to identify and obtain information about BO and make it readily available to the competent authorities. In addition, the FATF also expects that certain basic information on companies, including list of directors, must be publicly available at the company registry.
Visibly, the global trend towards transparency will continue and some countries have already implemented public registers of BO. However, up to now, other international financial centres have been able to withstand the pressure and reach of international organizations to implement public registers. But until when?
4.The Tail and the Snakes
We should also be mindful of the tail of Cerberus and the snakes protruding from the multiple parts of his body. Undoubtedly, the media bashing on international financial centres will keep going, and the risk will be let the media set the tone and control the screenplay. There are also a lot of interests at play, and the emergence of Mauritius as the prime investment gateway to Africa and a financial and business hub for the region will continue to make it the envy of less happy lands.
The Way Forward
Heracles (known as Hercules in the modern West), the greatest of the Greek heroes and a champion of the Olympian order against chthonic monsters, was able to defeat Cerberus, and we will indeed need a herculean effort to be able to overcome the some of the challenges and threats that loom ahead.
The following series of proposed measures, which are by no means exhaustive, should chart the way forward:
1.Seamless integration of the domestic and the global business sector
Mauritius has made enormous progress to address harmful tax practices and has also ratified the OECD Multi-Lateral Instrument (MLI) and introduced additional substance requirements. Over the years, it has also eliminated most of the ringfencing between the domestic and the global business sector. However, it is time to consider a complete integration of the domestic and the global business sector. Having one type of company that can undertake domestic and global business will go a long way towards steering itself away from the unjustified tag of being a tax haven or an offshore centre. It also needs to consider the fate of the Authorized Company, which was introduced to replace the GBC2, but which sits very uncomfortably in our legislative framework. This will also have the added advantage of dealing with the issue of low taxation in advance of the coming into force of the OECD proposed safety net. The requirement for an authorization from the FSC, as opposed to a license (see further below), for a company which is not undertaking financial services of which the majority of the economic interests is owned by a foreigner, should be preserved to ensure that there is appropriate oversight of that company’s activities through a Management Company.
2. The FSC should only license financial services businesses
The FSC should stop “licensing” companies which are not involved in the conduct of financial services businesses. This will free up much needed time and resources to allow the FSC to focus its efforts on risk-based supervision (as required by the FAFT). Instead, the FSC would issue an authorisation to a company which proposes to conduct global business, but which is not undertaking financial services and of which the majority of the economic interests is owned by a foreigner.
3.Promote the consolidation of the industry
The increasing cost of compliance means that smaller Management Companies may not have the necessary economies of scale to properly discharge their compliance duties. The FSC should, through several initiatives, drive a process of consolidation within the industry. This could include increasing the unimpaired capital requirements, determining the minimum amount of professional indemnity cover and impose minimum staff requirements specially within the compliance department.
4.Raise the bar in respect of Compliance
The regulatory expectation should not be to comply with the minimum standards but to exceed them. As an example, Jersey's reputation as a leading international finance centre has been assisted by being an extremely well-regulated jurisdiction and it is therefore not surprising why it is always highly rated by most if not all of the supranational bodies. Similarly, the regulator should impose hefty sanctions for non-compliance. There should also be a policy decision about the admissibility of “risky” PEP into the jurisdiction. All in all, the country should be ready to get rid of those clients that pose a reputational risk to the integrity of the financial center.
5.Proactively endorse initiatives aimed at promoting transparency
The world’s attitude has changed in respect of absolute confidentiality and Mauritius also need to align itself with this new paradigm. Whilst Mauritius should not hastily implement public registers of BO, there is no reason for example why the current arrangement of keeping basic information on Global Business Companies inaccessible to the public should prevail.
6.Promote the Jurisdiction locally and internationally
Mauritius need to work with key partners to represent and promote the jurisdiction, both locally and internationally, as a sound and competitive Financial Services Centre supportive of the highest regulatory standards. The importance of this sector to the economy requires that it has a dedicated promotion agency which will be provided with adequate resources to undertake the necessary marketing initiatives. This agency needs to have boots on the ground in our key markets.
7.Enhance our diplomatic efforts
Mauritius need to drastically enhance its diplomatic efforts to ensure that it engages regularly and meaningfully with all the standard setters and the key stakeholders in its main markets. This will also go a long way towards building trust and confidence back into the jurisdiction.
The Mauritius financial centre has been built painstakingly over the last three decades and has grown to become one of the main pillars of the economy. It has succeeded in generating high value-added employment, especially for our young professionals. It is estimated that the sector, including banking, directly employs more than 15,000 people. Additionally, the knock-on effect on the economy cannot be underestimated as the development of the global business sector has also spurred growth in the other sub-segments of the financial services sector, indirect employment as well as in the foreign reserves of the country and balance of payment. It is also one of the few sectors that has shown incredible resilience during the exceptional times that we currently live in with the Covid-19 pandemic. It is one that cannot be allowed to fail. It is our individual and collective reaction to the adversity that will determine the future of the global business industry and as Walt Disney has so beautifully put it, “the flower that blooms in adversity is the rarest and sweetest of all”.
*Caveat: Opinions expressed are solely my own and do not express the views or opinions of my company or associations of which I am a member.