Eu Blacklist: From Red Flags to Red Card

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The European Commission has included Mauritius in its revised list of high-risk jurisdictions. Could and should this situation have been avoided? What are the implications? What about the strategic deficiencies? Here is an analysis of Rehana Kasenally-Pondor, Former Executive, Financial Services Commission and Independent Consultant.

Our image and reputation are undermined resulting in Mauritius losing out on the choice of potential jurisdiction by clean and high repute investors, says the author.

Having been closely involved in the inception and development of our Global Business sector since the early 1990s, it dismays me deeply to face the reality that Mauritius is now on the list of High-Risk Third Countries issued by the European Commission (EC). This is a state of affairs that we would have never contemplated and that falls at a most inopportune time with the Covid-19 predicament.

Notwithstanding the communiqué issued by the Ministry of Financial Services and Good Governance, one must be honest enough to acknowledge that we have brought this on ourselves despite the multiple red flags over the recent past, coupled by systematic and increasing lack of effective mechanisms to truthfully and genuinely address the challenges of Anti-Money Laundering/Counter-Terrorist Financing (AML/CFT). Blaming the European Union’s (EU) lack of consultations in a communiqué that has no doubt caught the attention of operators across the world, smacks of pettiness and inability to understand the gravity behind this listing.

Based on my experience, I wish to shed light on some of the issues that have contributed to this situation and assess the deep deficiencies that have been allowed to persistently prevail. The evolution and development of any jurisdiction as a sound and well-regulated International Financial Centre (IFC) emanates from the premise of high reputation, given the inherent vulnerabilities associated with ‘offshore centres’. For Mauritius and since its inception, we have strived hard in building our reputation and demarcating ourselves as a jurisdiction of substance, whilst continuously ensuring our credibility. Making the Global Business sector become an important pillar of the Mauritian economy is a commendable achievement as the sector contributes to 5.8% of our GDP and direct employment of around 10,000 people.

Successive Red Flags with Scant Attention

Importantly, since 2018, various organisations have alerted the Mauritian authorities about the need to undertake major reforms to strengthen the AML/CFT framework in line with the international standard setter – the Financial Action Task Force (FATF). The essence being - proper effectiveness, not only compliance of measures.

The Mutual Evaluation Report (MER) of the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) (July 2018), the IMF Staff Report (April 2019) and the FATF listing of Mauritius as a “jurisdiction under increased monitoring” (externally referred to “Grey List”) (February 2020) are the main red flags brought to the attention of the current Government.

Late last year, Government was venting its anger and arrogance towards the ESAAMLG instead of paying heed to the fundamental shortcomings flagged in the MER - ESAAMLG highlighted all the very same strategic deficiencies that have been brought forward in the latest EC Report, culminating in Mauritius’ listing.

Could and should this situation have been avoided?

Only Government could strive to answer this question but it continues to play the usual blame game: EU lack of consultations, questioning the EC’s listing of countries, previous Government inaction, revised methodology, amongst others. Even if one must admit that the EU in its drive to strengthen its AML/CFT framework beyond international standards with the objective of closing loopholes and weak links in its AML rules, the EC may have spread its net stringently over the 20 jurisdictions on the list.

Did the current Government keep tabs with EU’s progress on the prevention of the use of the EU financial system for the purposes of money laundering and terrorist financing through the 5th AML Directive issued in May 2018? In as much as we appreciate that the strengthening of the AML/ CFT framework continues to evolve globally, the process cuts across multiple Governments – the current Government had no reason not to get its act right from at least 2018; we would certainly have stood a good chance of not being caught in the EU net as a listed jurisdiction.

What is clear is that the Ministry of Financial Services and Good Governance, responsible for the FATF Recommendations evaluation, has failed miserably in addressing the flagged deficiencies involving effectiveness outlined in the MER of July 2018. Also, it is worth noting that this situation is unravelling under the watchful gaze of the Minister of Finance and the Governor of the Central Bank who as interested parties were until last year respectively Chairman and CEO of the FSC.

Implications

Firstly, our image and reputation are undermined resulting in Mauritius losing out on a choice of potential jurisdiction by clean and high repute investors. Existing operators and businesses may consider relocating their operations permanently to competitive jurisdictions such as Luxembourg and Singapore. There may likely be a run on the banking system with potential withdrawals of funds, thereby affecting significantly our balance of payments, and having spinoffs on the currency seriously affecting macroeconomic fundamentals.

As mentioned in the EC Report, the listing means that Mauritius poses a significant threat to the financial system in the EU. Consequently, EU Member States are required to apply Enhanced Due Diligence (EDD) criteria for all business and financial transactions to and from Mauritius, thereby hampering the existing business operations in the Global Business sector.

Typically, clients shy away from EDD and will have increasing difficulties in dealing with international banks for the transfer of funds, as the levels of scrutiny will be deepened. Investments into India through Mauritius may be affected, as the Securities Exchange Board of India will probably increase monitoring of Foreign Portfolio Investments. Lastly, EU funds will not be allowed to be channelled through Mauritius entities for financing projects.

Strategic Deficiencies

The genesis of this most recent listing is linked to the so-called strategic deficiencies identified in the EU Report.

(i) The lack of risk-based supervision for the Global Business sector and Designated Non-Financial Businesses and Professions (DNFBP)

In line with the risk-based supervision framework, supervision (including AML/ CFT controls) of the Global Business sector is carried out by the 200 licensed Management Companies (MCs). The onus is on the MCs to apply the necessary Customer Due Diligence measures and monitor all clients’ business and financial transactions.

Against the above, the MER highlighted the shortcomings of the existing practice in terms of “varying levels of compliance within this sector”. Further, the MER states that “compliance monitoring through onsite inspections by the FSC is considered to be low relative to the size of the Global Business sector and it's perceived/related money laundering and terrorist financing (ML/TF) risks”. It has further been evaluated that “banks lead the way on the filing of suspicious transaction reports (STRs), distantly followed by MCs.”

It is clear that there is an urgent need to revamp and review the operations of the far too many MCs operating on the island, notwithstanding that quite a few rogue MCs have been involved in illicit businesses. Just to name a few scandals involving the Mauritius jurisdiction: Isabel Dos Santos and Luanda Leaks, diversion of tax revenue revealed in Mauritius Leaks, Namibia Fishrot Wikileaks, Álvaro Sobrinho VIP treatment and investment in real estate. It appears that politicians are quite attuned to dealing with and supporting tainted investors/ Politically Exposed Persons at the risk of the reputation of the Mauritius IFC.

With regards to the FSC, despite significant recruitment over the last couple of years, the necessary system and capacity are not yet in place to undertake such onsite inspections. The dynamics of the Global Business sector demands a robust, integrated, effective and comprehensive risk-based supervision framework that is in line with international norms.

The FATF defines DNFBPs to include casinos, real estate agents, dealers in precious metals, lawyers, notaries, and accountants operating in the domestic market. This category of operators is indeed vulnerable to abuse of ML/TF activities.

There is no risk-based AML/CFT supervisory framework for DNFBPs and one is puzzled as to why the Gambling Regulatory Authority (GRA) established since 2007 has not been mandated to have direct oversight on matters relating to ML/TF in the all-pervasive gambling sector. The real estate sector has also been identified as a source of international ML especially in view of the high interest by foreign investors – we all recall the headlines made by the case of Álvaro Sobrinho and Royal Park.

As assessed in the MER, “the level of STR reporting in the Global Business sector and DNFBPs is very low which is a concern given the size of the sectors and ML/TF risk exposure”.

The review provides extremely serious concerns as the country is becoming a breeding ground for attracting illicit transactions in the absence of a robust risk-based supervision framework.

(ii) Failure to demonstrate that law enforcement agencies (LEAs) have the capacity to conduct ML investigations and parallel financial investigations

It has been assessed that despite the Independent Commission against Corruption (ICAC) carrying out numerous investigations on corruption related to ML, barely any case proceeds to court with a conviction secured. As with most parastatal institutions being highly politicised, political interference and the total lack of independence by ICAC justify this evaluation.

It is stated in the MER that “LEAs do not conduct parallel financial investigations in most cases, in particular to the highrisk drug trafficking offences. Additionally, tax offences are not being investigated as a predicate offence and for the purposes of ML. LEAs do not have adequate technical capacity for specific investigative techniques.”

From the above, one can conclude that in the eyes of the EC, LEAs in Mauritius are toothless bulldogs vested with no mandate to effectively protect the country from ML/TF arising from drug trafficking and tax crimes!

(iii) Failure to ensure access to accurate basic and beneficial ownership information by competent authorities in a timely manner

Since 2018, Global Business Companies (GBCs) (through their MCs) are required to maintain and update share registers disclosing names and addresses of beneficial owners or the ultimate beneficial owners. This information is also required to be filed with the Registrar of Companies.

The Registrar is empowered to disclose the information in specific circumstances of investigation and inquiry, i.e. to LEAs. Only basic information is available publicly. The FSC as the supervisory body of the Global Business sector is entrusted with all confidential information relating to the beneficial owners of GBCs as per established licensing and supervisory conditions.

Notaries who are responsible for the registration of corporate trusts do not follow an established methodology for collecting and verifying beneficial ownership information. There is no legal framework for DNFBPs to collect and maintain updated information on beneficial ownership relating to legal persons and legal arrangements.

With regards to access of beneficial ownership information on GBCs to competent authorities (LEAs), the latter can only obtain information from the FSC for investigative purposes through a court order issued by the Supreme Court with said order limited only to drug trafficking, arms dealing and ML offences. The FATF has identified that the coverage of the offences is extended to include other serious offences such as tax crime that generate significant risks associated to ML/ TF, so as to provide the required information to LEAs in their investigations.

The MER has revealed that “authorities have not applied sanctions in cases where accurate records have not been kept as most of the cases are sent for compounding at the DPP’s office regardless of whether the gravity of offence warrants prosecution”.

The above facts reveal major gaps in the following:

No established and comprehensive system records of basic and beneficial ownership information across all legal persons and legal arrangements;

No proper and effective mechanism to allow sharing and flow of relevant information to relevant national authorities, including LEAs to undertake their tasks;

No comprehensive appreciation of ML/TF risks by national authorities associated with beneficial ownership of legal persons and arrangements;

The inability of authorities to take sanctions in cases of legal breaches.

Despite having the necessary legal frameworks in place, these weaknesses demonstrate the lack of appreciation and commitment by authorities in using judiciously the information in their custody in combatting ML/FT.

(iv) Failure to demonstrate the adequate implementation of targeted financial sanctions through outreach and supervision

This strategic deficiency is in relation to the UN Security Council Resolution (UNSCR) and its Sanctions List, as well as to the financing of proliferation by reporting entities. Despite the country’s various legislation in fighting against terrorism and its financing, Mauritius lacks a comprehensive legal framework and procedures to assess and expeditiously take necessary actions. Consequently, the risk exposure of the abuse of Mauritian legal persons and arrangements for ML/TF is high.

The numerous gaps analysed above point to systemic and systematic shortcomings of effective and comprehensive supervision both in the Global Business sector and the domestic market. It is time to establish a high level effective operational framework for all stakeholders (competent authorities and reporting persons/ entities), namely the FSC, Bank of Mauritius, Registrar of Companies, Financial Intelligence Unit, ICAC, Mauritius Police, Mauritius Revenue Authority, DPP Office, GRA, Management Companies, Financial Institutions and DNFBPs. In the process, there will have to be legal changes brought about to establish the framework. What is needed urgently to salvage our financial services is rigour, commitment and leadership. Blame games and laments will get us nowhere.

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